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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SeptemberJune 30, 20022003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
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Commission File No. 0-25642
COMMONWEALTH INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3245741
(State of incorporation) (I.R.S. Employer Identification No.)
500 West Jefferson Street
19thPNC Plaza -19th Floor
Louisville, Kentucky 40202-2823
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 589-8100
----------
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 proceedingpreceding 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|X| No ____
-----|_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |X| No
|_|
The registrant had 15,997,65116,010,971 shares of common stock outstanding at
OctoberJuly 29, 2002.2003.
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COMMONWEALTH INDUSTRIES, INC.
FORM 10-Q
For the Quarter Ended SeptemberJune 30, 20022003
INDEX
Part I - Financial Information
Item 1. Financial Statements (unaudited) Page Number
-----------
Condensed Consolidated Balance Sheet as of SeptemberJune 30, 20022003
and December 31, 20012002 3
Condensed Consolidated Statement of Operations for the three
months and ninesix months ended SeptemberJune 30, 20022003 and 20012002 4
Condensed Consolidated Statement of Comprehensive Income
for the three months and ninesix months ended SeptemberJune 30, 20022003
and 20012002 5
Condensed Consolidated Statement of Cash Flows for the ninesix
months ended SeptemberJune 30, 20022003 and 20012002 6
Notes to Condensed Consolidated Financial Statements 7-19
Item 2. Management's Discussion and Analysis of Financial Condition 20-25
and Results of Operations
Item 4. Controls and Procedures 25
Part II - Other Information
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Certifications 28-29
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Balance Sheet
(in thousands except share data)
SeptemberJune 30, December 31,
2003 2002 2001
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ -6,588 $ 6,39313,211
Accounts receivable, net 137 81211 66
Inventories 116,369 119,038142,374 125,348
Net residual interest in receivables sold 100,185 82,31039,865 81,195
Prepayments and other current assets 4,036 3,2307,819 7,133
------------- -------------
Total current assets 220,727 211,052196,857 226,953
Property, plant and equipment, net 146,067 152,137143,614 146,968
Goodwill net 48,872 74,19948,872
Other noncurrent assets 3,901 2,2445,644 6,111
------------- -------------
Total assets $ 419,567394,987 $ 439,632428,904
============= =============
Liabilities
Current liabilities:
Outstanding checks in excess of deposits $ 351 $ -
Accounts payable 54,264 50,693$ 39,347 $ 59,594
Accrued liabilities 36,564 38,87624,122 28,527
------------- -------------
Total current liabilities 91,179 89,56963,469 88,121
Long-term debt 125,000 125,000
Other long-term liabilities 5,511 6,8994,969 5,183
Accrued pension benefits 3,529 4,57629,149 26,743
Accrued postretirement benefits 77,121 79,42272,837 76,670
------------- -------------
Total liabilities 302,340 305,466295,424 321,717
------------- -------------
Commitments and contingencies - -
Stockholders' Equity
Common stock, $0.01 par value, 50,000,000 shares authorized,
15,997,65116,010,971 and 16,459,46815,997,651 shares outstanding at
June 30, 20022003 and December 31, 2001,2002, respectively 160 160
Additional paid-in capital 405,703 405,613 405,443
Accumulated deficit (283,507) (258,532)
Notes receivable from sale of common stock - (1,561)(287,907) (277,942)
Accumulated other comprehensive income:
Minimum pension liability adjustment (21,391) (21,391)
Effects of cash flow hedges (5,039) (11,344)2,998 747
------------- -------------
Total stockholders' equity 117,227 134,16699,563 107,187
------------- -------------
Total liabilities and stockholders' equity $ 419,567394,987 $ 439,632428,904
============= =============
See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Statement of Operations
(in thousands except per share data)
Three months ended NineSix months ended
SeptemberJune 30, SeptemberJune 30,
---------------------------- -----------------------------
2003 2002 20012003 2002 2001
----------- ----------- ------------ -----------
Net sales $ 253,933215,120 $ 249,914251,728 $ 727,519427,088 $ 715,610473,586
Cost of goods sold 234,571 235,366 681,933 678,890202,906 236,044 405,556 447,362
----------- ----------- ------------ -----------
Gross profit 19,362 14,548 45,586 36,72012,214 15,684 21,532 26,224
Selling, general and administrative expenses 12,524 11,326 34,779 34,154
Amortization of goodwill - 1,119 - 3,35710,693 10,995 23,217 22,255
----------- ----------- ------------ -----------
Operating income (loss) 6,838 2,103 10,807 (791)1,521 4,689 (1,685) 3,969
Other income (expense), net 332 289 818 647414 213 908 486
Interest expense, net (3,704) (3,745) (11,406) (11,764)(3,786) (3,851) (7,487) (7,702)
----------- ----------- ------------ -----------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 3,466 (1,353) 219 (11,908)(1,851) 1,051 (8,264) (3,247)
Income tax expense (benefit) (2,610) 200 (2,532) 60020 (47) 100 78
----------- ----------- ------------ -----------
Income (loss) before cumulative effect of
change in accounting principle 6,076 (1,553) 2,751 (12,508)(1,871) 1,098 (8,364) (3,325)
Cumulative effect of change in accounting principle - - - (25,327) -
----------- ----------- ------------ -----------
Net income (loss) $ 6,076(1,871) $ (1,553)1,098 $ (22,576)(8,364) $ (12,508)(28,652)
=========== =========== ============ ===========
Basic and diluted net income (loss) per share:
Income (loss) before cumulative effect of
change in accounting principle $ 0.38(0.12) $ (0.09)0.07 $ 0.17(0.52) $ (0.76)(0.21)
Cumulative effect of change in accounting principle - - - (1.58) -
----------- ----------- ------------ -----------
Net income (loss) $ 0.38(0.12) $ (0.09)0.07 $ (1.41)(0.52) $ (0.76)
=========== =========== ============ ===========
Diluted net income (loss) per share:
Income (loss) before cumulative effect of
change in accounting principle $ 0.38 $ (0.09) $ 0.17 $ (0.76)
Cumulative effect of change in accounting principle - - (1.57) -
----------- ----------- ------------ -----------
Net income (loss) $ 0.38 $ (0.09) $ (1.40) $ (0.76)(1.79)
=========== =========== ============ ===========
Weighted average shares outstanding
Basic 15,998 16,459 15,992 16,45716,011 15,994 16,011 15,989
Diluted 16,092 16,459 16,100 16,45716,011 16,140 16,011 15,989
Dividends paid per share $ 0.05 $ 0.05 $ 0.150.10 $ 0.150.10
See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Statement of Comprehensive Income (Loss)
(in thousands)
Three months ended NineSix months ended
SeptemberJune 30, SeptemberJune 30,
--------------------------- ------------------------
2003 2002 20012003 2002 2001
----------- ------------ ---------- ---------
Net income (loss) $ 6,076(1,871) $ (1,553)1,098 $ (22,576) $ (12,508)(8,364) $(28,652)
Other comprehensive income, net of tax:
Net change related to cash flow hedges:
Cumulative effect of accounting change - - - 6,619
Increase (decrease) in fair value of cash flow hedges (6,313) (15,866) (3,174) (30,621)1,990 (3,097) 5,266 3,139
Reclassification adjustment for (gains) losses included
in net income 4,267 8,297 9,479 6,159(322) 3,302 (3,015) 5,212
----------- ------------ ---------- ---------
Net change related to cash flow hedges (2,046) (7,569) 6,305 (17,843)1,668 205 2,251 8,351
----------- ------------ ---------- ---------
Comprehensive income (loss) $ 4,030(203) $ (9,122)1,303 $ (16,271) $ (30,351)(6,113) $(20,301)
=========== ============ ========== =========
See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Statement of Cash Flows
(in thousands)
NineSix months ended SeptemberJune 30,
------------------------------------------------------------------
2003 2002
2001
----------- ------------------------
Cash flows from operating activities:
Net income (loss) $ (22,576)(8,364) $ (12,508)(28,652)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operations:
Depreciation 15,940 24,64510,250 10,644
Amortization 762 4,305444 537
Goodwill inpairmentimpairment charge - 25,327 -
Loss on disposal of property, plant and equipment 196 35940 81
Issuance of common stock in connection with stock awards 90 170 106
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net (56) (748)
Decrease(145) 9
(Increase) decrease in inventories 2,669 23,724
(Increase)(17,026) 3,408
Decrease (increase) in net residual interest in receivables sold (17,875) (54,492)
(Increase) decrease41,330 (2,805)
Decrease in prepayments and other current assets (806) 8,316
(Increase)885 515
Decrease (increase) in other noncurrent assets (2,419) (445)
Increase23 (922)
(Decrease) increase in accounts payable 3,571 7,550
Increase (decrease)(20,247) 2,949
(Decrease) increase in accrued liabilities 3,993 (5,667)(3,725) 175
(Decrease) in other liabilities (4,736) (5,618)(1,641) (3,304)
----------- ------------------------
Net cash provided by (used in) operating activities 4,160 (10,473)1,914 8,132
----------- ------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment (10,089) (7,217)(7,091) (3,194)
Proceeds from sale of property, plant and equipment 23 90155 3
----------- ------------------------
Net cash (used in) investing activities (10,066) (7,127)(6,936) (3,191)
----------- ------------------------
Cash flows from financing activities:
Increase in outstanding checks in excess of deposits 351 6,942
Proceeds from long-term debt 55,700 48,06060,398 45,970
Repayments of long-term debt (55,700) (48,060)(60,398) (45,970)
Repayments of notes receivable from sale of common stock - 1,561 1,613
Cash dividends paid (2,399) (2,469)(1,601) (1,599)
----------- ------------------------
Net cash (used in) provided by financing activities (487) 6,086(1,601) (38)
----------- ------------------------
Net (decrease) increase in cash and cash equivalents (6,393) (11,514)(6,623) 4,903
Cash and cash equivalents at beginning of period 13,211 6,393
11,514
----------- ------------------------
Cash and cash equivalents at end of period $ -6,588 $ -11,296
=========== ========================
Supplemental disclosures:
Interest paid $ 7,5517,269 $ 8,6307,299
Income taxes paid (refunds received) (492) 157
Non-cash activities:
Repayment of notes receivable from sale of common stock with
common stock and subsequent retirement of common stock - 450179 (524)
See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC.
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying condensed consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not include
all the disclosures normally required by accounting principles generally
accepted accounting
principles.in the United States of America. The condensed consolidated financial
statements have been prepared in accordance with Commonwealth Industries, Inc.'s
(the "Company's") customary accounting practices and have not been audited. In
the opinion of management, all adjustments necessary to fairly present the
results of operations for the reporting interim periods have been made and were
of a normal recurring nature.
