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                                  UNITED STATES
                       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 March 31,September 30, 2003

                                       or

     [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934

               For the transition period from ________ to ________

                                 --------------

                           Commission File No. 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 preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X| No |_|
         Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes |X| No
|-||_|
         The registrant had 16,010,971 shares of common stock outstanding at
May
1,October 29, 2003.

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                          COMMONWEALTH INDUSTRIES, INC.
                                    FORM 10-Q
                    For the Quarter Ended March 31,September 30, 2003

                                      INDEX

                         Part I - Financial Information


Item 1.  Financial Statements (unaudited)                           Page Number
                                                                    -----------
         Condensed Consolidated Balance Sheet as of March 31,September
         30, 2003 and December 31, 2002                                 3

         Condensed Consolidated Statement of Operations for the
         three months and nine months ended March 31,September 30, 2003
         and 2002                                                       4

         Condensed Consolidated Statement of Comprehensive Income
         for the three months and nine months ended March 31,September
         30, 2003 and 2002                                              5

         Condensed Consolidated Statement of Cash Flows for the
         threenine months ended March 31,September 30, 2003 and 2002                  6

         Notes to Condensed Consolidated Financial Statements           7-167-19


Item 2.  Management's Discussion and Analysis of Financial Condition    17-2220-26
          and Results of Operations

