United States 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 September 30, 1996
Commission File No. 0-25642
----------
COMMONWEALTH ALUMINUM CORPORATION
(Exact name of Registrant as specified in its Charter)
Delaware 13-3245741
(State of incorporation) (IRS employer identification number)
1200 Meidinger Tower 40202
Louisville, Kentucky (Zip code)
(Address of principal executive offices)
Registrant's telephone number, including area code (502) 589-8100
----------
The registrant had 10,197,500 shares of common stock outstanding at November 8,
1996.
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 proceeding 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 ____
COMMONWEALTH ALUMINUM CORPORATION
Index to Quarterly Report Form 10-Q
For the Quarter Ended September 30, 1996
Part I - Financial Information
Item 1 - Financial Statements (Unaudited) Page Number
Condensed Consolidated Balance Sheets as of September 30, 1996 3
and December 31, 1995
Condensed Consolidated Statements of Income for the three
months and nine months ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1996 and 1995 5
Notes to the Condensed Consolidated Statements 6-7
Item 2 - Management's Discussion and Analysis of Financial Condition 8-10
and Results of Operations
Part II - Other Information
Item 1 - Legal Proceedings 10
Item 4 - Submission of Matters to a Vote of Security Holders 10
Item 6 - Exhibits and Reports on Form 8-K 10
Signatures 11
COMMONWEALTH ALUMINUM CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, December 31,
1996 1995
------------- ------------
(in thousands)
Assets
Current assets:
Cash and cash equivalents ..................... $ -- $ 2,665
Accounts receivable (net) ..................... 160,729 92,355
Inventories ................................... 155,962 125,683
Due (to) from broker .......................... (4,191) 440
Prepayments and other current assets .......... 13,171 6,032
Deferred Taxes ................................ 580 --
--------- ---------
Total current assets ..................... 326,251 227,175
Property, plant and equipment (net) ....................... 275,239 189,562
Other noncurrent assets (net) ............................. 12,128 3,947
Goodwill (net) ............................................ 172,187 --
--------- ---------
Total assets ............................. $ 785,805 $ 420,684
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings ......................... $ -- $ 4,000
Current portion of long-term debt ............. 5,000 10,504
Accounts payable .............................. 86,910 44,284
Accrued interest and taxes .................... 4,153 --
Accrued liabilities ........................... 38,501 14,655
Deferred (loss) gain .......................... (4,191) 440
--------- ---------
Total current liabilities ................ 130,373 73,883
Long-term debt ............................................ 330,006 33,871
Accrued pension benefits .................................. 11,114 18,480
Accrued postretirement benefits ........................... 79,960 77,895
Deferred income taxes ..................................... 9,750 --
Other non-current ......................................... 4,910 3,492
--------- ---------
Total liabilities ........................ 566,113 207,621
--------- ---------
Commitments and contingencies ............................. -- --
Stockholders' equity:
Common stock, $.01 par value, 50,000,000 shares
authorized, 10,197,500 shares outstanding at
September 30, 1996 .............................. 102 102
Additional paid-in capital ........................... 301,324 301,114
Treasury Stock ................................ (35) --
Accumulated deficit .................................. (77,305) (83,549)
Unearned compensation ................................ (2,125) (2,335)
Minimum pension adjustment ........................... (2,269) (2,269)
--------- ---------
Total stockholders' equity ............... 219,692 213,063
--------- ---------
Total liabilities and stockholders' equity $ 785,805 $ 420,684
========= =========
The accompanying notes are an integral part
of the condensed consolidated financial statements
COMMONWEALTH ALUMINUM CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
--------- --------- --------- ---------
(in thousands, except per share amount)
Net sales .................................. $ 170,052 $ 160,264 $ 497,268 $ 526,399
Cost of goods sold ......................... 159,482 143,835 468,017 471,657
--------- --------- --------- ---------
Gross profit .......................... 10,570 16,429 29,251 54,742
Selling, general and administrative expenses 6,876 5,302 19,076 16,811
--------- --------- --------- ---------
Operating income ...................... 3,694 11,127 10,175 37,931
Other income (expense), net ................ 95 118 (152) 4,212
Interest expense, net ...................... (1,346) (913) (2,468) (2,651)
--------- --------- --------- ---------
Income before income tax and
extraordinary loss ............... 2,443 10,332 7,555 39,492
Provision for income taxes ................. 2,191 (2,686) 1,574 (10,267)
--------- --------- --------- ---------
Income before extraordinary loss ...... 4,634 7,646 9,129 29,225
Extraordinary loss on early extinguishment
of debt, net of tax of $150 ........... (1,355) -- (1,355) --
--------- --------- --------- ---------
Net income ............................ $ 3,279 $ 7,646 $ 7,774 $ 29,225
