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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 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
(Exact name of Registrant as Specified in Its Charter)
MARYLAND 35-1139550
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
809 GLENEAGLES COURT, SUITE 300
BALTIMORE, MARYLAND
(Address of Principal Executive Offices) 21286
(Zip Code)
Registrant's telephone number, including area code: (410) 494-4500
-----------
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 August 3, 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 June 28, 1998 and December 31, 1997 (audited) 1
Statements of Operations for the three months ended June 28, 1998 and
June 29, 1997, and the six months ended June 28, 1998 and June 29, 1997 2
Statements of Cash Flows for the six months ended June 28, 1998 and
June 29, 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
SIGNATURES
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WELLS ALUMINUM CORPORATION
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
JUN. 28, DEC. 31,
1998 1997
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ........................................................ $ 5,986 $ 5,352
Accounts receivable, principally trade, less allowances of $880 and $825 ......... 32,329 30,599
Inventories ...................................................................... 21,093 20,209
Other current assets ............................................................. 637 1,444
--------- ---------
Total current assets ......................................................... 60,045 57,604
Property, plant and equipment, at cost less accumulated depreciation ................. 27,929 27,269
Debt issuance costs, net of accumulated amortization of $673 and $362 ............... 4,076 4,387
Goodwill, net of accumulated amortization of $13,068 and $12,474 ..................... 33,956 34,550
Other assets ......................................................................... 1,573 1,573
--------- ---------
Total assets ................................................................. $ 127,579 $ 125,383
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, principally trade .............................................. $ 18,549 $ 20,253
Accrued expenses ................................................................. 6,571 7,362
--------- ---------
Total current liabilities .................................................... 25,120 27,615
Long-term debt ....................................................................... 105,000 105,000
Deferred income taxes ................................................................ 5,534 5,804
Deferred benefit plan obligations .................................................... 3,240 3,032
--------- ---------
Total liabilities ............................................................ 138,894 141,451
--------- ---------
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 .............................................................. (12,052) (16,805)
Additional minimum pension liability ............................................. (487) (487)
--------- ---------
Total stockholders' equity ................................................... (11,315) (16,068)
--------- ---------
Total liabilities and stockholders' equity ................................... $ 127,579 $ 125,383
========= =========
See accompanying notes.
1
WELLS ALUMINUM CORPORATION
STATEMENTS OF OPERATIONS (Unaudited)
(DOLLARS IN THOUSANDS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUN. 28, JUN. 29, JUN. 28, JUN. 29,
1998 1997 1998 1997
---- ---- ---- ----
Net sales .................................. $66,855 $ 64,701 $130,674 $120,038
Cost of sales .............................. 55,580 52,688 109,275 99,882
------- -------- -------- --------
Gross profit ............................... 11,275 12,013 21,399 20,156
Selling, general and administrative expenses 4,140 4,286 8,037 8,068
Compensation from settlement of employee
stock options .......................... -- 4,070 -- 4,070
------- -------- -------- --------
Operating profit ........................... 7,135 3,657 13,362 8,018
Interest expense, net of interest income ... 2,700 1,790 5,405 2,949
------- -------- -------- --------
Earnings before income taxes and
extraordinary item ..................... 4,435 1,867 7,957 5,069
Income taxes ............................... 1,710 879 3,204 2,237
------- -------- -------- --------
Earnings before extraordinary item ......... 2,725 988 4,753 2,832
Extraordinary loss on refinancing of debt,
net of income taxes .................... -- 1,143 -- 1,143
------- -------- -------- --------
Net earnings (loss) ........................ $ 2,725 $ (155) $ 4,753 $ 1,689
======= ======== ======== ========
See accompanying notes.
