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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 1998
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
COMMISSION FILE NUMBER: 333-31071
WELLS ALUMINUM CORPORATION
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(Exact name of Registrant as Specified in Its Charter)
MARYLAND 35-1139550
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
809 GLENEAGLES COURT, SUITE 300
BALTIMORE, MARYLAND 21286
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (410) 494-4500
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of May 5, 1998, the registrant had 909,005.0 shares of Common Stock
outstanding.
WELLS ALUMINUM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited): Page
Balance Sheets as of March 29, 1998 and December 31, 1997 (audited) 1
Statements of Operations for the three months ended March 29, 1998
and March 30, 1997 2
Statements of Cash Flows for the three months ended March 29, 1998
and March 30, 1997 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 13
SIGNATURES 14
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WELLS ALUMINUM CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
MAR. 29, DEC. 31,
1998 1997
------------- ---------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $ 7,780 $ 5,352
Accounts receivable, principally trade, less allowances of $860 and $825 ......... 30,004 30,599
Inventories ...................................................................... 19,854 20,209
Other current assets ............................................................. 1,422 1,444
--------- ---------
Total current assets ......................................................... 59,060 57,604
Property, plant and equipment, at cost less accumulated depreciation ................. 28,041 27,269
Debt issuance costs, net of accumulated amortization of $518 and $362 ............... 4,231 4,387
Goodwill, net of accumulated amortization of $12,771 and $12,474 ..................... 34,253 34,550
Other assets ......................................................................... 1,573 1,573
--------- ---------
Total assets ................................................................. $ 127,158 $ 125,383
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, principally trade .............................................. $ 17,557 $ 20,253
Accrued expenses ................................................................. 9,850 7,362
--------- ---------
Total current liabilities .................................................... 27,407 27,615
Long-term debt ....................................................................... 105,000 105,000
Deferred income taxes ................................................................ 5,675 5,804
Deferred benefit plan obligations .................................................... 3,116 3,032
--------- ---------
Total liabilities ............................................................ 141,198 141,451
--------- ---------
Stockholders' equity:
Common stock, Class A, par value $0.01 per share, 1,100,000 shares
authorized and 909,005 shares issued ......................................... 9 9
Additional paid-in capital ....................................................... 1,215 1,215
Accumulated deficit .............................................................. (14,777) (16,805)
Additional minimum pension liability ............................................. (487) (487)
--------- ---------
Total stockholders' equity ................................................... (14,040) (16,068)
--------- ---------
Total liabilities and stockholders' equity ................................... $ 127,158 $ 125,383
========= =========
See accompanying notes.
1
WELLS ALUMINUM CORPORATION
STATEMENTS OF OPERATIONS (Unaudited)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MAR. 29, MAR. 30,
1998 1997
--------- ---------
Net sales .................................. $63,818 $55,337
Cost of sales .............................. 53,694 47,194
------- -------
Gross profit ............................... 10,124 8,143
Selling, general and administrative expenses 3,896 3,774
------- -------
Operating profit ........................... 6,228 4,369
Interest expense, net of interest income ... 2,706 1,167
------- -------
Earnings before income taxes ............... 3,522 3,202
Income taxes ............................... 1,494 1,358
------- -------
Net earnings ............................... $ 2,028 $ 1,844
======= =======
See accompanying notes.
2
WELLS ALUMINUM CORPORATION
STATEMENTS OF CASH FLOWS (Unaudited)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED
MAR. 29, MAR. 30,
1998 1997
------ -----
OPERATING ACTIVITIES:
NET EARNINGS ................................................................. $ 2,028 $ 1,844
ADJUSTMENTS TO RECONCILE NET EARNINGS TO NET CASH PROVIDED BY
OPERATING ACTIVITIES:
DEPRECIATION AND AMORTIZATION ........................................ 1,000 1,047
DEFERRED INCOME TAXES ................................................ (126) (80)
CHANGES IN OPERATING ASSETS AND LIABILITIES:
ACCOUNTS RECEIVABLE, NET ......................................... 595 (4,943)
INVENTORIES ...................................................... 355 (474)
ACCOUNTS PAYABLE AND ACCRUED EXPENSES ............................ (844) 8,571
OTHER ASSETS AND LIABILITIES ..................................... 740 101
------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................................... 3,748 6,065
------- --------
INVESTING ACTIVITIES:
PURCHASE OF PROPERTY, PLANT AND EQUIPMENT .................................... (1,320) (272)
------- --------
NET CASH USED IN INVESTING ACTIVITIES ........................................ (1,320) (272)
------- --------
FINANCING ACTIVITIES:
PRINCIPAL PAYMENTS ON LONG-TERM DEBT ......................................... -- (17,906)
PROCEEDS FROM LONG-TERM DEBT ................................................. -- 13,000
--------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES .......................... -- (4,906)
------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................... 2,428 887
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ............................... 5,352 277
------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR ..................................... $ 7,780 $ 1,164
======= ========
SEE ACCOMPANYING NOTES.
