1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15 (d) of the Securities
- -------- Act of 1934
For the quarterly period ended September 27, 1997
------------------
OR
Transition report pursuant to Section 13 or 15 (d) of the Securities
- -------- 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 or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1525 Perimeter Parkway, Suite 210
Huntsville, Alabama 35806
---------------------------------------- ---------
(Address of Principal executive offices) (Zip Code)
(205) 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 at October 31, 1997
----------- -------------------------------
Common Stock, par value $0.01 per share 14,060,106 shares
2
WOLVERINE TUBE, INC.
INDEX
Page No.
PART I. Financial Information
Item I. Financial Statements
Condensed Consolidated Statements of Income (unaudited) -
Three and Nine-Month Periods Ended September 27, 1997 and
September 28, 1996..............................................2
Condensed Consolidated Balance Sheets (unaudited)-
September 27, 1997 and December 31, 1996........................3
Condensed Consolidated Statements of Cash Flows (unaudited) -
Nine-Month Periods Ended September 27, 1997 and
September 28, 1996..............................................4
Notes to Condensed Consolidated
Financial Statements (unaudited)................................5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................8
PART II. Other Information
Item 1. Legal Proceedings...............................................17
Item 6. Exhibits and Reports on Form 8-K................................17
3
WOLVERINE TUBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(In thousands, except per share data)
Three-month period ended: Nine-month period ended:
-------------------------- ----------------------------
September 27, September 28, September 27, September 28,
1997 1996 1997 1996
Net sales ................................... $ 159,380 $ 168,653 $ 511,038 $ 528,346
Cost of goods sold .......................... 140,871 145,806 447,612 456,501
--------- --------- --------- ---------
Gross profit ................................ 18,509 22,847 63,426 71,845
Selling, general and
administrative expenses ................... 5,243 5,046 16,239 16,250
Non-recurring charge ........................ -- -- 4,384 --
--------- --------- --------- ---------
Income from operations ...................... 13,266 17,801 42,803 55,595
Other expenses:
Interest expense .......................... 1,602 2,287 5,984 6,918
Amortization and other, net ............... 152 351 400 979
--------- --------- --------- ---------
Income before income taxes and
extraordinary item ........................ 11,512 15,163 36,419 47,698
Income taxes ................................ 4,223 5,583 13,230 17,421
--------- --------- --------- ---------
Income before extraordinary item ............ 7,289 9,580 23,189 30,277
Extraordinary item, net of income
tax benefit of $2,782....................... -- -- 4,738 --
--------- --------- --------- ---------
Net income .................................. 7,289 9,580 18,451 30,277
Less: Preferred stock dividends ............. (70) (70) (210) (210)
--------- --------- --------- ---------
Net income applicable to common shares ...... $ 7,219 $ 9,510 $ 18,241 $ 30,067
========= ========= ========= =========
Earnings per common share:
Income before extraordinary item .......... $ 0.51 $ 0.67 $ 1.61 $ 2.12
Extraordinary item, net of
income tax benefit ....................... -- -- (0.33) --
--------- --------- --------- ---------
Net income per share ........................ $ 0.51 $ 0.67 $ 1.28 $ 2.12
========= ========= ========= =========
Weighted average number of common and
common equivalent shares .................. 14,240 14,215 14,227 14,191
========= ========= ========= =========
See notes to condensed consolidated financial statements.
