===============================================================================================================================================================
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 June 30, 2003March 31, 2004
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
PNC Plaza -19th- 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 16,010,97116,034,397 shares of common stock outstanding at July 29, 2003.
================================================================================May
1, 2004.
===============================================================================
COMMONWEALTH INDUSTRIES, INC.
FORM 10-Q
For the Quarter Ended June 30, 2003March 31, 2004
INDEX
Part I - Financial Information
Item 1. Financial Statements (unaudited) Page Number
-----------
Condensed Consolidated Balance Sheet as of June 30, 2003March 31, 2004
and December 31, 20022003 3
Condensed Consolidated Statement of Operations for the three
months ended March 31, 2004 and six months ended June 30, 2003 and 2002 4
Condensed Consolidated Statement of Comprehensive Income
for the three months ended March 31, 2004 and six months ended June 30, 2003
and 2002 5
Condensed Consolidated Statement of Cash Flows for the sixthree
months ended June 30,March 31, 2004 and 2003 and 2002 6
Notes to Condensed Consolidated Financial Statements 7-197-18
Item 2. Management's Discussion and Analysis of Financial Condition 20-2519-26
and Results of Operations
Item 4. Controls and Procedures 2526
Part II - Other Information
Item 1. Legal Proceedings 2627
Item 4 Submission of Matters to a Vote of Security Holders 27
Item 6. Exhibits and Reports on Form 8-K 2627
Signatures 2728
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Balance Sheet
(in thousands except share data)
June 30,(Unaudited)
March 31, December 31,
2004 2003
2002
------------- --------------------------- -----------------
Assets
Current assets:
Cash and cash equivalents $ 6,588836 $ 13,211-
Accounts receivable, net 211 66551 451
Inventories 142,374 125,348143,407 131,365
Net residual interest in receivables sold 39,865 81,19573,006 64,214
Prepayments and other current assets 7,819 7,133
------------- -------------18,983 14,194
-------------- -----------------
Total current assets 196,857 226,953236,783 210,224
Property, plant and equipment, net 143,614 146,968138,427 142,035
Goodwill 48,872 48,87219,265 19,265
Other noncurrent assets 5,644 6,111
------------- -------------7,753 7,802
-------------- -----------------
Total assets $ 394,987402,228 $ 428,904
============= =============379,326
============== =================
Liabilities
Current liabilities:
Outstanding checks in excess of deposits $ - $ 733
Long-term debt due within one year 5,104 --
Accounts payable $ 39,347 $ 59,59457,748 50,308
Accrued liabilities 24,122 28,527
------------- -------------31,032 24,009
-------------- -----------------
Total current liabilities 63,469 88,12193,884 75,050
Long-term debt 125,000 125,000
Other long-term liabilities 4,969 5,1833,707 3,845
Accrued pension benefits 29,149 26,74331,234 30,147
Accrued postretirement benefits 72,837 76,670
------------- -------------63,898 67,146
-------------- -----------------
Total liabilities 295,424 321,717
------------- -------------317,723 301,188
-------------- -----------------
Commitments and contingencies - -
Stockholders' Equity
Common stock, $0.01 par value, 50,000,000 shares authorized,
16,010,97116,020,397 and 15,997,65116,010,971 shares outstanding at
June 30, 2003March 31, 2004 and December 31, 2002,2003, respectively 160 160
Additional paid-in capital 405,793 405,703 405,613
Accumulated deficit (287,907) (277,942)(305,603) (308,477)
Accumulated other comprehensive income:
Unrealized gain on security - 34
Minimum pension liability adjustment (21,391) (21,391)(21,276) (21,276)
Effects of cash flow hedges 2,998 747
------------- -------------5,431 1,994
-------------- -----------------
Total stockholders' equity 99,563 107,187
------------- -------------84,505 78,138
-------------- -----------------
Total liabilities and stockholders' equity $ 394,987402,228 $ 428,904
============= =============379,326
============== =================
See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Statement of Operations
(in thousands except per share data)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
---------------------------- -----------------------------March 31,
-------------------------------------
2004 2003
2002 2003 2002
----------- ----------- ------------ ------------------------ --------------
Net sales $ 215,120284,077 $ 251,728 $ 427,088 $ 473,586211,968
Cost of goods sold 202,906 236,044 405,556 447,362
----------- ----------- ------------ -----------263,620 202,650
------------- --------------
Gross profit 12,214 15,684 21,532 26,22420,457 9,318
Selling, general and administrative expenses 10,693 10,995 23,217 22,255
----------- ----------- ------------ -----------13,913 12,524
------------- --------------
Operating income (loss) 1,521 4,689 (1,685) 3,9696,544 (3,206)
Other income (expense), net 414 213 908 486494 494
Interest expense, net (3,786) (3,851) (7,487) (7,702)
----------- ----------- ------------ -----------(4,094) (3,701)
------------- --------------
Income (loss) before income taxes and cumulative
effect of change in accounting principle (1,851) 1,051 (8,264) (3,247)2,944 (6,413)
Income tax expense (benefit) 20 (47) 100 78
----------- ----------- ------------ -----------
Income (loss) before cumulative effect of
change in accounting principle (1,871) 1,098 (8,364) (3,325)
Cumulative effect of change in accounting principle - - - (25,327)
----------- ----------- ------------ -----------70 80
------------- --------------
Net income (loss) $ (1,871)2,874 $ 1,098 $ (8,364) $ (28,652)
=========== =========== ============ ===========(6,493)
============= ==============
Basic and diluted net income (loss) per share:
Income (loss) before cumulative effect of
change in accounting principle $ (0.12) $ 0.07 $ (0.52) $ (0.21)
Cumulative effect of change in accounting principle - - - (1.58)
----------- ----------- ------------ -----------
Net income (loss) $ (0.12) $ 0.07 $ (0.52) $ (1.79)
=========== =========== ============ ===========share $0.18 ($0.41)
============= ==============
Weighted average shares outstanding
Basic 16,020 16,011
15,994Diluted 16,187 16,011 15,989
Diluted 16,011 16,140 16,011 15,989
Dividends paid per share $ 0.05- $ 0.05 $ 0.10 $ 0.10
See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Statement of Comprehensive Income (Loss)
(in thousands)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
--------------------------- ------------------------March 31,
-------------------------
2004 2003
2002 2003 2002---------- -----------
------------ ---------- ---------
Net income (loss) $ (1,871)2,874 $ 1,098 $ (8,364) $(28,652)
Other comprehensive(6,493)
Reclassification adjustment for realized gain on security
included in net income net of tax:(34) -
Minimum pension liability adjustment - -
Net change related to cash flow hedges:
Increase (decrease) in fair value of cash flow hedges 1,990 (3,097) 5,266 3,1394,162 3,276
Reclassification adjustment for (gains) losses included in
net income (322) 3,302 (3,015) 5,212(725) (2,693)
---------- ----------- ------------ ---------- ---------
Net change related to cash flow hedges 1,668 205 2,251 8,3513,437 583
---------- ----------- ------------ ---------- ---------
Comprehensive income (loss) $ (203)6,277 $ 1,303 $ (6,113) $(20,301)(5,910)
========== =========== ============ ========== =========
See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Statement of Cash Flows
(in thousands)
Six(Unaudited)
Three months ended June 30,
--------------------------------March 31,
-----------------------
2004 2003
2002
----------- ------------------ --------
Cash flows from operating activities:
Net income (loss) $ (8,364)2,874 $ (28,652)(6,493)
Adjustments to reconcile net income (loss) to net cash
provided by(used in) operations:
Depreciation 10,250 10,6445,643 5,143
Amortization 444 537
Goodwill impairment charge - 25,327255 222
Loss on disposal of property, plant and equipment 40 8121 12
Issuance of common stock in connection with stock awards 90 17090
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net (145) 9(100) (143)
(Increase) decrease in inventories (17,026) 3,408
Decrease (increase)(12,042) (15,207)
(Increase) decrease in net residual interest in receivablesinreceivables sold 41,330 (2,805)
Decrease(8,837) 21,200
(Increase) in prepayments and other current assets 885 515
Decrease (increase)(1,352) (1,011)
(Increase) decrease in other noncurrent assets 23 (922)(195) 22
Increase (decrease) in accounts payable 7,440 (13,761)
Increase in accrued liabilities 7,023 1,002
(Decrease) increase in accounts payable (20,247) 2,949
(Decrease) increase in accrued liabilities (3,725) 175
(Decrease) in other liabilities (1,641) (3,304)
----------- -----------(2,299) 691
------- --------
Net cash provided by(used in) operating activities 1,914 8,132
----------- -----------(1,479) (8,233)
------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment (7,091) (3,194)(2,118) (4,598)
Proceeds from sale of property, plant and equipment 15562 3
----------- ------------------ --------
Net cash (used in) investing activities (6,936) (3,191)
----------- -----------(2,056) (4,595)
------- --------
Cash flows from financing activities:
(Decrease) increase in outstanding checks in excess of deposits (733) 418
Proceeds from long-term debt 60,398 45,97077,648 33,707
Repayments of long-term debt (60,398) (45,970)
Repayments of notes receivable from sale of common stock - 1,561(72,544) (33,707)
Cash dividends paid (1,601) (1,599)
----------- ------------ (801)
------- --------
Net cash provided by (used in) financing activities (1,601) (38)
----------- -----------4,371 (383)
------- --------
Net increase (decrease) increase in cash and cash equivalents (6,623) 4,903836 (13,211)
Cash and cash equivalents at beginning of period - 13,211
6,393
----------- ------------------ --------
Cash and cash equivalents at end of period $ 6,588836 $ 11,296
=========== ===========-
======= ========
Supplemental disclosures:
Interest paid $ 7,269424 $ 7,299215
Income taxes paid (refunds received) 179 (524)119 78
See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC.