3
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(DOLLARS IN THOUSANDS)
1. GENERAL
Wells Aluminum Corporation (the "Company") is a domestic manufacturer
of aluminum extruded and fabricated products for several diverse industries
including building/construction, transportation, durable goods and
equipment/electrical.
2. BASIS OF PRESENTATION
The foregoing unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, these financial statements do not include all of the
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, these statements include all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation of the results for the three months ended March 29, 1998.
Operating results for the interim periods of 1998 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1998.
3. RECLASSIFICATION
Certain amounts previously reported have been reclassified to conform
with the 1998 presentation.
4. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
5. INVENTORIES
The aluminum component of inventories, representing 68% of total
inventories at March 29, 1998 and December 31, 1997, respectively, is stated at
the lower of cost or market, using the last-in, first-out method (LIFO). The
labor, overhead and supplies components of inventories are carried at the lower
of cost or market using the first-in, first-out method (FIFO). The outside
purchased parts component of inventories are carried at the lower of cost or
market using the weighted average cost method.
The components of inventories are as follows:
MAR. 29, DEC. 31,
1998 1997
------ ------
Raw materials ........................... $ 11,888 $ 11,840
Finished goods and work-in-progress...... 9,726 10,658
Supplies ................................ 480 471
-------- --------
22,094 22,969
Less LIFO reserve ....................... (2,240) (2,760)
-------- --------
$ 19,854 $ 20,209
======== ========
4
6. RELATED PARTY TRANSACTIONS
During the three months ended March 29, 1998 and March 30, 1997, the
Company purchased aluminum from CVG Industria Venezolana de Aluminio, C.A.
("Venalum"), an owner of 180,362.5 shares of the Company's Class A common stock,
in amounts of $5.4 million and $14.5 million, respectively. Amounts payable to
Venalum at March 29, 1998 and December 31, 1997 were $0 and $6.3 million,
respectively.
7. RECAPITALIZATION
On May 28, 1997, the Company issued and sold $105.0 million principal
amount of 10.125% Series A Senior Notes (the "Series A Notes") due 2005. In
connection with the consummation of the issuance and sale of the Series A Notes,
the Company repaid existing indebtedness and entered into a New Credit Facility,
a secured working capital line of $15.0 million, which matures in 2002.
The offering of the Series A Notes, the repayment of indebtedness under
an existing Bank Credit Facility, the retirement of 14.125% Senior Subordinated
Notes due 2001, and the entering into of a New Credit Facility were part of an
overall recapitalization of the Company (the "Recapitalization"). As part of the
Recapitalization, the Company used a substantial portion of the proceeds
received from the issuance and sale of the Series A Notes to pay a special cash
dividend to holders of its common stock, settle existing employee stock options,
and repurchase, or offer to repurchase, shares of common stock held by certain
stockholders.
In 1997, the Company paid a special cash dividend of $62.00 per share,
or $56.0 million, to the holders of common stock, paid an aggregate of $37.5
million related to the repayment or retirement of debt, and paid $1.2 million
for the repurchase and retirement of 152,100 shares of Class A Common Stock from
certain shareholders. The Company also incurred $4.1 million of compensation
expense and issued 158,042.5 shares of Class A Common Stock related to the
settlement of employee stock options. The compensation expense represents the
difference between fair market value and the exercise price on the settlement of
57,000 employee stock options and $0.9 million of bonuses paid to satisfy a
portion of income taxes incurred by option holders as a result of receiving
shares of common stock.