2
4
WOLVERINE TUBE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands,except share data)
ASSETS
September 27, December 31,
1997 1996
------------- ------------
Current assets: (Unaudited) (Note)
Cash and equivalents ................................... $ 8,802 $ 2,967
Accounts receivable, net ............................... 88,242 79,128
Inventories ............................................ 72,168 73,525
Prepaid expenses and other ............................. 1,079 205
--------- ---------
Total current assets ................................ 170,291 155,825
Property, plant and equipment, net ......................... 153,458 150,221
Deferred charges and intangible assets, net ................ 88,294 84,946
Prepaid pensions ........................................... 4,969 6,028
--------- ---------
Total assets ........................................ $ 417,012 $ 397,020
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ....................................... $ 39,257 $ 27,318
Accrued liabilities .................................... 8,429 11,231
Deferred income taxes .................................. 4,000 4,613
--------- ---------
Total current liabilities ........................... 51,686 43,162
Deferred income taxes ...................................... 25,995 25,857
Long-term debt ............................................. 94,347 100,473
Postretirement benefit obligations ......................... 12,378 12,505
Accrued environmental remediation .......................... 2,920 3,732
--------- ---------
Total liabilities ................................... 187,326 185,729
Minority interest .......................................... -- 69
Redeemable cumulative preferred stock, par
value $1 per share; 20,000
shares issued and outstanding at
September 27, 1997 and December 31, 1996 .............. 2,000 2,000
Stockholders' equity:
Cumulative preferred stock,
par value $1 per share;
500,000 shares authorized ............................. -- --
Common stock, par value $.01 per share;
20,000,000 shares authorized,
14,057,076 and 13,980,517 shares
issued and outstanding at
September 27, 1997 and December
31, 1996, respectively ................................ 141 140
Additional paid-in capital ............................. 99,833 98,870
Retained earnings ...................................... 135,756 117,515
Accumulated currency translation adjustment ............ (8,044) (7,303)
--------- ---------
Total stockholders' equity .......................... 227,686 209,222
--------- ---------
Total liabilities, redeemable
cumulative preferred stock
and stockholder's equity ............................ $ 417,012 $ 397,020
========= =========
Note: The Balance Sheet at December 31, 1996 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.
3
5
WOLVERINE TUBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
Nine-month period ended:
----------------------------
September 27, September 28,
1997 1996
------------- -------------
OPERATING ACTIVITIES
Net income ................................................. $ 18,451 $ 30,277
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation and amortization ........................... 12,881 12,179
Deferred income taxes ................................... (411) 2,076
Non-cash portion of non-recurring charge ................ 3,533 --
Extraordinary loss on retirement of debt ................ 4,738 --
Changes in operating assets and liabilities:
Accounts receivable .................................... (9,257) (4,093)
Inventories ............................................ 1,708 (10,776)
Prepaid expenses and other ............................. (1,401) (1,379)
Accounts payable ....................................... 10,017 (179)
Accrued liabilities including pension,
postretirement benefit and environmental ............... (889) (2,199)
-------- --------
Net cash provided by operating activities .................. 39,370 25,906
INVESTING ACTIVITIES
Additions to property, plant and equipmen .................. (17,349) (4,602)
Purchase of subsidiary ..................................... -- (34,305)
Acqusition of business assets .............................. (4,048) --
Other ...................................................... (132) --
-------- --------
Net cash used by investing activities ...................... (21,529) (38,907)
FINANCING ACTIVITIES
Financing Fees ............................................. (820) --
Borrowings under revolving credit facility, net ............ 92,115 10,935
Issuance of common stock ................................... 907 2,547
Premium and fees paid on retirement of debt ............... (5,517) --
Principal payments on long-term debt and
capitalized lease obligations ............................ (98,440) (57)
Dividends paid ............................................. (210) (210)
-------- --------
Net cash provided (used) by financing activities ........... (11,965) 13,215
Effect of exchange rate on cash and equivalents ............ (41) 26
-------- --------
Net increase in cash and equivalents ....................... 5,835 240
Cash and equivalents beginning of period ................... 2,967 5,494
-------- --------
Cash and equivalents end of period ......................... $ 8,802 $ 5,734
======== ========
See notes to condensed consolidated financial statements.
4
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 27, 1997
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries after
elimination of significant intercompany accounts and transactions. The
accompanying condensed 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 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
September 27, 1997 are not necessarily indicative of the results of operations
that may be expected for the year ending December 31, 1997. For further
information, refer to the consolidated financial statements and footnotes
included in the Company's annual report on Form 10-K for the year ended December
31, 1996.
The Company uses its internal operational reporting cycle for quarterly
financial reporting.
NOTE 2 - CONTINGENCIES
The Company is subject to extensive U.S. and Canadian federal, 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 various waste disposal
sites. The Company believes that its potential liability with respect to these
waste disposal sites is not material.