Notes to Condensed Consolidated Financial Statements (Unaudited)
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 in the United States of America. The condensed consolidated financial
statements have been prepared in accordance with Commonwealth Industries, Inc.'s
(the "Company's") customary accounting practices and have not been audited. In
the opinion of management, all adjustments necessary to fairly present the
results of operations for the reporting interim periods have been made and were
of a normal recurring nature.
2. Stock-Based Compensation
At June 30, 2003,March 31, 2004, 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, 2002.2003. As permitted by Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), the Company
follows the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations in
accounting for its stock option plans under the intrinsic value based method.
Accordingly, no stock-based compensation expense has been recognized for stock
options issued under the plans as all stock options granted under the plans had
an exercise price equal to the market value of the underlying common stock on
the date of grant. Had compensation expense been determined based on the fair
value of the stock options at the grant date consistent with the provisions of
SFAS No. 123, the Company's net loss and basic and diluted net loss per share
would have been increased for the three months and six months ended June 30,
2003 and the six months ended June 30, 2002 and the Company's net income and basic and diluted net income per
share would have been reduceddecreased for the three months ended June 30, 2002March 31, 2004 and the
Company's net loss would have been increased for the three months ended March
31, 2003 to the pro forma amounts which follow (in thousands except per share
data):
Three months ended
June 30,March 31,
2004 2003 2002
---- ----
Net income (loss) as reported $(1,871) $1,098$ 2,874 $(6,493)
Less total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects 104 116
--------130 80
------ -------
Pro forma net income (loss) $(1,975) $ 982
========2,744 $(6,573)
======= =======
Basic and diluted net income (loss) per share
As reported $(0.12) $0.07$0.18 $(0.41)
Pro forma (0.12) 0.06
Diluted net income (loss) per share
As reported $(0.12) $0.07
Pro forma (0.12) 0.06
Six months ended
June 30,
2003 2002
---- ----
Net income (loss) as reported $(8,364) $(28,652)
Less total stock-based employee compensation expense
determined under fair value method for all awards, net of
related tax effects 184 187
-------- --------
Pro forma net income (loss) $(8,548) $(28,839)
======== ========
Basic net income (loss) per share
As reported $(0.52) $(1.79)
Pro forma (0.53) (1.80)
Diluted net income (loss) per share
As reported $(0.52) $(1.79)
Pro forma (0.53) (1.80)0.17 (0.41)
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 2004.2004 and in February
2004, extended the agreement through the end of March 2005. 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, in
October 2003, the availability was reduced to $60.0 million and in February
2004, the availability was increased to $80.0 million and in May 2004 was
increased to $100 million. At June 30,March 31, 2004 and 2003, and 2002, the Company had
outstanding under the agreement $70.0$80.0 million and $39.0$55.0 million, respectively,
and had $39.9$73.0 million and $85.1$60.0 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
sixthree months of 20032004 and 2002,2003, the Company received gross proceeds of $62.0$20.0
million and $37.0$42.0 million, respectively, from the sale of receivables and made
gross payments of $16.0 and $18.0$11.0 million respectively,in the three months ended March 31, 2003 under
the agreement. The Company made no gross payments in the first three months of
2004.
4. Inventories
Inventories consist of the following (in thousands):
June 30, 2003March 31, 2004 December 31, 2002
-------------2003
-------------- -----------------
Raw materials $ 53,87838,812 $ 22,71838,118
Work in process 36,837 46,67658,177 49,052
Finished goods 41,261 43,78048,292 38,051
Expendable parts and supplies 14,272 14,32015,140 12,915
--------- ---------
146,248 127,494160,421 138,136
LIFO reserve (3,874) (2,146)(17,014) (6,771)
--------- ---------
$ 142,374143,407 $ 125,348131,365
========= =========
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 $116.5$129.6 million and $98.2$110.0
million, included in the above totals (before the LIFO reserve) at June 30, 2003March 31,
2004 and December 31, 2002,2003, 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 $0.02$0.07 million and $0.1$0.08 million for
the three months ended March 31, 2004 and six months ended June 30, 2003, respectively, compared to
an income tax benefit of $0.05 million and an income tax expense of $0.1 million
for the three months and six months ended June 30, 2002, respectively.
6. Net Income Per Share Computations
The following is a reconciliation of the numerator and denominator of the basic
and diluted per share computations (in thousands except per share data):
Three months ended
June 30,March 31,
2004 2003 2002
---- ----
Income (numerator) amounts used for basic and diluted per share computations:
Income (loss) before cumulative effect of change in accounting principle $(1,871) $1,098
Cumulative effect of change in accounting principle - -
------- ------
Net income (loss) $(1,871) $1,098$ 2,874 $(6,493)
======= =============
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 16,020 16,011 15,994
====== ======
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 16,020 16,011 15,994
Plus: dilutive effect of stock options - 146
------ ------
Adjusted weighted average shares 16,011 16,140
====== ======
Basic and diluted per share data:
Income (loss) before cumulative effect of change in accounting principle $(0.12) $0.07
Cumulative effect of change in accounting principle - -
------ ------
Net income (loss) $(0.12) $0.07
====== ======
Six months ended
June 30,
2003 2002
---- ----
Income (numerator) amounts used for basic and diluted per share computations:
Income (loss) before cumulative effect of change in accounting principle $(8,364) $(3,325)
Cumulative effect of change in accounting principle - (25,327)
------- --------
Net income (loss) $(8,364) $(28,652)
======= ========
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 16,011 15,989
====== ======
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 16,011 15,989
Plus: dilutive effect of stock options -167 -
------ ------
Adjusted weighted average shares 16,187 16,011 15,989
====== ======
Net income (loss) per share data:
Basic and diluted per share data:
Income (loss) before cumulative effect of change in accounting principle $(0.52) $(0.21)
Cumulative effect of change in accounting principle - (1.58)
------ ------
Net income (loss) $(0.52) $(1.79)
======$0.18 $(0.41)
===== ======
Options to purchase 583,000 588,500 and 600,000 common shares, which equate to 31,177, 54,133 and 115,57477,089 incremental
common equivalent shares, respectively,were excluded from the calculation above for the three
months and six months ended June 30,March 31, 2003, and the six months ended
June 30, 2002 were excluded from the diluted calculation above as their effect would have been antidilutive. In
addition, options to purchase 1,118,5001,124,789 and 1,113,000 common shares for the
three months ended March 31, 2004 and six months ended June 30, 2003,
respectively, and 763,500 and 798,500 common shares for the three months and six
months ended June 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 secondlast three quarters of the year ending December 31, 2003
and the first quarter ending June 30, 2003,March 31, 2004, the Company's aluminum futures
contracts did not meet certain "effectiveness" requirements set forth in
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", including Statement of Financial Accounting
Standards No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS No. 133").
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 secondlast three quarters of 2003 and the first quarter of 20032004 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 June 30, 2003,March 31, 2004, the Company had $3.0$5.4 million of deferred net gains
recorded in accumulated other comprehensive income. Over the next twelve months,
approximately $2.8$4.2 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 June 30, 2003,March 31, 2004, the Company held open aluminum and natural gas
futures and forward contracts and aluminum options having maturity dates
extending through December 2005.2006. A net gain of $0.6$3.0 million and $0.4 million was recognized as a reduction
in cost of goods sold during the three months and six months ended June 30,
2003, respectively, and a net loss of
$0.04 million and $0.11$0.2 million was recognized in cost of goods sold during the three months ended
March 31, 2004 and six months ended
June 30, 2002,2003, 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.
During the fourth quarter of 2003, the Company performed its annual impairment
review of the Company's remaining goodwill balance relating to the Alflex
electrical products segment and determined that an additional goodwill
impairment write-down of $29.6 million was necessary. The impairment loss was
due to increased competition in the electrical products industry which lowered
the operating profits and cash flows during 2003 over what had been expected.
Based upon this trend, the long-term earnings and cash flow forecasts were
revised.
The following displays the changes in the carrying amount of goodwill in each of
the Company's reportable segments for the three months ended Marchsince December 31, 20022001 (in thousands). There
have beenwere no further changes in the carrying amount of goodwill sinceduring the three months ended
March 31, 2002:2004 and 2003:
Electrical
Aluminum Products Total
-------- ---------- -----------------
Balance December 31, 2001 $13,470 $60,729 $74,199
Goodwill impairment loss as a result of transitional
Impairment test related to adoption of SFAS No. 142 (13,470) (11,857) (25,327)
------- ------- -------
Balance MarchDecember 31, 2002 - 48,872 48,872
Goodwill impairment loss as a result of annual
Impairment test performed in fourth quarter - (29,607) (29,607)
------ ------- -------
Balance December 31, 2003 $ - $48,872 $48,872
=======$19,265 $19,265
====== ======= =======
The Company has no other intangible assets other than the goodwill discussed
above.
