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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
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Commission File No. 0-25642
COMMONWEALTH INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3245741
(State of incorporation) (I.R.S. Employer Identification No.)
500 West Jefferson Street
19th Floor
Louisville, Kentucky 40202-2823
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 589-8100
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the 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 ____
The registrant had 10,207,500 shares of common stock outstanding at May 1, 1997.
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COMMONWEALTH INDUSTRIES, INC.
FORM 10-Q
For the Quarter Ended March 31, 1997
INDEX
Part I - Financial Information
Item 1. Financial Statements (unaudited) Page Number
Condensed Consolidated Balance Sheets as of March 31, 1997
and December 31, 1996 3
Condensed Consolidated Statements of Income for the three
months ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 7-8
and Results of Operations
Part II - Other Information
Item 1. Legal Proceedings 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Balance Sheets
(in thousands except share data)
March 31, December 31,
1997 1996
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Assets
Current assets:
Cash and cash equivalents $ - $ 1,944
Accounts receivable, net 190,196 146,091
Inventories 162,546 173,911
Prepayments and other current assets 13,009 10,056
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Total current assets 365,751 332,002
Property, plant and equipment, net 271,012 274,095
Goodwill, net 176,901 175,146
Other noncurrent assets 12,958 13,339
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Total assets $ 826,622 $ 794,582
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Liabilities
Current liabilities:
Current portion of long-term debt $ 7,500 $ 6,250
Accounts payable 84,505 82,340
Accrued liabilities 32,540 36,351
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Total current liabilities 124,545 124,941
Long-term debt 362,000 336,000
Other long-term liabilities 18,205 14,584
Accrued pension benefits 10,707 10,610
Accrued postretirement benefits 81,922 81,224
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Total liabilities 597,379 567,359
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Commitments and contingencies - -
Stockholders' Equity
Common stock, $.01 par value, 50,000,000 shares authorized,
10,207,500 and 10,197,500 shares outstanding at
March 31, 1997 and December 31, 1996, respectively 102 102
Additional paid-in capital 301,467 301,289
Accumulated deficit (70,530) (72,188)
Unearned compensation (1,796) (1,980)
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Total stockholders' equity 229,243 227,223
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Total liabilities and stockholders' equity $ 826,622 $ 794,582
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See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Statements of Income
(in thousands except per share amounts)
Three months ended March 31,
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1997 1996
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Net sales $ 272,191 $ 167,544
Cost of goods sold 248,145 157,733
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Gross profit 24,046 9,811
Selling, general and administrative expenses 11,803 5,976
Amortization of goodwill 1,119 -
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Operating income 11,124 3,835
Other income (expense), net 179 (238)
Interest expense, net (8,333) (679)
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Income before income taxes 2,970 2,918
Income tax expense 802 525
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Net income $ 2,168 $ 2,393
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Net income per share $ 0.21 $ 0.23
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Weighted average shares outstanding 10,206 10,193
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Dividends per share $ 0.05 $ 0.05
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See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Statements of Cash Flow
(in thousands)
Three months ended March 31,
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1997 1996
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Cash flows from operating activities:
Net income $ 2,168 $ 2,393
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 9,170 4,317
Issuance of common stock in connection with stock awards 84 -
Changes in assets and liabilities:
(Increase) in accounts receivable, net (44,105) (12,472)
Decrease in inventories 11,365 9,882
(Increase) in prepayments and other current assets (3,361) (906)
Decrease in other noncurrent assets 381 105
Increase in accounts payable 2,165 10,369
(Decrease) in accrued liabilities (3,811) (1,812)
Increase (decrease) in other liabilities 4,416 (386)
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Net cash (used in) provided by operating activities (21,528) 11,490
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Cash flows from investing activities:
Net cash and cash equivalents (outflow) from acquisition (2,874) -
Additions to property, plant and equipment (4,367) (1,877)
Disposals of property, plant and equipment 3 206
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Net cash (used in) investing activities (7,238) (1,671)
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Cash flows from financing activities:
Proceeds from short-term borrowings - 4,000
Repayments of short-term borrowings - (8,000)
Proceeds from long-term debt 28,500 -
Repayments of long-term debt (1,250) (1,875)
Proceeds from issuance of common stock 82 -
Cash dividends paid (510) (510)
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Net cash provided by (used in) financing activities 26,822 (6,385)
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Net (decrease) increase in cash and cash equivalents (1,944) 3,434
Cash and cash equivalents at beginning of period 1,944 2,665
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Cash and cash equivalents at end of period $ - $ 6,099
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See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC.
