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 March 31, 1998
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
-------- ----------
(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)
(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 May 5, 1998, there were 31,155,488 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 months ended March 31, 1998 and 1997. . . . 3
Condensed Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997. . . . . . . . . . . 4
Condensed Consolidated Statements of Stockholders' Equity -
For the three months ended March 31, 1998 and the
year ended December 31, 1997 . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows -
For the three months ended March 31, 1998 and 1997. . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . 7 - 8
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . 9 - 14
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 15
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2
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<TABLE>
WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
----------------
1998 1997
---- ----
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . $263,073 $255,148
Cost of sales. . . . . . . . . . . . . . . . . . . . 220,848 216,019
-------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . 42,225 39,129
Selling, general and administrative
expenses. . . . . . . . . . . . . . . . . . . . . . 19,346 20,543
-------- --------
Operating income . . . . . . . . . . . . . . . . . . 22,879 18,586
Interest expense, net. . . . . . . . . . . . . . . . 2,378 3,275
-------- --------
Earnings before income taxes . . . . . . . . . . . . 20,501 15,311
Income taxes . . . . . . . . . . . . . . . . . . . . 7,790 6,584
-------- --------
Net earnings . . . . . . . . . . . . . . . . . . . . $ 12,711 $ 8,727
======== ========
Basic and diluted net earnings per common share. . . $ 0.41 $ 0.28
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE>
<TABLE>
WELLMAN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<CAPTION>
March 31, December 31,
1998 1997
---------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents. . . . . . . . . . . . $ -- $ --
Accounts receivable, less allowance of $4,984
in 1998 and $5,229 in 1997. . . . . . . . . . . 135,724 126,106
Inventories. . . . . . . . . . . . . . . . . . . 165,958 154,133
Prepaid expenses and other current assets. . . . 3,174 3,366
---------- ----------
Total current assets. . . . . . . . . . . . . 304,856 283,605
Property, plant and equipment, at cost:
Land, buildings and improvements . . . . . . . . 103,655 104,073
Machinery and equipment. . . . . . . . . . . . . 732,741 735,144
Construction in progress . . . . . . . . . . . . 303,667 251,493
---------- ----------
1,140,063 1,090,710
Less accumulated depreciation. . . . . . . . . . 350,250 336,230
---------- ----------
Property, plant and equipment, net. . . . . . 789,813 754,480
Cost in excess of net assets acquired, net . . . . 267,242 269,756
Other assets, net. . . . . . . . . . . . . . . . . 11,358 11,384
---------- ----------
$1,373,269 $1,319,225
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . $ 63,325 $ 73,070
Accrued liabilities. . . . . . . . . . . . . . . 39,060 39,590
Current portion of long-term debt. . . . . . . . 166 208
---------- ----------
Total current liabilities . . . . . . . . . . 102,551 112,868
Long-term debt . . . . . . . . . . . . . . . . . . 451,908 394,545
Deferred income taxes and other liabilities. . . . 177,218 177,378
---------- ----------
Total liabilities . . . . . . . . . . . . . . 731,677 684,791
Stockholders' equity:
Common stock, $0.001 par value; 55,000,000
shares authorized, 33,642,670 shares issued
in 1998, 33,638,193 in 1997 . . . . . . . . . . 34 34
Class B common stock, $0.001 par value; 5,500,000
shares authorized; no shares issued . . . . . . -- --
Paid-in capital. . . . . . . . . . . . . . . . . 234,264 234,179
Accumulated other comprehensive income . . . . . (2,472) 372
Retained earnings. . . . . . . . . . . . . . . . 459,290 449,373
Less common stock in treasury at cost:
2,500,000 shares. . . . . . . . . . . . . . . . (49,524) (49,524)
---------- ----------
Total stockholders' equity. . . . . . . . . . 641,592 634,434
---------- ----------
$1,373,269 $1,319,225
========== ==========
</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 ACCUMULATED
STOCK ISSUED OTHER
--------------- PAID-IN COMPREHENSIVE RETAINED TREASURY
SHARES AMOUNT CAPITAL INCOME EARNINGS STOCK TOTAL
------ ------ ------- ---------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 . 33,612 $34 $233,665 $ 9,853 $429,900 $(49,524) $623,928
Comprehensive income:
Net earnings . . . . . . . . 30,355 30,355
Currency translation
adjustment. . . . . . . . . (9,481) (9,481)
Cash dividends ($0.35
per share) . . . . . . . . . (10,882) (10,882)
Exercise of stock options. . . 25 453 453
Issuance of restricted stock . 1 16 16
Tax effect of exercise of
