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, 1997
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.
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(Exact name of registrant as specified in its charter)
Delaware 04-1671740
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1040 Broad Street, Shrewsbury, NJ 07702
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(Address of principal executive offices)
(732) 542-7300
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(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 10, 1997, there were 31,127,043 shares of the registrant's
common stock, $.001 par value, 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, 1997 and 1996 3
Condensed Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 . . . . . . . . . . . 4
Condensed Consolidated Statements of Stockholders' Equity . . . 5
Condensed Consolidated Statements of Cash Flows -
For the nine months ended September 30, 1997 and 1996. . . . . 6
Notes to Condensed Consolidated Financial Statements. . . . . .7 - 8
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . 9 - 15
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 16
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2
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<TABLE>
WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------ ------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Net sales $264,682 $265,383 $799,041 $850,233
Cost of sales 225,831 236,302 678,163 731,164
-------- -------- -------- --------
Gross profit 38,851 29,081 120,878 119,069
Selling, general and
administrative expenses 19,812 22,187 62,563 66,883
Restructuring charges -- -- 7,469 --
-------- -------- -------- --------
Operating income 19,039 6,894 50,846 52,186
Interest expense, net 3,015 3,791 10,211 10,793
-------- -------- -------- --------
Earnings before income taxes 16,024 3,103 40,635 41,393
Income taxes 6,249 5,933 16,831 20,790
-------- -------- -------- --------
Net earnings (loss) $ 9,775 $ (2,830) $ 23,804 $ 20,603
======== ======== ======== ========
Net earnings (loss) per
common share $ 0.31 $ (0.09) $ 0.76 $ 0.62
======== ======== ======== ========
Weighted average common shares 31,458 32,354 31,244 33,275
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
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<TABLE>
WELLMAN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<CAPTION>
September 30, December 31,
1997 1996
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,054 $ 2,120
Accounts receivable, less allowance
of $4,945 in 1997 and $2,661 in 1996 124,229 132,296
Inventories 154,607 158,685
Prepaid expenses and other current assets 3,416 3,947
-------- ---------
Total current assets 292,306 297,048
Property, plant and equipment, at cost:
Land, buildings and improvements 105,664 102,093
Machinery and equipment 928,863 791,578
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1,034,527 893,671
Less accumulated depreciation 325,747 296,043
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Property, plant and equipment, net 708,780 597,628
Cost in excess of net assets acquired, net 281,597 290,450
Other assets, net 11,493 18,823
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$1,294,176 $1,203,949
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 60,288 $ 64,019
Accrued liabilities 42,262 41,320
Current portion of long-term debt 159 159
---------- ----------
Total current liabilities 102,709 105,498
Long-term debt 385,725 319,407
Deferred income taxes and other liabilities 173,376 155,116
---------- ----------
Total liabilities 661,810 580,021
Stockholders' equity:
Common stock, $.001 par value; 55,000,000
shares authorized, 33,627,043 shares
issued at September 30, 1997,
33,612,464 at December 31, 1996 34 34
Class B common stock, $.001 par value;
5,500,000 shares authorized -- --
Paid-in capital 233,920 233,665
Foreign currency translation adjustments 2,314 9,853
Retained earnings 445,622 429,900
Less common stock in treasury at cost:
2,500,000 shares (49,524) (49,524)
---------- ----------
Total stockholders' equity 632,366 623,928
---------- ----------
$1,294,176 $1,203,949
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
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<TABLE>
WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except per share data)
<CAPTION>
COMMON STOCK
ISSUED CURRENCY
--------------- PAID-IN TRANSLATION RETAINED TREASURY
SHARES AMOUNT CAPITAL ADJUSTMENTS EARNINGS STOCK TOTAL
------ ------ ------- ----------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 33,441 $ 33 $ 230,008 $ 6,849 $ 413,456 $ -- $ 650,346
Net earnings 26,529 26,529
Cash dividends ($0.31 per share) (10,085) (10,085)
Exercise of stock options 49 861 861
Issuance of common stock to
employee benefit plans 121 1 2,669 2,670
Issuance of restricted stock 1 26 26
Tax effect of exercise of stock
options 101 101
Currency translation adjustments 3,004 3,004
Purchase of treasury stock (49,524) (49,524)
------ ---- -------- -------- -------- -------- --------
Balance at December 31, 1996 33,612 34 233,665 9,853 429,900 (49,524) 623,928
Net earnings 23,804 23,804
Cash dividends ($0.26 per share) (8,082) (8,082)
Exercise of stock options 14 239 239
Issuance of restricted stock 1 16 16
Currency translation adjustments (7,539) (7,539)
------ ---- -------- -------- -------- -------- --------
Balance at September 30, 1997 33,627 $ 34 $ 233,920 $ 2,314 $ 445,622 $(49,524) $ 632,366
====== ==== ========= ======= ========= ======== =========
</TABLE>
See notes to condensed consolidated financial statements.
