Eagle-Picher Files Its Third Quarter 10Q with the SEC
2 October 1998
Eagle-Picher Files Its Third Quarter 10Q with the SEC
CINCINNATI, Oct. 2 -- Eagle-Picher Industries, Inc. filed a
10Q with the Securities and Exchange Commission today, excerpts of which
follow. Incorporated in this release are the financials for the third quarter
ending August 31, 1998 together with the Management Discussion and Analysis.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
EAGLE-PICHER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)(UNAUDITED)
(Dollars in thousands, except per share amounts)
Six Months Three Months Nine Months
Three Months Ended Ended Ended Ended
August 31 August 31 February 28 August 31
1998 1997 1998 1998 1997
Predecessor Predecessor Predecessor
Net Sales $206,356 $216,756 $426,277 $205,842 $682,546
Operating Costs
and Expenses:
Cost of products
sold 163,518 174,103 333,093 162,796 549,082
Selling and
administrative 18,042 17,503 38,329 17,141 56,846
Management
compensation
expense 4,395 - 21,716 2,056 -
Depreciation 9,644 9,688 19,417 8,983 30,697
Amortization of
intangibles 4,244 4,084 8,741 3,839 12,239
Loss on division
sales - 1,803 - - 1,803
Total 199,843 207,181 421,296 194,815 650,667
Operating Income 6,513 9,575 4,981 11,027 31,879
Interest expense (12,132) (7,540) (24,686) (6,940) (24,391)
Other income
(expense) 681 (817) 1,007 820 539
Income (Loss)
Before Taxes (4,938) 1,218 (18,698) 4,907 8,027
Income Taxes (1,135) 2,337 (5,596) 4,100 9,821
Net Income
(Loss) $(3,803) $(1,119) $(13,102) $807 $(1,794)
Income (Loss)
per Share $(38,030) $(.11) $(131,020) $.08 $ (.18)
See accompanying notes to the consolidated financial statements.
EAGLE-PICHER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
August 31 November 30
1998 1997
ASSETS
Predecessor
CURRENT ASSETS
Cash and cash equivalents $ 21,098 $ 53,739
Receivables, less allowances 120,444 130,927
Income tax refunds receivable 1,341 3,025
Inventories:
Raw materials and supplies 55,354 51,592
Work in process 17,547 25,801
Finished goods 17,712 14,803
Total 90,613 92,196
Prepaid expenses 8,440 8,290
Deferred income taxes 18,935 13,793
Total current assets 260,871 301,970
PROPERTY, PLANT AND EQUIPMENT 255,653 279,847
Less accumulated depreciation 19,505 36,309
Net property, plant and equipment 236,148 243,538
DEFERRED INCOME TAXES 1,144 98,991
EXCESS OF ACQUIRED NET ASSETS OVER COST NET OF
ACCUMULATED AMORTIZATION OF $8,729 233,106 -
REORGANIZATION VALUE IN EXCESS OF AMOUNTS ALLOCABLE TO
IDENTIFIABLE ASSETS NET OF ACCUMULATED AMORTIZATION
OF $16,284 - 48,837
OTHER ASSETS 85,162 53,545
Total Assets $816,431 $746,881
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 44,062 $ 52,886
Long-term debt - current portion 14,072 3,403
Income taxes 3,246 2,294
Other current liabilities 75,136 55,419
Total current liabilities 136,516 114,002
LONG-TERM DEBT - less current portion 487,209 269,994
OTHER LONG TERM LIABILITIES 25,676 26,768
Total Liabilities 649,401 410,764
EAGLE-PICHER INDUSTRIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS(UNAUDITED)
(Dollars in thousands)
August 31 November 30
1998 1997
Predecessor
SHAREHOLDERS' EQUITY
Common shares -- authorized 20,000,000 shares;
issued and outstanding 100 and 10,000,000
shares, respectively 180,005 341,807
Foreign currency translation 127 (1,836)
Accumulated deficit (13,102) (3,854)
Total Shareholders' Equity 167,030 336,117
Total Liabilities and
Shareholders' Equity $816,431 $746,881
See accompanying notes to the consolidated financial statements.
