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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 September 30, 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 15,956,500 shares of common stock outstanding at October 20,
1997.
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COMMONWEALTH INDUSTRIES, INC.
FORM 10-Q
For the Quarter Ended September 30, 1997
INDEX
Part I - Financial Information
Item 1. Financial Statements (unaudited) Page Number
Condensed Consolidated Balance Sheets as of
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Income for the three
months and nine months ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial 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 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Balance Sheet
(in thousands except share data)
September 30, December 31,
1997 1996
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ - $ 1,944
Accounts receivable, net 637 146,091
Inventories 177,373 173,911
Prepayments and other current assets 49,442 10,056
------------- -------------
Total current assets 227,452 332,002
Property, plant and equipment, net 265,866 274,095
Goodwill, net 174,681 175,146
Other noncurrent assets 10,536 13,339
------------- -------------
Total assets $ 678,535 $ 794,582
============= =============
Liabilities
Current liabilities:
Current portion of long-term debt $ - $ 6,250
Accounts payable 74,529 82,340
Accrued liabilities 30,347 36,351
------------- -------------
Total current liabilities 104,876 124,941
Long-term debt 136,100 336,000
Other long-term liabilities 11,031 14,584
Accrued pension benefits 12,109 10,610
Accrued postretirement benefits 83,579 81,224
------------- -------------
Total liabilities 347,695 567,359
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Commitments and contingencies - -
Stockholders' Equity
Common stock, $.01 par value, 50,000,000 shares authorized,
15,956,500 and 10,197,500 shares outstanding at
September 30, 1997 and December 31, 1996, respectively 160 102
Additional paid-in capital 399,123 301,289
Accumulated deficit (66,978) (72,188)
Unearned compensation (1,465) (1,980)
------------- -------------
Total stockholders' equity 330,840 227,223
------------- -------------
Total liabilities and stockholders' equity $ 678,535 $ 794,582
============= =============
See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Statement of Income
(in thousands except per share amounts)
Three months ended Nine months ended
September 30, September 30,
------------------------------ -------------------------------
1997 1996 1997 1996
------------- ------------ ------------- ------------
Net sales $ 271,142 $ 170,052 $ 830,573 $ 497,268
Cost of goods sold 249,987 159,482 761,125 468,017
------------- ------------ ------------- ------------
Gross profit 21,155 10,570 69,448 29,251
Selling, general and administrative expenses 9,872 6,752 31,559 18,952
Amortization of goodwill 1,119 124 3,359 124
------------- ------------ ------------- ------------
Operating income 10,164 3,694 34,530 10,175
Other income (expense), net 82 95 579 (152)
Securitization expense (25) - (25) -
Interest expense, net (8,636) (1,346) (25,057) (2,468)
------------- ------------ ------------- ------------
Income before income taxes and extraordinary loss 1,585 2,443 10,027 7,555
Income tax expense (benefit) (5) (2,191) 2,106 (1,574)
------------- ------------ ------------- ------------
Income before extraordinary loss 1,590 4,634 7,921 9,129
Extraordinary loss on early extinguishment of debt,
net of income tax benefit (1,181) (1,355) (1,181) (1,355)
------------- ------------ ------------- ------------
Net income $ 409 $ 3,279 $ 6,740 $ 7,774
============= ============ ============= ============
Per share data:
Income before extraordinary loss $ 0.16 $ 0.45 $ 0.78 $ 0.89
Extraordinary loss (0.12) (0.13) (0.12) (0.13)
------------- ------------ ------------- ------------
Net income $ 0.04 $ 0.32 $ 0.66 $ 0.76
============= ============ ============= ============
Weighted average shares outstanding 10,333 10,195 10,249 10,195
============= ============ ============= ============
Dividends per share $ 0.05 $ 0.05 $ 0.15 $ 0.15
============= ============ ============= ============
See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Statement of Cash Flows
(in thousands)
Nine months ended September 30,
------------------------------------
1997 1996
------------ -------------
Cash flows from operating activities:
Net income $ 6,740 $ 7,774
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 27,350 14,092
Extraordinary loss on early extinguishment of debt 1,495 1,505
Issuance of common stock in connection with stock awards 84 -
Proceeds from the initial sale of accounts receivable 150,000 -
Changes in assets and liabilities:
(Increase) in accounts receivable, net (46,932) (2,002)
(Increase) decrease in inventories (3,462) 22,386
Decrease (increase) in prepayments and other current assets 2,635 (6,449)
Decrease (increase) in other noncurrent assets 449 (8,513)
(Decrease) increase in accounts payable (7,811) 1,322
(Decrease) increase in accrued liabilities (6,004) 2,891
Increase (decrease) in other liabilities 301 (7,265)
