1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended October 1, 2000
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from to .
------ ---------
Commission file number 1-12164
WOLVERINE TUBE, INC.
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(Exact name of registrant as specified in its charter)
Delaware 63-0970812
(State of Incorporation) (IRS Employer Identification No.)
1525 Perimeter Parkway, Suite 210
Huntsville, Alabama 35806
- ------------------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
(256) 353-1310
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(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each class of Common Stock, as of
the latest practicable date:
Class Outstanding as of November 9, 2000
----- ----------------------------------
Common Stock, $0.01 Par Value 12,034,018 Shares
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FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
Page No.
PART I
Item 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited)-- Three-Month and
Nine-Month Periods Ended October 1, 2000 and October 2, 1999 .......................... 1
Condensed Consolidated Balance Sheets (Unaudited)-- October 1, 2000 and
December 31, 1999 ..................................................................... 2
Condensed Consolidated Statements of Cash Flows (Unaudited)-- Nine-Month Periods Ended
October 1, 2000 and October 2, 1999 ................................................... 3
Notes to Condensed Consolidated Financial Statements (Unaudited) ...................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ............................................................................ 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................ 16
PART II
Item 1. Legal Proceedings ..................................................................... 17
Item 6. Exhibits and Reports on Form 8-K ...................................................... 17
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three-month period ended: Nine-month period ended:
OCTOBER 1, October 2, OCTOBER 1, October 2,
2000 1999 2000 1999
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(In thousands except per share amounts)
Net sales $ 171,078 $ 164,766 $ 528,430 $ 489,928
Cost of goods sold 151,974 161,278 461,362 440,209
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Gross profit 19,104 3,488 67,068 49,719
Selling, general and administrative expenses 8,383 8,082 25,640 22,536
Restructuring and other charges -- 19,938 -- 19,938
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Income (loss) from operations 10,721 (24,532) 41,428 7,245
Other expenses:
Interest expense, net 2,978 3,319 9,341 9,617
Amortization and other, net (51) 4 486 912
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Income (loss) before income taxes and cumulative
effect of accounting change 7,794 (27,855) 31,601 (3,284)
Income tax provision (benefit) 2,800 (10,751) 11,751 (1,991)
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Income (loss) before cumulative effect of
accounting change 4,994 (17,104) 19,850 (1,293)
Cumulative effect of accounting change, net of
income tax benefit of $2,211 -- -- -- (5,754)
- ---------------------------------------------------------------------------------------------------
Net income (loss) 4,994 (17,104) 19,850 (7,047)
Less preferred stock dividends (70) (70) (210) (210)
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Net income (loss) applicable to common shares 4,924 ($ 17,174) 19,640 ($ 7,257)
===================================================================================================
Earnings per common share--basic:
Income (loss) before cumulative effect of
accounting change $ 0.41 ($ 1.32) $ 1.61 ($ 0.12)
Cumulative effect of accounting change, net of
income tax benefit -- -- -- (0.43)
- ---------------------------------------------------------------------------------------------------
Net income (loss) per common share--basic $ 0.41 ($ 1.32) $ 1.61 ($ 0.55)
===================================================================================================
Basic weighted average number of common shares 12,051 13,003 12,192 13,247
===================================================================================================
Earnings per common share--diluted:
Income (loss) before cumulative effect of
accounting change $ 0.40 ($ 1.32) $ 1.59 ($ 0.12)
Cumulative effect of accounting change, net of
tax income benefit -- -- -- (0.43)
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Net income (loss) per common share--diluted $ 0.40 ($ 1.32) $ 1.59 ($ 0.55)
===================================================================================================
Diluted weighted average number of common and
common equivalent shares 12,307 13,003 12,388 13,247
===================================================================================================
See Notes to Condensed Consolidated Financial Statements.
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WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
OCTOBER 1, December 31,
2000 1999
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(In thousands except share and per share amounts) (Unaudited) (Note)
ASSETS
Current assets:
Cash and equivalents $ 18,538 $ 26,894
Accounts receivable, net 110,106 84,440
Inventories 105,891 95,368
Refundable income taxes 5,233 9,511
Prepaid expenses and other 2,452 1,415
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Total current assets 242,220 217,628
Property, plant and equipment, net 209,508 190,774
Deferred charges and intangible assets, net 110,693 91,772
Assets held for resale 5,404 --
Prepaid pensions 7,464 6,515
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Total assets $ 575,289 $ 506,689
=========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 53,176 $ 39,240
Accrued liabilities 12,464 14,772
Short-term borrowings 10,615 13,469
- ---------------------------------------------------------------------------------------------------------
Total current liabilities 76,255 67,481
Deferred income taxes 20,403 20,931
Long-term debt 228,304 176,421
Postretirement benefit obligation 12,049 11,935
Accrued environmental remediation 2,350 2,590
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Total liabilities 339,361 279,358
Minority interest 2,511 2,381
Redeemable cumulative preferred stock, par value $1 per share; 20,000 shares
issued and outstanding at October 1, 2000 and December 31, 1999 2,000 2,000
Stockholders' equity:
Cumulative preferred stock, par value $1 per share; 500,000 shares
authorized -- --
Common stock, par value $0.01 per share; 40,000,000 shares
authorized, 14,214,318 and 14,196,289 shares issued as of
October 1, 2000 and December 31, 1999, respectively 142 142
Additional paid-in capital 103,589 102,654
Retained earnings 182,805 163,165
Unearned compensation (792) (309)
Accumulated other comprehensive income (14,855) (10,688)
Treasury stock, at cost; 2,179,900 and 1,642,300 shares as of
October 1, 2000 and December 31, 1999, respectively (39,472) (32,014)
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 231,417 222,950
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Total liabilities, minority interest, redeemable cumulative preferred
stock and stockholders' equity $ 575,289 $ 506,689
=========================================================================================================
Note: The Consolidated Balance Sheet at December 31, 1999 has been derived
from the audited financial statements at that date but does not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
See Notes to Condensed Consolidated Financial Statements.