Item 4.   Controls and Procedures                                       2226

                           Part II - Other Information

Item 1.   Legal Proceedings                                             23

Item 4.   Submission of Matters to a Vote of Security Holders           2327

Item 6.   Exhibits and Reports on Form 8-K                              2327

Signatures                                                              24

Certifications                                                          25-2628

                          COMMONWEALTH INDUSTRIES, INC.
                      Condensed Consolidated Balance Sheet
                        (in thousands except share data)
March 31,September 30, December 31, 2003 2002 ------------- -------------- ----------------- Assets Current assets: Cash and cash equivalents $ -2,940 $ 13,211 Accounts receivable, net 209312 66 Inventories 140,555116,067 125,348 Net residual interest in receivables sold 59,99581,633 81,195 Prepayments and other current assets 7,4235,051 7,133 ------------- -------------- ----------------- Total current assets 208,182206,003 226,953 Property, plant and equipment, net 146,408142,868 146,968 Goodwill net 48,872 48,872 Other noncurrent assets 5,8675,423 6,111 ------------- -------------- ----------------- Total assets $ 409,329403,166 $ 428,904 ============= ============== ================= Liabilities Current liabilities: Outstanding checks in excess of deposits $ 418 $ - Accounts payable 45,833$ 47,151 $ 59,594 Accrued liabilities 28,22527,507 28,527 ------------- -------------- ----------------- Total current liabilities 74,47674,658 88,121 Long-term debt 125,000128,190 125,000 Other long-term liabilities 5,0763,921 5,183 Accrued pension benefits 28,13627,043 26,743 Accrued postretirement benefits 76,07570,085 76,670 ------------- -------------- ----------------- Total liabilities 308,763303,897 321,717 ------------- -------------- ----------------- Commitments and contingencies - - Stockholders' Equity Common stock, $0.01 par value, 50,000,000 shares authorized, 16,010,971 and 15,997,651 shares outstanding at March 31,September 30, 2003 and December 31, 2002, respectively 160 160 Additional paid-in capital 405,703 405,613 Accumulated deficit (285,236)(284,999) (277,942) Accumulated other comprehensive income: Minimum pension liability adjustment (21,391) (21,391) Effects of cash flow hedges 1,330(204) 747 ------------- -------------- ----------------- Total stockholders' equity 100,56699,269 107,187 ------------- -------------- ----------------- Total liabilities and stockholders' equity $ 409,329403,166 $ 428,904 ============= ============== ================= See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC. Condensed Consolidated Statement of Operations (in thousands except per share data)
Three months ended March 31, -------------------------------------Nine months ended September 30, September 30, -------------------------- --------------------------- 2003 2002 ------------- --------------2003 2002 ---------- ----------- ----------- ----------- Net sales $ 211,968248,117 $ 221,858253,933 $ 675,205 $ 727,519 Cost of goods sold 202,650 211,318 ------------- --------------231,760 234,571 637,316 681,933 ---------- ----------- ----------- ----------- Gross profit 9,318 10,54016,357 19,362 37,889 45,586 Selling, general and administrative expenses 10,094 12,524 11,260 ------------- --------------33,311 34,779 ---------- ----------- ----------- ----------- Operating income (loss) (3,206) (720)6,263 6,838 4,578 10,807 Other income (expense), net 494 273423 332 1,331 818 Interest expense, net (3,701) (3,851) ------------- --------------(3,728) (3,704) (11,215) (11,406) ---------- ----------- ----------- ----------- Income (loss) before income taxes and cumulative effect of change in accounting principle (6,413) (4,298)2,958 3,466 (5,306) 219 Income tax expense 80 125 ------------- --------------(benefit) 50 (2,610) 150 (2,532) ---------- ----------- ----------- ----------- Income (loss) before cumulative effect of change in accounting principle (6,493) (4,423)2,908 6,076 (5,456) 2,751 Cumulative effect of change in accounting principle - - - (25,327) ------------- ------------------------ ----------- ----------- ----------- Net income (loss) $ (6,493)2,908 $ (29,750) ============= ==============6,076 $ (5,456) $ (22,576) ========== =========== =========== =========== Basic and diluted net income (loss) per share: Income (loss) before cumulative effect of change in accounting principle $ (0.41)0.18 $ (0.28)0.38 $ (0.34) $ 0.17 Cumulative effect of change in accounting principle - - - (1.58) ------------- ------------------------ ----------- ----------- ----------- Net income (loss) $ (0.41)0.18 $ (1.86) ============= ==============0.38 $ (0.34) $(1.41) ========== =========== =========== =========== Diluted net income (loss) per share: Income (loss) before cumulative effect of change in accounting principle $ 0.18 $ 0.38 $ (0.34) $ 0.17 Cumulative effect of change in accounting principle - - - (1.57) ---------- ----------- ----------- ----------- Net income (loss) $ 0.18 $ 0.38 $ (0.34) $(1.40) ========== =========== =========== =========== Weighted average shares outstanding Basic 16,011 15,98415,998 16,011 15,992 Diluted 16,034 16,092 16,011 15,98416,100 Dividends paid per share $ - $ 0.05 $ 0.050.10 $ 0.15 See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC. Condensed Consolidated Statement of Comprehensive Income (Loss) (in thousands)
Three months ended March 31, -----------------------------Nine months ended September 30, September 30, ------------------------ --------------------- 2003 2002 ------------ -------------2003 2002 --------- ----------- -------- -------- Net income (loss) $ (6,493)2,908 $ (29,750)6,076 $(5,456) $(22,576) Other comprehensive income, net of tax: Minimum pension liability adjustment - - Net change related to cash flow hedges: Increase (decrease) in fair value of cash flow hedges 3,276 6,236(1,459) (6,313) 3,807 (3,174) Reclassification adjustment for (gains) losses included in net income (2,693) 1,910 ------------ -------------(1,743) 4,267 (4,758) 9,479 --------- ----------- -------- -------- Net change related to cash flow hedges 583 8,146 ------------ -------------(3,202) (2,046) (951) 6,305 --------- ----------- -------- -------- Comprehensive income (loss) $ (5,910)(294) $ (21,604) ============ =============4,030 $(6,407) $(16,271) ========= =========== ======== ======== See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC. Condensed Consolidated Statement of Cash Flows (in thousands)
ThreeNine months ended March 31, -----------------------------September 30, ---------------------------- 2003 2002 ------------------- ---------- Cash flows from operating activities: Net income (loss) $(6,493) $(29,750)$ (5,456) $ (22,576) Adjustments to reconcile net income (loss) to net cash (used in) provided by operations: Depreciation 5,143 5,31515,417 15,940 Amortization 222 319666 762 Goodwill impairment chargescharge - 25,327 Loss on disposal of property, plant and equipment 12 268 196 Issuance of common stock in connection with stock awards 90 75170 Changes in assets and liabilities: (Increase) in accounts receivable, net (143) (148) (Increase)(246) (56) Decrease in inventories (15,207) (8,563) Decrease (increase)9,281 2,669 (Increase) in net residual interest in receivables sold 21,200 (4,188) (Increase) decrease(438) (17,875) Decrease (increase) in prepayments and other current assets (1,011) 1,05825 (806) Decrease (increase) in other noncurrent assets 22 (697)(2,419) (Decrease) increase in accounts payable (13,761) 8,573(12,443) 3,571 Increase in accrued liabilities 1,002 5,114 Increase (decrease)86 3,993 (Decrease) in other liabilities 691 (1,374) ----------(7,547) (4,736) --------- ---------- Net cash (used in) provided by operating activities (8,233) 1,063 ----------(475) 4,160 --------- ---------- Cash flows from investing activities: Purchases of property, plant and equipment (4,598) (1,429)(11,543) (10,089) Proceeds from sale of property, plant and equipment 3 - ----------158 23 --------- ---------- Net cash (used in) investing activities (4,595) (1,429) ----------(11,385) (10,066) --------- ---------- Cash flows from financing activities: Increase in outstanding checks in excess of deposits 418 - 351 Proceeds from long-term debt 33,707 34,00075,168 55,700 Repayments of long-term debt (33,707) (34,000)(71,978) (55,700) Repayments of notes receivable from sale of common stock - 1,561 Cash dividends paid (801) (799) ----------(1,601) (2,399) --------- ---------- Net cash provided by (used in) financing activities (383) (799) ----------1,589 (487) --------- ---------- Net (decrease) in cash and cash equivalents (13,211) (1,165)(10,271) (6,393) Cash and cash equivalents at beginning of period 13,211 6,393 ------------------- ---------- Cash and cash equivalents at end of period $ 2,940 $ - $ 5,228 =================== ========== Supplemental disclosures: Interest paid $ 2157,584 $ 2127,551 Income taxes paid (refunds received) 78 (681)167 (492) 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 March 31,September 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 nine months ended March 31,September 30, 2003 and the nine months ended September 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 September 30, 2002 to the pro forma amounts which follow (in thousands except per share data): Three months ended March 31,September 30, 2003 2002 ---- ---- Net income (loss) as reported $(6,493) $(29,750)$2,908 $6,076 Less total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects 80 7150 110 ------ ------ Pro forma net income $2,858 $5,966 ====== ====== Basic net income per share As reported $0.18 $0.38 Pro forma 0.18 0.37 Diluted net income per share As reported $0.18 $0.38 Pro forma 0.18 0.37 Nine months ended September 30, 2003 2002 ---- ---- Net income (loss) as reported $(5,456) $(22,576) Less total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects 234 297 ------- -------- --------- Pro forma net income (loss) $(6,573) $(29,821)$(5,690) $(22,873) ======= ======== ========= Basic net income (loss) per share As reported $(0.41) $(1.86)$(0.34) $(1.41) Pro forma (0.41) (1.87)(0.36) (1.43) Diluted net income (loss) per share As reported $(0.41) $(1.86)$(0.34) $(1.40) Pro forma (0.41) (1.87)(0.36) (1.43) 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 and in October 2003, the availability was further reduced to $60.0 million. At March 31,September 30, 2003 and 2002, the Company had outstanding under the agreement $55.0$40.0 million and $47.0$20.0 million, respectively, and had $60.0$81.6 million and $86.5$100.2 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 threenine months of 2003 and 2002, the Company received gross proceeds of $42.0$62.0 million and $27.0$37.0 million, respectively, from the sale of receivables and made gross payments of $11.0$46.0 and $37.0 million, in the first three months of 2003respectively, under the agreement. The Company made no gross payments in the first three months of 2002. 