The Company has accrued environmental remediation costs of $2,920,000
as of September 27, 1997 consisting primarily of $38,000 for estimated
remediation costs for the London and Fergus, Canada, facilities, $1,792,000 for
the Decatur, Alabama facility, $595,000 for the Greenville, Mississippi
facility, and an aggregate of $495,000 for the Ardmore, Tennessee facility and
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 reasonable likely to have a material adverse effect on the
Company's consolidated financial condition, results of operations or liquidity.
5
7
NOTE 3 - INVENTORIES
- --------------------------------------------------------------------------------
Inventories are as follows: September 27, December 31,
1997 1996
- --------------------------------------------------------------------------------
(In thousands)
Finished products $15,962 $13,626
Work-in-progress 23,495 26,646
Raw materials and supplies 32,711 33,253
- -------------------------------------------------------------------------------
$72,168 $73,525
================================================================================
NOTE 4 - INTEREST EXPENSE, NET
Interest expense is net of interest income and capitalized interest of
$162,000 and $285,000 for the three-month periods ended September 27, 1997 and
September 28, 1996, respectively, and $537,000 and $884,000 for the nine-month
periods ended September 27, 1997 and September 28, 1996, respectively.
NOTE 5 - LONG-TERM DEBT
In April 1997, the Company completed a refinancing which consisted of
entering into a new five year $200 million unsecured credit agreement (the "New
Credit Agreement") to replace the Company's existing credit facility, as well as
a tender offer for the $99 million in outstanding principal amount of the
Company's 10 1/8% Senior Subordinated Notes due 2002 ("Notes"). The New Credit
Agreement (i) provides for an aggregate available revolving credit facility of
$200 million, including a $20 million sublimit available to Wolverine Tube
(Canada) Inc., (ii) matures in full in April 2002, and (iii) provides for an
interest rate, at the Company's election, at a floating base rate that is either
(a) the higher of the federal funds effective rate plus .50% or the prime rate
or (b) LIBOR plus a specified margin of .25% to .875%. Upon the consummation of
the refinancing, on April 30, 1997, the Company borrowed approximately $107
million under the New Credit Agreement, substantially all of which was used to
finance the purchase of the $98.225 million in Notes that were tendered as well
as related financing expenses. Accordingly, during the second quarter the
Company recorded an extraordinary after-tax charge of $4,738,000 ($7,520,000
pre-tax) resulting from the early retirement of the Notes. As of September 27,
1997, the Company had approximately $106 million in additional borrowing
availability under the New Credit Agreement. On October 31, 1997, the balance of
$775,000 in aggregate principal amount of the Notes that had remained
outstanding was called for redemption by the Company at 103.8%, pursuant to the
terms of the Notes.
NOTE 6 - INTEREST RATE INSTRUMENTS
On May 7, 1997, the Company entered into an interest rate swap
agreement with a certain lender providing bank financing. The agreement
effectively fixed the interest rate on $65,000,000 floating debt provided under
the New Credit Agreement at a rate of 6.82% plus the specified margin from the
New Credit Agreement of .25% to .875%. The interest rate swap expires on May 7,
2002 and is based on 3-month LIBOR. This interest rate swap is accounted for as
a hedge; accordingly, gains and losses are recognized as interest expense.
6
8
NOTE 7 - NON-RECURRING CHARGE
During the second quarter of 1997, the Company recognized a
non-recurring, pre-tax charge of $4,384,000 ($2,997,000 net of tax). This charge
included $1.8 million of expenses related to the implementation of the Company's
1997 Voluntary Early Retirement Program; $1.3 million of severance costs
primarily associated with the departure of the Company's former Chief Executive
Officer; $0.6 million professional fees and other costs associated with an
acquisition that was not completed; and $0.7 million for the cost of
discontinuing the Poland operations of Small Tube Manufacturing Corporation (a
wholly-owned subsidiary of the Company).
