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 September 30, 2001
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.
(Exact name of registrant as specified in its charter)
Delaware 63-0970812
-------- ----------
(State of Incorporation) (IRS Employer Identification No.)
200 Clinton Avenue West, Suite 1000
Huntsville, Alabama 35801
- ------------------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
(256) 353-1310
(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 7, 2001
----- ----------------------------------
Common Stock, $0.01 Par Value 12,096,931 Shares
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
Page No.
--------
PART I
Item 1. Financial Statements
Condensed Consolidated Statements of Income (Unaudited)-- Three-Month and Nine-Month Periods Ended
September 30, 2001 and October 1, 2000 1
Condensed Consolidated Balance Sheets
September 30, 2001 and December 31, 2000 2
Condensed Consolidated Statements of Cash Flows (Unaudited)--
Nine-Month Periods Ended September 30, 2001 and October 1,
2000 3
Notes to Condensed Consolidated Financial Statements (Unaudited) 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II
Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
ITEM 1. FINANCIAL STATEMENTS
WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three-month period ended: Nine-month period ended:
----------------------------- -------------------------------
SEPTEMBER 30, October 1, SEPTEMBER 30, October 1,
2001 2000 2001 2000
------------- ---------- ------------- ---------
(In thousands except per share amounts)
Net sales $ 146,983 $ 171,078 $ 511,192 $ 528,430
Cost of goods sold 135,295 151,974 456,131 461,362
--------- --------- --------- ---------
Gross profit 11,688 19,104 55,061 67,068
Selling, general and administrative expenses 8,098 8,383 25,858 25,640
Restructuring and other charges
1,546 -- 6,239 --
--------- --------- --------- ---------
Income from operations 2,044 10,721 22,964 41,428
Other expenses:
Interest expense, net 3,281 2,978 10,744 9,341
Amortization and other, net (354) (51) (709) 486
--------- --------- --------- ---------
Income (loss) before income taxes (883) 7,794 12,929 31,601
Income tax provision (benefit) (761) 2,800 3,266 11,751
--------- --------- --------- ---------
Net income (loss) (122) 4,994 9,663 19,850
Less preferred stock dividends (70) (70) (210) (210)
--------- --------- --------- ---------
Net income (loss) applicable to common
shares ($ 192) $ 4,924 $ 9,453 $ 19,640
========= ========= ========= =========
Net income (loss) per common share--basic ($ 0.02) $ 0.41 $ 0.78 $ 1.61
========= ========= ========= =========
Basic weighted average number of common
shares 12,085 12,051 12,071 12,192
========= ========= ========= =========
Net income (loss) per common share--diluted ($ 0.02) $ 0.40 $ 0.77 $ 1.59
========= ========= ========= =========
Diluted weighted average number of common and
common equivalent shares 12,085 12,307 12,322 12,388
========= ========= ========= =========
See Notes to Condensed Consolidated Financial Statements.
1
WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, December 31,
2001 2000
------------ -----------
(In thousands except share and per share amounts) (UNAUDITED) (Note)
ASSETS
Current assets
Cash and equivalents $ 24,709 $ 23,458
Accounts receivable, net 91,765 105,025
Inventories 107,499 108,164
Refundable income taxes 6,081 10,769
Prepaid expenses and other 4,816 2,591
--------- ---------
Total current assets 234,870 250,007
Property, plant and equipment, net 234,039 215,491
Deferred charges and intangible assets, net 110,053 111,723
Assets held for resale 5,381 5,381
Prepaid pensions 7,240 7,753
--------- ---------
Total assets $ 591,583 $ 590,355
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 40,619 $ 51,904
Accrued liabilities 18,072 18,229
Deferred income taxes 1,466 1,493
Short-term borrowings 104,578 10,057
--------- ---------
Total current liabilities 164,735 81,683
Deferred income taxes 20,997 21,190
Long-term debt 149,784 231,163
Postretirement benefit obligation 16,288 17,272
Accrued environmental remediation 1,975 2,165
--------- ---------
Total liabilities 353,779 353,473
Minority interest 1,436 2,508
Redeemable cumulative preferred stock, par value $1 per share; 20,000
shares issued and outstanding at September 30, 2001 and
December 31, 2000 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, 14,273,371 and 14,214,318 shares issued as of
September 30, 2001 and December 31, 2000, respectively 143 142
Additional paid-in capital 103,681 103,589
Retained earnings 192,501 183,048
Unearned compensation (280) (613)
Accumulated other comprehensive loss (22,205) (14,320)
Treasury stock, at cost; 2,179,900 shares as of September 30,
2001 and December 31, 2000 (39,472) (39,472)
--------- ---------
Total stockholders' equity 234,368 232,374
--------- ---------
Total liabilities, minority interest, redeemable cumulative
preferred stock and stockholders' equity $ 591,583 $ 590,355
========= =========
Note: The Balance Sheet at December 31, 2000 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by accounting principles
generally accepted in the United States for complete financial
statements. See Notes to Condensed Consolidated Financial Statements.