stock options . . . . . . . . 45 45
------ --- -------- ------- -------- -------- --------
Balance at December 31, 1997 . 33,638 $34 $234,179 $372 $449,373 $(49,524) $634,434
Comprehensive income:
Net earnings . . . . . . . . 12,711 12,711
Currency translation
adjustment. . . . . . . . . (2,844) (2,844)
Cash dividends ($0.09 per
share). . . . . . . . . . . . (2,794) (2,794)
Exercise of stock options. . . 5 85 85
------ --- -------- ------- -------- -------- --------
Balance at March 31, 1998. . . 33,643 $34 $234,264 $(2,472) $459,290 $(49,524) $641,592
====== === ======== ======= ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
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<TABLE>
WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(In thousands)
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings. . . . . . . . . . . . . . . . . . . . $ 12,711 $ 8,727
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation. . . . . . . . . . . . . . . . . . . 15,703 13,767
Amortization. . . . . . . . . . . . . . . . . . . 2,184 2,805
Deferred income taxes . . . . . . . . . . . . . . 2,710 2,868
Changes in assets and liabilities . . . . . . . . (35,590) 139
-------- --------
Net cash (used in) provided by operating
activities . . . . . . . . . . . . . . . . . . . . (2,282) 28,306
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment. . . . . (52,912) (35,575)
Decrease in restricted cash . . . . . . . . . . . . -- 132
-------- --------
Net cash used in investing activities . . . . . . . (52,912) (35,443)
-------- --------
Cash flows from financing activities:
Net borrowings of long-term debt. . . . . . . . . . 57,913 8,717
Dividends paid on common stock. . . . . . . . . . . (2,794) (2,487)
Exercise of stock options . . . . . . . . . . . . . 85 --
-------- --------
Net cash provided by financing activities . . . . . 55,204 6,230
-------- --------
Effect of exchange rate changes on cash
and cash equivalents . . . . . . . . . . . . . . . . (10) (179)
-------- --------
Decrease in cash and cash equivalents . . . . . . . . 0 (1,086)
Cash and cash equivalents at beginning of period. . . 0 2,120
-------- --------
Cash and cash equivalents at end of period. . . . . . $ 0 $ 1,034
======== ========
Supplemental cash flow data:
Cash paid during the period for:
Interest (net of amounts capitalized) . . . . . . $ 2,959 $ 2,381
Income taxes. . . . . . . . . . . . . . . . . . . $ 74 $ 4,932
Non-cash investing activities financed
through government grants. . . . . . . . . . . . . $ 4,795 $ 2,134
</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 months ended
March 31, 1998 and 1997 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.
Certain 1997 amounts have been reclassified to conform to 1998 presentation.
2. NET EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
March 31, March 31,
1998 1997
------ -------
<S> <C> <C>
Numerator for basic and diluted
earnings per share:
Net Income. . . . . . . . . . . . . . . $ 12,711 $ 8,727
-------- --------
Denominator:
Denominator for basic earnings per
share - weighted average shares. . . . 31,139 31,112
Effect of dilutive securities:
Employee stock options. . . . . . . . 186 34
-------- --------
Denominator for diluted earnings per
share-adjusted weighted average shares 31,325 31,146
======== ========
Basic earnings per share. . . . . . . . . $ 0.41 $ 0.28
======== ========
Diluted earnings per share. . . . . . . . $ 0.41 $ 0.28
======== ========
</TABLE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ---------
<S> <C> <C>
Raw materials. . . . . . . . . . . $ 51,451 $ 50,669
Finished and semi-finished goods . 101,204 90,210
Supplies . . . . . . . . . . . . . 13,303 13,254
-------- --------
$165,958 $154,133
======== ========
</TABLE>
7
<PAGE>
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 $10,300 and $27,000. In connection with these
expenditures, the Company has accrued an amount at March 31, 1998 representing
management's best estimate of probable non-capital environmental expenditures.
In addition, future capital expenditures aggregating approximately $9,400 to
$28,900 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. COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income". This statement
establishes standards for the reporting and display of comprehensive income and
its components. Comprehensive income for the Company represents net income
adjusted for foreign currency translation adjustments. Comprehensive income was
$9,867 and $5,296 for the quarters ended March 31, 1998 and 1997, respectively.
6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires that costs
incurred during start-up activities, including organization costs, be expensed
as incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. Initial application of SOP 98-5 should be as
of the beginning of the fiscal year in which SOP 98-5 is first adopted and
should be reported as a cumulative effect of a change in accounting principle.