7
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Three-Month Period Ended September 27, 1997 Compared to
Three-Month Period Ended September 28, 1996
For the three-month period ended September 27, 1997, consolidated net
sales were $159.4 million compared with $168.7 million in the three-month period
ended September 28, 1996. The decrease in sales for the three-month period this
year versus last year was attributable to a decrease in shipments and
fabrication charges, which was partially offset by increased copper prices. The
average Comex price of copper was $1.02 per pound in the most recent three-month
period compared with $0.91 per pound in the same period a year ago. The primary
impact to Wolverine of higher copper prices is higher net sales and costs 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 of 1997 decreased to
81.9 million pounds compared with 89.4 million pounds in the three-month period
a year ago. Shipments of commercial tube products decreased 11.7%, primarily as
a result of decreased shipments of industrial tube used in the residential air
conditioning industry as those customers generally did not meet their
anticipated levels of production during that period. Shipments of the Company's
wholesale products decreased 5.3% as a result of increased competition in the
United States market. In addition, the Company is experiencing a softness in
demand for wholesale products in Canada which is primarily the result of lower
construction activity in this market. Shipments of rod, bar and strip products
were unchanged compared to the three-month period a year ago.
Consolidated gross profit decreased to $18.5 million in the three-month
period of 1997 compared to $22.8 million in the three-month period of 1996. This
decrease is primarily the result of decreased shipments of commercial products,
which are generally the Company's highest margin product, and a shift in product
mix to products with lower margins within the commercial products category. In
addition, there was a decrease in shipments of wholesale products. During the
three-month period of 1997, the Company experienced a reduction in fabrication
charges for wholesale products as compared to the three-month period in 1996. In
order for the Company to manage weak market conditions, the Company utilized its
manufacturing capabilities and shifted production to lower margin products
within these product categories for which there was a stronger market.
Consolidated selling, general and administrative expenses for the
three-month period of 1997 were $5.2 million as compared to $5.0 million in the
three-month period in 1996.
8
10
Consolidated net interest expense for the three-month period in 1997
decreased to $1.6 million from $2.3 million in the three-month period in 1996.
This decrease is primarily the result of reduced interest expense resulting from
the Company's refinancing of its 10 1/8% Senior Subordinated Notes due 2002
("Notes") in April 1997.
The effective tax rate for the three-month period ended September 27,
1997 was 36.7%, compared with 36.8% in the three-month period a year ago.
Consolidated net income for the three-month period in 1997 was $7.3
million or $0.51 per share, compared to $9.6 million or $0.67 per share in the
three-month period a year ago.
Nine-Month Period Ended September 27, 1997 Compared to
Nine-Month Period Ended September 28, 1996
For the nine-months ended September 27, 1997, consolidated net sales
were $511.0 million compared with $528.3 million in the nine-month period ended
September 28, 1996. The decrease in sales for the nine-month period this year
versus the same period last year was attributable to a decrease in shipments and
fabrication charges, which was partially offset by increased copper prices. The
average Comex price of copper was $1.09 per pound in the most recent nine-month
period compared with $1.08 per pound in the same period a year ago. The primary
impact to Wolverine of higher copper prices is higher net sales and a
corresponding increase in 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 of 1997 decreased to
254.6 million compared with 261.9 million pounds in the nine-month period a year
ago. Shipments of commercial tube products decreased 5.1% primarily as a result
of decreased shipments of industrial tube used in the residential air
conditioning industry, as those customers generally did not meet their
anticipated levels of production, during that period, as well as a decrease in
technical tube shipments because the manufacturers of large commercial air
conditioners reduced their production from previous years' levels. The decline
in shipments was offset somewhat by increased shipments of fabricated products
as a result of the acquisition of Tube Forming, Inc. in September 1996.
Shipments of the Company's wholesale products increased 6.3% as a result of
increased participation in the United States market. Rod, bar and strip products
decreased 5.3%, primarily as a result of decreased shipments of strip products
to the Canadian mint.
Consolidated gross profit decreased to $63.4 million in the nine-month
period of 1997 compared to $71.8 million in the nine-month period in 1996. This
decrease is primarily the result of decreased shipments of commercial products,
which are generally the Company's highest margin product, and a shift in product
mix to products with lower margins within the commercial product category.
Consolidated selling, general and administrative expenses for the
six-month period of 1997 were $16.2 million compared to $16.3 million in the
six-month period of 1996.
