SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
Commission File No. 333-72305
Advanced Glassfiber Yarns LLC
(Exact name of registrant as specified in its charter)
Delaware 3229 58-2407014
(State of formation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
Commission File No. 333-72305-01
AGY Capital Corp.
(Exact name of registrant as specified in its charter)
Delaware 3229 57-1072917
(State of incorporation) (Primary Standard Industrial (I.R.S. Employer
Classification Code Number) Identification No.)
2558 Wagener Road, Aiken, South Carolina
(Address of registrants' principal executive office)
29801
(Zip Code)
Registrants' telephone number, including area code:
(803) 643-1501
---------------------------
Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports) and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
As of August 14, 2001, all 1,000 shares of common stock of AGY Capital
Corp. were owned by Advanced Glassfiber Yarns LLC. Accordingly, AGY Capital
Corp. meets the conditions set forth in General Instruction H(1)(a) and (b) of
Form 10-Q and is therefore filing this form with the reduced disclosure format.
ADVANCED GLASSFIBER YARNS LLC
QUARTERLY REPORT FOR THE THREE MONTHS ENDED JUNE 30, 2001
TABLE OF CONTENTS
Page No.
--------
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 1
Consolidated Balance Sheets as of June 30, 2001 (unaudited)
and December 31, 2000 1
Consolidated Statements of Operations 2
For the three months ended June 30, 2001 and 2000 (unaudited) 2
For the six months ended June 30, 2001 and 2000 (unaudited) 2
Consolidated Statements of Comprehensive Income 3
For the three months ended June 30, 2001 and 2000 (unaudited) 3
For the six months ended June 30, 2001 and 2000 (unaudited) 3
Consolidated Statements of Cash Flows 4
For the six months ended June 30, 2001 and 2000 (unaudited) 4
Notes to the Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
Overview 10
Results of Operations 11
Liquidity and Capital Resources 14
Disclosure Regarding Forward-Looking Statements 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ADVANCED GLASSFIBER YARNS LLC
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
June 30, December 31,
2001 2000
------------- -----------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 3,519 $ 4,054
Trade accounts receivable less allowance of $1,063 and $1,770 respectively 21,560 29,981
Inventories 38,910 25,011
Other current assets 1,691 5,947
------------- -----------------
Total current assets 65,680 64,993
------------- -----------------
Net property, plant and equipment 147,417 148,438
Intangible assets, net 215,775 222,578
Other non-current assets 71 -
------------- -----------------
Total assets $ 428,943 $ 436,009
============= =================
LIABILITIES AND MEMBERS' INTEREST
Current liabilities:
Accounts payable $ 16,596 $ 29,181
Accrued liabilities 21,674 23,863
Current portion of long-term debt 17,778 14,670
------------- -----------------
Total current liabilities 56,048 67,714
------------- -----------------
Long-term debt, net of discount of $2,507 and $2,616, respectively 314,082 314,916
Deferred distribution 11,032 6,681
Pension and other employee benefit plans 24,310 22,947
Other non-current liabilities 694 -
------------- -----------------
Total liabilities 406,166 412,258
------------- -----------------
Commitments and contingencies - -
Members' interest 22,777 23,751
------------- -----------------
Total liabilities and members' interest $ 428,943 $ 436,009
============= =================
The accompanying notes are an integral part of the consolidated financial
statements.
1
ADVANCED GLASSFIBER YARNS LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------------- -------------------------------
2001 2000 2001 2000
------------------------------- -------------------------------
(unaudited) (unaudited)
Net sales $ 55,118 $ 68,704 $ 123,965 $ 139,181
Cost of goods sold 40,026 49,896 87,293 102,597
------------ ------------ ----------- ------------
Gross profit 15,092 18,808 36,672 36,584
Selling, general and administrative expenses 3,278 4,386 7,913 8,357
Amortization 2,900 2,855 5,960 5,710
------------ ------------ ----------- ------------
Operating income 8,914 11,567 22,799 22,517
Interest expense 8,356 9,119 16,602 18,166
Other income, net (193) (1,223) (586) (1,628)
------------ ------------ ----------- ------------
Income before taxes 751 3,671 6,783 5,979
Income tax expense 80 132 92 132
------------ ------------ ----------- ------------
Net income $ 671 $ 3,539 $ 6,691 $ 5,847
============ ============ =========== ============
The accompanying notes are an integral part of the consolidated financial
statements.