2
WELLS ALUMINUM CORPORATION
STATEMENTS OF CASH FLOWS (Unaudited)
(DOLLARS IN THOUSANDS)
SIX MONTHS ENDED
JUN. 28, JUN. 29,
1998 1997
------ -----
OPERATING ACTIVITIES:
Net Earnings ................................................ $ 4,753 $ 1,689
Adjustments to Reconcile Net Earnings to Net Cash Provided by
Operating Activities:
Depreciation and Amortization ....................... 2,001 2,101
Settlement of Employee Stock Options ................ -- 1,263
Deferred Income Taxes ............................... (270) (131)
Extraordinary Loss on Refinancing of Debt ........... -- 1,143
Changes in Operating Assets and Liabilities:
Accounts Receivable, Net ........................ (1,730) (8,206)
Inventories ..................................... (884) (1,670)
Accounts Payable and Accrued Expenses ........... (2,645) 4,644
Other Assets and Liabilities .................... 1,171 746
------- ---------
Net Cash Provided by Operating Activities ................... 2,396 1,579
------- ---------
INVESTING ACTIVITIES:
Purchase of Property, Plant and Equipment ................... (1,762) (391)
------- ---------
Net Cash Used in Investing Activities ....................... (1,762) (391)
------- ---------
FINANCING ACTIVITIES:
Principal Payments on Long-term Debt ........................ -- (54,789)
Proceeds from Long-term Debt ................................ -- 134,700
Payments of Debt Issuance Costs ............................. -- (4,496)
Payment of Special Cash Dividend ............................ -- (55,990)
Repurchase of Common Stock .................................. -- (1,102)
------- ---------
Net Cash Provided by Financing Activities ................... -- 18,323
------- ---------
Net Increase in Cash and Cash Equivalents ................... 634 19,511
Cash and Cash Equivalents at Beginning of Year .............. 5,352 277
------- ---------
Cash and Cash Equivalents at End of Period .................. $ 5,986 $ 19,788
======= =========
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 six months ended June 28, 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 69% and 68% of
total inventories at June 28, 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:
JUN. 28, DEC. 31,
1998 1997
---- ----
Raw materials ..................... $ 12,403 $ 11,840
Finished goods and work in progress 9,833 10,658
Supplies .......................... 522 471
-------- --------
Sub-total ..................... 22,758 22,969
Less LIFO reserve ................. (1,665) (2,760)
-------- --------
Inventories ................... $ 21,093 $ 20,209
======== ========
4
6. RELATED PARTY TRANSACTIONS
During the six months ended June 28, 1998 and June 29, 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 $32.7 million, respectively. Amounts payable to
Venalum at June 28, 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 June 28, 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 SIX MONTHS ENDED
JUN. 28, JUN. 29, JUN. 28, JUN. 29,
1998 1997 1998 1997
---- ---- ---- ----
Interest expense ........................... $ 2,672 $ 1,785 $ 5,343 $ 2,816
Amortization of debt issuance costs ........ 155 142 311 278
------- ------- ------- -------
Sub-total .............................. 2,827 1,927 5,654 3,094
Interest income ............................ (127) (137) (249) (145)
------- ------- ------- -------
Interest expense, net of interest income $ 2,700 $ 1,790 $ 5,405 $ 2,949
======= ======= ======= =======
5
10. 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 June 28, 1998, the Company was party to $14.5 million of
aluminum futures contracts through nationally recognized brokerage firms and
major metal brokers. These aluminum futures contracts are for periods between
July 1998 and November 1999, covering 21.4 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.
11. 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.