========= ========= ========== =========
Earnings per share:
Before extraordinary loss ............. $ 0.45 $ 0.75 $ 0.90 $ 2.87
Extraordinary loss .................... (0.13) -- (0.13) --
--------- --------- ---------- ---------
Net income ............................ 0.32 0.75 0.76 2.87
Weighted average shares outstanding ... 10,195 10,195 10,195 10,195
Dividends per share ................... $ 0.05 $ 0.05 $ 0.15 $ 0.10
The accompanying notes are an integral part
of the condensed consolidated financial statements
COMMONWEALTH ALUMINUM CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Nine months ended September 30,
-------------------------------
1996 1995
-------- --------
(in thousands)
Cash flows from operating activities:
Net income .............................................. $ 7,774 $ 29,225
Adjustments to reconcile net income to net cash
provided by operations:
Depreciation and amortization ...................... 14,092 13,665
Provision for losses on accounts receivable ........ 153 89
Extraordinary loss ................................. 1,505 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable .... (2,155) 2,780
Decrease (increase) in inventories ............ 22,386 (16,262)
(Increase) decrease in prepayments
and other current assets ................. (2,258) 847
Increase in other noncurrent assets ........... (8,513) --
Increase (decrease) in accounts payable ....... 1,322 (16,206)
Decrease in accrued liabilities ............... (1,300) (679)
(Decrease) increase in other liabilities ...... (7,265) 5,902
--------- ---------
Net cash provided by operating activities .......... 25,741 19,361
Cash flows from investing activities:
Acquisition of business (net of cash of $1,505) ......... (276,336) --
Additions to property, plant and equipment .............. (8,165) (12,567)
Disposals of property, plant and equipment .............. 215 241
--------- ---------
Net cash used in investing activities .............. (284,286) (12,326)
Cash flows from financing activities:
Dividends paid on common stock .......................... (1,530) (1,018)
Proceeds from short-term borrowings ..................... 21,000 25,000
Repayments of short-term borrowings ..................... (25,000) (25,000)
Proceeds from long-term debt ............................ 335,000 50,000
Repayments of long-term debt ............................ (73,590) (3,750)
Payment to prior sole shareholder ....................... -- (50,000)
Miscellaneous receipts from prior sole shareholder ...... -- 500
--------- ---------
Net cash provided by (used for) financing activities 255,880 (4,268)
--------- ---------
(Decrease) increase in cash and cash equivalents ........ (2,665) 2,767
Cash and cash equivalents, beginning of period .......... 2,665 --
--------- ---------
Cash and cash equivalents, end of period ................ $ -- $ 2,767
========= =========
The accompanying notes are an integral part
of the condensed consolidated financial statements
COMMONWEALTH ALUMINUM CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying financial statements are presented in accordance with
the requirements of Form 10-Q and consequently do not include all the
disclosures normally required by generally accepted accounting principles. The
condensed consolidated statements have been prepared in accordance with
Commonwealth Aluminum Corporation's (the "Company's") customary accounting
practices and have not been audited. In the opinion of management, all
adjustments necessary to fairly present the results of operations for the
reporting interim periods have been made and were of a normal, recurring nature.
2. ACQUISITION
On September 20, 1996, the Company acquired CasTech Aluminum Group Inc.
("CasTech") in a transaction that was accounted for under the purchase method of
accounting. CasTech is the nation's leading manufacturer of continuous cast
aluminum sheet and is also a leading manufacturer of electrical flexible conduit
and prewired armored cable. Concurrent with the acquisition, the Company repaid
its existing indebtedness. The acquisition and repayment were financed with a
new $325 million senior secured bank credit facility ("New Bank Credit
Facility") and proceeds from a $125 million subordinated debt issue. The New
Bank Credit Facility consists of a $100 million term loan and a $225 million
revolving credit facility. The aggregate cost of the acquisition is estimated to
be $290 million.
Goodwill resulting from the acquisition is $172 million and is being
amortized over forty years. Estimates have been used in some cases to make
purchase price allocations. Future purchase price adjustments may be needed
during subsequent quarters.
The Company's results include CasTech activity since the date of
acquisition (net sales - $12 million, gross profit - $2 million, net income -
$.7 million).
The following unaudited pro forma information was prepared assuming the
CasTech acquisition had consummated on January 1, 1995. The information is based
upon and should be read in conjunction with the historical consolidated
financial statements of the Company and CasTech, including the notes thereto.
The information presented herein is based on certain assumptions, is for
information purposes only and does not necessarily reflect future results of
operations and financial position or what the results of operations would have
been had such transactions occurred at the beginning of 1995.