2. Stock-Based Compensation
At June 30, 2003, the Company had stock-based compensation plans which are
described more fully in note 14 to the consolidated financial statements
included in the Company's annual report to stockholders for the year ended
December 31, 2002. As permitted by Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company
follows the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for its stock option plans under the intrinsic value based method.
Accordingly, no stock-based compensation expense has been recognized for stock
options issued under the plans as all stock options granted under the plans had
an exercise price equal to the market value of the underlying common stock on
the date of grant. Had compensation expense been determined based on the fair
value of the stock options at the grant date consistent with the provisions of
SFAS No. 123, the Company's net loss and basic and diluted net loss per share
would have been increased for the three months and six months ended June 30,
2003 and the six months ended June 30, 2002 and the Company's net income and
basic and diluted net income per share would have been reduced for the three
months ended June 30, 2002 to the pro forma amounts which follow (in thousands
except per share data):
Three months ended
June 30,
2003 2002
---- ----
Net income (loss) as reported $(1,871) $1,098
Less total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects 104 116
-------- -------
Pro forma net income (loss) $(1,975) $ 982
======== =======
Basic net income (loss) per share
As reported $(0.12) $0.07
Pro forma (0.12) 0.06
Diluted net income (loss) per share
As reported $(0.12) $0.07
Pro forma (0.12) 0.06
Six months ended
June 30,
2003 2002
---- ----
Net income (loss) as reported $(8,364) $(28,652)
Less total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects 184 187
-------- --------
Pro forma net income (loss) $(8,548) $(28,839)
======== ========
Basic net income (loss) per share
As reported $(0.52) $(1.79)
Pro forma (0.53) (1.80)
Diluted net income (loss) per share
As reported $(0.52) $(1.79)
Pro forma (0.53) (1.80)
3. Receivables Purchase Agreement
On September 26, 1997, the Company sold all of its trade accounts receivables to
a 100% owned subsidiary, Commonwealth Financing Corp. ("CFC"). Simultaneously,
CFC entered into a three-year receivables purchase agreement with a financial
institution and its affiliate whereby CFC can sell, on a revolving basis, an
undivided interest in certain of its receivables and receive up to $150.0
million from an unrelated third party purchaser at a cost of funds linked to
commercial paper rates plus a charge for administrative and credit support
services. The Company services the receivables for a fee in accordance with the
receivables purchase agreement. In addition, under the agreement, the
receivables are sold with no recourse to the Company and the Company records no
discount on the sale of the receivables. During September 2000, the Company and
the financial institution extended the receivables purchase agreement for an
additional three-year period ending in September 2003 and in October 2002,
extended the agreement for an additional year ending in September 2004. In
addition during September 2001, the Company and the financial institution agreed
to reduce the maximum amount which can be outstanding under the agreement to
$95.0 million. At SeptemberJune 30, 20022003 and 2001,2002, the Company had outstanding under the
agreement $20.0$70.0 million and $17.5$39.0 million, respectively, and had $100.2$39.9 million
and $126.9$85.1 million, respectively, of net residual interest in the receivables
sold. The fair value of the net residual interest is measured at the time of the
sale and is based on the sale of similar assets. In the first ninesix months of 20022003
and 2001,2002, the Company received gross proceeds of $37.0$62.0 million and $30.0$37.0
million, respectively, from the sale of receivables and made gross payments of
$37.0$16.0 and $81.5$18.0 million, respectively, under the agreement.
3.4. Inventories
Inventories consist of the following (in thousands):
SeptemberJune 30, 20022003 December 31, 2001
------------------2002
------------- -----------------
Raw materials $ 19,13753,878 $ 21,20322,718
Work in process 42,973 45,83036,837 46,676
Finished goods 39,499 35,97841,261 43,780
Expendable parts and supplies 14,207 14,223
---------- -----------
115,816 117,23414,272 14,320
--------- ---------
146,248 127,494
LIFO reserve 553 1,804
---------- -----------(3,874) (2,146)
--------- ---------
$ 116,369142,374 $ 119,038
========== ===========125,348
========= =========
The Company usesCompany's raw materials, work in process and finished goods inventories are
valued using the last-in, first-out (LIFO), accounting method in the Company's
aluminum segment and the first-in, first-out (FIFO) and average-cost accounting
methods in the Company's electrical products segment. The FIFO accounting method
is used throughout the entire Company for valuing its inventories.expendable parts and
supplies inventory. Inventories of approximately $86.5$116.5 million and $87.9$98.2
million, included in the above totals (before the LIFO reserve) at SeptemberJune 30, 20022003
and December 31, 2001,2002, respectively, are accounted for under the LIFO method of
accounting while the remainder of the inventories are accounted for under the
FIFO and average-cost methods.
4.5. Provision for Income Taxes
The Company recognized an income tax benefitexpense of $2.6$0.02 million and $2.5$0.1 million for
the three months and ninesix months ended SeptemberJune 30, 2002,2003, respectively, compared to
an income tax benefit of $0.05 million and an income tax expense of $0.2 million and $0.6$0.1 million
for the three months and ninesix months ended September 30, 2001, respectively. The Company
recorded an adjustment of $2.7 million in the three months ended SeptemberJune 30, 2002, to reduce prior year's income tax accruals.
5.respectively.
6. Net Income Per Share Computations
The following is a reconciliation of the numerator and denominator of the basic
and diluted per share computations (in thousands except per share data):
Three months ended
SeptemberJune 30,
2003 2002 2001
---- ----
Income (numerator) amounts used for basic and diluted per share computations:
Income (loss) before cumulative effect of change in accounting principle $6,076 $(1,553)$(1,871) $1,098
Cumulative effect of change in accounting principle - -
------- ------ -------
Net income (loss) $6,076 $(1,553)$(1,871) $1,098
======= ====== =======
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 15,998 16,45916,011 15,994
====== ======
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 15,998 16,45916,011 15,994
Plus: dilutive effect of stock options 94 - 146
------ ------
Adjusted weighted average shares 16,092 16,45916,011 16,140
====== ======
Basic and diluted per share data:
Income (loss) before cumulative effect of change in accounting principle $0.38 $ (0.09)$(0.12) $0.07
Cumulative effect of change in accounting principle - -
----- ------------- ------
Net income (loss) $0.38 $ (0.09)
===== =======
Nine$(0.12) $0.07
====== ======
Six months ended
SeptemberJune 30,
2003 2002 2001
---- ----
Income (numerator) amounts used for basic and diluted per share computations:
Income (loss) before cumulative effect of change in accounting principle $ 2,751 $(12,508)$(8,364) $(3,325)
Cumulative effect of change in accounting principle - (25,327)
-------- -------- ---------
Net income (loss) $(22,576) $(12,508)
========= =========$(8,364) $(28,652)
======= ========
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 15,992 16,45716,011 15,989
====== ======
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 15,992 16,45716,011 15,989
Plus: dilutive effect of stock options 108- -
------ ------
Adjusted weighted average shares 16,100 16,45716,011 15,989
====== ======
Basic and diluted per share data:
Income (loss) before cumulative effect of change in accounting principle $ 0.17 $(0.76)$(0.52) $(0.21)
Cumulative effect of change in accounting principle - (1.58)
-
------------- ------
Net income (loss) $(1.41) $(0.76)
=======$(0.52) $(1.79)
====== Diluted per share data:
Income (loss) before cumulative effect of change in accounting principle $ 0.17 $(0.76)
Cumulative effect of change in accounting principle (1.57) -
------- -------
Net income (loss) $(1.40) $(0.76)
======= =============
Options to purchase 305,500583,000, 588,500 and 600,000 common shares, which equate to
31,177, 54,133 and 115,574 incremental common equivalent shares, respectively,
for both the three months and ninesix months ended SeptemberJune 30, 2001, which equate to 43,1412003 and 42,571 incremental
common equivalent shares, respectively,the six months ended
June 30, 2002 were excluded from the diluted calculation above as their effect
would have been antidilutive. In addition, options to purchase 794,0001,118,500 and
1,113,000 common shares for both the three months and ninesix months ended SeptemberJune 30, 20022003,
respectively, and 799,500763,500 and 798,500 common shares for both the three months and ninesix
months ended SeptemberJune 30, 20012002, respectively, were excluded from the diluted
calculations above because the exercise prices on the options were greater than
the average market price for the periods.
6.7. Financial Instruments and Hedging Activities
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", including Statement of Financial Accounting Standards No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an amendment of FASB Statement No. 133" ("SFAS No. 133"). The Company recorded a
cumulative-effect-type net gain transition adjustment of $6.6 million in
accumulated other comprehensive income to recognize at fair value all
derivatives that were designated as cash-flow hedging instruments upon adoption
of SFAS No. 133 on January 1, 2001. This entire amount was reclassified from
accumulated other comprehensive income into cost of goods sold during 2001.
The Company enters into futures contracts, forward contracts and options to
manage exposures to price risk related to aluminum and natural gas purchases.
The Company has designated the futures contracts and forward contracts as cash
flow hedges of anticipated aluminum raw material and natural gas requirements,
respectively. For the second quarter ending June 30, 2003, the Company's
aluminum futures contracts did not meet certain "effectiveness" requirements set
forth in Statement of Financial Accounting Standards No. 133 ("SFAS No. 133").
Accordingly, as prescribed by the provisions of SFAS No. 133, the derivative
instruments used as hedges were marked-to-market and the gains and losses during
the second quarter of 2003 were recorded currently in the consolidated statement
of operations instead of being deferred in other comprehensive income and
included in income when the underlying hedged transactions occur. The Company's
natural gas futures continue to be deemed "effective" per SFAS No. 133 and
accordingly the gains and losses on these financial instruments are deferred in
other comprehensive income and included in income when the underlying hedged
transactions occur.
As of SeptemberJune 30, 2002, approximately $4.9 million of2003, the $5.0Company had $3.0 million of deferred net lossesgains recorded
in accumulated other comprehensive income. Over the next twelve months,
approximately $2.8 million of deferred net gains are expected to be reclassified
from other comprehensive income into net income as a reduction of cost of goods
sold over the next twelve months. A net
loss of $0.05 million and $0.16 million was recognized in cost of goods sold
during the three months and nine months ended September 30, 2002, respectively,
and a net loss of $0.13 million and $0.16 million was recognized in cost of
goods sold during the three months and nine months ended September 30, 2001,
respectively, representing the amount of the hedges' ineffectiveness.sold. As of SeptemberJune 30, 2002,2003, the Company held open aluminum and natural gas
futures and forward contracts having maturity dates extending through March 2004.