5
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<TABLE>
WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(In thousands)
<CAPTION>
1997 1996
----- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 23,804 $20,603
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation 45,653 43,202
Amortization 8,433 9,958
Deferred income taxes 6,545 5,627
Common stock issued for stock plans -- 2,669
Changes in assets and liabilities 2,009 14,467
-------- -------
Net cash provided by operating activities 86,444 96,526
-------- -------
Cash flows from investing activities:
Additions to property, plant and equipment (144,115) (90,112)
Other investing activities 5,016 4,850
-------- -------
Net cash used in investing activities (139,099) (85,262)
-------- -------
Cash flows from financing activities:
Net borrowings of long-term debt 68,861 55,999
Net decrease in line of credit with bank -- (6,216)
Dividends paid on common stock (8,082) (7,593)
Exercise of stock options 255 883
Purchase of treasury stock -- (38,389)
-------- -------
Net cash provided by financing activities 61,034 4,684
-------- -------
Effect of exchange rate changes on cash
and cash equivalents (445) (133)
-------- -------
Increase in cash and cash equivalents 7,934 15,815
Cash and cash equivalents at beginning of period 2,120 3,893
-------- -------
Cash and cash equivalents at end of period $ 10,054 $19,708
======== =======
Supplemental cash flow data:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 9,922 $ 8,857
Income taxes $ 13,318 $ 8,238
Non-cash investing activities financed through
government grants $ 20,295 $ --
</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, 1997 and 1996 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 weighted average number
of common and common equivalent shares (i.e., stock options) outstanding
during the period. In February 1997, the Financial Accounting Standards
Board issued Statement No. 128, "Earnings per Share," which is required
to be adopted on December 31, 1997. At that time, the Company will be
required to change the method currently used to compute earnings per
share and to restate all prior periods. Under the new requirements for
calculating primary earnings per share, the dilutive effect of stock
options will be excluded. The impact is not expected to result in any
change in primary earnings per share as reported herein for the three
months ended September 30, 1997 and 1996. The impact is expected to
result in an increase of $0.01 in primary earnings per share for the nine
months ended September 30, 1997 and is not expected to result in any
change for the nine months ended September 30, 1996.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
--------- ----------
<S> <C> <C>
Raw materials $ 53,556 $ 65,552
Finished and semi-finished goods 87,994 78,280
Supplies 13,057 14,853
--------- ---------
$ 154,607 $ 158,685
========= =========
</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 $10,500
and $28,400. In connection with these expenditures, the Company has
7
<PAGE>
accrued an amount at September 30, 1997 within this range representing
management's best estimate of probable non-capital environmental
expenditures. In addition, future capital expenditures aggregating
approximately $7,800 to $27,700 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.
5. RESTRUCTURING CHARGES
During the second quarter of 1997, the Company implemented a
restructuring plan designed to reduce costs and enhance the overall
competitiveness of its European operations, resulting in a pretax charge
of $7,469. Approximately $4,600 of the restructuring charge is estimated
costs for the modification and reduction of certain supply and service
agreements at the Company's Netherlands-based PET resin business. This
includes the modification of its take-or-pay supply arrangement, reducing
the number of pounds required to be purchased during the period from 1997
to 2000 from 134,000 to an immaterial amount. The restructuring charge
also includes $2,400 in termination benefits for 61 employees at its
recycled fibers operation in Ireland. Approximately $600 and $3,000 has
been charged against the restructuring accrual during the three months
and nine months ended September 30, 1997, respectively.