2
ADVANCED GLASSFIBER YARNS LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(dollars in thousands)
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------- -----------------------------
2001 2000 2001 2000
------------------------- -----------------------------
(unaudited) (unaudited)
Net income $ 671 $ 3,539 $ 6,691 $ 5,847
Other comprehensive income (loss):
Currency hedges-options 27 - 195 -
Currency hedges-forwards (71) - 36 -
Commodity swaps (468) - (468) -
Interest rate swaps (36) - 425 -
Foreign currency translation 72 27 (51) 2
--------- -------- ----------- ----------
Comprehensive income $ 195 $ 3,566 $ 6,828 $ 5,849
========= ======== =========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
3
ADVANCED GLASSFIBER YARNS LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the Six Months
Ended June 30,
--------------------------------------
2001 2000
--------------------------------------
(unaudited)
Cash flows from operating activities:
Net income $ 6,691 $ 5,847
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 7,167 7,100
Amortization of debt issuance costs 874 874
Amortization of goodwill and other intangibles 5,960 5,709
Amortization of discount on notes 109 99
Alloy usage 894 1,059
Changes in assets and liabilities:
Trade accounts receivable, net 8,405 289
Inventories (13,899) 2,410
Other assets 4,195 (4,178)
Accounts payable (9,550) (2,497)
Accrued liabilities (1,835) 455
Pension and post-retirement 1,363 1,339
---------------- ---------------
Net cash provided by operating activities 10,374 18,506
---------------- ---------------
Cash flows from investing activities:
Purchase of property, plant and equipment (10,067) (9,841)
Proceeds from sale of fixed assets - 3,915
Other (43) (51)
---------------- ---------------
Net cash used in investing activities (10,110) (5,977)
---------------- ---------------
Cash flows from financing activities:
Proceeds from revolving credit facility, net 11,000 3,300
Payments on capital lease (50) (45)
Payments on term loans (8,786) (14,149)
Proceeds from interest rate swap 1,118 -
Distribution to Owens Corning (4,033) (3,977)
---------------- ---------------
Net cash used in financing activities (751) (14,871)
---------------- ---------------
Effect of exchange rate on cash (48) 10
---------------- ---------------
Net decrease in cash and cash equivalents (535) (2,332)
---------------- ---------------
Cash and cash equivalents, beginning of period 4,054 6,223
---------------- ---------------
Cash and cash equivalents, end of period $ 3,519 $ 3,891
================ ===============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 15,290 $ 17,257
================ ===============
Supplemental disclosure of non-cash financing/investing activities:
Increase/(decrease) in property and equipment financed in accrueds $ (3,027) $ 3,765
================ ===============
Increase/(decrease) in fair value of interest rate swaps $ (694) $ -
================ ===============
Increase/(decrease) in fair value of derivative instruments $ (237) $ -
================ ===============
Deferred distribution $ 3,979 $ 4,306
================ ===============
The accompanying notes are an integral part of the consolidated
financial statements.
4
ADVANCED GLASSFIBER YARNS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except as otherwise indicated)
1. Basis of Presentation
We have prepared the accompanying unaudited interim consolidated
financial statements of Advanced Glassfiber Yarns LLC in accordance with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of items of a normal recurring
nature) considered necessary for a fair presentation have been included.
Operating results for the three months and six months ended June 30, 2001 are
not necessarily indicative of the results to be expected for the full year. We
believe that the disclosures are adequate to make the information presented not
misleading.
AGY Capital Corp. is a wholly owned subsidiary of Advanced Glassfiber
Yarns LLC, formed solely to facilitate our offering of 9 7/8% Senior
Subordinated Notes due 2009. Separate financial statements or consolidating
financial data of AGY Capital Corp. are not presented because management has
determined that they are not material. AGY Capital Corp. has no assets or
operations.
These financial statements should be read in conjunction with the
audited consolidated financial statements of Advanced Glassfiber Yarns LLC as of
and for the year ended December 31, 2000 in our 2000 Annual Report on Form 10-K.
Certain amounts from the prior consolidated financial statements have
been reclassified to conform to the current presentation.
