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SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C. 20549
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FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
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For Quarter Ended December 31, 2002 Commission File Number 1-5341
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ELKCORP
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(Exact name of Registrant as specified in its charter)
DELAWARE 75-1217920
- --------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14643 DALLAS PARKWAY
SUITE 1000, WELLINGTON CENTRE, DALLAS, TEXAS 75254-8890
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (972) 851-0500
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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 by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X]. No [ ] .
As of close of business on January 31, 2003, Registrant had outstanding
19,496,289 shares of Common Stock, par value $1 per share.
ELKCORP AND SUBSIDIARIES
FOR THE QUARTER ENDED DECEMBER 31, 2002
INDEX
Page
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PART I. FINANCIAL INFORMATION (UNAUDITED)
Item 1. Financial Statements
Consolidated Statements of Operations for the Three Months and
Six Months Ended December 31, 2002 and 2001 1
Consolidated Balance Sheets as of
December 31, 2002 and June 30, 2002 2
Consolidated Statements of Cash Flows for the Six Months Ended
December 31, 2002 and 2001 3
Notes to Consolidated Financial Statements 4-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 19
Item 4. Controls and Procedures 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
SIGNATURES 23
CERTIFICATIONS 24-25
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ELKCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, $ in thousands,
except per share data)
Three Months Ended Six Months Ended
December 31, December 31,
----------------------------- ----------------------------
2002 2001 2002 2001
----------- ----------- ----------- -----------
SALES $ 109,063 $ 113,128 $ 229,145 $ 256,347
----------- ----------- ----------- -----------
COST AND EXPENSES
Cost of sales 89,131 90,107 184,559 206,611
Selling, general and administrative 13,970 15,421 28,072 30,461
Noncash stock option compensation -- 4,040 (5,378) 5,477
----------- ----------- ------------ -----------
INCOME FROM OPERATIONS 5,962 3,560 21,892 13,798
----------- ----------- ----------- -----------
OTHER EXPENSE
Interest expense, net 1,373 1,337 3,053 3,617
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 4,589 2,223 18,839 10,181
Provision for income taxes 1,773 960 7,027 4,018
----------- ----------- ----------- -----------
NET INCOME $ 2,816 $ 1,263 $ 11,812 $ 6,163
=========== =========== =========== ===========
NET INCOME PER SHARE-BASIC $ .14 $ .07 $ .61 $ .32
=========== =========== =========== ===========
NET INCOME PER SHARE-DILUTED $ .14 $ .06 $ .60 $ .32
=========== =========== =========== ===========
DIVIDENDS PER COMMON SHARE $ .05 $ .05 $ .10 $ .10
=========== =========== =========== ===========
AVERAGE COMMON SHARES OUTSTANDING (000'S)
Basic 19,484 19,244 19,473 19,238
=========== =========== =========== ===========
Diluted 19,580 19,648 19,587 19,556
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
1
ELKCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited, $ in thousands, except share data)
December 31, June 30,
2002 2002
--------- ---------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 17,804 $ 12,436
Trade receivables, less allowance of $1,028 and $734 67,309 94,764
Inventories -
Finished goods 52,091 36,888
Work-in-process 363 538
Raw materials 9,392 9,484
--------- ---------
Total inventories 61,846 46,910
--------- ---------
Prepaid expenses and other 9,537 9,474
Deferred income taxes 3,920 5,727
--------- ---------
Total current assets 160,416 169,311
--------- ---------
PROPERTY, PLANT AND EQUIPMENT, AT COST 341,034 320,695
Less - accumulated depreciation (123,186) (114,216)
--------- ---------
Property, plant and equipment, net 217,848 206,479
--------- ---------
OTHER ASSETS 12,231 5,638
--------- ---------
$ 390,495 $ 381,428
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 23,263 $ 27,418
Accrued liabilities 20,650 24,655
--------- ---------
Total current liabilities 43,913 52,073
--------- ---------
LONG-TERM DEBT 125,421 119,718
DEFERRED INCOME TAXES 35,096 33,545
SHAREHOLDERS' EQUITY -
Common stock ($1 par, 19,988,074 shares issued) 19,988 19,988
Paid-in-capital 58,093 58,419
Unearned compensation (287) --
Accumulated other comprehensive income -- 31
Retained earnings 116,635 106,772
--------- ---------
194,429 185,210
Less-Treasury stock (493,949 and 527,076 shares, at cost) (8,364) (9,118)
--------- ---------
Total shareholders' equity 186,065 176,092
--------- ---------
$ 390,495 $ 381,428
========= =========
See accompanying notes to consolidated financial statements.
2
ELKCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, $ in thousands)
Six Months Ended
December 31,
-------------------------
2002 2001
---------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 11,812 $ 6,163
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 9,101 8,977
Deferred income taxes 3,358 4,256
Changes in assets and liabilities:
Trade receivables 27,635 14,492
Inventories (14,708) 3,571
Prepaid expenses and other 16 (880)
Accounts payable and accrued liabilities (8,160) 9,034
-------- --------
Net cash provided by operating activities 29,054 45,613
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment (19,354) (4,989)
Acquisition of business (2,224) --
Other (301) 287
-------- --------
Net cash used for investing activities (21,879) (4,702)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments on Revolving Credit Facility, net -- (39,300)
Dividends on common stock (1,948) (1,931)
Treasury stock transactions and other, net 141 371
-------- --------
Net cash used for financing activities (1,807) (40,860)
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 5,368 51
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 12,436 128
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,804 $ 179
======== ========
See accompanying notes to consolidated financial statements.
3
ELKCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - GENERAL
Effective September 1, 2002, the company changed its corporate name from
Elcor Corporation to ElkCorp to better identify itself with the Elk brand name
of its principal Building Products subsidiaries.
The attached condensed consolidated financial statements have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. As a result, certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted. The company believes that the disclosures included herein
are adequate to make the information presented not misleading. These condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and related notes included in the company's
2002 Annual Report on Form 10-K. The unaudited financial information contained
herein has been prepared in conformity with accounting principles generally
accepted in the United States of America on a consistent basis and does reflect
all adjustments (consisting of normal recurring accruals) which are, in the
opinion of management, necessary for fair presentation of the financial position
of ElkCorp and subsidiaries (the company) at December 31, 2002, and the results
of their operations for the three and six month periods ended December 31, 2002
and 2001 and their cash flows for the six month periods then ended, but are,
however, subject to year-end audit by the company's independent auditors.
Because of seasonal, weather-related conditions in some of the company's market
areas, sales can vary at times, and results of any one quarter or other interim
reporting period should not necessarily be considered as indicative of results
for a full fiscal year.
