-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FiED1+f4CxXCXbZ7/Saiw7ragB2YfXk/narUDczc9GZzqnPikPxAFKfTKiwvpO4A rxDxuzerMlphBZ8W/ZaA/Q== 0000025757-98-000058.txt : 19981111 0000025757-98-000058.hdr.sgml : 19981111 ACCESSION NUMBER: 0000025757-98-000058 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19980926 FILED AS OF DATE: 19981110 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CROMPTON & KNOWLES CORP CENTRAL INDEX KEY: 0000025757 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 041218720 STATE OF INCORPORATION: MA FISCAL YEAR END: 1225 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04663 FILM NUMBER: 98741668 BUSINESS ADDRESS: STREET 1: ONE STATION PL STREET 2: METRO CTR CITY: STAMFORD STATE: CT ZIP: 06902 BUSINESS PHONE: 2033535400 MAIL ADDRESS: STREET 1: ONE STATION PLACE STREET 2: METRO CENTER CITY: STAMFORD STATE: CT ZIP: 06902 10-Q 1 CROMPTON & KNOWLES CORPORATION 3RD QTR SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended September 26, 1998 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 No. 1-4663 Crompton & Knowles Corporation (exact name of registrant as specified in its charter) Massachusetts 04-1218720 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) One Station Place, Metro Center Stamford, Connecticut 06902 (address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (203)353-5400 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 Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding at October 14, 1998 Common Stock, $.10 par value 72,062,595 shares CROMPTON & KNOWLES CORPORATION FORM 10-Q FOR QUARTER ENDED SEPTEMBER 26, 1998 INDEX PART I. FINANCIAL INFORMATION: Item 1. Condensed Financial Statements and Accompanying Notes . Consolidated Statements of Earnings (unaudited) - Quarters and nine months ended September 26, 1998 and September 27, 1997 . Consolidated Balance Sheets - September 26, 1998 (unaudited) and December 27, 1997 . Consolidated Statements of Cash Flows (unaudited) - Nine months ended September 26, 1998 and September 27, 1997 . Notes to Consolidated Financial Statements - Quarter ended September 26, 1998 (unaudited) Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION: Item 1. Legal proceedings Item 6. Exhibits and Reports on Form 8-K Signatures Exhibit 11 Statement Re Computation of Per Share Earnings *Exhibit 27 Financial Data Schedules * A copy of this Exhibit is annexed to this report on Form 10-Q provided to the Securities and Exchange Commission and the New York Stock Exchange. UNAUDITED CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings Quarters and nine months ended September 26, 1998 and September 27, 1997 (In thousands, except per share data) Quarters ended Nine months ended Sept. 26, Sept. 27, Sept. 26, Sept. 27, 1998 1997 1998 1997 Net sales $ 442,768 $ 455,076 $ 1,394,324 $ 1,423,091 Cost of products sold 279,600 287,626 874,156 904,636 Selling, general and administrative 64,219 67,713 197,566 204,152 Depreciation and amortization 20,164 20,092 60,651 60,245 Research and development 13,080 13,543 39,443 39,481 Severance and other costs - 13,000 - 13,000 Special environmental charge - 15,000 - 15,000 Operating profit 65,705 38,102 222,508 186,577 Interest expense 17,916 25,641 62,034 79,175 Other income (1,055) (27,910) (2,602) (27,129) Earnings before income taxes and extraordinary loss 48,844 40,371 163,076 134,531 Provision for income taxes 18,252 15,549 60,746 51,330 Earnings before extraordinary loss 30,592 24,822 102,330 83,201 Extraordinary loss on early extinguishment of debt (5,674) (1,882) (21,468) (3,109) Net earnings $ 24,918 $ 22,940 $ 80,862 $ 80,092 Basic earnings per common share Earnings before extraordinary loss $ .41 $ .33 $ 1.37 $ 1.13 Extraordinary loss (.07) (.02) (.28) (.04) Net earnings $ .34 $ .31 $ 1.09 $ 1.09 Diluted earnings per common share Earnings before extraordinary loss $ .40 $ .32 $ 1.34 $ 1.10 Extraordinary loss (.07) (.02) (.28) (.04) Net earnings $ .33 $ .30 $ 1.06 $ 1.06 Dividends per common share $ - $ - $ .05 $ .05 See accompanying notes to consolidated financial statements. - 2 - September 26, 1998 UNAUDITED CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets September 26, 1998 and December 27, 1997 (In thousands of dollars) September 26, December 27, 1998 1997 ASSETS CURRENT ASSETS Cash $ 8,803 $ 10,607 Accounts receivable 288,311 262,412 Inventories 357,921 356,716 Other current assets 71,843 85,314 Total current assets 726,878 715,049 NON-CURRENT ASSETS Property, plant and equipment 476,292 474,892 Cost in excess of acquired net assets 180,023 181,025 Other assets 161,690 177,854 $ 1,544,883 $ 1,548,820 