------------ -------------
Net cash provided by operating activities 124,845 25,741
------------ -------------
Cash flows from investing activities:
Net cash and cash equivalents (outflow) from acquisition (2,894) (276,336)
Additions to property, plant and equipment (14,101) (8,165)
Disposals of property, plant and equipment 10 215
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Net cash (used in) investing activities (16,985) (284,286)
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Cash flows from financing activities:
Proceeds from short-term borrowings - 21,000
Repayments of short-term borrowings - (25,000)
Proceeds from long-term debt 283,450 335,000
Repayments of long-term debt (489,600) (73,590)
Proceeds from issuance of common stock 97,876 -
Cash dividends paid (1,530) (1,530)
------------ -------------
Net cash (used in) provided by financing activities (109,804) 255,880
------------ -------------
Net (decrease) in cash and cash equivalents (1,944) (2,665)
Cash and cash equivalents at beginning of period 1,944 2,665
------------ -------------
Cash and cash equivalents at end of period $ - $ -
============ =============
See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC.
Notes to Condensed Consolidated Financial Statements
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 (formerly Commonwealth
Aluminum Corporation) (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, first-out
(LIFO) methods for valuing its inventories.
(In thousands) September 30, 1997 December 31, 1996
- -------------- ------------------ -----------------
Raw materials $ 40,223 $ 29,458
Work in process 79,816 82,205
Finished goods 46,427 46,959
Expendable parts and supplies 15,047 15,338
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181,513 173,960
LIFO reserve (4,140) (49)
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$ 177,373 $ 173,911
========= =========
Inventories of approximately $42 million and $38 million, included in the above
totals at September 30, 1997 and December 31, 1996, respectively, are accounted
for under the LIFO method of accounting.
On September 30, 1997, the Company had deferred realized gains of $2.0 million
on closed futures contracts which are recorded as a reduction of 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 nine months ended September 30, 1997 is
greater than the rate for the nine months ended September 30, 1996 as a result
of the expected increase in the Company's taxable income for the year 1997
compared to the year 1996. The income tax benefit relating to the extraordinary
loss on the early extinguishment of debt was $0.3 million for 1997 and $0.1
million for 1996.
5. Accounts Receivable Securitization
On September 26, 1997, the Company sold certain of its accounts receivables to a
100% owned subsidiary, Commonwealth Financing Corp., ("CFC"). Simultaneously,
CFC entered into a three-year accounts receivable securitization facility with a
financial institution and its affiliate whereby CFC can sell, on a revolving
basis, an undivided interest in certain of its receivables and receive up to
$150.0 million from an unrelated third party purchaser at a cost of funds linked
to commercial paper rates plus a charge for administrative and credit support
services. At September 30, 1997, the Company had received $150.0 million under
the agreement and had $46.2 million of net residual interest in the securitized
receivables which is included in other current assets in the Company's
consolidated financial statements.
The Company maintains an allowance for uncollectible accounts based upon the
expected collectibility of all consolidated trade accounts receivable, including
receivables sold by CFC.
6. Stockholders' Equity
On September 29, 1997, the Company completed a common stock offering of 5.75
million shares at a public offering price of $18 per share. The net proceeds
from the offering of approximately $97.7 million were used to repay the entire
amount outstanding under the Company's term loan agreement, totaling $95.0
million, as well as $2.7 million outstanding under the Company's revolving
credit facility.
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
distributors and 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, primary aluminum, copper and steel. Trends in the
demand for the Company's aluminum sheet products in the United States and in the
prices of aluminum primary metal, aluminum scrap and copper 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
products and its cost of raw material ("material margins") and its unit cost of
converting raw material into its products ("conversion cost"). While changes in
aluminum and copper 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 nine months 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. The sales and production throughput at all
of the Company's facilities increased from the previous year due to product mix
optimization, debottlenecking and increased electrical conduit and cable
capacity.
During the third quarter, the operating earnings of the aluminum business unit
were negatively impacted by weaker pricing in the aluminum sheet industry.