9. Pension Plans
The Company has two defined benefit pension plans covering certain salaried and
non-salaried employees. The components of net pension expense for the three
months ended March 31 are as follows (in thousands):
2004 2003
---- ----
Components of net pension expense:
Service cost $ 856 $ 755
Interest cost 1,747 1,632
Expected return on plan assets (1,715) (1,462)
Amortization of prior service cost (benefit) 46 (5)
Recognized net actuarial loss 341 355
------ ------
Net pension expense $1,275 $1,275
====== ======
The Company previously disclosed in its annual report to stockholders for the
year ended December 31, 2003, that the Company expected to contribute $4.7
million of contributions to the plans in the year ended December 31, 2004. As of
March 31, 2004, $0.2 million of contributions have been made.
10. Postretirement Benefits Other Than Pensions
The Company provides postretirement health care and life insurance benefits to
certain employees hired on or before September 1, 1998. The components of net
postretirement benefit expense for the three months ended March 31 are as
follows (in thousands):
2004 2003
---- ----
Components of net postretirement benefit expense:
Service cost $ 128 $155
Interest cost 748 1,005
Amortization of prior service cost (benefit) (2,373) (739)
Recognized net actuarial gain (66) (63)
------ -----
Net postretirement benefit expense (income) ($1,563) $358
====== =====
The Company previously disclosed in its annual report to stockholders for the
year ended December 31, 2003, that the Company expected to contribute $4.0
million of contributions to the plan in the year ended December 31, 2004. As of
March 31, 2004, $1.7 million of contributions have been made.
11. 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, 2002.2003. 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 business unitsbusinesses 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 ended March 31, 2004 and six months ended June 30,
2003 and 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 June 30, 2003March 31, 2004
- -----------------------------------------------------------------
Net sales to external customers $190,099 $25,021 $ -- $215,120$252,254 $31,823 $-- $284,077
Intersegment net sales 4,1406,023 -- (4,140)(6,023) --
Operating income (loss) 6,705 (27) (5,157) 1,52112,193 2,959 (8,608) 6,544
Depreciation 4,5484,573 429 641 5,643
Amortization -- -- 255 255
Total assets 326,745 62,419 13,064 402,228
Capital expenditures 1,523 595 -- 2,118
Three months ended March 31, 2003
- ---------------------------------
Net sales to external customers $187,286 $24,682 $-- $211,968
Intersegment net sales 5,647 -- (5,647) --
Operating income (loss) 4,886 (1,019) (7,073) (3,206)
Depreciation 4,584 559 -- 5,1075,143
Amortization -- -- 222 222
Total assets 302,824 82,211 9,952 394,987315,242 85,245 8,842 409,329
Capital expenditures 1,008 266 1,219 2,493
Three months ended June 30, 2002
- --------------------------------
Net sales to external customers $223,999 $27,729 $ -- $251,728
Intersegment net sales 4,577 -- (4,577) --
Operating income (loss) 7,764 1,969 (5,044) 4,689
Depreciation 4,758 571 -- 5,329
Amortization -- -- 218 218
Total assets 319,837 89,244 1,851 410,932
Capital expenditures 1,755 10 -- 1,765
Six months ended June 30, 2003
- ------------------------------
Net sales to external customers $377,385 $49,703 $ -- $427,088
Intersegment net sales 8,516 -- (8,516) --
Operating income (loss) 11,159 (1,046) (11,798) (1,685)
Depreciation 9,132 1,118 -- 10,250
Amortization -- -- 444 444
Total assets 302,824 82,211 9,952 394,987
Capital expenditures 3,567 268 3,256 7,091
Six months ended June 30, 2002
- ------------------------------
Net sales to external customers $416,957 $56,629 $ -- $473,586
Intersegment net sales 9,534 -- (9,534) --
Operating income (loss) 9,978 3,932 (9,941) 3,969
Depreciation 9,503 1,141 -- 10,644
Amortization -- -- 537 537
Total assets 319,837 89,244 1,851 410,932
Capital expenditures 2,951 243 -- 3,1942,559 2 2,037 4,598
10.12. 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 June 30, 2003March 31, 2004 and December 31, 2002,2003 and a
statement of operations for the three months and six months ended June 30, 2003 and 2002 and statement of cash flows for the sixthree months ended
June 30, 2003March 31, 2004 and 2002.2003.
Combining Balance Sheet at June 30,March 31, 2004
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ----------- ----------- ------------ --------
Assets
Current assets:
Cash and cash equivalents $ -- $ 836 $ -- $ -- $ 836
Accounts receivable, net -- 299,230 -- (298,679) 551
Inventories -- 143,407 -- -- 143,407
Net residual interest in receivables sold -- -- 73,006 -- 73,006
Prepayments and other current assets 435 18,548 -- -- 18,983
--------- --------- --------- --------- ---------
Total current assets 435 462,021 73,006 (298,679) 236,783
Property, plant and equipment, net 2 138,425 -- -- 138,427
Goodwill -- 19,265 -- -- 19,265
Other noncurrent assets 411,129 7,100 -- (410,476) 7,753
--------- --------- --------- --------- ---------
Total assets $ 411,566 $ 626,811 $ 73,006 $(709,155) $ 402,228
========= ========= ========= ========= =========
Liabilities
Current liabilities:
Long-term debt due within one year $ -- $ 5,104 $ -- $ -- $ 5,104
Accounts payable 176,770 57,741 121,916 (298,679) 57,748
Accrued liabilities 9,446 22,170 (584) -- 31,032
--------- --------- --------- --------- ---------
Total current liabilities 186,216 85,015 121,332 (298,679) 93,884
Long-term debt 125,000 -- -- -- 125,000
Other long-term liabilities -- 3,707 -- -- 3,707
Accrued pension benefits -- 31,234 -- -- 31,234
Accrued postretirement benefits -- 63,898 -- -- 63,898
--------- --------- --------- --------- ---------
Total liabilities 311,216 183,854 121,332 (298,679) 317,723
--------- --------- --------- --------- ---------
Commitments and contingencies -- -- -- -- --
Stockholders' Equity
Common stock 160 1 -- (1) 160
Additional paid-in capital 405,793 486,727 5,000 (491,727) 405,793
Accumulated deficit (305,603) (27,926) (53,326) 81,252 (305,603)
Accumulated other comprehensive income:
Minimum pension liability adjustment -- (21,276) -- -- (21,276)
Effects of cash flow hedges -- 5,431 -- -- 5,431
--------- --------- --------- --------- ---------
Total stockholders' equity 100,350 442,957 (48,326) (410,476) 84,505
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 411,566 $ 626,811 $ 73,006 $(709,155) $ 402,228
========= ========= ========= ========= =========
Combining Balance Sheet at December 31, 2003
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ----------- ----------- ------------ --------
Assets
Current assets:
Cash and cash equivalents $ -- $ 6,588-- $ -- $ -- $ 6,588--
Accounts receivable, net -- 255,688288,989 -- (255,477) 211(288,538) 451
Inventories -- 142,374131,365 -- -- 142,374131,365
Net residual interest in receivables sold -- -- 39,86564,214 -- 39,86564,214
Prepayments and other current assets 435 7,38413,759 -- -- 7,81914,194
--------- --------- --------- --------- ---------
Total current assets 435 412,034 39,865 (255,477) 196,857434,113 64,214 (288,538) 210,224
Property, plant and equipment, net -- 143,6143 142,032 -- -- 143,614142,035
Goodwill net -- 48,87219,265 -- -- 48,87219,265
Other noncurrent assets 418,438 4,664404,703 7,040 -- (417,458) 5,644(403,941) 7,802
--------- --------- --------- --------- ---------
Total assets $ 418,873405,141 $ 609,184602,450 $ 39,865 $(672,935)64,214 $(692,479) $ 394,987379,326
========= ========= ========= ========= =========
Liabilities
Current liabilities:
Outstanding checks in excess of deposits $ -- $ 733 $ -- $ -- $ 733
Accounts payable $ 170,018 $ 39,347 $ 85,459 $(255,477) $ 39,347176,832 50,303 111,711 (288,538) 50,308
Accrued liabilities 5,899 19,029 (806)5,923 18,576 (490) -- 24,12224,009
--------- --------- --------- --------- ---------
Total current liabilities 175,917 58,376 84,653 (255,477) 63,469182,755 69,612 111,221 (288,538) 75,050
Long-term debt 125,000 -- -- -- 125,000
Other long-term liabilities -- 4,9693,845 -- -- 4,9693,845
Accrued pension benefits -- 29,14930,147 -- -- 29,14930,147
Accrued postretirement benefits -- 72,83767,146 -- -- 72,83767,146
--------- --------- --------- --------- ---------
Total liabilities 300,917 165,331 84,653 (255,477) 295,424307,755 170,750 111,221 (288,538) 301,188
--------- --------- --------- --------- ---------
Commitments and contingencies -- -- -- -- --
Stockholders' Equity
Common stock 160 1 -- (1) 160
Additional paid-in capital 405,703 486,727 5,000 (491,727) 405,703
Accumulated deficit (287,907) (24,482) (49,788) 74,270 (287,907)(308,477) (35,746) (52,041) 87,787 (308,477)
Accumulated other comprehensive income:
Unrealized gain on security -- -- 34 -- 34
Minimum pension liability adjustment -- (21,391)(21,276) -- -- (21,391)(21,276)
Effects of cash flow hedges -- 2,9981,994 -- -- 2,9981,994
--------- --------- --------- --------- ---------
Total stockholders' equity 117,956 443,853 (44,788) (417,458) 99,56397,386 431,700 (47,007) (403,941) 78,138
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 418,873405,141 $ 609,184602,450 $ 39,865 $(672,935)64,214 $(692,479) $ 394,987379,326
========= ========= ========= ========= =========
Combining Balance Sheet at DecemberStatement of Operations for the three months ended March 31, 20022004