9
11
During the nine-month period of 1997, the Company recognized a
non-recurring pre-tax charge to operations of $4.4 million ($3.0 million after
tax). This one-time charge to operations reflects $1.8 million of expenses
incurred in connection with the implementation of the Company's 1997 Voluntary
Early Retirement Program; $1.3 million of severance cost primarily associated
with the departure of the Company's former Chief Executive Officer; $0.6 million
of professional fees and other cost associated with an acquisition that was not
completed; and $0.7 million of cost for discontinuing the Poland operations of
Small Tube Manufacturing Corporation (a wholly owned subsidiary of the Company).
Consolidated net interest expenses for the nine-month period in 1997
was $6.0 million compared to $6.9 million in the nine-month period in 1996. This
decrease is primarily due to reduced interest expense associated with the
Company's refinancing of debt in April 1997 which was partially offset by
reduced interest income resulting from the Company's use of cash holdings in the
third quarter of 1996 to purchase Tube Forming, Inc.
The Company incurred an extraordinary charge associated with the early
extinguishment of the Notes. The charge on the extinguishment net of tax was
$4.7 million ($7.5 million pre-tax).
The effective tax rate for the nine-month period in 1997 was 36.3%
compared to 36.5% in the nine-month period in 1996.
Consolidated net income for the nine-month period in 1997 was $18.5
million or $1.28 per share, compared to $30.3 million or $2.12 per share in the
nine-month period a year ago. Adjusting for the one-time after tax charge of
$3.0 million or $0.22 per share and the extraordinary charge of $4.7 million or
$0.33 per share, consolidated net income and earnings per share for the
nine-month period in 1997 would have been $26.2 million or $1.83 per share.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $39.4 million in the
first nine-months of 1997 compared to $25.9 million in the first nine-months of
1996. The change was primarily due to the decrease in net income which was
offset by a decrease in inventory and an increase in accounts payable. The
Company's inventory balance for the first nine-months of 1997 decreased $1.7
million as compared to a $10.8 million increase in the first nine-months of 1996
as a result of reduced production requirements. The $9.3 million increase in net
accounts receivable from December 31, 1996 is primarily due to increases in
Comex copper prices over the prevailing prices at year end 1996.
On April 30, 1997, the Company entered into a new five-year $200
million unsecured credit agreement (the "New Credit Agreement") to replace the
Company's existing credit facility as well as to finance a tender offer for the
$99 million in outstanding principal amount of the Notes. The New Credit
Agreement (i) provides for an aggregate available revolving credit facility of
$200 million, including a $20 million sub-limit facility available to Wolverine
Tube (Canada) Inc., (ii) matures in full in April 2002, and (iii) provides for
an interest rate, at the Company's selection, at a floating base rate that is
either (a) the higher of the federal funds effective rate plus .50% or the prime
rate or (b) LIBOR plus a specified margin of .25% to .875%. Upon the
consummation of the refinancing, the Company borrowed approximately $107 million
under the New Credit Agreement, substantially all of which was used to
10
12
refinance the purchase of the $98.225 million in Notes that were tendered in the
tender offer and related refinancing expenses. As of September 27, 1997 the
Company had approximately $94 million in outstanding borrowings and obligations
under the New Credit Agreement and approximately $106 million in additional
borrowing availability thereafter. On October 31, 1997 the balance of $775,000
in aggregate principal amount of the Notes that had remained outstanding was
called for redemption by the Company at 103.8%, pursuant to the terms of the
Notes.
In the ordinary course of business the Company enters into various
types of transactions that involve contracts and financial instruments with
off-balance sheet risk. The Company enters into these financial instruments to
manage financial market risk, including foreign exchange risk, commodity price
risk for certain customers and interest rate risk. The Company is exposed to
loss on the forward contracts in the event of non-performance by the customer
whose orders are covered by such contracts. However, the Company does not
anticipate non-performance by such customers. The Company accounts for its
interest rate swap as a hedge, accordingly, gains and losses are recognized as
interest expense. The Company enters into these financial instruments utilizing
over-the-counter as opposed to exchange traded instruments. The Company
mitigates the risk that counter parties to these over-the-counter agreements
will fail to perform by only entering into agreements with major international
financial institutions.