4. Inventories Inventories consist of the following (in thousands): March 31,September 30, 2003 December 31, 2002 -------------------------------- ----------------- Raw materials $ 25,80724,104 $ 22,718 Work in process 49,80451,429 46,676 Finished goods 55,89431,598 43,780 Expendable parts and supplies 14,59114,409 14,320 ---------- ----------- 146,096121,540 127,494 LIFO reserve (5,541)(5,473) (2,146) ---------- ----------- $ 140,555116,067 $ 125,348 ========== =========== The Company'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 expendable parts and supplies inventory. Inventories of approximately $116.3$93.0 million and $98.2 million, included in the above totals (before the LIFO reserve) at March 31,September 30, 2003 and December 31, 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. 5. Provision for Income Taxes The Company recognized income tax expense of $0.1$0.05 million and $0.2 million for boththe three months and nine months ended September 30, 2003, respectively, compared to an income tax benefit of $2.6 million and $2.5 million for the three months and nine months ended September 30, 2002, respectively. The Company recorded an adjustment of $2.7 million in the three months ended March 31, 2003 and 2002.September 30, 2002 to reduce prior year's income tax accruals. 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 March 31,September 30, 2003 2002 ---- ---- Income (numerator) amounts used for basic and diluted per share computations: Income before cumulative effect of change in accounting principle $2,908 $6,076 Cumulative effect of change in accounting principle - - ------ ------ Net income $2,908 $6,076 ====== ====== Shares (denominator) used for basic per share computations: Weighted average shares of common stock outstanding 16,011 15,998 ====== ====== Shares (denominator) used for diluted per share computations: Weighted average shares of common stock outstanding 16,011 15,998 Plus: dilutive effect of stock options 23 94 ------ ------ Adjusted weighted average shares 16,034 16,092 ====== ====== Basic and diluted per share data: Income before cumulative effect of change in accounting principle $0.18 $0.38 Cumulative effect of change in accounting principle - - ------ ------ Net income $0.18 $0.38 ====== ====== Nine months ended September 30, 2003 2002 ---- ---- Income (numerator) amounts used for basic and diluted per share computations: Income (loss) before cumulative effect of change in accounting principle $(6,493) $ (4,423)$(5,456) $2,751 Cumulative effect of change in accounting principle - (25,327) -------- --------------- ------- Net income (loss) $(6,493) $(29,750) ======== ========$(5,456) $(22,576) ======= ======= Shares (denominator) used for basic per share computations: Weighted average shares of common stock outstanding 16,011 15,98415,992 ====== ====== Shares (denominator) used for diluted per share computations: Weighted average shares of common stock outstanding 16,011 15,98415,992 Plus: dilutive effect of stock options - -108 ------ ------ Adjusted weighted average shares 16,011 15,98416,100 ====== ====== Basic and diluted per share data: Income (loss) before cumulative effect of change in accounting principle $(0.41) $(0.28)$(0.34) $0.17 Cumulative effect of change in accounting principle - (1.58) ------ ------ Net income (loss) $(0.41) $(1.86)$(0.34) $(1.41) ====== ====== Diluted per share data: Income (loss) before cumulative effect of change in accounting principle $(0.34) $0.17 Cumulative effect of change in accounting principle - (1.57) ------ ------ Net income (loss) $(0.34) $(1.40) ====== ====== Options to purchase 583,000 and 600,000577,000 common shares, which equate to 77,089 and 85,02544,004 incremental common equivalent shares for the nine months ended September 30, 2003 were excluded from the diluted calculation above for the three months ended March 31, 2003 and 2002, respectively, as their effect would have been antidilutive. In addition, options to purchase 1,113,0001,382,500 and 755,0001,092,000 common shares for the three months and nine months ended March 31,September 30, 2003, respectively, and 794,000 common shares for both the three months and nine months ended September 30, 2002 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.
7. Financial Instruments and Hedging Activities 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 and the third quarter ending September 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 and third quarters 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 March 31,September 30, 2003, the Company had $1.3$0.2 million of deferred net gainslosses recorded in accumulated other comprehensive income. Over the next twelve months, approximately $1.6$0.6 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. As of March 31,September 30, 2003, the Company held open aluminum and natural gas futures and forward contracts having maturity dates extending through December 2005. A net gain of $1.1 million and $1.5 million was recognized as a reduction in cost of goods sold during the three months and nine months ended September 30, 2003, respectively, and a net loss of $0.2$0.05 million and $0.1$0.16 million was recognized in cost of goods sold during the three months and nine months ended March 31, 2003 andSeptember 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 was subsequently superseded 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 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 was 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 recorded a goodwill impairment loss of $25.3 million ($13.5 million in its aluminum segment and $11.8 million in its electrical products segment). As required by SFAS No. 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 segments for the three months ended 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 March 31, 2002 $ - $48,872 $48,872 ======= =============== ======== =======
The Company has no other intangible assets other than the goodwill discussed above. 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 noteNote 1, "Basis of Presentation and Summary of Significant Accounting Policies" in the Company's annual report to stockholders for the year ended December 31, 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 nine months ended March 31,September 30, 2003 and 2002.2002 (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. Certain expenses and assets relating to information technology which prior to the first quarter of 2003 had been allocated to reportable segments are no longer being allocated. Prior period amounts have been reclassified to conform with current classifications.
Electrical Aluminum Products Other Total -------- ---------- ------------------- ---------- Three months ended March 31,September 30, 2003 - ---------------------------------------------------------------------- Net sales to external customers $187,286 $24,682$221,213 $26,904 $ -- $211,968$248,117 Intersegment net sales 5,6473,906 -- (5,647)(3,906) -- Operating income (loss) 4,454 (1,019) (6,641) (3,206)11,112 29 (4,878) 6,263 Depreciation 4,5844,608 559 -- 5,1435,167 Amortization -- -- 222 222 Total assets 315,242 85,245 8,842 409,329303,908 86,393 12,865 403,166 Capital expenditures 2,559 2 2,037 4,5981,353 77 3,022 4,452 Three months ended March 31,September 30, 2002 - ---------------------------------------------------------------------- Net sales to external customers $192,958 $28,900$224,124 $29,809 $ -- $221,858$253,933 Intersegment net sales 7,2334,656 -- (7,233)(4,656) -- Operating income (loss) 2,214 1,963 (4,897) (720)11,506 1,137 (5,805) 6,838 Depreciation 4,745 5704,725 571 -- 5,3155,296 Amortization -- -- 319 319225 225 Total assets 332,129 87,383 1,959 421,471324,589 93,236 1,742 419,567 Capital expenditures 1,196 2332,975 11 3,909 6,895 Nine months ended September 30, 2003 - ------------------------------------ Net sales to external customers $598,598 $76,607 $ -- 1,429$675,205 Intersegment net sales 12,422 -- (12,422) -- Operating income (loss) 22,271 (1,017) (16,676) 4,578 Depreciation 13,740 1,677 -- 15,417 Amortization -- -- 666 666 Total assets 303,908 86,393 12,865 403,166 Capital expenditures 4,920 345 6,278 11,543 Nine months ended September 30, 2002 - ------------------------------------ Net sales to external customers $641,081 $86,438 $ -- $727,519 Intersegment net sales 14,190 -- (14,190) -- Operating income (loss) 21,484 5,069 (15,746) 10,807 Depreciation 14,228 1,712 -- 15,940 Amortization -- -- 762 762 Total assets 324,589 93,236 1,742 419,567 Capital expenditures 5,926 254 3,909 10,089