2. Inventories
Inventories consist of the following:
June 30, December 31,
2001 2000
---------------- -----------------
(unaudited)
Finished Goods $ 33,045 $ 20,051
Materials and supplies 5,865 4,960
---------------- -----------------
$ 38,910 $ 25,011
================ =================
5
3. Accrued Liabilities
Accrued liabilities consist of the following:
June 30, December 31,
2001 2000
---------------- -----------------
(unaudited)
Vacation $ 3,141 $ 3,003
Interest 6,958 7,001
Real and personal property taxes 2,062 2,531
Incentive compensation and profit sharing - 2,555
Benefits 3,023 2,622
Due to Owens Corning 1,289 1,804
Other 5,201 4,347
---------------- -----------------
$ 21,674 $ 23,863
================ =================
4. Long-term Debt
Debt consists of the following:
June 30, December 31,
2001 2000
---------------- ----------------
(unaudited)
Senior Credit Facility
Revolving credit facility $ 20,500 $ 9,500
Term Loan A 68,313 76,840
Term Loan B 95,410 95,669
9 7/8% Senior Subordinated Notes, net
of amortized discount 147,493 147,384
Capital lease obligation 144 193
---------------- ----------------
331,860 329,586
Less current portion (17,778) (14,670)
---------------- ----------------
Long-term debt $ 314,082 $ 314,916
================ ================
5. Segment Information
We operate in one business segment that manufactures glass fiber yarns
and specialty yarns that are used in a variety of industrial and commercial
applications. Our principal market is the United States. We do not have any
significant long-lived assets outside of the United
6
States. Information by geographic area is presented below, with net sales based
on product shipment location (in millions):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------- --------------------------
2001 2000 2001 2000
------------------------- --------------------------
(unaudited) (unaudited)
Net Sales
North America $ 37.4 $ 48.2 $ 83.3 $ 97.4
Europe 14.0 15.1 32.0 32.3
Asia 3.0 4.7 7.4 8.2
Latin America 0.7 0.7 1.3 1.3
--------- --------- --------- ---------
Total $ 55.1 $ 68.7 $ 124.0 $ 139.2
========= ========= ========= =========
Sales by product category are as follows (in millions):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
------------------------- --------------------------
2001 2000 2001 2000
------------------------- --------------------------
(unaudited) (unaudited)
Net Sales
Heavy Yarns $ 43.9 $ 50.8 $ 90.6 $ 102.3
Fine Yarns 11.2 17.9 33.4 36.9
--------- --------- --------- ---------
Total $ 55.1 $ 68.7 $ 124.0 $ 139.2
========= ========= ========= =========
6. Accounting for Derivatives
The Company is exposed to market risk, such as fluctuations in foreign
currency exchange rates, commodity prices and interest rates. To manage the
volatility relating to these exposures that are not offset within its
operations, the Company enters into various derivative transactions pursuant to
its risk management policies. Designation is performed on a transaction basis to
support hedge accounting. The changes in fair value of these hedging instruments
are offset in part or in whole by corresponding changes in the fair value or
cash flows of the underlying exposures being hedged. The Company assesses the
initial and ongoing effectiveness of its hedging relationships in accordance
with its documented policy. The Company does not hold or issue derivative
financial instruments for trading or speculative purposes.
The Company has foreign currency exchange exposure from selling in
currencies other than the U.S. dollar. The primary purpose of the Company's
foreign currency hedging activities is to manage the volatility associated with
forecasted foreign currency sales. Principal currencies hedged include the Euro
and the Japanese Yen. The Company primarily utilizes forwards, purchased options
and collars with maturities of less than 12 months, which qualify as cash flow
hedges.
7
In order to manage the interest rate risk associated with its senior
credit facility, the Company enters into derivative transactions, primarily
swaps, to manage exposure to changes in interest rates. The Company's interest
rate derivatives mature within the next three years and qualify as cash flow
hedges.
Due to the nature of its business, the Company is also exposed to risks
due to changes in natural gas commodity prices. The Company has entered into
swaps in order to reduce the variability of the cash flows associated with its
forecasted purchases of natural gas. These swaps mature within the next two
years and qualify as cash flow hedges.