6. PENDING ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("FAS 131"), effective
for years beginning after December 15, 1997. FAS 131 requires that a
public company report financial and descriptive information about its
reportable operating segments pursuant to criteria that differ from
current accounting practice. Operating segments, as defined, are
components of an enterprise about which separate financial information is
available that is evaluated regularly by the chief operating decision
maker in deciding how to allocate resources and in assessing performance.
The financial information to be reported includes segment profit or loss,
certain revenue and expense items and segment assets and reconciliations
to corresponding amounts in the general purpose financial statements.
FAS 131 also requires information about products and services, geographic
areas of operation, and major customers. The Company has not completed
its analysis of the effect of adoption on its financial statement
disclosure; however, the adoption of FAS 131 will not affect results of
operations or financial position.
8
<PAGE>
WELLMAN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The primary business of Wellman, Inc. is the manufacture and marketing of
high-quality polyester products, including Fortrel brand polyester textile
fibers, polyester fibers made from recycled raw materials and PermaClear
brand PET (polyethylene terephthalate) packaging resin. In the third
quarter, the Company had annual capacity to manufacture approximately 1.1
billion pounds of fiber and over 600 million pounds of resin worldwide at
five major production facilities in the United States and Europe. The
Company is also the world's largest plastics recycler, utilizing a
significant amount of recycled raw materials in its manufacturing operations.
The Fibers Group produces Fortrel textile fibers, which represent
approximately 60% of the Company's fiber production. These fibers, which are
used in apparel and home furnishings, are produced from two chemical raw
materials, purified terephthalic acid (PTA) and monoethylene glycol (MEG).
The other 40% of fiber production, primarily fiberfill and carpet fibers, is
manufactured by the Recycled Products Group from recycled raw materials,
including producer wastes and postconsumer PET soft drink bottles. The
Company's PET resins, produced by the Packaging Products Group from PTA and
MEG, are primarily used in the manufacture of clear plastic soft drink
bottles and other food and beverage packaging.
The Company's markets are highly competitive. It competes in these
markets primarily on the basis of product quality, customer service, brand
identity and price. It believes it is the second-largest polyester staple
and third-largest POY producer in the United States and the fourth-largest
PET resin producer in North America. Several of the Company's competitors
are substantially larger than the Company and have substantially greater
economic resources.
Demand for polyester fiber historically has been cyclical, as it is
subject to changes in consumer preferences and spending, retail sales
patterns, and fiber or textile product imports, all of which are driven
primarily by general economic conditions. Global PET resin demand continues
to grow, driven by new product applications for PET and conversion from other
packaging materials to PET.
Several factors significantly affect the Company's profitability: raw
material margins, or the difference (or spread) between product selling
prices and raw material costs; supply and demand for its products; the prices
of competing materials, such as cotton and aluminum, which can affect demand
for its products; and economic and market conditions in the United States,
Europe and other regions of the world. Prices of PTA and MEG, primary
determinants of polyester fiber and PET resin selling prices, are cyclical.
Changes in PTA and MEG prices are driven by worldwide supply and demand.
Raw material margins for the chemical-based fiber and PET resin
businesses have generally been influenced by supply and demand factors.
Despite growing demand for PET resin, worldwide supply is currently
undergoing significant expansion which has adversely affected profitability,
and is expected to continue to do so. Both fiber and resin margins
experience increases or decreases due to timing of price changes and market
conditions.
9
<PAGE>
Raw material margins for the recycled fiber operation tend to be more
variable than those for the chemical-based businesses, primarily because
recycled raw material costs do not materially affect changes in fiber prices.
Recycled raw material costs are primarily dependent upon worldwide supply and
demand for waste materials.
The Company's sales are neither materially dependent upon a single
customer nor seasonal in nature. Demand, prices and raw material costs for
both fibers and PET resins may be affected by global economic conditions,
supply and demand balances and export activity.
The Company plans to substantially increase its PET resin and polyester
fiber production capacity through the construction of a new, state-of-the-art
production facility in Mississippi expected to be operational in phases
beginning in late 1998. As a result, the Company's production mix is
expected to be approximately 50% fibers and 50% PET resins.