EAGLE-PICHER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Six Months Three Months Nine Months
Ended Ended Ended
August 31 February 28 August 31
1998 1998 1997
Predecessor Predecessor
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(13,102) $807 $(1,794)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and amortization 29,522 12,822 42,936
Proceeds from insurance
settlement 13,659 - -
Loss on division sales - - 1,803
Changes in assets and liabilities:
Receivables 15,188 (4,705) 4,072
Income tax refunds
receivable 660 1,024 69,771
Inventories 4,435 (2,235) 985
Accounts payable (6,837) (2,787) 7,063
Accrued liabilities 25,205 (5,488) 8,334
Other (4,784) (8,521) 7,561
Net cash provided by (used in)
operating activities 63,946 (9,083) 140,731
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from division sales - - 38,417
Capital expenditures (16,053) (5,692) (41,476)
Other 94 (1,042) (2,407)
Net cash used in
investing activities (15,959) (6,734) (5,466)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of long-term debt - 445,000 8,000
Reduction of long-term debt (2,580) (250,000) (127,411)
Borrowings under revolving
credit agreement 47,825 79,100 -
Repayments under revolving
credit agreement (91,925) - -
Redemption of common stock - (446,638) -
Issuance of common stock - 180,005 -
Debt issuance cost - (26,062) -
Other 824 (360) 4,876
Net cash used in
financing activities (45,856) (18,955) (114,535)
EAGLE-PICHER INDUSTRIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Six Months Three Months Nine Months
Ended Ended Ended
August 31 February 28 August 31
1998 1998 1997
Predecessor Predecessor
Net increase (decrease) in cash
and cash equivalents 2,131 (34,772) 20,730
Cash and cash equivalents,
beginning of period 18,967 53,739 32,725
Cash and cash equivalents,
end of period $21,098 $ 18,967 $53,455
Supplemental cash flow information: 1998 1997
Cash paid during the nine months ended August 31:
Interest paid $19,060 $ 18,052
Income taxes paid (refunded), net $ 4,446 $(66,016)
Cash paid during the three months ended August 31:
Interest paid $ 6,250 $ 1,551
Income taxes paid (refunded), net $ 4,141 $ 1,213
See accompanying notes to the consolidated financial statements.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Results of Operations
As a result of the Acquisition of the Company by Granaria Industries B.V.
from the Trust as of February 24, 1998, which was accounted for as a purchase,
the Company's results of operations and financial position for periods after
February 24, 1998 are not comparable to prior periods. The unaudited
condensed consolidated statement of income (loss) as of February 28, 1998
includes results of operations from (1) December 1, 1997 through February 24,
1998 of the Predecessor Company and (2) February 25 through February 28, 1998
of the Company.
In addition to the effects of the Acquisition, another factor affecting
comparability of operations is the sale of the Plastics, Transicoil and
Fabricon Products divisions in 1997. The Company also contributed the assets
of its former Suspension Systems division to Eagle-Picher-Boge, L.L.C., a
joint venture formed in 1997 in which the Company has a 45% interest. These
divisions are collectively referred to as the "Divested Divisions."
The following table sets forth certain sales and operating data, net of
all inter-segment transactions, for the Company's businesses for the periods
indicated:
Six months Three months Nine months
Three months ended ended ended ended
August 31 August 31 February 28 August 31
1998 1997 1998 1998 1997
(In millions of dollars)
Predecessor Predecessor Predecessor
Net sales by segment:
Industrial $ 35.1 $ 52.4 $ 71.5 $ 37.6 $157.3
Machinery 68.0 65.8 136.8 64.4 199.4
Automotive 103.3 98.6 218.0 103.8 325.8
Total $206.4 $216.8 $426.3 $205.8 $682.5
EBITDA by segment:
Industrial $ 7.0 $ 8.1 $ 14.1 $ 6.6 $ 23.8
Machinery 9.6 6.6 20.5 7.8 22.9
Automotive 13.5 13.1 31.3 15.2 43.1
Corporate overhead (5.3) (2.7) (11.0) (3.7) (13.2)
Total $ 24.8 $ 25.1 $ 54.9 $ 25.9 $ 76.6
Net Sales. The Company's net sales were $206.4 million for the third
quarter ended August 31, 1998, a decrease of $10.4 million or 4.8% from the
comparable period of 1997. Included in the results of the third quarter of
1997 are $13.7 million of sales of the Divested Divisions, which, if excluded,
would result in an increase in the Company's quarterly net sales of
approximately 1.6%.