2
WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine-month period ended:
----------------------------------------
SEPTEMBER 30, 2001 October 1, 2000
------------------ ---------------
(IN THOUSANDS)
Operating Activities
Net income $ 9,663 $ 19,850
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization 14,532 13,290
Non-cash portion of restructuring charge 2,145 --
Other non-cash charges (2,228) 523
Changes in operating assets and liabilities:
Accounts receivable, net 11,787 (19,895)
Inventories (2,573) (8,908)
Refundable income taxes 4,622 4,278
Prepaid expenses and other (1,479) (689)
Accounts payable (12,804) 11,104
Accrued liabilities including pension, postretirement
benefit
and environmental (516) (1,022)
-------- --------
Net cash provided by operating activities 23,149 18,531
Investing Activities
Purchases of property, plant and equipment (31,993) (25,289)
Acquisition of business assets
(1,481) (42,211)
Other
(119) (132)
-------- --------
Net cash used for investing activities (33,593) (67,632)
Financing Activities
Net borrowings from revolving credit facilities 22,924 51,566
Principal payments on long-term debt (10,057) (2,150)
Issuance of common stock 130 61
Purchase of treasury stock -- (7,458)
Dividends paid on preferred stock (210) (210)
-------- --------
Net cash provided by financing activities 12,787 41,809
Effect of exchange rate on cash and equivalents (1,092) (1,064)
-------- --------
Net increase (decrease) in cash and equivalents 1,251 (8,356)
Cash and equivalents at beginning of period 23,458 26,894
-------- --------
Cash and equivalents at end of period $ 24,709 $ 18,538
======== ========
See Notes to Condensed Consolidated Financial Statements.
3
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2001
(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 accounting principles generally
accepted in the United States 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-month and nine-month periods ended
September 30, 2001 are not necessarily indicative of the results of operations
that may be expected for the year ending December 31, 2001. 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,
2000.
The Company uses its internal operational reporting cycle for quarterly
financial reporting.
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 responsible
party ("PRP") at one waste disposal site.
The Company had accrued estimated environmental remediation costs of $2.0
million at September 30, 2001, consisting primarily of $0.8 million for the
Decatur, Alabama facility; $0.1 million for the Greenville, Mississippi
facility; $0.7 million for the Ardmore, Tennessee facility and $0.4 million for
the Shawnee, Oklahoma facility (with respect to the Double Eagle Refinery site).
4
NOTE 3. INVENTORIES
Inventories are as follows:
SEPTEMBER 30, 2001 December 31, 2000
------------------ -----------------
(In thousands)
Finished products $ 26,586 $ 25,886
Work-in-process 26,888 26,719
Raw materials and supplies 54,025 55,559
-------- --------
Totals $107,499 $108,164
======== ========
Approximately 52% of the total consolidated inventories at September 30, 2001
and 58% at December 31, 2000 are stated on the basis of last-in, first-out
("LIFO") method. The remaining inventories are valued using the average cost
method.
NOTE 4. INTEREST EXPENSE, NET
Interest expense is net of interest income and capitalized interest of $0.1
million and $0.5 million for the three-month period ended September 30, 2001,
and $42,000 and $0.5 million for the three-month period ended October 1, 2000.
Interest expense is net of interest income and capitalized interest of $0.6
million and $1.3 million for the nine-month period ended September 30, 2001 and
$0.4 million and $1.0 million for the nine-month period ended October 1, 2000.
NOTE 5. DERIVATIVES
The Company adopted Statement of Financial Accounting Standard (SFAS) No. 133
(subsequently amended by SFAS Nos. 137 and 138), Accounting for Derivative
Instruments and Hedging Activities, on January 1, 2001. This statement requires
that derivative instruments be recorded in the balance sheet as either assets or
liabilities measured at fair value, and that changes in the fair value of the
derivative instruments be recorded as unrealized gains or losses in either net
income or other comprehensive income, depending on whether specific hedge
accounting criteria are met.
In connection with the purchase of certain raw materials, principally copper, on
behalf of firm contracts with customers, the Company has entered into commodity
forward contracts through June 30, 2003 as deemed appropriate for these
customers to reduce their risk of future price increases. The notional amount of
these forward contracts, which were designated as fair value hedging
instruments, was $18.0 million at September 30, 2001. For the nine months ended
September 30, 2001, a $10,514 decrease to cost of goods sold was recorded for
the ineffective portion of these derivative instruments.
Also in connection with the purchase of certain raw materials, principally
copper, for anticipated future contracts with customers, the Company has entered
into commodity forward contracts through December 31, 2003 to reduce the
Company's risk of future price increases. The notional amount of these forward
contracts, which were designated as cash flow hedging instruments, was $33.6
million at September 30, 2001. For the nine-months ended September 30, 2001, a
decline in fair value of these forward contracts of $3.8 million was recorded,
$3.8 million in accumulated
5
other comprehensive loss and a $34,050 increase in cost of goods sold for the
ineffective portion of these derivative instruments.
At September 30, 2001, the Company had forward exchange contracts outstanding to
purchase foreign currency with a notional value of $2.1 million and to sell
foreign currency with a notional value of $2.7 million. These forward contracts
were designated as fair value hedging instruments and there was no ineffective
portion of the change in fair value of these forward contracts for the period
ended September 30, 2001.
At September 30, 2001, in connection with the purchase of natural gas, the
Company had commodity futures to purchase natural gas for the period of November
2001 through March 2002 with a notional value of $1.5 million. These future
contracts were designated as cash flow hedging instruments and there was no
ineffective portion of the change in fair value of these future contracts for
the period ended September 30, 2001. For the nine-months ended September 30,
2001, the Company recorded a decline in fair value of these instruments of $0.7
million in accrued liabilities and accumulated other comprehensive loss.
