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, 1999
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)
(732) 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 May 3, 1999, there were 31,405,078 shares of the registrant's
common stock, $.001 par value, outstanding and no shares of Class B common
stock outstanding.
<PAGE>
WELLMAN, INC.
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
ITEM 1 - Financial Statements
Condensed Consolidated Statements of Income -
For the three months ended March 31, 1999 and 1998 . . . . . . 3
Condensed Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Stockholders' Equity
For the three months ended March 31, 1999 and the
year ended December 31, 1998 . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows -
For the three months ended March 31, 1999 and 1998 . . . . . . 6
Notes to Condensed Consolidated Financial Statements. . . . . . 7 - 10
ITEM 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . . 11 - 17
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K. . . . . . . . . . . . . 18
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
2
<PAGE>
<TABLE>
WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
--------------
1999 1998
------ ------
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . $218,891 $263,073
Cost of sales. . . . . . . . . . . . . . . . . . . . . 194,074 220,848
-------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . . 24,817 42,225
Selling, general and
administrative expenses . . . . . . . . . . . . . . . 18,672 19,346
-------- --------
Operating income . . . . . . . . . . . . . . . . . . . 6,145 22,879
Interest expense, net . . . . . . . . . . . . . . . . 3,332 2,378
-------- --------
Earnings before income taxes and cumulative effect of
accounting change . . . . . . . . . . . . . . . . . . 2,813 20,501
Income taxes . . . . . . . . . . . . . . . . . . . . . 1,027 7,790
-------- --------
Earnings before cumulative effect of accounting change 1,786 12,711
Cumulative effect of accounting change, net of tax . . 1,769 --
-------- --------
Net income . . . . . . . . . . . . . . . . . . . . . . $ 17 $ 12,711
======== ========
Basic and diluted net earnings per common share:
Income before cumulative effect of accounting change $ 0.06 $ 0.41
Cumulative effect of accounting change . . . . . . . (0.06) --
-------- --------
Net income . . . . . . . . . . . . . . . . . . . . . $ 0.00 $ 0.41
======== ========
</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,
1999 1998
---------- ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents. . . . . . . . . . . $ -- $ --
Accounts receivable, less allowance of $3,992
in 1999 and $4,184 in 1998. . . . . . . . . . 110,384 101,420
Inventories. . . . . . . . . . . . . . . . . . 181,827 183,883
Prepaid expenses and other current assets. . . 9,153 18,959
---------- ----------
Total current assets. . . . . . . . . . . . 301,364 304,262
Property, plant and equipment, at cost:
Land, buildings and improvements . . . . . . . 118,847 107,730
Machinery and equipment. . . . . . . . . . . . 887,608 766,153
Construction in progress . . . . . . . . . . . 327,621 437,084
---------- ----------
1,334,076 1,310,967
Less accumulated depreciation. . . . . . . . . 408,124 396,109
---------- ----------
Property, plant and equipment, net. . . . . 925,952 914,858
Cost in excess of net assets acquired, net . . . 258,854 262,089
Other assets, net. . . . . . . . . . . . . . . . 8,860 9,956
---------- ----------
$1,495,030 $1,491,165
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . $ 58,106 $ 64,013
Accrued liabilities. . . . . . . . . . . . . . 28,629 40,895
Current portion of long-term debt. . . . . . . 506,216 145,869
---------- ----------
Total current liabilities . . . . . . . . . 592,951 250,777
Long-term debt . . . . . . . . . . . . . . . . . 80,490 410,679
Deferred income taxes and other liabilities. . . 187,370 186,455
---------- ----------
Total liabilities . . . . . . . . . . . . . 860,811 847,911
Stockholders' equity:
Common stock, $0.001 par value; 55,000,000
shares authorized, 33,898,493 shares issued
in 1999, 33,816,212 in 1998 . . . . . . . . . 34 34
Class B common stock, $0.001 par value; 5,500,000
shares authorized; no shares issued . . . . . -- --
Paid-in capital. . . . . . . . . . . . . . . . 238,727 237,810
Accumulated other comprehensive income (loss). (2,030) 5,133
Retained earnings. . . . . . . . . . . . . . . 447,012 449,801
Less common stock in treasury at cost:
2,500,000 shares. . . . . . . . . . . . . . . (49,524) (49,524)
---------- ----------
Total stockholders' equity. . . . . . . . . 634,219 643,254
---------- ----------
$1,495,030 $1,491,165
========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
<TABLE>
WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<CAPTION>
COMMON ACCUMULATED
STOCK ISSUED OTHER
--------------- PAID-IN COMPREHENSIVE RETAINED TREASURY
SHARES AMOUNT CAPITAL INCOME (LOSS) EARNINGS STOCK TOTAL
------ ------ ------- ---------- -------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 . 33,638 $34 $234,179 $ 372 $449,373 $(49,524) $634,434
Net earnings . . . . . . . . . 11,681 11,681
Currency translation
adjustments . . . . . . . . . 4,761 4,761
--------
Total comprehensive income . . 16,442
Cash dividends ($0.36 per
share). . . . . . . . . . . . (11,253) (11,253)
Exercise of stock options. . . 65 1,136 1,136
Issuance of restricted stock . 113 2,352 2,352
Tax effect of exercise of
stock options . . . . . . . . 143 143
------ --- -------- ------- -------- -------- --------
Balance at December 31, 1998 . 33,816 $34 $237,810 $ 5,133 $449,801 $(49,524) $643,254
Net earnings . . . . . . . . . 17 17
Currency translation
adjustments . . . . . . . . . (7,163) (7,163)
--------
Total comprehensive loss . . . (7,146)
Cash dividends ($0.09 per
share). . . . . . . . . . . . (2,806) (2,806)
Issuance of restricted stock . 82 917 917
