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 June 30, 1995
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 0-15899
WELLMAN, INC.
-------------
(Exact name of registrant as specified in its charter)
Delaware 04-1671740
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1040 Broad Street, Shrewsbury, NJ 07702
---------------------------------------
(Address of principal executive offices)
(908) 542-7300
--------------
(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
As of August 4, 1995, there were 33,332,507 shares of the registrant's
common stock, $.001 par value, issued and outstanding and no shares of Class B
common stock outstanding.
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WELLMAN, INC.
INDEX
Page No.
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PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Condensed Consolidated Statements of Income -
For the three and six months ended June 30, 1995 and 1994. 3
Condensed Consolidated Balance Sheets -
June 30, 1995 and December 31, 1994. . . . . . . . . . . . 4
Condensed Consolidated Statements of Stockholders' Equity . . . 5
Condensed Consolidated Statements of Cash Flows -
For the six months ended June 30, 1995 and 1994. . . . . . 6
Notes to Condensed Consolidated Financial Statements. . . . . . 7 - 8
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . 9 - 11
PART II - OTHER INFORMATION
ITEM 4 - Submission of Matters to a Vote of Security Holders . . . . 12
ITEM 6 - Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 13
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
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2
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<CAPTION>
WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------- --------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $293,971 $229,805 $570,037 $452,382
Cost of sales 227,351 176,615 441,345 355,309
-------- -------- -------- --------
Gross profit 66,620 53,190 128,692 97,073
Selling, general and
administrative expenses 23,407 21,838 45,908 42,551
-------- -------- -------- --------
Operating income 43,213 31,352 82,784 54,522
Interest expense, net 2,876 3,607 5,775 7,311
Loss on sale of subsidiary 5,500 - 5,500 -
-------- -------- -------- --------
Earnings before income taxes 34,837 27,745 71,509 47,211
Income taxes 13,238 11,653 27,174 19,829
-------- -------- -------- --------
Net earnings $ 21,599 $ 16,092 $ 44,335 $ 27,382
======== ======== ======== ========
Net earnings per common share $ 0.64 $ 0.48 $ 1.32 $ 0.83
======== ======== ======== ========
Average common shares 33,657 33,310 33,683 33,178
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
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<TABLE>
<CAPTION>
WELLMAN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 38,005 $ 21,556
Accounts receivable, less allowance
of $5,163 in 1995 and $4,733 in 1994 135,889 119,278
Inventories 127,494 122,914
Prepaid expenses and other current assets 7,230 8,479
------------ ------------
Total current assets 308,618 272,227
Property, plant and equipment, at cost:
Land, buildings and improvements 104,388 100,172
Machinery and equipment 595,529 553,834
------------ ------------
699,917 654,006
Less accumulated depreciation 232,253 206,130
------------ ------------
Property, plant and equipment, net 467,664 447,876
Cost in excess of net assets acquired, net 296,511 301,030
Other assets, net 15,232 19,507
------------ ------------
$ 1,088,025 $ 1,040,640
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 65,688 $ 53,647
Accrued liabilities 39,454 30,472
Current portion of long-term debt 136 200
------------ ------------
Total current liabilities 105,278 84,319
Long-term debt 228,047 256,331
Deferred income taxes and other liabilities 129,776 122,417
------------ ------------
Total liabilities 463,101 463,067
Stockholders' equity:
Common stock, $.001 par value; 55,000,000
shares authorized, 33,307,373 shares
issued and outstanding in 1995,
33,191,987 in 1994 33 33
Class B common stock, $.001 par value;
5,500,000 shares authorized -- --
Paid-in capital 227,301 224,352
Foreign currency translation adjustments 9,174 4,783
Retained earnings 388,416 348,405
------------ ------------
Total stockholders' equity 624,924 577,573
------------ ------------
$ 1,088,025 $ 1,040,640
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
4
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<TABLE>
<CAPTION>
WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
COMMON STOCK CURRENCY
------------------ PAID-IN TRANSLATION RETAINED
SHARES AMOUNT CAPITAL ADJUSTMENTS EARNINGS TOTAL
---------- ------ --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 32,780,018 $ 33 $ 215,179 $ 96 $ 291,198 $ 506,506
Net earnings 64,800 64,800
Cash dividends ($0.23 per share) (7,593) (7,593)
Exercise of stock options 235,116 4,047 4,047
