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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 April 3, 1999
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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
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WOLVERINE TUBE, INC.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 63-0970812
-------- ----------
(State of Incorporation) (IRS Employer Identification No.)
1525 Perimeter Parkway, Suite 210
Huntsville, Alabama 35806
- ---------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(256) 353-1310
--------------
(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 April 30, 1999
----- --------------------------------
Common Stock, $0.01 Par Value 13,363,400 Shares
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FORM 10-Q
QUARTERLY REPORT
THREE-MONTH PERIOD ENDED APRIL 3, 1999
TABLE OF CONTENTS
Page No.
PART I
Item 1. Financial Statements
Condensed Consolidated Statements of Income
(Unaudited)--Three-Month Periods Ended April 3, 1999
and April 4, 1998....................................................1
Condensed Consolidated Balance Sheets (Unaudited)--April 3, 1999
and December 31, 1998................................................2
Condensed Consolidated Statements of Cash Flows
(Unaudited)--Three-Month Periods Ended April 3, 1999
and April 4, 1998....................................................3
Notes to Condensed Consolidated Financial Statements
(Unaudited)..........................................................4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk..........15
PART II
Item 1. Legal Proceedings...................................................16
Item 6. Exhibits and Reports on Form 8-K....................................16
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ITEM 1. FINANCIAL STATEMENTS
WOLVERINE TUBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands except per share amounts)
Three-month period ended:
APRIL 3, 1999 April 4, 1998
- -----------------------------------------------------------------------------------------
Net sales $ 160,845 $ 170,299
Cost of goods sold 138,733 145,504
- ---------------------------------------------------------------------------------------
Gross profit 22,112 24,795
Selling, general and administrative expenses 7,385 6,435
- ---------------------------------------------------------------------------------------
Income from operations 14,727 18,360
Other expenses:
Interest expense 3,128 1,586
Amortization and other, net 245 245
- ---------------------------------------------------------------------------------------
Income before income taxes and cumulative effect of
accounting change 11,354 16,529
Income taxes 4,134 5,954
- ---------------------------------------------------------------------------------------
Income before cumulative effect of accounting change 7,220 10,575
Cumulative effect of accounting change
(net of tax benefit of $2,211) (5,754) --
- ---------------------------------------------------------------------------------------
Net income 1,466 10,575
Less preferred stock dividends (70) (70)
- ---------------------------------------------------------------------------------------
Net income applicable to common shares $ 1,396 $ 10,505
=======================================================================================
Earnings per common share--basic:
Income before cumulative effect of accounting change $ 0.53 $ 0.75
Cumulative effect of accounting change (0.43) --
- ---------------------------------------------------------------------------------------
Net income per common share--basic $ 0.10 $0.75
=======================================================================================
Basic weighted average number of common shares 13,365 14,085
=======================================================================================
Earnings per common share--diluted:
Income before cumulative effect of accounting change $ 0.53 $0.74
Cumulative effect of accounting change (0.43) --
- ---------------------------------------------------------------------------------------
Net income per common share--diluted $ 0.10 $0.74
=======================================================================================
Diluted weighted average number of common and common
equivalent shares 13,520 14,272
=======================================================================================
See Notes to Condensed Consolidated Financial Statements.