NOTE 2 - COMPANY SEGMENTS
The company is segregated and managed as two segments: Elk Premium
Building Products (Building Products) and Elk Technologies (Other,
Technologies). The Building Products group consists of Elk Premium Building
Products, Inc. and its operating subsidiaries (collectively Elk). These
companies manufacture (1) premium laminated fiberglass asphalt shingles, (2)
coated and non-coated nonwoven fabrics used in asphalt shingles and other
applications in the building and construction, filtration, floor coverings and
other industries, and (3) beginning with an October 2002 business acquisition,
advanced composite building products. Building Products accounted for 91% of
consolidated sales in fiscal 2002 and 92% of consolidated sales during the six
months ended December 31, 2002.
The Other, Technologies segment consists of the operations that are not
part of the Building Products segment. These dissimilar operations were combined
into one segment beginning in fiscal 2002, as none individually met the
materiality criteria for separate segment reporting. The businesses aggregated
together as the Other, Technologies segment accounted for 9% of consolidated
sales in fiscal 2002 and 8% of consolidated sales during the six months ended
December 31, 2002.
The operations included as Other, Technologies are (1) the operating
subsidiaries of Cybershield, Inc. (collectively Cybershield), which apply
precise conductive metal coatings to plastic components utilized in electronics
enclosures to control the electromagnetic and radio frequency emissions of such
devices, and to create circuitry and antennae for digital wireless cellular
phones, consumer electronics
4
equipment, and various other industries; (2) Chromium Corporation (Chromium),
which is a leading provider of hard chrome and other surface finishes for the
railroad, marine and various other industries; and (3) Ortloff Engineers, LTD
(Ortloff), a leading supplier of proprietary technologies and related
engineering services to the natural gas processing industry. A fourth operation,
Elk Technologies, Inc., was incorporated to develop and market fabrics featuring
VersaShield(R) fire retardant coatings for use outside of traditional building
products applications, including mattresses, furniture, curtains and bed
clothing. This business has not yet produced commercial sales.
Financial information by company segment is summarized as follows:
(In thousands) (In thousands)
Three Months Ended Six Months Ended
December 31, December 31,
------------------------- -------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
SALES
Building Products $ 98,622 $ 96,964 $ 211,938 $ 227,989
Other, Technologies 10,441 16,164 17,207 28,358
--------- --------- --------- ---------
$ 109,063 $ 113,128 $ 229,145 $ 256,347
========= ========= ========= =========
OPERATING PROFIT (LOSS)
Building Products $ 7,491 $ 9,672 $ 21,989 $ 24,297
Other, Technologies 1,189 1,073 100 1,166
Corporate and other, excluding
noncash stock option compensation (2,718) (3,145) (5,575) (6,188)
Noncash stock option compensation -- (4,040) 5,378 (5,477)
--------- --------- --------- ---------
5,962 3,560 21,892 13,798
Interest expense, net (1,373) (1,337) (3,053) (3,617)
--------- --------- --------- ---------
Income before income taxes $ 4,589 $ 2,223 $ 18,839 $ 10,181
========= ========= ========= =========
DEPRECIATION AND AMORTIZATION
Building Products $ 3,413 $ 3,193 $ 6,828 $ 6,573
Other, Technologies 463 534 915 1,065
Corporate 675 670 1,358 1,339
--------- --------- --------- ---------
$ 4,551 $ 4,397 $ 9,101 $ 8,977
========= ========= ========= =========
CAPITAL EXPENDITURES
Building Products $ 11,570 $ 1,649 $ 18,564 $ 3,942
Other, Technologies 54 462 200 920
Corporate 155 56 590 127
--------- --------- --------- ---------
$ 11,779 $ 2,167 $ 19,354 $ 4,989
========= ========= ========= =========
December 31, June 30,
2002 2002
--------------- --------------
IDENTIFIABLE ASSETS
Building Products $ 315,048 $314,668
Other, Technologies 33,612 32,420
Corporate 41,835 34,340
--------------- --------------
$390,495 $381,428
=============== ==============
5
NOTE 3 - EARNINGS PER SHARE
Basic earnings per share is computed based on the average number of common
shares outstanding. Diluted earnings per share includes outstanding stock
options. The following table sets forth the computation of basic and diluted
earnings per share:
(In thousands) (In thousands)
Three Months Ended Six Months Ended
December 31, December 31,
-------------------- --------------------
2002 2001 2002 2001
------- ------- ------- -------
Net income $ 2,816 $ 1,263 $11,812 $ 6,163
======= ======= ======= =======
Denominator for basic earnings
per share - weighted average
shares outstanding 19,484 19,244 19,473 19,238
Effect of dilutive securities:
Employee stock options 96 404 114 318
------- ------- ------- -------
Denominator for dilutive
earnings per share -
adjusted weighted average
shares and assumed issuance
of shares purchased under
incentive stock option plan
using the treasury stock method 19,580 19,648 19,587 19,556
======= ======= ======= =======
Basic earnings per share $ .14 $ .07 $ .61 $ .32
======= ======= ======= =======
Diluted earnings per share $ .14 $ .06 $ .60 $ .32
======= ======= ======= =======
NOTE 4 - COMPREHENSIVE INCOME
Total comprehensive income for the three-month and six-month periods ended
December 31, 2002 and December 31, 2001 were as follows:
(In thousands) (In thousands)
Three Months Ended Six Months Ended
December 31, December 31,
----------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income $ 2,816 $ 1,263 $ 11,812 $ 6,163
Derivative transactions (15) -- (31) --
-------- -------- -------- --------
Total comprehensive income $ 2,801 $ 1,263 $ 11,781 $ 6,163
======== ======== ======== ========
At December 31, 2002, there are no remaining derivative transactions in
effect that will cause net income to vary from total comprehensive income in
future periods.
6
NOTE 5 - NONCASH STOCK OPTION COMPENSATION
Prior to fiscal 2002, the company followed the "fixed" method of accounting
for all employee stock options under APB No. 25, "Accounting for Stock Issued to
Employees," and related interpretations, and the disclosure-only provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation." Accordingly, no
compensation expense was recorded prior to fiscal 2002 with respect to the
company's stock option plan, as options were granted with an exercise price
equal to the stock's fair market value at date of grant.
The company's 1998 Incentive Stock Option Plan (the 1998 Plan) contained a
cashless exercise provision that permitted an optionee to relinquish vested
options to the company in exchange for common shares having a current market
value equal to the net exercised market value of the relinquished options. Under
APB No. 25, the aforementioned cashless relinquishment feature can cause options
issued under the 1998 Plan to be considered stock appreciation rights (SAR's) in
substance, if not in form, unless past experience and economic incentives
indicate that optionees are more likely to exercise, rather than relinquish, the
options. Under APB No. 25, SAR's are accounted for using "variable" accounting
whereby income is charged (or credited) during each accounting period to reflect
any excess of the market value of shares underlying vested SAR's, over the
exercise price of vested SAR's.
It was never the company's intention to issue SAR's under the 1998 Plan.
