UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 November 2, 1995, there were 33,388,728 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 nine months ended September 30, 1995 and 1994. 3
Condensed Consolidated Balance Sheets -
September 30, 1995 and December 31, 1994. . . . . . . . . . 4
Condensed Consolidated Statements of Stockholders' Equity. . . . 5
Condensed Consolidated Statements of Cash Flows -
For the nine months ended September 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
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
2
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<TABLE>
<CAPTION>
WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- --------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $274,586 $232,955 $844,623 $685,337
Cost of sales 216,827 180,361 658,172 535,670
-------- -------- -------- --------
Gross profit 57,759 52,594 186,451 149,667
Selling, general and
administrative expenses 22,050 20,629 67,958 63,180
-------- -------- -------- --------
Operating income 35,709 31,965 118,493 86,487
Interest expense, net 2,687 3,027 8,462 10,338
Loss on sale of subsidiary - - 5,500 -
-------- -------- -------- --------
Earnings before income taxes 33,022 28,938 104,531 76,149
Income taxes 11,888 11,621 39,062 31,450
-------- -------- -------- --------
Net earnings $ 21,134 $ 17,317 $ 65,469 $ 44,699
======== ======== ======== ========
Net earnings per common share $ 0.63 $ 0.52 $ 1.94 $ 1.34
======== ======== ======== ========
Average common shares 33,680 33,535 33,700 33,331
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
WELLMAN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 29,694 $ 21,556
Accounts receivable, less allowance
of $6,026 in 1995 and $4,733 in 1994 129,878 119,278
Inventories 164,857 122,914
Prepaid expenses and other current assets 5,906 8,479
------------ ------------
Total current assets 330,335 272,227
Property, plant and equipment, at cost:
Land, buildings and improvements 106,066 100,172
Machinery and equipment 613,077 553,834
------------ ------------
719,143 654,006
Less accumulated depreciation 242,075 206,130
------------ ------------
Property, plant and equipment, net 477,068 447,876
Cost in excess of net assets acquired, net 285,788 301,030
Other assets, net 17,910 19,507
------------ ------------
$ 1,111,101 $ 1,040,640
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 66,023 $ 53,647
Accrued liabilities 42,560 30,472
Current portion of long-term debt 136 200
------------ ------------
Total current liabilities 108,719 84,319
Long-term debt 224,013 256,331
Deferred income taxes and other liabilities 134,639 122,417
------------ ------------
Total liabilities 467,371 463,067
Stockholders' equity:
Common stock, $.001 par value; 55,000,000
shares authorized, 33,378,696 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 228,529 224,352
Foreign currency translation adjustments 7,953 4,783
Retained earnings 407,215 348,405
------------ ------------
Total stockholders' equity 643,730 577,573
------------ ------------
$ 1,111,101 $ 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 65,469 65,469
Cash dividends ($0.20 per share) (6,659) (6,659)
Exercise of stock options 49,121 520 520
Issuance of common stock to
employee benefit plans 137,588 3,657 3,657
Currency translation adjustment 3,170 3,170
---------- ------ --------- ----------- --------- ---------
Balance at September 30, 1995 33,378,696 $ 33 $ 228,529 $ 7,953 $ 407,215 $ 643,730
========== ====== ========= =========== ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
5
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<TABLE>
<CAPTION>
WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
NINE MONTHS
ENDED SEPTEMBER 30,
------------------------
1995 1994
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 65,469 $ 44,699
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 39,906 33,127
Amortization 9,080 10,260
Deferred income taxes 7,539 (345)
Common stock issued for stock plans 3,657 3,267
Loss on sale of subsidiary 5,500 -
Changes in assets and liabilities (29,891) (4,688)
--------- ---------
Net cash provided by operating activities 101,260 86,320
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (72,411) (53,704)
Decrease in restricted cash 1,453 4,561
Proceeds from sale of subsidiary 16,230 -
--------- ---------
Net cash used in investing activities (54,728) (49,143)
--------- ---------
Cash flows from financing activities:
Repayments of long-term debt (32,464) (34,957)
Dividends paid on common stock (6,659) (5,604)
Exercise of stock options 520 3,105
--------- ---------
Net cash used by financing activities (38,603) (37,456)
--------- ---------
Effect of exchange rate changes on cash
and cash equivalents 209 216
--------- ---------
Increase (decrease) in cash and cash equivalents 8,138 (63)
Cash and cash equivalents at beginning of period 21,556 18,751
--------- ---------
Cash and cash equivalents at end of period $ 29,694 $ 18,688
========= =========
Supplemental cash flow data:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 8,970 $ 11,915
Income taxes $ 28,341 $ 30,739
</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 nine months ended
September 30, 1995 and 1994 is unaudited)
(In thousands)
1. BASIS OF PRESENTATION
The results of operations for the three and nine 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
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
--------- ---------
<S> <C> <C>
Raw materials $ 90,869 $ 61,680
Finished and semi-finished goods 75,695 51,362
Supplies 15,143 14,672
--------- ---------
181,707 127,714
Less adjustments of certain
inventories to a LIFO basis (16,850) (4,800)
--------- ---------
$ 164,857 $ 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 $11,500 and
$27,500. In connection with these expenditures, the Company has accrued
an amount at September 30, 1995 within such range representing management's
best estimate of probable non-capital environmental expenditures. In
addition, future capital expenditures aggregating approximately $13,000 to
$24,500 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
During the quarter ended September 30, 1995, the Company completed the sale
of substantially all of the businesses of its New England CRInc. (CRInc.)