Notes to Condensed Consolidated Financial Statements
(unaudited)
1. Basis of Presentation
The accompanying condensed consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not include
all the disclosures normally required by generally accepted accounting
principles. The condensed consolidated financial statements have been prepared
in accordance with Commonwealth Industries, Inc.'s (the "Company's") customary
accounting practices and have not been audited. In the opinion of management,
all adjustments necessary to fairly present the results of operations for the
reporting interim periods have been made and were of a normal recurring nature.
2. Acquisition
On September 20, 1996, the Company acquired CasTech Aluminum Group Inc.
("CasTech") for a purchase price of $285 million. The excess of the purchase
price over the acquired net assets of $179 million was recorded as goodwill and
is being amortized over 40 years. The acquisition was recorded under the
purchase method of accounting and accordingly, the results of operations of
CasTech prior to the date of acquisition have not been included in the
accompanying consolidated financial statements.
3. Inventories
The Company uses the first-in, first-out (FIFO) and the last-in, last-out (LIFO)
methods for valuing its inventories.
(in thousands) March 31, 1997 December 31, 1996
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Raw materials $ 23,515 $ 29,458
Work in process 76,286 82,205
Finished goods 51,302 46,959
Expendable parts and supplies 15,702 15,338
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166,805 173,960
LIFO reserve (4,259) (49)
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$ 162,546 $ 173,911
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Inventories of approximately $41 million and $38 million, included in the above
totals at March 31, 1997 and December 31, 1996, respectively, are accounted for
under the LIFO method of accounting.
On March 31, 1997, the Company had deferred realized losses of $0.1 million on
closed futures contracts which are recorded as an increase to the carrying value
of inventory. The Company had deferred realized gains of $0.4 million at
December 31, 1996.
4. Provision for Income Taxes
The effective income tax rate for the quarter ended March 31, 1997 is greater
than the rate for the quarter ended March 31, 1996 as a result of the expected
increase in the Company's taxable income for the year 1997 compared to the year
1996.
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 are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
and involve risks and uncertainties that could render them materially different,
including, but not limited to, the 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
various 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
aluminum scrap and primary aluminum. Trends in the demand for aluminum sheet
products in the United States and in the prices of aluminum primary metal and
scrap affect the business of the Company. The Company's operating results also
are affected by factors specific to the Company, such as the margins between
selling prices for its aluminum sheet and its cost of metal ("material margins")
and its unit cost of converting metal into aluminum sheet products ("conversion
cost"). 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 first quarter of 1997, shipments of the Company's products, both
aluminum sheet and electrical conduit and cable, continued to increase as demand
for those products remained strong. Increased sales of electrical conduit and
cable were supported by additional production capacity which was brought on line
in the first quarter.
In the aluminum sheet industry, customers remain cautious toward inventory
levels. The Company believes that the aluminum sheet order rate is indicative of
the underlying demand for aluminum products and remains strong. The cash price
of primary aluminum on the London Metal Exchange increased during the quarter
from $0.69 per pound on December 31, 1996 to $0.73 per pound on March 31, 1997.
In response to these increases, the Company announced price increases in
February and March which maintained material margin levels comparable to those
earned in the fourth quarter of 1996.
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 was the nation's leading manufacturer of continuous cast
aluminum sheet and a leading manufacturer of electrical flexible conduit and
prewired armored cable. Concurrent with the acquisition, the Company prepaid its
existing indebtedness and that of CasTech. The acquisition and prepayment were
financed with a new $325 million senior secured bank credit facility and the
proceeds from the issue and sale of $125 million principal amount of 10.75%
Senior Subordinated Notes Due 2006.