12. COMMITMENTS AND CONTINGENCIES
At June 28, 1998, the Company has commitments with eight North
American suppliers to purchase 52.1 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 durables 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 and six months ended June 28, 1998 and June 29, 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, extraordinary items and compensation from settlement of employee stock
options. 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 SIX MONTHS ENDED
JUN. 28, JUN. 29, JUN. 28, JUN. 29,
Amounts in Thousands, Except Per Pound Data 1998 1997 1998 1997
- ------------------------------------------- ---- ---- ---- ----
Net Sales - Products ....................... $ 66,855 $ 60,889 $ 127,145 $112,907
Net Sales - Metal .......................... -- 3,812 3,529 7,131
-------- -------- --------- --------
Net Sales .............................. 66,855 64,701 130,674 120,038
Cost of Sales - Products ................... 56,155 48,758 106,879 91,073
Cost of Sales - Metal ...................... -- 3,778 3,491 6,874
LIFO Charges (Income) ...................... (575) 152 (1,095) 1,935
-------- -------- --------- --------
Cost of Sales .......................... 55,580 52,688 109,275 99,882
Gross Profit ............................... 11,275 12,013 21,399 20,156
Operating Profit ........................... 7,135 3,657 13,362 8,018
Net Earnings (Loss) ........................ $ 2,725 $ (155) $ 4,753 $ 1,689
7
OTHER MEASUREMENT DATA:
THREE MONTHS ENDED SIX MONTHS ENDED
JUN. 28, JUN. 29, JUN. 28, JUN. 29,
Amounts in Thousands, Except Per Pound Data 1998 1997 1998 1997
- ------------------------------------------- ---- ---- ---- ----
Pounds of Product Shipped ................................ 44,133 39,254 83,180 75,090
Gross Sales - Products ................................... $ 69,826 $ 63,179 $ 132,417 $ 117,348
Gross Sales Price per Pound .............................. 1.582 1.609 1.592 1.563
Adjusted EBITDA .......................................... $ 7,405 $ 8,790 $ 13,957 $ 15,845
Adjusted EBITDA per Pound ................................ 0.168 0.224 0.168 0.211
Average Market Price of Aluminum per Pound ............... $ 0.686 $ 0.786 $ 0.708 $ 0.770
Market Price of Aluminum per Pound at Period-End ......... -- -- 0.628 0.759
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. The actual
impact on the Company from changes in aluminum prices is affected by a number of
factors including the specific timing and frequency of prices changes, the level
and turnover of aluminum inventory, and the lead and lag time between selling
price changes and cost changes in aluminum inventory. If aluminum prices
decrease (increase) over a period of several months, the market indexed prices
charged to customers may decrease (increase) more rapidly than the costs charged
from the Company's aluminum inventory.
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
8
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 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 six months ended June 28, 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 1998 and 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 JUNE 28, 1998 COMPARED TO THREE MONTHS ENDED JUNE 29, 1997
The Company's net sales increased to $66.9 million in the three
months ended June 28, 1998 from $64.7 million in the three months ended June 29,
1997, an increase of $2.2 million or 3.4%. Net sales - products increased to
$66.9 million in the three months ended June 28, 1998 from $60.9 million in the
three months ended June 29, 1997, an increase of $6.0 million or 9.9%. Gross
sales of value added products, which includes painted, anodized and fabricated
products, increased $2.4 million, or 6.8%, to $37.7 million in the three months
ended June 28, 1998 from $35.3 million in the three months ended June 29, 1997.
Gross sales of mill finished extrusions increased $4.3 million, or 15.4%, to
$32.2 million in the three months ended June 28, 1998 from $27.9 million in the
three months ended June 29, 1997. The gross sales price per pound decreased by
1.7%, reflecting a higher percentage of mill finished sales as compared to value
added sales, the effect of a decline of $0.100 in the average market price per
pound of aluminum and a changing customer and product mix in value added sales,
offset by an improved customer and product mix in mill finished sales.
Pounds of product shipped increased 4.8 million pounds, or 12.2%,
to 44.1 million in the three months ended June 28, 1998 from 39.3 million pounds
of product shipped in the three months ended June 29, 1997. Shipments to
commercial construction increased 1.2 million pounds, primarily due to increased
shipments for several large architectural projects. In residential construction,
shipments increased 0.8 million pounds, reflecting increased shipments to
suppliers to the mobile home market. Shipments to transportation increased 0.8
million pounds, primarily due to increased business with major trailer and
specialty vehicle manufacturers. In consumer durables, shipments increased 1.0
million pounds, reflecting increased shipments to manufacturers of pleasure
boats and office furniture. Shipments to equipment/electrical increased 0.1
million pounds, primarily due to increased shipments to manufacturers of
material handling systems, offset by a decline in shipments to one specialty
industrial account. The increase of 0.9 million pounds to distributors/other
resulted from increases in shipments to distributors of specialty products
serving the southeastern and midwestern markets.