In order to hedgeDecember
2005. A net gain of $0.6 million and $0.4 million was recognized as a portionreduction
in cost of its interest rate risk, the Company was a party
to an interest rate swap agreement with a notional amount of $5 million under
which the Company paid a fixed rate of interest and received a LIBOR-based
floating rate. The interest rate swap agreement expiredgoods sold during September 2001
and as of September 30, 2002 the Company has no interest rate swap agreements in
effect. The Company's interest rate swap agreement which expired during
September 2001 did not qualify for hedge accounting under SFAS 133 and as such
the change in the fair value of the interest rate swap agreement had been
recognized currently as interest expense, net in the Company's consolidated
statement of operations. The amount of such change in the fair value of the
interest rate swap agreement was immaterial for the three months and ninesix months ended SeptemberJune 30,
2001.
7.2003, respectively, and a net loss of $0.04 million and $0.11 million was
recognized in cost of goods sold during the three months and six months ended
June 30, 2002, respectively, representing the amount of the hedges'
ineffectiveness.
8. Goodwill
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142"). The Statement addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes Accounting Principles Board
Opinion No. 17, "Intangible Assets" and amends Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"), to exclude from its scope
goodwill and intangible assets that are not amortized. SFAS No. 121 haswas
subsequently been
supercededsuperseded by Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No.
144").
SFAS No. 142 addresses how intangible assets that are acquired individually or with a
group of other assets (but not those acquired in a business combination) should
be accounted for in financial statements upon their acquisition. This Statement
also addresses how goodwill and other intangible assets should be
accounted for after they have been initially recognized in the financial
statements. Under SFAS No. 142, goodwill is no longer to be amortized but
reviewed for impairment annually or more frequently if certain indicators arise,
using a two-step approach. SFAS No. 142 iswas effective January 1, 2002 and the
Company was required to complete step one of a transitional impairment test by
June 30, 2002 and to complete step two of the transitional impairment test, if
step one indicates that the reporting unit's carrying value exceeds its fair
value, by December 31, 2002. Any impairment loss resulting from the transitional
impairment test was required to be recorded as a cumulative effect of a change
in accounting principle in the quarter ended March 31, 2002. Any subsequent
impairment losses will be reflected in operating income in the consolidated
statement of operations. The net goodwill balances attributable to each of the
Company's reporting units were tested for impairment by comparing the fair value
of each reporting unit to its carrying value. Fair value was determined by using
the valuation technique of calculating the present value of estimated expected
future cash flows (using a discount rate commensurate with the risks involved).
Based upon the transitional impairment test performed upon adoption of SFAS No.
142, the Company has recorded a goodwill impairment loss of $25.3 million ($13.5
million in its aluminum products segment and $11.8 million in its electrical products
segment). This non-cash goodwill impairment charge has no impact on the
calculation of financial covenants under the Company's revolving credit
facility. As required by SFAS No.142No. 142 and as previously described, the Company
recorded the goodwill write-down as a cumulative effect of a change in
accounting principle as of January 1, 2002 and restated the Company's first
quarter 2002 financial results.
The following displays the changes in the carrying amount of goodwill in each of
the Company's reportable business segments for the ninethree months ended September
30,March 31, 2002 (in
thousands):. There have been no further changes in the carrying amount of
goodwill since March 31, 2002:
Electrical
Aluminum Products Total
-------- ---------- -----------------
Balance December 31, 2001 $13,470 $60,729 $74,199
Goodwill impairment loss as a result of transitional
impairmentImpairment test related to adoption of SFAS No. 142 (13,470) (11,857) (25,327)
-------- -------- --------------- ------- -------
Balance September 30,March 31, 2002 $ - $48,872 $48,872
======== ======== ========
The following represents transitional disclosures relating to goodwill
amortization (in thousands except per share data):
Three months ended
September 30,
2002 2001
---- ----
Reported net income (loss) $6,076 $(1,553)
Add back: goodwill amortization - 1,119
------ ------
Adjusted net income (loss) $6,076 $ (434)
====== ======
Reported basic and diluted net income (loss) per share $0.38 $(0.09)
Goodwill amortization per basic and diluted per share - 0.06
----- ------
Adjusted basic and diluted net income (loss) per share $0.38 $(0.03)
===== ======
Weighted average shares outstanding
Basic 15,998 16,459
Diluted 16,092 16,459
Nine months ended
September 30,
2002 2001
---- ----
Reported income (loss) before cumulative effect of change in accounting principle $2,751 $(12,508)
Cumulative effect of change in accounting principle (25,327) -
-------- -------
Reported net income (loss) $(22,576) $(12,508)
Add back: goodwill amortization - 3,357
-------- -------
Adjusted net income (loss) $(22,576) $(9,151)
======== ======= Basic net income (loss) per share:
Reported income (loss) before cumulative effect of change in accounting principle $ 0.17 $(0.76)
Cumulative effect of change in accounting principle (1.58) -
------ ------
Reported net income (loss) $(1.41) $(0.76)
Goodwill amortization - 0.20
------ ------
Adjusted net income (loss) $(1.41) $(0.56)
====== ======
Diluted net income (loss) per share:
Reported income (loss) before cumulative effect of change in accounting principle $0.17 $(0.76)
Cumulative effect of change in accounting principle (1.57) -
------ ------
Reported net income (loss) $(1.40) $(0.76)
Goodwill amortization - 0.20
------ ------
Adjusted net income (loss) $(1.40) $(0.56)
====== ======
Weighted average shares outstanding
Basic 15,992 16,457
Diluted 16,100 16,457======= =======
The Company has no other intangible assets other than the goodwill discussed
above.
8.9. Information Concerning Business Segments
The Company has determined it has two reportable segments: aluminum and
electrical products. The aluminum segment manufactures aluminum sheet for
distributors and the transportation, construction, and consumer durables end-use
markets. The electrical products segment manufactures flexible electrical wiring
products for the commercial construction and do-it-yourself markets.
The accounting policies of the reportable segments are the same as those
described in Note 1, "Basis of Presentation and Summary of Significant
Accounting Policies" in the Company's annual report to stockholders for the year
ended December 31, 2001.2002. All intersegment sales prices are market based. The
Company evaluates the performance of its operating segments based upon operating
income.
The Company's reportable segments are strategic businessesbusiness units that offer
different products to different customer groups. They are managed separately
because each business requires different technology and marketing strategies.
Summarized financial information concerning the Company's reportable segments is
shown in the following table for the three months and ninesix months ended SeptemberJune 30,
20022003 and 20012002 (in thousands). The "Other" column includes corporate related
items, including elimination of intersegment transactions, and as it relates to
segment operating income, income and expense not allocated to reportable
segments. TotalCertain expenses and assets at September 30, 2002 includerelating to information technology which
prior to the effects of
the $167.3 million non-cash asset impairment charges recorded in the fourthfirst quarter of 2001 and the $25.3 million non-cash goodwill impairment charges
($13.5 million relating2003 had been allocated to the aluminum products segment and $11.8 million
relatingreportable segments are
no longer being allocated. Prior period amounts have been reclassified to
the electrical products segment) recorded as a cumulative effect of
a change in accounting principle as of January 1, 2002 during the second quarter
of 2002. The $167.3 million non-cash asset impairment charges were all related
to the aluminum products segment and composed of $85.4 million of property,
plant and equipment write-downs ($1.8 million of net land and improvements,
$15.7 million of net building improvements, $59.0 million of net machinery and
equipment and $8.9 million of construction in progress) and $81.9 million of
goodwill write-downs. See note 2 in the Company's annual report to stockholders
for the year ended December 31, 2001 for additional information on the asset
impairment charges and note 7 in this report for additional information on the
goodwill impairment charges.conform with current classifications.
Electrical
Aluminum Products Other Total
-------- ---------- --------- -------------------
Three months ended SeptemberJune 30, 20022003
- ---------------------------------------------------------------------
Net sales to external customers $224,124 $29,809$190,099 $25,021 $ -- $253,933$215,120
Intersegment net sales 7,5224,140 -- (7,522)(4,140) --
Operating income (loss) 10,840 1,137 (5,139) 6,8386,705 (27) (5,157) 1,521
Depreciation and amortization 4,950 5714,548 559 -- 5,5215,107
Amortization -- -- 222 222
Total assets 324,589 93,236 1,742 419,567302,824 82,211 9,952 394,987
Capital expenditures 6,884 11 -- 6,8951,008 266 1,219 2,493
Three months ended SeptemberJune 30, 20012002
- ---------------------------------------------------------------------
Net sales to external customers $220,028 $29,886$223,999 $27,729 $ -- $249,914$251,728
Intersegment net sales 5,4434,577 -- (5,443)(4,577) --
Operating income (loss) 4,335 1,680 (3,912) 2,1037,764 1,969 (5,044) 4,689
Depreciation and amortization 8,632 9774,758 571 -- 9,6095,329
Amortization -- -- 218 218
Total assets 540,007 102,998 2,291 645,296319,837 89,244 1,851 410,932
Capital expenditures 3,042 141,755 10 -- 3,056
Nine1,765
Six months ended SeptemberJune 30, 20022003
- ------------------------------------------------------------------
Net sales to external customers $641,081 $86,438$377,385 $49,703 $ -- $727,519$427,088
Intersegment net sales 21,6508,516 -- (21,650)(8,516) --
Operating income (loss) 18,759 5,069 (13,021) 10,80711,159 (1,046) (11,798) (1,685)
Depreciation and amortization 14,990 1,7129,132 1,118 -- 16,70210,250
Amortization -- -- 444 444
Total assets 324,589 93,236 1,742 419,567302,824 82,211 9,952 394,987
Capital expenditures 9,835 254 -- 10,089
Nine3,567 268 3,256 7,091
Six months ended SeptemberJune 30, 20012002
- ------------------------------------------------------------------
Net sales to external customers $623,252 $92,358$416,957 $56,629 $ -- $715,610$473,586
Intersegment net sales 19,8769,534 -- (19,876)(9,534) --
Operating income (loss) 6,062 4,343 (11,196) (791)9,978 3,932 (9,941) 3,969
Depreciation and amortization 26,012 2,931 7 28,9509,503 1,141 -- 10,644
Amortization -- -- 537 537
Total assets 540,007 102,998 2,291 645,296319,837 89,244 1,851 410,932
Capital expenditures 7,017 2002,951 243 -- 7,2173,194
9.10. Guarantor Financial Statements
The $125 million of 10.75% senior subordinated notes due 2006 issued by the
Company, and the $30 million revolving credit facility are guaranteed by the
Company's wholly-owned subsidiaries (collectively the "Subsidiary Guarantors"),
other than Commonwealth Financing Corp. ("CFC"), a Securitization Subsidiary (as
defined in the Indenture with respect to such debt) and certain subsidiaries of
the Company without substantial assets or operations. Such guarantees are full,
unconditional and joint and several. Separate financial statements of the
Subsidiary Guarantors are not presented because management has determined that
they would not be material to investors. The following supplemental financial
information sets forth on a condensed combined basis for the Parent Company
Only, Subsidiary Guarantors, Non-guarantor Subsidiaries and for the Company, a
combining balance sheet as of SeptemberJune 30, 20022003 and December 31, 2001,2002, statement of
operations for the three months and ninesix months ended SeptemberJune 30, 20022003 and 20012002 and
statement of cash flows for the ninesix months ended SeptemberJune 30, 20022003 and 2001.2002.