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ----------- ----------- ------------ ----------------- --------- --------- ---------
Assets
Current assets:
Cash and cash equivalentsNet sales $ -- $ 13,211284,077 $ -- $ -- $ 13,211
Accounts receivable, net284,077
Cost of goods sold -- 286,847 -- (286,781) 66
Inventories -- 125,348263,620 -- -- 125,348
Net residual interest in receivables sold -- -- 81,195 -- 81,195
Prepayments and other current assets 435 6,698 -- -- 7,133263,620
--------- --------- --------- --------- ---------
Total current assets 435 432,104 81,195 (286,781) 226,953
Property, plant and equipment, netGross profit -- 146,96820,457 -- -- 146,968
Goodwill, net20,457
Selling, general and administrative expenses 193 13,675 45 -- 48,872 -- -- 48,872
Other noncurrent assets 419,913 4,913 -- (418,715) 6,11113,913
--------- --------- --------- --------- ---------
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)Operating income (loss) (193) 6,782 (45) -- 28,5276,544
Other income (expense), net 6,535 383 111 (6,535) 494
Interest income (expense), net (3,468) 725 (1,351) -- (4,094)
--------- --------- --------- --------- ---------
Total current liabilities 167,517 83,109 124,276 (286,781) 88,121
Long-term debt 125,000Income (loss) before income taxes 2,874 7,890 (1,285) (6,535) 2,944
Income tax expense -- 70 -- -- -- 125,000
Other long-term liabilities -- 5,183 -- -- 5,183
Accrued pension benefits -- 26,743 -- -- 26,743
Accrued postretirement benefits -- 76,670 -- -- 76,67070
--------- --------- --------- --------- ---------
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' equityNet income (loss) $ 420,3482,874 $ 632,8577,820 $ 81,195 $(705,496)(1,285) $ 428,904(6,535) $ 2,874
========= ========= ========= ========= =========
Combining Statement of Operations for the three months ended June 30,March 31, 2003
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- --------- --------- --------- ---------
Net sales $ -- $ 215,120211,968 $ -- $ -- $ 215,120211,968
Cost of goods sold -- 202,906202,650 -- -- 202,906202,650
--------- --------- --------- --------- ---------
Gross profit -- 12,2149,318 -- -- 12,2149,318
Selling, general and administrative expenses 44 10,649128 12,396 -- -- 10,69312,524
--------- --------- --------- --------- ---------
Operating income (loss) (44) 1,565(128) (3,078) -- -- 1,521(3,206)
Other income (expense), net (1,640) 414(2,897) 494 -- 1,640 4142,897 494
Interest income (expense), net (3,467) 680 (999)(3,468) 475 (708) -- (3,786)(3,701)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle (5,151) 2,659 (999) 1,640 (1,851)(6,493) (2,109) (708) 2,897 (6,413)
Income tax expense -- 2080 -- -- 20
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle (5,151) 2,639 (999) 1,640 (1,871)
Cumulative effect of change in accounting principle -- -- -- -- --80
--------- --------- --------- --------- ---------
Net income (loss) $ (5,151)(6,493) $ 2,639(2,189) $ (999)(708) $ 1,6402,897 $ (1,871)(6,493)
========= ========= ========= ========= =========
Combining Statement of IncomeCash Flows for the three months ended June 30, 2002March 31, 2004
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ---------- ---------- --------- --------- --------- -------------------
Cash flows from operating activities:
Net salesincome (loss) $ 2,874 $ 7,820 $ (1,285) $ (6,535) $ 2,874
Adjustments to reconcile net income (loss) to
net cash (used in) operations:
Depreciation 1 5,642 -- -- 5,643
Amortization -- 244 11 -- 255
Loss on disposal of property, plant and equipment -- 21 -- -- 21
Issuance of common stock in connection with stock awards 90 -- -- -- 90
Equity in undistributed net income of subsidiaries (6,535) -- -- 6,535 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net -- (10,241) -- 10,141 (100)
(Increase) in inventories -- (12,042) -- -- (12,042)
(Increase) in net residual interest in receivables sold -- -- (8,837) -- (8,837)
(Increase) in prepayments and other current assets -- (1,352) -- -- (1,352)
Decrease (increase) in other noncurrent assets 109 (304) -- -- (195)
(Decrease) increase in accounts payable (62) 7,438 10,205 (10,141) 7,440
Increase (decrease) in accrued liabilities 3,523 3,594 (94) -- 7,023
(Decrease) in other liabilities -- (2,299) -- -- (2,299)
-------- -------- -------- -------- --------
Net cash (used in) operating activities -- (1,479) -- -- (1,479)
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment -- (2,118) -- -- (2,118)
Proceeds from sale of property, plant and equipment -- 62 -- -- 62
-------- -------- -------- -------- --------
Net cash (used in) investing activities -- (2,056) -- -- (2,056)
-------- -------- -------- -------- --------
Cash flows from financing activities:
(Decrease) in outstanding checks in excess of deposits -- (733) -- -- (733)
Proceeds from long-term debt -- 77,648 -- -- 77,648
Repayments of long-term debt -- (72,544) -- -- (72,544)
-------- -------- -------- -------- --------
Net cash provided by financing activities -- 4,371 -- -- 4,371
-------- -------- -------- -------- --------
Net increase in cash and cash equivalents -- 836 -- -- 836
Cash and cash equivalents at beginning of period -- -- -- -- --
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ -- $ 251,728836 $ -- $ -- $ 251,728
Cost of goods sold -- 236,044 -- -- 236,044
--------- --------- --------- --------- ---------
Gross profit -- 15,684 -- -- 15,684
Selling, general and administrative expenses 57 10,938 -- -- 10,995
--------- --------- --------- --------- ---------
Operating income (loss) (57) 4,746 -- -- 4,689
Other income (expense), net 4,622 213 -- (4,622) 213
Interest income (expense), net (3,467) 948 (1,332) -- (3,851)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 1,098 5,907 (1,332) (4,622) 1,051
Income tax expense -- (47) -- -- (47)
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle 1,098 5,954 (1,332) (4,622) 1,098
Cumulative effect of change in accounting principle -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ 1,098 $ 5,954 $ (1,332) $ (4,622) $ 1,098
========= ========= ========= ========= =========
Combining Statement of Operations for the six months ended June 30, 2003
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- --------- --------- --------- ---------
Net sales $ -- $ 427,088 $ -- $ -- $ 427,088
Cost of goods sold -- 405,556 -- -- 405,556
--------- --------- --------- --------- ---------
Gross profit -- 21,532 -- -- 21,532
Selling, general and administrative expenses 172 23,045 -- -- 23,217
--------- --------- --------- --------- ---------
Operating income (loss) (172) (1,513) -- -- (1,685)
Other income (expense), net (1,257) 908 -- 1,257 908
Interest income (expense), net (6,935) 1,155 (1,707) -- (7,487)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle (8,364) 550 (1,707) 1,257 (8,264)
Income tax expense -- 100 -- -- 100
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle (8,364) 450 (1,707) 1,257 (8,364)
Cumulative effect of change in accounting principle -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ (8,364) $ 450 $ (1,707) $ 1,257 $ (8,364)
========= ========= ========= ========= =========
Combining Statement of Income for the six months ended June 30, 2002
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- --------- --------- --------- ---------
Net sales $ -- $ 473,586 $ -- $ -- $ 473,586
Cost of goods sold -- 447,362 -- -- 447,362
--------- --------- --------- --------- ---------
Gross profit -- 26,224 -- -- 26,224
Selling, general and administrative expenses 173 22,082 -- -- 22,255
--------- --------- --------- --------- ---------
Operating income (loss) (173) 4,142 -- -- 3,969
Other income (expense), net 3,781 486 -- (3,781) 486
Interest income (expense), net (6,933) 1,496 (2,265) -- (7,702)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle (3,325) 6,124 (2,265) (3,781) (3,247)
Income tax expense -- 78 -- -- 78
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle (3,325) 6,046 (2,265) (3,781) (3,325)
Cumulative effect of change in accounting principle (25,327) (25,327) -- 25,327 (25,327)
--------- --------- --------- --------- ---------
Net income (loss) $ (28,652) $ (19,281) $ (2,265) $ 21,546 $ (28,652)
========= ========= ========= ========= =========836
======== ======== ======== ======== ========
Combining Statement of Cash Flows for the sixthree months ended June 30,March 31, 2003
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ---------- ---------- --------- ----------
Cash flows from operating activities:
Net income (loss) $ (8,364)(6,493) $ 450(2,189) $ (1,707)(708) $ 1,2572,897 $ (8,364)(6,493)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operations:
Depreciation -- 10,2505,143 -- -- 10,2505,143
Amortization -- 444222 -- -- 444222
Loss on disposal of property, plant and equipment -- 4012 -- -- 4012
Issuance of common stock in connection with stock awards 90 -- -- -- 90
Equity in undistributed net income of subsidiaries 1,2572,897 -- -- (1,257)(2,897) --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable, net -- 31,15919,668 -- (31,304) (145)(19,811) (143)
(Increase) in inventories -- (17,026)(15,207) -- -- (17,026)(15,207)
Decrease in net residual interest in receivables sold -- -- 41,33021,200 -- 41,330
Decrease21,200
(Increase) in prepayments and other current assets -- 885(1,011) -- -- 885(1,011)
Decrease (increase) in other noncurrent assets 218 (195)109 (87) -- -- 2322