Cost of sales increased to $55.6 million for the three months ended
June 28, 1998 from $52.7 million in the three months ended June 29, 1997, an
increase of $2.9 million or 5.5%. Cost of sales - products increased to $56.2
million in the three months ended June 28, 1998 from $48.8 million in the three
months ended June
9
29, 1997, an increase of $7.4 million or 15.2%. This increase resulted from a
$3.5 million increase in operating costs and a $3.9 million increase in aluminum
costs. Variable costs per pound increased to $0.446 in the three months ended
June 28, 1998 from $0.417 in the three months ended June 29, 1997, a change of
$0.029 per pound. This increase was primarily due to additional overtime costs
in response to the increase in sales volume and the effect of initial lower
productivity related to the hiring of new personnel.
Gross profit decreased to $11.3 million in the three months ended
June 28, 1998 from $12.0 million in the three months ended June 29, 1997, a
decrease of $0.7 million or 5.8%.
Selling, general and administrative expenses decreased to $4.1
million in the three months ended June 28, 1998 from $8.4 million in the three
months ended June 29, 1997, a decrease of $4.3 million or 51.2%. This decrease
is primarily attributable to a decrease in compensation of $4.1 million related
to the settlement of employee stock options as part of the overall
recapitalization of the Company in May 1997 as described herein under "Liquidity
and Capital Resources - Cash Flows from Financing Activities (the
"Recapitalization").
Operating profit increased to $7.1 million in the three months
ended June 28, 1998 from $3.7 million in the three months ended June 29, 1997,
an increase of $3.4 million or 91.9%.
Interest expense, net of interest income, increased to $2.7 million
in the three months ended June 28, 1998 from $1.8 million in the three months
ended June 29, 1997, an increase of $0.9 million, or 50.0%. This increase was
mainly attributable to the increase in debt outstanding and higher effective
interest rates as a result of the Recapitalization. Income tax expense increased
to $1.7 million in the three months ended June 28, 1998 from $0.9 million in the
three months ended June 29, 1997, an increase of $0.8 million, or 88.9%. The
effective tax rates for the three months ended June 28, 1998 and June 29, 1997
were 39% and 47%, respectively, which differed from the federal statutory rate
of 35% primarily due to the goodwill amortization and state income taxes.
Net earnings increased to $2.7 million in the three months ended
June 28, 1998 from a net loss of $0.2 million in the three months ended June 29,
1997, an increase of $2.9 million. This increase was due to the above described
factors and the incurrence of an extraordinary loss of $1.1 million (net of
applicable income taxes of $0.7 million) in the three months ended June 29, 1997
on the refinancing of debt related to the Recapitalization.
Adjusted EBITDA (as defined herein) decreased to $7.4 million in
the three months ended June 28, 1998 from $8.8 million in the three months ended
June 29, 1997, a decrease of $1.4 million or 15.9%. The decline in Adjusted
EBITDA consisted of a decrease in sales spread of $1.3 million and an
incremental increase in operating costs of $1.8 million, offset by $1.7 million
from increased sales volume. The decrease in sales spread was affected by the
continuing decrease in aluminum prices in the three months ended June 28, 1998,
since market indexed prices charged to customers declined more rapidly than the
costs charged from aluminum inventory. Adjusted EBITDA per pound decreased
$0.056 to $0.168 in the three months ended June 28, 1998, reflecting both the
lower Adjusted EBITDA and the increased pounds of product shipped.