Combining Balance Sheet at SeptemberJune 30, 2003
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ----------- ----------- ------------ --------
Assets
Current assets:
Cash and cash equivalents $ -- $ 6,588 $ -- $ -- $ 6,588
Accounts receivable, net -- 255,688 -- (255,477) 211
Inventories -- 142,374 -- -- 142,374
Net residual interest in receivables sold -- -- 39,865 -- 39,865
Prepayments and other current assets 435 7,384 -- -- 7,819
--------- --------- --------- --------- ---------
Total current assets 435 412,034 39,865 (255,477) 196,857
Property, plant and equipment, net -- 143,614 -- -- 143,614
Goodwill, net -- 48,872 -- -- 48,872
Other noncurrent assets 418,438 4,664 -- (417,458) 5,644
--------- --------- --------- --------- ---------
Total assets $ 418,873 $ 609,184 $ 39,865 $(672,935) $ 394,987
========= ========= ========= ========= =========
Liabilities
Current liabilities:
Accounts payable $ 170,018 $ 39,347 $ 85,459 $(255,477) $ 39,347
Accrued liabilities 5,899 19,029 (806) -- 24,122
--------- --------- --------- --------- ---------
Total current liabilities 175,917 58,376 84,653 (255,477) 63,469
Long-term debt 125,000 -- -- -- 125,000
Other long-term liabilities -- 4,969 -- -- 4,969
Accrued pension benefits -- 29,149 -- -- 29,149
Accrued postretirement benefits -- 72,837 -- -- 72,837
--------- --------- --------- --------- ---------
Total liabilities 300,917 165,331 84,653 (255,477) 295,424
--------- --------- --------- --------- ---------
Commitments and contingencies -- -- -- -- --
Stockholders' Equity
Common stock 160 1 -- (1) 160
Additional paid-in capital 405,703 486,727 5,000 (491,727) 405,703
Accumulated deficit (287,907) (24,482) (49,788) 74,270 (287,907)
Accumulated other comprehensive income:
Minimum pension liability adjustment -- (21,391) -- -- (21,391)
Effects of cash flow hedges -- 2,998 -- -- 2,998
--------- --------- --------- --------- ---------
Total stockholders' equity 117,956 443,853 (44,788) (417,458) 99,563
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 418,873 $ 609,184 $ 39,865 $(672,935) $ 394,987
========= ========= ========= ========= =========
Combining Balance Sheet at December 31, 2002
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ----------- ----------- ------------ --------
Assets
Current assets:
Cash and cash equivalents $ -- $ --13,211 $ -- $ -- $ --13,211
Accounts receivable, net -- 299,349286,847 -- (299,212) 137(286,781) 66
Inventories -- 116,369125,348 -- -- 116,369125,348
Net residual interest in receivables sold -- -- 100,18581,195 -- 100,18581,195
Prepayments and other current assets 435 3,6016,698 -- -- 4,0367,133
--------- --------- --------- --------- ---------
Total current assets 435 419,319 100,185 (299,212) 220,727432,104 81,195 (286,781) 226,953
Property, plant and equipment, net -- 146,067146,968 -- -- 146,067146,968
Goodwill, net -- 48,872 -- -- 48,872
Other noncurrent assets 409,862 2,594419,913 4,913 -- (408,555) 3,901(418,715) 6,111
--------- --------- --------- --------- ---------
Total assets $ 410,297420,348 $ 616,852632,857 $ 100,185 $(707,767)81,195 $(705,496) $ 419,567428,904
========= ========= ========= ========= =========
Liabilities
Current liabilities:
Outstanding checks in excess of deposits $ -- $ 351 $ -- $ -- $ 351
Accounts payable 156,156 54,264 143,056 (299,212) 54,264$ 161,658 $ 59,594 $ 125,123 $(286,781) $ 59,594
Accrued liabilities 6,875 30,446 (757)5,859 23,515 (847) -- 36,56428,527
--------- --------- --------- --------- ---------
Total current liabilities 163,031 85,061 142,299 (299,212) 91,179167,517 83,109 124,276 (286,781) 88,121
Long-term debt 125,000 -- -- -- 125,000
Other long-term liabilities -- 5,5115,183 -- -- 5,5115,183
Accrued pension benefits -- 3,52926,743 -- -- 3,52926,743
Accrued postretirement benefits -- 77,12176,670 -- -- 77,12176,670
--------- --------- --------- --------- ---------
Total liabilities 288,031 171,222 142,299 (299,212) 302,340292,517 191,705 124,276 (286,781) 321,717
--------- --------- --------- --------- ---------
Commitments and contingencies -- -- -- -- --
Stockholders' Equity
Common stock 160 1 -- (1) 160
Additional paid-in capital 405,613 486,727 5,000 (491,727) 405,613
Accumulated deficit (283,507) (36,059) (47,114) 83,173 (283,507)(277,942) (24,932) (48,081) 73,013 (277,942)
Accumulated other comprehensive income:
Minimum pension liability adjustment -- (21,391) -- -- (21,391)
Effects of cash flow hedges -- (5,039)747 -- -- (5,039)747
--------- --------- --------- --------- ---------
Total stockholders' equity 122,266 445,630 (42,114) (408,555) 117,227127,831 441,152 (43,081) (418,715) 107,187
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 410,297420,348 $ 616,852632,857 $ 100,185 $(707,767)81,195 $(705,496) $ 419,567428,904
========= ========= ========= ========= =========
Combining Balance Sheet at December 31, 2001Statement of Operations for the three months ended June 30, 2003
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ----------- ----------- ------------ ----------------- --------- --------- ---------
Assets
Current assets:
Cash and cash equivalentsNet sales $ -- $ 6,393215,120 $ -- $ -- $ 6,393
Accounts receivable, net215,120
Cost of goods sold -- 271,074 -- (270,993) 81
Inventories -- 119,038202,906 -- -- 119,038
Net residual interest in receivables sold -- -- 82,310 -- 82,310
Prepayments and other current assets 435 2,795 -- -- 3,230202,906
--------- --------- --------- --------- ---------
Total current assets 435 399,300 82,310 (270,993) 211,052
Property, plant and equipment, netGross profit -- 152,13712,214 -- -- 152,137
Goodwill, net -- 74,19912,214
Selling, general and administrative expenses 44 10,649 -- -- 74,199
Other noncurrent assets 424,830 611 -- (423,197) 2,24410,693
--------- --------- --------- --------- ---------
Total assets $ 425,265 $ 626,247 $ 82,310 $(694,190) $ 439,632
========= ========= ========= ========= =========
Liabilities
Current liabilities:
Accounts payable $ 148,971 $ 50,693 $ 122,022 $(270,993) $ 50,693
Accrued liabilities 5,784 33,997 (905)Operating income (loss) (44) 1,565 -- 38,876-- 1,521
Other income (expense), net (1,640) 414 -- 1,640 414
Interest income (expense), net (3,467) 680 (999) -- (3,786)
--------- --------- --------- --------- ---------
Total current liabilities 154,755 84,690 121,117 (270,993) 89,569
Long-term debt 125,000Income (loss) before income taxes and cumulative
effect of change in accounting principle (5,151) 2,659 (999) 1,640 (1,851)
Income tax expense -- 20 -- -- -- 125,000
Other long-term liabilities -- 6,899 -- -- 6,899
Accrued pension benefits -- 4,576 -- -- 4,576
Accrued postretirement benefits -- 79,422 -- -- 79,42220
--------- --------- --------- --------- ---------
Total liabilities 279,755 175,587 121,117 (270,993) 305,466Income (loss) before cumulative effect of
change in accounting principle (5,151) 2,639 (999) 1,640 (1,871)
Cumulative effect of change in accounting principle -- -- -- -- --
--------- --------- --------- --------- ---------
Commitments and contingencies -- -- -- -- --
Stockholders' Equity
Common stock 160 1 -- (1) 160
Additional paid-in capital 405,443 486,727 5,000 (491,727) 405,443
Accumulated deficit (258,532) (24,724) (43,807) 68,531 (258,532)
Notes receivable from sale of common stock (1,561) -- -- -- (1,561)
Accumulated other comprehensive income:
Effects of cash flow hedges -- (11,344) -- -- (11,344)
--------- --------- --------- --------- ---------
Total stockholders' equity 145,510 450,660 (38,807) (423,197) 134,166
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equityNet income (loss) $ 425,265(5,151) $ 626,2472,639 $ 82,310 $(694,190)(999) $ 439,6321,640 $ (1,871)
========= ========= ========= ========= =========
Combining Statement of Income for the three months ended SeptemberJune 30, 2002
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- --------- --------- --------- ---------
Net sales $ -- $ 253,933251,728 $ -- $ -- $ 253,933251,728
Cost of goods sold -- 234,571236,044 -- -- 234,571236,044
--------- --------- --------- --------- ---------
Gross profit -- 19,36215,684 -- -- 19,36215,684
Selling, general and administrative expenses 51 12,47357 10,938 -- -- 12,524
Amortization of goodwill -- -- -- -- --10,995
--------- --------- --------- --------- ---------
Operating income (loss) (51) 6,889(57) 4,746 -- -- 6,8384,689
Other income (expense), net 6,904 3324,622 213 -- (6,904) 332(4,622) 213
Interest income (expense), net (3,469) 807 (1,042)(3,467) 948 (1,332) -- (3,704)(3,851)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 3,384 8,028 (1,042) (6,904) 3,4661,098 5,907 (1,332) (4,622) 1,051
Income tax expense (benefit) (2,692) 82-- (47) -- -- (2,610)(47)
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle 6,076 7,946 (1,042) (6,904) 6,0761,098 5,954 (1,332) (4,622) 1,098
Cumulative effect of change in accounting principle -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ 6,0761,098 $ 7,9465,954 $ (1,042)(1,332) $ (6,904)(4,622) $ 6,0761,098
========= ========= ========= ========= =========
Combining Statement of IncomeOperations for the threesix months ended SeptemberJune 30, 20012003
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- --------- --------- --------- ---------
Net sales $ -- $ 249,914427,088 $ -- $ -- $ 249,914427,088
Cost of goods sold -- 235,366405,556 -- -- 235,366405,556
--------- --------- --------- --------- ---------
Gross profit -- 14,54821,532 -- -- 14,54821,532
Selling, general and administrative expenses 49 11,277172 23,045 -- -- 11,326
Amortization of goodwill -- 1,119 -- -- 1,11923,217
--------- --------- --------- --------- ---------
Operating income (loss) (49) 2,152(172) (1,513) -- -- 2,103(1,685)
Other income (expense), net 1,863 289(1,257) 908 -- (1,863) 2891,257 908
Interest income (expense), net (3,367) 1,214 (1,592)(6,935) 1,155 (1,707) -- (3,745)(7,487)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle (1,553) 3,655 (1,592) (1,863) (1,353)(8,364) 550 (1,707) 1,257 (8,264)
Income tax expense -- 200100 -- -- 200100
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle (1,553) 3,455 (1,592) (1,863) (1,553)(8,364) 450 (1,707) 1,257 (8,364)
Cumulative effect of change in accounting principle -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ (1,553)(8,364) $ 3,455450 $ (1,592)(1,707) $ (1,863)1,257 $ (1,553)(8,364)
========= ========= ========= ========= =========
Combining Statement of Income for the ninesix months ended SeptemberJune 30, 2002
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- --------- --------- --------- ---------
Net sales $ -- $ 727,519473,586 $ -- $ -- $ 727,519473,586
Cost of goods sold -- 681,933447,362 -- -- 681,933447,362
--------- --------- --------- --------- ---------
Gross profit -- 45,58626,224 -- -- 45,58626,224
Selling, general and administrative expenses 224 34,555173 22,082 -- -- 34,779