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable $ 11,595 $ 1,770 Accounts payable 147,435 145,405 Accrued expenses 149,331 149,910 Income taxes payable 48,022 38,909 Other current liabilities 26,420 27,094 Total current liabilities 382,803 363,088 NON-CURRENT LIABILITIES Long-term debt 811,769 896,291 Postretirement health care liability 148,392 149,344 Other liabilities 144,148 160,187 STOCKHOLDERS' EQUITY (DEFICIT) Common stock 7,733 7,733 Additional paid-in capital 236,761 232,213 Accumulated deficit (96,878) (174,019) Accumulated translation adjustment (34,894) (42,045) Treasury stock at cost (51,357) (40,228) Deferred compensation (834) (984) Pension liability adjustment (2,760) (2,760) Total stockholders' equity (deficit) 57,771 (20,090) $ 1,544,883 $ 1,548,820 See accompanying notes to consolidated financial statements. - 3 - UNAUDITED CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Nine months ended September 26, 1998 and September 27, 1997 (In thousands of dollars) Sept. 26, Sept. 27, Increase (decrease) to cash 1998 1997 CASH FLOWS FROM OPERATING ACTIVITIES Net earnings $ 80,862 $ 80,092 Adjustments to reconcile net earnings to net cash provided by operations: Extraordinary loss on early debt extinguishment 21,468 3,109 Depreciation and amortization 60,651 60,245 Noncash interest 4,977 10,541 Deferred taxes 6,442 21,689 Changes in assets and liabilities, net (8,916) (9,292) Net cash provided by operations 165,484 166,384 CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions (5,927) - Capital expenditures (42,084) (27,900) Other investing activities 380 3,008 Net cash used by investing activities (47,631) (24,892) CASH FLOWS FROM FINANCING ACTIVITIES Redemption of 11% and 12% notes (352,802) - Proceeds (payments) on long-term borrowings 259,438 (136,975) Proceeds (payments) on short-term borrowings 9,825 (5,901) Premium paid on early extinguishment of debt (22,984) (4,123) Treasury stock acquired (20,922) - Dividends paid (3,721) (3,671) Other financing activities 10,669 3,612 Net cash used by financing activities (120,497) (147,058) CASH Effect of exchange rates on cash 840 (400) Change in cash (1,804) (5,966) Cash at beginning of period 10,607 21,120 Cash at end of period $ 8,803 $ 15,154 See accompanying notes to consolidated financial statements. -4- CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES Notes to Unaudited Consolidated Financial Statements Quarter ended September 26, 1998 PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS The information included in the foregoing consolidated financial statements is unaudited but reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. Included in accounts receivable are allowances for doubtful accounts of $12.8 million in 1998 and $8.7 million at December 27, 1997. Accumulated depreciation amounted to $456.9 million in 1998 and $416.6 million at December 27, 1997. Accumulated amortization of cost in excess of acquired net assets amounted to $46.7 million in 1998 and $42.2 million at December 27, 1997. Accumulated amortization of patents, unpatented technology, trademarks and other intangibles included in other assets amounted to $134.4 million in 1998 and $123.3 million at December 27, 1997. Cash payments during the nine months ended September 26, 1998 and September 27, 1997 included interest of $57.3 million and $62.7 million, respectively, and income taxes of $24.2 million and $25.1 million, respectively. It is suggested that the interim consolidated financial statements be read in conjunction with the consolidated financial statements and notes included in the Company's 1997 Annual Report on Form 10-K. CAPITAL STOCK As of September 26, 1998, there were 77,332,751 common shares issued at $.10 par value, of which 3,891,856 shares were held in the treasury. INVENTORIES Components of inventories are as follows: Sept.26, Dec. 27, (In thousands) 1998 1997 Finished goods $243,666 $226,730 Work in process 42,500 47,029 Raw materials and supplies 71,755 82,957 $357,921 $356,716 EARNINGS(LOSS)PER COMMON SHARE The computation of basic earnings per common share is based on the weighted average number of common shares outstanding. The computation of diluted earnings per common share is based on the weighted average number of common and common equivalent shares outstanding. The following is a reconciliation of the shares used in both computations: (In thousands) Third Quarter Nine Months 1998 1997 1998 1997 Weighted average common shares outstanding 74,460 73,508 74,331 73,309 Stock options, warrants and other equivalents 1,823 2,117 2,189 1,902 Weighted average common and common equivalent shares outstanding 