Increase (decrease) in accounts payable 8,360 (20,247) (39,664) 31,304 (20,247)747 (13,761) (20,558) 19,811 (13,761)
Increase (decrease) in accrued liabilities 40 (3,806) 413,451 (2,515) 66 -- (3,725)
(Decrease)1,002
Increase in other liabilities -- (1,641)691 -- -- (1,641)691
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities 1,601 313801 (9,034) -- -- 1,914(8,233)
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment -- (7,091)(4,598) -- -- (7,091)(4,598)
Proceeds from sale of property, plant and equipment -- 1553 -- -- 1553
-------- -------- -------- -------- --------
Net cash (used in) investing activities -- (6,936)(4,595) -- -- (6,936)(4,595)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Increase in outstanding checks in excess of deposits -- 418 -- -- 418
Proceeds from long-term debt -- 60,39833,707 -- -- 60,39833,707
Repayments of long-term debt -- (60,398)(33,707) -- -- (60,398)(33,707)
Cash dividends paid (1,601)(801) -- -- -- (1,601)(801)
-------- -------- -------- -------- --------
Net cash (used in) provided by financing activities (1,601)(801) 418 -- -- -- (1,601)(383)
-------- -------- -------- -------- --------
Net (decrease) in cash and cash equivalents -- (6,623)(13,211) -- -- (6,623)(13,211)
Cash and cash equivalents at beginning of period -- 13,211 -- -- 13,211
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ -- $ 6,588-- $ -- $ -- $ 6,588--
======== ======== ======== ======== ========
Combining13. Contingencies
The Company disclosed in its annual report to stockholders for the year ended
December 31, 2003 that Goldendale Aluminum Company ("Goldendale Aluminum") had
filed for bankruptcy protection in December 2003. The Company still cannot
presently quantify any additional liability that may be incurred as a result of
Goldendale Aluminum's bankruptcy filing. Reference is made to footnote 13
"Contingencies" in the Company's annual report to stockholders for the year
ended December 31, 2003 for additional information.
14. Recently Issued Accounting Standards
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"), and issued a
revision in December 2003. 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. FIN 46 was effective for the Company in the quarter ending March
31, 2004. The Statement's initial adoption did not have a material impact on the
Company's results of operations or financial position.
In December 2003, the Financial Accounting Standards Board issued Statement of
Cash FlowsFinancial Accounting Standard No. 132 (revised 2003), "Employers' Disclosures
about Pensions and Other Postretirement Benefits". The Statement requires
additional disclosures about an employer's pension plans and postretirement
benefits plans such as: the types of plan assets, investment strategy,
measurement date, plan obligations, cash flows, and components of net periodic
benefit cost recognized during interim periods. See notes 9 and 10 to the
condensed consolidated financial statements for the six months ended June 30, 2002
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ---------- ---------- --------- ----------
Cash flows from operating activities:
Net income (loss) $(28,652) $(19,281) $ (2,265) $ 21,546 $(28,652)
Adjustments to reconcile net income (loss) to
net cash provided by operations:
Depreciation -- 10,644 -- -- 10,644
Amortization -- 537 -- -- 537
Goodwill impairment charge 25,327 25,327 -- (25,327) 25,327
Loss on disposal of property, plant and equipment -- 81 -- -- 81
Issuance of common stock in connection with stock awards 170 -- -- -- 170
Equity in undistributed net income of subsidiaries (3,781) -- -- 3,781 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net -- (11,208) -- 11,217 9
Decrease in inventories -- 3,408 -- -- 3,408
(Increase) in net residual interest in receivables sold -- -- (2,805) -- (2,805)
Decrease in prepayments and other current assets -- 515 -- -- 515
Decrease (increase) in other noncurrent assets 217 (1,139) -- -- (922)
Increase (decrease) in accounts payable 6,342 2,949 4,875 (11,217) 2,949
Increase (decrease) in accrued liabilities 415 (435) 195 -- 175
(Decrease) in other liabilities -- (3,304) -- -- (3,304)
-------- -------- -------- -------- --------
Net cash provided by operating activities 38 8,094 -- -- 8,132
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment -- (3,194) -- -- (3,194)
Proceeds from sale of property, plant and equipment -- 3 -- -- 3
-------- -------- -------- -------- --------
Net cash (used in) investing activities -- (3,191) -- -- (3,191)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Proceeds from long-term debt -- 45,970 -- -- 45,970
Repayments of long-term debt -- (45,970) -- -- (45,970)
Repayments of notes receivable from sale of common stock 1,561 -- -- -- 1,561
Cash dividends paid (1,599) -- -- -- (1,599)
-------- -------- -------- -------- --------
Net cash (used in) financing activities (38) -- -- -- (38)
-------- -------- -------- -------- --------
Net increase in cash and cash equivalents -- 4,903 -- -- 4,903
Cash and cash equivalents at beginning of period -- 6,393 -- -- 6,393
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ -- $ 11,296 $ -- $ -- $ 11,296
======== ======== ======== ======== ========
required additional
disclosures for interim periods.
In January 2004, the Financial Accounting Standards Board issued Staff Position
No. FAS 106-1, "Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" ("FSP FAS 106-1").
FSP FAS 106-1 allows companies to assess the effect of the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 ("the Act") on their
postretirement benefit obligations and costs and reflect the effects in their
financial statements, pursuant to SFAS No. 106, "Employer's Accounting for
Postretirement Benefits Other Than Pensions." Companies are also allowed to make
a one-time election to defer accounting for the effects of the Act until
authoritative guidance is issued. The guidance in FSP FAS 106-1 is effective for
years ending after December 7, 2003. In accordance with FSP FAS 106-1, the
accumulated postretirement benefit obligation and net periodic postretirement
benefit expense (income) in the Company's consolidated financial statements do
not reflect the effects of the Act on the Company's postretirement health care
plan. In addition, specific authoritative guidance on the accounting for the
federal subsidy, one of the provisions of the Act, is pending, and that
guidance, when issued, could require the Company to change previously reported
information.
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, 2002,2003, including footnote 1 which describes the Company's
significant accounting policies including its use of estimates. See the caption
entitled "Application of Critical Accounting Policies" in this section for
further information. The following discussion contains statements which are
forward-looking rather than historical fact. These forward-looking statements
are made pursuant to the safe harbor provisions of the Private Securities
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 operates two businesses, an aluminum business and an electrical
products business. The aluminum business is the larger of the two, accounting
for approximately 89% of net sales in 2003. The aluminum business manufactures
non-heat treat coiledcoil aluminum sheet forproducts, generally referred to as common
alloy products, that are sold through distributors and theto end-users, principally
in building and construction, transportation, construction and consumer durables end use markets and electrical flexible conduitwelded tube
product markets. Both businesses are highly cyclical in nature and prewired armored cableare affected
by global economic conditions, market competition, product development and
commercialization and other such factors that influence supply and demand for
the commercial
construction and renovation markets.products produced by the Company.
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 primary 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 materialmaterials ("material
margins") and its unit cost of converting raw materialmaterials into its products
("conversion cost"). While changes in aluminum and copper prices can cause the
Company's net sales to changevary significantly from period to period, net income is
more directly impacted by the fluctuationfluctuations in material margins.margins and conversion cost.
The price of aluminum metal affects the price of the Company's products and in
the longer term can have an effect on the competitive position of aluminum in
relation to alternative materials. The price of primary metal is determined
largely by worldwide supply and demand conditions and is highly cyclical. The
price of primary aluminum in world markets greatly influences the price of
aluminum scrap, the Company's principal raw material. Significant movements in
the price of primary aluminum can affect the Company's margins, however,
aluminum sheet prices do not always move simultaneously nor necessarily to the
same degree as the primary markets. The Company seeks to manage its material
margins by focusing on higher margin products and by sourcing the scrap and
primary metal markets in the most cost-effective manner. An important element in
the Company's management of its material margins involves the use of futures
contracts to hedge the Company's exposure to the risk of changes in aluminum
prices.