Amortization of goodwill -- -- -- -- --22,255
--------- --------- --------- --------- ---------
Operating income (loss) (224) 11,031(173) 4,142 -- -- 10,8073,969
Other income (expense), net 10,685 8183,781 486 -- (10,685) 818(3,781) 486
Interest income (expense), net (10,402) 2,303 (3,307)(6,933) 1,496 (2,265) -- (11,406)(7,702)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 59 14,152 (3,307) (10,685) 219(3,325) 6,124 (2,265) (3,781) (3,247)
Income tax expense (benefit) (2,692) 160-- 78 -- -- (2,532)78
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle 2,751 13,992 (3,307) (10,685) 2,751(3,325) 6,046 (2,265) (3,781) (3,325)
Cumulative effect of change in accounting principle (25,327) (25,327) -- 25,327 (25,327)
--------- --------- --------- --------- ---------
Net income (loss) $ (22,576)(28,652) $ (11,335)(19,281) $ (3,307)(2,265) $ 14,64221,546 $ (22,576)(28,652)
========= ========= ========= ========= =========
Combining Statement of IncomeCash Flows for the ninesix months ended SeptemberJune 30, 20012003
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ---------- ---------- --------- --------- --------- -------------------
Cash flows from operating activities:
Net salesincome (loss) $ (8,364) $ 450 $ (1,707) $ 1,257 $ (8,364)
Adjustments to reconcile net income (loss) to
net cash provided by operations:
Depreciation -- 10,250 -- -- 10,250
Amortization -- 444 -- -- 444
Loss on disposal of property, plant and equipment -- 40 -- -- 40
Issuance of common stock in connection with stock awards 90 -- -- -- 90
Equity in undistributed net income of subsidiaries 1,257 -- -- (1,257) --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net -- 31,159 -- (31,304) (145)
(Increase) in inventories -- (17,026) -- -- (17,026)
Decrease in net residual interest in receivables sold -- -- 41,330 -- 41,330
Decrease in prepayments and other current assets -- 885 -- -- 885
Decrease (increase) in other noncurrent assets 218 (195) -- -- 23
Increase (decrease) in accounts payable 8,360 (20,247) (39,664) 31,304 (20,247)
Increase (decrease) in accrued liabilities 40 (3,806) 41 -- (3,725)
(Decrease) in other liabilities -- (1,641) -- -- (1,641)
-------- -------- -------- -------- --------
Net cash provided by operating activities 1,601 313 -- -- 1,914
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment -- (7,091) -- -- (7,091)
Proceeds from sale of property, plant and equipment -- 155 -- -- 155
-------- -------- -------- -------- --------
Net cash (used in) investing activities -- (6,936) -- -- (6,936)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Proceeds from long-term debt -- 60,398 -- -- 60,398
Repayments of long-term debt -- (60,398) -- -- (60,398)
Cash dividends paid (1,601) -- -- -- (1,601)
-------- -------- -------- -------- --------
Net cash (used in) financing activities (1,601) -- -- -- (1,601)
-------- -------- -------- -------- --------
Net (decrease) in cash and cash equivalents -- (6,623) -- -- (6,623)
Cash and cash equivalents at beginning of period -- 13,211 -- -- 13,211
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ -- $ 715,6106,588 $ -- $ -- $ 715,610
Cost of goods sold -- 678,890 -- -- 678,890
--------- --------- --------- --------- ---------
Gross profit -- 36,720 -- -- 36,720
Selling, general and administrative expenses 225 33,929 -- -- 34,154
Amortization of goodwill -- 3,357 -- -- 3,357
--------- --------- --------- --------- ---------
Operating income (loss) (225) (566) -- -- (791)
Other income (expense), net (2,227) 647 -- 2,227 647
Interest income (expense), net (10,056) 3,881 (5,589) -- (11,764)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle (12,508) 3,962 (5,589) 2,227 (11,908)
Income tax expense -- 600 -- -- 600
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle (12,508) 3,362 (5,589) 2,227 (12,508)
Cumulative effect of change in accounting principle -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ (12,508) $ 3,362 $ (5,589) $ 2,227 $ (12,508)
========= ========= ========= ========= =========6,588
======== ======== ======== ======== ========
Combining Statement of Cash Flows for the ninesix months ended SeptemberJune 30, 2002
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ---------- ---------- --------- ----------
Cash flows from operating activities:
Net income (loss) $(22,576) $(11,335)$(28,652) $(19,281) $ (3,307)(2,265) $ 14,642 $(22,576)21,546 $(28,652)
Adjustments to reconcile net income (loss) to
net cash provided by operations:
Depreciation -- 15,94010,644 -- -- 15,94010,644
Amortization -- 762537 -- -- 762537
Goodwill impairment charge 25,327 25,327 -- (25,327) 25,327
Loss on disposal of property, plant and equipment -- 19681 -- -- 19681
Issuance of common stock in connection with stock awards 170 -- -- -- 170
Equity in undistributed net income of subsidiaries (10,685)(3,781) -- -- 10,6853,781 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net -- (28,275)(11,208) -- 28,219 (56)11,217 9
Decrease in inventories -- 2,6693,408 -- -- 2,6693,408
(Increase) in net residual interest in receivables sold -- -- (17,875)(2,805) -- (17,875)
(Increase)(2,805)
Decrease in prepayments and other current assets -- (806)515 -- -- (806)515
Decrease (increase) in other noncurrent assets 326 (2,745)217 (1,139) -- -- (2,419)(922)
Increase (decrease) in accounts payable 7,185 3,571 21,034 (28,219) 3,5716,342 2,949 4,875 (11,217) 2,949
Increase (decrease) in accrued liabilities 1,091 2,754 148415 (435) 195 -- 3,993175
(Decrease) in other liabilities -- (4,736)(3,304) -- -- (4,736)(3,304)
-------- -------- -------- -------- --------
Net cash provided by operating activities 838 3,32238 8,094 -- -- 4,1608,132
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment -- (10,089)(3,194) -- -- (10,089)(3,194)
Proceeds from sale of property, plant and equipment -- 233 -- -- 233
-------- -------- -------- -------- --------
Net cash (used in) investing activities -- (10,066)(3,191) -- -- (10,066)(3,191)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Increase in outstanding checks in excess of deposits -- 351 -- -- 351
Proceeds from long-term debt -- 55,70045,970 -- -- 55,70045,970
Repayments of long-term debt -- (55,700)(45,970) -- -- (55,700)(45,970)
Repayments of notes receivable from sale of common stock 1,561 -- -- -- 1,561
Cash dividends paid (2,399)(1,599) -- -- -- (2,399)(1,599)
-------- -------- -------- -------- --------
Net cash (used in) provided by financing activities (838) 351(38) -- -- (487)-- (38)
-------- -------- -------- -------- --------
Net (decrease)increase in cash and cash equivalents -- (6,393)4,903 -- -- (6,393)4,903
Cash and cash equivalents at beginning of period -- 6,393 -- -- 6,393
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ -- $ --11,296 $ -- $ -- $ --
======== ======== ======== ======== ========
Combining Statement of Cash Flows for the nine months ended September 30, 2001
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ---------- ---------- --------- ----------
Cash flows from operating activities:
Net income (loss) $(12,508) $ 3,362 $ (5,589) $ 2,227 $(12,508)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operations:
Depreciation -- 24,645 -- -- 24,645
Amortization 7 4,298 -- -- 4,305
Loss on disposal of property, plant and equipment -- 359 -- -- 359
Issuance of common stock in connection with stock awards 106 -- -- -- 106
Equity in undistributed net income of subsidiaries 2,227 -- -- (2,227) --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net -- (67,884) -- 67,136 (748)
Decrease in inventories -- 23,724 -- -- 23,724
(Increase) in net residual interest in receivables sold -- -- (54,492) -- (54,492)
Decrease in prepayments and other current assets 248 8,068 -- -- 8,316
Decrease (increase) in other noncurrent assets 326 (771) -- -- (445)
Increase (decrease) in accounts payable 6,766 7,550 60,370 (67,136) 7,550
Increase (decrease) in accrued liabilities 3,684 (9,062) (289) -- (5,667)
(Decrease) in other liabilities -- (5,618) -- -- (5,618)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities 856 (11,329) -- -- (10,473)
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment -- (7,217) -- -- (7,217)
Proceeds from sale of property, plant and equipment -- 90 -- -- 90
-------- -------- -------- -------- --------
Net cash (used in) investing activities -- (7,127) -- -- (7,127)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Increase in outstanding checks in excess of deposits -- 6,942 -- -- 6,942
Proceeds from long-term debt -- 48,060 -- -- 48,060
Repayments of long-term debt -- (48,060) -- -- (48,060)
Repayments of notes receivable from sale of common stock 1,613 -- -- -- 1,613
Cash dividends paid (2,469) -- -- -- (2,469)
-------- -------- -------- -------- --------
Net cash (used in) provided by financing activities (856) 6,942 -- -- 6,086
-------- -------- -------- -------- --------
Net (decrease) in cash and cash equivalents -- (11,514) -- -- (11,514)
Cash and cash equivalents at beginning of period -- 11,514 -- -- 11,514
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ -- $ -- $ -- $ -- $ --11,296
======== ======== ======== ======== ========
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This section should be read in conjunction with the condensed consolidated
financial statements and notes thereto included in item 1 of this report in
addition to the consolidated financial statements of the Company and the notes
thereto included in the Company's annual report to stockholders for the year
ended December 31, 2001,2002, including footnote 1 which describes the Company's
significant accounting policies including its use of estimates. See the caption
entitled "Application of Critical Accounting Policies" in this section for
further information. The following discussion contains statements which are
forward-looking rather than historical fact. These forward-looking statements
are made pursuant to the safe harbor provisions of the Private Securities
LegislationLitigation Reform Act of 1995 and involve risks and uncertainties that could
render them materially different, including, but not limited to, the effect of
global economic conditions, the ability to achieve the level of cost savings or
productivity improvements anticipated by management, the effect (including
possible increases in the cost of doing business) resulting from war and
terrorist activities or political uncertainties, the ability to successfully
implement new marketing and sales strategies, the impact of competitive products
and pricing, product development and commercialization, availability and cost of
critical raw materials, the ability to effectively hedge the cost of raw
materials, capacity and supply constraints or difficulties, the success of the
Company in implementing its business strategy, and other risks as detailed in
the Company's various Securities and Exchange Commission filings.