All derivative transactions are subject to the Company's risk management policy,
which does not permit speculative positions. The Company formally documents all
relationships between hedging instruments and hedged items, its risk management
objective and its strategy for undertaking the hedge. This process includes
identification of the hedging instrument, the hedged transaction, the nature of
the risk being hedged, and the method of assessing the effectiveness of the
hedge.
NOTE 6. DEBT
The Company has a $200 million Revolving Credit Facility (the "Facility") which
matures on April 30, 2002. Beginning July 1, 2001, the Company reclassified its
outstanding borrowings under the Facility from long-term debt to current
liabilities, the balance of which was $104.0 million at September 30, 2001. As
of September 30, 2001, the Company had approximately $109 million in outstanding
borrowings, obligations and letters of credit under the Facility and
approximately $91 million in additional borrowing availability thereunder.
On August 8, 2001, the Company and the lenders executed the Fifth Amendment and
Limited Waiver to Credit Agreement regarding certain debt covenants and certain
financial covenants for the last six-months of 2001, including an increase of
the floating base interest rate to LIBOR plus 0.75% to 2.00%.
NOTE 7. COMPREHENSIVE INCOME (LOSS)
For the three-month periods ended September 30, 2001 and October 1, 2000,
comprehensive income (loss) was ($5.1) million and $3.1 million, respectively.
For the nine-month periods ended September 30, 2001 and October 1, 2000,
comprehensive income was $1.8 million and $15.7 million, respectively.
Comprehensive income differs from net income due to foreign currency translation
adjustments and, beginning in 2001, adjustments related to accounting for
derivative instruments and hedging activities in accordance with SFAS No. 133
and subsequent amendments.
6
Comprehensive income (loss) is as follows:
Three-month period ended: Nine-month period ended:
-------------------------------- -----------------------------------
SEPTEMBER 30, October 1, SEPTEMBER 30, October 1,
2001 2000 2001 2000
------------- ---------- ------------- -----------
(In thousands)
Net income (loss) ($ 122) $ 4,994 $ 9,663 $ 19,850
Translation adjustment for financial statements
denominated in a foreign currency (3,706) (1,846) (4,944) (4,167)
Unrealized loss on cash flow hedges, net of tax (1,223) -- (2,941) --
------- ------- ------- --------
Comprehensive income (loss) ($5,051) $ 3,148 $ 1,778 $ 15,683
======= ======= ======= ========
NOTE 8. RESTRUCTURING AND OTHER CHARGES
During the second quarter of 2001, the Company recognized restructuring and
other charges of $4.7 million ($2.8 million net of tax) related to the closure
of the Ratcliffs Severn facility in Richmond Hill, Ontario, Canada. The closure
resulted from the Company's plan to consolidate its strip manufacturing
capabilities into one facility at Fergus, Ontario, Canada in order to achieve
cost and manufacturing efficiencies. The Company accrued and charged to expense
$3.4 million for severance benefits for approximately 135 salaried and hourly
employees. As of September 30, 2001, the Company had charged $2.4 million
against the liability for severance benefits and had separated or transferred
all of the employees. The restructuring charge also included $1.3 million of
other costs related to the consolidation of the strip manufacturing
capabilities, including a $0.1 million write-off of impaired assets. As of
September 30, 2001, the Company had charged $0.5 million against the liability
for professional fees and other costs. The restructuring will be substantially
completed by the end of 2001.
During the third quarter of 2001, the Company recognized restructuring and other
charges of $3.3 million ($2.0 million net of tax), of which $1.8 million was
charged to cost of goods sold. The Company accrued and charged to expense $1.1
million for severance benefits for approximately 40 salaried and hourly
employees. The Company offered a voluntary separation program to employees at
several of its facilities due to lack of demand for the facility's products, the
criteria for which was dependent on the employee's age, job duties and years of
service. The Company separated these employees in order to reduce costs for
anticipated continued weakness in sales volumes and mix and anticipated
reductions of capacity utilization. As of September 30, 2001, the Company had
charged $0.3 million against the liability for severance benefits and had
separated 40 employees. The Company accrued and charged to expense $2.2 million
of other costs primarily due to realized and anticipated reductions in demand
for its products, including a $1.8 million write-down of excessive or obsolete
inventory and a $0.2 million write-off of impaired assets. As of September 30,
2001, the Company had charged $1.9 million against the liability for these
costs. The Company anticipates that the restructuring will be substantially
completed by the end of 2001.
NOTE 9. INDUSTRY SEGMENTS
The Company's reportable segments are based on the Company's three product
groups: commercial products, wholesale products and rod, bar, strip and other
products. Commercial
7
products consist primarily of high value added products
sold directly to original equipment manufacturers. Wholesale products are
commodity-type plumbing tube products, which are primarily sold to plumbing
wholesalers and distributors. Rod, bar, strip and other 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, Strip
Commercial Wholesale & Other Consolidated
---------- --------- --------------- ------------
(In thousands)
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2001
NET SALES $ 99,420 $28,463 $ 19,100 $146,983
GROSS PROFIT (LOSS) 9,174 3,222 (708) 11,688
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
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2001
NET SALES $360,521 $77,730 $ 72,941 $511,192
GROSS PROFIT 46,097 8,448 516 55,061
Nine-month period ended October 1, 2000
Net sales $367,930 $74,064 $ 86,436 $528,430
Gross profit 52,804 9,173 5,091 67,068
8
NOTE 10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three-month period ended: Nine-month period ended:
------------------------------ -------------------------------
SEPTEMBER 30, October 1, SEPTEMBER 30, October 1,
2001 2000 2001 2000
------------- ---------- ------------- ----------
(In thousands, except per share data)
Net income (loss) ($ 122) $ 4,994 $ 9,663 $ 19,850
Dividends on preferred stock (70) (70) (210) (210)
-------- -------- -------- --------
Net income (loss) applicable to common
shares ($ 192) $ 4,924 $ 9,453 $ 19,640
======== ======== ======== ========
Basic weighted average common shares 12,085 12,051 12,071 12,192
Employee stock options -- 256 251 196
-------- -------- -------- --------
Diluted weighted average common and common
equivalent shares 12,085 12,307 12,322 12,388
======== ======== ======== ========
Net income (loss) per common share - basic ($ 0.02) $ 0.41 $ 0.78 $ 1.61
======== ======== ======== ========
Net income (loss) per common share - diluted ($ 0.02) $ 0.40 $ 0.77 $ 1.59
======== ======== ======== ========
NOTE 11. 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 July 6, 2000, the Company
announced completion of this common stock repurchase program at an aggregate
purchase price of $36.7 million and the repurchase of 2,000,000 shares.