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 March 31,September 30, 2003 and December 31, 2002, and a statement of operations for the three months and nine months ended September 30, 2003 and 2002 and statement of cash flows for the threenine months ended March 31,September 30, 2003 and 2002. Combining Balance Sheet at March 31,September 30, 2003 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- ----------- ----------- ------------ -------- Assets Current assets: Cash and cash equivalents $ -- $ --2,940 $ -- $ -- $ --2,940 Accounts receivable, net -- 267,179298,466 -- (266,970) 209(298,154) 312 Inventories -- 140,555116,067 -- -- 140,555116,067 Net residual interest in receivables sold -- -- 59,99581,633 -- 59,99581,633 Prepayments and other current assets 435 6,9884,616 -- -- 7,4235,051 --------- --------- --------- --------- --------- Total current assets 435 414,722 59,995 (266,970) 208,182422,089 81,633 (298,154) 206,003 Property, plant and equipment, net -- 146,408142,868 -- -- 146,408142,868 Goodwill, net -- 48,872 -- -- 48,872 Other noncurrent assets 416,907 4,778424,757 4,552 -- (415,818) 5,867(423,886) 5,423 --------- --------- --------- --------- --------- Total assets $ 417,342425,192 $ 614,780618,381 $ 59,995 $(682,788)81,633 $(722,040) $ 409,329403,166 ========= ========= ========= ========= ========= Liabilities Current liabilities: Outstanding checks in excess of deposits $ -- $ 418 $ -- $ -- $ 418 Accounts payable 162,405 45,833 104,565 (266,970) 45,833$ 170,063 $ 47,151 $ 128,091 $(298,154) $ 47,151 Accrued liabilities 9,310 19,696 (781)9,265 19,000 (758) -- 28,22527,507 --------- --------- --------- --------- --------- Total current liabilities 171,715 65,947 103,784 (266,970) 74,476179,328 66,151 127,333 (298,154) 74,658 Long-term debt 125,000 3,190 -- -- -- 125,000128,190 Other long-term liabilities -- 5,0763,921 -- -- 5,0763,921 Accrued pension benefits -- 28,13627,043 -- -- 28,13627,043 Accrued postretirement benefits -- 76,07570,085 -- -- 76,07570,085 --------- --------- --------- --------- --------- Total liabilities 296,715 175,234 103,784 (266,970) 308,763304,328 170,390 127,333 (298,154) 303,897 --------- --------- --------- --------- --------- 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 (285,236) (27,121) (48,789) 75,910 (285,236)(284,999) (17,142) (50,700) 67,842 (284,999) Accumulated other comprehensive income: Minimum pension liability adjustment -- (21,391) -- -- (21,391) Effects of cash flow hedges -- 1,330(204) -- -- 1,330(204) --------- --------- --------- --------- --------- Total stockholders' equity 120,627 439,546 (43,789) (415,818) 100,566120,864 447,991 (45,700) (423,886) 99,269 --------- --------- --------- --------- --------- Total liabilities and stockholders' equity $ 417,342425,192 $ 614,780618,381 $ 59,995 $(682,788)81,633 $(722,040) $ 409,329403,166 ========= ========= ========= ========= =========
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 -- 286,847 -- (286,781) 66 Inventories -- 125,348 -- -- 125,348 Net residual interest in receivables sold -- -- 81,195 -- 81,195 Prepayments and other current assets 435 6,698 -- -- 7,133 --------- --------- --------- --------- --------- Total current assets 435 432,104 81,195 (286,781) 226,953 Property, plant and equipment, net -- 146,968 -- -- 146,968 Goodwill, net -- 48,872 -- -- 48,872 Other noncurrent assets 419,913 4,913 -- (418,715) 6,111 --------- --------- --------- --------- --------- Total assets $ 420,348 $ 632,857 $ 81,195 $(705,496) $ 428,904 ========= ========= ========= ========= ========= Liabilities Current liabilities: Accounts payable $ 161,658 $ 59,594 $ 125,123 $(286,781) $ 59,594 Accrued liabilities 5,859 23,515 (847) -- 28,527 --------- --------- --------- --------- --------- Total current liabilities 167,517 83,109 124,276 (286,781) 88,121 Long-term debt 125,000 -- -- -- 125,000 Other long-term liabilities -- 5,183 -- -- 5,183 Accrued pension benefits -- 26,743 -- -- 26,743 Accrued postretirement benefits -- 76,670 -- -- 76,670 --------- --------- --------- --------- --------- Total liabilities 292,517 191,705 124,276 (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 (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 -- 747 -- -- 747 --------- --------- --------- --------- --------- Total stockholders' equity 127,831 441,152 (43,081) (418,715) 107,187 --------- --------- --------- --------- --------- Total liabilities and stockholders' equity $ 420,348 $ 632,857 $ 81,195 $(705,496) $ 428,904 ========= ========= ========= ========= =========
Combining Statement of Operations for the three months ended March 31,September 30, 2003 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- --------- --------- --------- --------- Net sales $ -- $ 211,968248,117 $ -- $ -- $ 211,968248,117 Cost of goods sold -- 202,650231,760 -- -- 202,650231,760 --------- --------- --------- --------- --------- Gross profit -- 9,31816,357 -- -- 9,31816,357 Selling, general and administrative expenses 128 12,39652 10,042 -- -- 12,52410,094 --------- --------- --------- --------- --------- Operating income (loss) (128) (3,078)(52) 6,315 -- -- (3,206)6,263 Other income (expense), net (2,897) 4946,428 423 -- 2,897 494(6,428) 423 Interest income (expense), net (3,468) 475 (708)652 (912) -- (3,701)(3,728) --------- --------- --------- --------- --------- Income (loss) before income taxes and cumulative effect of change in accounting principle (6,493) (2,109) (708) 2,897 (6,413)2,908 7,390 (912) (6,428) 2,958 Income tax expense -- 8050 -- -- 8050 --------- --------- --------- --------- --------- Income (loss) before cumulative effect of change in accounting principle (6,493) (2,189) (708) 2,897 (6,493)2,908 7,340 (912) (6,428) 2,908 Cumulative effect of change in accounting principle -- -- -- -- -- --------- --------- --------- --------- --------- Net income (loss) $ (6,493)2,908 $ (2,189)7,340 $ (708)(912) $ 2,897(6,428) $ (6,493)2,908 ========= ========= ========= ========= =========
Combining Statement of OperationsIncome for the three months ended March 31,September 30, 2002 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- --------- --------- --------- --------- Net sales $ -- $ 221,858253,933 $ -- $ -- $ 221,858253,933 Cost of goods sold -- 211,318234,571 -- -- 211,318234,571 --------- --------- --------- --------- --------- Gross profit -- 10,54019,362 -- -- 10,54019,362 Selling, general and administrative expenses 116 11,14451 12,473 -- -- 11,26012,524 Amortization of goodwill -- -- -- -- -- --------- --------- --------- --------- --------- Operating income (loss) (116) (604)(51) 6,889 -- -- (720)6,838 Other income (expense), net (841) 2736,904 332 -- 841 273(6,904) 332 Interest income (expense), net (3,466) 548 (933)(3,469) 807 (1,042) -- (3,851)(3,704) --------- --------- --------- --------- --------- Income (loss) before income taxes and cumulative effect of change in accounting principle (4,423) 217 (933) 841 (4,298)3,384 8,028 (1,042) (6,904) 3,466 Income tax expense -- 125(benefit) (2,692) 82 -- -- 125(2,610) --------- --------- --------- --------- --------- Income (loss) before cumulative effect of change in accounting principle (4,423) 92 (933) 841 (4,423)6,076 7,946 (1,042) (6,904) 6,076 Cumulative effect of change in accounting principle -- -- -- -- -- --------- --------- --------- --------- --------- Net income (loss) $ 6,076 $ 7,946 $ (1,042) $ (6,904) $ 6,076 ========= ========= ========= ========= =========
Combining Statement of Operations for the nine months ended September 30, 2003 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- --------- --------- --------- --------- Net sales $ -- $ 675,205 $ -- $ -- $ 675,205 Cost of goods sold -- 637,316 -- -- 637,316 --------- --------- --------- --------- --------- Gross profit -- 37,889 -- -- 37,889 Selling, general and administrative expenses 224 33,087 -- -- 33,311 --------- --------- --------- --------- --------- Operating income (loss) (224) 4,802 -- -- 4,578 Other income (expense), net 5,171 1,331 -- (5,171) 1,331 Interest income (expense), net (10,403) 1,807 (2,619) -- (11,215) --------- --------- --------- --------- --------- Income (loss) before income taxes and cumulative effect of change in accounting principle (5,456) 7,940 (2,619) (5,171) (5,306) Income tax expense -- 150 -- -- 150 --------- --------- --------- --------- --------- Income (loss) before cumulative effect of change in accounting principle (5,456) 7,790 (2,619) (5,171) (5,456) Cumulative effect of change in accounting principle -- -- -- -- -- --------- --------- --------- --------- --------- Net income (loss) $ (5,456) $ 7,790 $ (2,619) $ (5,171) $ (5,456) ========= ========= ========= ========= =========
Combining Statement of Income for the nine months ended September 30, 2002 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- --------- --------- --------- --------- Net sales $ -- $ 727,519 $ -- $ -- $ 727,519 Cost of goods sold -- 681,933 -- -- 681,933 --------- --------- --------- --------- --------- Gross profit -- 45,586 -- -- 45,586 Selling, general and administrative expenses 224 34,555 -- -- 34,779 Amortization of goodwill -- -- -- -- -- --------- --------- --------- --------- --------- Operating income (loss) (224) 11,031 -- -- 10,807 Other income (expense), net 10,685 818 -- (10,685) 818 Interest income (expense), net (10,402) 2,303 (3,307) -- (11,406) --------- --------- --------- --------- --------- Income (loss) before income taxes and cumulative effect of change in accounting principle 59 14,152 (3,307) (10,685) 219 Income tax expense (benefit) (2,692) 160 -- -- (2,532) --------- --------- --------- --------- --------- Income (loss) before cumulative effect of change in accounting principle 2,751 13,992 (3,307) (10,685) 2,751 Cumulative effect of change in accounting principle (25,327) (25,327) -- 25,327 (25,327) --------- --------- --------- --------- --------- Net income (loss) $ (29,750)(22,576) $ (25,235)(11,335) $ (933)(3,307) $ 26,16814,642 $ (29,750)(22,576) ========= ========= ========= ========= =========