Rather than yielding to this pricing environment, the Company chose to forego
certain business the Company believed reflected unrealistic pricing
expectations. As a result, the Company's material margins and sales volumes were
down from the second quarter by $.01 per pound and 8.5%, respectively. Unplanned
equipment outages at the Uhrichsville, Ohio and Lewisport, Kentucky rolling
mills were also contributing factors to the reduced sales volumes recorded by
the Company in the third quarter.
Subsequently, during the quarter, the Company announced a price increase for
shipments beginning in the month of November. The Company believes that the
price increase stemmed the price erosion occurring in the third quarter and will
contribute to improved pricing in the future.
The Alflex business unit continued to benefit from strong demand within the
construction sector of the United States economy. Additional electrical flexible
conduit and prewired armored cable capacity has been brought on line during 1997
by the Company and coupled with customer demand has led to record shipment
levels for the Alflex business unit during 1997.
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 and nine months ended
September 30, 1997 and 1996
Net Sales. Net sales for the quarter ended September 30, 1997, increased 59% to
$271 million (including $32.7 million from Alflex) from $170 million (including
$3.2 million from Alflex) for the same period in 1996. Net sales for the nine
month period ended September 30, 1997, were $831 million (including $96.4
million from Alflex), a 67% increase from the first nine months of 1996. The
increase is due to the CasTech acquisition along with increased sales volumes at
all facilities. Unit sales volume of aluminum increased 43% to 240.7 million
pounds for the third quarter of 1997 from 168.0 million pounds for the third
quarter of 1996. Unit sales volume of aluminum was 764.1 million pounds for the
first nine months of 1997, an increase of 58% over the 482.6 million pounds for
the first nine months of 1996. Alflex unit sales volume was 134 million feet for
the third quarter of 1997 and 396 million feet for the first nine months of 1997
versus 130 million feet and 361million feet, respectively, for the comparable
periods in 1996 after giving pro forma effect for the 1996 CasTech acquisition.
Gross Profit. Gross profit for the quarter ended September 30, 1997, increased
to $21.2 million from $10.6 million for the same period in 1996. Gross profit
for the nine months ended September 30, 1997 was $69.4 million, a 137% increase
from the $29.3 million reported for the nine months ended September 30, 1996.
This increase was attributable to the CasTech acquisition , increased unit sales
volumes and lower manufacturing unit costs which more than offset lower material
margins . 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 $10.2 million for the
third quarter of 1997 compared with $3.7 million for the third quarter of 1996.
For the nine month period ended September 30, 1997, operating income was $34.5
million, up from $10.2 million for the first nine months of 1996. Selling,
general and administrative expenses during the third quarter of 1997 were $9.9
million, compared with $6.8 million for the same period in 1996 and $31.6 for
the nine months ended September 30, 1997, compared with $19.0 million for the
same period in 1996. This increase along with the amortization of goodwill
recorded in the third quarter and first nine months of 1997 of $1.1 and $3.4
million, respectively, is due to the CasTech acquisition. Contributing to the
increase were corporate relocation, severance and other costs related to the
integration of the businesses.
Net Income. Net income was $0.4 million for the quarter ended September 30,
1997, compared with $3.3 million for the same period in 1996. Net income for the
nine months ended September 30, 1997 was $6.7 million compared with $7.8 million
for the first nine months of 1996. Interest expense was $8.6 million for the
quarter ended September 30, 1997 and $1.3 million for the comparable period in
1996 and $25.1 million for the nine months ended September 30, 1997, compared
with $2.5 million for the same period in 1996. The increase in the Company's
interest expense is due to borrowings associated with the CasTech acquisition.
These borrowings were reduced as described in the "Liquidity and Capital
Resources" section following. The Company had an income tax benefit of $5,000 in
the third quarter of 1997 compared to an income tax benefit of $2.2 million for
the same period in 1996 and income tax expense of $2.1 million for the nine
months ended September 30, 1997, compared to an income tax benefit of $1.6 for
the same period in 1996. In the third quarter of 1996, the Company had recorded
an income tax benefit of $2.2 million reflecting the impact of a pension
contribution made in the third quarter of 1996. The Company's income tax expense
for the third quarter of 1997 included a $0.3 million benefit due to a change in
the projected annual effective tax rate which, in turn, reflected the Company's
lower projected before tax income for 1997. The Company also recorded an
extraordinary loss on the early extinguishment of debt in both the third quarter
of 1997 and 1996 of $1.5 million ($1.2 million and $1.4 million net of income
tax benefit, respectively).