Capital expenditures were $17.3 million for the first nine-months of
1997 and $4.6 million for the first nine months of 1996. The Company currently
expects to spend approximately $20 million in 1997 under its existing capital
program. The Company believes that it will be able to satisfy its existing
working capital needs, interest obligations and capital expenditure requirements
with cash flow from operations and funds available from the New Credit
Agreement.
Upon review of current business and market conditions, the Company
elected to adopt the 1997 Voluntary Early Retirement Program (the "Plan"). This
Plan rewards certain eligible employees who elected on a voluntary basis to take
early retirement from the Company between March 26, 1997 and May 12, 1997. After
the execution of a binding Voluntary Early Retirement Agreement and General
Release by each eligible employee, the Company paid each such employee an early
retirement payment and provided certain other considerations. The payment was an
amount equal to four weeks' base pay plus one additional week's pay for each
year of service, up to a maximum of twenty-six weeks' total, less applicable
taxes and withholdings required by law. Twenty-six employees from various
locations and departments throughout the Company elected to participate in the
Plan. At the end of the second quarter the implementation of the Plan was
completed. The Company expects to realize approximately $2.0 million in reduced
salary and related expenses per year as a result of the Plan. Implementation of
the Plan resulted in an approximate $1.8 million charge that was included in the
Company's non-recurring charge and recognized in the second quarter of 1997. The
primary components of the charge relating to the Plan include approximately $1.0
million relating to severance and vacation pay and $0.6 million of increased
pension expense resulting from these early retirements.
The Company continues to experience weak demand for its tubular
products used in the commercial market and unusually weak demand in the
residential air conditioning market. The unanticipated availability of reclaimed
chlorofluorocarbons ("CFCs") at reasonable prices has slowed the rate of
replacing large commercial air conditioners using CFC refrigerants. In addition,
the record levels
11
13
of manufacturer and distributor residential inventories, compounded by a cool
spring and early summer, has softened demand for the Company's high margin
residential air conditioner products. In addition, wholesale products
experienced price decreases due to a slowdown in product demand and increases in
foreign competition. In order to manage these weak markets, the Company
exercised its flexibility and shifted manufacturing to lower margin products.
These markets are very volatile and are subject to rapid change. However, if
these market conditions persist throughout the fourth quarter of 1997, the
Company could experience a decrease in fabrication charges compared to the
fourth quarter of 1996.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain of the statements and subject areas contained herein that are
not based upon historical or current facts 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 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 also
may be subject to the effect of other risks and uncertainties in addition to the
relevant qualifying factors identified elsewhere 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.
ENVIRONMENTAL
The Company's facilities and operations are subject to extensive
environmental laws and regulations. During the nine-month period ended September
27, 1997, the Company spent approximately $0.8 million on environmental matters
which include remediation costs, monitoring costs and legal and other costs. The
Company has a reserve of $2.9 million for environmental remediation costs which
is reflected in the Company's Condensed Consolidated Balance Sheet. The Company
has approved $3.1 million for capital expenditures relating to environmental
matters during 1997, of which $ 2.6 million has been spent through September 27,
1997. 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 consolidated financial
condition, results of operations or liquidity.
Oklahoma City, Oklahoma
The Company is one of a number of Potentially Responsible Parties
("PRP's") named by the Environmental Protection Agency ("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 PRP group (the "Group"), as the site owner
has filed for bankruptcy protection. In March 1993, twenty-three PRP's named
with respect to the soil contamination
12
14
of the site, including the Company, submitted a settlement offer to the EPA.
Settlement negotiations between the Group and the EPA are continuing, but
currently contemplate a settlement and consent order among the PRP's, the EPA
and the State of Oklahoma, which would provide for each PRP's liability to be
limited to a prorata share of an aggregate amount based upon the EPA's
worst-cast cost scenario to remediate the site. Under the current proposal, the
Company's settlement amount is estimated to be $390,000.