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 September 30, 2001, the Company had
repurchased 179,900 shares of common stock under this program. The common stock
repurchase program, which was extended on February 23, 2001, expires March 31,
2002.
NOTE 12. RECENT PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142 Goodwill and Other Intangible
Assets. This statement addresses financial accounting and reporting for acquired
goodwill and other intangible assets. SFAS No. 142 presumes that goodwill has an
indefinite useful life and thus should not be amortized but rather tested at
least annually for impairment using a lower of cost or fair value
9
approach. Other intangible assets will still be amortized over their useful
lives under SFAS No. 142.
Effective January 1, 2002, the Company will adopt SFAS No. 142. A transitional
impairment test of all goodwill is required to be completed within six months of
adopting SFAS No. 142. The Company has not yet determined the amount, if any, of
goodwill impairment under the specific guidance of SFAS No. 142. However, any
impairment charge resulting from the transitional impairment test would be
recognized as a cumulative effect of a change in accounting principal. The
Company has $110.0 million of net deferred charges and intangible assets at
September 30, 2001, of which $106.1 million is goodwill. Adoption of SFAS No.
142 is expected to increase net income by approximately $3.3 million in 2002 due
to the elimination of amortization of goodwill.
In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets that supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of, and
provides a single accounting model for long-lived assets to be disposed of.
Although retaining many of the fundamental recognition and measurement
provisions of SFAS No. 121, the new rules significantly change the criteria that
would have to be met to classify an asset as held-for-sale. The new rules also
supersede the provision of Accounting Principle Board (APB) Opinion No. 30 with
regard to reporting the effects of a disposal of a segment of a business and
require expected future operating losses from discontinued operations to be
displayed in discontinued operations in the period(s) in which the losses are
incurred (rather than as of the measurement date as presently required by APB
No. 30). In addition, more dispositions will qualify for discontinued operation
treatment in the income statement. The Company plans to adopt SFAS No. 144 in
the first quarter 2002. The provisions of this statement are not expected to
have a significant impact on the Company.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 2001 COMPARED TO
THREE-MONTH PERIOD ENDED OCTOBER 1, 2000
Consolidated net sales for the third quarter ended September 30, 2001 were
$147.0 million, a decrease of $24.1 million, or 14.1%, from net sales of $171.1
million in the third quarter ended October 1, 2000. Sales decreased primarily as
a result of a slowing global economy. Decreases in sales of industrial tube,
technical tube, fabricated products, rod, bar and strip products were partially
offset by the addition of joining products, which resulted from the acquisition
of Wolverine Joining Technologies in September 2000, and an increase in sales of
wholesale products. International sales decreased due to a strong U.S. dollar
relative to other currencies. The average COMEX price was $0.67 per pound in the
third quarter of 2001 compared with $0.87 per pound in 2000. Pounds shipped
decreased 14.2 million pounds, or 14.6%, in the third quarter of 2001 to 83.0
million from 97.1 million in 2000.
Pounds of commercial products shipped decreased by 9.6 million pounds, or 16.5%,
in the third quarter of 2001 to 48.3 million, from 57.9 million in the third
quarter of 2000. The decrease in shipments was primarily due to lower volumes of
industrial tube, technical tube and fabricated products, reflecting a weakening
global economy and a relatively cool summer in North America. Lower alloy tube
shipments primarily resulted from the Company's strategy to enhance the
operating results of this product. These volume decreases were partially offset
by the addition of joining products. Sales of commercial products decreased
$17.4 million, or 14.9%, in the third quarter of 2001 to $99.4 million from
$116.8 million in 2000. Sales decreased due to lower volumes of industrial tube,
technical tube, fabricated products and alloy tube. These declines in sales were
partially offset by the addition of joining products. Gross profit from
commercial products excluding the restructuring charge recorded in the third
quarter of 2001, decreased by $6.0 million, or 36.1%, in the third quarter of
2001 to $10.6 million from $16.6 million in 2000.
Pounds of wholesale products shipped increased by 4.9 million pounds, or 27.7%,
in the third quarter of 2001 to 22.6 million pounds from 17.7 million pounds in
2000. Sales of wholesale products increased $3.7 million, or 14.9%, in the third
quarter of 2001 to $28.5 million from $24.8 million in 2000. Gross profit from
wholesale products increased $1.3 million, or 64.1%, in the third quarter of
2001 to $3.2 million from $2.0 million in 2000. Wholesale products benefited
from the positive impact of an increase in housing starts and lower interest
rates.