Combining Statement of Cash Flows for the threenine months ended March 31,September 30, 2003 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- ---------- ---------- --------- ---------- Cash flows from operating activities: Net income (loss) $ (6,493)(5,456) $ (2,189)7,790 $ (708)(2,619) $ 2,897(5,171) $ (6,493)(5,456) Adjustments to reconcile net income (loss) to net cash provided by (used in) operations: Depreciation -- 5,14315,417 -- -- 5,14315,417 Amortization -- 222666 -- -- 222666 Loss on disposal of property, plant and equipment -- 1268 -- -- 1268 Issuance of common stock in connection with stock awards 90 -- -- -- 90 Equity in undistributed net income of subsidiaries 2,897(5,171) -- -- (2,897)5,171 -- Changes in assets and liabilities: Decrease (increase)(Increase) decrease in accounts receivable, net -- 19,668(11,619) -- (19,811) (143) (Increase)11,373 (246) Decrease in inventories -- (15,207)9,281 -- -- (15,207) Decrease9,281 (Increase) in net residual interest in receivables sold -- -- 21,200(438) -- 21,200 (Increase)(438) Decrease in prepayments and other current assets -- (1,011)25 -- -- (1,011)25 Decrease (increase) in other noncurrent assets 109 (87)327 (305) -- -- 22 Increase (decrease) in accounts payable 747 (13,761) (20,558) 19,811 (13,761)8,405 (12,443) 2,968 (11,373) (12,443) Increase (decrease) in accrued liabilities 3,451 (2,515) 663,406 (3,409) 89 -- 1,002 Increase86 (Decrease) in other liabilities -- 691(7,547) -- -- 691(7,547) -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities 801 (9,034)1,601 (2,076) -- -- (8,233)(475) -------- -------- -------- -------- -------- Cash flows from investing activities: Purchases of property, plant and equipment -- (4,598)(11,543) -- -- (4,598)(11,543) Proceeds from sale of property, plant and equipment -- 3158 -- -- 3158 -------- -------- -------- -------- -------- Net cash (used in) investing activities -- (4,595)(11,385) -- -- (4,595)(11,385) -------- -------- -------- -------- -------- Cash flows from financing activities: Increase in outstanding checks in excess of deposits -- 418 -- -- 418 Proceeds from long-term debt -- 33,70775,168 -- -- 33,70775,168 Repayments of long-term debt -- (33,707)(71,978) -- -- (33,707)(71,978) Cash dividends paid (801)(1,601) -- -- -- (801)(1,601) -------- -------- -------- -------- -------- Net cash (used in) provided by financing activities (801) 418(1,601) 3,190 -- -- (383)1,589 -------- -------- -------- -------- -------- Net (decrease) in cash and cash equivalents -- (13,211)(10,271) -- -- (13,211)(10,271) Cash and cash equivalents at beginning of period -- 13,211 -- -- 13,211 -------- -------- -------- -------- -------- Cash and cash equivalents at end of period $ -- $ --2,940 $ -- $ -- $ --2,940 ======== ======== ======== ======== ========
Combining Statement of Cash Flows for the threenine months ended March 31,September 30, 2002 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- ---------- ---------- --------- ---------- Cash flows from operating activities: Net income (loss) $(29,750) $(25,235)$(22,576) $(11,335) $ (933)(3,307) $ 26,168 $(29,750)14,642 $(22,576) Adjustments to reconcile net income (loss) to net cash provided by operations: Depreciation -- 5,31515,940 -- -- 5,31515,940 Amortization -- 319762 -- -- 319762 Goodwill impairment charge 25,327 25,327 -- (25,327) 25,327 Loss on disposal of property, plant and equipment -- 2196 -- -- 2196 Issuance of common stock in connection with stock awards 75170 -- -- -- 75170 Equity in undistributed net income of subsidiaries 841(10,685) -- -- (841)10,685 -- Changes in assets and liabilities: (Increase) decrease in accounts receivable, net -- (5,349)(28,275) -- 5,201 (148) (Increase)28,219 (56) Decrease in inventories -- (8,563)2,669 -- -- (8,563)2,669 (Increase) in net residual interest in receivables sold -- -- (4,188)(17,875) -- (4,188) Decrease(17,875) (Increase) in prepayments and other current assets -- 1,058(806) -- -- 1,058(806) Decrease (increase) in other noncurrent assets 109 (806)326 (2,745) -- -- (697)(2,419) Increase (decrease) in accounts payable 321 8,573 4,880 (5,201) 8,5737,185 3,571 21,034 (28,219) 3,571 Increase in accrued liabilities 3,876 997 2411,091 2,754 148 -- 5,1143,993 (Decrease) in other liabilities -- (1,374)(4,736) -- -- (1,374)(4,736) -------- -------- -------- -------- -------- Net cash provided by operating activities 799 264838 3,322 -- -- 1,0634,160 -------- -------- -------- -------- -------- Cash flows from investing activities: Purchases of property, plant and equipment -- (1,429)(10,089) -- -- (1,429)(10,089) Proceeds from sale of property, plant and equipment -- 23 -- -- -- --23 -------- -------- -------- -------- -------- Net cash (used in) investing activities -- (1,429)(10,066) -- -- (1,429)(10,066) -------- -------- -------- -------- -------- Cash flows from financing activities: Increase in outstanding checks in excess of deposits -- 351 -- -- 351 Proceeds from long-term debt -- 34,00055,700 -- -- 34,00055,700 Repayments of long-term debt -- (34,000)(55,700) -- -- (34,000)(55,700) Repayments of notes receivable from sale of common stock 1,561 -- -- -- 1,561 Cash dividends paid (799)(2,399) -- -- -- (799)(2,399) -------- -------- -------- -------- -------- Net cash (used in) provided by financing activities (799)(838) 351 -- -- -- (799)(487) -------- -------- -------- -------- -------- Net (decrease) in cash and cash equivalents -- (1,165)(6,393) -- -- (1,165)(6,393) Cash and cash equivalents at beginning of period -- 6,393 -- -- 6,393 -------- -------- -------- -------- -------- Cash and cash equivalents at end of period $ -- $ 5,228-- $ -- $ -- $ 5,228-- ======== ======== ======== ======== ========
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, 2002, including notefootnote 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 Litigation Reform Act of 1995 and involve risks and uncertainties that could render them materially different, including, but not limited to, the success of the implementation of the company-wide information system, 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 quarternine months of 2003, shipments of the Company's aluminum sheet products decreased by 12%18% from the first nine months of 2002 due to weak economic conditions, however third quarter 2003 shipments have trended upward to the highest level in 2003 having increased 10% over the second quarter of 2003 and 6% over the first quarter of 2002 due2003. Contributing to weakness in certain markets, particularly for welded aluminum tube. Thethe nine-month decline in aluminum shipments also reflectedwas planned equipment downtime for maintenance and capital improvement outages during the first quarter of 2003. Despite the decreased aluminum shipments, material margins for the first quarternine months of 2003 were higher than the first quarternine months of 2002 primarily duehelping to partially offset the sales volume decline. The improvement in margin was principally the outcome of initiatives to: maintain selling price increases which went into effect duringintroduced in the first quarter of 2003, a strategic decision to2003; increase the volume of product available for spot sales plus the decisionCompany's higher value added products; and continue to actively pursue new customers and new markets offering higher margin opportunities than the Company's traditional high volume commodity markets. In addition, the material margin was favorably impacted by a third quarter 2003 gain of approximately $1.1 million or $0.07 per share relating to certain aluminum hedge transactions. The Company determined that hedges in place during the quarter to reduce its exposure to aluminum price fluctuations 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, giving rise to the $1.1 million gain. Demand for the Company's electrical products decreased during the first quarternine months of 2003. Shipments were down 9%6% compared to the first quarternine months of 2002 reflecting continued weakness in key markets in the electrical products sector, particularly commercial construction.construction, however third quarter 2003 shipments increased 12% compared to shipments for the second quarter of 2003 reflecting a strengthening of demand in the commercial construction market even though net selling prices were lower. Material margins for the first quarternine months of 2003 decreased 10%15% from the first quarter of 2002 and were down 13% from the fourth quarternine months of 2002. The increase in manufacturing costs per foot in the first quarter of 2003 compared to the first quarter of 2002 due to lower volumes combined with lowerLower net selling prices due to the competitive price environment contributed tocombined with higher material costs resulted in the decrease in material margins for the first quarternine months of 2003 versus the first nine months of 2002. While manufacturing costs per foot were up for the nine-month period 2003 versus the same period in 2002, manufacturing costs per foot for the third quarter 2003 were down compared to the third quarter of 2002.2002 and the second quarter of 2003 primarily due to lower overtime labor, group insurance and workers compensation insurance costs. 