Decatur, Alabama
The Company is subject to an order under Section 3008(h) of the
Resource Conservation and Recovery Act ("RCRA") to perform a facilities
investigation of its site in Decatur, Alabama, including a portion of the site
where wastes were buried (the "Burial Site"). Should the EPA decide to order
remediation, the remaining monitoring, legal and other costs are estimated to be
$1.8 million. Under an agreement between the Company and an affiliate of the
Henley Group, Inc. (collectively, "Henley"), the prior owner of the property,
Henley took control of investigation and any required cleanup of the Burial
Site. In February 1997, the Company exercised its option to release Henley from
liability for further remediation, monitoring and related costs with respect to
the Burial Site in exchange for a settlement payment, all pursuant to the terms
of the existing agreements with Henley. In June 1997, the Company released
Henley from liability of the Burial Site following the receipt of the settlement
payment. The Company is currently awaiting comments and approval from the EPA on
a Corrective Measures Study ("CMS") that Henley had submitted to the EPA
regarding the Burial Site. The cost to the Company to comply with the CMS, as
currently presented, will not have an adverse effect on the Company's financial
position, results of operations, or liquidity.
New Westminster, British Columbia
In February 1988, the Company purchased substantially all of the assets
of Noranda Metal Industries Limited ("NMI" and, collectively with its parent,
Noranda, Inc., "Noranda"), which included property located in Montreal, Quebec
(the "Montreal Property"), Fergus, Ontario (the "Fergus Property"), and a
leasehold interest in property located on Annacis Island in Delta, British
Columbia (the "New Westminster Property", and collectively with the Montreal
Property and the Fergus Property, the "Properties"). In 1993, the Company
commissioned a series of environmental assessments of the Properties, which
resulted in the finding of PCB's above permissible limits at the New Westminster
Property and in an adjacent tidal flat of the Fraser River. Additional findings
include traces of PCB's within the Montreal Property, as well as the presence of
heavy metal and other contaminants at the New Westminster Property and the
Montreal Property.
The Company discontinued operations at the New Westminster facility in
April 1991, and the facility was sold in November 1995 to Juker Holdings Ltd.
("Juker"). Terms of the sales agreement provide that Juker assume responsibility
for the remediation of the New Westminster and neighboring properties (excluding
the Fraser River) and indemnify Wolverine from any liability with respect to the
remediation of the New Westminster Property.
The Company currently has no obligation to remediate the soil
contamination at its Montreal property under current Quebec statutes. The traces
of PCB's within the Montreal Property have been
13
15
remediated. The Company has instituted a program to prevent further
contamination and is monitoring the existing contamination. The Company intends
to continue to operate the Montreal Property and does not currently plan to
remediate the heavy metal contamination; thus, no estimate has been made of the
costs to remove the heavy metal from the soil and no amount has been accrued in
the accompanying Condensed Consolidated Financial Statements.
On October 13, 1993, the Company filed a Statement of Claim against
Noranda and other parties, contending that Noranda is liable for substantially
all of the cleanup costs at New Westminster and Montreal under the environmental
indemnity contained in the purchase agreement and that Noranda materially
breached the agreement by failing, among other things, to provide full and
complete disclosure of the conditions of the facilities. The Statement of Claim
seeks certain declaratory judgements, specific performance of the agreement, and
general specific prospective damages of up to $25,000,000 (Canadian). In
September 1997, the Company and Noranda reached an agreement to settle the
Statement of Claim. The settlement provides that Noranda will reimburse the
Company for a portion of the costs incurred in the remediation study and other
related costs associated with the New Westminster Property. In addition, the
agreement contemplates that Noranda and the Company would enter into a cost
sharing arrangement with respect to future remediation costs at the Montreal
Property, up to a maximum amount of $9.9 million. Pursuant to the proposed
arrangement, which would expire in September 2002, Noranda would be responsible
for a maximum of $6 million and the Company would be responsible for a maximum
of $3.9 million of such costs. Any remediation costs in excess of $9.9 million
would be the sole responsibility of the Company.