Results of Operations for the three months ended March 31, 1997 and 1996
Net Sales. Net sales for the quarter ended March 31, 1997, increased 62% to $272
million from $168 million for the same period in 1996. The increase is due to
the CasTech acquisition along with increased sales volumes at all facilities.
Average selling prices for aluminum sheet for the quarter ended March 31, 1997,
were $1.04 per pound, a decrease of 2% from $1.06 per pound for the quarter
ended March 31, 1996. Unit sales volume of aluminum increased 65% to 261.3
million pounds for the first quarter of 1997 from 157.9 million pounds for the
first quarter of 1996.
Gross Profit. Gross profit for the quarter ended March 31, 1997, increased to
$24.0 million from $9.8 million for the same period in 1996. This increase was
attributable to increased unit sales volumes, the CasTech acquisition and lower
manufacturing unit costs. The Company's unit manufacturing costs decreased
compared to the same period in 1996 as a result of the higher unit volumes and
mill optimization practices.
Operating Income. The Company produced operating income of $11.1 million for the
first quarter of 1997 compared with $3.8 million for the first quarter of 1996.
Selling, general and administrative expenses during the first quarter of 1997
were $11.8 million, compared with $6.0 million for the same period in 1996. This
increase along with the amortization of goodwill recorded in the first quarter
of 1997 of $1.1 million is due to the CasTech acquisition. Contributing to the
increase are corporate relocation, severance and other costs related to the
integration of the businesses.
Net Income. Net income was $2.2 million for the quarter ended March 31, 1997,
compared with $2.4 million for the same period in 1996. Interest expense was
$8.3 million for the quarter ended March 31, 1997 and $0.7 million for the
comparable period in 1996. The increase in the Company's interest expense is due
to borrowings associated with the CasTech acquisition. Income tax expense was
$0.8 million in the first quarter of 1997 compared to $0.5 million for the same
period in 1996.
Liquidity and Capital Resources
The Company's sources of liquidity are cash flows from operations and borrowings
under its $225 million revolving credit facility. The Company believes these
sources will be sufficient to fund its working capital requirements, capital
expenditures, debt service and dividend payments at least through 1998.
Capital expenditures were $4.4 million during the quarter ended March 31, 1997.
At March 31, 1997, the Company had commitments of $8.9 million for the purchase
or construction of capital assets. Total capital expenditures for the year 1997
are expected to be approximately $28 million, principally related to upgrading
the Company's manufacturing and other facilities and meeting environmental
requirements .
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 March 31, 1997,
the Company held purchase and sales commitments through 1997 totaling $66
million and $280 million, respectively. The Company held futures contracts,
marked-to-market at March 31, 1997, with a net unrealized loss of $1.4 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 $117 million. With respect to these agreements, the Company pays a
fixed rate of interest and receives a LIBOR-based floating rate.
Recently Issued Accounting Pronouncements
During February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share"
("SFAS No. 128"). The Company will adopt SFAS No. 128 during the fourth quarter
of 1997 as required and does not expect the Statement to have a material impact
on the calculation of net income per share.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to non-environmental legal proceedings and administrative
actions all of which are of an ordinary routine nature incidental to the
operations of the Company. Although it is impossible to predict the outcome of
any legal proceeding, in the opinion of management such proceedings and actions
should not, individually or in aggregate, have a material adverse effect on the
Company's financial condition, results of operations or cash flows, although
resolution in any year or quarter could be material to the results of operation
for that period.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Restated Certificate of Incorporation, effective April 18, 1997.
10.1 1995 Stock Incentive Plan as amended and restated April 17, 1997.
10.2 1997 Stock Incentive Plan.
11 Computation of Net Income Per Share.
27 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended March 31, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMONWEALTH INDUSTRIES, INC.
By: /s/ Donald L. Marsh, Jr.
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Donald L. Marsh, Jr.
Executive Vice President, Chief Financial
Officer and Secretary
Date: May 8, 1997