Issuance of common stock to
employee benefit plans 176,186 3,936 3,936
Issuance of restricted stock 667 23 23
Tax effect of exercise of stock
options 1,167 1,167
Currency translation adjustments 4,687 4,687
---------- ------ --------- ----------- --------- ---------
Balance at December 31, 1994 33,191,987 $ 33 $ 224,352 $ 4,783 $ 348,405 $ 577,573
Net earnings 44,335 44,335
Cash dividends ($0.13 per share) (4,324) (4,324)
Exercise of stock options 13,125 192 192
Issuance of common stock to
employee benefit plans 102,261 2,757 2,757
Currency translation adjustment 4,391 4,391
---------- ------ --------- ----------- --------- ---------
Balance at June 30, 1995 33,307,373 $ 33 $ 227,301 $ 9,174 $ 388,416 $ 624,924
========== ====== ========= =========== ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
5
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<CAPTION>
WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
SIX MONTHS
ENDED JUNE 30,
------------------------
1995 1994
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<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 44,335 $ 27,382
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 26,189 21,748
Amortization 6,114 6,869
Deferred income taxes 5,506 (768)
Common stock issued for stock plans 2,757 2,542
Changes in assets and liabilities 8,035 2,663
--------- ---------
Net cash provided by operating activities 92,936 60,436
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (45,810) (35,902)
Decrease in restricted cash 1,239 3,639
--------- ---------
Net cash used in investing activities (44,571) (32,263)
--------- ---------
Cash flows from financing activities:
Repayments of long-term debt (28,452) (28,709)
Dividends paid on common stock (4,324) (3,613)
Exercise of stock options 192 309
--------- ---------
Net cash used by financing activities (32,584) (32,013)
--------- ---------
Effect of exchange rate changes on cash
and cash equivalents 668 128
--------- ---------
Increase (decrease) in cash and cash equivalents 16,449 (3,712)
Cash and cash equivalents at beginning of period 21,556 18,751
--------- ---------
Cash and cash equivalents at end of period $ 38,005 $ 15,039
========= =========
Supplemental cash flow data:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 7,433 $ 7,766
Income taxes $ 19,920 $ 20,120
</TABLE>
See notes to condensed consolidated financial statements.
6
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WELLMAN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information for the three and six months ended
June 30, 1995 and 1994 is unaudited)
(In thousands)
1. BASIS OF PRESENTATION
The results of operations for the three month periods are not
necessarily indicative of those for the full year.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements are presented on a basis consistent with
the audited statements, and all adjustments, which consist only of normal
recurring adjustments necessary to present fairly the financial position and
the results of operations for the periods indicated, have been reflected.
2. NET EARNINGS PER COMMON SHARE
Net earnings per common share is based on the average number of common
and common equivalent shares outstanding.
3. INVENTORIES
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Inventories consist of the following:
June 30, December 31,
1995 1994
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<S> <C> <C>
Raw materials $ 64,379 $ 61,680
Finished and semi-finished goods 61,535 51,362
Supplies 14,430 14,672
--------- ---------
140,344 127,714
Less adjustments of certain
inventories to a LIFO basis (12,850) (4,800)
--------- ---------
$ 127,494 $ 122,914
========= =========
</TABLE>
4. ENVIRONMENTAL MATTERS
The Company's operations are subject to extensive laws and regulations
governing air emissions, wastewater discharges and solid and hazardous
waste management activities. The Company's policy is to accrue
environmental remediation costs when it is both probable that a liability
has been incurred and the amount can be reasonably estimated. While it is
often difficult to reasonably quantify future environmental-related
expenditures, the Company currently estimates its future non-capital
expenditures related to environmental matters to range between $12,000 and
$28,000. In connection with these expenditures, the Company has accrued
an amount at June 30, 1995 within such range representing management's
best estimate of probable non-capital environmental expenditures. In
addition, future capital expenditures aggregating approximately $9,000 to
$23,000 may be required related to environmental matters. These
non-capital and capital expenditures are estimated to be incurred over the
next 10 to 20 years. The Company believes that it is entitled to recover a
portion of these expenditures under indemnification and escrow agreements.