Prior to March 2002, no optionee ever utilized the cashless relinquishment
alternative, and a total of only three optionees, none being executive officers
of the company, utilized this exercise alternative. The company believed that
its prior use of "fixed" accounting for options outstanding under the 1998 Plan
was appropriate. However, in fiscal 2002 the company determined that options
granted under the 1998 Plan should have been accounted for using "variable"
option accounting. The impact of variable accounting on each year prior to
fiscal 2002 was not material. Net income as previously reported for each quarter
of fiscal 2002 has been restated for the change from the "fixed" method to the
"variable" method of stock option accounting. For the three-month and six-month
periods ended December 31, 2001, net income was previously reported as
$3,889,000 ($.20 diluted earnings per share) and $9,723,000 ($.50 diluted
earnings per share), respectively. The company recorded noncash stock option
compensation of $4,040,000 ($2,626,000, net of tax, or $.14 per diluted share)
and $5,477,000 ($3,560,000, net of tax, or $.18 per diluted share) for the
three-month and six-month periods ended December 31, 2001, respectively.
Accordingly, net income was restated as $1,263,000 ($.06 diluted earnings per
share) and $6,163,000 ($.32 diluted earnings per share) for the three-month and
six-month periods ended December 31, 2001, respectively.
In keeping with the company's original intent, effective August 13, 2002,
the Compensation Committee of the Board of Directors terminated the availability
of the relinquishment alternative under the 1998 Plan, thereby removing any
question regarding the appropriateness of "fixed" accounting for these employee
stock options thereafter. Based on this action, together with a decline in the
company's share price subsequent to June 30, 2002, the company recorded a
reversal of fiscal 2002 noncash stock option compensation expense of $5,378,000
($3,496,000, net of tax, or $.18 per diluted share) in the first quarter of
fiscal 2003. Subsequent to August 13, 2002, the company is again utilizing the
"fixed" method of stock option accounting.
7
NOTE 6 - LONG-TERM DEBT
In June 2002, the company issued $120,000,000 of Senior Notes (Notes). Of
the Notes, $60,000,000 mature in fiscal 2009 and carry a coupon rate of 6.99%,
and $60,000,000 mature in fiscal 2012 and carry a coupon rate of 7.49%. In
conjunction with the sale of the Notes, the company reduced its Revolving Credit
Facility (Facility) to $100,000,000 of primary credit, including up to a maximum
of $10,000,000 in letters of credit through November 30, 2005. At December 31,
2002, letters of credit totaling $2,584,000 were outstanding. No borrowings were
outstanding on the Facility at December 31, 2002. In June 2002, the company
entered into an interest rate swap to effectively convert the interest rate from
fixed to floating on $60,000,000 of Notes through 2012. For this fair value
hedge, both the fair value of the derivative and the underlying hedged item are
reported in the balance sheet. At December 31, 2002, the fair value of the
derivative was $5,421,000 and this amount was included in other assets and as an
increase in the carrying value of long-term debt. Changes in the fair value of
the derivative and the underlying hedged item offset and are recorded each
period in other income or expense, as applicable. Long-term debt is summarized
as follows:
December 31, June 30,
(In thousands) 2002 2002
------------ ----------
Senior Notes $ 120,000 $ 120,000
Fair value of interest rate swap 5,421 (282)
Revolving Credit Facility -- --
---------- ----------
$ 125,421 $ 119,718
========== ==========
NOTE 7 - ACQUISITION
On October 16, 2002, a newly formed wholly owned indirect subsidiary of the
company purchased substantially all of the assets of Advanced Composites
Technologies, L.L.C. (ACT), a start-up stage manufacturer of advanced composite
building products. The total purchase price was $2,224,000, plus contingent
future earn-out payments based upon the profitability above certain thresholds
of the newly formed subsidiary. Existing cash resources were used to fund the
acquisition. Assets acquired included $180,000 in trade receivables, $228,000 in
inventory, $79,000 in other current assets, $1,123,000 in property and equipment
and $614,000 in patents and other intangibles. The operating results have been
included in the company's consolidated financial statements since the date of
acquisition. ACT's sales were not significant in its most recent fiscal year.
NOTE 8 - ENVIRONMENTAL RISK
Chromium has engaged in limited remediation activities at its former
plating operation, closed in 1999, at what is now Cybershield's Lufkin, Texas
manufacturing facility. Soil sampling results from a pre-closing environmental
evaluation of the site indicated the necessity of localized cleanup. Chromium
has entered the property into the Texas Voluntary Cleanup Program (VCP). Under
this program, the Texas Commission on Environmental Quality (TCEQ) reviews the
voluntary cleanup plan the applicant submits, and, when the work is complete,
issues a certificate of completion, evidencing cleanup to levels protective of
human health and the environment and releasing prospective purchasers and
lenders from liability to the state. Properties entered into the VCP are
protected from TCEQ enforcement actions.
8
Chromium submitted a work plan, which the TCEQ has approved, for a
supplemental groundwater and soil assessment at the facility. The plan was
designed to, among other things, further define the cleanup requirements at the
site. Chromium is preparing to implement that plan. Once the investigation is
complete, Chromium intends to clean up the site under the VCP to a site specific
risk-based cleanup standard as prescribed by the Texas Risk Reduction Program.
Until Chromium has the results from its supplemental assessment and TCEQ
approval of a cleanup plan, it is unable to estimate and provide reserves for
remediation costs, which may or may not be material.
The company's operations are subject to extensive federal, state and local
laws and regulations relating to environmental matters. Other than the possible
costs associated with the previously described Chromium matter, the company does
not believe it will be required to expend amounts which will have a material
adverse effect on the company's consolidated financial position or results of
operations by reason of environmental laws and regulations. Such laws and
regulations are frequently changed and could result in significantly increased
cost of compliance. Further, certain of the company's manufacturing operations
utilize hazardous materials in their production processes. As a result, the
company incurs costs for recycling or disposal of such materials and may incur
costs for remediation activities at its facilities and off-site from time to
time. The company establishes and maintains reserves for such known remediation
activities in accordance with SFAS No. 5, "Accounting for Contingencies," when
appropriate.
NOTE 9 - LEGAL PROCEEDINGS
In February 2000, Wedgewood Knolls Condominium Association filed a
purported class action in the United States District Court in Newark, New Jersey
which, as amended, names two Elk subsidiaries. The purported nationwide class
would include purchasers or current owners of buildings with certain Elk asphalt
shingles installed between January 1, 1980 and present. The suit alleges, among
other things, that the shingles were uniformly defective. It seeks various
remedies including damages and reformation of the limited warranty applicable to
the shingles on behalf of the plaintiff and the purported class. In late March
2002, the United States District Court for the District of New Jersey issued its
opinion denying the plaintiff's motion for class certification in the Wedgewood
Knolls lawsuit pending against Elk.
In June 2000, an individual homeowner filed a purported class action,
Lastih v. Elk Corporation of Alabama, in the Judicial District of Hartford,
Connecticut. The Lastih suit involves similar class allegations and claims to
those asserted in the Wedgewood Knolls suit described above.
