SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
Commission File No. 333-72305
Advanced Glassfiber Yarns LLC
(Exact name of registrant as specified in its charter)
Delaware 3229 58-2407014
(State of formation) (Primary Standard Industrial (IRS Employer
Classification Code Number) Identification No.)
Commission File No. 333-72305-01
AGY Capital Corp.
(Exact name of registrant as specified in its charter)
Delaware 3229 57-1072917
(State of incorporation) (Primary Standard Industrial (IRS Employer
Classification Code Number) Identification No.)
2558 Wagener Road, Aiken, South Carolina
(Address of registrants' principal executive office)
29801
(Zip Code)
Registrants' telephone number, including area code:
(803) 643-1501
---------------------------
Indicate by check mark whether the registrants (1) have 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
registrants were required to file such reports) and (2) have been subject to
such filing requirements for the past 90 days. Yes X No
As of November 14, 2001, all 1,000 shares of common stock of AGY
Capital Corp. were owned by Advanced Glassfiber Yarns LLC. Accordingly, AGY
Capital Corp. meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this form with the reduced disclosure
format.
ADVANCED GLASSFIBER YARNS LLC
QUARTERLY REPORT FOR THE PERIOD ENDED SEPTEMBER 30, 2001
TABLE OF CONTENTS
Page No.
--------
Part I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements 1
Consolidated Balance Sheets as of September 30, 2001 (unaudited)
and December 31, 2000 1
Consolidated Statements of Operations 2
For the three months ended September 30, 2001 and 2000 (unaudited) 2
For the nine months ended September 30, 2001 and 2000 (unaudited) 2
Consolidated Statements of Comprehensive Income 3
For the three months ended September 30, 2001 and 2000 (unaudited) 3
For the nine months ended September 30, 2001 and 2000 (unaudited) 3
Consolidated Statements of Cash Flows 4
For the nine months ended September 30, 2001 and 2000 (unaudited) 4
Notes to the Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 10
Overview 10
Results of Operations 11
Liquidity and Capital Resources 14
Disclosure Regarding Forward-Looking Statements 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part I - Financial Information
Item 1. Consolidated Financial Statements
ADVANCED GLASSFIBER YARNS LLC
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30, December 31,
2001 2000
--------------- ---------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 837 $ 4,054
Trade accounts receivable less allowance of $1,424 and $1,770 respectively 18,275 29,981
Inventories 40,269 25,011
Other current assets 1,779 5,947
--------------- ----------------
Total current assets 61,160 64,993
--------------- ----------------
Net property, plant and equipment 144,606 148,438
Intangible assets, net 212,434 222,578
Other non-current assets 136 -
--------------- ---------------
Total assets $ 418,336 $ 436,009
=============== ===============
LIABILITIES AND MEMBERS' INTEREST
Current liabilities:
Accounts payable $ 18,256 $ 29,181
Accrued liabilities 19,506 23,863
Current portion of long-term debt 21,044 14,670
--------------- ---------------
Total current liabilities 58,806 67,714
--------------- ---------------
Long-term debt, net of discount of $2,449 and $2,616, respectively 301,884 314,916
Deferred distribution 11,235 6,681
Pension and other employee benefit plans 25,090 22,947
Other non-current liabilities 5,516 -
-------------- ---------------
Total liabilities 402,531 412,258
-------------- ---------------
Commitments and contingencies - -
Members' interest 15,805 23,751
--------------- -----------------
Total liabilities and members' interest $ 418,336 $ 436,009
============== =================
The accompanying notes are an integral part of the consolidated financial
statements.
1
ADVANCED GLASSFIBER YARNS LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------------- ---------------------------------
2001 2000 2001 2000
----------------------------- ----------------------------------
(unaudited) (unaudited)
Net sales $ 48,894 $ 68,834 $ 172,859 $ 208,015
Cost of goods sold 36,216 51,678 123,509 154,275
----------- ---------- ----------- ------------
Gross profit 12,678 17,156 49,350 53,740
Selling, general and administrative expenses 3,252 3,954 11,165 12,310
Amortization 2,901 2,856 8,861 8,565
----------- ---------- ----------- ------------
Operating income 6,525 10,346 29,324 32,865
Interest expense 8,285 8,803 24,887 26,970
Other income, net (254) (436) (840) (2,064)
----------- ---------- ----------- ------------
Income (loss) before taxes (1,506) 1,979 5,277 7,959
Income tax expense 8 26 100 158
----------- ----------- ----------- ------------
Net income (loss) $ (1,514) $ 1,953 $ 5,177 $ 7,801
=========== ========== =========== ===========
The accompanying notes are an integral part of the consolidated financial
statements.