7
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5. DERIVATIVE FINANCIAL INSTRUMENTS
During June 1995, the Company entered into forward interest rate swaps to
reduce (hedge) the impact of interest rate changes for variable rate borrowings
associated with planned capital expenditures over the next five years (see
LIQUIDITY AND CAPITAL RESOURCES section). The agreements include an aggregate
notional amount of $200,000, forward periods ranging from two years to three
years and maturity dates of at least 5 years thereafter. The Company will pay
fixed rates of interest ranging from 6.10% to 6.20%.
6. SALE OF SUBSIDIARY
The Company has made the decision to sell substantially all of the
businesses of its New England CRInc. (CRInc.) subsidiary. These disposals are
part of the Company's strategy to focus on and expand its core businesses. For
the quarter ended June 30, 1995, the Company recorded an estimated pretax loss
on the sale amounting to $5,500. The estimated loss from the sale of CRInc.
decreased quarterly net earnings by approximately $3,400, or $0.10 per share.
The sales are expected to close during the third quarter. The operating results
for CRInc. have not had a material impact on the Company's consolidated
financial statements.
8
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WELLMAN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1995 COMPARED TO THREE MONTHS ENDED JUNE 30, 1994
Net sales for the three months ended June 30, 1995 increased approximately
28% to $294.0 million from $229.8 million for the three months ended June 30,
1994. Sales increased in the 1995 period for all of the Company's businesses
with the fibers and PET resins businesses accounting for the majority of the
increase. Domestic and foreign fibers sales were higher in the second quarter
of 1995 versus 1994 due to higher polyester fiber selling prices, which reflects
continued strong worldwide demand and the pass-through of a substantial portion
of increased raw material costs. Sales for the PET resins business increased in
1995 as a result of the start-up of a 140 million pounds per year capacity
expansion late in the second quarter.
Gross profit for the three months ended June 30, 1995 amounted to $66.6
million versus $53.2 million for the 1994 period. The gross profit margin for
1995 was 22.7% compared to 23.1% in 1994. Gross profit margin for domestic
fibers sales decreased slightly between the periods as increases in raw material
costs exceeded increases in selling prices. Gross profit and margin for Irish
fibers sales increased primarily due to higher selling prices, which more than
offset increases in raw material costs. Gross profit for PET resins sales
increased in 1995 due to the aforementioned capacity expansion.
Selling, general and administrative expenses amounted to $23.4 million, or
8.0% of sales, for the 1995 period compared to $21.8 million, or 9.5% of sales,
for the 1994 period.
As a result of the foregoing, operating income was $43.2 million for the
second quarter of 1995 versus $31.4 million for the comparable 1994 period.
Net interest expense was $2.9 million in the second quarter of 1995
compared to $3.6 million in the second quarter of 1994. Interest expense was
lower due to a decrease in outstanding borrowings, which more than offset higher
interest rates.
For the quarter ended June 30, 1995, the Company recorded an estimated
pretax loss of $5.5 million (resulting in a decrease in net earnings of $0.10
per share) on the expected sale of a subsidiary. For additional information
regarding this loss, see note 6 to the condensed consolidated financial
statements.
The effective income tax rate was 38% in the second quarter of 1995 versus
42% in the comparable 1994 period, reflecting the positive impact of strong
domestic and Irish earnings. The Irish tax rate for manufacturing operations is
significantly lower than the U.S. statutory rate.
As a result of the foregoing, net earnings for the three months ended June
30, 1995 were $21.6 million, or $0.64 per share, compared to $16.1 million, or
$0.48 per share, for the three months ended June 30, 1994.
SIX MONTHS ENDED JUNE 30, 1995 COMPARED TO SIX MONTHS ENDED JUNE 30, 1994
Net sales for the six months ended June 30, 1995 increased approximately
26% to $570.0 million from $452.4 million for the six months ended June 30,
1994. Sales increased in the 1995 period for all of the Company's businesses
with the fibers and PET resins businesses accounting for the majority of the
increase. Domestic and foreign fibers sales were higher in the first half of
9
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1995 versus 1994 due to higher polyester fiber selling prices, which reflects
continued strong worldwide demand and the pass-through of a substantial portion
of increased raw material costs. Sales for the PET resins business increased in
1995 primarily as a result of the start-up of the previously discussed capacity
expansion.