The Company expects to adopt SOP 98-5 in the first quarter of 1999. At the
present time, the Company has not completed its analysis of the impact the
adoption of SOP 98-5 will have on the consolidated statement of income.
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 fiscal 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 for 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 of FAS 131 on its financial
statement disclosure; however, the adoption of FAS 131 will not affect results
of operations or financial position.
8
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WELLMAN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company's primary business is the manufacture and marketing of high-
quality polyester products, including Fortrel(R) brand polyester textile fibers,
polyester fibers made from recycled raw materials and PermaClear(R) brand PET
(polyethylene terephthalate) packaging resins. The Company currently has annual
capacity to manufacture approximately 1.1 billion pounds of fiber and 610
million pounds of resins worldwide at five major production facilities in the
United States and Europe. The Company is also the world's largest PET plastics
recycler, utilizing a significant amount of recycled raw materials in its
manufacturing operations.
The Company plans to substantially increase its polyester fiber and PET
resins production capacity through the construction of its new, state-of-the-
art Pearl River Plant in Mississippi. This facility is expected to commence
operation in three phases beginning in late 1998. By the year 2002, this
facility is expected to have annual capacity to manufacture approximately 570
million pounds of resins and 230 million pounds of fiber. As a result, the
Company's production mix is expected to be approximately 50% fibers and 50% PET
resins.
The Fibers Group produces Fortrel(R) textile fibers, which currently
represent approximately 60% of the Company's fiber production. These fibers
are used in apparel and home furnishings and 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 postindustrial fiber, resin and film materials 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 resins 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 resins 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, which are 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 resins selling prices, are cyclical. Changes in PTA and
MEG prices are driven by worldwide supply and demand.
9
<PAGE>
Raw material margins for the chemical-based fiber and PET resins businesses
have generally been influenced by supply and demand factors. Despite growing
demand for PET resins, worldwide supply has recently undergone significant
expansion which has adversely affected profitability. Both fiber and resins
margins experience increases or decreases due to timing of price changes and
market conditions.
Raw material margins for the recycled fiber operation tend to be more
variable than those for the chemical-based businesses, primarily because changes
in recycled raw material costs do not cause changes in fiber prices. Recycled
raw material costs are primarily dependent upon worldwide supply and demand for
recycled materials.
The Company's sales are neither materially dependent upon a single customer
nor seasonal in nature. Sales for PET resins, primarily for soft drink bottles
and other beverages, may be influenced by weather and the relative price of
aluminum cans. Demand, prices and raw material costs for both fiber and PET
resins may be affected by global economic conditions, supply and demand
balances, the prices of competing materials, such as cotton and aluminum, and
export activity.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
1997
Net sales for the three months ended March 31, 1998 increased 3.1% to $263.1
million from $255.1 million for the three months ended March 31, 1997. This
increase was primarily a result of higher sales volumes for recycled polyester
fiber and higher selling prices for PET resins offsetting lower overall
polyester fiber selling prices and the loss of sales of Creative Forming, Inc.
(CFI), which was sold in December 1997. Sales for the Fibers Group decreased
5.1% to $100.1 million in the 1998 period from $105.4 million in the 1997 period
due to lower polyester fiber selling prices. Sales for the Recycled Products
Group (RPG) increased 10.4% to $104.6 million in the 1998 period from $94.7
million in the 1997 period due to higher worldwide polyester fiber sales volumes
which more than offset continued declines in worldwide polyester fiber selling
prices. Sales for the Packaging Products Group (PPG) increased 6.2% in the 1998
period to $58.4 million from $55.0 million in the year-ago period due to higher
worldwide PET resins selling prices and increased domestic sales volumes which
offset decreased sales volumes at the Company's European resins operation and
the divestiture of CFI, which had sales in the first quarter of 1997 of $5.2
million. In the second quarter of 1997, the Company commenced operation of an
additional 200 million pounds per year PET resin production line at its
Darlington, SC plant.
Gross profit for the three months ended March 31, 1998 increased 7.9% to
$42.2 million from $39.1 million for the comparable 1997 period. The gross
profit margin for the 1998 period was 16.1% compared to 15.3% for the 1997
period. This increase was primarily the result of increased profitability in
the PPG, which offset lower profitability in the Fibers Group. Gross profit for
the Fibers Group decreased in the 1998 period as compared to the 1997 period due
primarily to lower polyester fiber selling prices, which more than offset lower
costs. Gross profit for the RPG remained unchanged in the first quarter of 1998
as compared to the same period in 1997 due to higher worldwide sales volumes and
lower raw material costs at the Company's Irish fiber operation which offset
lower worldwide polyester fiber selling prices and increased domestic raw
material costs. Gross profit for the PPG increased significantly in the 1998
period compared to the 1997 period due primarily to higher PET resins selling
prices.