(in thousands except per share data, unaudited)
For the nine months ended
-------------------------
Sept. 30, 1996 Sept. 30, 1995
-------------- --------------
Net Sales $791,654 $850,507
Net earnings $ 5,549 $ 27,855
Net earnings per share $ .54 $ 2.73
3. INVENTORIES
The Company uses the first-in, first-out (FIFO), the last-in, last-out
(LIFO) and the weighted average method for valuing its inventory.
(in thousands) Sept. 30, 1996 December 31, 1995
Raw Materials $ 26,415 $ 26,438
Work in Process 74,949 55,585
Finished Goods 42,950 32,676
Expendable Parts and Supplies 11,648 10,984
---------- ----------
Total $ 155,962 $ 125,683
---------- ----------
Inventories of $25 million, included in the above totals at September
30, 1996, are accounted for under the LIFO method of accounting.
On September 30, 1996, the Company had deferred realized losses of $1.7
million on closed futures contracts which are recorded as an increase to the
carrying value of inventory. The Company had deferred realized gains of $0.2
million at December 31, 1995.
4. PROVISION FOR INCOME TAXES
The effective income tax rate for the quarter and nine months ended
September 30, 1996 is less than the rate for the quarter and nine months ended
September 30, 1995 as a result of the increased effect of the expected
utilization of the Company's net operating loss carryforward and adjustments to
prior year's tax provisions.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion contains statements which are forward-looking rather
than historical fact. These forward-looking statements involve risks and
uncertainties that could render them materially different, including, but not
limited to, the effect of global economic conditions, the impact of competitive
products and pricing, product development and commercialization, availability
and cost of critical raw materials, the rate of technological change, product
demand and market acceptance risks, capacity and supply constraints or
difficulties, and other risks detailed in the Company's Securities and Exchange
Commission filings.
OVERVIEW
The Company manufactures non-heat treat coiled aluminum sheet for the
transportation, construction and consumer durables end use markets and
electrical flexible conduit and prewired armored cable for the non-residential
construction and renovation markets. The Company's principal raw materials are
primary aluminum, aluminum scrap and copper. Three factors generally determine
the financial performance of the Company, 1) sales volume, 2) material margin
(the selling price of the coiled sheet less the cost of raw materials) and 3)
conversion costs (the direct cost of converting raw material into finished
product). While changes in aluminum prices can cause the Company's net sales to
change significantly from period to period, net income is more directly impacted
by the fluctuation in material margins.
During the third quarter, competitive conditions in the transportation and
distribution markets continued to compress material margins. This situation
represents a continuation of a trend that began during the third quarter of
1995, when, in anticipation of falling metal prices, customers began shortening
their lead times for new orders. The Company has been able to partially offset
the downward pressure on material margins through increased shipments, as unit
volume for the first nine months of 1996 increased 5% from the same period in
1995.
On September 20, 1996, the Company acquired CasTech Aluminum Group Inc.
("CasTech") in a transaction that was accounted for under the purchase method of
accounting. CasTech is the nation's leading manufacturer of continuous cast
aluminum sheet and is also a leading manufacturer of electrical flexible conduit
and prewired armored cable. Concurrent with the acquisition, the Company repaid
its existing indebtedness. The acquisition and repayment were financed with a
new $325 million senior secured bank credit facility ("New Bank Credit
Facility") and proceeds from a $125 million subordinated debt issue. The New
Bank Credit Facility consists of a $100 million term loan and a $225 million
revolving credit facility. The aggregate cost of the acquisition is estimated to
be $290 million. The acquisition creates the largest independent aluminum
rolling operation in the United States. The Company expects that the acquisition
will offer many strategic benefits including improved product mix, enhanced
technology, expanded geographic presence and cost savings.
RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED
SEPTEMBER 30, 1996 AND 1995
Net Sales. Net sales for the quarter ended September 30, 1996, increased 6% to
$170 million from $160 million for the same period in 1995. The acquisition of
CasTech accounted for approximately $12 million of the sales increase. Net sales
for the nine month period ended September 30, 1996, were $497 million, a 6%
decrease from the year earlier comparable period. This decrease was due
primarily to lower selling prices. Average selling prices for the quarter ended
September 30, 1996, were $1.01 per pound, a decrease of 13% from $1.16 per pound
for the quarter ended September 30, 1995. Average selling prices for the nine
months ended September 30, 1996 were $1.05 per pound, a decrease of 10% from the
$1.17 per pound for the comparable year earlier period. Unit sales volume
increased 20% to 168 million pounds for the third quarter of 1996 (CasTech
represented 8.3 million pounds) from 140 million pounds for the third quarter of
1995. Unit sales volumes for the first nine months of 1996 increased by 5% as
compared to the same period in 1995.