SIX MONTHS ENDED JUNE 28, 1998 COMPARED TO SIX MONTHS ENDED JUNE 29, 1997
The Company's net sales increased to $130.7 million in the six
months ended June 28, 1998 from $120.0 million in the six months ended June 29,
1997, an increase of $10.7 million or 8.9%. Net sales - products increased to
$127.1 million in the six months ended June 28, 1998 from $112.9 million in the
six months ended June 29, 1997, an increase of $14.2 million or 12.6%. Gross
sales of value added products increased $6.3 million, or 9.7%, to $71.2 million
in the six months ended June 28, 1998 from $64.9 million in the six months ended
June 29, 1997. Gross sales of mill finished extrusions increased $8.8 million,
or 16.8%, to $61.3 million in the six months ended June 28, 1998 from $52.5
million in the six months ended June 29, 1997. The gross sales price per pound
increased by 1.9%, reflecting an improved customer and product mix in both value
added and mill finished sales, offset by the
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effect of a decline of $0.062 in the average market price per pound of aluminum
and a higher percentage of mill finished sales as compared to value added sales.
Pounds of product shipped increased 8.1 million pounds, or 10.8%,
to 83.2 million in the six months ended June 28, 1998 from 75.1 million pounds
of product shipped in the six months ended June 29, 1997. Shipments to
commercial construction increased 1.2 million pounds, primarily due to increased
shipments for several large architectural projects, offset by declines in
shipments to manufacturers of commercial doors and windows. In residential
construction, shipments increased 1.2 million pounds, reflecting increased
shipments to suppliers to the mobile home market, offset by a decline in
shipments to manufacturers of residential doors and windows. Shipments to
transportation increased 3.4 million pounds, primarily due to increased business
with major trailer and specialty vehicle manufacturers. In consumer durables,
shipments increased 1.5 million pounds, reflecting increased shipments to
manufacturers of pleasure boats and office furniture. Shipments to
equipment/electrical decreased 0.1 million pounds, primarily due to a decline in
shipments to one specialty industrial account, offset by increased shipments to
electrical/electronic accounts. The increase of 0.9 million pounds to
distributors/other resulted from increases in shipments to distributors of
specialty products serving the southeastern and midwestern markets.
Cost of sales increased to $109.3 million for the six months ended
June 28, 1998 from $99.9 million in the six months ended June 29, 1997, an
increase of $9.4 million or 9.4%. Cost of sales - products increased to $106.9
million in the six months ended June 28, 1998 from $91.1 million in the six
months ended June 29, 1997, an increase of $15.8 million or 17.3%. This increase
resulted from a $6.0 million increase in operating costs and a $9.8 million
increase in aluminum costs. Variable costs per pound increased to $0.441 in the
six months ended June 28, 1998 from $0.415 in the six months ended June 29,
1997, a change of $0.026 per pound. This increase was primarily due to
additional costs associated with a major upgrade of an extrusion press, the
effect of a 4 1/2 week work stoppage at one plant location, additional overtime
costs incurred in response to the increase in sales volume and the effect of
initial lower productivity related to the hiring of new personnel.
Gross profit increased to $21.4 million in the six months ended
June 28, 1998 from $20.2 million in the six months ended June 29, 1997, an
increase of $1.2 million or 5.9%.
Selling, general and administrative expenses decreased to $8.0
million in the six months ended June 28, 1998 from $12.1 million in the six
months ended June 29, 1997, a decrease of $4.1 million or 33.9%. This decrease
is primarily attributable to a decrease in compensation of $4.1 million related
to the settlement of employee stock options as part of the Recapitalization of
the Company in May 1997.
Operating profit increased to $13.4 million in the six months ended
June 28, 1998 from $8.0 million in the six months ended June 29, 1997, an
increase of $5.4 million or 67.5%.