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WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine-month period ended:
OCTOBER 1, October 2,
2000 1999
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(IN THOUSANDS)
OPERATING ACTIVITIES
Net income (loss) $ 19,850 ($ 7,047)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 13,290 11,933
Deferred income taxes -- (5,923)
Non-cash portion of restructuring and other charges -- 14,920
Loss on disposal of assets -- 1,024
Cumulative effect of accounting change -- 5,754
Changes in operating assets and liabilities:
Accounts receivable, net (19,895) (22,821)
Inventories (8,908) 19,709
Refundable income taxes 4,278 (13,850)
Prepaid expenses and other (166) 236
Accounts payable and accrued liabilities 11,104 (5,980)
Other accrued liabilities including pension, postretirement
benefit and environmental (1,022) 3,962
- -----------------------------------------------------------------------------------------------
Net cash provided by operating activities 18,531 1,917
INVESTING ACTIVITIES
Additions to property, plant and equipment (25,289) (17,107)
Acquisition of business assets (42,211) (6,689)
Other (132) 97
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Net cash used for investing activities (67,632) (23,699)
FINANCING ACTIVITIES
Net borrowings (payments) on revolving credit facilities 51,566 (39,000)
Principal payments on long-term debt (2,150) (335)
Proceeds from issuance of debt -- 8,215
Issuance of common stock 61 509
Purchase of treasury stock (7,458) (12,949)
Dividends paid on preferred stock (210) (210)
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Net cash provided by (used for) financing activities 41,809 (43,770)
Effect of exchange rate on cash and equivalents (1,064) 843
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Net decrease in cash and equivalents (8,356) (64,709)
Cash and equivalents at beginning of period 26,894 78,899
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Cash and equivalents at end of period 18,538 $ 14,190
===============================================================================================
See Notes to Condensed Consolidated Financial Statements.
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WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 1, 2000
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Wolverine Tube, Inc. (the "Company") and its majority-owned
subsidiaries after elimination of significant intercompany accounts and
transactions. The accompanying condensed consolidated financial statements have
been prepared in accordance with instructions to Form 10-Q and do not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements. The accompanying condensed
consolidated financial statements (and all information in this report) have not
been examined by independent auditors; but, in the opinion of management, all
adjustments, which consist of normal recurring accruals necessary for a fair
presentation of the results for the periods, have been made. The results of
operations for the three and nine-month periods ended October 1, 2000 are not
necessarily indicative of the results of operations that may be expected for the
year ending December 31, 2000. For further information, refer to the
consolidated financial statements and notes included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1999.
The Company uses its internal operational reporting cycle for quarterly
financial reporting.
Certain reclassifications have been made to the previously reported condensed
consolidated statement of operations for the three and nine-month periods ended
October 2, 1999 to provide comparability with the current year presentation.
In September 2000, the Company acquired the joining products business of
Engelhard Corporation. The joining products business is a leading manufacturer
of brazing alloys and fluxes, as well as a supplier of lead-free solder. The
business employs approximately 150 people at its manufacturing plant in Warwick,
Rhode Island, and had approximately $49 million in net sales during 1999. The
transaction was structured as an all-cash acquisition for approximately $41.8
million, which the Company financed through its credit facility. The transaction
was accounted for under the purchase method of accounting and the Company
recorded $21.8 million of goodwill, to be amortized on a straight-line basis
over 40 years. The condensed, consolidated statements of operations for the
three- and nine-month periods ended October 1, 2000 do not include the operating
results of the joining products business because the acquisition occurred on
September 29, 2000.
NOTE 2. CONTINGENCIES
The Company is subject to extensive national, state, provincial and local
environmental laws and regulations. These laws, which are constantly changing,
regulate the discharge of materials into the environment. The Company has
received various communications from regulatory authorities concerning certain
environmental matters and has currently been named as a potentially
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responsible party ("PRP") at one waste disposal site. The Company believes that
its potential liability with respect to this waste disposal site is not
material.