subsidiary. These disposals were part of the Company's strategy to focus on and
expand its core businesses. During 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 second quarter net earnings by
approximately $3,400, or $0.10 per share. The operating results for CRInc. have
not had a material impact on the Company's consolidated financial statements.
8
<PAGE>
WELLMAN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1994
Net sales for the three months ended September 30, 1995 increased
approximately 18% to $274.6 million from $233.0 million for the three months
ended September 30, 1994. Sales increased in the 1995 period for many of the
Company's businesses with the PET (polyethylene terephthalate) resins and
chemical-based fibers businesses accounting for the majority of the increase.
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.
Sales for Wellman International Limited (WIL) and the chemical-based fibers
business were higher in the third quarter of 1995 versus 1994 due to higher
polyester fiber selling prices which more than offset lower sales volumes.
Sales decreased in 1995 for the domestic recycled fibers business due to the
previously announced curtailed production at the Johnsonville facility.
Gross profit for the three months ended September 30, 1995 amounted to
$57.8 million versus $52.6 million for the 1994 period. The gross profit margin
for 1995 was 21.0% compared to 22.6% in 1994. Gross profit for PET resins sales
increased in 1995 due to the aforementioned capacity expansion. Gross profit
and margin for domestic fibers sales decreased between the periods due to higher
production costs and lower sales volumes, including the aforementioned
curtailment of production at the Johnsonville facility. Gross profit and margin
for WIL fibers sales increased primarily due to higher selling prices, which
more than offset increases in raw material costs.
Selling, general and administrative expenses amounted to $22.1 million, or
8.0% of sales, for the 1995 period compared to $20.6 million, or 8.9% of sales,
for the 1994 period.
As a result of the foregoing, operating income was $35.7 million for the
third quarter of 1995 versus $32.0 million for the comparable 1994 period.
Net interest expense was $2.7 million in the third quarter of 1995 compared
to $3.0 million in the third quarter of 1994. Interest expense was lower due to
a decrease in outstanding borrowings, which more than offset higher interest
rates.
The effective income tax rate was approximately 36% in the third quarter of
1995 versus approximately 40% in the comparable 1994 period, reflecting the
continued positive impact of strong Irish and domestic 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
September 30, 1995 were $21.1 million, or $0.63 per share, compared to $17.3
million, or $0.52 per share, for the three months ended September 30, 1994.
9
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1995 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1994
Net sales for the nine months ended September 30, 1995 increased
approximately 23% to $844.6 million from $685.3 million for the nine months
ended September 30, 1994. Sales increased in the 1995 period for virtually all
of the Company's businesses with the fibers and PET resins businesses accounting
for the majority of the increase. Domestic and WIL fibers sales were higher in
the first nine months of 1995 versus 1994 due to higher polyester fiber selling
prices. 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 nine months ended September 30, 1995 amounted to
$186.5 million versus $149.7 million for the comparable 1994 period. The gross
profit margin for 1995 was 22.1% compared to 21.8% in 1994. Gross profit for
domestic and WIL fibers sales increased primarily due to higher selling prices,
which more than offset increases in raw material and production costs. Gross
profit for PET resins sales increased due to the aforementioned capacity
expansion.