In November 1997, the Company consummated an exchange of 100% of the
Series A Notes for $105.0 million aggregate principal amount of 10.125% Series B
Senior Notes (the "Series B Notes") due 2005, which are registered under the
Securities Act of 1933, as amended.
8. INDEBTEDNESS
At March 29, 1998 and December 31, 1997, indebtedness consisted of
$105.0 million of Series B Notes. There were no borrowings outstanding under the
New Credit Facility.
9. INTEREST EXPENSE, NET OF INTEREST INCOME
Interest expense, net of interest income, is as follows:
THREE MONTHS ENDED
MAR. 29, MAR. 30,
1998 1997
------- ------
Interest expense ........................... $ 2,672 $1,031
Amortization of debt issuance costs ........ 156 136
------- ------
2,828 1,167
Interest income ............................ (122) --
------- ------
Interest expense, net of interest income ... $ 2,706 $1,167
======= ======
5
9. FUTURES CONTRACTS AND FORWARD SALES CONTRACTS
In the normal course of business, the Company enters into forward sales
contracts with certain customers for the sale of fixed quantities of finished
products at scheduled intervals. The aluminum cost component of the forward
sales contract is fixed for the duration of the contract, based on forward
market prices at the inception of the contract. In order to hedge its exposure
to aluminum price volatility under these forward sales contracts, the Company
enters into aluminum futures contracts (a financial hedge) based on scheduled
deliveries.
At March 29, 1998, the Company was party to $15.9 million of aluminum
futures contracts through nationally recognized brokerage firms and major metal
brokers. These aluminum futures contracts are for periods between April 1998 and
May 1999, covering 22.4 million pounds of aluminum at prices expected to be
settled financially in cash as they reach their respective settlement dates. The
Company does not engage in any speculative trading of futures contracts.
10. LABOR AGREEMENT
In late February 1998, the Company's collective bargaining agreement
with the local union at one plant location expired, and shortly thereafter, the
local union initiated a work stoppage. In late March 1998, the Company and the
local union agreed on a new collective bargaining agreement and the work
stoppage ceased. During the work stoppage, the Company operated the affected
plant using salaried personnel from within the Company and temporary employees.
Management believes that the work stoppage did not have a material adverse
effect on the financial performance of the Company.
11. COMMITMENTS AND CONTINGENCIES
At March 29, 1998, the Company has commitments with five North American
suppliers to purchase 71.8 million pounds of primary aluminum and aluminum
billet through January 1999 at current market prices at the delivery dates.
Management expects that such quantity of aluminum will be utilized in the normal
course of operations during the terms of these agreements.
The Company accrues for losses associated with environmental
remediation obligations when such losses are probable and reasonably estimable.
Based upon information that is currently available, management does not expect
that the resolution of environmental claims will have a material adverse effect
on the Company. However, given the inherent uncertainties in evaluating
environmental exposure, it is not possible to predict the amount of future costs
of environmental claims which may be subsequently determined. The Company has
not anticipated any insurance proceeds or third-party payments in determining
its estimated liability for environmental remediation.
The Company is a party to a number of other lawsuits and claims arising
out of the conduct of its business. Although the ultimate results of lawsuits
and other proceedings against the Company cannot be predicted with certainty,
management does not expect that these matters will have a material adverse
effect on the Company and its operations.
6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Wells Aluminum Corporation (the "Company") is a custom extruder,
finisher and fabricator of soft alloy aluminum products, serving principally the
building/construction, transportation, consumer durable and equipment/electrical
markets. The Company operates a network of seven facilities with 12 extrusion
presses, located in six states in the midwestern and southeastern United States,
and also has its own casting facility for aluminum billet.
The following discussion contains forward-looking statements which
involve risks and uncertainties. The Company's actual results or future events
could differ materially from those anticipated in these forward-looking
statements as a result of certain factors, including, but not limited to, raw
material costs and availability (primarily aluminum), labor market conditions,
the Company's level of utilization of its extrusion, finishing and fabrication
capacities, and the impact of capacity utilization on costs, whether and to what
extent the Company's capital expenditures can facilitate reductions in variable
costs, the highly competitive nature of the extrusion industry, and developments
with respect to contingencies such as environmental matters and litigation.