76,283 75,625 76,520 75,211 BUSINESS SEGMENT DATA Third Quarter Ended Sept. 26, Sept. 27, (In thousands) 1998 1997 SALES Specialty Chemicals $ 352,322 $ 375,328 Specialty Equipment and Controls 90,446 79,748 Total net sales $ 442,768 $ 455,076 OPERATING PROFIT Specialty Chemicals $ 56,902 $ 61,407 Specialty Equipment and Controls 11,814 10,165 Severance and other costs - ( 13,000) Special environmental provision - ( 15,000) General corporate expense ( 3,011) ( 5,470) Total operating profit $ 65,705 $ 38,102 Nine Months Ended Sept. 26, Sept. 27, (In thousands) 1998 1997 SALES Specialty Chemicals $ 1,139,117 $ 1,192,337 Specialty Equipment and Controls 255,207 230,754 Total net sales $ 1,394,324 $ 1,423,091 OPERATING PROFIT Specialty Chemicals $ 205,019 $ 206,039 Specialty Equipment and Controls 32,012 25,913 Severance and other costs - ( 13,000) Special environmental provision - ( 15,000) General corporate expense ( 14,523) ( 17,375) Total operating profit $ 222,508 $ 186,577 COMPREHENSIVE INCOME Effective in the first quarter of 1998, the Company adopted Financial Accounting Standards Board Statement No. 130 "Reporting Comprehensive Income". The statement establishes standards for reporting "comprehensive income" and its components in financial statements and notes thereto. An analysis of the Company's comprehensive income follows: Third Quarter Nine Months Ended Ended Sept.26, Sept.27, Sept.26, Sept.27, (In thousands) 1998 1997 1998 1997 Net earnings $ 24,918 $ 22,940 $ 80,862 $ 80,092 Other comprehensive (income)expense: Foreign currency translation adjustments (11,690) 1,871 ( 7,151) 13,110 Minimum pension liability adjustments, net - - - ( 953) (11,690) 1,871 ( 7,151) 12,157 Comprehensive income $ 36,608 $ 21,069 $ 88,013 $ 67,935 LONG-TERM DEBT On March 31, 1998, the Company amended its $600 million revolving credit agreement with a syndicate of banks. The termination date was extended to September 2003 from August 2001. Borrowings under the credit agreement were amended as follows: Tranche I provides a maximum of $375 million (up from $300 million) available to the Company for working capital and general corporate purposes. Tranche II provides a maximum of $75 million (down from $150 million) available to Uniroyal Chemical Company, Inc. for working capital and general corporate purposes. Tranche III continues to provide up to $150 million available to the European and Canadian subsidiaries of the Company. On May 8, 1998 the Company redeemed the outstanding 11% Senior Subordinated Notes at a price of 105.5% of the principal amount thereof plus accrued and unpaid interest and the 12% Subordinated Discount Notes at a price of 100% of the principal amount thereof plus accrued and unpaid interest. The payment for the redemption including premium and accrued interest amounted to $366.2 million and was funded by drawing on the Company's $600 million revolving credit agreement. In addition, $107.2 million of the Company's 9% and 10.5% debt was refinanced in the nine months of 1998. Borrowings under the revolving credit agreement totaled $453.4 million at September 26, 1998. RECENT EVENT On September 17, 1998, the Company and Bayer AG, Germany announced an agreement in principle to form a joint venture to serve the agricultural seed treatment market in North America. The basis of the joint venture will be the Company's Gustafson seed treatment business. The transaction is anticipated to close in November 1998. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THIRD QUARTER RESULTS Overview Consolidated net sales of $442.8 million for the third quarter of 1998 decreased 3% from the comparable period in 1997. The decrease was primarily attributable to lower unit volume. International sales, including US exports, were 41% of total sales, unchanged from the third quarter of 1997. Net earnings before extraordinary losses on early extinguishment of debt increased 23% to $30.6 million, or $.41 per share basic and $.40 per share diluted, compared to $24.8 million, or $.33 per share basic and $.32 per share diluted, in last year's third quarter. The extraordinary losses on early extinguishment of debt were $5.7 million, or $.07 per share in the third quarter of 1998 and $1.9 million, or $.02 per share in the comparable 1997 quarter. Net earnings were $24.9 million, or $.34 per share basic and $.33 per share diluted, compared with $22.9 million, or $.31 per share basic and $.30 per share diluted, in the prior year's third quarter. Gross margin as a percentage of net sales increased slightly to 36.9% from 36.8% in the third quarter of 1997. Consolidated operating profit of $65.7 