2
ADVANCED GLASSFIBER YARNS LLC
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(dollars in thousands)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
----------------------- ---------------------
2001 2000 2001 2000
----------------------- ---------------------
(unaudited) (unaudited)
Net income (loss) $ (1,514) $ 1,953 $ 5,177 $ 7,801
Other comprehensive income (loss):
Currency hedges-options (171) - 24 -
Currency hedges-forwards (36) - - -
Commodity swaps (250) - (718) -
Interest rate swaps (4,983) - (4,558) -
Foreign currency translation (19) (74) (70) (72)
------------ --------- ----------- ----------
Comprehensive income (loss) $ (6,973) $ 1,879 $ (145) $ 7,729
============= ========= =========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
3
ADVANCED GLASSFIBER YARNS LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
For the Nine Months
Ended September 30,
-----------------------------
2001 2000
-----------------------------
(unaudited)
Cash flows from operating activities:
Net income $ 5,177 $ 7,801
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 10,993 10,662
Amortization of debt issuance costs 1,310 1,310
Amortization of goodwill and other intangibles 8,861 8,565
Amortization of discount on notes 167 151
Alloy usage 1,474 1,369
Changes in assets and liabilities:
Trade accounts receivable, net 11,638 2,873
Inventories (15,258) 3,449
Other assets 4,636 (2,217)
Accounts payable (8,432) (3,660)
Accrued liabilities (4,411) (5,359)
Pension and post-retirement 2,143 1,944
------------ ------------
Net cash provided by operating activities 18,298 26,888
------------ ------------
Cash flows from investing activities:
Purchase of property, plant and equipment (13,235) (13,365)
Proceeds from sale of fixed assets 1,513 3,915
Other (43) (58)
------------- ----------
Net cash used in investing activities (11,765) (9,508)
------------- -----------
Cash flows from financing activities:
Proceeds from revolving credit facility, net 6,300 3,900
Payments on capital lease (76) (68)
Payments on term loans (13,050) (18,724)
Proceeds from interest rate swap 1,118 -
Distribution to Owens Corning (4,033) (3,979)
------------- -----------
Net cash used in financing activities (9,741) (18,871)
------------- -----------
Effect of exchange rate on cash (9) (88)
------------- -----------
Net decrease in cash and cash equivalents (3,217) (1,579)
------------- -----------
Cash and cash equivalents, beginning of period 4,054 6,223
------------- -----------
Cash and cash equivalents, end of period $ 837 $ 4,644
============= ===========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 26,552 $ 28,987
============= ===========
Supplemental disclosure of non-cash financing/investing activities:
Decrease in property and equipment financed in accrueds $ (2,489) $ (4,039)
============= ===========
Decrease in fair value of interest rate swaps $ (5,516) $ -
============= ===========
Decrease in fair value of derivative instruments $ (694) $ -
============= ===========
Deferred distribution $ 3,979 $ 4,456
============= ============
The accompanying notes are an integral part of the consolidated financial
statements.
4
ADVANCED GLASSFIBER YARNS LLC
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except as otherwise indicated)
1. Basis of Presentation
We have prepared the accompanying unaudited interim consolidated
financial statements of Advanced Glassfiber Yarns LLC in accordance with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X, and accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of items of a normal recurring
nature) considered necessary for a fair presentation have been included.
Operating results for the three months and nine months ended September 30, 2001
are not necessarily indicative of the results to be expected for the full year.
We believe that the disclosures are adequate to make the information presented
not misleading.
AGY Capital Corp. is a wholly owned subsidiary of Advanced
Glassfiber Yarns LLC, formed solely to facilitate our offering of 9 7/8%
Senior Subordinated Notes due 2009. Separate financial statements or
consolidating financial data of AGY Capital Corp. are not presented because
management has determined that they are not material. AGY Capital Corp. has no
assets or operations.
These financial statements should be read in conjunction with the
audited consolidated financial statements of Advanced Glassfiber Yarns LLC as of
and for the year ended December 31, 2000 in our 2000 Annual Report on Form 10-K.
Certain amounts from the prior consolidated financial statements
have been reclassified to conform to the current presentation.