Elk denied the claims asserted in both actions, and vigorously defended
them. Elk and the other parties are carrying out the terms of a settlement
agreement with all plaintiffs represented by the law firm prosecuting the
Wedgewood Knolls and Lastih cases, including without limitation Wedgewood Knolls
Condominium Association, Lastih and several other individual plaintiffs. The
settlement was not a class settlement and did not have a material adverse effect
on the company's consolidated results of operations, financial condition or
liquidity.
On April 3, 2002, CertainTeed Corporation filed suit in the United States
District Court for the Eastern District of Pennsylvania, Philadelphia,
Pennsylvania for alleged patent infringement against the company and two of its
Elk affiliates. The suit, in essence, claims that Elk's Capstone shingle
infringes three CertainTeed patents, and seeks preliminary and permanent
injunctive relief, damages and attorneys' fees. Both parties have filed motions
for summary judgment in the case, which is in the late stages of discovery. The
company believes that it and its named affiliates have strong defenses to
9
the suit, and does not believe the suit will have a material adverse effect on
its consolidated results of operations, financial position or liquidity.
The company and its subsidiaries are involved in various other legal
actions and claims, including claims arising in the ordinary course of business.
Based on advice from legal counsel, management believes such litigation and
claims will be resolved without material adverse effect on the consolidated
financial statements.
NOTE 10 - NEW ACCOUNTING STANDARDS
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." The company adopted SFAS No. 142, effective July 1, 2002. Accordingly,
goodwill must be tested for impairment annually and recorded goodwill is not
amortized. The adoption of SFAS No. 142 did not significantly impact the
company's financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This statement is effective for the company in fiscal
2004. SFAS No. 143 requires legal obligations associated with the retirement of
long-lived assets to be recognized at their fair value at the time that the
obligations are incurred. Upon initial recognition of a liability, that cost is
capitalized as part of the related long-lived asset and allocated to expense
over the useful life of the asset. Based on current circumstances, the company
does not believe the adoption of SFAS No. 143 will have a material impact on the
company's financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment and Disposal of Long-Lived Assets." This statement supersedes SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of" and the accounting and reporting provision of
Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations
- - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual, and Infrequently Occurring Events and Transactions."
SFAS No. 144 became effective for the company on July 1, 2002. The adoption of
SFAS No. 144 did not have a material impact on the company's financial position
or results of operations.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at a date of a commitment to an exit or disposal plan. SFAS
No. 146 is to be applied prospectively to exit or disposal activities after
December 31, 2002. The company has no currently anticipated exit or disposal
activities.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure." This statement amends SFAS No. 123,
"Accounting for Stock-Based Compensation," providing alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. SFAS No. 148 also amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results. The
company has adopted the disclosure-only provisions of SFAS No. 123. Therefore,
SFAS No. 148 will not affect the company's results of operations. The new
disclosure requirements will be effective for the company beginning in the
quarter ending March 31, 2003.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
CHANGES IN THE THREE-MONTH PERIOD ENDED DECEMBER 31, 2002 COMPARED TO THE
THREE-MONTH PERIOD ENDED DECEMBER 31, 2001.
OVERALL PERFORMANCE
Sales of $109,063,000 during the three-month period ended December 31, 2002
were 3.6% lower than $113,128,000 in the same three-month period of fiscal 2002.
During the quarter ended December 31, 2002, net income of $2,816,000 was 123%
higher than $1,263,000 for the same period in the prior fiscal year. For the
quarter ended December 31, 2001, net income was previously reported as
$3,889,000. After recording noncash stock option compensation of $2,626,000, net
of tax, net income was restated as $1,263,000 for that period.
In fiscal 2002, the company changed its accounting for certain stock options
from fixed awards with no compensation expense to variable awards, which
generally results in periodic expense or income, as the company determined that
variable accounting is more appropriate for such stock options. Pursuant to
variable option accounting, income is charged or credited during each accounting
period to reflect any excess of the market value of shares underlying vested
options, over the exercise price of vested options. Based on a decline in the
company's share price subsequent to June 30, 2002 and actions taken by the Board
of Directors to terminate the feature of the 1998 Incentive Stock Option Plan
that caused certain stock options to be accounted for as variable awards, the
company recorded a reversal of the majority of fiscal 2002 noncash stock option
compensation in the first quarter of fiscal 2003. The company now has no options
subject to variable stock option accounting, and therefore, income in the
quarter ended December 31, 2002 was not, and income in future quarters will not
be, affected by changes in the company's share price.
Consolidated operating income of $5,962,000 in the quarter ended December 31,
2002 was 67.5% higher than $3,560,000 in the second quarter in the prior fiscal
year. Operating income for the previous year quarter was reduced by a $4,040,000
charge for noncash stock option compensation. Excluding the impact of noncash
stock option compensation, operating income for the three months ended December
31, 2001 was $7,600,000. As a percentage of sales, operating income (excluding
the impact of noncash stock option compensation), was 5.5% in the second quarter
of fiscal 2003 compared to 6.7% for the same quarter in the prior fiscal year.
Cost of sales was 81.7% of sales for the three months ended December 31, 2002,
compared to 79.7% for the same three month period in the prior fiscal year. On a
per unit basis, cost of sales in the current year period was adversely affected
by much higher asphalt costs. Despite higher litigation costs, selling, general
and administrative (SG&A) costs in the three-month period ended December 31,
2002 were significantly lower than in the second quarter of fiscal 2002,
primarily as a result of lower promotional costs and lower SG&A costs realized
from a restructuring at Cybershield in the third quarter of fiscal 2002. As a
percentage of sales, SG&A costs were 12.8% in the second quarter of fiscal 2003,
compared to 13.6% in the same quarter last year.
Interest expense was $1,373,000 in the second quarter of fiscal 2003 compared
to $1,337,000 in the same prior year period. In the three months ended December
31, 2002, interest expense of $201,000 was capitalized related to the
construction of the Tuscaloosa, Alabama shingle plant and other significant
capital projects. No interest cost was capitalized in the same fiscal 2002
period.
The company currently projects its effective tax rate to be 37.3% for fiscal
2003 compared to 39.0% for fiscal 2002. The difference between years primarily
relates to the impact of noncash stock option compensation on the effective tax
rate.
11
RESULTS OF BUSINESS SEGMENTS
Sales in the Building Products segment increased 1.7% to $98,622,000 for the
three months ended December 31, 2002 compared to $96,964,000 in the same prior
year period. Higher sales in the current year period were reflective of a 10.4%
increase in unit shingle shipments, partially offset by lower external nonwoven
mat sales. Average shingle selling prices declined 2.6% in the second quarter of
fiscal 2003 compared to the same quarter last year. Sales price per unit was
also slightly lower in the current year quarter due to a lower sales mix (i.e. a
relatively higher proportion of sales from lower-priced product categories).