Overview
The Company manufactures non-heat treat coiled aluminum sheet for distributors
and the transportation, construction and consumer durables end use markets and
electrical flexible conduit and prewired armored cable for the commercial
construction and renovation markets. The Company's principal raw materials are
aluminum scrap, primary aluminum, copper and steel. Trends in the demand for
aluminum sheet products in the United States and in the prices of aluminum
primary metal, aluminum scrap and copper commodities affect the business of the
Company. The Company's operating results also are affected by factors specific
to the Company, such as the margins between selling prices for its products and
its cost of raw material ("material margins") and its unit cost of converting
raw material into its products ("conversion cost"). While changes in aluminum
and copper prices can cause the Company's net sales to change significantly from
period to period, net income is more directly impacted by the fluctuation in
material margins.
During the first nine monthshalf of 2002,2003, shipments of the Company's aluminum sheet
products increaseddecreased by 12%19% from the first nine monthshalf of 2001. This is2002 due to weak economic
conditions. Contributing to the third
consecutivedecline in aluminum shipments was planned
equipment downtime for maintenance and capital improvement outages during the
first quarter of higher year-over-year shipment volume following a
downturn that began in2003. Despite the second quarter of 2000 and extended throughout 2001.
The positive impact of this increased volume, combined with lower depreciation
and amortization charges, more than offset the impact of lowerdecreased aluminum shipments, material
margins infor the first nine monthshalf of 2002 versus the first nine months of 2001 and helped
to increase profitability of the aluminum business unit for both the third
quarter and first nine months of 2002 compared to the same periods in 2001.
Material margins which had been declining somewhat in2003 were higher than the first six months of 2002
increasedhelping to partially offset the sales volume decline. The improvement in margin
was principally the outcome of initiatives to: maintain selling price increases
introduced in the thirdfirst quarter of 2002 compared2003; increase the volume of product
available for the Company's higher value added products; and continue to
actively pursue new markets offering higher margin opportunities than the
third quarter of
2001 and the first and second quarters of 2002 due to firmer pricing for
aluminum prices coupled with lower metal costs and better scrap availability.Company's traditional high volume commodity markets.
Demand for the Company's electrical products decreased during the first nine
monthshalf of
2002.2003. Shipments were down 5%7% compared to the first nine monthshalf of 2001
as business conditions remained competitive and commercial construction activity
declined, however shipments were up 3%2002 reflecting
continued weakness in key markets in the third quarter of 2002 compared to
the third quarter of 2001 which was the first such increase in two years.electrical products sector,
particularly commercial construction. Material margins for the first nine monthshalf of
2002 increased 3%2003 decreased 16% from the first ninesix months of 2001, but decreased 8%2002. Lower net selling prices
due to the competitive price environment more than offset a decrease in
the third quarter of 2002 from the
second quarter of 2002. The reduction in materialmanufacturing costs per foot in the first ninesix months of 20022003 compared to the
first nine monthshalf of 2001 more than offset
the lower net selling prices2002 and contributed to the material margin improvementresulted in the decrease in material margins for the
first nine monthshalf of 20022003 versus the first ninesix months of 2001.2002. The Company's electrical products business continued to report operating profits
which were increased over the first nine months of 2001 principallydecrease in
manufacturing costs per foot was due to lower overtime labor costs and other
cost reductions.
During the second quarter of 2003, the Company implemented changes to its
postretirement medical insurance program applicable to all non-bargaining unit
Kentucky employees, limiting eligibility and increasing premiums. Because of
these changes, the Company realized a decreasesecond quarter benefit of approximately
$2.5 million after tax or $0.16 per share. The Company recognized this benefit
as reductions of approximately $1.3 million in cost of goods sold and $1.2
million in selling, general and administrative expenses andexpenses. In addition to the
eliminationeffect on the second quarter of goodwill amortization expense2003, the Company estimates that net income will
be increased approximately $2.0 million in 2002. However, ineach of the third quarterand fourth quarters
of 2002
operating profits were down compared to the third quarter of 2001 primarily due
to a third quarter 2002 adjustment of employee healthcare costs as well as a
decrease2003, approximately $8.3 million in the composite selling price.2004 and approximately $1.7 million in
2005.
During the second quarter of 2002, the Company completed its previously
announced transitional test
of goodwill as called for underupon adoption of Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). Pursuant to this
test, the Company recorded a charge of $25.3 million or $1.58 per diluted share
(before and after tax), as a cumulative effect of a change in accounting
principle, to reflect the impairment of goodwill on the balance sheet as of
January 1, 2002. The Company's restated net loss for the first quarter of 2002,
giving effect to the change in accounting principle, was $29.8 million or $1.86
per diluted share. See the caption entitled "Cumulative effect of change in
accounting principle" in the following section and note 78 to the condensed
consolidated financial statements for additional information.
Application of Critical Accounting Policies
The Company's discussion and analysis of financial condition and results of
operation is based upon the Company's condensed consolidated financial
statements, which have been prepared in conformity with accounting principles
generally accepted in the United States of America. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The Company's most critical accounting policies require the use of
estimates relating to the valuation of property, plant and equipment and
goodwill, assumptions for computing pension and postretirement benefits
obligations, allowance for uncollectible accounts receivable, assumptions for
computing workers'compensation liabilities and environmental liabilities. See
the caption entitled "Application of Critical Accounting Policies" in the
Management's Discussion and Analysis of Financial Condition and Results of
Operations section of the Company's annual report to stockholders for the year
ended December 31, 2002 for additional information.
Results of Operations for the three months and ninesix months ended SeptemberJune 30, 20022003
and 20012002
Net Sales. Net sales for the quarter ended SeptemberJune 30, 2002, increased 2%2003 decreased 15% to $254$215
million (including $29.8$25.0 million from Alflex) from $250$252 million (including $29.9$27.7
million from Alflex) for the same period in 2001.2002. The increasedecrease is due to an increase inthe
combined effect of lower aluminum and electrical product shipments and lower net
selling prices of electrical products which more than offset a decreasean increase in the net
selling prices.prices of aluminum products. Unit sales volume of aluminum increased 5%decreased 25%
to 232.8178.2 million pounds for the thirdsecond quarter of 20022003 from 221.4237.9 million pounds
for the thirdsecond quarter of 2001.2002. Alflex unit sales volume was 130.3111.5 million feet
for the thirdsecond quarter of 2002, an increase2003, a decrease of 3%6% versus 126.9118.5 million feet for
the comparable period in 2001.2002. As mentioned previously, the decreased aluminum
and electrical product shipments were due to difficult business conditions in
both businesses. Net sales for the nine-monthsix-month period ended SeptemberJune 30, 2002,2003, were
$728$427 million (including $86.4$49.7 million from Alflex), a 2% increase10% decrease from the $716$474
million recorded in the first nine monthshalf of 20012002 (including $92.4$56.6 million from
Alflex). The increasedecrease is due to the increasedcombined effect of lower aluminum and
electrical product shipments resulting from
increased demand forand lower net selling prices of electrical products
which more than offset an increase in net selling prices of aluminum products across all of the Company's aluminum
products' markets.products.
Unit sales volume of aluminum was 680.2361.9 million pounds for the first nine monthshalf of
2002, an increase2003, a decrease of 12%19% from the 609.0447.4 million pounds for the first nine monthshalf of
2001.2002. Alflex unit sales volume was 374.8226.4 million feet for the first ninesix months
of 2002,2003, a decrease of 5%7%, versus 393.4244.5 million feet for the comparable period
in 2001.2002. As mentioned previously, the decreased aluminum and electrical product
shipments were due to difficult business conditions in both businesses.
Gross Profit. Gross profit for the quarter ended SeptemberJune 30, 2002, increased2003, decreased to
$19.4$12.2 million (7.6%(5.7% of net sales) from $14.5$15.7 million (5.8%(6.2% of net sales) for the
same period in 2001.2002. Gross profit for the ninesix months ended SeptemberJune 30, 20022003 was
$45.6$21.5 million (6.3%(5.0% of net sales) versus $36.7$26.2 million (5.1%(5.5% of net sales) for
the comparable period in 2001. The third quarter and nine-month
increases were related entirely2002. Contributing to the aluminumsecond quarter decrease in
gross profit were decreases in both the Aluminum business unit and Alflex. Alflex's
gross profit decrease was primarily due primarily
to increased volumeslower volume and greater manufacturing efficiencies, improvinglower material
margins which were only partially offset by a decrease in the third quarter,unit manufacturing
costs. The Aluminum business's decrease in gross profit was primarily due to
lower natural gas rates, lower outside processing
costs plus lower depreciation expense as a result of asset impairment charges
recorded in the fourth quarter of 2001. All the above factorsvolume which more than offset an increase in material margins and the
benefit recorded in cost of goods sold relating to the Company's changes to its
postretirement medical insurance program. The six-month decrease reflected the
net effect of lower material margins experienced during the first half of 2002 which were
due to the tighter scrap spreads for the six months of 2002 versus the same
period in 2001. These scrap spreads widened during the third quarter of 2002 as
scrap availabilityand increased and coupled with lower primary metalunit manufacturing costs and
firmer pricing for aluminum products translated into higher material marginsat
Alflex that more than offset an increase in the third quarter of 2002 versus the third quarter of 2001 and the first two
quarters of 2002. Alflex'sAluminum business's gross profit
for the first nine months of 2002 versus
the first nine months of 2001 was down as decreased net sales revenue resulting
from decreaseddespite lower shipments and lower selling prices offset the improved material
margins.volume.