2. Inventories
Inventories consist of the following:
September 30, December 31,
2001 2000
-------------- -------------
(unaudited)
Finished Goods $ 35,602 $ 20,051
Materials and supplies 4,667 4,960
--------------- -------------
$ 40,269 $ 25,011
=============== =============
5
3. Accrued Liabilities
Accrued liabilities consist of the following:
September 30, December 31,
2001 2000
------------- ------------
(unaudited)
Vacation $ 3,054 $ 3,003
Interest 3,284 7,001
Real and personal property taxes 2,389 2,531
Incentive compensation and profit sharing 10 2,555
Benefits 2,838 2,622
Due to Owens Corning 4,176 1,804
Other 3,755 4,347
------------- -------------
$ 19,506 $ 23,863
============= =============
4. Long-term Debt
Debt consists of the following:
September 30, December 31,
2001 2000
------------- ------------
(unaudited)
Senior Credit Facility
Revolving credit facility $ 15,800 $ 9,500
Term Loan A 64,049 76,840
Term Loan B 95,410 95,669
9 7/8% Senior Subordinated Notes, net
of amortized discount 147,551 147,384
Capital lease obligation 118 193
------------- -------------
322,928 329,586
Less current portion (21,044) (14,670)
-------------- -------------
Long-term debt $ 301,884 $ 314,916
============== =============
5. Segment Information
We operate in one business segment that manufactures glass fiber
yarns and specialty yarns that are used in a variety of industrial and
commercial applications. Our principal market is the United States. We do not
have any significant long-lived assets outside of the United
6
States. Information by geographic area is presented below, with net sales
based on product shipment location (in millions):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- --------------------
2001 2000 2001 2000
--------------------- --------------------
(unaudited) (unaudited)
Net Sales
North America $ 36.2 $ 49.6 $ 119.5 $ 147.1
Europe 9.8 13.7 41.8 46.0
Asia 1.3 4.9 8.7 13.1
Latin America 1.6 0.6 2.9 1.8
--------- --------- --------- ---------
Total $ 48.9 $ 68.8 $ 172.9 $ 208.0
========= ========= ========= =========
Sales by product category are as follows (in millions):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
2001 2000 2001 2000
--------------------- --------------------
(unaudited) (unaudited)
Net Sales
Heavy Yarns $ 41.4 $ 49.6 $ 132.0 $ 151.9
Fine Yarns 7.5 19.2 40.9 56.1
-------- -------- -------- ---------
Total $ 48.9 $ 68.8 $ 172.9 $ 208.0
======== ======== ======== =========
6. Accounting for Derivatives
The Company is exposed to market risk, such as fluctuations in
foreign currency exchange rates, commodity prices and interest rates. To manage
the volatility relating to these exposures that are not offset within its
operations, the Company enters into various derivative transactions pursuant to
its risk management policies. Designation is performed on a transaction basis to
support hedge accounting. The changes in fair value of these hedging instruments
are offset in part or in whole by corresponding changes in the fair value or
cash flows of the underlying exposures being hedged. The Company assesses the
initial and ongoing effectiveness of its hedging relationships in accordance
with its documented policy. The Company does not hold or issue derivative
financial instruments for trading or speculative purposes.
The Company has foreign currency exchange exposure from selling in
currencies other than the U.S. dollar. The primary purpose of the Company's
foreign currency hedging activities is to manage the volatility associated with
forecasted foreign currency sales. Principal currencies hedged include the Euro
and the Japanese Yen. The Company primarily utilizes forwards, purchased options
and collars with maturities of less than 12 months, which qualify as cash flow
hedges.
7
In order to manage the interest rate risk associated with its senior
credit facility, the Company enters into derivative transactions, primarily
swaps, to manage exposure to changes in interest rates. The Company's interest
rate derivatives mature within the next three years and qualify as cash flow
hedges.
Due to the nature of its business, the Company is also exposed to
risks due to changes in natural gas commodity prices. The Company has entered
into swaps in order to reduce the variability of the cash flows associated with
its forecasted purchases of natural gas. These swaps mature within the next two
years and qualify as cash flow hedges.
Effective January 1, 2001, the Company adopted SFAS 133, "Accounting
for Derivative Instruments and Hedging Activities," and related amendments. SFAS
133 requires that all derivative instruments be recorded on the balance sheet at
their fair value. For derivatives designated as fair value hedges, the changes
in the fair values of both the derivative instrument and the hedged item are
recognized in earnings in the current period. For derivatives designated as cash
flow hedges, the effective portion of changes in the fair value of the
derivative is recorded to accumulated other comprehensive income ("OCI") and is
reclassified to earnings when the underlying transaction impacts earnings.
As of January 1, 2001, the Company recorded a cumulative effect type
adjustment to OCI of $4.1 million relating to the fair value of its interest
rate swaps and currency hedges, which have been designated as cash flow hedges.
The effect of the adoption of SFAS 133 as of January 1, 2001 on net income was
not significant, primarily because the hedges in place as of January 1, 2001
qualified for hedge accounting treatment and were highly effective.