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 second quarter benefit of approximately $2.5 million after tax or $0.16 per share and a third quarter benefit of approximately $2.0 million after tax or $0.12 per share. The Company recognized the second quarter and third quarter benefits as reductions of approximately $1.3 million and $1.0 million, respectively, in cost of goods sold and $1.2 million and $1.0 million, respectively, in selling, general and administrative expenses. In addition to the effect on the second and third quarter of 2003, the Company estimates that net income will be increased approximately $2.0 million in the fourth quarter of 2003, approximately $8.3 million in 2004 and approximately $1.7 million in 2005. During the second quarter of 2002, the Company completed its transitional test of goodwill upon 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 forDuring the firstfourth quarter of 2002, giving effect2003, the Company will be conducting its annual impairment review of the Company's remaining goodwill balance of $48.9 million relating to the change in accounting principle, was $29.8 million or $1.86 per diluted share.Company's Alflex electrical products reporting unit. See the caption entitled "Cumulative effect of change in accounting principle" in the following section and note 8 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 and methodology for assessing hedge effectiveness regarding aluminum and natural gas futures contracts, forward contracts and options, 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 nine months ended March 31,September 30, 2003 and 2002 Net Sales. Net sales for the quarter ended March 31,September 30, 2003 decreased 4%2% to $212.0$248 million (including $24.7$27 million from Alflex) from $221.9$254 million (including $28.9$30 million from Alflex) for the same period in 2002. The decrease is due to the combined effect of lower aluminum and electrical product shipments and lower net selling prices of electrical products which more than offset an increase in net selling prices of aluminum products. As mentioned previously, the decreased aluminum shipments were primarily due to weakness in certain markets, particularly for welded aluminum tube. Unit sales volume of aluminum decreased 12%16% to 183.7195.4 million pounds for the firstthird quarter of 2003 from 209.5232.8 million pounds for the firstthird quarter of 2002. Alflex unit sales volume was 114.9124.5 million feet for the firstthird quarter of 2003, a decrease of 4% versus 126.0130.3 million feet for the comparable period in 2002, a decline of 9%.2002. As mentioned previously, the decrease was primarilydecreased aluminum and electrical product shipments were due to continued weaknessdifficult business conditions in key marketsboth businesses. Net sales for the nine-month period ended September 30, 2003, were $675 million (including $77 million from Alflex), a 7% decrease from the $728 million recorded in the first nine months of 2002 (including $86 million from Alflex). The decrease is due to the combined effect of lower aluminum and electrical product shipments and lower net selling prices of electrical products sector, particularly commercial construction.which more than offset an increase in net selling prices of aluminum products. Unit sales volume of aluminum was 557.3 million pounds for the nine months of 2003, a decrease of 18% from the 680.2 million pounds for the first nine months of 2002. Alflex unit sales volume was 350.9 million feet for the first nine months of 2003, a decrease of 6%, versus 374.8 million feet for the comparable period in 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 March 31,September 30, 2003, decreased to $9.3$16.4 million (4.4%(6.6% of net sales) from $10.5$19.4 million (4.8%(7.6% of net sales) for the same period in 2002. This decreaseGross profit for the nine months ended September 30, 2003 was $37.9 million (5.6% of net sales) versus $45.6 million (6.3% of net sales) for the comparable period in 2002. Contributing to the third quarter and nine-month decreases in gross profit were decreases in both the Aluminum business and Alflex. The Aluminum business gross profit declined in both the third quarter and nine-month period compared to the prior year periods primarily due to lower shipment volumes, partially offset by the combined effects of improved material margins, the mark-to-market hedge adjustments mentioned previously and by cost of goods sold reductions related entirely to the aforementioned changes to the Company's postretirement medical insurance program. The third quarter and nine-month gross profit decreases at Alflex asreflect the net effects of lower shipment volume, lower material margins due to increasedand a mix of higher manufacturing unit manufacturing costs combined with lower net selling prices reduced Alflex's gross profit and more than offset the Aluminum business's increase in gross profit. Despite lower net sales, the Aluminum business's gross profit for the first quarter of 2003 was higher thannine-month period, somewhat offset by lower manufacturing unit costs in the first quarter of 2002 reflecting improved material margins due to the factors mentioned previously.third quarter. Operating Income. The Company had an operating lossincome of $3.2$6.3 million for the firstthird quarter of 2003 compared with an operating lossincome of $0.7$6.8 million for the third quarter of 2002. For the nine-month period ended September 30, 2003, the Company had operating income of $4.6 million, versus operating income of $10.8 million for the first quarternine months of 2002. The increase in the operating loss was related primarily to the combined effect of Alflex which had an operating loss of $1.0 million in the first quarter of 2003 compared to operating income of $2.0 million in the first quarter of 2002 and an increase in selling, general and administrative which more than offset the increasedecreases in operating income offor the Aluminum business. The changes in thethird quarter and nine-month period were primarily due to reduced operating income ofat both Alflex and the Aluminum business were primarily due to the factors described in the gross profit section in the preceding paragraph.paragraph, partially offset by lower selling, general and administrative expenses. Selling, general and administrative expenses during the firstthird quarter of 2003 were $12.5$10.1 million, compared with $11.3$12.5 million for the same period in 2002 and were $33.3 million for the nine months ended September 30, 2003, compared with $34.8 million for the same period in 2002. The increasethird quarter and nine-month decreases in selling, general and administrative expenses iswere 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 and lower accruals for employee incentive plans which more than offset an increase in professional service costs principally associated with the Company's project to upgrade its information technology systems. Cumulative Effecteffect of Changechange in Accounting Principle.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 8 to the condensed consolidated financial statements for additional information. Net Income (Loss).Income. The Company had a net lossincome of $6.5$2.9 million for the quarter ended March 31,September 30, 2003, compared to awith net lossincome of $29.8$6.1 million for the same period in 2002. The Company's net loss for the nine months ended September 30, 2003 was $5.5 million compared with a net loss of $22.6 million for the first nine months of 2002. The net loss for the first nine months of 2002 includes the $25.3 million goodwill impairment charge described in the preceding paragraph. Interest expense was $3.7 million for both the quarter ended March 31,September 30, 2003 and 2002 and $11.2 million for the nine months ended September 30, 2003, compared to $3.9with $11.4 million recorded infor the first quarternine months of 2002. The nine-month decrease was primarily due to a reduction in interest rates under the Company's receivables purchase agreement which more than offset the combined effect of an increase in amounts outstanding under the agreement and a reduction in investment interest income. ThereIncome tax expense was $0.05 million in the third quarter of 2003 compared to an income tax benefit of $2.6 million for the same period in 2002 and an income tax expense of $0.1$0.2 million for the nine months ended September 30, 2003 compared to an income tax benefit of $2.5 million for the same period in both2002. The increase in income tax expense was due to a $2.7 million adjustment recorded in the firstthird quarter of 2003 and 2002.2002 to reduce prior years' income tax accruals. 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 and in October 2003, the availability was further reduced to $60.0 million. At March 31,September 30, 2003 and 2002, the Company had outstanding under the agreement $55.0$40.0 million and $47.0$20.0 million, respectively, and had $60.0$81.6 million and $86.5$100.2 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 threenine months ended March 31,September 30, 2003 and 2002, the Company received gross proceeds of $42.0$62.0 million and $27.0$37.0 million, respectively, from the sale of receivables and made gross payments of $11.0$46.0 million in the three months ended March 31, 2003and 37.0 million, respectively, under the agreement. The Company made no gross payments in the first three months of 2002. 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 used cash flows of $8.2$0.5 million for the threenine months ended March 31,September 30, 2003 compared to providing cash flows of $1.1$4.2 million in the threenine months ended March 31,September 30, 2002. Working capital increased to $133.7$131.3 million at March 31,September 30, 2003 from $126.6$129.5 million at March 31,September 30, 2002. Capital expenditures were $4.6 million during the quarter ended March 31, 2003 compared to $1.4$4.4 million during the three months ended March 31,September 30, 2003 and $11.5 million during the nine months ended September 30, 2003 compared to $6.9 million during the three months ended September 30, 2002 and $10.1 million during the nine months ended September 30, 2002. At March 31,September 30, 2003, the Company had commitments of $7.8$4.9 million for the purchase or construction of capital assets. Total capital expenditures for the year 2003 are estimated to be approximately $18.8$15.4 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 Company's sources of liquidity are cash flows from operations, the Company's receivables purchase agreement described previously and borrowings under its $30 million revolving credit facility. The revolving credit facility expires on March 31, 2005. 