million was essentially unchanged from the $66.1 million (before special charges of $28 million) in the third quarter of 1997. The specialty chemicals segment decreased 7% while the specialty process equipment and controls segment increased 16%. Specialty Chemicals The Company's specialty chemicals segment sales of $352.3 million decreased 6% from the comparable 1997 period. The decrease was primarily due to lower unit volume. An analysis of sales by major product class within the specialty chemicals segment follows. Chemicals and polymers sales of $115.9 million decreased 4% from the third quarter of 1997 primarily due to lower unit volume offset, in part, by improved pricing. Sales of rubber chemicals were 9% lower than 1997 primarily due to an unfavorable sales mix and lower unit volume. EPDM sales increased 8% primarily due to improved pricing. Nitrile rubber sales decreased 12% primarily as a result of lower unit volume. Crop protection sales of $86.9 million decreased 5% from the comparable 1997 quarter primarily as a result of lower unit volume. The U.S. farm economy worsened during the third quarter of 1998 as drought, low commodity prices and lack of grower financing impacted demand for the Company's insecticide, harvest aid and seed treatment products. In addition, international sales were negatively impacted by economic conditions in Russia, Asia and Central Europe. Specialty sales of $74.7 million decreased 4% versus the third quarter of 1997 primarily attributable to lower unit volume as weak demand for urethanes more than offset increased sales from the introduction of a new polymerization inhibitor and the recent plant expansion for synthetic lubricants. Colors sales of $53.2 million decreased 15% from the third quarter of 1997 primarily due to lower unit volume of 13% and lower pricing of 2%. Increased imports of finished apparel from Asia adversely affected the business. Specialty ingredients sales of $21.6 million were 8% lower than the third quarter of 1997 primarily attributable to lower unit volume as a result of product rationalization in the second half of 1997. Operating profit of $56.9 million decreased 7% versus the third quarter of 1997 primarily as a result of lower unit volume and unfavorable product mix within certain businesses. Specialty Process Equipment and Controls The Company's specialty process equipment and controls segment sales of $90.5 million increased 13% from the third quarter of 1997 primarily as a result of increased unit volume. Operating profit of $11.8 million increased 16% from the third quarter of 1997 primarily attributable to higher unit volume. The order backlog of extruders and related equipment at the end of the third quarter of 1998 amounted to $117 million compared to $115 million at the end of the second quarter. Other Selling, general and administrative expenses of $64.2 million decreased 5% versus the third quarter of 1997 primarily due to an adjustment of long-term incentive expense caused by the Company's recent share price decline. Depreciation and amortization of $20.2 million increased slightly from the comparable 1997 period. Research and development costs of $13.1 million decreased 3% from the third quarter of 1997, but as a percentage of sales remained constant at 3%. Interest expense of $17.9 million decreased 30% from the comparable period of 1997 primarily due to lower levels of indebtedness and lower interest cost on borrowings used to redeem the 11% and 12% Notes in May, 1998. Other income of $1.1 million decreased significantly from $27.9 million in the third quarter of 1997, primarily as a result of the settlement of post retirement medical and life insurance benefits with the U.S. Department of the Army which resulted in a gain to the company of $28.0 million in 1997. The effective tax rate of 37.4% decreased versus the 38.5% in the comparable 1997 quarter. YEAR-TO-DATE RESULTS Overview Consolidated net sales of $1.39 billion for the first nine months of 1998 decreased 2% from the comparable period in 1997. The decrease resulted primarily from lower unit volume (1%) and the impact of lower foreign currency translation (1%). International sales, including U.S. exports, increased as a percentage of total sales to 40% from 39% for the first nine months of 1997. Net earnings before extraordinary losses on early extinguishment of debt increased 23% to $102.3 million, or $1.37 per share basic and $1.34 per share diluted, compared to $83.2 million, or $1.13 per share basic and $1.10 per share diluted, for the prior year. The extraordinary losses on early extinguishment of debt were $21.5 million, or $.28 