During the second quarter of 1997, the Company implemented a
restructuring plan designed to reduce costs and enhance the competitive
position of its European operations, resulting in a pretax restructuring
charge of approximately $7.5 million. The primary components of the
restructuring charge relate to the modification and reduction of certain
supply and service agreements at the Company's Netherlands-based PET resin
business and termination benefits related to a workforce reduction at the
Company's recycled fibers operation in Ireland. See note 5 to the condensed
consolidated financial statements.
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1996
Net sales for the three months ended September 30, 1997 decreased
slightly to $264.7 from $265.4 for the three months ended September 30, 1996.
This decrease is primarily the result of lower selling prices for polyester
fiber and resin which offset higher sales volumes. Sales for the Fibers
Group declined 12.9% to $102.3 million in the 1997 period from $117.5 million
in the 1996 period due to significantly lower polyester fiber selling prices.
Sales for the Recycled Products Group (RPG) increased 19.8% to $92.4 million
in the 1997 period from $77.1 million in the year-ago period due to increased
polyester fiber sales volumes and increased sales in other divisions which
offset worldwide declines in polyester fiber selling prices. The increased
sales volumes are primarily attributable to the 1996 period being negatively
impacted by a 12 week strike at the Company's Irish recycled fibers
operation which kept the facility closed from mid-July through the end of the
period. Sales for the Packaging Products Group (PPG) decreased slightly to
$70.1 million in 1997 from $70.8 million in 1996 due to substantially lower
sales volumes and lower selling prices at the Netherlands-based PET resins
business more than offsetting a significant increase in domestic sales
volumes. In April 1997, the Company commenced operation of an additional 200
million pounds per year PET resin production line at its Darlington, S.C.
plant.
Gross profit for the three months ended September 30, 1997 increased
33.6% to $38.9 million in 1997 from $29.1 million for the comparable 1996
period. The gross profit margin for the 1997 period was 14.7% compared to
11.0% in the 1996 period. This is primarily the result of the 1996 period
being negatively impacted by a charge of $7.0 million to establish an
inventory reserve resulting from large declines in raw material costs and the
12-week strike at the Company's Irish recycled fibers operation. Gross
profit for the Fibers Group decreased as a result of lower polyester fiber
selling prices and higher raw material costs. Gross profit for the RPG
10
<PAGE>
increased primarily due to the negative impact of the aforementioned strike
on the 1996 period as well as lower worldwide raw material costs and domestic
production costs offsetting lower worldwide polyester fiber selling prices.
Gross profit for the PPG increased due to increased domestic sales volumes
and smaller losses at the Netherlands-based operation as a result of the
restructuring plan implemented in the second quarter of 1997.
Selling, general and administrative expense amounted to $19.8 million, or
7.5% of sales, for 1997, compared to $22.2 million, or 8.4% of sales, for
1996. The decrease is due in part to cost savings resulting from the
Company's restructuring plan.
As a result of the foregoing, operating income was $19.0 million for the
third quarter of 1997 compared to $6.9 million for the third quarter of 1996.
Net interest expense was $3.0 million in 1997 compared to $3.8 million in
1996. Interest expense decreased as a result of higher interest
capitalization resulting from the Company's ongoing capacity expansion.
The effective income tax rate was 39.0% in the third quarter of 1997
compared to 191.2% in the comparable 1996 period. In the 1996 period, the
Company experienced a higher than expected tax rate as a result of lower
projected pretax earnings for 1996, a significant portion of which were at
the Irish recycled fiber operation, which is subject to significantly lower
tax rates than the U.S. operations, and the European PET resin operation,
which incurred a pretax loss which had no associated tax benefit.