The Company had accrued estimated environmental remediation costs of $2,350,000
at October 1, 2000, consisting primarily of $724,000 for the Decatur, Alabama
facility; $290,000 for the Greenville, Mississippi facility; $730,000 for the
Jackson, Tennessee facility; $217,000 for the Ardmore, Tennessee facility and
$389,000 for the Shawnee, Oklahoma facility (with respect to the Double Eagle
Refinery site). Based on information currently available, the Company believes
that the costs of these matters are not reasonably likely to have a material
adverse effect on the Company's business, financial condition or results of
operations.
NOTE 3. INVENTORIES
Inventories are as follows:
OCTOBER 1, December 31,
2000 1999
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(In thousands)
Finished products $ 18,033 $16,489
Work-in-process 26,090 24,890
Raw materials and supplies 61,768 53,989
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Totals $105,891 $95,368
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Approximately 61% and 60% of the total consolidated inventories at October 1,
2000 and December 31, 1999 are stated on the basis of last-in, first-out
("LIFO") method. The remaining inventories, which primarily include supplies,
are valued using the average cost method.
NOTE 4. INTEREST EXPENSE, NET
Interest expense is net of interest income and capitalized interest of $42,000
and $547,000 for the three-month period ended October 1, 2000, and $820,000 and
$78,000 for the three-month period ended October 2, 1999, respectively. Interest
expense is net of interest income and capitalized interest of $437,000 and
$979,000 for the nine-month period ended October 1, 2000 and $2,781,000 and
$280,000 for the nine-month period ended October 2, 1999.
NOTE 5. DEBT
The Company has a $200 million Revolving Credit Facility (the "Facility") which
matures on April 30, 2002. The Facility provides for a floating base interest
rate that is, at the Company's election, either (a) the higher of the federal
funds effective rate plus 0.50% or the prime rate, or (b) LIBOR plus a specified
margin of 0.25% to 1.00%. Commitment fees on the unused available portion of the
Facility range from 0.10% to 0.50%. As of October 1, 2000, the Company had
approximately $80 million in outstanding borrowings and obligations under the
Facility, which provided approximately $120 million in additional borrowing
availability thereunder.
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NOTE 6. COMPREHENSIVE INCOME
For the three-month periods ended October 1, 2000 and October 2, 1999, total
comprehensive income (loss) was $3,148,000 and ($17,539,000), respectively. For
the nine-month periods ended October 1, 2000 and October 2, 1999, total
comprehensive income (loss) was $15,683,000 and ($4,061,000), respectively.
Comprehensive income (loss) differs from net income due to foreign currency
translation adjustments. The comprehensive loss for the three-month period and
nine-month period ended October 2, 1999, includes non-recurring and
restructuring charges net of tax of $21.4 million.
NOTE 7. INDUSTRY SEGMENTS
The Company's reportable segments are based on the Company's three product
lines: commercial products, wholesale products and rod, bar and strip products.
Commercial products consist primarily of high value added products sold directly
to original equipment manufacturers. Wholesale products are commodity-type
plumbing tube products, which are typically sold to a variety of customers. Rod,
bar and strip products are sold to a variety of customers.
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
Rod, Bar
Commercial Wholesale & Strip Consolidated
---------------------------------------------------------
(In thousands)
THREE-MONTH PERIOD ENDED OCTOBER 1, 2000
NET SALES $116,804 $ 24,779 $ 29,495 $171,078
GROSS PROFIT 16,551 1,963 590 19,104
Three-month period ended October 2, 1999
Net sales $107,171 $ 35,056 $ 22,539 $164,766
Gross profit 4,019 (128) (403) 3,488
NINE-MONTH PERIOD ENDED OCTOBER 1, 2000
NET SALES $367,930 $ 74,064 $ 86,436 $528,430
GROSS PROFIT 52,804 9,173 5,091 67,068
Nine-month period ended October 2, 1999
Net sales $333,998 $ 92,559 $ 63,371 $489,928
Gross profit 36,980 10,312 2,427 49,719
NOTE 8. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
During the first quarter of 1999, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position 98-5, Reporting on the Costs
of Start-Up Activities (the "Statement"), which requires that certain costs
related to start-up activities be expensed as incurred. In accordance with the
Statement, the Company recognized a charge for the cumulative effect of a change
in accounting principle of $8.0 million pre-tax ($5.8 million after-tax). The
implementation of the Statement required the Company to write-off the remaining
start-up costs relating primarily to the Company's Roxboro, North Carolina;
Jackson, Tennessee; and Shanghai, China facilities.