per share in 1998, and $3.1 million, or $.04 per share, in the first nine months of 1997. Net earnings were $80.9 million, or $1.09 per share basic and $1.06 per share diluted, compared with $80.1 million, or $1.09 per share basic and $1.06 per share diluted, for the comparable period in 1997. Gross margin as a percentage of net sales increased to 37.3% from 36.4% for the first nine months of 1997. The increase was attributable primarily to lower raw material costs and improved pricing. Consolidated operating profit increased 4% to $222.5 million from $214.6 million (before special charges of $28 million) in the prior year. The specialty chemicals segment was slightly lower than 1997 while the specialty process equipment and controls segment increased 24%. Specialty Chemicals The Company's specialty chemicals segment sales of $1.14 billion decreased 4% from the comparable 1997 period. The decrease was primarily due to lower unit volume of 3% and lower foreign currency translation of 1%. An analysis of sales by major product class within the specialty chemicals segment follows. Chemicals and polymers sales of $360.2 million decreased 4% from the first nine months of 1997. The decrease was primarily attributable to lower unit volume of 3% and lower foreign currency translation of 1%. Sales of rubber chemicals were 9% lower than 1997 primarily due to lower pricing, unfavorable sales mix and unit volume. EPDM sales increased 8% primarily due to improved pricing. Nitrile rubber sales decreased 8% primarily as a result of lower unit volume. Crop protection sales of $295.3 million decreased 5% from the comparable 1997 period primarily as a result of lower unit volume. Unfavorable weather, low commodity prices and lack of grower financing impacted demand for insecticide and other products in the United States, and international sales were negatively impacted by economic conditions in Russia, Asia and Central Europe. Specialty sales of $234.9 million were comparable to the prior year. Improved pricing of 1% was offset by the impact of lower foreign currency translation. Colors sales of $178.9 million decreased 9% from the first nine months of 1997 primarily due to lower unit volume of 6%, foreign currency translation of 2% and lower pricing of 1%. Specialty ingredients sales of $69.8 million were 7% lower than the comparable period in 1997 primarily attributable to lower unit volume as a result of product rationalization in the second half of 1997. Operating profit of $205.0 million decreased $1.0 million from $206.0 million for the nine month period in 1997 primarily from a decrease in unit volume offset by lower operating costs and improved pricing. Specialty Process Equipment and Controls The Company's specialty process equipment and controls segment reported sales of $255.2 million representing an 11% increase from the 1997 nine month period primarily due to higher unit volume. Operating profit of $32.0 million increased 24% versus the comparable 1997 period primarily due to increased unit volume and improved pricing and product mix. Other Selling, general and administrative expenses of $197.6 million decreased 3% versus the comparable period in 1997, primarily from the lower unit volume of sales and an adjustment of long- term incentive expense caused by the Company's share price decline. Depreciation and amortization of $60.7 million increased 1% versus the 1997 period primarily as a result of a higher fixed asset base. Research and development cost of $39.4 million approximated the comparable period in 1997 and as a percentage of net sales remained constant at 3%. Interest expense of $62.0 million decreased 22% from the nine months of 1997 due to lower levels of indebtedness and lower interest cost on borrowings used to redeem the 11% and 12% Notes in May. Other income of $2.6 million in 1998 decreased significantly from $27.1 million in 1997 which included a settlement gain of $28.0 million with the U.S. Department of the Army. The effective tax rate of 37.3% decreased versus the 38.2% rate in the comparable 1997 period. LIQUIDITY AND CAPITAL RESOURCES The September 26, 1998 working capital balance of $344.1 million decreased $7.9 million from year-end 1997. The current ratio of 1.9 decreased slightly from 2.0 at the end of 1997. Days sales in receivables averaged 55 days versus 54 days for the nine months of 1997. Inventory turnover averaged 3.2 compared to 3.3 for the nine months of 1997. Net cash flow provided by operations of $165.5 million decreased $900 thousand compared to the first nine months of 1997 primarily due to increased operating earnings more than offset by