BASIS OF PRESENTATION
The following discussion of financial condition and the results of
operations for the three months ended March 29, 1998 and March 30, 1997 are
based on the unaudited results achieved by the Company. The following tables set
forth for the periods indicated, net sales, gross profit, operating profit and
net earnings, and for performance and other measurements, pounds of product
shipped, gross sales price per pound, Adjusted EBITDA (as defined below) and
Adjusted EBITDA per pound. The table also includes average market prices of
aluminum per pound and market price of aluminum per pound at period-end.
Adjusted EBITDA is defined as earnings before interest expense, income
taxes and depreciation and amortization, and excludes LIFO charges or income.
Adjusted EBITDA should not be considered in isolation of, nor in substitute for,
net income, cash flows from operations, or other income or cash flow data
prepared in accordance with generally accepted accounting principles.
STATEMENT OF OPERATIONS DATA:
THREE MONTHS ENDED
MAR. 29, MAR. 30,
Amounts in Thousands, Except Per Pound Data 1998 1997
- ------------------------------------------- --------- ---------
Net Sales - Products .......................... $ 60,287 $52,018
Net Sales - Metal ............................. 3,531 3,319
-------- -------
Net Sales ................................. 63,818 55,337
Cost of Sales - Products....................... 50,716 42,315
Cost of Sales - Metal ......................... 3,498 3,096
LIFO Charges (Income) ......................... (520) 1,783
-------- -------
Cost of Sales ............................. 53,694 47,194
Gross Profit .................................. 10,124 8,143
Operating Profit .............................. 6,228 4,369
Net Earnings .................................. $ 2,028 $ 1,844
7
OTHER MEASUREMENT DATA:
THREE MONTHS ENDED
MAR. 29, MAR. 30,
Amounts in Thousands, Except Per Pound Data 1998 1997
- ------------------------------------------- ---------- ---------
Pounds of Product Shipped .................................. 39,047 35,836
Gross Sales - Products ..................................... $ 62,590 $ 54,169
Gross Sales Price per Pound ................................ 1.603 1.512
Adjusted EBITDA ............................................ $ 6,553 $ 7,063
Adjusted EBITDA per Pound .................................. 0.168 0.197
Average Market Price of Aluminum per Pound ................. $ 0.730 $ 0.755
Market Price of Aluminum per Pound at Period-End ........... 0.697 0.786
ALUMINUM PRICES. For the periods indicated, approximately 60% of the
Company's cost of sales - products reflect the cost of aluminum, its principal
raw material. The Company seeks to manage aluminum price fluctuations, which can
be volatile, principally either by passing aluminum prices through to customers
by systematic market indexed pricing or by fixing the cost of aluminum by
hedging against committed fixed price sales to customers. As a result, increases
and decreases in aluminum prices have generally caused similar increases and
decreases in selling prices, sales and costs of sales, and generally have had
little impact on the Company's level of profitability for the periods described
herein.
BUSINESS ACTIVITY. The Company's experience indicates that pounds of
product shipped has a direct impact on profitability, since a significant
portion of the Company's operating costs are fixed. The Company defines pounds
of product shipped as the weight of all extrusions shipped, including those
pounds transferred within the Company from which it manufactures fabricated
parts, components and assemblies, but excluding the pounds of aluminum related
to excess metal sales as described herein.
FINANCIAL AND OTHER MEASURES. The Company believes that its abilities
to manage its sales spread (gross sales minus aluminum costs), control variable
spending and minimize its fixed cost structure are significant determinants of
profitability and resultant cash flow. The Company, therefore, monitors its
sales spread per pound, variable costs per pound and fixed costs per pound,
focusing on operating profit as a key performance measure. In addition, the
Company monitors Adjusted EBITDA, as it is relevant for debt covenant analysis
under the New Credit Facility (as defined herein) and it can also be used as a
measure of the Company's ability to service its debt.