As a result of the foregoing, net earnings in the three months ended
September 30, 1997 were $9.8 million, or $0.31 per share, compared to a net
loss of $2.8 million, or $0.09 per share, for the three month period ended
September 30, 1996. During the last seven months of 1996, the Company
repurchased 2.5 million shares of its common stock on the open market. This
repurchase had no material impact on earnings per share as reported for the
1997 period.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Net sales for the nine months ended September 30, 1997 decreased 6.0% to
$799.0 million from $850.2 million for the nine months ended September 30,
1996. This is primarily the result of significantly lower worldwide selling
prices for polyester fiber and resin. Sales for the Fibers Group decreased
9.0% to $314.8 million in the 1997 period from $345.8 million in the 1996
period due to significantly lower polyester fiber selling prices. Sales for
the RPG increased 2.0% to $285.2 million in the first nine months of 1997
from $279.7 million in the first nine months of 1996 due to increased sales
in other divisions which offset significant declines in worldwide polyester
fiber selling prices. In addition, the 1996 period was negatively impacted
by the 12-week strike at the Company's Irish recycled fibers operation,
which kept the facility closed from mid-July through the end of the period.
Sales for the PPG decreased 11.4% to $199.1 million in the first nine months
of 1997 from $224.8 million in the year-ago period due to worldwide declines
in PET resin selling prices during the first half of 1997 which more than
offset increased domestic sales volumes. In April 1997, the Company
commenced operation of an additional 200 million pounds per year PET resin
production line at its Darlington, S.C. plant.
Gross profit for the nine months ended September 30, 1997 increased
slightly to $120.9 million compared to $119.1 million for the 1996 period.
The gross profit margin for the 1997 period was 15.1% compared to 14.0% in
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the year-ago period. This was primarily the result of increased
profitability in the RPG which offset lower profitability in the Fibers Group
and PPG. The 1996 period was also negatively impacted by a charge of $7.0
million to establish an inventory reserve resulting from large declines in
raw material costs and the 12-week strike at the Company's Irish recycled
fibers operation. Gross profit for the Fibers Group decreased slightly in
the first nine months of 1997 compared to 1996 due to significantly lower
polyester fiber selling prices which offset lower overall costs. Gross
profit for the RPG increased significantly in the first nine months of 1997
due to substantially lower raw material costs and higher sales volumes along
with increased gross profit in other divisions. The 1996 period was
negatively impacted by the aforementioned strike. Gross profit for the PPG
decreased substantially in the first nine months of 1997 compared to the
year-ago period as weak global market conditions in the first half of the
year caused lower worldwide PET resin selling prices which outpaced lower raw
material costs and higher domestic sales volumes.
Selling, general and administrative expenses amounted to $62.6 million,
or 7.8% of sales, for the 1997 period compared to $66.9 million, or 7.9% of
sales, for the 1996 period.
During the second quarter of 1997, the Company implemented a
restructuring plan designed to reduce costs and enhance the competitive
position of its European operations, resulting in a pre-tax restructuring
charge of approximately $7.5 million. The primary components of the
restructuring charge relate to the modification and reduction of certain
supply and service agreements at the Company's Netherlands-based PET resin
business and termination benefits related to a workforce reduction at the
recycled fiber operation in Ireland. See note 5 of the notes to condensed
consolidated financial statements.
As a result of the foregoing, operating income was $50.8 million for the
first nine months of 1997, or $58.3 million excluding the restructuring
charge, compared to $52.2 million for the comparable 1996 period.
Net interest expense was $10.2 million for the first nine months of 1997
compared to $10.8 million for the first nine months of 1996. Interest
expense decreased due to higher interest capitalization resulting from the
Company's ongoing capacity expansion.
The effective income tax rate was 41.4% in the first nine months of 1997
versus 50.2% in the comparable 1996 period. The rate decreased primarily as
a result of increased earnings at the Company's Irish recycled fiber
operation, which is subject to significantly lower tax rates than the U.S.
operations, and the ability of the Company to utilize current operating
losses related to the Netherlands-based PET resin operation.
As a result of the foregoing, net earnings for the nine months ended
September 30, 1997 were $23.8 million, or $0.76 per share. Excluding the
restructuring charge, net earnings for this period were $28.2 million, or
$0.90 per share, compared to $20.6 million, or $0.62 per share, for the nine
months ended September 30, 1996.
OUTLOOK
Demand for polyester fiber and PET resin continues to be good. The
Company expects worldwide sales volumes for these products to remain
relatively stable in the fourth quarter of 1997.
12
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Selling prices for polyester fiber and PET resins have recently
stabilized. However, global capacity oversupply and expected U.S. industry
capacity expansions may continue to exert downward pressure on the selling
prices of both products.