The use of futures contracts to hedge the Company's exposure to changes in
aluminum prices can best be understood by following aluminum metal
sales/purchases flows. Aluminum metal sold to customers is typically priced by
industry participants, including the Company, at a market-based cents-per-pound
differential ("rolling margin") over the prevailing market price of a
base-reference primary metal type ("P1020"). The rolling margin differs for each
coil type sold, depending on the specifications of the metal, the cost of
manufacturing the metal, and by prevailing supply and demand conditions, as
reflected by competitors' price offerings and general economic trends. The
base-reference primary metal, P1020, is used in the sales pricing formula
because of its widespread acceptance as a reference value for the price of
primary aluminum. The P1020 price is determined in the market by the market
price of primary aluminum sold on the London Metal Exchange ("LME") commodity
market, plus a market-based cents-per-pound price differential ("Mid-West
Premium") covering the cost of transportation from the smelter to the Midwestern
United States.
On the raw materials side of the business, the Company purchases the great
majority of its scrap aluminum and its primary aluminum at a discount or premium
to the prevailing LME price, the particular differential in each case based on
the qualities of the type of metal being purchased. (Discounts from LME relating
to scrap aluminum purchases are generally referred to as "scrap spreads"). Like
its counterpart base-reference P1020 for sales transactions, the LME serves as a
base-reference for raw material purchase transactions in the industry because of
its widespread acceptance as a value indicator. Since the P1020 market price
used to set selling prices is itself directly linked to the market price of LME
as described in the preceding paragraph, the LME serves as a common component in
pricing both raw material purchases and finished product sales. Common use of
the LME as a component in both purchase and sale pricing practices enables the
Company to substantially, but not exactly, "lock-in" material margins on its
sales without simultaneously buying physical metal to satisfy customers' fixed
price sales orders. This is accomplished by the Company's purchase of LME
futures contracts, which serve as economic substitutes for physical metal
purchases, at the same time that selling prices are fixed. (When the metal to
satisfy the fixed price sale commitments is physically purchased and fixed in
price the LME futures contracts are sold, resulting in an economically effective
cash flow hedge of the metal component of the transactions at issue.)
The Company's metal hedging practices have several distinct advantages. The
foremost of these advantages is that by executing the hedge strategy described
the Company can continue to make fixed price sales for delivery to customers in
future periods without assuming the significant metal price risk associated with
changes in the LME. If the Company did not hedge its future metal delivery
commitments by purchasing futures contracts on the LME, the Company,
alternatively, could avoid metal price risk by simultaneously buying physical
metal to match its future sales commitments; however, this approach would
significantly increase the Company's working capital requirements to accommodate
the inventory purchases and create serious logistical storage and transportation
problems. If the Company were to assume metal price risk, by neither hedging its
fixed price sales commitments with futures contracts nor simultaneously buying
physical metal, its exposure to metal price changes could threaten the Company's
solvency in periods of metal price fluctuations.
Despite the obvious benefit (in an economic and cash flow sense) of employing
LME futures contracts to hedge its metal purchases, the Company notes that the
accounting treatment accorded hedge gains/losses realized during the last three
quarters of 2003 and the first quarter of 2004 required that such gains/losses
be marked-to-market as prescribed by Statement of Financial Accounting Standards
No. 133 ("SFAS No. 133"). This mark-to-market treatment resulted from a
determination that the hedges did not meet certain "effectiveness" requirements
that would have enabled such realized gains/losses to be recorded in other
comprehensive income for later reclassification into cost of goods sold when the
hedged transactions occur. The "effectiveness" standard required to be met for
deferral treatment of the hedge gains/losses is predicated on a statistically
based high degree of correlation between price changes in the metal purchases
being hedged and price changes in the hedge instruments, the LME futures
contracts. The requisite correlation was not met during the last three quarters
of 2003 and the first quarter of 2004 due to the fact that the variability in
price changes relating to unhedged components of the metal purchases being
hedged (principally scrap spreads) did not move in tandem with hedged components
to the degree that would statistically demonstrate the requisite correlation.
Recognizing in income rather than deferring the hedge gains/losses as required
by SFAS No. 133 had the effect of increasing 2003 material margins, pretax
income and net income by approximately $7.0 million, that otherwise would have
been recorded in other comprehensive income and matched to hedged metal
purchases in 2004. Consequently, 2004 material margins when the hedged
transactions occur have been and will be adversely affected by the $7.0 million
which was required under SFAS No. 133 to be recognized in 2003 (see the section
entitled "Risk Management" for additional information regarding the Company's
hedging programs.) The Company had estimated at the end of 2003 that, absent any
other effects that arise from 2004 transactions, the $7.0 million adverse impact
in 2004 would be distributed approximately $3.3 million in the first quarter,
$1.7 million in the second quarter, $1.2 million in the third quarter and $0.8
million in the fourth quarter. During the first halfquarter of 2004, new
transactions were entered into which increased material margins, pretax income
and net income by approximately $6.3 million or a net favorable effect on the
first quarter of $3.0 million after the reversal of 2003 transactions mentioned
above of $3.3 million. At March 31, 2004, the cumulative marked-to-market
adjustments described herein would have the effect of reducing future period
material margins by approximately $10.0 million (excluding the effects of new
marked-to-market adjustments arising in the future). The $10.0 million adverse
impact would be distributed approximately $5.0 million in the second quarter of
2004, $3.1 million in the third quarter of 2004, $1.8 million in the fourth
quarter of 2004 and $0.1 million in 2005.
During the first quarter of 2004, shipments of the Company's aluminum sheet
products decreasedincreased by 19%32% from the first half of 2002 due to weak economic
conditions. Contributing to the decline in aluminum shipments was 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 half of 2003 were higher than the first six months of 2002
helpingdue to partially offset the sales volume decline. The improvementstrengthening in
margin
was principally the outcome of initiatives to: maintain selling price increases
introduced in the first quarter of 2003; increase the volume of product
available for the Company's higher value added products; and continue to
actively pursue new markets offering higher margin opportunities than the
Company's traditional high volume commoditycertain markets. Demand for the Company's electrical products decreasedalso increased
during the first halfquarter of 2003.2004. Shipments were down 7%up 11% compared to the first
halfquarter of 20022003 reflecting continued weaknessstrengthening in key markets in the electrical
products sector, particularly commercial construction. Material margins for the first half of
2003 decreased 16% from the first six months of 2002. Lower net selling prices
due to the competitive price environment more than offset a decrease in
manufacturing costs per foot in the first six months of 2003 compared to the
first half of 2002 and resulted in the decrease in material margins for the
first half of 2003 versus the first six months of 2002. The decrease in
manufacturing costs per foot was due to lower overtime labor costs and other
cost reductions.
During the second quarter of 2003, the Company implemented changes to its
postretirement medical insurance program applicable to all non-bargaining unit
Kentucky employees, limiting eligibility and increasing premiums. Because of
these changes, the Company realized a second quarter benefit of approximately $2.5$6.5 million
after tax or $0.16$0.40 per share. The Company recognized thisshare in 2003 with the benefit allocated approximately
one-half as reductions of approximately $1.3 milliona reduction in cost of goods sold and $1.2
millionone-half in selling, general
and administrative expenses. In addition to the effect on 2003, the secondCompany
realized a benefit of approximately $2.1 million after tax or $0.13 per share in
the first quarter of 2003, the Company2004 and estimates that net income will be increased
approximately $2.0$8.3 million in each offor the third and fourth quarters
of 2003, approximately $8.3 millionfull year 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 for the first quarter of 2002,
giving effect to the change in accounting principle, was $29.8 million or $1.86
per diluted share. See the caption entitled "Cumulative effect of change in
accounting principle" in the following section and note 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, 20022003 for additional information.
Results of Operations for the three months ended March 31, 2004 and six months ended June 30, 2003
and 2002
Net Sales. Net sales for the quarter ended June 30, 2003 decreased 15%March 31, 2004, increased 34% to
$215$284.1 million (including $25.0$31.8 million from Alflex) from $252$212.0 million
(including $27.7$24.7 million from Alflex) for the same period in 2002.2003. The decreaseincrease
is due to the combined effect of lowerhigher aluminum and electrical product
shipments and lower net
selling prices of electrical products which more than offset an increase inhigher net selling prices of aluminum and electrical products. As
mentioned previously, the increased aluminum shipments were primarily due to
strengthening in certain markets. Unit sales volume of aluminum decreased 25%increased 32% to
178.2241.9 million pounds for the secondfirst quarter of 20032004 from 237.9183.7 million pounds for
the secondfirst quarter of 2002.2003. Alflex unit sales volume was 111.5127.7 million feet for
the secondfirst quarter of 2003, a decrease of 6%2004 versus 118.5114.9 million feet for the comparable period in
2002.2003, an increase of 11%. As mentioned previously, the decreased aluminum
and electrical product shipments wereincrease was primarily
due to difficult business conditionsa strengthening in both businesses. Net sales for the six-month period ended June 30, 2003, were
$427 million (including $49.7 million from Alflex), a 10% decrease from the $474
million recordedkey markets in the first half of 2002 (including $56.6 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 which more than offset an increase in net selling prices of aluminum products.