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WOLVERINE TUBE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except per share amounts)
APRIL 3, December 31,
1999 1998
- -------------------------------------------------------------------------------------------------
(Unaudited) (Note)
ASSETS
Current assets
Cash and equivalents $ 73,529 $ 78,899
Account receivable, net 77,728 66,231
Inventories 100,864 108,134
Prepaid expenses and other 1,965 1,094
- -------------------------------------------------------------------------------------------------
Total current assets 254,086 254,358
Property, plant and equipment, net 192,675 197,708
Deferred charges and intangible assets, net 89,273 87,984
Assets held for resale 2,989 2,989
Prepaid pensions 6,124 6,379
- -------------------------------------------------------------------------------------------------
Total assets $ 545,147 $ 549,418
=================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 32,981 $ 38,653
Accrued liabilities 12,099 12,584
Deferred income taxes 3,015 3,018
- -------------------------------------------------------------------------------------------------
Total current liabilities 48,095 54,255
Deferred income taxes 26,027 25,903
Long-term debt 215,383 215,689
Postretirement benefit obligations 11,440 11,606
Accrued environment remediations 2,955 3,002
- -------------------------------------------------------------------------------------------------
Total liabilities 303,900 310,455
Redeemable cumulative preferred stock, par value $1 per share;
20,000 shares issued and outstanding at April 3, 1999
and December 31, 1998 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, 14,147,600 and 14,147,060 shares issued as of
April 3, 1999 and December 31, 1998, respectively 141 141
Additional paid-in capital 101,514 101,514
Retained earnings 168,826 167,430
Accumulated currency translation adjustment (14,005) (15,494)
Treasury stock at cost (17,229) (16,628)
- --------------------------------------------------------------------------------------------------
Total stockholders' equity 239,247 236,963
- --------------------------------------------------------------------------------------------------
Total liabilities, redeemable cumulative preferred stock and
stockholders' equity $ 545,147 $ 549,418
=================================================================================================
Note: The Balance Sheet at December 31, 1998 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See Notes to Condensed Consolidated Financial Statements.
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WOLVERINE TUBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands except per share amounts)
Three-month period ended:
APRIL 3, 1999 April 4, 1998
- --------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 1,466 $ 10,575
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 4,516 4,604
Cumulative effect of accounting change 5,754 --
Changes in operating assets and liabilities
Accounts receivable (11,539) (16,894)
Inventories 7,712 3,794
Prepaid expenses and other (2,218) (346)
Accounts payable (5,824) (4,049)
Accrued liabilities including pension,
postretirement benefit and environmental 1,730 8,589
- -------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,597 6,273
INVESTING ACTIVITIES
Additions to property, plant and equipment (6,096) (6,485)
Other (275) (166)
- -------------------------------------------------------------------------------------------------
Net cash used by investing activities (6,371) (6,651)
FINANCING ACTIVITIES
Net borrowings from revolving credit facility -- 2,009
Issuance of common stock -- 418
Principal payments on long-term debt (337) (351)
Purchase of treasury stock (601) --
Dividends paid (70) (70)
- -------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (1,008) 2,006
Effect of exchange rate on cash and equivalents 412 (17)
- -------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents (5,370) 1,611
Cash and equivalents beginning of period 78,899 15,096
- -------------------------------------------------------------------------------------------------
Cash and equivalents end of period $ 73,529 $ 16,707
=================================================================================================
See Notes to Condensed Consolidated Financial Statements.
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WOLVERINE TUBE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
APRIL 3, 1999
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 consolidated financial statements have been prepared in accordance
with instructions to Form 10-Q and do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying condensed consolidated financial
statements (and all information in this report) have not been examined by
independent auditors; but, in the opinion of management all adjustments, which
consist of normal recurring accruals necessary for a fair presentation of the
results for the periods, have been made. The results of operations for the
three-month period ended April 3, 1999 are not necessarily indicative of the
results of operations that may be expected for the year ending December 31,
1999. 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, 1998.
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 $2,955,000 as of
April 3, 1999, consisting primarily of $34,000 for estimated remediation costs
for the London and Fergus, Canada facilities, $1,000,000 for the Decatur,
Alabama facility, $418,000 for the Greenville, Mississippi facility, $740,000
for the Jackson, Tennessee facility and an aggregate of $763,000 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 reasonably likely to
have a material adverse effect on the Company's business, financial condition or
results of operations.
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NOTE 3. INVENTORIES
Inventories are as follows:
APRIL 3, 1999 April 4, 1998
- ---------------------------------------------------------------------------------
(In thousands)
Finished products $21,271 $22,740
Work-in-process 26,421 28,401
Raw materials and supplies 53,172 56,993
- ---------------------------------------------------------------------------------
$100,864 $108,134
=================================================================================
NOTE 4. INTEREST EXPENSE, NET
Interest expense is net of interest income and capitalized interest of
$998,000 and $124,000 for the three-month period ended April 3, 1999,
respectively, and $292,000 and $60,000 for the three-month period ended April 4,
1998, respectively.