The Netherlands-based PET resins business is expected to incur an
operating loss in 1997. The Company incurred a restructuring charge at this
business in the second quarter of 1997 to reduce the volume required to be
purchased under a take-or-pay supply arrangement. This has lowered sales
volumes and benefited operating results at that operation beginning in the
third quarter of 1997.
The construction and start-up of a new polyester production facility in
Mississippi in late 1998 and 1999 is the primary focus of the Company's
ongoing capital investment program. As part of its overall strategic plan,
the Company continues to evaluate alternatives, including divestiture, for
certain non-core businesses.
The statements above are forward-looking statements subject to the
qualifications set forth below in "Forward Looking Statements."
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash from operations of $86.4 million for the nine
months ended September 30, 1997 compared to $96.5 million for the nine months
ended September 30, 1996. The decrease in cash from operations was primarily
the result of changes in working capital items.
Net cash used in investing activities totaled $139.1 million in 1997
compared to $85.3 million in 1996. This increase was the result of additions
to property, plant and equipment due to the Company's long-term capital
investment program (see below), which totaled $144.1 million in 1997 compared
to $90.1 million in 1996.
Net cash provided by financing activities totaled $61.0 million for 1997
compared to $4.7 million in 1996. Net borrowings of long-term debt and bank
line of credit totaled $68.9 million in 1997 compared to $49.8 million in
1996. In addition, the Company initiated the purchase of treasury stock in
1996 totaling $38.4 million at September 30, 1996.
With the completion of the Darlington, S.C. PET resins capacity expansion
in April 1997, the remainder of the Company's ongoing capital investment
program primarily includes the construction of a new domestic polyester
production facility in Mississippi expected to be operational in phases
beginning in late 1998. The Company estimates that capital expenditures
through the end of 1998 could aggregate approximately $260 to $290 million.
To receive certain incentives provided by the state of Mississippi, the
Company expects to issue Rural Economic Development Bonds.
The Company's planned capital expenditures in the remainder of 1997 are
approximately $60 to $80 million. The exact amount and timing of the capital
spending is difficult to predict since certain projects may extend into 1998
or beyond depending upon equipment delivery and construction schedules.
The Company's financing agreements contain normal financial and
restrictive covenants. The financial resources available to the Company at
September 30, 1997 include $270.0 million under its $330 million revolving
credit facility, unused short-term uncommitted lines of credit aggregating
$120.0 million, and internally generated funds. The Company is considering
other forms of financing including the issuance of public or private debt
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securities. The Company believes these financial resources and other credit
arrangements will be sufficient to meet its foreseeable working capital,
capital expenditures and dividend payment requirements.
The Company has entered into two types of financial instruments to
minimize its interest rate exposure. One instrument, with a notional amount
of $150 million, was designed to provide a fixed 10 year interest rate
between 6.36% and 6.40% (exclusive of corporate spreads) on $150 million of
debt if issued between October 1 and November 28, 1997. The contract is
extendible. The Company has also entered into forward interest rate swaps to
reduce (hedge) the impact of interest rate changes for variable rate
borrowings. The agreements are for $200 million, $50 million of which were
in effect for the third quarter of 1997, and $150 million with starting dates
ranging between October 1997 and May 1998. Maturity dates are a minimum of 5
years and a maximum of 10 years after the starting date of the swaps. The
Company will pay fixed rates of interest ranging from 6.10% to 6.20%. In
aggregate, the Company estimates it would have had to pay approximately $5.9
million to terminate these agreements at September 30, 1997.
The Company has entered into forward foreign currency contracts to
exchange Dutch guilders for U.S. dollars with an aggregate notional amount of
$21.8 million at September 30, 1997 in order to reduce the related impact of
foreign currency translation adjustments. This has the effect of converting
a portion of U.S. debt to local currency (guilder) debt. The Company has
designated these contracts as a hedge of a net investment in a foreign
entity. At September 30, 1997, the cost to terminate these agreements was
immaterial.