Effective January 1, 2001, the Company adopted SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities," and related amendments. SFAS
133 requires that all derivative instruments be recorded on the balance sheet at
their fair value. For derivatives designated as fair value hedges, the changes
in the fair values of both the derivative instrument and the hedged item are
recognized in earnings in the current period. For derivatives designated as cash
flow hedges, the effective portion of changes in the fair value of the
derivative is recorded to accumulated other comprehensive income ("OCI") and is
reclassified to earnings when the underlying transaction impacts earnings.
As of January 1, 2001, the Company recorded a cumulative effect type
adjustment to OCI of $4.1 million relating to the fair value of its interest
rate swaps and currency hedges, which have been designated as cash flow hedges.
The effect of the adoption of SFAS 133 as of January 1, 2001 on net income was
not significant, primarily because the hedges in place as of January 1, 2001
qualified for hedge accounting treatment and were highly effective.
Gains and losses on derivatives qualifying as cash flow hedges are
recorded in OCI to the extent that the hedges are effective until the underlying
transactions are recognized in earnings. As of June 30, 2001, the net derivative
gain in OCI was $0.2 million. The amount reclassified from OCI to earnings
during the second quarter of 2001 was immaterial. The ineffective portion of
changes in fair values of hedge positions reported in second quarter earnings
was immaterial. As of June 30, 2001, the Company expects to reclassify $0.5
million of net losses on derivative instruments from OCI to earnings during the
next 12 months due to actual export sales, the payment of variable interest
associated with the floating rate debt and purchases of natural gas.
8
A summary of the amounts included in the accumulated other comprehensive income
is shown below (unaudited):
Commodity
Options Forwards Swaps
---------------- --------------- ----------------
Balance at December 31, 2000 $ - $ $ -
January 1, 2001, transition adjustment - 136 -
Current period changes in value (168) (125) -
Reclassification to earnings - (118) -
---------------- --------------- ----------------
Balance at March 31, 2001 (168) (107) -
---------------- --------------- ----------------
Current period changes in value 66 123 468
Reclassification to earnings (93) (52) -
---------------- --------------- ----------------
Balance at June 30, 2001 $ (195) $ (36) $ 468
================ =============== ================
Interest-Rate Accumulated
Swaps OCI
---------------- ----------------
Balance at December 31, 2000 $ - $ -
January 1, 2001, transition adjustment (4,200) (4,064)
Current period changes in value 3,036 2,743
Reclassification to earnings 703 585
---------------- ----------------
Balance at March 31, 2001 (461) (736)
---------------- ----------------
Current period changes in value - 657
Reclassification to earnings 36 (109)
---------------- ----------------
Balance at June 30, 2001 $ (425) $ (188)
================ ================
7. Recent Accounting Pronouncement
On June 29, 2001, the Financial Accounting Standards Board issued
Statement No. 141, Business Combinations, and Statement No. 142, Goodwill and
Other Intangible Assets, which are required to be adopted by the Company at the
beginning of 2002. Management is currently evaluating the effects of these
Statements.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Quarterly Report contains certain forward-looking statements with
respect to our operations, industry, financial condition and liquidity. These
statements reflect our assessment of a number of risks and uncertainties. Our
actual results could differ materially from the results anticipated in these
forward-looking statements as a result of certain factors set forth in this
Quarterly Report. An additional statement made pursuant to the Private
Securities Litigation Reform Act of 1995 and summarizing certain of the
principal risks and uncertainties inherent in our business is included herein
under the caption "Cautionary Statement Regarding Forward-Looking Statements."
You are encouraged to read this section carefully.
You should read the following discussion and analysis in conjunction
with the accompanying consolidated financial statements and related notes, and
with our audited consolidated financial statements as of the year ended December
31, 2000 and related notes set forth in our 2000 Annual Report on Form 10-K.
Overview
Our business focuses on the production of glass yarn by converting
molten glass into thin filaments, which are then twisted into yarn. Our products
fall into two categories based on filament diameter:
. heavy yarns, which accounted for 73.1% of our net sales during
the six months ended June 30, 2001 and 73.5% of our net sales
during the six months ended June 30, 2000; and
. fine yarns, which accounted for 26.9% of our net sales during the
six months ended June 30, 2001 and 26.5% of our net sales during
the six months ended June 30, 2000.