Net sales of Industrial products, excluding net sales of the Divested
Divisions, decreased 22.4% in the third quarter of 1998 from the comparable
period in 1997, due primarily to decreased prices of germanium products.
Germanium sales have been affected by lower market prices which have resulted
from increased supplies, the completion of a major satellite project and the
increased use of recycled germanium by the Company's customers in response to
sharp increases in germanium prices which took place in 1996. Since the
customers now supply a larger portion of the Company's raw materials, its
sales volume is less as a toll refiner than as a buyer and seller of
germanium. Operating margins, however, have been maintained.
Net sales for the Machinery Group in the third quarter of 1998, excluding
the Divested Divisions, increased 8.2% due in part to increases in demand for
heavy-duty fork lift trucks and wheel tractor scrapers. Sales of special
purpose batteries are comparable to those of the same period in 1997.
The Automotive Group's net sales, excluding the Divested Divisions,
increased 8.7% primarily due to increased market penetration of precision
machined components, many of which are used in light trucks, vans and sport
utility vehicles which have recently grown in popularity. Volumes of fuel
systems have also increased as new programs are implemented.
The Ford Motor Company ("Ford") has recently notified the Company that it
will no longer purchase certain products from the Automotive Group. Sales
contributed by those products in 1997 were $19.4 million. The Company
anticipates that these programs will be discontinued gradually through 1999
and that this revenue will be replaced by new programs currently being
implemented.
The Company expects strong price pressure to continue across all product
lines, particularly in the Automotive Group. The Company will continue to
pursue productivity improvements and material cost reductions to mitigate such
price pressure.
Historically, the third quarter results of the Automotive Group are
depressed as most of the automobile companies shut their plants for two weeks
in July to retool for new model years. In 1998, these results were further
depressed by the strike by the United Auto Workers at certain General Motors
Corporation ("GM") plants and the resulting closure of other GM plants. Some
of the Automotive Group operations experienced lay-offs as a result of the
strike at GM. It is estimated that the Company lost approximately $7.0
million in revenue and $2.5 million in operating income during the strike.
Since the 1980's, original equipment manufacturers ("OEM's") such as Ford,
GM and the Chrysler Corporation have been outsourcing an increasing percentage
of their production requirements. OEM's benefit from outsourcing because
outside suppliers generally have significantly lower cost structures and can
assist in shortening development periods for new products. The Company
expects to continue to benefit from the trend toward outsourcing.
Historically, sales to certain Asian markets have been insignificant to
the Company's total net sales; therefore, the current economic conditions in
Asia have not had, nor are they expected to have, a material adverse effect on
the Company's operations. The Company believes that despite these conditions,
the Asian region has solid long-term growth opportunities and will continue to
explore these opportunities.
Cost of Products Sold. Cost of products sold, excluding depreciation
expense, decreased by $10.6 million or 6.1% from the third quarter of 1997
compared to the comparable period in 1998. Excluding the results of Divested
Divisions, as a percentage of sales, cost of products sold declined from
79.7% in the third quarter of 1997 to 79.2% in the third quarter of 1998.
Reasons for this decline include improved performance at certain start-up
operations, increased operating efficiencies and changes in product mix in
certain operations in the Machinery Group.
Selling and Administrative. Selling and administrative expenses increased
by $.6 million or 3.1% in the quarter ended August 31, 1998 from the quarter
ended August 31, 1997. Excluding results of Divested Divisions, these expenses
increased $1.3 million or 7.9% over the same time frame. Besides a general
increase due to activity relating to increased sales volumes, items
contributing to this increase include management fees now payable to Granaria
Industries B.V. and a retention program for mid-level management.
Depreciation and Amortization. Depreciation and amortization are not
comparable for the three months ended August 31, 1998 and 1997 due to the
differences in asset bases as a result of the Acquisition on February 24,
1998.
EBITDA. The Company defines EBITDA as earnings before interest, taxes,
depreciation, amortization and management expenses. Due to the differences in
the asset bases, it is preferable to compare EBITDA rather than operating
income. EBITDA decreased from $25.1 million in the three months ended August
31, 1997 to $24.8 million for the same period in 1998 or 1.2%. After
excluding the results of Divested Divisions, EBITDA increased .8%.