Pounds of rod, bar, strip and other products shipped decreased by 9.5 million
pounds, or 44.1%, in the third quarter of 2001 to 12.1 million from 21.6 million
in 2000, primarily due to a change in the mix of products sold, from heavy-gauge
strip to a light-gauge strip as well as weaker demand for rod and bar products
which were impacted by the slowing economy. Sales of rod, bar, strip and other
products decreased $10.4 million, or 35.2%, in the third quarter of 2001 to
$19.1 million from $29.5 million in 2000. Gross profit from rod, bar, strip and
other products, excluding the restructuring charge recorded in the third quarter
of 2001, decreased $0.9 million in the third quarter of 2001 to a loss of ($0.3)
million from a profit of $0.6 million in 2000. The
11
decrease in gross profit was primarily due to inefficiencies incurred in the
transition from heavy-gauge to light-gauge strip and in the consolidation of the
production of strip products into one facility. The Company completed the
consolidation of its strip manufacturing capabilities into one facility during
the third quarter of 2001.
Consolidated gross profit decreased $7.4 million or 38.8% in the third quarter
of 2001 to $11.7 million from $19.1 million in 2000. Excluding the $1.8 million
restructuring charge recorded in the third quarter of 2001, gross profit
decreased 29.5% in the third quarter of 2001 to $13.5 million from $19.1 million
in 2000. Gross profit was negatively impacted primarily by the aforementioned
overall decline in volume of shipments, as well as inefficiencies in the
production of strip products.
Consolidated selling, general and administrative expenses for the third quarter
of 2001 decreased 3.4% to $8.1 million, compared with $8.4 million in 2000,
while remaining approximately five percent of sales for both the third quarter
of 2001 and 2000. Excluding the selling, general and administrative expenses of
Wolverine Joining Technologies and the Distribution Center in The Netherlands,
both of which were acquired in the fourth quarter of 2000, selling, general and
administrative expenses decreased approximately 11.5%, or $1.0 million,
primarily due to a reduction in incentive compensation.
During the second quarter of 2001, the Company recognized restructuring and
other charges of $4.7 million ($2.8 million net of tax) related to the closure
of the Ratciffs Severn facility in Richmond Hill, Ontario, Canada. The closure
resulted from the Company's plan to consolidate its strip manufacturing
capabilities into one facility at Fergus, Ontario, Canada in order to achieve
cost and manufacturing efficiencies. The Company accrued and charged to expense
$3.4 million for severance benefits for approximately 135 salaried and hourly
employees. As of September 30, 2001, the Company had charged $2.4 million
against the liability for severance benefits and had separated or transferred
all of the employees. The restructuring charge also included $1.3 million of
other costs related to the consolidation of the strip manufacturing
capabilities, including a $0.1 million write-off of impaired assets. As of
September 30, 2001, the Company had charged $0.5 million against the liability
for professional fees and other costs. The restructuring will be substantially
completed by the end of 2001. The Company expects to realize approximately $3.4
million ($2.0 million net of tax) in reduced salary and related expenses per
year as a result of the consolidation of its strip manufacturing capabilities.
During the third quarter of 2001, the Company recognized restructuring and other
charges of $3.3 million ($2.0 million net of tax), of which $1.8 million was
charged to cost of goods sold. The Company accrued and charged to expense $1.1
million for severance benefits for approximately 40 salaried and hourly. The
Company offered a voluntary separation program to employees at several of its
facilities due to lack of demand for the facility's products, the criteria for
which was dependent on the employee's age, job duties and years of service. The
Company separated these employees in order to reduce costs for anticipated
continued weakness in sales volumes and mix and anticipated reductions of
capacity utilization. As of September 30, 2001, the Company had charged $0.3
million against the liability for severance benefits and had separated 40
employees. The Company accrued and charged to expense $2.2 million of other
costs primarily due to realized and anticipated reductions in demand for its
products, including a $1.8 million write-
12
down of excessive or obsolete inventory and a $0.2 million write-off of impaired
assets. As of September 30, 2001, the Company had charged $1.9 million against
the liability for these costs. The Company anticipates that the restructuring
will be substantially competed by the end of 2001 and expects to realize
approximately $2.1 million ($1.3 million net of tax) in reduced salary and
related expenses per year as a result of the restructuring.
Consolidated net interest expense for the third quarter of 2001 increased $0.3
million to $3.3 million, compared to $3.0 million in 2000. The increase in
interest expense is the result of having an average of $92.3 million in
outstanding borrowings and obligations under the Revolving Credit Facility
during the third quarter of 2001 versus an average of $38.4 million during the
third quarter of 2000, reflecting the funding of the Company's capital programs
as well as the Wolverine Joining Technologies acquisition in September of 2000.
The average interest rate under the Revolving Credit Facility was 4.68% for the
third quarter of 2001 versus 7.23% for the third quarter of 2000. Interest
expense for the remainder of 2001 will be impacted by the terms of the Fifth
Amendment and Limited Waiver to Credit Agreement dated August 8, 2001, wherein
the floating base interest rate on the Facility was changed to LIBOR plus 0.75%
to 2.00% from LIBOR plus 0.25% to 1.00%. See Note 6 to Notes to the Condensed
Consolidated Financial Statements.