LIFO INVENTORY. The Company values its aluminum inventory under the
last-in, first-out (LIFO) method. During periods of rising aluminum prices,
compared to historical LIFO inventory values, the Company may incur LIFO
charges, which will reduce taxable income, and when aluminum prices subsequently
decline, the Company may recognize LIFO income, which will increase taxable
income. As a result of fluctuations in earnings levels resulting from the
application of LIFO, the Company excludes LIFO charges and LIFO income from
certain measures, such as Adjusted EBITDA.
EXCESS METAL SALES. The Company's policy is to sell excess metal
(primary aluminum ingot and billet) on the open market when necessary to
maintain aluminum inventory levels consistent with near-term business needs.
Imbalances in inventory can arise from the ongoing and efficient operation of
the Company's casting facility and from the Company's obligations to purchase
fixed amounts of primary aluminum ingot and billet under long-term supply
agreements. The sale of excess metal, which also reflects aluminum price
fluctuations, has minimal effect
8
on profit performance since the prices of metal bought and metal sold are
closely matched. Pounds of excess metal sold are not included in the calculation
of pounds of product shipped, the Company's primary indicator of business
activity. In the normal course of business, the Company also sells secondary
aluminum billet and aluminum scrap, which are not accounted for as excess metals
sales.
RECLASSIFICATION OF SALES AND MARKETING END USE DATA
In the three months ended March 29, 1998, the Company completed an
evaluation of the markets of its customers by the end use codes as established
by the Aluminum Association and the Aluminum Extruders Council. These end use
codes are used to compile aluminum industry statistics by specific markets. As a
result of the evaluation, the Company reclassified certain pounds shipped to its
customers during 1997 from one market designation to another designation. The
analysis of pounds shipped to a specific market contained herein is based on the
consistent application of end use codes for the periods under comparison.
THREE MONTHS ENDED MARCH 29, 1998 COMPARED TO THREE MONTHS ENDED MARCH 30, 1997
The Company's net sales increased to $63.8 million in the three months
ended March 29, 1998 from $55.3 million in the three months ended March 30,
1997, an increase of $8.5 million or 15.4%. Net sales - products increased to
$60.3 million in the three months ended March 29, 1998 from $52.0 million in the
three months ended March 30, 1997, an increase of $8.3 million or 16.0%. Gross
sales of value added products increased $3.9 million, or 13.2%, to $33.5 million
in the three months ended March 29, 1998 from $29.6 million in the three months
ended March 30, 1997. Gross sales of mill finished extrusions increased $4.6
million, or 18.8%, to $29.1 million in the three months ended March 29, 1998
from $24.5 million in the three months ended March 30, 1997. The gross sales
price per pound increased by 6.0%, reflecting an increase of 21.3% in sales of
fabricated products, offset by a decline of $0.025 in the average market price
per pound of aluminum and the effect of a higher sales mix of mill finished
extrusions.
Pounds of product shipped increased 3.2 million pounds, or 8.9%, to
39.0 million in the three months ended March 29, 1998 from 35.8 million pounds
of product shipped in the three months ended March 30, 1997. Shipments to
commercial construction decreased 0.1 million pounds, with declines in shipments
to manufacturers of commercial doors, windows and store front systems being
offset by increased shipments to manufacturers of specialty construction
products. In residential construction, shipments increased 0.5 million pounds,
reflecting increased shipments to suppliers to the mobile home market, offset by
a decline in shipments to manufacturers of storm doors due to the relatively
mild winter. Shipments to transportation increased 2.7 million pounds, primarily
due to increased business with major trailer manufacturers. In consumer
durables, shipments increased 0.5 million pounds, reflecting increased shipments
to manufacturers of pleasure boats and office furniture. Shipments to
equipment/electrical decreased 0.2 million pounds, primarily due to a decline in
shipments to two niche accounts. The decrease of 0.2 million pounds to
distributors/other resulted from reductions in shipments to two distributors of
specialty products serving the midwestern markets.