In the third quarter of 1998, EBITDA for the Industrial Group declined to
$7.0 million from $8.1 million in the comparable period of 1997. Excluding
the results of Divested Divisions, this decline was $.5 million or 6.7% on a
22.4% decrease in sales. As previously mentioned, although lower germanium
prices have contributed to reduced sales, EBITDA has remained relatively
consistent for these operations as did results at other Industrial Group
operations.
In the Machinery Group, EBITDA increased from $6.6 million in the third
quarter of 1997 to $9.6 million in the same period of 1998. Excluding results
of the Divested Divisions, the increase was $3.2 million. Reasons for this
increase include improved efficiencies at operations manufacturing special-
purpose batteries and at the aluminum foundry, and a shift in product mix at
operations manufacturing construction and other industrial equipment.
EBITDA for the Automotive Group increased to $13.5 million in the third
quarter of 1998 from $13.1 million in the same period in the prior year.
Excluding the results of Divested Divisions, the increase was .7%. Any
increases in EBITDA resulting from the increased volumes previously discussed
have been offset by losses related to the GM strike situation.
Interest Expense. Interest expense for the three months ended August 31,
1998 and 1997 was $12.1 million and $7.5 million, respectively. In 1997,
interest expense included interest on the $250 million Subordinated Debentures
held by the Trust which were retired upon the Acquisition and the $50 million
Divestiture Notes retired in August 1997. In 1998, the increase in interest
was attributable to the borrowings against the new credit facility totaling
$304.1 million, the issuance of $220 million in Subordinated Notes and the
issuance of an additional $8 million industrial revenue bond in June 1997.
Financial Condition
Since the Acquisition, the Company has generated cash from operations of
$63.9 million which has enabled it to repay a net amount of $46.7 million in
debt and expend $16.1 million for capital. Significant factors contributing
to cash provided by operations include:
1) the receipt of $13.7 million from an insurance company in settlement of
certain claims relating primarily to environmental remediation
expenses;
2) a $15.2 million reduction of accounts receivable from what were
considered high levels at February 28, 1998 to more normal levels at
August 31, 1998;
3) the funding of approximately $8.0 million of employee health care
expenses from a trust that had been earmarked for this purpose rather
than from Company funds; and
4) the accrual of $10.3 million in interest (which was paid September 1,
1998) relating to the Senior Subordinated Notes.
The Company's liquidity needs are primarily for capital maintenance and
debt service. With the exception of an expansion at a plant manufacturing
industrial machinery, capital expenditures in the six months ended August 31,
1998 have been primarily for capital maintenance. The Company anticipates
that capital spending will be approximately $9.0 to $11.0 million in the
fourth quarter of 1998. The Company has scheduled debt payments of $2.7
million in the fourth quarter of 1998 and $10.4 million in 1999.
The Company has entered into a letter of intent for the sale of its Trim
Division for $14.5 million in cash. The transaction is conditioned on, among
other things, the buyer's due diligence investigation and the buyer obtaining
financing. There is not assurance that this transaction will be completed on
these terms. If consummated, the transaction is not expected to result in a
material gain or loss.
The Company believes that its cash flows from operations and available
borrowings under its bank credit facilities will be sufficient to fund its
anticipated liquidity requirements for the next twelve months. In the event
that the foregoing sources are not sufficient to fund the Company's
expenditures and service its indebtedness, the Company would be required to
raise additional funds.
Year 2000
The Year 2000 problem arose because many existing computer programs use
only the last two digits to refer to a year. Therefore, these computer
programs do not properly recognize a year that begins with "20." If not
corrected, many computer programs could fail or cause erroneous results.
Failures of this nature could cause interruptions to manufacturing processes,
business and financial functions and communications with customers and
suppliers.
Due to the diverse nature of the Company's operations, each operating
division has its own discrete computer systems. The Company is performing a
comprehensive review to identify the systems affected by the Year 2000 issue.
The Company is assessing its information technology systems such as business
computing systems, end user computer systems and technical infrastructure, as
well as embedded systems commonly found in manufacturing and service
equipment, testing equipment and environmental operations. The assessments
also include the Company's products and evaluation of the readiness of its
suppliers and service providers.