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NOTE 9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three-month period ended: Nine-month period ended:
OCTOBER 1, October 2, OCTOBER 1, October 2,
2000 1999 2000 1999
- ----------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Income (loss) before cumulative effect of
accounting change $ 4,994 ($17,104) $ 19,850 ($ 1,293)
Cumulative effect of accounting change,
net of income tax benefit -- -- -- (5,754)
- ----------------------------------------------------------------------------------------------------
Net income (loss) 4,994 (17,104) 19,850 (7,047)
Dividends on preferred stock (70) (70) (210) (210)
====================================================================================================
Net income (loss) applicable to common shares $ 4,924 ($17,174) $ 19,640 ($ 7,257)
====================================================================================================
Basic weighted average common shares 12,051 13,003 12,192 13,247
Employee stock options 256 -- 196 --
- ----------------------------------------------------------------------------------------------------
Diluted weighted average common and common
equivalent shares 12,307 13,003 12,388 13,247
====================================================================================================
Earnings per share-basic:
Income (loss) before cumulative effect of
accounting change $ 0.41 ($ 1.32) $ 1.61 ($ 0.12)
Cumulative effect of accounting change, net
of income tax benefit -- -- -- (0.43)
- ----------------------------------------------------------------------------------------------------
Net income (loss) per common share - basic $ 0.41 ($ 1.32) $ 1.61 ($ 0.55)
====================================================================================================
Earnings per share-diluted:
Income (loss) before cumulative effect of
accounting change $ 0.40 ($ 1.32) $ 1.59 ($ 0.12)
Cumulative effect of accounting change,
net of income tax benefit -- -- -- (0.43)
- ----------------------------------------------------------------------------------------------------
Net income (loss) per common share - diluted $ 0.40 ($ 1.32) $ 1.59 ($ 0.55)
====================================================================================================
NOTE 10. STOCK REPURCHASE PLAN
In September 1998, the Company announced that the Board of Directors had
authorized the Company to purchase up to 1,000,000 shares of the Company's
outstanding common stock in the open market from time to time as market
conditions warranted. In July 1999, the Company announced that the Board of
Directors had authorized an increase in the amount of this common stock
repurchase program up to 2,000,000 shares. On April 6, 2000, the Company
announced completion of this common stock repurchase program at an aggregate
purchase price of $36,690,000.
On April 6, 2000, the Company also announced that the Board of Directors had
authorized the Company to purchase an additional 1,000,000 shares of the
Company's outstanding common stock. As of October 1, 2000, the Company had
repurchased 179,900 shares of common stock under this program.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED OCTOBER 1, 2000 COMPARED TO
THREE-MONTH PERIOD ENDED OCTOBER 2, 1999
For the three-month period ended October 1, 2000, net sales were $171.1 million,
compared with $164.8 million in the three-month period ended October 2, 1999.
The increase in net sales for the three-month period of 2000 versus 1999 was
primarily due to higher average copper prices, as well as increased volumes of
commercial and rod, bar and strip products. The average COMEX copper price was
$0.87 per pound in the most recent three-month period, compared with $0.78 per
pound in the same period a year ago. The primary impact to the Company of higher
copper prices is higher net sales and cost of goods sold. The cost of copper is
generally passed along to the Company's customers and is included in the cost of
goods sold. The Company uses various strategies to minimize the effect of copper
prices on the Company's earnings.
Total pounds shipped for the three-month period ended October 1, 2000 decreased
2.2% to 97.1 million pounds, compared with 99.3 million pounds in the
corresponding period in 1999. Shipments of commercial tube products increased
5.0%, primarily the result of increased shipments of technical tube. To a lesser
extent, shipments were positively impacted by an increase in shipments of
industrial tube and fabricated products. Alloy tube shipments were lower in the
third quarter of 2000 than in the third quarter of 1999, reflecting the
Company's rationalization for this product. Shipments of the Company's wholesale
products for the three-month period ended October 1, 2000 as compared to the
three-month period ended October 2, 1999 decreased 30.6% to 17.7 million pounds.
The lower shipments reflect a reduction in demand caused by a slowdown in the
residential construction markets in both the U.S. and Canada. Shipments in
Canada have also been negatively impacted by offshore competition entering the
marketplace. Rod, bar and strip product shipments for the three-month period
ended October 1, 2000 increased 15.4% from the corresponding period in 1999,
primarily as a result of increased shipments of strip product from the Wolverine
Ratcliffs, Inc. ("WRI") joint entity, formed in mid-July 1999.
Gross profit increased to $19.1 million in the three-month period ended October
1, 2000 compared to $3.5 million in the corresponding period in 1999. For the
three-month period ended October 2, 1999, non-recurring charges of $14.4 million
were recognized in cost of goods sold. These charges primarily consisted of $8.1
million related to the liquidation of LIFO inventory values resulting from
planned inventory reductions and $6.3 million of additional costs associated
with the realignment of the Company's manufacturing operations and product
rationalization. Excluding the effect of these non-recurring charges,
consolidated gross profit increased 6.7% to $19.1 million in the third quarter
of 2000 from $17.9 million in the third quarter of 1999. This increase was
primarily the result of benefits from previously-enacted cost reduction programs
and increased shipments of technical tube (included in commercial products).
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Gross profit was negatively impacted by the lower production and shipments of
plumbing tube. Gross profit for rod, bar and strip was also negatively impacted
by integration costs and unexpected maintenance costs associated with WRI.
Selling, general and administrative expenses for the three-month period ended
October 1, 2000 were $8.4 million, as compared to $8.1 million in the
corresponding period in 1999. This increase was primarily due to an increase in
post-retirement health care expenses and variable incentive compensation.