Glass yarns are a critical material used in a variety of electronic,
industrial, construction and specialty applications such as printed circuit
boards, roofing materials, filtration equipment, building reinforcement, window
screening, aerospace materials, sporting goods and vehicle armor.
10
Results of Operations
The following table summarizes our historical results of operations as
a percentage of net sales:
For the Three Months For the Six Months
Ended June 30 Ended June 30
------------------------------ ----------------------------
2001 2000 2001 2000
------------------------------ ----------------------------
(unaudited) (unaudited)
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of goods sold 72.6 % 72.6 % 70.4 % 73.7 %
------------ ----------- ---------- ----------
Gross profit 27.4 % 27.4 % 29.6 % 26.3 %
Selling, general and
administrative expenses 6.0 % 6.4 % 6.4 % 6.0 %
Amortization 5.2 % 4.1 % 4.8 % 4.1 %
------------ ----------- ---------- ----------
Operating income 16.2 % 16.9 % 18.4 % 16.2 %
Interest expense 15.2 % 13.2 % 13.4 % 13.1 %
Other income, net (0.5)% (1.6)% (0.5)% (1.1)%
------------ ----------- ---------- ----------
Income before taxes 1.5 % 5.3 % 5.5 % 4.2 %
Income tax expense 0.2 % 0.2 % 0.1 % - %
------------ ----------- ---------- ----------
Net income 1.3 % 5.1 % 5.4 % 4.2 %
============ =========== ========== ==========
Adjusted EBITDA, as presented below, is defined as net income before interest
expense, income taxes, depreciation, amortization expense and non-recurring
non-cash charges. Adjusted EBITDA is calculated as follows (in thousands):
For the Three Months For the Six Months
Ended June 30, Ended June 30,
---------------------------- ----------------------------
2001 2000 2001 2000
---------------------------- ----------------------------
(unaudited) (unaudited)
Net income $ 671 $ 3,539 $ 6,691 $ 5,847
Depreciation and amortization 6,578 6,356 13,127 12,809
Interest 8,356 9,119 16,602 18,166
Taxes 80 132 92 132
---------- ---------- ---------- ----------
Adjusted EBITDA $ 15,685 $ 19,146 $ 36,512 $ 36,954
========== ========== ========== ==========
Adjusted EBITDA for the quarter ended June 30, 2001 decreased $3.4 million, or
17.8%, to $15.7 million from $19.1 million for the quarter ended June 30, 2000
and for the six months ended June 30, 2001 decreased $0.5 million, or 1.4%, to
$36.5 million from $37.0 million for the same period in 2000.
We believe that adjusted EBITDA is a widely accepted financial
indicator of a company's ability to service and/or incur indebtedness. Adjusted
EBITDA does not represent
11
and should not be considered as an alternative to net income or cash flow from
operations as determined by generally accepted accounting principles, and
adjusted EBITDA does not necessarily indicate whether cash flow will be
sufficient for cash requirements. Not every company calculates adjusted EBITDA
in exactly the same fashion. As a result, adjusted EBITDA as presented above may
not necessarily be comparable to similarly titled measures of other companies.
Three Months Ended June 30, 2001 Compared to Three Months Ended June 30, 2000
Net Sales. Net sales decreased $13.6 million, or 19.8%, to $55.1
million in the three months ended June 30, 2001 from $68.7 million in the three
months ended June 30, 2000. Had the Euro exchange rate versus the US dollar not
declined by 6.0% year to year, second quarter of 2001 sales would have been $0.8
million higher. While sales to the specialty and construction markets remained
stable, lower sales volumes to our other markets have more than offset the
benefits of price increases implemented earlier this year. The 46.0% decrease in
electrical sales was primarily a result of significant inventory adjustments in
the electronics industry that began during the first quarter of 2001. Due to
these inventory adjustments, we do not expect sales to the electronics market to
increase in the third quarter of 2001. In response to these market conditions,
we have reduced production schedules, furloughed production employees and
focused on operating cost reductions.
Gross Profit. Gross profit remained constant at 27.4% of net sales for
the three months ended June 30, 2001 to the three months ended June 30, 2000.