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.
On September 29, 1997, the Company completed a common stock offering of 5.75
million shares at a public offering price of $18 per share. The net proceeds
from the offering of approximately $97.7 million were used to repay the entire
amount outstanding under the Company's term loan agreement, totaling $95.0
million, as well as $2.7 million outstanding under the Company's revolving
credit facility.
On September 26, 1997, the Company sold certain of its accounts receivables to a
100% owned subsidiary, Commonwealth Financing Corp., ("CFC"). Simultaneously,
CFC entered into a three-year accounts receivable securitization facility with a
financial institution and its affiliate whereby CFC can sell, on a revolving
basis, an undivided interest in certain of its receivables and receive up to
$150.0 million from an unrelated third party purchaser at a cost of funds linked
to commercial paper rates plus a charge for administrative and credit support
services. At September 30, 1997, the Company had received $150.0 million under
the agreement and had $46.2 million of net residual interest in the securitized
receivables which is included in other current assets in the Company's
consolidated financial statements.
Capital expenditures were $5.2 million during the quarter ended September 30,
1997 and $14.1 million for the nine months ended September 30, 1997. At
September 30, 1997, the Company had commitments of $9.6 million for the purchase
or construction of capital assets. Total capital expenditures for the year 1997
are expected to be approximately $26 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 September 30,
1997, the Company held purchase and sales commitments through 1997 totaling $69
million and $236 million, respectively. The Company held futures contracts,
marked-to-market at September 30, 1997, with a net unrealized gain of $1.7
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 $107 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.
During June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). The Company will adopt
SFAS No. 131 during the fourth quarter of 1998 as required.
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
10.1 Receivables Purchase Agreement among Commonwealth Financing Corp., the
Company, Market Street Funding Corporation and PNC Bank, National
Association, dated as of September 29, 1997.
10.2 Amendment No. 1, dated as of July 31, 1997, to Amended and Restated
Credit Agreement among the Company, subsidiaries of the Company, the several
lenders from time to time parties thereto, and National Westminister Bank
PLC, as agent, dated as of November 29, 1996.
10.3 Amendment No. 2, dated as of August 29, 1997, to Amended and Restated
Credit Agreement among the Company, subsidiaries of the Company, the several
lenders from time to time parties thereto, and National Westminister Bank
PLC, as agent, dated as of November 29, 1996.
10.4 Amendment No. 3, dated as of August 29, 1997, to Amended and Restated
Credit Agreement among the Company, subsidiaries of the Company, the several
lenders from time to time parties thereto, and National Westminister Bank
PLC, as agent, dated as of November 29, 1996.
11 Computation of Net Income Per Share.
27 Financial Data Schedule.
(b) Reports on Form 8-K
The following report on Form 8-K was filed during the quarter ended
September 30, 1997:
A report on Form 8-K dated August 25, 1997 was filed with the
Securities and Exchange Commission announcing the Company anticipated lower
third quarter results.
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.
------------------------
Donald L. Marsh, Jr.
Executive Vice President, Chief Financial
Officer and Secretary
Date: October 29, 1997
Exhibit Index
Exhibit
Number Description
10.1 Receivables Purchase Agreement among Commonwealth Financing Corp., the
Company, Market Street Funding Corporation and PNC Bank, National Association,
dated as of September 29, 1997.
10.2 Amendment No. 1, dated as of July 31, 1997, to Amended and Restated
Credit Agreement among the Company, subsidiaries of the Company, the several
lenders from time to time parties thereto, and National Westminister Bank
PLC, as agent, dated as of November 29, 1996.
10.3 Amendment No. 2, dated as of August 29, 1997, to Amended and Restated
Credit Agreement among the Company, subsidiaries of the Company, the several
lenders from time to time parties thereto, and National Westminister Bank
PLC, as agent, dated as of November 29, 1996.
10.4 Amendment No. 3, dated as of August 29, 1997, to Amended and Restated
Credit Agreement among the Company, subsidiaries of the Company, the several
lenders from time to time parties thereto, and National Westminister Bank
PLC, as agent, dated as of November 29, 1996.
11 Computation of Net Income Per Share.
27 Financial Data Schedule.