lower noncash interest and deferred taxes. The cash flow was primarily used, together with additional credit agreement borrowings, to fund capital expenditures, reduce debt including the 11% and 12% Notes, repurchase 1.3 million shares of the Company's common stock and pay the annual cash dividend. The Company's debt to total capital percentage decreased to 93% from 102% at year-end 1997. The Company's liquidity needs, including debt servicing, are expected to be financed from operations. On May 8, 1998 the Company redeemed the outstanding 11% Senior Subordinated Notes and the 12% Subordinated Discount Notes. The payment for the redemption including premium and accrued interest amounted to $366.2 million and was funded by drawing on the Company's $600 million revolving credit agreement. Borrowings under the revolving credit agreement totaled $453.4 million at September 26, 1998. On September 17, 1998, the Company and Bayer AG, Germany announced an agreement in principle to form a joint venture to serve the agricultural seed treatment market in North America. The basis of the joint venture will be the Company's Gustafson seed treatment business. The transaction is anticipated to close in November 1998. Capital expenditures are expected to approximate $60 million in 1998 primarily for replacement needs and improvement of domestic and foreign facilities. YEAR 2000 ISSUES The Company has assessed and continues to assess its Information Technology (IT) infrastructures including those systems that are typically viewed as non-IT systems to determine and address any potential problems that may result from Year 2000 compliance issues. As generally known, Year 2000 compliance issues pertain to the ability of computerized systems to recognize and process date sensitive information beginning January 1, 2000. The Company has performed this assessment over the last two years and has been implementing appropriate steps to be Year 2000 compliant in both its IT and non-IT systems. Under the Company's current environment, IT systems include mission critical applications that directly support the Company's operations. These IT systems also include networked personal computers running desktop applications. Typical non-IT system within the Company's environment include process controls and other microcontrollers containing imbedded computer chips. Assessment of non-IT systems is an ongoing activity and, to the extent that any existing non-IT system has Year 2000 compliance issues, the Company is aggressively undertaking measures to remedy such systems. The Company believes that existing non-IT systems will continue to function without significant problems beyond January 1, 2000. The Company employs a number of major mission critical IT systems in its Specialty Chemicals business. These systems are currently being upgraded to address Year 2000 compliance issues and the Company expects this to be completed by mid-1999. The Company's Specialty Machinery and Controls business is supported by a legacy system that runs on a mid-range computer system. This system has been reworked, tested and the Company believes that it is now Year 2000 compliant. The Company has assessed all other IT systems including non-IT systems in this business segment and has undertaken necessary steps to address any Year 2000 compliance issues. This business currently sells equipment controls containing programs and microchips. The Company believes that these products which are used in the operation of extrusion machinery are Year 2000 compliant. The Company has operations in Europe, Asia Pacific, and Latin America supported by IT systems operating on mid-range computers. The Company is presently upgrading these IT systems to address Year 2000 compliance. The Company expects to complete this upgrade by mid-1999. The Company is actively looking into the overall Year 2000 readiness of its major business partners including vendors, suppliers, and service providers in order to determine that the Company's operations will not be disrupted in the event that any such third party failed to have Year 2000 compliant systems. The Company has received assurances from nearly all of the major business entities that it conducts business with that these entities will be able to conduct business beyond January 1, 2000 without any disruption. The Company continues to provide status information of its Year 2000 compliance effort to its customers and assures its customers that the Company's IT infrastructure will continue to function properly beyond January 1, 2000. The Company has spent approximately $4.6 million to assess and correct Year 2000 