Selling, general and administrative expense amounted to $19.3 million, or
7.4% of sales, for 1998 decreasing from $20.5 million, or 8.1% of sales, for
10
<PAGE>
1997. The decrease is due to reduced costs at the Company's European operations
resulting from the restructuring plan implemented in the second quarter of 1997
and the divestiture of CFI in December 1997.
As a result of the foregoing, operating income was $22.9 million for the
first three months of 1998 compared to $18.6 million for the first three months
of 1997.
Interest expense was $2.4 million for the 1998 period compared to $3.3
million for the 1997 period. The decrease in interest expense is due to higher
interest capitalization resulting from the Company's ongoing capital investment
program.
The effective tax rate was 38.0% in the first quarter of 1998 compared to
43.0% for the comparable 1997 period. The tax rate decreased primarily as a
result of an overall increase in earnings in conjunction with increased earnings
at the Company's Irish fiber operation, which is subject to significantly lower
tax rates than the U.S. operations, and the reduction in foreign operating
losses for which no tax benefit had been provided.
As a result of the foregoing, net earnings in the first three months of 1998
were $12.7 million, or $0.41 per basic and diluted share, compared to $8.7
million, or $0.28 per basic and diluted share, for the first three months of
1997.
OUTLOOK
The worldwide polyester fiber market has begun to experience some effect from
the financial troubles of the Far East. In the U.S., higher imports of
polyester fiber and apparel have led to sluggish demand and intense price
competition. This situation is expected to continue, and gradually affect the
European polyester fiber market, during the second half of 1998. Domestic fiber
profit margins are expected to remain at low levels primarily due to continued
downward pressure on selling prices.
PET resins sales volumes are expected to increase in 1998 primarily due to
the completion of a domestic expansion in the second quarter of 1997 and the
scheduled start-up of the first PET resins production line at the Company's
Pearl River Plant in Mississippi in late 1998. The start-up of the Pearl River
Plant and other worldwide capacity expansions due on-line in the second half of
1998 may result in downward pressure on selling prices and profit margins during
that period. Nevertheless, the Company believes that profit margins in this
business will recover in 1998 from the historically low levels in 1997.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations was $2.3 million for the three months ended March
31, 1998 compared to cash generated from operations of $28.3 million for the
three months ended March 31, 1997. The decrease in cash from operations was
primarily the result of changes in working capital items.
Net cash used in investing activities amounted to $52.9 million in the 1998
period compared to $35.4 million in the comparable 1997 period. Capital
spending amounted to $52.9 million in the 1998 period compared to $35.6 million
in the 1997 period reflecting the Company's ongoing capital investment program.
Net cash provided by financing activities amounted to $55.2 million in the
1998 period compared to $6.2 million in the 1997 period. In 1998, there were
net borrowings of $57.9 million compared to $8.7 million in 1997.
11
<PAGE>
With the completion of the PET resins capacity expansion at the Darlington,
SC plant in the second quarter of 1997, the major portion of the Company's
ongoing capital investment program is the construction of its Pearl River Plant
in Mississippi. The total capitalized cost of the facility is estimated to be
approximately $450 million, consisting of approximately $400 million of
construction costs plus Mississippi state grants and capitalized interest. This
facility, approximately 62% completed, is expected to be operational in three
phases beginning in late 1998. The Company's planned capital expenditures in
1998 are estimated to range between $210 and $230 million. The exact amount and
timing of the capital spending is difficult to predict since certain projects
may extend into 1999 or beyond depending upon equipment delivery and
construction schedules. To receive certain incentives provided by the state of
Mississippi, the Company, in conjunction with the Mississippi Business Finance
Corporation, issued taxable Rural Economic Development Bonds in May 1998.
The Company's financing agreements contain normal financial and restrictive
covenants. The financial resources available to the Company at March 31, 1998
include $215 million under its $330 million revolving credit facility, unused
short-term uncommitted lines of credit aggregating approximately $276.9 million,
and internally generated funds. The Company is pursuing other forms of
financing including the issuance of public or private debt securities. The
Company believes these financial resources and other credit arrangements will be
sufficient to meet its foreseeable working capital, capital expenditure and
dividend payment requirements.