Gross profit for the six months ended June 30, 1995 amounted to $128.7
million versus $97.1 million for the 1994 period. The gross profit margin for
1995 was 22.6% compared to 21.5% in 1994. Gross profit for domestic and foreign
fibers sales increased primarily due to higher selling prices, which more than
offset increases in raw material costs. Gross profit for PET resins sales
increased due to the aforementioned capacity expansion.
Selling, general and administrative expenses amounted to $45.9 million, or
8.1% of sales, for the 1995 period compared to $42.6 million, or 9.4% of sales,
for the 1994 period.
As a result of the foregoing, operating income was $82.8 million for the
first six months of 1995 versus $54.5 million for the comparable 1994 period.
Net interest expense was $5.8 million for the first six months of 1995
compared to $7.3 million for the first six months of 1994. Interest expense
was lower due to a decrease in outstanding borrowings, which more than offset
higher interest rates.
For the six months ended June 30, 1995, the Company recognized an estimated
pretax loss of $5.5 million (resulting in a decrease in net earnings of $0.10
per share) on the expected sale of a subsidiary. For additional information
regarding this loss, see note 6 to the condensed consolidated financial
statements.
The effective income tax rate was 38% in the first six months of 1995
versus 42% in the comparable 1994 period, reflecting the positive impact of
strong domestic and Irish earnings. The Irish tax rate for manufacturing
operations is significantly lower than the U.S. statutory rate.
As a result of the foregoing, net earnings for the six months ended June
30, 1995 were $44.3 million, or $1.32 per share, compared to $27.4 million, or
$0.83 per share, for the six months ended June 30, 1994.
OUTLOOK
Overall demand for the Company's polyester fibers and PET resins remains
healthy, while upward pressure on raw material costs and selling prices
continues. The Company's recent PET resins expansion may help to offset
expected significant increases in recycled and chemical raw material costs and
traditional seasonal weakness in the fibers business in the second half of
1995. Modest capacity expansions are expected to be completed at the Palmetto
and Irish fibers plants during the 1995 third quarter.
The Company has announced plans to construct a new domestic production
facility. See LIQUIDITY AND CAPITAL RESOURCES section below.
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash from operations of $92.9 million for the six
months ended June 30, 1995 compared to $60.4 million for the six months ended
June 30, 1994. The increase in cash from operations was primarily the result of
significantly higher net earnings.
10
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Net cash used in investing activities amounted to $44.6 million in 1995
compared to $32.3 million in 1994. Additions to property, plant and equipment
amounted to $45.8 million in 1995 compared to $35.9 million in 1994.
Net cash used in financing activities amounted to $32.6 million for 1995
and $32.0 million for 1994. Net repayments of long-term debt amounted to $28.5
million in 1995 compared to $28.7 million in 1994.
The Company's long-term capital investment program includes an estimated
range of $105-$120 million in planned expenditures in 1995. The exact amount
and timing of the capital spending is difficult to predict, however, since
certain projects may extend into 1996 and beyond depending upon equipment
delivery and construction schedules. The 1995 capital expenditure plan includes
the recently completed as well as future expansion of PET resins production
capacity at the Palmetto Plant and expansions and continued equipment upgrades
at the Company's fibers operations.
The Company currently estimates that capital expenditures could aggregate
approximately $1 billion over the next five years. Part of that capital plan
includes construction of the previously announced PET resins and domestic fibers
production facility with cost estimates ranging between $400 - $500 million and
expected to be on-line in late 1998. Internally generated funds and currently
available credit facilities will be used to fund the construction.
The Company has also announced its intent to purchase the Netherlands-based
PET resins business of Akzo Nobel (Akzo) in a transaction expected to close by
December 31, 1995. The expected production capacity of the facility will be 100
million pounds per year. In addition, Akzo will provide an initial 75 million
pounds per year through a tolling agreement.