Operating Income. The Company had operating income of $6.8$1.5 million for the
thirdsecond quarter of 20022003 compared with operating income of $2.1$4.7 million for the
thirdsecond quarter of 2001.2002. For the nine-monthsix-month period ended SeptemberJune 30, 2002,2003, the
Company had operating income of $10.8 million, versus an operating loss of $0.8$1.7 million, versus operating income of $4.0
million for the first nine monthshalf of 2001.2002. The increasedecrease in operating income for the
second quarter was primarily due to reduced operating income at both Alflex and
the Aluminum business due to the factors described in the gross profit section
in the preceding paragraph. The six-month decrease in operating income was
related primarily to the Aluminum business unitcombined effect of Alflex which had an operating incomeloss
of $10.8
million and $18.8$1.0 million in the third quarter and first nine monthshalf of 2002,
respectively,2003 compared to operating income of $4.3 million and $6.1$3.9
million in the third quarter and first ninesix months of 2001, respectively.2002 and an increase in selling, general and
administrative expenses which more than offset the increase in operating income
of the Aluminum business. The increaseschanges in the operating income of Alflex and the
Aluminum business were primarily due to the factors described in the gross
profit section in the preceding paragraphparagraph. Selling, general and administrative
expenses during the eliminationsecond quarter of goodwill amortization2003 were $10.7 million, compared with
$11.0 million for the same period in 2002 and were $23.2 million for the six
months ended June 30, 2003, compared with $22.3 million for the same period in
2002. The second quarter decrease in selling, general and administrative
expenses is primarily due to a reduction in postretirement medical expense
relating to the changes made in the postretirement medical program during the
second quarter of 2003 which more than offset an increase in selling, general and administrative expenses.
Depreciation and amortization was $4.1 million lower inprofessional
service costs principally associated with the third quarter of
2002 versus the third quarter of 2001 and $12.2 million lower in the first nine
months of 2002 comparedCompany's project to the first nine months of 2001. Selling, general and
administrative expenses during the third quarter of 2002 were $12.5 million,
compared with $11.3 million for the same period in 2001 and were $34.8 million
for the nine months ended September 30, 2002, compared with $34.2 million for
the same period in 2001.upgrade its
information technology systems. The six-month increase in selling, general and
administrative expenses is primarily due to increasedthe combined increase in
professional service costs principally associated with the Company's project to
upgrade its information system redesigntechnology systems and accruals for employee
incentive plansinsurance costs which more than
offset lower depreciation as a result of asset
impairment charges recorded in the fourthsecond quarter of 2001 on assets which the
depreciation2003 reduction in postretirement medical expense
is classified in selling, general and administrative
expenses.described previously.
Cumulative effect of change in accounting principle. A non-cash goodwill
impairment charge of $25.3 million was recorded as a cumulative effect of change
in accounting principle as of January 1, 2002 under SFAS No.142. See note 78 to
the condensed consolidated financial statements for additional information.
Net Income. The Company had a net incomeloss of $6.1$1.9 million for the quarter ended
SeptemberJune 30, 2002,2003, compared with a net lossincome of $1.6$1.1 million for the same period in
2001.2002. The Company's net loss for the ninesix months ended SeptemberJune 30, 20022003 was $22.6$8.4
million compared with a net loss of $12.5$28.7 million for the first nine
monthshalf of 2001.2002.
The net loss for the first half of 2002 includes the $25.3 million goodwill
impairment charge described in the preceding paragraph. Interest expense was
$3.7$3.8 million for both the thirdquarter ended June 30, 2003, compared to $3.9 million
recorded in the second quarter of 2002 and the third quarter of 2001 and $11.4$7.5 million for the ninesix months ended
SeptemberJune 30, 2002,2003, compared with $11.8$7.7 million for the first nine monthshalf of 2001.2002. The
decrease in the nine months amount was primarily due to lowera reduction in interest rates under the Company's
receivables purchase agreement which more than offset the combined with a
reductioneffect of an
increase in amounts outstanding under the agreement which more than offsetand a reduction in
investment interest income. The Company hadIncome tax expense was $0.02 million in the second
quarter of 2003 compared to an income tax benefit of $2.6 million in the third quarter of 2002 compared to income tax expense of
$0.2$0.05 million for the same
period in 20012002 and an income tax benefitexpense of $2.5$0.1 million for both the ninesix months
ended SeptemberJune 30, 2002, compared to income tax
expense of $0.6 million for the same period in 2001. The decrease in income tax
expense was due to a $2.7 million adjustment recorded in the third quarter of
2002 to reduce prior years' income tax accruals.
Liquidity2003 and Capital Resources
The Company's sources of liquidity are cash flows from operations, the Company's
receivables purchase agreement described below and borrowings under its $30
million revolving credit facility. The Company believes these sources will be
sufficient to fund its working capital requirements, capital expenditures, debt
service and dividend payments at least through 2003.2002.
Off-Balance Sheet Arrangement
During 1997, the Company sold all of its trade accounts receivables to a 100%
owned subsidiary, Commonwealth Financing Corp. ("CFC"). Simultaneously, CFC
entered into a three-year receivables purchase agreement with a financial
institution and its affiliate, whereby CFC sells, on a revolving basis, an
undivided interest in certain of its receivables and receives up to $150.0
million from an unrelated third party purchaser at a cost of funds linked to
commercial paper rates plus a charge for administrative and credit support
services. During 2000, the Company and the financial institution extended the
receivables purchase agreement for an additional three-year period ending in
September 2003 and in October 2002 extended the agreement for an additional year
ending in September 2004. In addition during September 2001, the Company and the
financial institution agreed to reduce the size of the facility to $95.0
million. At SeptemberJune 30, 20022003 and 2001,2002, the Company had outstanding under the
agreement $20.0$70.0 million and $17.5$39.0 million, respectively, and had $100.2$39.9 million
and $126.9$85.1 million, respectively, of net residual interest in receivables sold.
The fair value of the net residual interest is measured at the time of the sale
and is based on the sale of similar assets. In the first ninesix months ofended June 30,
2003 and 2002, and
2001, the Company received gross proceeds of $37.0$62.0 million and $30.0$37.0
million, respectively, from the sale of receivables and made gross payments of
$37.0$16.0 million and $81.518.0 million, respectively, under the agreement. Under the
terms of the agreement, the Company is required to maintain tangible net worth
of $5 million, and to not exceed certain percentages of credit sales for
uncollectible accounts, delinquent accounts and sales returns and allowances.
Should the Company exceed such limitations, the financial institution has the
right to terminate the agreement.
Liquidity and Capital Resources
The Company's operations provided cash flows of $4.2$1.9 million for the ninesix months
ended SeptemberJune 30, 20022003 compared to using $10.5$8.1 million in the ninesix months ended SeptemberJune 30,
2001.2002. Working capital increased to $129.5$133.4 million at SeptemberJune 30, 20022003 from $123.5$130.5
million at SeptemberJune 30, 2001.2002.
Capital expenditures were $6.9$7.1 million during the quarter ended September 30,
2002 and $10.1 million for the ninesix months ended SeptemberJune 30, 2003
compared to $3.2 million during the six months ended June 30, 2002. At SeptemberJune 30,
2002,2003, the Company had commitments of $16.0$5.9 million for the purchase or
construction of capital assets. Total capital expenditures for the year 20022003 are
expectedestimated to be approximately $18.9$13.8 million, all generally related to upgrading
and expanding the Company's manufacturing and other facilities, acquiring and
enhancing software and hardware as part of the Company's information system
redesign project and meeting environmental requirements.
The indicated annual rateCompany's sources of dividends being paidliquidity are cash flows from operations, the Company's
receivables purchase agreement described previously and borrowings under its
$30 million revolving credit facility. Availability of advances under the $30
million revolving credit facility is dependent on the continued satisfaction of
certain financial covenants contained in the revolving credit agreement. While
the Company is currently in full compliance with such financial covenants there
is no assurance that the Company will be able to continue meeting such
covenants, as currently structured, at all times during the next twelve months.
In the event the Company does not meet the requisite covenants it may seek to
obtain waivers or amendments of applicable covenant provisions from the
participating lenders. In any event, the Company believes it has sufficient
liquidity available from operating cash flows and amounts available under its
receivables purchase agreement to fund its working capital requirements,
capital expenditures, debt service, and if necessary, to satisfy any
outstanding amounts under its revolving credit facility for at least the next
twelve months.
The Company's Common Stockrevolving credit facility permits borrowings and letters of credit
up to $30.0 million outstanding at any time. As noted in the previous paragraph,
availability is $0.20 per share, or an annual totalsubject to satisfaction of approximately $3.2 million.certain covenants and other
requirements. At June 30, 2003 $26.9 million was available as the omly
outstandings against the credit facility was $3.1 million of standby letters of
credit. The facility expires on March 31, 2005.
The Company announced on July 31, 2003, that its Board of Directors had
suspended the Company's quarterly cash dividend payments on its common stock as
of the third quarter of 2003 due to the challenging economic conditions and to
ensure continued compliance with the Company's debt instruments regarding the
payment of dividends. The restrictions that limit the payment of cash
dividends are contained in the Indenture relating to the Company's $125 million
senior subordinated notes due in 2006. The Company believes that the
restrictions are likely to result in suspension of the cash dividend through
the maturity of the senior subordinated notes in 2006.
The following schedules summarize the Company's contractual cash obligations and
unused availability of financing sources at SeptemberJune 30, 20022003 (in thousands).
Payments Due By Period
------------------------------------------------------------
Contractual Cash Obligations Total Less than 1 year 1-3 years 4-5 years After 5 years
- ------------------------------------------------------------------------------------------------------------
Long-term debt $125,000 $ -- $ -- $125,000 $ --
Operating leases 13,158 3,517 4,460 1,783 3,39811,072 3,280 3,558 1,559 2,675
Standby letters of credit 2,839 2,8393,111 3,111 -- -- --
Outstanding obligation under
Receivablesreceivables purchase
Agreement 20,000 20,000agreement 70,000 70,000 -- -- --
----------------------------------------------------------------------
Total contractual cash obligations $160,997 $26,356 $4,460 $126,783 $3,398$209,183 $76,391 $3,558 $126,559 $2,675
======================================================================
Amount of Availability Per Period
Unused Availability of Total Amounts ------------------------------------------------------------
Financing Sources Available Less than 1 year 1-3 years 4-5 years Over 5 years
- ------------------------------------------------------------------------------------------------------------
Unused revolving credit
Facility $ 27,161facility $26,889 $ -- $27,161$26,889 $ -- $ --
Unused availability under
Receivablesreceivables purchase
agreement 75,00013,943 -- 75,00013,943 -- --
-------------------------------------------------------------------------------------------------------------------------------------------
Total available $102,161$40,832 $ -- $102,161$40,832 $ -- $ --
===========================================================================================================================================
The Company has approximately 87 1/42 years remaining on a 10-year guaranteed supply agreement
with Glencore Ltd. ("Glencore"), a leading diversified trading and industrial
company, for the purchase of primary aluminum. Under the agreement, the Company
committed to purchase a minimum of 1.2 billion pounds of P1020/99.7% aluminum at
current market prices from Glencore over the 10-year term beginning in January 2001.term.