The Company has entered into two types of financial instruments. One
instrument, with a notional amount of $150 million, was designed to provide a
fixed 10-year interest rate of 6.51% (exclusive of corporate spreads) on $150
million of debt if issued on March 31, 1998 and approximately 6.61%
(exclusive of corporate spreads) if issued on June 30, 1998. The Company has
also entered into interest rate swaps to fix the interest rate on variable
rate borrowings. The agreements are for $200 million, $150 million of which
were in effect at March 31, 1998, and $50 million with a starting date in May
1998. Maturity dates are a minimum of 5 years and a maximum of 10 years after
the starting date of the swaps. The swaps will effectively fix the rate of
interest between 6.10% and 6.20% on $200 million of borrowings. In aggregate,
the Company estimates it would have had to pay approximately $15.7 million to
terminate these agreements at March 31, 1998.
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 March 31, 1998 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 March 31,
1998, the Company estimates it would have received approximately $0.4 million if
these contracts were terminated.
The Company has also entered into forward foreign currency contracts to
exchange U.S. dollars for German marks with an aggregate notional amount of
$8.1 million at March 31, 1998. 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 April 1998 through March 1999.
At March 31, 1998, the Company would have had to pay approximately $.9 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 March 31, 1998, the
12
<PAGE>
notional amount of the forward foreign currency contracts was $12.5 million and
the cost to terminate these contracts was approximately $.7 million.
The Company's estimates with respect to the values of its derivative
instruments are based on readily available dealer quotes.
YEAR 2000
Based on a recent assessment, the Company determined that it will be
required to modify certain portions of its software and process equipment so
that its computer systems will function properly with respect to dates in the
year 2000 and thereafter. The Company presently believes that with
modifications to existing software the Year 2000 Issue will not pose
significant operational problems for its computer systems. The Company expects
to complete its Year 2000 project by mid 1999, which is prior to any anticipated
impact on its operating systems. The total project cost, which will be expensed
as incurred, is not expected to have a material effect on the results of
operations.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on
the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires that costs
incurred during start-up activities, including organization costs, be expensed
as incurred. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. Initial application of SOP 98-5 should be as
of the beginning of the fiscal year in which SOP 98-5 is first adopted and
should be reported as a cumulative effect of a change in accounting principle.
The Company expects to adopt SOP 98-5 in the first quarter of 1999. At the
present time, the Company has not completed its analysis of the impact the
adoption of SOP 98-5 will have on the consolidated statement of income.
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 fiscal 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 for 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 of FAS 131 on its financial
statement disclosure; however, the adoption of FAS 131 will not affect results
of operations or financial position.
FORWARD-LOOKING STATEMENTS; RISKS AND UNCERTAINTIES
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 1998 and beyond to differ
materially from those expressed in any forward-looking statements made by or
13
<PAGE>
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.
For a more complete description of the prominent risks and uncertainties
inherent in the Company's business, see the Company's Form 10-K for the year
ended December 31, 1997.
14
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
4(a) 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.
27 Financial Data Schedule.
(b) Reports on Form 8-K.
None.
15
<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 May 8, 1998 By /s/ Keith R. Phillips
-------------- ------------------------
Keith R. Phillips
Vice President, Chief Financial
Officer and Treasurer (Principal
Financial Officer)
Dated May 8, 1998 By /s/ Mark J. Rosenblum
------------- ------------------------
Mark J. Rosenblum
Vice President, Chief Accounting
Officer and Controller
(Principal Accounting Officer)
16
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
ART. 5 FDS for first quarter 1998 10-Q
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 140,708
<ALLOWANCES> 4,984
<INVENTORY> 165,958
<CURRENT-ASSETS> 304,856
<PP&E> 1,140,063
<DEPRECIATION> 350,250
<TOTAL-ASSETS> 1,373,269
<CURRENT-LIABILITIES> 102,551
<BONDS> 451,908
0
0
<COMMON> 34
<OTHER-SE> 641,558
<TOTAL-LIABILITY-AND-EQUITY> 1,373,269
<SALES> 263,073
<TOTAL-REVENUES> 263,073
<CGS> 220,848
<TOTAL-COSTS> 220,848
<OTHER-EXPENSES> 19,346
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,378
<INCOME-PRETAX> 20,501
<INCOME-TAX> 7,790
<INCOME-CONTINUING> 12,711
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,711
<EPS-PRIMARY> 0.41
<EPS-DILUTED> 0.41
</TABLE>