The Ministry of Environment, Lands and Parks of the Province of British
Columbia (the "B.C. Ministry") has issued a Pollution Abatement Order to the
Company and NMI regarding the New Westminster facility and a tidal flat in the
Fraser River immediately adjacent to an outfall from the property's drainage
system. The order requires the Company and NMI to prevent discharge of
contaminants from the property, to undertake further investigation of this site
and to prepare a remediation plan and implementation schedule for cleanup of the
contaminated area, including the Fraser River. Pursuant to the sale agreement
with Juker, Juker assumes responsibility for the remediation of the New
Westminster Property, other than with respect to Fraser River. The Company has
been informed that Juker has completed the remediation of the New Westminster
Property, and that NMI has completed the remediation of the Fraser River and
associated uplands, all as outlined in the implementation plan that was approved
by the B.C. Ministry. The Company does not anticipate that it will have any
further liability under the Pollution Abatement Order.
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 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
14
16
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. Based on the available information, and
recognizing that the nature and scope of remediation will be affected by the
results of the RI/FS, the Company preliminarily estimates a range of between
$855,000 and $1,655,000 to complete the investigation and remediation of this
site, of which approximately $750,000 has been spent.
A recent 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 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 contaminants in soil and groundwater at the site. Based on
further investigation, it appears that the contamination has not spread off
site. The Company entered into a Consent Order with the Mississippi Department
of Environmental Quality ("MDEQ") for a pilot study program which will help
determine the effectiveness of certain technology tentatively identified for
remediation and which will also help define the scope of remediation for the
site. The pilot study program concluded on June 1, 1997. The Company entered
into a final consent agreement with the MDEQ on July 15, 1997. Remediation
efforts began in the third quarter of 1997 and are expected to continue for
approximately three years. The remaining total investigative and remedial costs
could total $1,190,000, under the remediation plan the Company adopted.
Applicable costs of testing and remediation required at the Greenville facility
are being shared with the former owners of the facility on a dollar for dollar
basis, not to exceed $750,000, pursuant to the terms of an Escrow Agreement
established at the time the facility was acquired. Any remediation costs in
excess of the shared amount would be the sole responsibility of the Company.
Other
The Company has been identified by the EPA as one of a number of PRP's
at Superfund sites in Athens, Alabama and in Criner, Oklahoma. The Company
believes that its potential liability with respect to these Superfund sites is
not material. However, there can be no assurance that the Company will not be
named a PRP at additional Superfund sites in the future or that the costs
associated with those sites would not be substantial.
The Company believes that it faces no significant liability for the
Athens, Alabama site because it has removed all of the material that it
contributed to the site. The Company believes that it faces no significant
liability for the Criner, Oklahoma site because Henley, the prior owner of the
site, has retained liability for all cleanup costs resulting from past disposal
of used oil at the Criner, Oklahoma site pursuant to an indemnification
agreement between the Company and Henley. Henley, which is not affiliated with
the Company, has discharged these obligations to date.
15
17
Impact of Recently Issued Accounting Standards
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share", which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate earnings per
share for all prior periods. Under the new requirements for calculating primary
earnings per share, the dilutive effect of stock options will be excluded. The
impact is expected to result in an increase in primary earnings per share for
the three-month period ended September 28, 1996 of $0.02 per share.
Additionally, the impact is expected to result in an increase in primary
earnings per share for the nine-month periods ended September 27, 1997 and
September 28, 1996 of $0.03 and $0.07 per share, respectively.
In June 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No.130, "Reporting Comprehensive
Income," and No.131, "Disclosures about Segments of an Enterprise and Related
Information." These statements establish standards for reporting and display of
comprehensive income and its components and for reporting information about
business segments and products in financial statements, and are effective for
years beginning after December 15, 1997. Adoption of these statements is not
expected to have a material effect on the Company's financial statements.
16
18
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material legal proceeding developments during the
three-month period ended September 27, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.2 By-Laws of the Company, as amended
11 Computation of Earnings per Share
27 Financial Data Schedule (for SEC use only)
(b) Reports
No reports on Form 8-K were filed by the Company during the
three-month period ended September 27, 1997.
17
19
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.
(registrant)
Dated: November 5, 1997 By: /s/ James E. Deason
----------------------
James E. Deason
Executive Vice President
Chief Financial Officer
18