Cost of sales increased to $53.7 million for the three months ended
March 29, 1998 from $47.2 million in the three months ended March 30, 1997, an
increase of $6.5 million or 13.8%. Cost of sales - products increased to $50.7
million in the three months ended March 29, 1998 from $42.3 million in the three
months ended March 30, 1997, an increase of $8.4 million or 19.9%. This increase
resulted from a $2.4 million increase in operating costs and a $6.0 million
increase in aluminum costs. Variable costs per pound increased to $0.435 in the
three months ended March 29, 1998 from $0.412 in the three months ended March
30, 1997, a change of $0.023 per pound. This decline in performance was
primarily due to variable costs incurred during a major upgrade of an extrusion
press and non-recurring, incremental costs incurred during a work stoppage at
one plant location as further discussed in Note 10 in the Notes to the Financial
Statements.
9
Gross profit increased to $10.1 million in the three months ended March
29, 1998 from $8.1 million in the three months ended March 30, 1997, an increase
of $2.0 million or 24.7%.
Selling, general and administrative expenses increased to $3.9 million
in the three months ended March 29, 1998 from $3.7 million in the three months
ended March 30, 1997, an increase of $0.2 million or 5.4%. This increase is
attributable to an increase of $0.1 million in incidental administrative
expenses related to the work stoppage at one plant location as discussed further
in Note 10 in the Notes to the Financial Statements and an increase of $0.1
million in other general and administrative expenses.
Operating profit increased to $6.2 million in the three months ended
March 29, 1998 from $4.4 million in the three months ended September 29, 1996,
an increase of $1.8 million or 40.9%.
Interest expense, net of interest income, increased to $2.7 million in
the three months ended March 29, 1998 from $1.2 million in the three months
ended March 30, 1997, an increase of $1.5 million, or 125.0%. This increase was
mainly attributable to the increase in debt outstanding and higher effective
interest rates as a result of the Recapitalization (as defined herein), offset
in part by an increase in interest income. Income tax expense increased to $1.5
million in the three months ended March 29, 1998 from $1.4 million in the three
months ended March 30, 1997, an increase of $0.1 million, or 7.1%. The effective
tax rates for the three months ended March 29, 1998 and March 30, 1997 were 42%,
which differed from the federal statutory rate of 35% primarily due to the
goodwill amortization and state income taxes.
As a result of the above factors, net earnings increased to $2.0
million in the three months ended March 29, 1998 from $1.8 million in the three
months ended March 30, 1997, an increase of $0.2 million or 11.1%.
Adjusted EBITDA (as defined herein) decreased to $6.6 million in the
three months ended March 29, 1998 from $7.1 million in the three months ended
March 30, 1997, a decrease of $0.5 million or 7.0%. The decline in Adjusted
EBITDA consisted of a decrease in sales spread of $0.1 million and an
incremental increase in operating costs of $1.5 million, offset by $1.1 million
from increased sales volume. Adjusted EBITDA per pound, in turn, decreased
$0.029 to $.168 in the three months ended March 29, 1998, reflecting both lower
Adjusted EBITDA and increased pounds of product shipped.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically obtained funds from its operations,
augmented by borrowings under various credit agreements. Aluminum price changes
increase or decrease working capital requirements since the dollar value of
accounts receivable, inventories and accounts payable reflect these changes.
Working capital requirements are generally higher during periods of higher
aluminum prices.
As of March 29, 1998, the Company had $105.0 million of Series B Notes
(as defined herein) outstanding and no borrowings under the New Credit Facility
(as defined herein). The significant indebtedness incurred by the Company as a
result of the Recapitalization in May 1997 has several important consequences,
the foremost being that interest expense will be substantially higher than prior
to the Recapitalization. The ability of the Company to satisfy its obligations
pursuant to such indebtedness, including the Series B Notes and the Indenture
under which these notes were issued, will be dependent upon the Company's future
performance, which, in turn, will be subject to management, financial and other
business factors affecting the business and operations of the Company, some of
which are not in the Company's control. The Company's liquidity may also be
impacted by environmental and other regulatory matters.
The Company believes that cash flow from operating activities, together
with borrowings available under the New Credit Facility, will be sufficient to
fund currently anticipated working capital needs and capital expenditure
requirements for at least several years. However, there can be no assurance that
this will be the case.