Amortization and other, net was $0.4 million of income in the third quarter of
2001, as compared to $51,000 of income in 2000. The Company recorded a foreign
currency exchange gain of $0.3 million in 2001 versus a foreign currency
exchange gain of $0.1 million in 2000. These foreign currency gains are largely
attributable to fluctuations in the Canadian to U.S. dollar exchange rate. Also
reflected in other expense is the elimination of minority interest, which was a
$0.2 million credit in 2001 versus a $0.1 million credit in 2000. Amortization
expense was $0.2 million in the third quarter of 2001 as compared to $0.1
million in the third quarter of 2000.
The Company recognized a tax benefit of $1.3 million in the third quarter of
2001 related to the restructuring and other charges described above. Excluding
the effect of the tax benefit and the associated restructuring charges, the
effective tax rate for the third quarter of 2001 was 21.6%, versus 35.9% in
2000. The decrease in the effective tax rate in the third quarter of 2001
resulted from more income from tax jurisdictions with lower tax rates than in
the third quarter of 2000.
The Company reported a consolidated net loss in the third quarter of 2001 of
($0.1) million, or ($0.02) per diluted share, compared to net income of $5.0
million, or $0.40 per diluted share, in 2000. Excluding the restructuring charge
recognized in the third quarter of 2001, consolidated net income was $1.9
million or $0.15 per diluted share.
NINE-MONTH PERIOD ENDED SEPTEMBER 30, 2001 COMPARED TO
NINE-MONTH PERIOD ENDED OCTOBER 1, 2000
Consolidated net sales for the nine-month period ended September 30, 2001 were
$511.2 million, a decrease of $17.2 million, or 3.3%, from net sales of $528.4
million in the nine-month period ended October 1, 2000. Sales decreased as a
result of a slowing global economy. Decreases in sales of industrial tube,
fabricated products, rod, bar and strip products were partially offset by the
addition of joining products, which resulted from the acquisition of Wolverine
Joining
13
Technologies in September 2000 and an increase in sales of wholesale products.
The average COMEX price was $0.75 per pound in 2001 compared with $0.83 per
pound in 2000. Pounds shipped decreased 21.6 million pounds, or 7.2%, in 2001 to
277.7 million from 299.4 million in 2000.
Pounds of commercial products shipped decreased by 14.8 million pounds, or 8.0%,
in 2001 to 169.0 million, from 183.8 million in 2000. The decrease in shipments
was primarily due to lower volumes of industrial tube and fabricated products,
reflecting a weakening global economy and a relatively cool summer in North
America. Lower alloy tube shipments primarily resulted from the Company's
strategy to enhance the operating results of this product. These volume
decreases were partially offset by the addition of joining products. Sales of
commercial products decreased $7.4 million, or 2.0%, in 2001 to $360.5 million
from $367.9 million in 2000. Sales decreased primarily due to reduced volumes of
industrial tube and fabricated products, partially offset by the addition of
joining products. Gross profit from commercial products, excluding the
restructuring charge recorded in the third quarter of 2001 decreased by $5.3
million, or 10.0%, in 2001 to $47.5 million from $52.8 million in 2000.
Pounds of wholesale products shipped increased by 8.4 million pounds, or 16.4%,
in 2001 to 59.6 million pounds from 51.2 million pounds in 2000. Sales of
wholesale products increased by $3.7 million, or 4.9%, in 2001 to $77.7 million
from $74.1 million in 2000. Wholesale products benefited from the positive
impact of an increase in housing starts and lower interest rates. Gross profit
from wholesale products decreased $0.7 million, or 7.9%, in 2001 to $8.4 million
from $9.2 million in 2000, reflecting pricing in this commodity marketplace.
Pounds of rod, bar, strip and other products shipped decreased by 15.3 million
pounds, or 23.7%, in 2001 to 49.2 million from 64.4 million in 2000, primarily
due to a change in the mix of products sold, from heavy-gauge strip to a
light-gauge strip. Sales of rod, bar, strip and other products decreased $13.5
million, or 15.6%, in 2001 to $72.9 million from $86.4 million in 2000. Gross
profit from rod, bar, strip and other products, excluding the restructuring
charge recorded in the third quarter of 2001, decreased $4.2 million in 2001 to
$0.9 million from $5.1 million in 2000. The decrease in gross profit was due
primarily to inefficiencies incurred in the transition from heavy-gauge to
light-gauge strip, and to additional costs incurred as the Company consolidated
production of strip products into one facility.
Consolidated gross profit decreased $12.0 million or 17.9% in 2001 to $55.1
million from $67.1 million in 2000. Excluding the $1.8 million charge recorded
in the third quarter of 2001 gross profit decreased 15.3% in 2001 to $56.8
million from $67.1 million in 2000. Gross profit was negatively impacted by
lower volumes of industrial tube and fabricated products, the aforementioned
inefficiencies in the production of strip products, and the decline in pricing
for wholesale products. Additionally, gross profit was negatively impacted by
approximately $2.0 million of higher healthcare costs, which the Company was
able to partially mitigate through its cost reduction efforts and capital
improvement programs.
Consolidated selling, general and administrative expenses in 2001 increased 0.9%
to $25.9 million, compared with $25.6 million in 2000, while remaining
approximately five percent of sales for both 2001 and 2000. Excluding the
selling, general and administrative expenses of Wolverine
14
Joining Technologies and the Distribution Center in The Netherlands, both of
which were acquired in September 2000, selling, general and administrative
expenses decreased approximately 7.0%, or $1.8 million, primarily due to a
reduction in incentive compensation.