During the third quarter of 1999, the Company recognized restructuring and other
charges of $19.9 million ($12.5 million net of tax). This charge included $10.0
million in expenses relating to the closing of the Company's Roxboro, North
Carolina facility, which employed approximately 100 people, of which $8.6
million in expenses related to the write-off of impaired assets; $2.8 million in
expenses related to the implementation of an indirect (non-manufacturing)
workforce reduction program of approximately 100 employees; $3.6 million in
expenses related to impaired assets due to a product and plant rationalization
plan; $1.9 million in expenses related to previously-closed entities, of which
$1.8 million was related to the write-off of impaired assets; $0.8 million in
expenses related to the termination of an interest rate swap; and $0.8 million
in expenses related to professional fees and other costs, primarily associated
with acquisitions that were not completed.
Net interest expense for the three-month period ended October 1, 2000 decreased
to $3.0 million from $3.3 million in the corresponding period in 1999. This
decrease reflects a reduction in interest expense due to a lower average
outstanding balance on the Company's credit facilities and an increase in
capitalized interest, which was partially offset by less interest income in the
third quarter of 2000.
The effective tax rate for the third quarter of 2000 was 35.9%. The Company
recognized a tax benefit of $10.7 million in the third quarter of 1999,
primarily resulting from the recognition of non-recurring charges included in
cost of goods sold and restructuring and other charges described above.
Excluding the effect of the tax benefit and the associated non-recurring and
restructuring and other charges, the effective tax rate for the third quarter of
1999 was 33.6%. The increase in the effective tax rate in the third quarter of
2000 resulted from more income from tax jurisdictions with higher tax rates than
in the third quarter of 1999.
Net income for the three-month period ended October 1, 2000 was $5.0 million, or
$0.40 per diluted share, compared to a loss of ($17.1) million, or ($1.32) per
diluted share in the corresponding period in 1999. Excluding non-recurring
charges included in cost of goods sold and restructuring and other charges
recognized in the third quarter of 1999, consolidated net income was $4.3
million, or $0.33 per basic share in the third quarter of 1999.
NINE-MONTH PERIOD ENDED OCTOBER 1, 2000 COMPARED TO
NINE-MONTH PERIOD ENDED OCTOBER 2, 1999
For the nine-month period ended October 1, 2000, net sales were $528.4 million,
compared with $489.9 million in the nine-month period ended October 2, 1999. The
increase in net sales for the
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nine-month period of 2000 versus 1999 was primarily due to higher average copper
prices, as well as increased volumes of commercial and rod, bar and strip
products. The average COMEX copper price was $0.83 per pound in the most recent
nine-month period, compared with $0.70 per pound in the same period a year ago.
The primary impact to the Company of higher copper prices is higher net sales
and cost of goods sold. The cost of copper is generally passed along to the
Company's customers and is included in the cost of goods sold. The Company uses
various strategies to minimize the effect of copper prices on the Company's
earnings.
Total pounds shipped for the nine-month period ended October 1, 2000 increased
1.0% to 299.4 million pounds, compared with 296.6 million pounds in the
corresponding period in 1999. Shipments of commercial tube products increased
6.3%, primarily as a result of increased shipments of industrial tube used in
the residential air conditioning industry. To a lesser extent, shipments were
positively impacted by an increase in shipments of technical tube and fabricated
products. Alloy tube shipments were lower in the nine-month period of 2000 than
in 1999, reflecting the Company's rationalization for this product. Shipments of
the Company's wholesale products for the nine-month period ended October 1, 2000
as compared to the nine-month period ended October 2, 1999 decreased 26.5% to
51.2 million pounds. The lower shipments primarily reflect a reduction in demand
caused by a slowdown in the residential construction markets in both the U.S.
and Canada. Shipments in Canada have also been negatively impacted by offshore
competition entering the marketplace. Rod, bar and strip product shipments for
the nine-month period ended October 1, 2000 increased 19.4% from the
corresponding period in 1999, primarily as a result of increased shipments of
strip product from WRI.
Gross profit increased 35.0% to $67.1 million in the nine-month period ended
October 1, 2000, compared to $49.7 million in the corresponding period in 1999.
As previously discussed, during the nine-month period of 1999, the Company
recognized non-recurring charges to cost of goods sold totaling $14.4 million.
Excluding the effect of the non-recurring charges, gross profit increased 4.7%
to $67.1 million in the nine-month period of 2000 compared to $64.1 million in
the nine-month period of 1999. This increase was primarily the result of
benefits from previously-enacted cost reduction programs and increased shipments
of industrial and technical tube (included in commercial products) and strip
products and, to a lesser extent, improved operating results at the Jackson,
Tennessee facility. Gross profit was negatively impacted by the lower production
and shipment volume of plumbing tube.
Selling, general and administrative expenses for the nine-month period ended
October 1, 2000 were $25.6 million, as compared to $22.5 million in the
corresponding period in 1999. This increase was primarily the result of
increased costs due to the addition of WRI, increased employee compensation
expenses relating to limited merit increases and performance awards, increased
professional fees, incremental depreciation and maintenance charges on new
information systems software and increased post-retirement health care expenses.
As previously discussed, the Company recognized restructuring and other charges
of $19.9 million ($12.5 million net of tax) during the third quarter of 1999.