NOTE 5. LONG-TERM DEBT
The Company's $200 million Revolving Credit Facility (the "Facility") (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 a floating base
interest rate that is, at the Company's election, either (a) the higher of the
federal funds effective rate plus 0.50% or the prime rate, or (b) LIBOR plus a
specified margin of 0.25% to 0.875%. As of April 3, 1999, the Company had
approximately $67 million in outstanding borrowings and obligations under the
Facility and approximately $133 million in additional borrowing availability
thereafter.
The Company is currently party to an interest rate swap agreement which
effectively fixes the interest rate on $65,000,000 in principal amount of
floating rate borrowings provided under the Facility at a rate of 6.82% plus the
specified margin of 0.25% to 1.00%. This agreement expires on May 7, 2002 and is
based on the three-month LIBOR. This interest rate swap is accounted for as a
hedge; the differential to be paid as interest rates change is accrued and
recognized as an adjustment to interest expense.
In August 1998, the Company issued $150 million in principal amount of 7 3/8%
Senior Notes (the "Notes") due August 1, 2008. The Notes were issued pursuant to
an Indenture, dated as of August 4, 1998, between the Company and First Union
National Bank, as Trustee. The net proceeds from the sale of the Notes were
applied to reduce borrowings under the Facility by approximately $58 million.
The remaining net proceeds are available for capital expenditures, potential
future acquisitions, working capital and other general corporate purposes. The
Notes (i) have interest payment dates on February 1 and August 1 of each year,
commencing February 1, 1999, (ii) are redeemable at the option of the Company at
a redemption price equal to the greater of (a) 100% of the principal amount of
the Notes to be redeemed, or (b) the sum of the present
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value of the remaining scheduled payments of principal and interest thereon from
the redemption date to the maturity date, discounted to the redemption date on a
semiannual basis at a rate based upon the yield of the specified treasury
securities plus 25 basis points, plus, in each case, accrued interest thereon to
the date of redemption, (iii) are senior unsecured obligations of the Company
and are pari passu in right of payment with any existing and future senior
unsecured indebtedness of the Company, including borrowings under the Facility,
(iv) are guaranteed by certain of the Company's subsidiaries, and (v) are
subject to the terms of the Indenture, which contains certain covenants that
limit the Company's ability to incur indebtedness secured by certain liens and
to engage in sale/leaseback transactions.
NOTE 6. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Financial Accounting Standards Board
Statement No. 130, Reporting Comprehensive Income ("Statement 130"). Statement
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of Statement 130 had no impact on the
Company's net income or stockholders' equity. Statement 130 requires unrealized
gains or losses on the Company's foreign currency translation adjustments, which
prior to the adoption of Statement 130 were reported separately in stockholders'
equity, to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of Statement
130. During the first quarters of 1999 and 1998, total comprehensive income
amounted to $2,885,000 and $10,967,000, respectively.
NOTE 7. INDUSTRY SEGMENTS
The Company adopted Financial Accounting Standards Board Statement 131,
Disclosures About Segments of an Enterprise and Related Information, during
1998. The Company's reportable segments are based on the Company's three product
lines: commercial products, wholesale products and other products. Commercial
products consist primarily of high value added products sold directly to
equipment manufacturers. Wholesale products are commodity-type plumbing tube
products, which are typically sold to a variety of customers. Other products
consist primarily of commodity-type rod, bar and strip products, which are sold
to a variety of customers.
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
Commercial Wholesale Other Consolidated
-------------------------------------------------------
(In thousands)
QUARTER ENDED APRIL 3, 1999
SALES $113,063 $26,193 $21,589 $160,845
GROSS PROFIT 16,595 4,081 1,436 22,112
Quarter ended April 4, 1998
Sales $122,385 $31,103 $16,811 $170,299
Gross profit 21,204 3,195 396 24,795
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NOTE 8. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
During the first quarter of 1999, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position 98-5, Reporting on the Costs
of Start-Up Activities (the "Statement"), which requires that certain costs
related to start-up activities be expensed as incurred. In accordance with the
Statement, the Company recognized a charge for the cumulative effect of a change
in accounting principle of $8 million pre-tax ($5.8 million after-tax). The
implementation of the Statement required the Company to write-off the remaining
start-up costs relating primarily to the Company's Roxboro, North Carolina;
Jackson, Tennessee; and Shanghai, China facilities.