At SeptemberJune 30, 2002,2003, the Company held firm-priced aluminum purchase and sales
commitments through AprilDecember 2004 totaling $8$12 million and $167$107 million,
respectively. The Company hedges the impact of changes in prices related to
these commitments as explained in the section entitled "Risk Management" which
follows.
Risk Management
The price of aluminum is subject to fluctuations due to unpredictable factors on
the worldwide market. To reduce this market risk, the Company follows a policy
of hedging its anticipated raw material purchases based on firm-priced sales and
purchase orders by purchasing and selling futures contracts, forward contracts
and options on the London Metal Exchange ("LME"). The Company also uses forward
contracts and options to reduce its risks associated with its natural gas
requirements.
As describedFor the second quarter ending June 30, 2003, the Company's aluminum futures
contracts did not meet certain "effectiveness" requirements set forth in note 6 to the condensed consolidated financial statements, the
Company adopted
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133") effective
January 1, 2001. Accordingly, as prescribed
by the provisions of SFAS No. 133, the derivative instruments that were used as
hedges were marked-to-market and has designated virtually allthe gains and losses during the second quarter
of its aluminum2003 were recorded currently in the consolidated statement of operations
instead of being deferred in other comprehensive income and included in income
when the underlying hedged transactions occur. The Company's natural gas futures
contractscontinue to be deemed "effective" per SFAS No. 133 and forward contracts as cash flow hedges.
Gainsaccordingly the gains and
losses on these financial instruments that are deferred in other comprehensive income
are reclassified into netand included in income as cost of goods sold inwhen the periods
when theunderlying hedged transactions occur.
As of SeptemberJune 30, 2002, approximately $4.9
million of2003, the $5.0Company had $3.0 million of deferred net lossesgains recorded
in accumulated other comprehensive income. Over the next twelve months,
approximately $2.8 million of deferred net gains are expected to be reclassified
from other comprehensive income into net income as a reduction of cost of goods
sold over the next twelve months.sold. A net lossgain of $0.05$0.6 million and $0.16$0.4 million was recognized in cost of
goods sold during the three months and ninesix months ended SeptemberJune 30, 2002,2003,
respectively, and a net loss of $0.13$0.04 million and $0.16$0.11 million was recognized
in cost of goods sold during the three months and ninesix months ended SeptemberJune 30,
2001,2002, respectively, representing the amount of the hedges' ineffectiveness. As
of SeptemberJune 30, 2002,2003, the Company held open aluminum and natural gas futures and
forward contracts having maturity dates extending through March 2004.December 2005.
Before entering into futures contracts, forward contracts and options, the
Company reviews the credit rating of the counterparty and assesses any possible credit risk.
While the Company is exposed to certain losses in the event of non-performance
by the counterparties to these agreements, the Company does not anticipate non-performance byexpect any such
counterparties.
In ordercounterparties to hedge a portion of its interest rate risk, the Company was a party
to an interest rate swap agreement with a notional amount of $5 million under
which the Company paid a fixed rate of interest and received a LIBOR-based
floating rate. The interest rate swap agreement expired during September 2001
and as of September 30, 2002 the Company had no interest rate swap agreements in
effect. The Company's interest rate swap agreement which expired during
September 2001 did not qualify for hedge accounting under SFAS 133 and as such
the change in the fair value of the interest rate swap agreement had been
recognized currently as interest expense, net in the Company's consolidated
statement of operations. The amount of such change in the fair value of the
interest rate swap agreement was immaterial for the three months and nine months
ended September 30, 2001.perform.
Recently Issued Accounting Pronouncements
In January 2003, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Interpretation No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of ARB No. 51" ("FIN 46"). This
Interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements" requires certain variable interest entities to be consolidated by
the primary beneficiary of the entity if the equity investors in the entity do
not have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN46 was
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 must be applied for the first
interim or annual period beginning after June 2001,15, 2003. Management does not
expect the adoption of this Interpretation to have a material impact on the
Company's results of operations or financial position.
In April 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations"149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 143"149"). The Statement
addressesamends and clarifies financial accounting and reporting for obligations associated with the retirementderivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under Statement of tangible long-lived assetsFinancial Accounting
Standards No. 133, "Accounting for Derivative Instruments and the associated asset retirement costs.Hedging
Activities." SFAS 143No. 149 is generally effective for financial
statements issued for fiscal years beginningcontracts entered into or
modified after June 15, 2002.30, 2003 and for hedging relationships designated after June
30, 2003. In addition, the provisions of this Statement are generally to be
applied prospectively. Management does not expect the adoption of this Statement
to have a material impact on the Company's results of operations or financial
position.
In October 2001,May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting StandardsStandard No. 144,150, "Accounting for the Impairment or
DisposalCertain Financial
Instruments with Characteristics of Long-Lived Assets"both Liabilities and Equity" ("SFAS No.
144"150"). The Statement addressesestablishes standards for how an issuer classifies and
measures certain financial accountinginstruments with characteristics of both liabilities
and reporting for the impairment or disposalequity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). Many of
long-lived
assets. This Statement supersedes SFAS No. 121, and the accounting and reportingthose instruments were previously classified as equity. The provisions 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",
for the disposal of a "segment of a business" (as previously defined in that
Opinion). This Statement also amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements", to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The objectives of SFAS
No. 144150 apply immediately to all financial instruments entered into or modified
after May 31, 2003, and otherwise are to address significant issues relating toeffective at the implementationbeginning of
SFAS No. 121 and to develop a single accounting model, based on the framework
established in SFAS No. 121, for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. The Company adopted SFAS No.
144 in the first
quarterinterim period beginning after June 15, 2003. Management does not expect the
adoption of 2002, as required. The Statement's initial adoption
did notthis Statement to have a material impact on the Company's results of
operations or financial position.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities"(" SFAS No. 146"). The Statement nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity," under which
a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized at fair value when
the liability is incurred. The provisions of this statement are effective for
exit or disposal activities that are initiated after December 31, 2002.
Item 4. Controls and Procedures
The Company's certifying officers have concluded based on their evaluation of
the Company's disclosure controls and procedures that the disclosure controls
and procedures as of the end of the quarter ended June 30, 2003 are effective in
ensuring that material information relating to the Company, including its
consolidated subsidiaries, is made known to the certifying officers by others
within those entities, as appropriate to allow timely decisions regarding
required disclosure, particularly during the period in which this Form 10-Q was
being prepared and that both non-financial
and financial information required to be disclosed by the Company in
its periodic reports that it files under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in a timely
fashion. The evaluation was conducted within 90 days of the
filing date of this
Form 10-Q.Securities and Exchange Commission's rules and forms. In addition, there werewas no
significant changeschange in internal control over financial reporting during the quarter ended
June 30, 2003 that has materially affected, or is reasonably likely to
materially affect, the Company's internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation.control over financial reporting.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to non-environmental legal proceedings and administrative
actions all of which are of an ordinary routine nature incidental to the
operations of the Company. Although it is impossible to predict the outcome of
any legal proceeding, in the opinion of management such proceedings and actions
should not, individually or in aggregate, have a material adverse effect on the
Company's financial condition, results of operations or cash flows, although
resolution in any year or quarter could be material to the results of operation
for that period.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
There were no exhibits31 Rule 13a-14(a)/15d-14(a) Certifications ("Section 302
Certifications").
32 Section 1350 Certifications ("Section 906 Certifications").
(b) Reports on Form 8-K
There were noThe following reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended SeptemberJune 30, 2002.2003:
A Form 8-K dated April 9, 2003 reporting that the Company and Wise
Alloys form strategic alliance to market Commonwealth Aluminum-branded
wide-width coil products.
A Form 8-K dated April 10, 2003 reporting that steelworkers at the
Company's Lewisport, Kentucky plant sign new five-year labor contract.
A Form 8-K dated April 22, 2003 reporting the Company's results of
operations for the First Quarter of 2003.
A Form 8-K dated April 24, 2003 reporting that the Company declares
regular quarterly dividend.
A Form 8-K dated April 24, 2003 reporting an excerpt from the
transcript of the Company's First Quarter 2003 Earnings Conference Call.
A Form 8-K dated April 25, 2003 reporting that the Company adjourns
annual meeting.
A Form 8-K dated June 26, 2003 reporting the Company's cost cutting
initiatives in response to challenging market conditions.
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.
COMMONWEALTH INDUSTRIES, INC.
By: /s/ Donald L. Marsh, Jr.
------------------------
Donald L. Marsh, Jr.
Executive Vice President and
Chief Financial Officer
Date: November 12, 2002August 7, 2003
CERTIFICATIONS
I, Mark V. Kaminski, certify that:
1. I have reviewed this quarterly report on form 10-Q of Commonwealth
Industries, Inc.;
2. 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;
3. 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;
4. 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 date within 90 days prior to the filing date of this quarterly
report (the "Evaluation Date"Exhibit Index
-------------
Exhibit
Number Description
- ------ ----------------------------------------------------------------
31 Rule 13a-14(a)/15d-14(a) Certifications ("Section 302 Certifications"); 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;
5. The registrant's other certifying officers 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
6. 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: November 12, 2002
/s/ Mark V. Kaminski
--------------------
Mark V. Kaminski
President and Chief Executive
Officer
CERTIFICATIONS (continued)
I, Donald L. Marsh, Jr., certify that:
1. I have reviewed this quarterly report on form 10-Q of Commonwealth
Industries, Inc.;
2. 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;
3. 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;
4. 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 date within 90 days prior to the filing date of this quarterly
report (the "Evaluation Date".
32 Section 1350 Certifications ("Section 906 Certifications"); 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;
5. The registrant's other certifying officers 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
6. 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: November 12, 2002
/s/ Donald L. Marsh, Jr.
-------------------------
Donald L. Marsh, Jr.
Executive Vice President and
Chief Financial Officer.