Unit sales volume of aluminum was 361.9 million pounds for the first half of
2003, a decrease of 19% from the 447.4 million pounds for the first half of
2002. Alflex unit sales volume was 226.4 million feet for the first six months
of 2003, a decrease of 7%, versus 244.5 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.sector,
particularly commercial construction.
Gross Profit. Gross profit for the quarter ended June 30, 2003, decreasedMarch 31, 2004, increased to
$12.2$20.5 million (5.7%(7.2% of net sales) from $15.7$9.3 million (6.2%(4.4% of net sales) for the
same period in 2002. Gross profit for the six months ended June 30, 20032003. This increase was $21.5 million (5.0% of net sales) versus $26.2 million (5.5% of net sales) for
the comparable period in 2002. Contributingrelated to the second quarter decrease in
gross profit were decreasesincreases in both the Aluminum
business and Alflex. Alflex'sThe Aluminum business gross profit decrease wasincreased primarily due
to higher shipment volumes, lower volumemanufacturing unit costs and lower material
margins which were only partially offset by a decrease in unit manufacturing
costs. The Aluminum business's decrease in gross profit was primarily due to
lower volume which more than offset an increase in material margins and the
benefit recorded in cost of goods
sold relatingreductions related to the Company'saforementioned changes to itsthe Company's
postretirement medical insurance program. The six-month decrease reflectedThese items were partially offset by
the net effecteffects of lower material margins despite the fact there was a net favorable
effect as a result of the mark-to-market hedge adjustments also mentioned
previously. The lower material margins were primarily due to the affects of a
competitive marketplace, inventory mix, melt loss and increased unit manufacturing costshardeners cost increases.
The gross profit increase at Alflex that more than offset an increase inreflects the Aluminum business's gross profit
despitenet effects of higher shipment
volume, higher material margins and lower shipments volume.manufacturing unit costs.
Operating Income. The Company had operating income of $1.5$6.5 million for the
secondfirst quarter of 20032004 compared with operating income of $4.7 million for the
second quarter of 2002. For the six-month period ended June 30, 2003, the
Company had an operating loss of $1.7 million, versus operating income of $4.0$3.2 million for the
first halfquarter of 2002. The decrease2003. This increase was related to increases in operating income for the
second quarter was primarily due to reduced operating income at both Alflex and the
Aluminum business due to the factors describedand Alflex. The Aluminum business had an operating income of
$12.2 million in the gross profit sectionfirst quarter of 2004 compared to operating income of $4.9
million in the preceding paragraph. The six-month decrease infirst quarter of 2003 while Alflex had operating income was
related primarilyof $3.0
million in the first quarter of 2004 compared to the combined effect of Alflex which had an operating loss of $1.0
million in the first halfquarter of 2003 compared to operating income of $3.9
million in the first six months of 2002 and an increase in selling, general and
administrative expenses which more than offset the increase in operating income
of the Aluminum business.2003. The changes in the operating income of Alflex and the
Aluminum business and Alflex were primarily due to the factors described in the
gross profit section in the preceding paragraph. These combined increases more
than offset an increase in selling, general and administrative expenses.
Selling, general and administrative expenses during the secondfirst quarter of 20032004
were $10.7$13.9 million, compared with $11.0$12.5 million for the same period in 2002 and were $23.2 million for the six
months ended June 30, 2003, compared with $22.3 million for the same period in
2002.2003. The second quarter decrease in selling, general and administrative
expenses is primarily due to a reduction in postretirement medical expense
relating to the changes made in the postretirement medical program during the
second quarter of 2003 which more than offset an increase in professional
service costs principally associated with the Company's project to upgrade its
information technology systems. The six-month
increase in selling, general and administrative expenses is primarily due to
the combined increase in
professional service costs principally associated with the Company's projecthigher accruals for employee incentive plans, increased depreciation expense due
to upgrade itsthe information technology systems upgrade, higher sales commissions due to
increased sales at Alflex and insurance costs which more thanincreased professional service costs. These items
were partially offset by the second quarter of 2003 reduction in postretirement medical expense
described previously.
Cumulative effect of change in accounting principle. A non-cash goodwill
impairment charge of $25.3 million was recorded as a cumulative effect of change
in accounting principle as of January 1, 2002 under SFAS No.142. See note 8 to
the condensed consolidated financial statements for additional information.expenses
previously mentioned.
Net Income.Income (Loss). The Company had a net lossincome of $1.9$2.9 million for the quarter
ended June 30, 2003,March 31, 2004, compared withto a net incomeloss of $1.1$6.5 million for the same period
in 2002. The Company's net loss for2003 due to the six months ended June 30, 2003 was $8.4
million compared with a net loss of $28.7 million for the first half of 2002.
The net loss for the first half of 2002 includes the $25.3 million goodwill
impairment chargefactors described in the preceding paragraph.previous sections. Interest expense,
net was $3.8$4.1 million for the quarter ended June 30, 2003,March 31, 2004, compared to $3.9$3.7
million recorded in the secondfirst quarter of 2002 and $7.5 million for the six months ended
June 30, 2003, compared with $7.7 million for the first half of 2002.2003. The decreaseincrease 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 Company's receivables purchase
agreement and an increase in interest rates under the agreement combined with a
reduction in investment interest income. Income tax expenseThere was $0.02 million in the second
quarter of 2003 compared to an income tax benefit of $0.05 million for the same
period in 2002 and an income tax expense of $0.1$0.07
million for bothin the six months
ended June 30, 2003first quarter of 2004 and 2002.$0.08 million in the first quarter of
2003.
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 2004.2004 and in February 2004, extended the agreement through
the end of March 2005. In addition, during September 2001 the Company and the
financial institution agreed to reduce the size of the facility to $95.0
million, in October 2003, the availability was reduced to $60.0 million and in
February 2004, the availability was increased to $80.0 million and in May 2004
was increased to $100.0 million. At June 30,March 31, 2004 and 2003, and 2002, the Company had
outstanding under the agreement $70.0$80.0 million and $39.0$55.0 million, respectively,
and had $39.9$73.0 million and $85.1$60.0 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 sixthree
months ended June 30,March 31, 2004 and 2003, and 2002, the Company received gross proceeds of
$62.0$20.0 million and $37.0$42.0 million, respectively, from the sale of receivables and
made gross payments of $16.0$11.0 million and 18.0 million, respectively,in the three months ended March 31, 2003
under the agreement. The Company made no gross payments in the first three
months of 2004. 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 providedused cash flows of $1.9$1.5 million and $8.2 million for
the sixthree months ended June 30, 2003 compared to $8.1 million in the six months ended June 30,
2002.March 31, 2004 and 2003. Working capital increased to
$133.4$148.0 million at June 30, 2003March 31, 2004 from $130.5$133.7 million at June 30, 2002.March 31, 2003.
Capital expenditures were $7.1$2.1 million during the six monthsquarter ended June 30, 2003March 31, 2004
compared to $3.2$4.6 million during the sixthree months ended June 30, 2002.March 31, 2003. At June 30,
2003,March
31, 2004, the Company had commitments of $5.9$8.7 million for the purchase or
construction of capital assets. Total capital expenditures for the year 20032004 are
estimated to be approximately $13.8$18.3 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 it has sufficient liquidity available from
operating cash flows and amounts available under its receivables purchase
agreement to fund its working capital requirements, capital expenditures, debt
service, and if necessary, to satisfy any outstanding amounts under its
revolving credit facility for at least the next twelve months.
The Company's revolving credit facility permits borrowings and letters of credit
up to $30.0 million outstanding at any time. As noted in the previous paragraph,
availability is subject to satisfaction of certain covenants and other
requirements. At June 30, 2003 $26.9March 31, 2004, $21.8 million was available, as the omly
outstandingsonly
outstanding amounts against the credit facility was $3.1 million of standby
letters of credit. The facility expires on March 31, 2005.credit and $5.1 million of borrowings.
The Company announced on July 31, 2003, that its Board of Directors had
suspended the Company's quarterly cash dividend payments on its common stock as
of the third quarter of 2003 due to the challenging economic conditions and to
ensure continued compliance with the Company's debt instruments regarding the
payment of dividends. The restrictions that limit the payment of cash dividends
are contained in the Indenture relating to the Company's $125 million senior
subordinated notes due in 2006. The Company believes that the restrictions are
likely to result in suspension of the cash dividend through 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 June 30, 2003March 31, 2004 (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$130,104 $ -- $130,104 $ -- $ --
$125,000 $ --
OperatingCapital and operating leases 11,072 3,280 3,558 1,559 2,6759,510 3,114 2,836 1,205 2,355
Standby letters of credit 3,111 3,111 -- -- --
Outstanding obligation under
receivablesReceivables purchase
agreement 70,000 70,000Agreement 80,000 -- 80,000 -- --
----------------------------------------------------------------------
Total contractual cash obligations $209,183 $76,391 $3,558 $126,559 $2,675$222,725 $6,225 $212,940 $1,205 $2,355
======================================================================
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 $26,889Facility $ 21,785 $ -- $26,889$ 21,785 $ -- $ --
Unused availability under
receivablesReceivables purchase
agreement 13,943Agreement -- 13,943(1) -- --(1) -- --
-------------------------------------------------------------------------------------------------------------------------------------------
Total available $40,832$ 21,785(2) $ -- $40,832$21,785(2) $ -- $ --
===========================================================================================================================================
(1) The amount would be $20,000 giving effect to the May 2004
amendment to the receivables purchase agreement described previously.