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Net interest expense for the nine-month period ended October 1, 2000 decreased
to $9.3 million from $9.6 million in the corresponding period in 1999. This
decrease reflects a reduction in interest expense due to a lower average
outstanding balance on the Company's credit facilities and an increase in
capitalized interest, which was partially offset by less interest income in the
first nine months of 2000.
The effective tax rate for the first nine months of 2000 was 37.2%. For the
nine-month period of 1999, the Company recognized a tax benefit of $2.0 million
resulting from the recognition of non-recurring and restructuring and other
charges described above. Excluding the effect of the tax benefit and the
associated non-recurring and restructuring and other charges, the effective tax
rate in the nine-month period of 1999 was 35.2%. The increase in the effective
tax rate resulted from more income from tax jurisdictions with higher tax rates
than in the first nine months of 1999.
During the first quarter of 1999, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position 98-5, Reporting on the Costs
of Start-Up Activities (the "Statement"), which requires that certain costs
related to start-up activities be expensed as incurred. In accordance with the
Statement, the Company recognized a charge for the cumulative effect of a change
in accounting principle of $8.0 million pre-tax ($5.8 million after-tax). The
implementation of the Statement required the Company to write-off the remaining
start-up costs relating primarily to the Company's Roxboro, North Carolina;
Jackson, Tennessee and Shanghai, China facilities.
Net income for the nine-month period ended October 1, 2000 was $19.9 million, or
$1.59 per diluted share, compared to a loss of ($7.0) million, or ($0.55) per
diluted share in the corresponding nine-month period of 1999. Excluding the
non-recurring, restructuring and other charges and the cumulative effect of an
accounting change recognized in 1999, consolidated net income was $20.1 million,
or $1.50 per share for the nine-month period of 1999.
LIQUIDITY AND CAPITAL RESOURCES
In September 2000, the Company acquired the joining products business of
Engelhard Corporation. The joining products business is a leading manufacturer
of brazing alloys and fluxes, as well as a supplier of lead-free solder. The
business employs approximately 150 people at its manufacturing plant in Warwick,
Rhode Island, and had approximately $49 million in net sales during 1999. The
transaction was structured as an all-cash acquisition for approximately
$41,750,000, which the Company financed through its Revolving Credit Facility
(the "Facility").
The Company's Facility matures on April 30, 2002. The Facility provides for a
floating base interest rate that is, at the Company's election, either (a) the
higher of the federal funds effective rate plus 0.50% or the prime rate, or (b)
LIBOR plus a specified margin of 0.25% to 1.00%. Commitment fees on the unused
available portion of the Facility range from 0.10% to 0.50%. As of October 1,
2000, the Company had approximately $80 million in outstanding borrowings and
obligations under the Facility, which provided approximately $120 million in
additional borrowing availability thereunder.
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Net cash provided by operating activities totaled $18.5 million in the first
nine months of 2000 as compared to $1.9 million in the first nine months of
1999. The increase in cash provided by operations in 2000 as compared to 1999
was primarily due to an increase in net income, an increase in accounts payable
and accrued liabilities and a reduction in refundable income tax, which were
partially offset by an increase in inventory. The $8.9 million increase in
inventory from December 31, 1999 reflects seasonality in the industries to which
the Company sells its products and the purposeful accumulation of
work-in-progress inventory to facilitate the relocation of equipment from the
closed Roxboro facility to the Company's other facilities.
Capital expenditures were $25.3 million for the first nine months of 2000
compared to $17.1 million for the first nine months of 1999. The Company
currently expects to spend a total of approximately $35 to $38 million in 2000
under its capital improvement program.
The Company believes that it will be able to satisfy its existing working
capital needs, interest obligations, stock repurchases and capital expenditure
requirements with cash flow from operations and funds available from the
Facility.
ENVIRONMENTAL
The Company's facilities and operations are subject to extensive environmental
laws and regulations. During the three-month period ended October 1, 2000, the
Company spent approximately $83,000 on environmental matters which included
remediation costs, monitoring costs and legal and other costs. The Company has a
reserve of approximately $2.4 million for environmental remediation costs which
is reflected in the Company's Condensed Consolidated Balance Sheet. Based upon
information currently available, the Company believes that the costs of the
environmental matters described below are not reasonably likely to have a
material adverse effect on the Company's business, financial condition or
results of operations.
Oklahoma City, Oklahoma
The Company is one of a number of Potentially Responsible Parties ("PRPs") named
by the United States Environmental Protection Agency (the "EPA") with respect to
the soil and groundwater contamination at the Double Eagle Refinery Superfund
site in Oklahoma City, Oklahoma. The costs associated with the cleanup of this
site will be entirely borne by the PRPs, as the site owner has filed for
bankruptcy protection. In March 1993, twenty-three PRPs named with respect to
the soil contamination of the site, including the Company, submitted a
settlement offer to the EPA. Settlement negotiations between the PRPs and the
EPA are continuing, and a settlement and consent order is currently being
contemplated among the PRPs, the EPA, the Department of Justice, and the State
of Oklahoma which would provide for each PRP's liability to be limited to a pro
rata share of an aggregate amount based on the EPA'a worst-case cost scenario to
remediate the site. Under the current proposal, the Company's settlement amount
is estimated to be $389,000.