Gains and losses on derivatives qualifying as cash flow hedges are
recorded in OCI to the extent that the hedges are effective until the underlying
transactions are recognized in earnings. As of September 30, 2001, the net
derivative loss in OCI was $5.3 million. During the third quarter of 2001, $0.4
million of net losses were reclassified from OCI to earnings. The ineffective
portion of changes in fair values of hedge positions reported in third quarter
earnings was immaterial. As of September 30, 2001, the Company expects to
reclassify $4.1 million of net losses on derivative instruments from OCI to
earnings during the next 12 months due to actual export sales, the payment of
variable interest associated with the floating rate debt and purchases of
natural gas.
8
A summary of the amounts included in the accumulated other comprehensive
income (loss) is shown below (unaudited):
Commodity Interest-Rate Accumulated
Options Forwards Swaps Swaps OCI
--------- ---------- ----------- --------------- ------------
Balance at December 31, 2000 $ - $ - $ - $ - $ -
January 1, 2001, transition adjustment - 136 - (4,200) (4,064)
Current period changes in value (168) (125) - 3,036 2,743
Reclassification to earnings - (118) - 703 585
---------- ---------- ----------- --------------- ------------
Balance at March 31, 2001 (168) (107) - (461) (736)
---------- ---------- ----------- --------------- ------------
Current period changes in value 66 123 468 - 657
Reclassification to earnings (93) (52) - 36 (109)
---------- ----------- ----------- --------------- ------------
Balance at June 30, 2001 (195) (36) 468 (425) (188)
---------- ----------- ----------- --------------- ------------
Current period changes in value 276 85 53 4,614 5,028
Reclassification to earnings (105) (49) 197 369 412
---------- ----------- ----------- --------------- ------------
Balance at September 30, 2001 $ (24) $ - $ 718 $ 4,558 $ 5,252
========== ============ =========== ============== ============
7. Recent Accounting Pronouncement
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS No.
141") and Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141 requires that all
business combinations be accounted for under the purchase method. The statement
applies to all business combinations initiated after June 30, 2001.
SFAS No. 142 requires that an intangible asset that is acquired shall be
initially recognized and measured based on its fair value. The statement also
provides that goodwill should not be amortized, but shall be tested for
impairment annually, or more frequently if circumstances indicate potential
impairment, through a comparison of fair value to its carrying amount.Existing
goodwill will continue to be amortized through the remainder of 2001 at which
time amortization will cease and the Company will perform a transitional
goodwill impairment test. SFAS No. 142 is effective for fiscal periods beginning
after December 15, 2001. The Company is currently evaluating the impact of the
new accounting standards on existing goodwill and other intangible assets. While
the ultimate impact of the new accounting standards has yet to be determined, it
could have a negative impact on the Company's results. Goodwill amortization
expense for the nine months ended September 30, 2001 was $8.9 million.
8. Subsequent Events
In response to the recent downturn in the electronics industry, we
reduced production schedules and are focusing on operating cost reductions.
Subsequent to the end of the third quarter, we furloughed additional production
employees thereby reducing our production workforce by approximately 34% since
January 1, 2001. In addition to the furlough of production employees, we have
reduced the number of salaried positions in order to cut operating costs in
future periods.
9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This Quarterly Report contains forward-looking statements with
respect to our operations, industry, financial condition and liquidity. These
statements reflect our assessment of a number of risks and uncertainties. Our
actual results could differ materially from the results anticipated in these
forward-looking statements as a result of certain factors set forth in this
Quarterly Report. An additional statement made pursuant to the Private
Securities Litigation Reform Act of 1995 and summarizing certain of the
principal risks and uncertainties inherent in our business is included herein
under the caption "Cautionary Statement Regarding Forward-Looking Statements."
You are encouraged to read this section carefully.
You should read the following discussion and analysis in conjunction
with the accompanying consolidated financial statements and related notes, and
with our audited consolidated financial statements as of the year ended December
31, 2000 and related notes set forth in our 2000 Annual Report on Form 10-K.
Overview
Our business focuses on the production of glass yarn by converting
molten glass into thin filaments, which are then twisted into yarn. Our products
fall into two categories based on filament diameter:
o heavy yarns, which accounted for 76.3% of our net sales during
the nine months ended September 30, 2001 and 73.0% of our net
sales during the nine months ended September 30, 2000; and
o fine yarns, which accounted for 23.7% of our net sales during
the nine months ended September 30, 2001 and 27.0% of our net
sales during the nine months ended September 30, 2000.