NOTE 9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three-month period ended:
------------------------------------
APRIL 3, 1999 April 4, 1998
- ----------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
Income before cumulative effect of accounting change $ 7,220 $10,575
Cumulative effect of accounting change, net of income tax benefit (5,754) --
- --------------------------------------------------------------------------------------------------------------
Net income $ 1,466 $10,575
Preferred dividends (70) (70)
==============================================================================================================
Net income applicable to common shares $ 1,396 $10,505
==============================================================================================================
Basic weighted common shares outstanding 13,365 14,085
Employee stock options and warrants 155 187
- --------------------------------------------------------------------------------------------------------------
Diluted weighted average common and common equivalent
shares outstanding 13,520 14,272
- --------------------------------------------------------------------------------------------------------------
Earnings per share-basic:
Income before cumulative effect of accounting change $ 0.53 $ 0.75
Cumulative effect of accounting change (0.43) --
- --------------------------------------------------------------------------------------------------------------
Net income per common share $ 0.10 $ 0.75
==============================================================================================================
Earnings per share-diluted:
Income before cumulative effect of accounting change $ 0.53 $ 0.74
Cumulative effect of accounting change (0.43) --
- --------------------------------------------------------------------------------------------------------------
Net income per common share $ 0.10 $ 0.74
==============================================================================================================
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED APRIL 3, 1999 COMPARED TO THREE-MONTH PERIOD ENDED
APRIL 4, 1998
For the three-month period ended April 3, 1999 consolidated net sales were
$160.8 million, compared with $170.3 million in the three-month period ended
April 4, 1998. The decrease in sales for the three-month period this year versus
last year was attributable to a decrease in copper prices and unit fabrication
charges, which was partially offset by an increase in pounds of product shipped.
The average COMEX price of copper was $0.64 per pound in the most recent
three-month period, compared with $0.77 per pound in the same period a year ago.
The primary impact to the Company of lower copper prices is lower net sales and
cost of goods sold. The Company uses various strategies to minimize the effect
of copper prices on the Company's earnings.
Total pounds shipped for the three-month period of 1999 increased by 1.9 million
pounds to 97.5 million pounds, compared with 95.6 million pounds in the
three-month period a year ago. Shipments of commercial tube products remained
unchanged at 58.7 million pounds. The Company's industrial tube product
shipments used in the residential air conditioning industry increased over the
prior year period. The increase in shipments of industrial tube was offset
somewhat by reduced shipments of technical tube products. Technical tube
shipments decreased from prior period levels as the Company continued to
experience lower than anticipated demand for these products from major
customers, especially those with significant international sales. Shipments of
the Company's wholesale products for the three-month period of 1999 decreased
11.7% from the three-month period a year ago primarily due to a slowdown in the
Canadian commercial and residential construction markets. Rod, bar and strip
product shipments for the three-month period of 1999 increased 33.8% from the
three-month period a year ago as shipments of strip products to the Canadian
mint increased during the three-month period of 1999.
Consolidated gross profit decreased 10.8% to $22.1 million in the three-month
period of 1999. This decrease was primarily the result of decreased shipments of
technical tube that are included in commercial products, which are generally the
Company's highest margin product. This decrease was somewhat offset by increased
gross profit in wholesale and rod, bar and strip products. Wholesale product
gross profit increased primarily as a result of increased fabrication charges in
the United States market. Rod, bar and strip product gross profit increased
primarily as a result of the increased shipments of strip products previously
discussed.
Consolidated selling, general and administrative expenses for the three-month
period of 1999 were $7.4 million, as compared to $6.4 million in the three-month
period of 1998. This increase was primarily the result of increased salaries and
benefits, marketing expenses and professional fees.