Selling, general and administrative expenses amounted to $68.0 million, or
8.0% of sales, for the 1995 period compared to $63.2 million, or 9.2% of sales,
for the 1994 period. The increase in expenses relates to additional provision
for bad debts, higher employee profit sharing expense, fees for strategic
consulting services and higher selling expenses.
As a result of the foregoing, operating income was $118.5 million for the
first nine months of 1995 versus $86.5 million for the comparable 1994 period.
Net interest expense was $8.5 million for the first nine months of 1995
compared to $10.3 million for the first nine months of 1994. Interest expense
was lower due to a decrease in outstanding borrowings, which more than offset
higher interest rates.
For the nine months ended September 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 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 approximately 37% in the first nine
months of 1995 versus approximately 41% in the comparable 1994 period,
reflecting the continued 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 nine months ended
September 30, 1995 were $65.5 million, or $1.94 per share, compared to $44.7
million, or $1.34 per share, for the nine months ended September 30, 1994.
OUTLOOK
Overall demand for the Company's polyester fibers has become uneven as
weakness in the demand from the domestic textile and apparel markets has
recently become evident. Demand for the Company's PET packaging resins remains
strong. Chemical and recycled raw material costs, which have increased
significantly during each of the last several quarters, appear to have begun to
stabilize.
10
<PAGE>
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 $101.3 million for the nine
months ended September 30, 1995 compared to $86.3 million for the nine months
ended September 30, 1994. The increase in cash from operations was primarily
the result of significantly higher net earnings and increased non-cash charges
which were partially offset by a net increase in working capital items.
Net cash used in investing activities for the first nine months of 1995
amounted to $54.7 million compared to $49.1 million in 1994. Additions to
property, plant and equipment amounted to $72.4 million in 1995 compared to
$53.7 million in 1994. In 1995, proceeds from the sale of subsidiary amounted
to $16.2 million.
Net cash used in financing activities amounted to $38.6 million for 1995
and $37.5 million for 1994. Net repayments of long-term debt amounted to $32.5
million in 1995 compared to $35.0 million in 1994.
The Company's long-term capital investment program includes an estimated
range of $95-115 million in planned expenditures in 1995, of which $72.4 million
has been spent through September 30, 1995. The exact amount and timing of the
capital spending is difficult to predict since certain projects may extend into
1996 and beyond depending upon equipment delivery and construction schedules.
The 1995 capital expenditure plan includes the 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 are expected to 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, a tolling agreement with Akzo will
provide an initial 75 million pounds per year (such amount to decrease over the
five-year term).
The Company's financing agreements contain normal financial and restrictive
covenants. The Company believes that the financial resources available to it,
including approximately $291 million available at September 30, 1995 under its
$330 million revolving credit facility, unused, short-term uncommitted lines of
credit aggregating $160 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 million, 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
<PAGE>
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 November 8, 1995 By /s/ Keith R. Phillips
--------------- ------------------------
Keith R. Phillips
Vice President, Chief Financial
Officer and Treasurer (Principal
Financial Officer)
Dated November 8, 1995 By /s/ Mark J. Rosenblum
--------------- ------------------------
Mark J. Rosenblum
Vice President, Controller
(Principal Accounting Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
ART. 5 FDS for third quarter 1995 10-q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 29,694
<SECURITIES> 0
<RECEIVABLES> 135,904
<ALLOWANCES> 6,026
<INVENTORY> 164,857
<CURRENT-ASSETS> 330,335
<PP&E> 719,143
<DEPRECIATION> 242,075
<TOTAL-ASSETS> 1,111,101
<CURRENT-LIABILITIES> 108,719
<BONDS> 224,013
<COMMON> 33
0
0
<OTHER-SE> 643,697
<TOTAL-LIABILITY-AND-EQUITY> 1,111,101
<SALES> 844,623
<TOTAL-REVENUES> 844,623
<CGS> 658,172
<TOTAL-COSTS> 658,172
<OTHER-EXPENSES> 73,458
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,462
<INCOME-PRETAX> 104,531
<INCOME-TAX> 39,062
<INCOME-CONTINUING> 65,469
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65,469
<EPS-PRIMARY> 1.94
<EPS-DILUTED> 1.94
</TABLE>