The review of each of the systems involves a five step process. The
Company first inventories areas of potential risk based on comparison to
published industry guidelines. Each component identified in the inventory is
then evaluated for its risk of failure and the impact of potential failure to
the Company's operations and its customers. Once the risks are assessed,
remediation is commenced. Options for remediation may include replacement,
modification or continued use depending on information gathered during the
inventory and assessment stages. The remediated system is then tested and
reviewed before the determination is made as to the readiness of the system.
A project committee meets regularly to review the status of the investigation
into and resolution of Year 2000 issues. Most of the Company's divisions have
completed the inventory and assessment phases and are working on remediation
and testing. The remaining divisions have the inventory and assessment phases
underway. The Company expects that all divisions will have completed the
inventory and assessment phases by February 28, 1999 and will have implemented
initial remediation attempts and testing thereof by June 30, 1999.
The Company's remaining costs to remediate the Year 2000 problem are not
expected to exceed $4.0 million. Of this amount, approximately $1.5 million
will be spent in the form of capital for systems replacement and approximately
$1.0 million will be incremental costs. The remaining costs relate to the
redeployment of the Company's existing resources to assess and remediate the
Year 2000 problem. Projects being deferred by this issue include items such
as system enhancements that would improve performance or functionality. The
impact on net income (loss) to date has not been material.
The Company suspects its greatest risk lies within its financial computer
systems and Electronic Data Interchange ("EDI") capabilities with its
customers and suppliers. The Company relies on customer requirements and
outside services for most of its EDI capabilities and therefore is dependent
on such parties addressing Year 2000 issues. If these systems were to fail,
the Company would encounter difficulty performing functions such as compiling
financial data, invoicing customers, accepting electronic customer orders or
informing customers of shipment electronically. While some of these functions
could be performed manually, the Company presently is not certain what the
extent of the impact on operations would be. There is also risk associated
with certain suppliers, including utility companies, over which the Company
has little control. The Company is presently working on contingency plans to
address issues related to potential failures of critical systems due to Year
2000 problems, and it expects to have those plans in place by May 31, 1999.
The Company presently believes that through the planned modification to
existing systems and conversion to new systems, as well as ongoing
correspondence with suppliers and customers, the Year 2000 issue will not
materially impair the Company's ability to conduct business.
Euro Conversion
The Company has both operating divisions and domestic export customers
located in Europe. In 1997, combined revenues from these sources was
approximately 13% of total revenues. Revenues involving countries
participating in the Euro conversion were somewhat lower. The Company is
currently assessing the impact of the Euro conversion on its operations.
The Company's European operations are taking steps to ensure their
capability of entering Euro transactions as of January 1, 1999. It is not
anticipated that changes to information technology and other systems which are
necessary to enter these transaction will be material. The affected operations
plan to make the Euro the functional currency sometime during the transition
period.
It is difficult to assess the competitive impact of the Euro conversion on
the Company's operations. In some markets, where customers already appear to
be considering the exchange rates when considering prices, this process may be
accelerated. In other markets, where sales are made in U.S. dollars, there
may be pressures to denominate sales in the Euro, however, exchange risks
resulting from these transactions would be hedged.
Forward-Looking Statements
This Form 10-Q contains statements which, to the extent that they are not
recitations of historical fact, constitute "forward looking statements" within
the meaning of Section 21E of the Securities Exchange Act of 1934. The words
"estimate," "anticipate," "project," "intend," "believe," "expect," and
similar expressions are intended to identify forward looking statements. Such
forward-looking information involves important risks and uncertainties that
could materially alter results in the future from those expressed in any
forward-looking statements made by, or on behalf of, the Company. These risks
and uncertainties include, but are not limited to, the ability of the Company
to maintain existing relationships with customers, the ability of the Company
to successfully implement productivity improvements, cost reduction
initiatives, facilities expansion and the ability of the Company to develop,
market and sell new products and to continue to comply with environmental
laws, rules and regulations. Other risks and uncertainties include
uncertainties relating to economic conditions, acquisitions and divestitures,
government and regulatory policies, technological developments and changes in
the competitive environment in which the Company operates. Persons reading
this Form 10-Q are cautioned that such forward-looking statements are only
predictions and that actual events or results may differ materially. In
evaluating such statements, readers should specifically consider the various
factors which could cause actual events or results to differ materially from
those indicated by such forward-looking statements.