Total nonwoven mat sales, including internal sales, were comparable to the same
quarter last year. However, a relatively higher proportion of nonwoven mat was
consumed internally by Elk's roofing operations during the current year quarter.
Internal nonwoven mat sales are eliminated in consolidation.
Operating profit for the Building Products segment of $7,491,000 for the
three-month period ended December 31, 2002 decreased 22.6% from $9,672,000 of
operating profit achieved in the same period of fiscal 2002. This decrease in
year-to-year operating profit was largely the result of significantly higher
asphalt costs, which reduced operating profit by over $2,500,000 compared to the
same quarter last year. In addition, higher litigation expenses and limited
production of new "beta" shingle products combined to reduce operating profit by
about $1,000,000. Elk was successful in the current year quarter in lowering
controllable operating expenses through good cost control practices. Initial
operations for Elk Composite Building Materials further reduced operating profit
during the current year quarter by almost $500,000. During the December 2002
quarter, this acquisition was assimilated into Elk's operations and its product
line for decking, transportation and other applications was expanded and
improved. Management projects that by the end of March 2003, this new operation
will be capable of generating in the range of $15,000,000 to $20,000,000 in
annual sales and beginning to generate an operating profit.
The Building Products segment experienced higher than expected demand during
the month of December 2002 as a likely result of increased storm activity in
some regions of the United States, combined with inventory purchases by
distributors in advance of scheduled price increases, and to hedge against
potential asphalt shortages. Demand was particularly strong in the Western
United States, most likely the result of El Nino related storms containing heavy
rain and strong winds that affected that region. Management expects continued
strengthening in the roofing market during the spring and summer months of
calendar year 2003.
Management anticipates that the extended paralysis of Venezuela's oil
industry will result in asphalt shortages to the roofing industry in the United
States. Asphalt is believed to be in short supply in certain markets of the
Eastern United States, and suppliers have begun to allocate available supplies
to contractual customers based on historical usage. As a result of a strong
inventory position, management does not currently anticipate any significant
impairment of future sales related to an asphalt shortage. However, asphalt
costs in the near term could increase by $30 - $40 per ton over December 2002
levels.
Effective January 6, 2003, Elk implemented a 3% price increase intended to
recover prior increases in asphalt costs. Another 5% price increase is scheduled
for late February 2003 to recover the anticipated near term asphalt cost
escalation. Management believes that current market conditions are conducive to
Elk's realization of both price increases.
Sales for the Other, Technologies segment decreased 35.4% to $10,441,000 in
the second quarter of fiscal 2003 compared to $16,164,000 in the same prior year
quarter. Cybershield sales in the quarter ended December 31, 2002 were
significantly below sales in same quarter last year, as cellular handset
12
production previously conducted in the United States and Latin America has
largely shifted to Asia where the company has no significant operations.
Chromium's sales were also lower in the second quarter of fiscal 2003 compared
to the prior year quarter. However, Chromium continues to see momentum
developing for its new wear plate and tile products to partially offset lower
volumes as railroads continue to defer maintenance expenditures. Ortloff
achieved higher revenues from license agreements in the current year quarter
compared to the same quarter last year.
The Other, Technologies segment reported $1,189,000 of operating profit in
the second quarter of fiscal 2003 compared to a $1,073,000 operating profit in
the second quarter of the prior fiscal year. Despite the significant change in
Cybershield's market, this subsidiary experienced some benefit from a seasonal
increase in cellular handset related sales and growing sales momentum in other
product categories. These developments, combined with a much lower operating
cost structure, allowed Cybershield to achieve an approximate $200,000 operating
profit during the current year quarter compared to about $500,000 of operating
profit in the same quarter last year. Management believes Cybershield is
successfully positioned for sustained profitability. Chromium had an operating
loss of approximately $100,000 during the current year quarter compared to a
modest operating profit in the same period last year. Management expects
Chromium's operating results to improve during the second half of fiscal 2003 as
a result of projected increases in sales of new wear tile and abrasion plate
products. Ortloff reported operating profit of $1,100,000 in the current year
quarter, more than doubling its operating profit for the same quarter in fiscal
2002, due to higher revenues. Ortloff's activity backlog was strong at December
31, 2002 and this business is expected to generate good, to potentially
excellent, results over the remainder of fiscal 2003.
The company continues to be optimistic about the future market potential of
its Versa Shield TB 129 fire-barrier fabric. California has not yet announced
its definitive new fire standard for mattress products. Management expects a
decision by the end of January 2003 or early February 2003, with compliance
being required by January 2004. The company is hopeful that meaningful sales
opportunities will begin to develop for this product during the second half of
calendar 2003.
CHANGES IN THE SIX-MONTH PERIOD ENDED DECEMBER 31, 2002 COMPARED TO THE
SIX-MONTH PERIOD ENDED DECEMBER 31, 2001.
OVERALL PERFORMANCE
Sales of $229,145,000 during the six-month period ended December 31, 2002
were 10.6% lower than $256,347,000 in the same period of fiscal 2002. During the
six-month period ended December 31, 2002, net income of $11,812,000 was 91.7%
higher than $6,163,000 for the same period in the prior fiscal year. For the six
months ended December 31, 2001, net income was previously reported as
$9,723,000. After recording noncash stock option compensation of $3,560,000, net
of tax, net income was restated as $6,163,000 for that period.
Consolidated operating income of $21,892,000 in the first half of fiscal 2003
was 58.7% higher than $13,798,000 in the first half of the prior fiscal year.
Operating income for the current fiscal year period increased $5,378,000 as a
result of a credit for noncash stock option compensation, compared to a
$5,477,000 charge for this noncash item in the first half last year. Excluding
the impact of noncash stock option compensation, operating income for the first
six months of the current fiscal year was $16,514,000 compared to $19,275,000
for the same prior year period. As a percentage of sales, operating income
(excluding the impact of noncash stock option compensation) was 7.2% in the
first half of fiscal 2003 compared to 7.5% for the same period in the prior
fiscal year. Cost of sales were 80.5% of sales for the six months ended December
31, 2002, compared to 80.6% for the same period in
13
fiscal 2002. The impact of higher asphalt costs in the current fiscal year were
largely offset by, among other things, lower unit manufacturing costs and strict
management of controllable expenses at the company's roofing plants. Despite
much higher litigation costs, SG&A costs in the six-month period ended December
31, 2002 were lower than in the first half of fiscal 2002, primarily as a result
of lower promotional costs and lower SG&A costs achieved from the consolidation
of Cybershield's operations in the third quarter of fiscal 2002. As a percentage
of sales, SG&A costs were 12.3% in the first half of fiscal 2003, compared to
11.9% in the same period last year.
Interest expense was $3,053,000 in the first half of fiscal 2003 compared to
$3,617,000 in the same prior year period. In the first half of fiscal 2003,
interest expense of $248,000 was capitalized related to the expansion of the
Tuscaloosa, Alabama shingle plant and other significant capital projects. No
interest cost was capitalized in the comparable fiscal 2002 period.