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Decatur, Alabama
In 1999, the Company negotiated a new Consent Order under Section 3008(h) of the
Resource Conservation and Recovery Act (the "Order"). The Order incorporated the
Corrective Measures Study ("CMS") submitted to the EPA regarding a waste burial
site at the Decatur, Alabama facility. The Order also included an upgrade to an
existing chrome groundwater remediation system. The CMS proposes current
monitoring and site maintenance. The remaining monitoring, legal and other costs
related to the groundwater remediation project are estimated to be $724,000. The
cost to the Company to comply with the CMS, as currently approved, will not have
a material adverse effect on the Company's business, financial condition or
results of operations.
In July of 2000, the Company notified the Alabama Department of Environmental
Management of low levels of certain volatile organic chemicals and petroleum
hydrocarbons detected in the groundwater at the Decatur plant. The Company
expects to further define the extent of any contamination and execute any
necessary remedies once construction in the area is completed.
Ardmore, Tennessee
On December 28, 1995, the Company entered into a Consent Order and Agreement
with the Tennessee Division of Superfund (the "Tennessee Division"), relating to
the Ardmore, Tennessee facility (the "Ardmore facility"), under which the
Company agreed to conduct a preliminary investigation regarding whether volatile
organics detected in and near the municipal drinking water supply are related to
the Ardmore facility and, if necessary, to undertake an appropriate response.
That investigation has disclosed contamination, including elevated
concentrations of certain volatile organic compounds in soils of certain areas
of the Ardmore facility and also has disclosed elevated levels of certain
volatile organic compounds in the shallow residuum groundwater zone at the
Ardmore facility.
Under the terms of the Consent Order and Agreement, the Company submitted a
Remedial Investigation and Feasibility Study ("RI/FS") work plan, which was
accepted by the Tennessee Division, and the Company has initiated the RI/FS. The
Tennessee Division approved the Groundwater Assessment Plan (as a supplement to
the RI/FS Plan) and additional groundwater sampling to determine the lateral and
vertical extent of possible contamination began in July 2000. The data from the
groundwater assessment, the subsequent risk assessment and a preliminary review
of remedial alternatives will complete the RI/FS portion of the project. It is
anticipated that the RI/FS will be submitted to the Tennessee Division in 2001.
A Corrective Measures Study will follow the RI/FS and will recommend any
required remediation. Based on the available information, the Company
preliminarily estimates a range of between $217,000 and $1,100,000 to complete
the investigation and develop the remediation plan for this site.
A report of a 1995 EPA site inspection of the Ardmore facility recommended
further action for the site. The Company believes, however, that because the
Tennessee Division is actively supervising an ongoing investigation of the
Ardmore facility, it is unlikely that the EPA will intervene and take additional
action. If the EPA should intervene, however, the Company could incur additional
costs for any further investigation or remedial action required.
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Greenville, Mississippi
Following the Company's acquisition of its Greenville, Mississippi facility (the
"Greenville facility"), a preliminary investigation disclosed volatile organic
contaminants in soil and groundwater at the site. The Company entered into a
consent agreement with the Mississippi Department of Environmental Quality (the
"MDEQ") on July 15, 1997. Remediation efforts began in the third quarter of 1997
and are expected to take approximately three years. The Company recently
submitted a report of remediation activities and requested that the MDEQ allow
it to cease active remediation and begin post-closure monitoring. However, there
can be no assurance that remediation efforts will be allowed to be permanently
discontinued, and operations, maintenance and other expenses of the remediation
system may continue for a longer period of time. Through October 3, 1998,
applicable costs of testing and remediation required at the Greenville facility
had been shared with the former owners of the facility pursuant to the terms of
an Escrow Agreement established at the time the facility was acquired.
Subsequent to October 3, 1998, the Company released the former owners of the
facility from liability related to the remediation of the Greenville facility
following the receipt of a $145,000 settlement payment. The Company estimates
the remaining investigative and remedial costs could total $290,000 under the
remediation plan the Company adopted, but these costs could increase if
additional remediation is required.
The Company has previously entered into the Mississippi Brownfield Program for
industrial site redevelopment. Based on recent discussions with MDEQ, the
Company is reevaluating its participation in the Brownfields program.
Jackson, Tennessee
In connection with the Company's acquisition of its Jackson, Tennessee facility
(the "Jackson facility"), a preliminary investigation disclosed soil and/or
groundwater contamination at this site. The Company had performed a Phase I
Environmental Audit and identified the existence of volatile organic
contaminants; however, the extent of any such contamination has not been fully
determined. Investigation at the site is being conducted pursuant to a consent
order with the State of Tennessee by a prior owner of the property. Based on
currently available information, the Company preliminarily estimates that
remediation costs could amount up to $730,000. However, certain of the
remediation costs may be reimbursed pursuant to the terms of an indemnification
agreement between the Company and the previous owners of the Jackson facility.