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Consolidated net interest expense for the three-month period in 1999 increased
to $3.1 million from $1.6 million in the three-month period of 1998. This
increase was primarily the result of increased interest expense associated with
the issuance of $150 million in principal amount of 7 3/8% Senior Notes due
2008 in August 1998.
The effective tax rate for the three-month period ended April 3, 1999 was 36.4%,
compared with 36.0% in the three-month period a year ago.
During the three-month period of 1999, the Company recognized a charge for the
cumulative effect of a change in accounting principle of $8 million pre-tax
($5.8 million after tax). The Company adopted the American Institute of
Certified Public Accountants Statement of Position 98-5, Reporting on the Costs
of Start-Up Activities (the "Statement"). The implementation of the Statement
required the Company to write-off the remaining start-up costs relating
primarily to the Company's Roxboro, North Carolina, Jackson, Tennessee and
Shanghai, China facilities.
Consolidated net income for the three-month period of 1999 was $1.5 million, or
$0.10 per diluted and basic share, compared to $10.6 million or $0.74 per
diluted share and $0.75 per basic share in the three-month period a year ago.
Income before the cumulative effect of accounting change in the three-month
period of 1999 was $7.2 million, or $0.53 per diluted and basic share.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $1.6 million in the first
three months of 1999 compared to net cash provided by operating activities of
$6.3 million in the first three months of 1998. The decrease in cash provided by
operations in the first three months of 1999 was primarily due to decreased net
income, increased prepaid and other expenses, which was offset by a slight
increase in accrued liabilities. The $11.5 million increase in net accounts
receivable from December 31, 1998 is primarily due to increased sales which was
partially offset by decreases in COMEX copper prices over the prevailing prices
at year end 1998.
The Company's $200 million unsecured credit agreement (the "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 a
floating base interest rate that is, at the Company's election, either (a) the
higher of the federal funds effective rate plus 0.50% or the prime rate, or (b)
LIBOR plus a specified margin of 0.25% to 0.875%. As of April 3, 1999 the
Company had approximately $67 million in outstanding borrowings and obligations
under the Credit Agreement and approximately $133 million in additional
borrowing availability thereafter.
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
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customers. The Company accounts for its interest rate swaps 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 $6.1 million for the first three-months of 1999
compared to $6.5 million for the first three-months of 1998. The Company
currently expects to spend approximately $27 million in the aggregate in 1999
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 Credit Agreement.
IMPACT OF YEAR 2000
The Company utilizes a number of computer software programs and operating
systems throughout its organization, including applications used in order
processing, shipping and receiving, accounts payable and receivable processing,
financial reporting and in various other administrative functions. The Company
recognizes the need to ensure that its operations will not be adversely impacted
by applications and processing issues related to the upcoming calendar year 2000
(the "Year 2000 Issue"). The Year 2000 Issue is the result of computer programs
that have been written to recognize two digit, rather than four digit, date
codes to define the applicable year. To the extent that the Company's software
applications contain source codes that are unable to appropriately interpret a
code using "00" as the upcoming year 2000 rather than 1900, the Company could
experience system failures or miscalculations that could disrupt operations and
cause a temporary inability to process transactions, send and process invoices
or engage in similar normal business activities.
Based on an assessment of its systems during 1998, the Company has determined
that it will be required to modify or replace significant portions of its
software so that its computer systems will function properly with respect to
dates in the year 2000 and thereafter. The Company presently believes that with
modifications to its existing software and certain conversions to new software,
the Year 2000 Issue will not pose significant operational problems for its
computer systems. In addition, the Company's systems and operations are
dependent, in part, on interaction with systems operated or provided by vendors
or other third-parties, and the Company is currently surveying those parties
about their progress in identifying and addressing problems that their computer
systems may face in connection with the Year 2000 Issue. The Company believes
that it has no exposure for contingencies related to the Year 2000 Issue for the
products it has sold.