Glass yarns are a critical material used in a variety of electronic,
industrial, construction and specialty applications such as printed circuit
boards, roofing materials, filtration equipment, building reinforcement, window
screening, aerospace materials, sporting goods and vehicle armor.
10
Results of Operations
The following table summarizes our historical results of operations
as a percentage of net sales:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------- ---------------------
2001 2000 2001 2000
---------------------- ---------------------
(unaudited) (unaudited)
Net sales 100.0 % 100.0% 100.0% 100.0%
Cost of goods sold 74.0 75.0 71.4 74.2
-------- ------ ------ ------
Gross profit 26.0 25.0 28.6 25.8
Selling, general and
administrative expenses 6.7 5.8 6.5 5.9
Amortization 6.0 4.2 5.1 4.1
-------- ------ ------ ------
Operating income 13.3 15.0 17.0 15.8
Interest expense 17.0 12.8 14.4 13.0
Other income, net (0.6) (0.7) (0.5) (1.0)
-------- ------ ------ ------
Income (loss) before taxes (3.1) 2.9 3.1 3.8
Income tax expense - - 0.1 -
-------- ------ ------ ------
Net income (loss) (3.1)% 2.9% 3.0% 3.8%
======== ====== ====== ======
Adjusted EBITDA, as presented below, is defined as net income before
interest expense, income taxes, depreciation, amortization expense and
non-recurring non-cash charges. Adjusted EBITDA is calculated as follows (in
thousands):
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
--------------------- ---------------------
2001 2000 2001 2000
--------------------- -----------------------
(unaudited) (unaudited)
Net income (loss) $(1,514) $ 1,953 $ 5,177 $ 7,801
Depreciation and amortization 6,728 6,417 19,854 19,227
Interest 8,285 8,803 24,887 26,970
Taxes 8 26 100 158
-------- -------- ---------- ----------
Adjusted EBITDA $13,507 $17,199 $50,018 $54,156
======== ======== ========= ==========
Adjusted EBITDA for the quarter ended September 30, 2001 decreased
$3.7 million, or 21.5%, to $13.5 million from $17.2 million for the quarter
ended September 30, 2000 and for the nine months ended September 30, 2001
decreased $4.2 million, or 7.7%, to $50.0 million from $54.2 million for the
same period in 2000.
We believe that adjusted EBITDA is a widely accepted financial
indicator of a company's ability to service and/or incur indebtedness. Adjusted
EBITDA does not represent and should not be considered as an alternative to net
income or cash flow from operations as
11
determined by generally accepted accounting principles, and adjusted
EBITDA does not necessarily indicate whether cash flow will be sufficient for
cash requirements. Not every company calculates adjusted EBITDA in exactly the
same fashion. As a result, adjusted EBITDA as presented above may not
necessarily be comparable to similarly titled measures of other companies.
Three Months Ended September 30, 2001 Compared to Three Months Ended
September 30, 2000
Net Sales. Net sales decreased $19.9 million, or 28.9%, to $48.9
million in the three months ended September 30, 2001 from $68.8 million in the
three months ended September 30, 2000. Had the Euro exchange rate versus the US
dollar not declined by 4.3% year to year, third quarter of 2001 sales would have
been $0.6 million higher. While the demand of the specialty and construction
markets remained stable, lower sales volumes to the electronics and industrial
markets have more than offset the benefit of price increases implemented earlier
this year. The decrease in electrical sales of $17.6 million, or 73.0%, was
primarily a result of significant inventory adjustments in the electronics
industry that began during the first quarter of 2001. In addition, the decrease
in demand in computer and telecommunications equipment has resulted in reduced
demand for AGY products. AGY products sold into the electronics market are woven
into fabrics that are used to reinforce printed circuit boards. We do not expect
sales to the electronics market to improve in the fourth quarter of 2001.
In response to the recent downturn in the electronics industry, we
continued to take additional measures to reduce production schedules and focus
on operating cost reductions. Subsequent to the end of the third quarter, we
furloughed additional production employees, thereby reducing our production
workforce by approximately 34% since January 1, 2001. In addition to the
furlough of production employees, we recently reduced the number of salaried
positions in order to cut operating costs in future periods.
Gross Profit. Gross profit increased to 26.0% of net sales for the
three months ended September 30, 2001 from 25.0% in the three months ended
September 30, 2000. Excluding the impact of changes in the exchange rate of
European currencies, gross profit in the third quarter of 2001 would have been
26.3%. Continued improved manufacturing performance and cost reduction efforts,
as well as the previously mentioned price increases partially offset the
negative impact of under absorption of fixed costs due to reduced demand and a
less favorable product mix.