compliance issues in its IT infrastructure through September 26, 1998. The Company estimates that it will spend an additional $1.9 million to complete the remediation of Year 2000 compliance issues in its IT infrastructure. The Company is committed to allocate funds to remediate any other Year 2000 compliance issues in the course of its ongoing assessment of its IT infrastructure. Year 2000 compliance costs are not expected to have a material effect on the Company's results of operations. The Company does not expect to have any material risk exposure emanating from its internal IT infrastructure. While it is not expected to occur, failures of the Company's supplier's vendors, and key customers to address the Year 2000 compliance could have material adverse impact on the Company's operations. In particular, failures of the Company's energy and telecommunication suppliers to address Year 2000 compliance could have an immediate impact on the Company's operations. The Company is continuing to assess and focus its efforts to mitigate any potential risk associated with the Year 2000 compliance. The Company does not have any formal contingency plan at this time. The Company continually monitors the need to develop a formal contingency plan. ACCOUNTING STANDARD CHANGE In June 1997 the Financial Accounting Standards Board issued Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information", which is effective for years beginning after 1997. In June 1998, the Financial Accounting Standards Board issued Statement No. 133 "Accounting for Derivative Instruments and Hedging Activities", which is effective for years beginning after 1999. The Company is currently evaluating the statements and plans to adopt Statement No. 131 in the fourth quarter of 1998 and Statement No. 133 in the first quarter of 2000. ENVIRONMENTAL MATTERS The Company is involved in claims, litigation, administrative proceedings and investigations of various types in a number of jurisdictions. A number of such matters involve claims for a material amount of damages and relate to or allege environmental liabilities, including clean-up costs associated with hazardous waste disposal sites, natural resource damages, property damage and personal injury. The Company and some of its subsidiaries have been identified by federal, state or local governmental agencies, and by other potentially responsible parties (each a "PRP") under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, or comparable state statutes, as a PRP with respect to costs associated with waste disposal sites at various locations in the United States. In addition, the Company is involved with environmental remediation and compliance activities at some of its current and former sites in the United States and abroad. Each quarter, the Company evaluates and reviews estimates for future remediation and other costs to determine appropriate environmental reserve amounts. For each site a determination is made of the specific measures that are believed to be required to remediate the site, the estimated total cost to carry out the remediation plan, the portion of the total remediation costs to be borne by the Company and the anticipated time frame over which payments toward the remediation plan will occur. As of September 26, 1998, the Company's reserves for environmental remediation activities totaled $96.7 million. These estimates may change in the future should additional sites be identified, further remediation measures be required or undertaken, the interpretation of current laws and regulations be modified or additional environmental laws and regulations be enacted. The Company intends to assert all meritorious legal defenses and other equitable factors which are available to it with respect to the above matters. The Company believes that the resolution of these environmental matters will not have a material adverse effect on the consolidated financial position of the Company. While the Company believes it is unlikely, the resolution of these environmental matters could have a material adverse effect on the Company's consolidated results of operation in any given year if a significant number of these matters are resolved unfavorably. FORWARD-LOOKING STATEMENTS The information in this Form 10-Q contains forward-looking statements and estimates which are based on currently available information. The Company's actual results may differ significantly from the results discussed. Investors are cautioned that there can be no assurance that the actual results will not differ materially from those suggested in such forward- looking statements and estimates. Part II -- OTHER INFORMATION Item 1. Legal Proceedings. (a) Reference is made to Item 1(i) of the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 28, 1997, and to page 16 (Other Environmental Matters) of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 27, 1997 for information relating to Uniroyal's Painesville, Lake County, Ohio facility and to the facility's litigation with the Lake County Board of Commissioners. In September 1998, the parties entered into a settlement agreement pursuant to which Uniroyal agreed to comply with certain interim and final limits pertaining to the discharge of certain substances from its wastewater to the Lake County sanitary sewer system and paid an administrative fine of $176,000, and Lake County dismissed all of its present and past claims against Uniroyal with prejudice. (b) Reference is made to Item 3 of the Registrant's Annual Report on Form 10-K for the fiscal year ended December 27, 1997, for information pertaining to the Vertac Chemical Corporation site in Jacksonville, Arkansas ("Vertac Site") allegedly contaminated by dioxins. On October 23, 1998, the United States District Court for the Eastern District of Arkansas, Western Division, entered an order granting the United States of America's motion for summary judgement against the Registrant's Canadian subsidiary, Uniroyal Chemical Co./Cie. ("Uniroyal") and Hercules Incorporated ("Hercules") as to the amount of $102.9 million of removal and remediation costs that the United States claims it incurred at the Vertac Site. Trial on the allocation of these costs as between Uniroyal and Hercules was concluded on November 6, 1998, and how much, if any, of the costs will ultimately be imposed on Uniroyal cannot be determined at this time, although Uniroyal continues to believe that its share of liability will be small in comparison to that of Hercules. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Number Description 11 Statement Re Computation of Per Share Earnings 27* Financial Data Schedules (b) No reports on Form 8-K were filed during the quarter for which this report is filed. * A copy of this Exhibit is annexed to this report on Form 10-Q provided to the Securities and Exchange Commission and the New York Stock Exchange. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CROMPTON & KNOWLES CORPORATION (Registrant) November 10, 1998 By:/s/ Charles J. Marsden Charles J. Marsden Senior Vice President & Chief Financial Officer November 10, 1998 By:/s/ John T. Ferguson II John T. Ferguson II Vice President, General Counsel and Secretary EX-11 2 CROMPTON & KNOWLES CORPORATION AND SUBSIDIARIES EXHIBIT 11 - STATEMENT RE COMPUTATION OF PER SHARE EARNINGS (In thousands, except per share data) Quarters Ended Nine Months Ended Sept.26, Sept.27, Sept.26, Sept.27, 1998 1997 1998 1997 BASIC Earnings Earnings before extraordinary loss $ 30,592 $ 24,822 $ 102,330 $ 83,201 Extraordinary loss on early extinguishment of debt (5,674) (1,882) (21,468) (3,109) Net earnings $ 24,918 $ 22,940 $ 80,862 $ 80,092 Shares Weighted average shares outstanding 74,460 73,508 74,331 73,309 Per share Earnings before extraordinary loss $ .41 $ .33 $ 1.37 $ 1.13 Extraordinary loss on early extinguishment of debt (.07) (.02) (.28) (.04) Net earnings $ .34 $ .31 $ 1.09 $ 1.09 DILUTED Earnings Earnings before extraordinary loss $ 30,592 $ 24,822 $ 102,330 $ 83,201 Extraordinary loss on early extinguishment of debt (5,674) (1,882) (21,468) (3,109) Net earnings $ 24,918 $ 22,940 $ 80,862 $ 80,092 Shares Weighted average shares outstanding 74,460 73,508 74,331 73,309 Common stock equivalents 1,823 2,117 2,189 1,902 Average shares outstanding 76,283 75,625 76,520 75,211 Per share Earnings before extraordinary loss $ .40 $ .32 $ 1.34 $ 1.10 Extraordinary loss on early extinguishment of debt (.07) (.02) (.28) (.04) Net earnings $ .33 $ .30 $ 1.06 $ 1.06 EX-27 3
5 0000025757 CROMPTON & KNOWLES CORPORATION 1,000 9-MOS DEC-26-1998 SEP-26-1998 8,803 0 288,311 12,750 357,921 726,878 476,292 456,882 1,544,883 382,803 811,769 0 0 7,733 50,038 1,544,883 1,394,324 1,394,324 874,156 1,171,816 (2,602) 3,533 62,034 163,076 60,746 102,330 0 (21,468) 0 80,862 1.09 1.06 Reflects Basic earnings per share.
EX-27 4
5 0000025757 CROMPTON & KNOWLES CORPORATION 1,000 9-MOS DEC-27-1997 SEP-27-1997 15,154 0 281,595 8,787 350,491 732,777 471,437 409,766 1,572,781 359,866 924,549 0 0 7,733 (35,621) 1,572,781 1,423,091 1,423,091 904,636 1,236,514 (27,129) 1,400 79,175 134,531 51,330 83,201 0 (3,109) 0 80,092 1.09 1.06 Reflects Basic earnings per share. Restated for FAS 128. Restated for FAS 128.
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