10
CASH FLOWS FROM OPERATING ACTIVITIES
Cash provided by operations for the three months ended March 29, 1998
and March 30, 1997 was $3.7 million and $6.1 million, respectively, a decrease
of $2.4 million or 39.3%. Cash flow decreased as a result of increased interest
costs and an increase in accounts receivable from increased levels of business
activity.
Total working capital at March 29, 1998 was $31.7 million compared to
$30.0 million at December 31, 1997, an increase of $1.7 million or 5.7%. Cash
and cash equivalents increased $2.4 million to $7.8 million due in part to the
terms and conditions of the Series B Notes outstanding (see Cash Flows from
Financing Activities). Changes in other working capital accounts reflected
factors such as the impact of increased business activity, the timing of
incentive compensation payments, the effect of declining aluminum prices, and
the timing of interest payments. As discussed above, changes in aluminum prices
are typically passed through to customers.
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment for the three months
ended March 29, 1998 and March 30, 1997 were $1.3 million and $0.3 million,
respectively. The Company curtailed its capital expenditure program during the
first six months of 1997 due to the Recapitalization. The Company anticipates
that expenditures for property, plant and equipment will approach $4.0 million
in 1998 and will average $3.5 million per annum in the following four years. In
1998, approximately $3.0 million of the annual $4.0 million expenditure is
expected to be invested in productivity improvements and capacity enhancements,
with the remainder expected to be used for maintenance capital. In the following
four years, approximately $2.5 million of the annual $3.5 million expenditure is
expected to be invested in productivity improvements and capacity enhancements,
with the remainder expected to be used for maintenance capital.
CASH FLOWS FROM FINANCING ACTIVITIES
On May 28, 1997, the Company issued and sold $105.0 million principal
amount of 10.125% Series A Senior Notes (the "Series A Notes") due 2005. The
Company is required to make semi-annual payments of interest on the Series A
Notes on June 1 and December 1 of each year. The Company used a portion of the
proceeds from the issuance of the Series A Notes to repay an existing credit
facility and to retire its 14.125% Senior Subordinated Notes (the " Subordinated
Notes") due 2001. Upon the issuance of the Series A Notes, the Company entered
into a New Credit Facility, which provides a secured working capital line of
$15.0 million that matures on the last business day of June 2002. Under the New
Credit Facility, the Company is required to make payments of interest on a
monthly or quarterly basis.
The offering of the Series A Notes, the repayment of the existing
credit facility, the retirement of the Subordinated Notes, and the entering into
of a New Credit Facility were part of an overall recapitalization of the Company
(the "Recapitalization"). As part of the Recapitalization, the Company used a
substantial portion of the proceeds received from the issuance and sale of the
Series A Notes to pay a special cash dividend to holders of its common stock,
settle existing employee stock options, and repurchase, or offer to repurchase,
shares of common stock held by certain stockholders.
In 1997, the Company paid a special cash dividend of $62.00 per share,
or $56.0 million, to holders of common stock, paid an aggregate of $37.5 million
for the repayment and retirement of debt, and paid $1.2 million for the
repurchase and retirement of 152,100 shares of Class A Common Stock from certain
shareholders. The Company also incurred $4.1 million of compensation expense and
issued 158,042.5 shares of Class A Common Stock related to the settlement of
employee stock options. The compensation expense represents the difference
between fair market value and the exercise price on the settlement of 57,000
employee stock options and $0.9 million of bonuses paid to satisfy a portion of
income taxes incurred by option holders as a result of receiving shares of
common stock.
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On November 7, 1997, the Company consummated an exchange of 100% of the
Series A Notes for $105.0 aggregate principal amount of 10.125% Series B Senior
Notes (the "Series B Notes") due 2005 which are registered under the Securities
Act of 1933, as amended. The Company is required to make semi-annual payments of
interest on the Series B Notes on June 1 and December 1 of each year.
FUTURES CONTRACTS AND FORWARD SALES CONTRACTS
In the normal course of business, the Company enters into forward sales
contracts with certain customers for the sale of fixed quantities of finished
products at scheduled intervals. The aluminum cost component of the forward
sales contract is fixed for the duration of the contract, based on forward
market prices at the inception of the contract. In order to hedge its exposure
to aluminum price volatility under these forward sales contracts, the Company
enters into aluminum futures contracts (a financial hedge) based on scheduled
deliveries.