Altoona, Pennsylvania
With respect to the Altoona, Pennsylvania facility, the Company has entered into
the State of Pennsylvania Department of Environmental Protection Act II Program
(the "Program"). The Program was entered to address issues of contamination from
closed hazardous waste lagoons and oil contamination of soil at such facility.
The chrome lagoons were closed in 1982. The Program is a voluntary site
remediation program which allows the Company to direct the site evaluation and
any eventual remediation. Preliminary costs are estimated at $185,000 to
complete the investigation phase of the Program. Once the investigation phase is
completed, a decision on remediation (if any) will be made. Insufficient
information exists at this point to
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estimate any remediation costs or if remediation will be required. It is the
Company's position that the previous owner indemnified the Company for any
liability in the matter. The Company is pursuing this indemnification with
Millennium Chemicals (formerly National Distillers), and thus no liability has
been recorded at October 1, 2000.
Other
The Company has been named as a party in a Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") lawsuit by Southdown Environmental
Services ("Southdown") and Allworth, Inc. ("Allworth"). The Company is named
with approximately 200 other companies (the "Group") in the suit. The Company,
along with the other members of the Group, contracted with Allworth, and
subsequently Southdown, for treatment, storage and disposal of hazardous wastes
between 1978 and 1995. The suit seeks compensation from the Group for costs
related to environmental cleanup incurred by Southdown, and potentially
Allworth, at the site in Birmingham, Alabama. The site is presently owned by
Philips Services Corporation ("Philips"). To date, the Company has only incurred
legal fees associated with this matter. Negotiations have been ongoing,
unsuccessfully, between Philips, Southdown and Allworth to reach a settlement.
The Company's potential share of liability, if any, is unknown at this point.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133 Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). Subsequent to the issuance of
SFAS 133, the FASB has received many requests to clarify certain issues causing
difficulties in implementation. In June 2000, the FASB issued SFAS 138, which
responds to those requests by amending certain provisions of SFAS 133.
The Company is preparing to adopt SFAS 133 and the corresponding amendments
under SFAS 138 no later than the first quarter of fiscal year 2001. In that
regard, the Company is documenting its risk management philosophy with regard to
derivative instruments, inventorying all derivatives, documenting how
effectiveness of the derivatives will be assessed, and preparing its systems to
provide the necessary information for compliance. SFAS 133, as amended by SFAS
138, is not expected to have a material impact on the Company's consolidated
results of operations, financial position or cash flows.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain of the statements and subject areas contained herein in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" are
forward-looking statements and are not based on historical or current facts and
deal with or may be impacted by potential future circumstances and developments.
Such statements and the discussion of such subject areas involve, and are
therefore qualified by, the inherent risks and uncertainties surrounding future
expectations generally, and also may materially differ from the Company's actual
future experience involving any one or more of such subject areas. The Company
has attempted to
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identify, in context, certain of the factors that it currently believes may
cause actual future experience and results to differ from current expectations
regarding the relevant statement or subject area. The Company's operations and
results may be subject to the effect of other risks and uncertainties in
addition to the relevant qualifying factors identified herein, including but not
limited to, cyclicality and seasonality in the industries to which the Company
sells its products, the impact of competitive products and pricing,
extraordinary fluctuations in the pricing and supply of the Company's raw
materials, volatility of commodities markets, unanticipated developments in the
areas of environmental compliance and other risks and uncertainties identified
from time to time in the Company's reports filed with the Securities and
Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At October 1, 2000, the Company held foreign exchange forward contracts of $3.5
million related to buying and selling under firm contracts in currencies other
than the local currencies in which it operates, and had deferred hedging losses
of $51,000 associated with these forward contracts. The Company's foreign
currency exposures relate primarily to Germany and France. The potential loss in
fair value for these forward contracts from a hypothetical 10% adverse change in
quoted foreign currency exchange rates would be approximately $342,000.
In connection with the purchase of certain raw materials, principally copper, on
behalf of certain customers for future manufacturing requirements, the Company
has entered into commodity forward contracts as deemed appropriate for these
customers to reduce the Company's risk of future price increases. The amount of
forward contracts and their respective fair values have materially changed since
December 31, 1999 primarily due to the change in copper prices.
At December 31, 1999, the Company had entered into contracts hedging certain
future commodity purchases through May 2001 of $32.6 million. The estimated fair
value of these outstanding contracts was approximately $38.3 million at December
31, 1999. At October 1, 2000, the Company had entered into contracts hedging
certain future commodity purchases through December 2001 of $30.3 million. The
estimated fair value of these outstanding contracts was approximately $33.5
million at October 1, 2000. The effect of a 10% adverse change in commodity
prices at October 1, 2000 would change the estimated fair value of these
outstanding contracts to $30.1 million.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material legal proceeding developments during the
three-month period ended October 1, 2000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule (for SEC use only)
(b) Reports
The Company filed no reports on Form 8-K during the
three-month period ended October 1, 2000.
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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 thereto duly authorized.
Wolverine Tube, Inc.
By: /s/ James E. Deason
---------------------------------------
Name: James E. Deason
Title: Executive Vice President, Chief Financial Officer,
Secretary and Director
Dated: November 10, 2000
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