Selling General and Administrative Expenses. Selling, general and
administrative expenses increased to 6.7% of net sales for the quarter ended
September 30, 2001 as compared to 5.8% of net sales for the three months ended
September 30, 2000. This increase was primarily attributable to a decrease in
sales, but was partially offset by cost reduction efforts initiated during the
second quarter of 2001.
Operating Income. As a result of the aforementioned factors,
operating income decreased $3.8 million to $6.5 million, or 13.3% of net sales,
for the three months ended September 30, 2001 from $10.3 million, or 15.0% of
net sales, for the three months ended September 30, 2000.
12
Interest Expense. Interest expense decreased $0.5 million to $8.3
million in the three months ended September 30, 2001 from $8.8 million in the
three months ended September 30, 2000. The decrease is due primarily to a
reduction in the principal amounts outstanding under our senior credit facility.
Other Income, net. The quarter-to-quarter $0.1 million decrease in
other income is primarily attributable to lower royalty income resulting from a
decrease in sales by our licensee.
Net Income(Loss). As a result of the aforementioned factors, net
income decreased $3.5 million to a loss of $1.5 million in the three months
ended September 30, 2001, from income of $2.0 million in the three months ended
September 30, 2000.
Nine months Ended September 30, 2001 Compared to Nine months Ended September 30,
2000
Net Sales. Net sales decreased $35.1 million, or 16.9%, to $172.9
million in the nine months ended September 30, 2001 from $208.0 million in the
nine months ended September 30, 2000. Had the Euro exchange rate versus the US
dollar not declined by 5.5% year to year, sales in the first nine months of 2001
would have been $2.5 million higher. While the demand of the specialty and
construction markets remained stable, lower sales volumes to the electronics and
industrial markets have more than offset the benefit of price increases
implemented earlier this year. The decrease in electrical sales of $27.0
million, or 37.5%, was primarily a result of significant inventory adjustments
in the electronics industry that began during the first quarter of 2001. In
addition, the decrease in demand in computer and telecommunications equipment
has resulted in reduced demand for AGY products. AGY products sold into the
electronics market are woven into fabrics that are used to reinforce printed
circuit boards. We do not expect sales to the electronics market to improve in
the fourth quarter of 2001.
Gross Profit. Gross profit increased from 25.8% of net sales for the
nine months ended September 30, 2000 to 28.6% of net sales for the nine months
ended September 30, 2001. Excluding the impact of changes in the exchange rate
of European currencies, gross profit in the first nine months of 2001 would have
been 29.0%. The increase is attributable to previously mentioned manufacturing
gains as well as higher absorption of fixed costs during the first quarter of
2001.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased to 6.5% of net sales for the nine months ended
September 30, 2001 compared to 5.9% of net sales for the same period last year
due to reduced sales during the first nine
13
months of 2001. However, selling, general and administrative expenses decreased
in absolute dollar by $1.1 million following reduced accruals for profit sharing
and bonuses and cost reduction efforts initiated during the second quarter of
2001.
Operating Income. As a result of the aforementioned factors,
operating income decreased $3.6 million to $29.3 million, or 17.0% of net sales,
for the nine months ended September 30, 2001 from $32.9 million, or 15.8% of net
sales, for the nine months ended September 30, 2000.
Interest Expense. Interest expense decreased $2.1 million to $24.9
million for the nine months ended September 30, 2001 from $27.0 million in the
nine months ended September 30, 2000. As previously disclosed, the decrease is
due primarily to a reduction in the principal amounts outstanding under our
senior credit facility.
Other Income, net. The period-to-period $1.3 million decrease is
primarily the result of a $0.9 million decrease in royalty income, of which $0.6
million was non-recurring income we received in 2000 pursuant to a royalty
settlement.
Net Income. As a result of the aforementioned factors, net income
decreased $2.6 million to $5.2 million in the nine months ended September 30,
2001, from $7.8 million in the nine months ended September 30, 2000.
Liquidity and Capital Resources
Our primary sources of liquidity are cash flows from operations and
borrowings under the senior credit facility. Our principal future liquidity
requirement will generally include funding principal payments on our senior
credit facility, interest payments on our 9 7/8% senior subordinated notes due
2009 and our senior credit facility, capital expenditures and working capital
requirements. We have no mandatory payments of principal on our senior
subordinated notes prior to their maturity.
At September 30, 2001, we had outstanding $301.9 million of
long-term debt at a weighted average interest rate of 8.9%, consisting of $175.2
million under our senior credit facility, $147.6 million under our 9 7/8% senior
subordinated notes (net of discount of $2.4 million) and $0.1 million of capital
leases, less a current portion of $21.0 million. The amounts outstanding under
our senior credit facility included $15.8 million outstanding under the
revolver. As of September 30, 2001, we had approximately $47.0 million of
availability under the revolver.