The company currently projects its effective tax rate to be 37.3% for fiscal
2003 compared to 39.0% for fiscal 2002. The difference between years primarily
relates to the impact of noncash stock option compensation on the effective tax
rate.
RESULTS OF BUSINESS SEGMENTS
Sales in the Building Products segment decreased 7.0% to $211,938,000 for the
six months ended December 31, 2002 compared to $227,989,000 in the same prior
year period. Lower sales in the current year period were reflective of a general
slowing in the roofing market during the first quarter of the current fiscal
year and lower external nonwoven mat sales. Average selling prices during the
first half of fiscal 2003 were 0.4% lower than in the same six month period last
year. Sales price per unit has also been lower in the current fiscal year due to
a lower sales mix (i.e. a relatively higher proportion of sales from
lower-priced product categories).
Operating profit for the Building Products segment of $21,989,000 for the
six-month period ended December 31, 2002 was 9.5% lower compared to $24,297,000
of operating profit achieved in the same period of fiscal 2002. Lower sales
volumes and significantly higher asphalt costs have been partially offset by
lower freight costs, lower unit manufacturing costs and good expense control at
the company's roofing plants. Asphalt costs during the first six months of
fiscal 2003 were more than $5,000,000 higher than in the same period last year.
Other factors that had a negative impact on current year operating profit
include higher litigation expenses, limited production of new shingle products
and initial losses at a newly acquired subsidiary.
Sales for the Other, Technologies segment decreased 39.3% to $17,207,000 in
the first half of fiscal 2003 compared to $28,358,000 in the same prior year
period. Significantly reduced volumes of cellular handset business caused
Cybershield's sales to decline significantly in the current year. Cellular
handset production previously in the United States and Latin America has largely
shifted to Asia where the company has no significant operations.
Commercialization of EXACT(TM), a proprietary process for applying precise
conductive metal patterns to plastics or other components, together with other
strategic moves including marketing partnerships with key supply chain partners
and utilizing a network of manufacturing representatives to augment
Cybershield's internal sales force, are key strategies to diversify
Cybershield's sales among a wider variety of consumer, medical and military
electronics applications. Chromium's sales were also lower in the first half of
fiscal 2003 compared to the prior year period as a result of deferred
maintenance expenditures by its railroad customers. For the six months ended
December 31, 2002, Ortloff's licensing revenues were significantly lower than in
the same period last year.
14
Primarily as a result of lower revenues, the Other, Technologies segment
reported a $100,000 operating profit for the first half of fiscal 2003 compared
to $1,166,000 operating profit in the same six month period last year. Chromium
reported an approximate $150,000 operating loss during the current year period
compared to approximately $300,000 of operating profit in the same period last
year. Despite the significant reduction in revenues at Cybershield, cost
reductions allowed that subsidiary to limit its operating loss in the current
year period to approximately $450,000 compared to a modest operating profit in
the same period last year. Ortloff reported operating profit of approximately
$700,000 in the current year period compared to about $800,000 in the same prior
year period.
FINANCIAL CONDITION
Cash flows from operating activities are generally the result of net income,
deferred taxes, depreciation and amortization, and changes in working capital.
During the first six months of fiscal 2003, the company generated cash flows of
$29,054,000 from operating activities compared to $45,613,000 for the first six
months in the prior fiscal year. The decrease in cash flows generated in the
first half of fiscal 2003 was primarily the result of changing dynamics in the
significant components of working capital (trade receivables, inventories,
accounts payable and accrued liabilities).
Trade receivables from operating activities at December 31, 2002 were
$27,635,000 lower than at June 30, 2002, primarily due to the seasonal slowdown
in sales volumes, together with collection of $8,608,000 of deferred trade
receivables from promotional programs to certain customers in the current year
period. In the prior year first half, receivables were $14,492,000 lower than at
June 30, 2001.
At December 31, 2002, manufactured inventories were $14,708,000 higher than
at June 30, 2002 as production at the company's roofing plants continued at high
rates throughout much of the current year while sales volumes declined. The
company believes that current year inventories are at favorable levels,
particularly with the potential for industry product shortages resulting from
the short supply of asphalt in certain markets. In the prior year, extremely
strong sales volumes had reduced roofing product inventories to less than
desired levels.
The $8,160,000 decrease in current liabilities at December 31, 2002 compared
to June 30, 2002 is primarily the result of the reversal of an accrual for
noncash stock option compensation during the current fiscal year, together with
normal timing of vendor payments. In the prior year, cash flows were generated
from an increase in trade payables that resulted from advantageous cash
management strategies that were not beneficial in the current year due to the
company's cash position.
The current ratio was 3.7 to 1 at December 31, 2002 compared to 3.3 to 1 at
June 30, 2002. Historically, working capital requirements fluctuate during the
year because of seasonality in some market areas. Generally, working capital
requirements and related borrowings are higher in the spring and summer months,
and lower in the fall and winter months.
Cash flows from investing activities primarily reflect the company's capital
expenditure strategy. Approximately $11,500,000 of current year capital
expenditures relate to construction of a second shingle manufacturing line at
the Tuscaloosa, Alabama roofing plant. The company plans to invest approximately
$77,000,000 over a two year period to construct this shingle manufacturing line
and to install certain infrastructure and material handling improvements
designed to enhance the overall efficiency of the expanded facility.
Approximately $31,000,000 of the planned investment is projected to be expended
in fiscal 2003. In addition, the company intends to invest approximately
$11,000,000 in fiscal 2003 for productivity enhancements at certain of its other
roofing plants. During the second
15
quarter of fiscal 2003, the company utilized $2,224,000 of cash for a business
acquisition and subsequently invested $2,234,000 in incremental capital
expenditures for this new subsidiary to increase manufacturing capacity.
Cash flows from financing activities generally reflect changes in the
company's borrowings during the period, together with dividends paid on common
stock, treasury stock transactions and exercises of stock options. Net cash used
for financing activities was $1,807,000 in the first half of fiscal 2003
compared to $40,860,000 in the same period in fiscal 2002. In June 2002, the
company sold $120,000,000 in Senior Unsecured Notes in a private placement
transaction with a group of institutional investors. The proceeds of the notes
were used to repay indebtedness outstanding under the company's existing
Revolving Credit Facility. There was no outstanding balance on the Revolving
Credit Facility at December 31, 2002.
The increase in long-term debt during the first half of fiscal 2003 was the
result of a noncash adjustment in the fair value of long-term debt resulting
from an interest rate swap to effectively convert the interest rate from fixed
to floating on $60,000,000 of long-term debt through 2012. This fair market
adjustment is offset by recording a corresponding noncash amount in other assets
for the value of the interest rate swap instrument.