(2) The amount would be increased to $41,785 giving effect to the May 2004
amendment to the receivables purchase agreement described previously.
The Company has 7 1/26 3/4 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 billion120 million pounds of P1020/99.7% aluminum at
current market prices from Glencore each year over the 10-year term. The Company
has met or exceeded the minimum purchase quantity for each year of the contract.
At June 30, 2003,March 31, 2004, the Company held firm-priced aluminum purchase and sales
commitments through December 2004May 2005 totaling $12$14 million and $107$218 million,
respectively. The Company hedges the impact of changes in prices related to
these commitments as explained in the section entitled "Risk Management" which
follows.
Risk Management
The price of aluminum is subject to fluctuations due to unpredictable factors on
the worldwide market. To reduce this market risk, the Company follows a policy
of hedging its anticipated raw material purchases based on firm-priced sales and
purchase orders by purchasing and selling futures contracts, forward contracts
and options on the London Metal Exchange ("LME"). The Company also uses forward
contracts and options to reduce its risks associated with its natural gas
requirements.
For the secondlast three quarters of 2003 and the first quarter ending June 30, 2003,of 2004, the Company's
aluminum futures contracts did not meet certain "effectiveness" requirements set
forth in Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("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
secondlast three quarters of 2003 and the first quarter of 20032004 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 are deferred in other comprehensive income
and included in income when the underlying hedged transactions occur.
Gains and losses on these instruments that are deferred in other comprehensive
income are reclassified into net income as cost of goods sold in the periods
when the hedged transactions occur. As of June 30, 2003,March 31, 2004, the Company had $3.0$5.4
million of deferred net gains recorded in accumulated other comprehensive
income. Over the next twelve months, approximately $2.8$4.2 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 gain of $0.6$3.0 million and $0.4a
net loss of $0.2 million was recognized in cost of goods sold during the three
months ended March 31, 2004 and six months ended June 30, 2003,
respectively, and a net loss of $0.04 million and $0.11 million was recognized
in cost of goods sold during the three months and six months ended June 30,
2002, respectively, representing the amount of
the hedges' ineffectiveness. As of June 30, 2003,March 31, 2004, the Company held open
aluminum and natural gas futures and forward contracts and aluminum options
having maturity dates extending through December 2005.2006.
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 PronouncementsStandards
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")., and issued a
revision in December 2003. This Interpretation of Accounting Research Bulletin
No. 51, "Consolidated Financial Statements"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 must be applied for the first
interim or annual period beginning after June 15, 2003. Management doesCompany in the quarter ending March
31, 2004. The Statement's initial adoption did 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. Management does not expect the adoption of this Statement
to have a material impact on the Company's results of operations or financial
position.
In MayDecember 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities132 (revised 2003), "Employers' Disclosures
about Pensions and Equity" ("SFAS No.
150")Other Postretirement Benefits". The Statement establishes standardsrequires
additional disclosures about an employer's pension plans and postretirement
benefits plans such as: the types of plan assets, investment strategy,
measurement date, plan obligations, cash flows, and components of net periodic
benefit cost recognized during interim periods. See notes 9 and 10 to the
condensed consolidated financial statements for how an issuer classifiesthe required additional
disclosures for interim periods.
In January 2004, the Financial Accounting Standards Board issued Staff Position
No. FAS 106-1, "Accounting and measures certainDisclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003" ("FSP FAS 106-1").
FSP FAS 106-1 allows companies to assess the effect of the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 ("the Act") on their
postretirement benefit obligations and costs and reflect the effects in their
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 ofstatements, pursuant to SFAS No. 150 apply immediately106, "Employer's Accounting for
Postretirement Benefits Other Than Pensions." Companies are also allowed to all financial instruments entered into or modified
after May 31, 2003, and otherwise are effective atmake
a one-time election to defer accounting for the beginningeffects of the first
interim period beginningAct until
authoritative guidance is issued. The guidance in FSP FAS 106-1 is effective for
years ending after June 15,December 7, 2003. Management doesIn accordance with FSP FAS 106-1, the
accumulated postretirement benefit obligation and net periodic postretirement
benefit expense (income) in the Company's consolidated financial statements do
not expectreflect the adoptioneffects of this Statement to have a material impactthe Act on the Company's resultspostretirement health care
plan. In addition, specific authoritative guidance on the accounting for the
federal subsidy, one of operations or financial position.the provisions of the Act, is pending, and that
guidance, when issued, could require the Company to change previously reported
information.
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 disclosure controlsChief Executive Officer and procedures thatChief Financial
Officer, of the effectiveness of the Company's disclosure controls and
procedures as of the end of the quarter ended June 30, 2003March 31, 2004. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in
ensuring that material information relating to the Company, including its
consolidated subsidiaries, is made known to the certifying officers by others
within those entities, as appropriate to allow timely decisions regarding
required disclosure, particularly during the period in which this Form 10-Q was
being prepared andensure
that information required to be disclosed by the Company in its reports that it
files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms.
In addition,(b) Changes in Internal Control over Financial Reporting
As noted in the Company's 2003 Form 10-K Item 9A "Controls and Procedures", the
Company implemented a new information systems platform for its aluminum business
during the fourth quarter of 2003 and experienced information gaps that
inhibited effective internal controls over financial reporting. As a result,
during the first quarter of 2004, the Company implemented greater systems
functionality, improved user training and more comprehensive controls over
work-around procedures in order to address and correct the detected
deficiencies. During April 2004, the Company performed additional analysis and
procedures to obtain reasonable assurance of the accuracy of the Company's
financial statements for the first quarter of 2004. Certain additional
deficiencies were detected as a result of the additional analysis and procedures
and these deficiencies have been addressed.
The Company continues to believe that the detected failures to adequately and
timely detect all information necessary to ensure the reliability of financial
reporting noted herein are temporary, and that the continued effort to implement
greater systems functionality, improve user training and perform more
comprehensive controls over work-around processes have corrected these
deficiencies.
Except as set forth above, there was no
changehave not been any changes in the Company's
internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) of the Exchange Act) during the quarter ended June 30, 2003March 31, 2004 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 23,
2004, the following matters were submitted for a vote by the security holders:
Paul E. Lego and John E. Merow were elected directors for terms
expiring in 2007. There were 15,360,463 and 15,360,427, respectively,
votes cast for and 104,981 and 105,017, respectively, abstentions. The
terms of office of Catherine G. Burke, C. Frederick Fetterolf, Mark V.
Kaminski, Steven J. Demetriou, and Larry E. Kittelberger continued
after the meeting.
Ratification of the selection of PricewaterhouseCoopers LLP as the
Company's independent auditors for 2004. There were 15,417,079 votes
for and 40,881 votes against and 7,484 abstentions.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.1 Ninth Amemdment, dated as of May 3, 2004, to Receivables
Purchase Agreement among Commonwealth Financing Corp., the
Company, Market Street Funding Corporation and PNC Bank,
National Association, dated as of September 29, 1997.
31 Rule 13a-14(a)13a-14 (a) /15d-14(a) 15d-14 (a) Certifications ("Section 302
Certifications").
32 Section 1350 Certifications ("Section 906 Certifications").
(b) Reports on Form 8-K
The following reports on Form 8-K were furnished or filed with the Securities
and Exchange Commission during the quarter ended June 30, 2003:March 31, 2004:
A Form 8-K dated April 9, 2003 reporting that the Company and Wise
Alloys form strategic alliance to market Commonwealth Aluminum-branded
wide-width coil products.
A Form 8-K dated April 10, 2003 reporting that steelworkers at the
Company's Lewisport, Kentucky plant sign new five-year labor contract.
A Form 8-K dated April 22, 2003 reportingJanuary 29, 2004 announcing the Company's results of
operations for the FirstFourth Quarter ofand Full Year 2003.
A Form 8-K dated April 24, 2003 reporting that the Company declares
regular quarterly dividend.
A Form 8-K dated April 24, 2003 reporting an excerpt from the
transcript ofMarch 11, 2004 announcing the Company's Firstrevised
results of operations for the Fourth Quarter 2003 Earnings Conference Call.
A Form 8-K dated April 25, 2003 reporting that the Company adjourns
annual meeting.
A Form 8-K dated June 26, 2003 reporting the Company's cost cutting
initiatives in response to challenging market conditions.and Full Year 2003.
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: AugustMay 7, 20032004
Exhibit Index
-------------
Exhibit
Number Description
- ------ ----------------------------------------------------------------------- -----------------------------------------------------------------
10.1 Ninth Amendment, dated as of May 3, 2004, to Receivables Purchase
Agreement among Commonealth Financing Corp., the Company, Market
Street Funding Corporation and PNC Bank, National Association, dated
as of September 29, 1997.
31 Rule 13a-14(a)13a-14 (a) /15d-14(a) 15d-14 (a) Certifications ("Section 302
Certifications").
32 Section 1350 Certifications ("Section 906 Certifications").