Net Cash Provided by Operating Activities. Net cash provided by
operating activities was $18.3 million for the nine months ended September 30,
2001 and was primarily the result of net income of $5.2 million, a non-cash
adjustment to net income for depreciation of $11.0 million, amortization of
$10.3 million, alloy usage of $1.5 million, a decrease in trade accounts
receivable of $11.6 million, an increase in inventory of $15.3 million and a
decrease in accounts payable of $8.4 million.
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Net Cash Used in Investing Activities. Net cash used in investing
activities was $11.8 million for the nine months ended September 30, 2001 and
was mainly the result of purchases of property, plant and equipment. In the
third quarter of 2001, we entered into a sale and leaseback transaction pursuant
to which we sold manufacturing equipment for net proceeds of approximately $1.5
million. We concurrently agreed to lease such equipment back under an operating
lease agreement.
Net Cash Used in Financing Activities. Net cash used in financing
activities was $9.7 million for the nine months ended September 30, 2001 and was
primarily the result of net payments on our senior credit facility and
distribution of a dividend payable to a member.
Capital Expenditures. We have historically financed our capital
expenditures through cash flow from operations and borrowings under our senior
credit facility. For the nine months ended September 30, 2001, capital
expenditures were $8.6 million excluding assets associated with the sale and
leaseback transaction and amounts financed in accrued liabilities and other
assets. We will continue to monitor and will adjust our capital expenditures
spending level, if warranted by market developments or our operating
performance.
We derived 18.1% of our net sales in the third quarter of 2001 from
products sold in currencies other than the US dollar. The US dollar value of our
export sales sometimes varies with currency exchange rate fluctuations. We may
therefore be exposed to exchange losses as a result of such fluctuations that
could reduce our net income. We have adopted a risk management strategy to use
derivative financial instruments including forwards and options to hedge foreign
currency exposures. See "Quantitative and Qualitative Disclosures About Market
Risk." However, we cannot assure you that any such hedging agreements will be
sufficient to eliminate risks relating to currency fluctuations.
Our ability to make scheduled payments of principal of, or to pay
the interest or liquidated damages, if any, on, or to refinance, our
indebtedness, or to fund planned capital expenditures will depend on our future
performance, which is generally subject to economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control. Based
upon the current level of operations, we believe that cash flows from operations
and available cash, together with availability under the senior credit facility,
will be adequate to meet our future liquidity needs for the foreseeable future.
However, we cannot assure you that our business will generate sufficient cash
flows from operations or that future borrowings will be available under the
senior credit facility in an amount sufficient to enable us to service our
indebtedness, or to fund our other liquidity needs and the payment of tax
distributions. In addition, we may need to refinance all or a portion of the
principal on the notes on or prior to maturity. We cannot assure you that we
will be able to effect any refinancing on commercially reasonable terms or at
all.
Disclosure Regarding Forward-Looking Statements
Some of the information in this Quarterly Report may contain
forward-looking statements. These statements include, in particular, statements
about our plans, strategies and prospects within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. You can identify forward-looking statements by our use of
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forward-looking terminology such as "may," "will," "expect,"
"anticipate," "estimate," "continue" or other similar words. Although we believe
that our plans, intentions and expectations reflected in or suggested by such
forward-looking statements are reasonable, we cannot assure you that our plans,
intentions or expectations will be achieved. Such statements are based on our
current plans and expectations and are subject to risks and uncertainties that
exist in our operations and our business environment that could render actual
outcomes and results materially different from those predicted. When considering
such forward-looking statements, you should keep in mind the following important
factors that could cause our actual results to differ materially from those
contained in any forward-looking statements:
o our significant level of indebtedness and limitations on our
ability to incur additional debt;
o the impact of Owens Corning's unpredictable bankruptcy proceeding
on our financial condition and ongoing operations;
o the risk that obtaining raw materials and capital equipment
services from sources other than Owens Corning would be more
costly or require us to change substantively our manufacturing
processes;
o the risk of conflicts of interest with our equity holders;
o downturns in the electronics industry and the movement of
electronics industry production outside of North America;
o our concentrated customer base and the nature of our markets;
o a disruption of production at one of our facilities;
o foreign currency fluctuations;
o an easing of import restrictions and duties with respect to glass
fabrics;
o labor strikes or stoppages;
o our ability to comply with environmental and safety and health
laws and requirements; and
o changes in economic conditions generally.