Gross Profit. Gross profit for the quarter ended September 30, 1996, decreased
to $10.6 million from $16.4 million for the same period in 1995. Gross profit
for the nine months ended September 30, 1996 was $29.3 million, a 46% decrease
from the $54.7 million in the year earlier comparable period. This decrease was
attributable primarily to the lower material margins. Material margins dropped
18% for the nine months ended September 30, 1996 when compared to the year
earlier period. The Company's unit costs decreased as compared to the same
period in 1995, as a result of the higher unit volumes, even though the Company
was required to produce a more difficult product mix.
Operating Income. The Company produced operating income of $3.7 million for the
third quarter of 1996 compared with $11.1 million for the third quarter of 1995.
For the nine month period ended September 30, 1996, operating income was $10.2
million, down from $37.9 million for the year earlier comparable period.
Selling, general and administrative expenses during the third quarter of 1996
were $6.9 million, compared with $5.3 million for the same period in 1995, and
for the nine months ended September 30, 1996 were $19.1 million compared with
$16.8 for the same period in 1995. This increase was generally related to
staffing changes and professional services.
Net Income. Net income was $3.3 million for the quarter ended September 30,
1996, compared with $7.6 million for the same period in 1995. Net income for the
nine months ended September 30, 1996 was $7.8 million compared with $29.2
million for the comparable year earlier period. The Company had income of $1.3
million for the nine months ended September 30, 1995 associated with an
investment, which was assigned to its former parent company when the Company
went public. Also included in the nine months ended September 30, 1995 was a
reversal of accrued energy taxes as a result of a tax settlement with the
Kentucky Revenue Cabinet which totaled $2.0 million of income after tax.
Interest expense was $1.3 million for the quarter ended September 30, 1996 and
$.9 million for the comparable period in 1995. The increase is a result of the
Company's increased borrowings under its new credit facility. The income tax
benefit was $(2.2) million in the third quarter of 1996 and the income tax
provision was $2.7 million for the same period in 1995. This decrease is
primarily due to a lower level of earnings resulting in an increased effect of
the expected utilization of the Company's net operating loss carryforward and
adjustments to prior year's tax provisions. The Company also recorded an
extraordinary loss related to the refinancing of the Company's prior credit
facility.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of working capital are cash flows from operating
activities and borrowings under the Company's $225 million revolving credit
facility. Working capital amounted to $196 million and $153 million at September
31, 1996 and December 31, 1995, respectively. The Company's liquidity
requirements arise from working capital needs, capital investments, dividend
payments and debt service. The Company believes that operating cash flows and
availability under the revolving credit facility will be sufficient to fund its
liquidity requirements in 1996 and 1997.
Capital expenditures were $3.3 million during the quarter ended September 30,
1996 and $8.2 million year-to-date. At September 30, 1996, the Company had
commitments of $8.0 million for the purchase or construction of capital assets.
Total capital expenditures for the year 1996 are expected to be approximately
$18 million, principally related to upgrading the Company's manufacturing
facilities.
RISK MANAGEMENT
The Company offers its customers multiple pricing methods, including fixed firm
prices. Purchases of metal for forward delivery as well as hedging with futures
contracts and options are used to reduce the Company's aggregate exposure to the
risk of changes in metal prices. This is accomplished by establishing at the
time of a customer's order a fixed margin between the cost of the metal and the
Company's price of the product to the customer. Gains and losses resulting from
changes in the market value of these futures contracts and options increase or
decrease cost of sales at the time of revenue recognition. At September 30,
1996, the Company held purchase and sales commitments through 1997 totaling $60
million and $118 million, respectively. The Company held futures contracts,
marked-to-market at September 30, 1996, with a net unrealized loss of $4.2
million.
Before entering into futures contracts and options, the Company reviews the
credit rating of the counterparty and assesses any possible credit risk. While
the Company is exposed to certain losses in the event of non-performance by the
counterparties to these agreements, the Company does not anticipate
non-performance by such counterparties.
The Company has entered into interest rate swap agreements with a notional
amount of $35 million. With respect to these agreements, the Company pays a
fixed rate of interest and receives a LIBOR-based floating rate.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to non-environmental legal proceedings and administrative
actions all of which are of an ordinary or routine nature incidental to the
operations of the Company. Although it is impossible to predict the outcome of
any legal proceeding, in the opinion of the Company's management, such
proceedings and actions should not, individually or in aggregate, have a
material adverse effect on the Company's financial condition or results of
operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Calculation of Earnings Per Common Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed on August 19, 1996 regarding the
agreement and plan of merger between the Company and CasTech Aluminum Group,
Inc.
A report on Form 8-K was filed on September 26, 1996 reporting the
completion of the previously announced acquisition of CasTech Aluminum Group,
Inc. on September 20, 1996.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Commonwealth Aluminum Corporation
By: /s/Donald L.Marsh, Jr.
________________________
Donald L. Marsh, Jr.
Executive Vice President,
Chief Financial
Officer and Secretary
Date: November 8, 1996