Excluding the impact of changes in the exchange rate of European currencies,
gross profit in the second quarter of 2001 would have been 27.8%. Continued
improved manufacturing performance as well as the previously mentioned price
increases partially offset the negative impact of reduced demand and a less
favorable product mix.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses decreased to 6.0% of net sales for the quarter ended
June 30, 2001 as compared to 6.4% of net sales for the three months ended June
30, 2000. This decrease was primarily attributable to decreased accruals for
profit sharing and bonuses and to cost reduction efforts in place during the
second quarter of 2001.
Operating Income. As a result of the aforementioned factors, operating
income decreased $2.7 million to $8.9 million, or 16.2% of net sales, for the
three months ended June 30, 2001 from $11.6 million, or 16.9% of net sales, for
the three months ended June 30, 2000.
Interest Expense. Interest expense decreased $0.7 million to $8.4
million in the three months ended June 30, 2001 from $9.1 million in the three
months ended June 30, 2000. The decrease is due mainly to principal payments on
our senior credit facility, resulting in lower interest expense.
Other Income, net. The quarter-to-quarter $1.0 million decrease in
other income is primarily attributable to non-recurring income that we received
in June 2000 pursuant to a royalty settlement.
12
Net Income. As a result of the aforementioned factors, net income
decreased $2.8 million to $0.7 million in the three months ended June 30, 2001,
from $3.5 million in the three months ended June 30, 2000.
Six Months Ended June 30, 2001 Compared to Six Months Ended June 30, 2000
Net Sales. Net sales decreased $15.2 million, or 10.9%, to $124.0
million in the six months ended June 30, 2001 from $139.2 million in the six
months ended June 30, 2000. Had the Euro exchange rate versus the US dollar not
declined by 6% year to year, sales in the first half of 2001 would have been
$1.9 million higher. This reduction was primarily attributable to a global
decrease in the volume sold partially offset by the price increases implemented
earlier this year. The 20.0% decrease in electrical sales was primarily a result
of significant inventory adjustments in the electronics industry that began
during the first quarter of 2001. In response to these market conditions, we
have reduced production schedules, furloughed production employees and focused
on operating cost reductions.
Gross Profit. Gross profit increased from 26.3% of net sales for the
six months ended June 30, 2000 to 29.6% of net sales for the six months ended
June 30, 2001 but remained flat in absolute dollar. Excluding the impact of
changes in the exchange rate of European currencies, gross profit in the first
half of 2001 would have been 30.0%. The increase is attributable to sustained
improvement in manufacturing performances, higher absorption of fixed costs
during the first quarter as well as price increases implemented at the beginning
of 2001.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to 6.4% of net sales for the six months ended
June 30, 2001 compared to 6.0% of net sales for the same period last year due to
reduced sales during the first half of 2001. However, selling, general and
administrative expenses decreased in absolute dollar by $0.5 million following
reduced accruals for profit sharing and bonuses and cost reduction efforts in
place during the second quarter of 2001.
Operating Income. As a result of the aforementioned factors, operating
income increased $0.3 million to $22.8 million, or 18.4% of net sales, for the
six months ended June 30, 2001 from $22.5 million, or 16.2% of net sales, for
the six months ended June 30, 2000.
Interest Expense. Interest expense decreased $1.6 million to $16.6
million for the six months ended June 30, 2001 from $18.2 million in the three
months ended June 30, 2000. The decrease is due mainly to principal payments on
our senior credit facility, resulting in lower interest expense.
Other Income, net. The period-to-period $1.0 million decrease in "Other
income" primarily reflects the non-recurring settlement in June 2000 discussed
above.
13
Net Income. As a result of the aforementioned factors, net income
increased $0.9 million to $6.7 million in the six months ended June 30, 2001,
from $5.8 million in the six months ended June 30, 2000.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operations and
borrowings under the senior credit facility. Our principal future liquidity
requirement will generally include funding principal payments on our senior
credit facility, interest payments on our 9 7/8% senior subordinated notes due
2009 and our senior credit facility, capital expenditures and working capital
requirements. We have no mandatory payments of principal on our senior
subordinated notes prior to their maturity.
At June 30, 2001, we had outstanding $314.0 million of long-term debt
at a weighted average interest rate of 8.78%, consisting of $184.2 million under
our senior credit facility, $147.5 million under our 9 7/8% senior subordinated
notes (net of discount of $2.5 million) and $0.1 million of capital leases, less
a current portion of $17.8 million. The amounts outstanding under our senior
credit facility included $20.5 million outstanding under the revolver. As of
June 30, 2001, we had approximately $42.3 million of availability under the
revolver.