Consolidated net interest expense for 2001 increased $1.4 million to $10.7
million, compared to $9.3 million in 2000. The increase in interest expense is
the result of having an average of $94.0 million in outstanding borrowings and
obligations under the Revolving Credit Facility for the first nine months of
2001, versus an average of $36.3 million for the first nine months of 2000,
reflecting the funding of the Company's capital programs as well as the
Wolverine Joining Technologies acquisition in September of 2000. The average
interest rate under the Revolving Credit Facility was 5.41% for the first nine
months of 2001 versus 6.96% for the nine months of 2000. Partially mitigating
the increase in net interest expense was an increase of $0.2 million of interest
income and an increase of $0.3 million of capitalized interest.
Amortization and other, net was $0.7 million of income in 2001, as compared to
expense of $0.5 million in 2000. The Company recorded a foreign currency
exchange gain of $0.5 million in 2001 versus no foreign currency exchange gain
or loss in 2000. Foreign currency gains and losses are largely attributable to
fluctuations in the Canadian to U.S. dollar exchange rate. Also reflected in
other expense is the elimination of minority interest, which was a $0.5 million
credit in 2001 versus a $0.1 million debit in 2000. Amortization expense was
$0.5 million in 2001 versus $0.3 million in 2000.
The effective tax rate for 2001 was 25.3% versus 37.2% in 2000. Absent a $0.4
million non-recurring tax benefit recorded by the Company for its Canadian
operations in the first quarter of 2001 and absent a tax benefit of $3.2 million
and the associated $8.0 million of restructuring and other charges recorded in
the second and third quarters of 2001, the effective tax rate for 2001 would
have been approximately 32.5%. The decrease in the effective tax rate in 2001
resulted from more income from tax jurisdictions with lower tax rates than in
2000.
Consolidated net income in 2001 was $9.7 million, or $0.77 per diluted share,
compared to $19.6 million, or $1.59 per diluted share, in 2000. Excluding the
non-recurring, restructuring and other charges recognized in the second and
third quarters of 2001, consolidated net income was $14.5 million or $1.16 per
diluted share.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $23.1 million in the first
nine-months of 2001 as compared to $18.5 million in the first nine-months of
2000, despite a $10.2 million reduction in net income. Accounts receivable
increased $19.9 million in the first nine-months of 2000 primarily due to an 8%
increase in sales in 2000 versus the same period in the prior year. Accounts
receivable decreased $11.8 million in the first nine months of 2001 in
conjunction with a 3% decrease in sales in 2001 versus the same period in the
prior year. Conversely, accounts payable increased $11.1 million in the first
nine months of 2000 in conjunction with a 5% increase in cost of sales in 2000
versus cost of sales in 1999. Accounts payable decreased $12.8 million in the
first nine months of 2001 in conjunction with a 2% decrease in cost of sales
versus cost of sales in 2000.
15
Capital expenditures were $32.0 million in 2001 as compared to $25.3 million in
2000, primarily due to increased spending under the Company's capital
improvement program, Project 21. The Company currently expects to spend
approximately $34 million in 2001 as it has substantially frozen its capital
spending for the remainder of the year.
The Company's Revolving Credit Facility (the "Facility") matures on April 30,
2002. Beginning July 1, 2001, the Company reclassified its outstanding
borrowings under the Facility from long-term debt to current liabilities, the
balance of which was $104.0 million at September 30, 2001. The Company believes
that it will have a refinancing structure in place in advance of the April 30,
2002 maturity date. As of September 30, 2001, the Company had approximately $109
million in outstanding borrowings, obligations and letters of credit under the
Facility and approximately $91 million in additional borrowing availability
thereunder.
On August 8, 2001, the Company and the lenders executed the Fifth Amendment and
Limited Waiver to Credit Amendment regarding certain debt covenants and certain
financial covenants for the last six-months of 2001 including an increase of the
floating base interest rate to LIBOR plus 0.75% to 2.00%, from LIBOR plus 0.25%
to 1.00%. Based on the Company's forecast of continued weakness in sales volume
and mix and related anticipated reductions of its capacity utilization, the
Company could be in violation of some of the financial covenants of the Facility
during the fourth quarter of 2001. The Company anticipates remedying any
potential financial covenant violation in conjunction with its refinancing
structure that is expected to be put in place prior to the maturity of the
Facility on April 30, 2002.
On July 10, 2001, Standard and Poors lowered its corporate credit, bank loan and
debt ratings on the Company from BBB- to BB+ and provided a negative outlook on
the Company. The rating agency sited the level of debt outstanding and the
impact of the economic slowdown in North America on the Company's operating
profitability as the primary factors influencing the change in its rating. As a
result of the lowered rating and other economic factors affecting the practices
of credit institutions, the Company could incur higher interest rates upon
refinancing its Facility.
The Company believes that it will be able to satisfy its existing working
capital needs, interest obligations, stock repurchases, dividend payments 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 and nine-month periods ended September
30, 2001, the Company spent approximately $0.1 million and $0.3 million
respectively, on environmental matters, which included remediation costs,
monitoring costs, and legal and other costs. The Company has a reserve of
approximately $2.0 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
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.
16
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, thirty-one PRPs named with respect to the
soil contamination of the site, including the Company, submitted a settlement
offer to the EPA. On June 15, 2001 the Company received a final proposed
Administrative Order on Consent ("Order") from the EPA. On July 30, 2001 the
Company agreed to the Order with the EPA and submitted the required
documentation. The Order provides for each PRP's liability to be limited to a
pro rata share of an aggregate amount based on the EPA's worst-case cost
scenario to remediate the site. Under the Order, the Company's settlement amount
is estimated to be $0.4 million.