The Company has also entered into forward foreign currency contracts to
exchange U.S. dollars for German marks with an aggregate notional amount of
$12.8 million at September 30, 1997. These contracts are designed to reduce
(hedge) the impact of foreign currency fluctuations relative to fixed asset
purchase commitments and have maturity dates ranging from October 1997
through November 1998. At September 30, 1997, the Company would have had to
pay approximately $1.4 million to terminate these contracts.
The Company's European businesses utilize foreign currency debt and
forward currency contracts to hedge certain of their accounts receivable
and accounts payable denominated in other foreign currencies. At September
30, 1997, the notional amount of the forward foreign currency contracts was
$11.6 million and the cost to terminate these contracts was immaterial.
The Company's estimates with respect to the values of its derivative
instruments are based on readily available dealer quotes.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, "Earnings per Share," which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact is
not expected to result in any change in primary earnings per share as
reported herein for the three months ended September 30, 1997 and 1996. The
impact is expected to result in an increase of $0.01 in primary earnings per
share for the nine months ended September 30, 1997 and is not expected to
result in any change for the nine months ended September 30, 1996.
14
<PAGE>
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"), effective for years
beginning after December 15, 1997. FAS 131 requires that a public company
report financial and descriptive information about its reportable operating
segments pursuant to criteria that differ from current accounting practice.
Operating segments, as defined, are components of an enterprise about which
separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and
in assessing performance. The financial information to be reported includes
segment profit or loss, certain revenue and expense items and segment assets
and reconciliations to corresponding amounts in the general purpose financial
statements. FAS 131 also requires information about products and services,
geographic areas of operation, and major customers. The Company has not
completed its analysis of the effect of adoption on its financial statement
disclosure, however, the adoption of FAS 131 will not affect results of
operations or financial position.
FORWARD-LOOKING STATEMENTS
Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. In addition, words such as
"believes," "anticipates," "expects" and similar expressions are intended to
identify forward-looking statements. The Company cautions that a number of
important factors could cause actual results for 1997 and beyond to differ
materially from those expressed in any forward-looking statements made by or
on behalf of the Company. Such statements contain a number of risks and
uncertainties, including, but not limited to, demand and competition for
polyester fiber and PET resins, availability and cost of raw materials,
levels of production capacity and announced changes thereto, changes in
interest rates and foreign currency exchange rates, work stoppages, natural
disasters, U.S., European and global economic conditions and changes in laws
and regulations, prices of competing products, such as cotton and aluminum,
and the Company's ability to complete expansions and other capital projects
on time and budget and to maintain the operations of its existing production
facilities. The Company cannot assure that it will be able to anticipate or
respond timely to changes which could adversely affect its operating results
in one or more fiscal quarters. Results of operations in any past period
should not be considered indicative of results to be expected in future
periods. Fluctuations in operating results may result in fluctuations in the
price of the Company's common stock.
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
16
<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 12, 1997 By /s/ Keith R. Phillips
----------------- ------------------------
Keith R. Phillips
Vice President, Chief Financial
Officer and Treasurer
(Principal Financial Officer)
Dated November 12, 1997 By /s/ Mark J. Rosenblum
--------------- ------------------------
Mark J. Rosenblum
Vice President, Chief
Accounting Officer and
Controller Principal Accounting
Officer)
17
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
ART. 5 FDS for third quarter 1997 10-q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 10,054
<SECURITIES> 0
<RECEIVABLES> 129,174
<ALLOWANCES> 4,945
<INVENTORY> 154,607
<CURRENT-ASSETS> 292,306
<PP&E> 1,034,527
<DEPRECIATION> 325,747
<TOTAL-ASSETS> 1,294,176
<CURRENT-LIABILITIES> 102,709
<BONDS> 385,725
<COMMON> 34
0
0
<OTHER-SE> 632,332
<TOTAL-LIABILITY-AND-EQUITY> 1,294,176
<SALES> 799,041
<TOTAL-REVENUES> 799,041
<CGS> 678,163
<TOTAL-COSTS> 678,163
<OTHER-EXPENSES> 70,032
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,211
<INCOME-PRETAX> 40,635
<INCOME-TAX> 16,831
<INCOME-CONTINUING> 23,804
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,804
<EPS-PRIMARY> 0.76
<EPS-DILUTED> 0.76
</TABLE>