This list of risks and uncertainties, however, is not intended to be
exhaustive. You should also review the other cautionary statements we make in
this Quarterly Report and in our 2000 Annual Report on Form 10-K. All
forward-looking statements attributable to us or persons acting for us are
expressly qualified in their entirety by our cautionary statements.
We do not have, and expressly disclaim, any obligation to release
publicly any updates or changes in our expectations or any changes in events,
conditions or circumstances on which any forward-looking statement is based.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
The effects of potential changes in currency exchange rates,
commodity prices and interest rates are discussed below. Our market risk
discussion includes "forward-looking statements" and represents an estimate of
possible changes in fair value that would occur assuming hypothetical future
movements in interest rates, commodity prices and currency exchange rates. These
disclosures are not precise indicators of expected future losses, but only
indicators of reasonably possible losses. As a result, actual future results may
differ materially from those presented. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Disclosure Regarding
Forward-Looking Statements."
Our senior credit facility is subject to market risks, including
interest rate risk. We are exposed to foreign currency exchange rate risk mainly
as a result of our export sales. Due to the nature of our business, we are also
exposed to risks due to changes in natural gas commodity prices. Our risk
management strategy is to use derivative financial instruments, including
forwards, swaps and purchased options, to hedge foreign currency, commodity
price and interest rate exposures. Our objective is to limit the impact of
currency, commodity price and interest rate changes on earnings and cash flows.
We do not enter into derivatives for trading or speculative purposes.
As of September 30, 2001, the notional value of our interest rate
swaps was $159.5 million, equal to the outstanding borrowings under Term Loans A
and B of our senior credit facility. Under these agreements, we have secured a
weighted average fixed LIBOR rate of interest of 5.0% on the notional amount
that is reduced in a manner consistent with the amortization of the principal on
our term loans. These swaps effectively change our payment of interest on $159.5
million of variable rate debt to a fixed rate for the contract period.
The fair value of the interest rate swap agreement represents the
estimated receipts or payments that would be made to terminate the agreements.
At September 30, 2001, we would have paid approximately $5.5 million to
terminate the agreements. A 100 basis point increase in LIBOR would decrease the
amount paid by approximately $2.4 million. The fair value is based on dealer
quotes, considering current interest rates. During the quarter ended March 31,
2001, we shortened the duration of our interest rate swaps to September 2003. As
a result of this transaction, we received proceeds of $1.1 million, which will
remain in accumulated other comprehensive income and will be reclassified to
earnings over the remaining life of the related debt.
As of September 30, 2001, the notional value of our foreign currency
hedging instruments was $6.7 million and the approximate fair value was
immaterial. The potential gain in fair value of such financial instruments from
a hypothetical 10% increase in the underlying exchange rates relative to the US
dollar would be approximately $0.2 million as of September 30, 2001. The
potential loss in the fair value of such financial instruments from a
hypothetical 10% decrease in the underlying exchange rates relative to the US
dollar would be approximately $0.1 million as of September 30, 2001. The fair
value is based on dealer quotes, considering current exchange rates.
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During the quarter ended June 30, 2001, we entered into two natural
gas commodity swaps whereby we agreed to pay a weighted average fixed price of
$4.51/MMBtu on a total notional amount of 579,000 MMBtu's of the commodity. The
contracts terminate December 2001 and December 2002. We entered into these swaps
to reduce the variability of the cash flows associated with our forecasted
purchases of natural gas. As of September 30, 2001, the total notional value of
our commodity hedging instruments was $2.0 million, and the approximate fair
value was negative $0.7 million. The potential loss in fair value of such
financial instruments from a hypothetical 10% increase in the underlying
commodity price would be approximately $0.1 million as of September 30, 2001.
The potential gain in the fair value of such financial instruments from a
hypothetical 10% decrease in the underlying commodity price relative to the US
dollar would be approximately $0.1 million as of September 30, 2001. The fair
value is based on dealer quotes, considering current commodity prices.
Actual gains and losses in the future may differ materially from
that analysis, however, based on changes in the timing and amount of interest
rate, foreign currency exchange rate movements, natural gas commodity price
movements, and our actual exposures and hedges.
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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 thereunto duly authorized.
ADVANCED GLASSFIBER YARNS LLC
/s/Catherine Cuisson
----------------------------
Catherine Cuisson
Vice President and Chief Financial Officer
(Principal Accounting Officer)
Dated: November 14, 2001
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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 thereunto duly authorized.
AGY CAPITAL CORP.
/s/Catherine Cuisson
---------------------------
Catherine Cuisson
Vice President and Chief Financial Officer
(Principal Accounting Officer)
Dated: November 14, 2001
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