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 $0.8 million.
On May 31, 2001, the EPA ordered modifications to the previously approved CMS
and operations and maintenance plan to include continued monitoring of the
burial site and the development of a contingency plan in the event that
contamination is detected. In addition, the EPA requested that the Company have
a deed restriction placed on the burial site area to restrict any future
development. The Company is currently evaluating the financial and technical
impacts (if any) of these requests, and will work with the EPA to address these
matters. The cost to the Company to comply with the CMS, as currently approved,
is not expected to 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 ("ADEM") of low levels of certain volatile organic chemicals and
petroleum hydrocarbons detected in the groundwater at the Decatur, Alabama
facility during the expansion of the facility. The Company expects to further
define the extent of any contamination and execute any necessary remedies once
construction in the area is completed. On June 13, 2001 the Company received a
letter from the ADEM stating that a preliminary assessment would not be
conducted until 2002.
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
organic compounds detected in and near the municipal drinking water supply are
related to the Ardmore facility and, if necessary, to undertake an
17
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 by the
end of the first quarter of 2002. A Corrective Measures Study will follow the
RI/FS and will recommend any required remediation. On June 13, 2001, the Company
purchased 22 acres immediately north of the Ardmore facility because of the
potential migration of groundwater contamination onto this property. The Company
believes that owning the property will reduce both potential liability and
long-term remediation costs. Based on recent testing efforts at the facility and
the available information, the Company preliminarily estimates a range of
between $0.7 million and $1.8 million to complete the investigation and develop
the remediation plans 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.
Greenville, Mississippi
Following the Company's acquisition of its Greenville, Mississippi facility (the
"Greenville facility"), a preliminary investigation disclosed volatile organic
compounds 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 were 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 $0.1 million under
the remediation plan the Company adopted, but these costs could increase if
additional remediation is required.
18
The Company has previously entered into the Mississippi Brownfield Program for
industrial site redevelopment. The Company has delineated the Brownfield site,
prepared and submitted a Brownfield contingency monitoring plan, and is
implementing passive remediation at the site. The Company anticipates long-term
monitoring of the site to continue until the concentrations of contaminants
reach the MDEQ target goals.
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 hazardous waste 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 $0.2 million 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 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 September 30, 2001.
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 (collectively, with the Company, 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"). This matter has
been settled as it relates to the Company and did not have a materially adverse
effect to the Company.
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
made pursuant to the "Safe Harbor" provisions of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements use such words
as "may", "will", "expect", "believe", "plan" and other similar terminologies.
All statements which address operating performance, events or developments that
we expect or anticipate will occur in the future- including statements relating
to operating performance, restructuring strategies, property, plant and
equipment expenditures, debt refinancing and sources and uses of cash-are
forward-looking statements. These forward-looking statements are subject to
various risks and uncertainties that could cause actual results to differ
materially from those stated or implied by such forward-looking statements. The
Company
19
undertakes no obligation to publicly release any revision of any forward-looking
statements contained herein to reflect events or circumstances occurring after
the date hereof or to reflect the occurrence of unanticipated events. With
respect to expectations of future earnings, operating performance, restructuring
strategies, property, plant and equipment expenditures, debt refinancing and
sources and uses of cash, factors that could affect actual results include,
without limitation, global and local economic and political environments,
weather conditions, environmental contingencies, regulatory pressures, labor
costs, raw material costs, fuel, energy and healthcare costs, the mix of
geographic and product revenues, the effect of currency fluctuations,
competitive products and pricing, assumptions made as to customer retention,
costs associated with attracting new customers, costs of integrating recent
acquisitions and start-up facilities, costs associated with refinancing the
Company's debt maturing April 30, 2002 and costs of implementing restructuring
strategies.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 2001, the Company had forward exchange contracts outstanding to
purchase foreign currency with a notional value of $2.1 million and to sell
foreign currency with a notional value of $2.7 million. As of September 30,
2001, the Company had an unrealized loss of $43,000 associated with these
forward contracts. 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 $0.5 million.
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 their risk of future price increases. At December 31, 2000,
the Company had contracts hedging certain future commodity purchases through
December 2001 of $32.7 million. The estimated fair value of these outstanding
contracts was approximately $31.8 million at December 31, 2000. At September 30,
2001, the Company had contracts hedging certain future commodity purchases
through December 2003 of $51.6 million. The estimated fair value of these
outstanding contracts was approximately $45.8 million at September 30, 2001. The
potential loss in fair value for these forward contracts from a hypothetical 10%
adverse change in quoted future commodity rates would be approximately $5.2
million.
In connection with the purchase of natural gas, the Company has entered into
commodity futures contracts to purchase natural gas for the period of November
2001 through March 2002. These contracts are accounted for as hedges and,
accordingly, realized gains and losses are recognized in cost of goods sold upon
settlement. At September 30, 2001, the Company had outstanding contracts with a
notional value of $1.5 million and an unrealized loss of $0.7 million based on
the price of the futures at September 30, 2001. The potential loss in fair value
for these forward contracts from a hypothetical 10% adverse change in quoted
futures rates would be approximately $0.1 million.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material legal proceeding developments during the
three-month period ended September 30, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the
three-month period ended September 30, 2001.
22
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 14, 2001
23