The Company's financing agreements contain normal financial and restrictive
covenants. The Company believes that the financial resources available to it,
including approximately $287 million available at June 30, 1995 under its $330
million revolving credit facility, unused, short-term uncommitted lines of
credit aggregating $140 million and internally generated funds will be
sufficient to meet its foreseeable working capital, capital expenditure and
dividend payment requirements as well as to fund the Akzo acquisition.
During June 1995, the Company entered into forward interest rate swaps to
reduce (hedge) the impact of interest rate changes for variable rate borrowings
associated with planned capital expenditures over the next five years. The
agreements include an aggregate notional amount of $200,000, forward periods
ranging from two years to three years and maturity dates of at least 5 years
thereafter. The Company will pay fixed rates of interest ranging from 6.10% to
6.20%.
11
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PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders was held on May 16, 1995.
(b) Not applicable.
(c) At the Annual Meeting of Stockholders, the stockholders voted on the
following matters:
1. The nominees for election as directors for the ensuing year, and
until their successors are elected and qualified, received the
following votes:
Against/
Name For Withheld
---- --- --------
Thomas M. Duff 28,038,240 309,683
James B. Baker 28,044,283 303,840
C. William Beckwith 28,029,444 318,679
Peter H. Conze 28,025,678 322,445
Allan R. Dragone 28,023,332 324,791
Richard F. Heitmiller 28,039,208 308,915
Jonathan M. Nelson 28,043,226 304,897
James E. Rogers 28,044,197 303,926
Raymond C. Tower 28,027,158 320,965
Roger A. Vandenberg 28,043,950 304,173
2. The proposal to ratify the selection by the Board of Directors of
Ernst & Young LLP as independent auditors to audit the Company's
books and accounts for the fiscal year ending December 31, 1995
received the following votes: 28,249,323 votes cast for, 59,681
votes cast against, 39,119 abstentions and no broker non-votes.
3. The stockholder proposal to amend the Company's by-laws to
eliminate broker non-votes from the vote tabulation related to
stockholder proposals: 4,309,605 votes cast for, 19,866,254 votes
cast against, 1,170,646 abstentions and 3,001,615 broker non-votes.
4. The stockholder proposal recommending that all future non-employee
directors not be granted pension benefits and current non-employee
directors voluntarily relinquish their pension benefits: 8,959,584
votes cast for, 15,417,360 votes cast against, 909,564 abstentions
and 3,001,615 broker non-votes.
(d) Not applicable.
12
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the registrant has
not filed herewith any instrument with respect to long-term debt which
does not exceed 10% of the total assets of the registrant and its
subsidiaries on a consolidated basis. The registrant hereby agrees to
furnish a copy of any such instrument to the Securities and Exchange
Commission upon request.
(b) Reports on Form 8-K.
None.
13
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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.
WELLMAN, INC.
Dated August 10, 1995 By /s/ Keith R. Phillips
--------------- ------------------------
Keith R. Phillips
Vice President, Chief Financial
Officer and Treasurer (Principal
Financial Officer)
Dated August 10, 1995 By /s/ Mark J. Rosenblum
--------------- ------------------------
Mark J. Rosenblum
Vice President, Controller
(Principal Accounting Officer)
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
ART. 5 FDS for second quarter 1995 10-q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 38,005
<SECURITIES> 0
<RECEIVABLES> 135,889
<ALLOWANCES> 5,163
<INVENTORY> 127,494
<CURRENT-ASSETS> 308,618
<PP&E> 699,917
<DEPRECIATION> 232,253
<TOTAL-ASSETS> 1,088,025
<CURRENT-LIABILITIES> 105,278
<BONDS> 228,047
<COMMON> 33
0
0
<OTHER-SE> 624,891
<TOTAL-LIABILITY-AND-EQUITY> 1,088,025
<SALES> 570,037
<TOTAL-REVENUES> 570,037
<CGS> 441,345
<TOTAL-COSTS> 441,345
<OTHER-EXPENSES> 51,408
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,775
<INCOME-PRETAX> 71,509
<INCOME-TAX> 27,174
<INCOME-CONTINUING> 44,335
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,335
<EPS-PRIMARY> 1.32
<EPS-DILUTED> 1.32
</TABLE>