The Company's plan to address the Year 2000 Issue (the "Plan") identifies
exposure in three areas: information technology, operating equipment with
embedded chips or software, and third-party vendors. In addition, the Plan
involves the following four phases for each of the exposure areas: assessment,
remediation, testing and implementation. With respect to information technology,
the Company has fully completed its assessment of this area. This assessment
indicated that most of the Company's significant information technology systems
could be
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affected, particularly the general ledger, billing, payables and inventory
systems. To date, the Company is 96% complete on the remediation phase for the
information technology area and expects to complete software reprogramming and
replacement no later than June 30, 1999. Once software is reprogrammed or
replaced, the Company will begin testing and implementation. These phases run
concurrently for multiple systems. To date the Company has completed 65% of its
testing and has implemented 60% of its remediation systems. Completion of the
testing phase for all significant systems is expected by September 30, 1999,
with all remediation and implementation of systems expected to be fully tested
and operational by October 1, 1999.
The Company is completing the assessment and remediation phases for its
operating equipment with embedded chips or software. As the assessment phase
continues, the Company will begin to develop and implement any necessary
remediation efforts with the manufacturers or servicers of the operating
equipment. The target for completion of the remediation phase is May 31, 1999.
Testing and implementation of affected equipment is expected to be completed by
July 30, 1999.
The assessment of third-party vendors and customers and their exposure to the
Year 2000 Issue is 100% complete for systems that directly interface with the
Company and 100% complete for all other material exposure. The Company has
completed surveying all third-parties with whom it conducts business, has
completed remediation efforts on the effected systems and has completed the
testing and implementation phases. The Company has queried its significant
suppliers that do not share any information systems with the Company ("external
agents"). To date, the Company is not aware of any external agent with a Year
2000 Issue that would materially impact the Company's business, financial
condition or results of operations. The Company, however, has no means of
ensuring that external agents will be Year 2000 compliant. The inability of
external agents to complete their Year 2000 resolution processing in a timely
fashion could materially impact the Company. The effect of non-compliance by
external agents is not determinable by the Company.
The Company is utilizing both internal and external resources to reprogram, or
replace, and test its software for Year 2000 modifications. The total cost of
the Year 2000 project is estimated at $5.5 million and is being funded through
operating cash flows. Of the total project cost, approximately $5.3 million is
attributable to the purchase of new software, which will be capitalized. The
remaining $0.2 million, which will be expensed as incurred, is not expected to
have a material effect on the Company's business, financial condition or results
of operations. To date, the Company has incurred approximately $5.2 million in
costs related to the assessment, remediation and implementation efforts in its
Year 2000 modification project, the development of the plan for the purchase of
new systems and systems modifications. The Company has engaged an independent
consultant (the "Consultant") to review the adequacy, completeness and
feasibility of the Plan. The Consultant has made recommendations that the
Company is currently considering regarding improvements to the Plan. After the
Company completes the review and responds to these recommendations, the
Consultant will review the Company's responses to these recommendations and will
continue to monitor the Company's execution of the Plan. The Company currently
has no contingency plans in place in the event that it does not complete all
phases of the Year 2000 remediation program. The Company plans to evaluate the
status of completion in May 1999 and develop contingency planning.
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The costs of the project and the timeframe in which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third-party modification plans
and other factors. Specific factors that might result in additional costs or
time delays include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes and similar uncertainties. Based on the Company's current
estimates, the Company does not anticipate that the cost of compliance with the
Year 2000 Issue will be material to its business, financial condition or results
of operations; however, there can be no assurance that the Company's systems, or
those of its vendors, customers or other third-parties, will be made Year 2000
compliant in a timely manner or that the impact of the failure to achieve such
compliance will not have a material adverse effect on the Company's business,
financial condition or results of operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain of the statements and subject areas contained herein in "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that are not based on 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 may be subject to the effect of other risks and
uncertainties in addition to the relevant qualifying factors identified herein,
including but not limited to, cyclicality and seasonality in the industries to
which the Company sells its products, the impact of competitive products and
pricing, extraordinary fluctuations in the pricing and supply of the Company's
raw materials, volatility of commodities markets, unanticipated developments in
the areas of environmental compliance, unanticipated developments in the process
of assessing and addressing issues relating to the year 2000 issue 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 three-month period ended April 3, 1999, the
Company spent approximately $0.1 million on environmental matters which included
remediation costs, monitoring costs and legal and other costs. The Company has a
reserve of approximately $3.0 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 the
environmental matters described below are not reasonably likely to have a
material adverse effect on the Company's business, financial condition or
results of operations.