Net Cash Provided by Operating Activities. Net cash provided by
operating activities was $10.4 million for the six months ended June 30, 2001
and was primarily the result of net income of $6.7 million, a non-cash
adjustment to net income for depreciation of $7.2 million, amortization of $6.9
million, alloy usage of $0.9 million, a decrease in trade accounts receivable of
$8.4 million, an increase in inventory of $13.9 million and a decrease in
accounts payable of $9.6 million.
Net Cash Used in Investing Activities. Net cash used in investing
activities was $10.1 million for the six months ended June 30, 2001 and was
mainly the result of purchases of property, plant and equipment.
Net Cash Used in Financing Activities. Net cash used in financing
activities was $0.1 million for the six months ended June 30, 2001 and was
primarily the result of proceeds from the revolving credit facility, offset by
the repayment of principal amounts outstanding under our senior credit facility
and distribution of a dividend payable to a member.
Capital Expenditures. We have historically financed our capital
expenditures through cash flow from operations and borrowings under our senior
credit facility. For the six months ended June 30, 2001, capital expenditures
were $7.0 million. We will continue to monitor and will adjust our capital
expenditures spending level, if warranted by market developments or our
operating performance.
We derived 23.6% of our net sales in the second quarter of 2001 from
products sold in currencies other than the US dollar. The US dollar value of our
export sales sometimes varies with currency exchange rate fluctuations. We may
therefore be exposed to exchange losses as a
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result of such fluctuations that could reduce our net income. We have adopted a
risk management strategy to use derivative financial instruments including
forwards and options to hedge foreign currency exposures. See "Quantitative and
Qualitative Disclosures About Market Risk." However, we cannot assure you that
any such hedging agreements will be sufficient to eliminate risks relating to
currency fluctuations.
Our ability to make scheduled payments of principal of, or to pay the
interest or liquidated damages, if any, on, or to refinance, our indebtedness,
or to fund planned capital expenditures will depend on our future performance,
which is generally subject to economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. Based upon the current
level of operations, we believe that cash flows from operations and available
cash, together with availability under the senior credit facility, will be
adequate to meet our future liquidity needs for the foreseeable future. However,
we cannot assure you that our business will generate sufficient cash flows from
operations or that future borrowings will be available under the senior credit
facility in an amount sufficient to enable us to service our indebtedness, or to
fund our other liquidity needs and the payment of tax distributions. In
addition, we may need to refinance all or a portion of the principal on the
notes on or prior to maturity. We cannot assure you that we will be able to
effect any refinancing on commercially reasonable terms or at all.
Disclosure Regarding Forward-Looking Statements
Some of the information in this Quarterly Report may contain
forward-looking statements. These statements include, in particular, statements
about our plans, strategies and prospects within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. You can identify forward-looking statements by our use of forward-looking
terminology such as "may," "will," "expect," "anticipate," "estimate,"
"continue" or other similar words. Although we believe that our plans,
intentions and expectations reflected in or suggested by such forward-looking
statements are reasonable, we cannot assure you that our plans, intentions or
expectations will be achieved. Such statements are based on our current plans
and expectations and are subject to risks and uncertainties that exist in our
operations and our business environment that could render actual outcomes and
results materially different from those predicted. When considering such
forward-looking statements, you should keep in mind the following important
factors that could cause our actual results to differ materially from those
contained in any forward-looking statements:
. our significant level of indebtedness and limitations on our
ability to incur additional debt;
. the impact of Owens Corning's unpredictable bankruptcy proceeding
on our financial condition and ongoing operations;
. the risk that obtaining raw materials and capital equipment
services from sources other than Owens Corning would be more
costly or require us to change substantively our manufacturing
processes;
. the risk of conflicts of interest with our equity holders;
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. downturns in the electronics industry and the movement of
electronics industry production outside of North America;
. our concentrated customer base and the nature of our markets;
. a disruption of production at one of our facilities;
. foreign currency fluctuations;
. an easing of import restrictions and duties with respect to glass
fabrics;
. labor strikes or stoppages;
. our ability to comply with environmental and safety and health
laws and requirements; and
. changes in economic conditions generally.