The changes in the company's debt structure were made to extend the maturity
structure of the company's debt on favorable terms, increase the company's total
committed borrowing availability and better diversify the company's funding
sources. At December 31, 2002, liquidity consisted of $17,804,000 of cash and
cash equivalents and $97,416,000 of available borrowings under its $100,000,000
committed Revolving Credit Facility. The debt to capital ratio (after deducting
cash and cash equivalents from $120,000,000 of principal debt) was 35.4%. The
company has no off-balance sheet arrangements or transactions with
unconsolidated, special purpose entities.
The company's Board of Directors has authorized the purchase of common stock
from time to time on the open market. As of December 31, 2002, the company has
repurchase authority of approximately $10,600,000 remaining.
See footnote 8 on page 8 on this Form 10-Q for a summary of the company's
environmental risk and footnote 10 on page 10 for a discussion of new accounting
standards.
Management believes that current cash and cash equivalents, projected cash
flows from operations, and its existing debt capacity should be sufficient
during fiscal 2003 and for the foreseeable future to fund the Tuscaloosa,
Alabama plant expansion, other planned capital expenditures, working capital
needs, dividends, stock repurchases and other cash requirements.
CRITICAL ACCOUNTING POLICIES
The company's condensed consolidated financial statements were prepared in
conformity with accounting principles generally accepted in the United States of
America. As such, management is required to make certain estimates, judgments
and assumptions it believes are reasonable based on the information available.
The accounting policies which management believes are the most critical to fully
understanding and evaluating the company's reported financial results are
described in Management's Discussion and Analysis of Financial Condition and
Results of Operations on pages 22 and 23 in the company's Form 10-K for its
fiscal year ended June 30, 2002. There were no significant changes in critical
accounting policies during the six-month period ended December 31, 2002.
16
FORWARD-LOOKING STATEMENTS
In an effort to give investors a well-rounded view of the company's
current condition and future opportunities, management's discussion and analysis
of financial condition and results of operations contain "forward-looking
statements" that involve risks and uncertainties about its prospects for the
future. The statements that are not historical facts are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements usually are accompanied by words such as "optimistic,"
"outlook," "believe," "estimate," "potential," "project," "expect,"
"anticipate," "plan," "predict," "could," "should," "may," "likely," or similar
words that convey the uncertainty of future events or outcomes.
These statements are based on judgments the company believes are
reasonable; however, actual results could differ materially from those discussed
here as a result of a number of factors, including the following:
1. The company's building products business is substantially non-cyclical,
but can be affected by weather, the availability of financing,
insurance claims paying practices, and general economic conditions. In
addition, the asphalt roofing products manufacturing business is highly
competitive. Actions of competitors, including changes in pricing, or
slowing demand for asphalt roofing products due to general or industry
economic conditions or the amount of inclement weather could result in
decreased demand for the company's products, lower prices received or
reduced utilization of plant facilities. Further, changes in building
and insurance codes and other standards from time to time can cause
changes in demand, or increases in costs that may not be passed through
to customers.
2. In the building products business, the significant raw materials are
ceramic-coated granules, asphalt, glass fibers, resins and mineral
filler. Increased costs of raw materials can result in reduced margins,
as can higher energy, trucking and rail costs. Historically, the
company has been able to pass some of the higher raw material, energy
and transportation costs through to the customer. Should the company be
unable to recover higher raw material, energy and/or transportation
costs from price increases of its products, operating results could be
adversely affected and/or lower than projected.
3. Temporary shortages or disruption in supply of raw materials or
transportation do result from time to time from a variety of causes.
The current Venezuelan oil workers strike, if not timely resolved, has
adversely affected asphalt supplies in certain regions of the United
States, particularly the Eastern United States, and there can be no
assurance that such shortages will not be compounded in the future. If
the company experiences temporary shortages or disruption of supply of
raw materials from the Venezuelan situation, or other reasons,
operating results could be adversely affected and/or lower than
projected.
4. The company has been involved in a significant expansion plan over the
past several years, including the construction of new facilities and
the expansion of existing facilities. Progress in achieving anticipated
operating efficiencies and financial results is difficult to predict
for new and expanded plant facilities. If such progress is slower than
anticipated, or if demand for products produced at new or expanded
plants does not meet current expectations, operating results could be
adversely affected.
17
5. Certain facilities of the company's subsidiaries must utilize hazardous
materials in their production process. As a result, the company could
incur costs for remediation activities at its facilities or off-site,
and other related exposures from time to time in excess of established
reserves for such activities.
6. The company's litigation is subject to inherent and case-specific
uncertainty. The outcome of such litigation depends on numerous
interrelated factors, many of which cannot be predicted.
7. Although the company currently anticipates that most of its needs for
new capital in the near future will be met with internally generated
funds or borrowings under its available credit facilities, significant
increases in interest rates could substantially affect its borrowing
costs or its cost of alternative sources of capital.
8. Each of the company's businesses, especially Cybershield's business, is
subject to the risks of technological changes and competition that is
based on technology improvement or labor savings. These factors could
affect the demand for or the relative cost of the company's technology,
products and services, or the method and profitability of the method of
distribution or delivery of such technology, products and services. In
addition, the company's businesses each could suffer significant
setbacks in revenues and operating income if it lost one or more of its
largest customers, or if its customers' plans and/or markets should
change significantly. Cybershield has lost substantial business as a
result of most cellular handset production moving to Asia where
Cybershield has no significant presence. Low labor costs in Asia make
other coating processes competitive with those Cybershield would use.
Cybershield's future viability may depend on the successful
commercialization of the EXACT(TM) process, or other value added
services, which are unproven as yet on a large commercial scale.
9. Although the company insures itself against physical loss to its
manufacturing facilities, including business interruption losses,
natural or other disasters and accidents, including but not limited to
fire, earthquake, damaging winds, and explosions, operating results
could be adversely affected if any of its manufacturing facilities
became inoperable for an extended period of time due to such events.
10. Each of the company's businesses is actively involved in the
development of new products, processes and services which are expected
to contribute to the company's ongoing long-term growth and earnings.
Products using VersaShield fire retardant coatings have not yet
produced commercial sales. Its market potential may be dependent on the
stringency of federal and state regulatory requirements, which are
difficult to predict. If such development activities are not
successful, regulatory requirements are less stringent than currently
predicted, market demand is less than expected, or the company cannot
provide the requisite financial and other resources to successfully
commercialize such developments, the growth of future sales and
earnings may be adversely affected.
Parties are cautioned not to rely on any such forward-looking beliefs or
judgments in making investment decisions.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In addition to the risks inherent in its operations, the company is
exposed to financial, market, political and economic risks. The following
discussion provides additional detail regarding the company's exposure to the
risks of changing commodity prices and interest rates. The company has no
significant foreign exchange risk. Derivatives are held from time to time as
part of a formally documented risk management program. Derivatives are held to
mitigate uncertainty, volatility or to cover underlying exposures. No
derivatives are held for trading purposes. The company currently has entered
into derivative transactions related to interest rate risk.