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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 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 of the site, including the Company,
submitted a settlement offer to the EPA. Settlement negotiations between the
Group and the EPA are continuing, and a settlement and consent order is
currently being contemplated among the PRPs, 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 on the EPA's worst-case 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 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 $1.0 million. The Company
is currently awaiting comments and approval from the EPA on a Corrective
Measures Study ("CMS") that Henley (a former owner of the facility) 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 a material adverse
effect on the Company's business, financial condition or results of operations.
Ardmore, Tennessee
On December 28, 1995, the Company entered into a Consent Order and Agreement
with the Tennessee Division of Superfund (the "Tennessee Division"), relating to
the Ardmore, Tennessee facility (the "Ardmore facility"), under which the
Company agreed to conduct a preliminary investigation regarding whether volatile
organics detected in and near the municipal drinking water supply are related to
the Ardmore facility and, if necessary, to undertake an appropriate response.
That investigation has disclosed contamination, including elevated
concentrations of certain volatile organic compounds, in 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. Based on the available information, the Company
preliminarily estimates a range of between $373,000 and $1,173,000 to complete
the investigation and remediation of 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
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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 (the "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 take
approximately three years. However, there can be no assurance that remediation
efforts will be allowed to be discontinued after three years, 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 have 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 $418,000 under the remediation plan the Company
adopted, but these costs could increase if additional remediation is required.
Jackson, Tennessee
In connection with the Company's acquisition of its Jackson, Tennessee facility
(the "Jackson facility"), a preliminary investigation disclosed soil and/or
groundwater contamination at this site. The Company has performed a Phase I
Environmental Audit and identified the existence of volatile organic
contaminants; however, the extent of any such contamination has not been fully
determined. Investigation at the site is being conducted pursuant to a consent
order with the State of Tennessee by a prior owner of the property. Based on
currently available information, the Company preliminarily estimates that
remediation costs could amount up to $740,000. However, certain of the
remediation costs may be reimbursed pursuant to the terms of an indemnification
agreement between the Company and the previous owners of the Jackson facility.
Other
The Company has been identified by the EPA as one of a number of PRPs 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. There can be no assurance, however, 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.
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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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement No. 133,
Accounting for Derivative Instruments and Hedging Activities ("Statement 133").
This statement provides a comprehensive and consistent standard for the
recognition and measurement of derivatives and hedging activities. Statement 133
requires all derivatives to be recorded on the balance sheet at fair value and
establishes special accounting for the following three different types of
hedges: changes in the fair value of assets and liabilities of firm commitments,
hedges of the variable cash flows of forecasted transactions, and hedges of
foreign currency exposures of net investments in foreign operations. Though the
accounting treatment and criteria for each of the three types of hedges is
unique, they all result in recognizing offsetting changes in value or cash flows
of both the hedge and hedged item in earnings in the same period. Changes in the
fair value of derivatives that do not meet the criteria of one of these three
categories of hedges are included in earnings in the period of the change.
Statement 133 is effective for fiscal years beginning after June 15, 1999, but
early adoption is allowed. Adoption of this statement is not expected to have a
material effect on the Company's consolidated financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no material changes in quantitative or qualitative disclosures about
market risk during the first quarter of 1999.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material legal proceeding developments during the three-month
period ended April 3, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1* Form of Amended and Restated Change in Control, Severance and
Non-Competition Agreement for Executive Officers
10.2* Long-Term Incentive Plan
10.3* Annual Performance Incentive Plan
27 Financial Data Schedule (for SEC use only)
(b) Reports
The Company filed no reports on Form 8-K during the three-month period
ended April 3, 1999.
* Identifies each exhibit that is a "management contract or compensatory plan
or arrangement" required to be included as an exhibit to this Form 10-Q.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Wolverine Tube, Inc.
By: /s/ James E. Deason
--------------------------------------
Name: James E. Deason
Title: Executive Vice President, Chief Financial Officer,
Secretary and Director
Dated: May 14, 1999
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