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 these sources will beit 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 dividend paymentsif necessary, to satisfy any outstanding amounts under its revolving credit facility for at least for the next twelve months. The Company's revolving credit facility permits borrowings and letters of credit up to $30.0 million outstanding at any time. AvailabilityAs noted in the previous paragraph, availability is subject to satisfaction of certain covenants and other requirements. At MarchSeptember 30, 2003 outstanding amounts under the credit facility consisted of $3.2 million of borrowings and $3.1 million of standby letters of credit, leaving $23.7 million available at September 30, 2003. The Company announced on July 31, 2003, $26.9that 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 was available.senior subordinated notes due in 2006. The facility expires on March 31, 2005.Company believes that the restrictions are likely to result in suspension of the cash dividend through at least 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 March 31,September 30, 2003 (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$128,190 $ -- $ --$3,190 $125,000 $ -- Operating leases 11,751 3,330 3,915 1,717 2,78910,715 3,303 3,400 1,450 2,562 Standby letters of credit 3,111 3,111 -- -- -- Outstanding obligation under receivables purchase agreement 55,000 55,00040,000 40,000 -- -- -- ---------------------------------------------------------------------- Total contractual cash obligations $194,862 $61,441 $3,915 $126,717 $2,789$182,016 $46,414 $6,590 $126,450 $2,562 ====================================================================== 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 $26,889$ 23,699 $ -- $26,889$23,699 $ -- $ -- Unused availability under receivables purchase agreement 35,299 -- 35,29955,000(1) 55,000(1) -- -- ----------------------------------------------------------------------- ---------------------------------------------------------------------- Total available $62,188 $ -- $62,18878,699(2) $55,000(1) $23,699 $ -- $ -- =========================================================================================================================================== (1) The amount was reduced to $20,000 as of October 31, 2003. (2) The amount was reduced to $43,699 as of October 31, 2003.
The Company has 7 3/1/4 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. At March 31,September 30, 2003, the Company held firm-priced aluminum purchase and sales commitments through December 2004May 2005 totaling $5$7 million and $113$131 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. The indicated annual rate of dividends being paid on the Company's Common Stock is $0.20 per share, or an annual total of about $3.2 million. 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. The Company has designated virtually all of itsFor the second quarter ending June 30, 2003 and the third quarter ending September 30, 2003, the Company's aluminum and natural gas futures contracts and forward contracts as cash flow hedges pursuant todid not meet certain "effectiveness" requirements set forth in Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." GainsActivities" ("SFAS No. 133"). Accordingly, as prescribed by the provisions of SFAS No. 133, the derivative instruments that were used as hedges were marked-to-market and the gains and losses during the second and third 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. For the foreseeable future, it is likely that the derivative instruments will continue to be marked-to-market through the consolidated statement of operations. It is the Company's policy to hedge its exposure to variability in expected future cash flows relating to its purchases of scrap aluminum by entering into forward purchase contracts of primary aluminum. Scrap metal purchases are priced by suppliers in relation to prevailing primary metal prices, plus or minus certain quality and delivery differentials. The quality and delivery differentials change from time to time in relation to market conditions, but there is no derivative instrument available to correspondingly hedge such changes. Since the forward purchase contracts used by the Company only hedge the primary metal pricing components, changes in the other scrap metal pricing components cause the noted ineffectiveness. However, the derivative instruments are considered by the Company to be economically appropriate hedges of cash flows associated with the primary metal pricing components of scrap aluminum purchases. 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 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 March 31,September 30, 2003, the Company had $1.3$0.2 million of deferred net gainslosses recorded in accumulated other comprehensive income. Over the next twelve months, approximately $1.6$0.6 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. A net lossgain of $0.2$1.1 million and $0.1$1.5 million was recognized in cost of goods sold during the three months and nine months ended March 31,September 30, 2003, respectively, and 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, representing the amount of the hedges' ineffectiveness. As of March 31,September 30, 2003, the Company held open aluminum and natural gas futures and forward contracts having maturity dates extending through December 2005. Before entering into futures contracts, forward contracts and options, the Company reviews the credit rating of the counterparty and assesses 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 expect any such counterparties to not perform. Recently Issued Accounting Standards In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). The Statement addresses financial and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 was effective for financial statements issued for fiscal years beginning after June 15, 2002. The adoption of this Statement did not have a material impact on the Company's results of operations or financial position. In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" ("SFAS No. 145"). The Statement eliminates Statement of Financial Accounting Standards No. 4, "Reporting Gains and Losses from Extinguishment of Debt", which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item. Under SFAS No. 145, such gains and losses should be classified as extraordinary only if they meet the criteria of Accounting Principles Board Opinion No. 30. In addition, SFAS No. 145 amends Statement of Financial Accounting Standards No. 13, "Accounting for Leases", to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS 145 was generally effective for financial statements issued for fiscal years beginning after May 15, 2002. The adoption of this Statement did not 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 were effective for exit or disposal activities that were initiated after December 31, 2002. The adoption of this Statement did not have a material impact on the Company's results of operations or financial position. In November 2002, the Financial Accounting Standards Board issued Financial Accounting Standards Board Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 is an interpretation of Statement of Financial Accounting Standards No. 5, No. 57 and No. 107. FIN 45 elaborates on required disclosures by a guarantor in its financial statements about obligations under certain guarantees that it has issued and clarifies the need for a guarantor to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of FIN 45 were effective as of December 31, 2002. The provisions of this Interpretation relating to initial recognition and measurement of guarantor liabilities were effective for qualifying guarantees entered into or modified after December 31, 2002. The adoption of this Interpretation did not have a material impact on the Company's results of operations or financial position.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. FIN46FIN 46 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 mustwere to be applied forto the first interim or annual period beginning after June 15, 2003, but in October 2003 the Financial Accounting Standards Board decided to defer that implementation to the first interim or annual period beginning after December 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. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (" SFAS No. 149"). The Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is generally effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. In addition, the provisions of this Statement are generally to be applied prospectively. The Statement's initial adoption did not have a material impact on the Company's results of operations or financial position. In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS No. 150"). The Statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. 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 those instruments were previously classified as equity. The provisions of SFAS No. 150 apply immediately to all financial instruments entered into or modified after May 31, 2003, and otherwise are effective at the beginning of the first interim period beginning after June 15, 2003. The Statement's initial adoption did not have a material impact on the Company's results of operations or financial position. Item 4. Controls and Procedures The(a) Evaluation of Disclosure Controls and Procedures As required by Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Company's certifying officers have concluded based on theirmanagement carried out an evaluation, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company's disclosure controls and procedures as of the end of the quarter ended September 30, 2003. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in ensuringto ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to the certifying officers by others within those entities, 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 or submits under the Exchange Act 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. In addition, there were no significantSecurities and Exchange Commission's rules and forms. (b) Changes in Internal Control over Financial Reporting There have not been any changes in the Company's internal controls orcontrol over financial reporting (as defined in other factors that could significantly affect these controls subsequent to the dateRules 13a-15(f) and 15d-15(f) of the evaluation.Exchange Act) during the quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, the Company's internal 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 4. Submission of Matters to a Vote of Security Holders At the Company's Annual Meeting of Stockholders (the "Meeting"), held April 25, 2003 and adjourned and held May 5, 2003, the following matters were submitted for a vote by the security holders: Catherine G. Burke and Larry E. Kittelberger were elected directors for terms expiring in 2006. There were 14,296,491 and 15,584,807, respectively, votes cast for and 1,347,746 and 59,430, respectively, abstentions. The terms of office of C. Frederick Fetterolf, Mark V. Kaminski, Steven J. Demetriou, Paul E. Lego and John E. Merow continued after the meeting. Approval of an Amendment to the 1997 Stock Incentive Plan (increasing by 1,000,000 the number of shares available for awards under the Plan). There were 8,643,978 votes for and 3,147,430 votes against and 9,248 abstentions; and Ratification of the selection of PricewaterhouseCoopers LLP as the Company's independent auditors for 2003. There were 15,610,168 votes for and 24,974 votes against and 9,095 abstentions. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 FifthFirst Amendment, dated as of October 29, 2002,14, 2003, to Receivables PurchaseThird Amended and Restated Credit Agreement among Commonwealth Financing Corp., the Company, Market Street Funding Corporationsubsidiaries of the Company, the several lenders from time to time parties thereto, and PNC Bank, National Association, as administrative agent, dated as of September 29, 1997. 10.2 Amendment, dated May 5, 2003, to 1997 Stock Incentive Plan, as amended and restated April 23, 1999.March 21, 2002. 31 Rule 13a-14(a)/15d-14(a) Certifications ("Section 302 Certifications"). 32 Section 1350 Certifications ("Section 906 Certifications"). (b) Reports on Form 8-K The following reportreports on Form 8-K waswere filed with the Securities and Exchange Commission during the quarter ended March 31,September 30, 2003: A Form 8-K dated March 17,July 22, 2003 reporting the Company's results of operations for the Second Quarter of 2003. A Form 8-K dated July 31, 2003 reporting that the Company sees greater-than-expected loss in the first quarter of 2003.was suspending quarterly cash dividend payments on its common stock. 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: May 8,November 6, 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"); 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: May 8, 2003 /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"); 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: May 8, 2003 /s/ Donald L. Marsh, Jr. ------------------------- Donald L. Marsh, Jr. Executive Vice President and Chief Financial Officer Exhibit Index ------------- Exhibit Number Description - ------- ------------------------------------------------------------------------------------------------- 10.1 FifthFirst Amendment, dated as of October 29, 2002,14, 2003, to Receivables PurchaseThird Amended and Restated Credit Agreement among Commonwealth Financing Corp., the Company, Market Street Funding Corporationsubsidiaries of the Company, the several lenders from time to time parties thereto, and PNC Bank, National Association, as administrative agent, dated as of September 29, 1997. 10.2 Amendment, dated May 5, 2003, to 1997 Stock Incentive Plan, as amended and restated April 23, 1999. Exhibit 10.1 ------------ FIFTH AMENDMENT TO RECEIVABLES PURCHASE AGREEMENT THIS FIFTH AMENDMENT TO RECEIVABLES PURCHASE AGREEMENT, dated as of October 29, 2002 (this "Amendment"), is entered into among COMMONWEALTH FINANCING CORP., a Delaware corporation (the "Seller"), COMMONWEALTH INDUSTRIES, INC., a Delaware corporationMarch 21, 2002. 31 Rule 13a-14(a)/15d-14(a) Certifications ("Commonwealth"), MARKET STREET FUNDING CORPORATION, a Delaware corporation (the "Issuer"), and PNC BANK, NATIONAL ASSOCIATION, as Administrator (the "Administrator"Section 302 Certifications"). RECITALS 1. The Seller, Commonwealth, the Issuer and the Administrator are parties to the Receivables Purchase Agreement, dated as of September 29, 1997 (as amended through the date hereof, the "Agreement"); and 2. The parties hereto desire to amend the Agreement as hereinafter set forth. NOW THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties agree as follows: 1. Certain Defined Terms. Capitalized terms that are used herein without definition and that are defined in Exhibit I to the Agreement shall have the same meanings herein as therein defined. 2. Amendment to Agreement. Clause (a) of the definition of "Facility Termination Date" that appears in Exhibit I to the Agreement, is hereby amended by replacing the date "September 22, 2003" with the date "September 22, 2004" therein. 3. Effect of Amendment. All provisions of the Agreement, as expressly amended and modified by this Amendment, shall remain in full force and effect and are hereby ratified and confirmed in all respects. After this Amendment becomes effective, all references in the Agreement (or in any other Transaction Document) to "this Agreement", "hereof", "herein" or words of similar effect referring to the Agreement shall be deemed to be references to the Agreement as amended by this Amendment. This Amendment shall not be deemed, either expressly or impliedly, to waive, amend or supplement any provision of the Agreement other than as set forth herein. 4. Effectiveness. This Amendment shall become effective as of the date hereof upon receipt by the Administrator of counterparts of this Amendment (whether by facsimile or otherwise) executed by each of the other parties hereto, in form and substance satisfactory to the Administrator in its sole discretion. 5. Counterparts. This Amendment may be executed in any number of counterparts and by different parties on separate counterparts, each of which when so executed shall be deemed to be an original and all of which when taken together shall constitute but one and the same instrument. 6. Governing Law. This Amendment shall be governed by, and construed in accordance with, the internal laws of the State of New York (without regard to any otherwise applicable principles of conflicts of law), except to the extent that the validity or perfection of the interests of the Issuer in the Receivables or remedies hereunder in respect thereof are governed by the laws of a jurisdiction other than the State of New York. 7.32 Section Headings. The various headings of this Amendment are included for convenience only and shall not affect the meaning or interpretation of this Amendment, the Agreement or any provision hereof or thereof. (continued on following page) Fifth Amendment to Receivables Purchase Agreement (Commonwealth Financing Corp.) IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first written above. COMMONWEALTH FINANCING CORP. By: _______________________________________________________ Name: _______________________________________________________ Title: ______________________________________________________ COMMONWEALTH INDUSTRIES, INC. By: _______________________________________________________ Name: _______________________________________________________ Title: ______________________________________________________ MARKET STREET FUNDING CORPORATION, as Issuer By: _______________________________________________________ Name: _______________________________________________________ Title: ______________________________________________________ PNC BANK, NATIONAL ASSOCIATION, as Administrator By: _______________________________________________________ Name: _______________________________________________________ Title: ______________________________________________________ Exhibit 10.2 ------------ AMENDMENT TO THE COMMONWEALTH INDUSTRIES, INC. 1997 STOCK INCENTIVE PLAN THIS AMENDMENT TO THE COMMONWEALTH INDUSTRIES, INC. 1997 STOCK INCENTIVE PLAN (the "Plan") is made and entered into by Commonwealth Industries, Inc. (the "Company"1350 Certifications ("Section 906 Certifications"). WHEREAS, pursuant to Section 16 of the Company's 1997 Stock Incentive Plan, the Board of Directors of the Company (the "Board") has the power and authority to amend the Plan, subject to the approval of the Company's stockholders in respect to certain amendments; WHEREAS, the Board, has determined to amend the Plan to increase the number of shares authorized for issuance thereunder, such amendment being adopted subject to approval of the Company's stockholders. NOW, THEREFORE, the Plan is amended as follows: 1. The first sentence of Section 4 of the Plan is hereby amended in its entirely to provide as follows: "4. Shares Subject to the Plan. The maximum number of shares of -------------------------- Common Stock available for grant of Awards under the Plan shall be 2,350,000, subject to adjustment pursuant to Section 13 and to the following provisions." 2. Section 6 of the Plan is amended by deleting the last paragraph at the end of the section. 3. The foregoing amendments shall be effective upon their approval by the stockholders of the Company. IN WITNESS WHEREOF, Commonwealth Industries, Inc. has caused this Amendment to the Plan to be executed by its duly authorized officer this 5th day of May, 2003. Commonwealth Industries, Inc. By: ___________________________________ Name: Mark V. Kaminski Title: President and Chief Executive Officer