This list of risks and uncertainties, however, is not intended to be
exhaustive. You should also review the other cautionary statements we make in
this Quarterly Report and in our 2000 Annual Report on Form 10-K. All
forward-looking statements attributable to us or persons acting for us are
expressly qualified in their entirety by our cautionary statements.
We do not have, and expressly disclaim, any obligation to release
publicly any updates or changes in our expectations or any changes in events,
conditions or circumstances on which any forward-looking statement is based.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The effects of potential changes in currency exchange rates, commodity
prices and interest rates are discussed below. Our market risk discussion
includes "forward-looking statements" and represents an estimate of possible
changes in fair value that would occur assuming hypothetical future movements in
interest rates, commodity prices and currency exchange rates. These disclosures
are not precise indicators of expected future losses, but only indicators of
reasonably possible losses. As a result, actual future results may differ
materially from those presented. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Disclosure Regarding
Forward-Looking Statements."
Our senior credit facility is subject to market risks, including
interest rate risk. We are exposed to foreign currency exchange rate risk mainly
as a result of our export sales. Due to the nature of our business, we are also
exposed to risks due to changes in natural gas commodity prices. Our risk
management strategy is to use derivative financial instruments, including
forwards, swaps and purchased options, to hedge foreign currency, commodity
price and interest rate exposures. Our objective is to limit the impact of
currency, commodity price and interest rate changes on earnings and cash flows.
We do not enter into derivatives for trading or speculative purposes.
As of June 30, 2001, the notional value of our interest rate swaps was
$163.7 million, equal to the outstanding borrowings under Term Loans A and B of
our senior credit facility. Under these agreements, we have secured a weighted
average fixed LIBOR rate of interest of 5.0% on the notional amount that is
reduced in a manner consistent with the amortization of the principal on our
term loans. These swaps effectively change our payment of interest on $163.7
million of variable rate debt to a fixed rate for the contract period.
The fair value of the interest rate swap agreement represents the
estimated receipts or payments that would be made to terminate the agreements.
At June 30, 2001, we would have paid approximately $0.7 million to terminate the
agreements. A 100 basis point decrease in LIBOR would increase the amount paid
by approximately $2.7 million. The fair value is based on dealer quotes,
considering current interest rates. During the quarter ended March 31, 2001, we
shortened the duration of our interest rate swaps to September 2003. As a result
of this transaction, we received proceeds of $1.1 million, which will remain in
accumulated other comprehensive income and will be reclassified to earnings over
the remaining life of the related debt.
As of June 30, 2001, the notional value of our foreign currency hedging
instruments was $10.3 million and the approximate fair value was $0.5 million.
The potential gain in fair value of such financial instruments from a
hypothetical 10% decrease in the underlying exchange rates relative to the US
dollar would be approximately $1.0 million as of June 30, 2001. The potential
loss in the fair value of such financial instruments from a hypothetical 10%
increase in the underlying exchange rates relative to the US dollar would be
approximately $0.5 million as of June 30, 2001. The fair value is based on
dealer quotes, considering current exchange rates.
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During the quarter ended June 30, 2001, we entered into two natural gas
commodity swaps whereby we agreed to pay a weighted average fixed price of
$4.51/MMBtu on a total notional amount of 579,000 MMBtu's of the commodity. The
contracts terminate December 2001 and December 2002. We entered into these swaps
to reduce the variability of the cash flows associated with our forecasted
purchases of natural gas. As of June 30, 2001, the total notional value of our
commodity hedging instruments was $2.5 million, and the approximate fair value
was negative $0.5 million. The potential loss in fair value of such financial
instruments from a hypothetical 10% decrease in the underlying commodity price
would be approximately $0.2 million as of June 30, 2001. The potential gain in
the fair value of such financial instruments from a hypothetical 10% increase in
the underlying commodity price relative to the US dollar would be approximately
$0.2 million as of June 30, 2001. The fair value is based on dealer quotes,
considering current commodity prices.
Actual gains and losses in the future may differ materially from that
analysis, however, based on changes in the timing and amount of interest rate,
foreign currency exchange rate movements, natural gas commodity price movements,
and our actual exposures and hedges.
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