Interest expense, net of interest income, increased to $5.4 million
in the six months ended June 28, 1998 from $2.9 million in the six months ended
June 29, 1997, an increase of $2.5 million, or 86.2%. This increase was mainly
attributable to the increase in debt outstanding and higher effective interest
rates as a result of the Recapitalization, offset in part by an increase in
interest income. Income tax expense increased to $3.2 million in the six months
ended June 28, 1998 from $2.2 million in the six months ended June 29, 1997, an
increase of $1.0 million, or 45.5%. The effective tax rates for the six months
ended June 28, 1998 and June 29, 1997 were 40% and 44% respectively, which
differed from the federal statutory rate of 35% primarily due to the goodwill
amortization and state income taxes.
Net earnings increased to $4.8 million in the six months ended June
28, 1998 from $1.7 million in the six months ended June 29, 1997, an increase of
$3.1 million or 182%. This increase was due to the above described factors and
the incurrence of an extraordinary loss of $1.1 million (net of applicable
income taxes of $0.7 million) in the six months ended June 29, 1997 on the
refinancing of debt related to the Recapitalization.
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Adjusted EBITDA (as defined herein) decreased to $14.0 million in
the six months ended June 28, 1998 from $15.8 million in the six months ended
June 29, 1997, a decrease of $1.8 million or 11.4%. The decline in Adjusted
EBITDA consisted of a decrease in sales spread of $2.5 million and an
incremental increase in operating costs of $2.6 million, offset by $3.3 million
from increased sales volume. The decrease in sales spread was affected by the
continuing decrease in aluminum prices in the six months ended June 28, 1998,
since the market indexed prices charged to customers declined more rapidly than
the costs charged from aluminum inventory. Adjusted EBITDA per pound decreased
$0.043 to $0.168 in the six months ended June 28, 1998, reflecting both the
lower Adjusted EBITDA and the 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 June 28, 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 is 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.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash provided by operations for the six months ended June 28, 1998
was $2.4 million as compared to $1.6 million for the six months ended June 29,
1997, an increase of $0.8 million or 50.0%. Cash flow increased primarily as a
result of increased net earnings and changes in non-recurring items related to
the settlement of employee stock options and the extraordinary loss on
refinancing of debt as part of the Recapitalization in May 1997. The total
change in net working capital for the six months ended June 28, 1998 was
comparable to the total change in net working capital for the six months ended
June 29, 1997.
Total working capital at June 28, 1998 was $34.9 million compared
to $30.0 million at December 31, 1997, an increase of $4.9 million or 16.3%.
Cash and cash equivalents increased $0.6 million to $6.0 million due in part to
the terms and conditions of the Series B Notes outstanding. 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.
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment for the six months
ended June 28, 1998 and June 29, 1997 were $1.8 million and $0.4 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
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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.
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.
REPURCHASE OF COMMON STOCK
On May 14, 1998, the Company offered to repurchase all of the Class
A common stock of the Company owned by CVG Industria Venezolana de Aluminio,
C.A. ("Venalum") for an aggregate purchase price of $3.1 million. The Company's
offer was accepted subject to receipt by Venalum of certain corporate and
governmental consents and approvals. There can be no assurance that Venalum will
obtain the requisite consents and approvals or that the repurchase of Venalum's
shares will be completed.
FUTURES CONTRACTS AND FORWARD SALES CONTRACTS
In the normal course of business, the Company enters into forward
sales contracts with certain customers
13
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 June 28, 1998, the Company was party to $14.5 million of
aluminum futures contracts through nationally recognized brokerage firms and
major metal brokers. These aluminum futures contracts are for periods between
July 1998 and November 1999, covering 21.4 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 and six
months ended June 28, 1998 and June 29, 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 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 will be
modified or converted on a timely basis by such companies and that such Year
2000 issues would not have a material impact on the operations of the Company.
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COMMITMENTS AND CONTINGENCIES
At June 28, 1998, the Company has commitments with eight North
American suppliers to purchase 52.1 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 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.
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.
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: August 3, 1998
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