At March 29, 1998, the Company was party to $15.9 million of aluminum
futures contracts through nationally recognized brokerage firms and major metal
brokers. These aluminum futures contracts are for periods between April 1998 and
May 1999, covering 22.4 million pounds of aluminum at prices expected to be
settled financially in cash as they reach their respective settlement dates. The
Company does not engage in any speculative trading of futures contracts.
LIFO ADJUSTMENT AND INFLATION
The largest component of the Company's cost of sales is aluminum, its
principal raw material. Aluminum costs can be volatile, and reported results may
vary due to LIFO adjustments, as previously discussed. With the exception of
LIFO adjustments, the Company does not believe that inflation has had a
significant impact on its results of operations for the three months ended March
29, 1998 and March 30, 1997.
SEASONALITY
The Company generally does not experience significant seasonality in
its business. However, working capital requirements are often higher and
operating results are often lower during the fourth quarter principally due to
reduced shipments of product and increased inventory due to the decrease in
sales during the holiday season and increased accounts receivable due to
customers delaying payment until after the year-end.
YEAR 2000 SYSTEMS COMPLIANCE
The Company has undertaken a number of initiatives to ensure that its
computer systems, microprocessors, electronic data interchange (EDI) systems,
and other computer based applications are compliant with the Year 2000
requirements. The Year 2000 issue stems from the fact that many computer
programs were written with two, rather than four, digits to the identify the
applicable year. As a result, computer programs with time-sensitive software may
recognize a two-digit code for any year in the next century as related to this
century; for example, "00" entered into a date-field for the year 2000 may be
interpreted as the year 1900, resulting in system failures or miscalculations
and disruptions of operations, including, among other things, a temporary
inability to process transactions or engage in other normal business activities.
The Company has completed an evaluation of its centralized main
computer system and related software and has determined that this system and the
software is compliant with the Year 2000 requirements. The Company is in the
process of evaluating its other computer systems, microprocessors, EDI systems
and other computer based applications for Year 2000 compliance. The Company
expects to complete any required Year 2000 remediation prior to any anticipated
impact on its operations. The Company believes that with modifications to
existing software and conversions to new systems, where required, the Year 2000
issue will not pose significant operational
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problems for its computer systems. However, if such modifications or conversions
are not made, or are not completed timely, the Year 2000 issue could have a
material impact on the operations of the Company.
The Company is also contacting vendors and customers to determine the
extent to which the Company's interface systems are vulnerable to the failure of
such companies to remediate their own Year 2000 issues. There is no guarantee
that the systems of the Company's vendors and customers on which the Company's
systems rely will be converted timely by such companies and would not have a
material impact on the operations of the Company.
COMMITMENTS AND CONTINGENCIES
At March 29, 1998, the Company has commitments with five North American
suppliers to purchase 71.8 million pounds of primary aluminum and aluminum
billet through January 1999 at current market prices at the delivery dates.
Management expects that such quantities of aluminum will be utilized in the
normal course of operations during the terms of these agreements.
The Company has received notice of claims asserting potential liability
under various federal and state environmental laws. The Company accrues for
losses associated with environmental remediation obligations when such losses
are probable and reasonably estimable. Based upon information that is currently
available, management does not expect that the resolution of environmental
claims will have a material adverse effect on the Company. However, given the
inherent uncertainties in evaluating environmental exposure, it is not possible
to predict the amount of future costs of environmental claims which may be
subsequently determined. The Company has not anticipated any insurance proceeds
or third-party payments in determining its estimated liability for environmental
remediation.
The Corporation is a party to a number of other lawsuits and claims
arising out of the conduct of its business. Although the ultimate results of
lawsuits and other proceedings against the Corporation cannot be predicted with
certainty, management does not expect that these matters will have a material
adverse effect on the Corporation and its operations.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27.1 Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Corporation during
the quarter covered by this report.
(c) All other items were not applicable.
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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.
WELLS ALUMINUM CORPORATION
By: /s/ W. Russell Asher
--------------------
W. Russell Asher
Senior Vice President and Chief Financial Officer
(Principal Accounting Officer)
Date: May 5, 1998
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