The company is required to purchase natural gas for use in its
manufacturing facilities. These purchases expose the company to the risk of
higher natural gas prices. To hedge this risk, from time to time the company
enters into hedge transactions to fix the price on a portion of its projected
natural gas usage. There are no current hedge commitments on natural gas at
December 31, 2002. However, it is anticipated that hedging strategies will
likely be utilized in the future.
The company uses interest rate swaps to help maintain a reasonable balance
between fixed and floating rate debt. The company has entered into an interest
rate swap on $60,000,000, or 50% of the outstanding face amount of Senior Notes
at June 30, 2002. The fair value of this swap was a gain of $5,421,000 at
December 31, 2002. Based on outstanding debt at December 31, 2002, the company's
interest costs would increase or decrease $600,000 for each theoretical 1%
increase or decrease in the floating interest rate.
ITEM 4. CONTROLS AND PROCEDURES
In January 2003, the company completed an evaluation, under the
supervision and with the participation of management, including the Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the company's disclosure controls and procedures
pursuant to Exchange Act Rules 13a-14 and 15d-14. Based upon that evaluation,
the Chief Executive Officer and the Chief Financial Officer concluded that the
company's disclosure controls and procedures are effective to timely alert them
to any material information relating to the company (including its consolidated
subsidiaries) that must be included in the company's periodic SEC filings. There
have been no significant changes in the company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
the evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
19
PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
In February 2000, Wedgewood Knolls Condominium Association filed a
purported class action in the United States District Court in Newark, New Jersey
which, as amended, names two Elk subsidiaries. The purported nationwide class
would include purchasers or current owners of buildings with certain Elk asphalt
shingles installed between January 1, 1980 and present. The suit alleges, among
other things, that the shingles were uniformly defective. It seeks various
remedies including damages and reformation of the limited warranty applicable to
the shingles on behalf of the plaintiff and the purported class. In late March
2002, the United States District Court for the District of New Jersey issued its
opinion denying the plaintiff's motion for class certification in the Wedgewood
Knolls lawsuit pending against Elk.
In June 2000, an individual homeowner filed a purported class action,
Lastih v. Elk Corporation of Alabama, in the Judicial District of Hartford,
Connecticut. The Lastih suit involves similar class allegations and claims to
those asserted in the Wedgewood Knolls suit described above.
Elk denied the claims asserted in both actions, and vigorously defended
them. Elk and the other parties are carrying out the terms of a settlement
agreement with all plaintiffs represented by the law firm prosecuting the
Wedgewood Knolls and Lastih cases, including without limitation Wedgewood Knolls
Condominium Association, Lastih and several other individual plaintiffs. The
settlement was not a class settlement and did not have a material adverse effect
on the company's consolidated results of operations, financial condition or
liquidity.
On April 3, 2002, CertainTeed Corporation filed suit in the United States
District Court for the Eastern District of Pennsylvania, Philadelphia,
Pennsylvania for alleged patent infringement against the company and two of its
Elk affiliates. The suit, in essence, claims that Elk's Capstone shingle
infringes three CertainTeed patents, and seeks preliminary and permanent
injunctive relief, damages and attorneys' fees. Both parties have filed motions
for summary judgment in the case, which is in the late stages of discovery. The
company believes that it and its named affiliates have strong defenses to the
suit, and does not believe the suit will have a material adverse effect on its
consolidated results of operations, financial position or liquidity.
The company and its subsidiaries are involved in various other legal
actions and claims, including claims arising in the ordinary course of business.
Based on advice from legal counsel, management believes such litigation and
claims will be resolved without material adverse effect on the consolidated
financial statements.
20
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The company's Annual Meeting of Shareholders was held on October 29,
2002 for the purpose of electing three directors, approving the 2002
ElkCorp Equity Incentive Compensation Plan, and ratifying the
appointment of the company's independent auditors.
(b) Directors Elected
NUMBER OF VOTES
------------------------------------------
FOR AGAINST WITHHELD
--- ------- --------
Richard A. Nowak 16,272,938 64,202 286,960
David W. Quinn 15,947,042 390,098 286,960
Michael L. McMahan 15,949,461 387,679 286,960
(c) Other Directors Whose Term Continued After the Meeting:
Thomas D. Karol
Dale V. Kesler
James E. Hall
Harold K. Work
(c) Other matters voted upon at the meeting and the number of
affirmative votes, negative votes and abstentions.
NUMBER OF VOTES
----------------------------------------------------
BROKER
AFFIRMATIVE AGAINST ABSTENTIONS NON-VOTES
----------- ------- ----------- ---------
Approval of the 2002
ElkCorp Equity Incentive
Compensation Plan 11,531,939 3,255,902 127,755 1,708,504
Ratification of
PricewaterhouseCoopers
as independent auditors of
the company for the fiscal
year ending June 30, 2003 16,055,947 337,696 230,457 0
21
ITEM 6: EXHIBITS AND REPORTS OF FORM 8-K
(a) Exhibits:
99.1 Certification of the Chief Executive Officer of ElkCorp
99.2 Certification of the Chief Financial Officer of ElkCorp
(b) The company filed two reports on Form 8-K during the quarter ended
December 31, 2002. The company filed a Form 8-K on October 17, 2002
relating to a press release reporting consolidating operating
results and other financial information for the first quarter of
fiscal 2003, and containing "forward-looking" statements about its
prospects for the future, and certain other information concerning
the company's disclosures under Regulation FD, and the company filed
a Form 8-K on December 23, 2002 relating to a press release
containing "forward-looking" statements about its prospects for the
future and certain other information concerning the company's
disclosures under Regulation FD.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ElkCorp
DATE: February 3, 2003 /s/ Harold R. Beattie, Jr.
------------------ -------------------------------------
Harold R. Beattie, Jr.
Senior Vice President,
Chief Financial Officer and Treasurer
/s/ Leonard R. Harral
-------------------------------------
Leonard R. Harral
Vice President and Chief
Accounting Officer
23
CERTIFICATIONS
I, Thomas D. Karol, certify that:
I have reviewed this quarterly report on Form 10-Q of ElkCorp;
Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
Based on my knowledge, the financial statements, and other financial information
included in this quarterly report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 3, 2003 By /s/ Thomas D. Karol
----------------------------
Thomas D. Karol
Chief Executive Officer
24
I, Harold R. Beattie, Jr., certify that:
I have reviewed this quarterly report on Form 10-Q of ElkCorp;
Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
Based on my knowledge, the financial statements, and other financial information
included in this quarterly report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of
the Evaluation Date;
The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 3, 2003 By /s/ Harold R. Beattie, Jr.
------------------------------
Harold R. Beattie, Jr.
Chief Financial Officer
25
Exhibit Index
99.1 Certification of the Chief Executive Officer of ElkCorp
99.2 Certification of the Chief Financial Officer of ElkCorp