------ --- -------- ------- -------- -------- --------
Balance at March 31, 1999. . . 33,898 $34 $238,727 $(2,030) $447,012 $(49,524) $634,219
====== === ======== ======= ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
<TABLE>
WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(In thousands)
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings. . . . . . . . . . . . . . . . . . . $ 17 $ 12,711
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation . . . . . . . . . . . . . . . . . 15,021 15,703
Amortization . . . . . . . . . . . . . . . . . 2,187 2,184
Deferred income taxes . . . . . . . . . . . . . 432 2,710
Changes in assets and liabilities . . . . . . . (15,818) (35,590)
-------- -------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . . . 1,839 (2,282)
-------- -------
Cash flows from investing activities:
Additions to property, plant and equipment. . . . (31,584) ( 52,912)
-------- -------
Net cash used in investing activities . . . . . . (31,584) ( 52,912)
------- -------
Cash flows from financing activities:
Borrowings under long-term debt, net. . . . . . . 31,670 57,913
Dividends paid on common stock. . . . . . . . . . (2,806) (2,794)
Issuance of restricted stock. . . . . . . . . . . 917 --
Exercise of stock options . . . . . . . . . . . . -- 85
------- -------
Net cash provided by financing
activities . . . . . . . . . . . . . . . . . . . 29,781 55,204
------- -------
Effect of exchange rate changes on cash
and cash equivalents . . . . . . . . . . . . . . . (36) (10)
------- -------
Increase (decrease) in cash and cash equivalents. . 0 0
Cash and cash equivalents at beginning of period. . 0 0
------- -------
Cash and cash equivalents at end of period. . . . . $ 0 $ 0
======== ========
Supplemental cash flow data:
Cash paid (received) during the period for:
Interest (net of amounts capitalized) . . . . . $ 2,996 $ 2,959
Income taxes paid (received). . . . . . . . . . $(10,220) $ 74
Non-cash investing activities financed
through government grants. . . . . . . . . . . . $ 35 $ 1,522
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
WELLMAN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Information for the three months ended
March 31, 1999 and 1998 is unaudited)
(In thousands)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 1999 are not necessarily
indicative of the results that may be expected for the year ended December
31, 1999.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for
complete financial statements. For further information, refer to the
consolidated financial statements and footnotes thereto included in Wellman,
Inc.'s (which, together with its subsidiaries, is herein referred to as the
"Company") annual report on Form 10-K for the year ended December 31, 1998.
Certain 1998 amounts have been reclassified to conform to the 1999
presentation.
2. EARNINGS PER COMMON SHARE
The following table sets forth the computation of basic and diluted
earnings per share for the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
------ ------
<S> <C> <C>
Numerator for basic and diluted earnings per share:
Earnings before cumulative effect of
accounting change. . . . . . . . . . . . . . . $ 1,786 $12,711
Cumulative effect of accounting change. . . . . 1,769 --
------- -------
Net income. . . . . . . . . . . . . . . . . . . $ 17 $12,711
======= =======
Denominator:
Denominator for basic earnings per share -
weighted-average shares. . . . . . . . . . . . 31,203 31,139
Effect of dilutive securities:
Employee stock options and restricted stock . 128 186
------- -------
Denominator for diluted earnings
per share-adjusted weighted average shares . . 31,331 31,325
======= =======
Basic and diluted net earnings per common share:
Income before cumulative effect of accounting change $ 0.06 $ 0.41
Cumulative effect of accounting change. . . . . (0.06) --
------- -------
Net income. . . . . . . . . . . . . . . . . . . $ 0.00 $ 0.41
======= =======
</TABLE>
7
<PAGE>
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- ---------
<S> <C> <C>
Raw materials. . . . . . . . . . . $ 68,504 $ 66,580
Finished and semi-finished goods . 100,280 103,840
Supplies . . . . . . . . . . . . . 13,043 13,463
-------- --------
$181,827 $183,883
======== ========
</TABLE>
4. SUMMARY OF ACCOUNTING CHANGES
Effective January 1, 1999, the Company adopted the AICPA's Statement of
Position (SOP) No. 98-5, "Reporting on the Costs of Start-Up Activities,"
which required the Company to begin expensing all start-up and organization
costs as incurred. Start-up and organization costs incurred prior to the
adoption of this SOP have been reported as a cumulative effect of an
accounting change. The effect of the change was to decrease net income in
the first quarter of 1999 by $1,769, or $0.06 per diluted share.
In the first quarter of 1999, the effect of the change on income before
the cumulative effect of the accounting change was not material.
In the fourth quarter of 1998, the Company extended the estimated useful
lives of certain assets of its Palmetto facility to reflect time periods more
consistent with actual historical experience and anticipated utilization of
the assets. The effect of the change was a decrease in depreciation expense
of approximately $1,450 in the first quarter of 1999.
5. RESTRUCTURING CHARGES
1998 Restructuring
------------------
In the fourth quarter of 1998, the Company adopted a restructuring plan
to consolidate and lower the overall operating costs of the business units in
the Recycled Products Group. In connection with this plan, the Company
closed the operations of a leased manufacturing facility in New Jersey and a
sales office in England. The Company recorded a pretax charge of $6,861 in
its fourth quarter of 1998, which included a $3,738 write-off of equipment
and other assets to be sold or scrapped; a $1,717 accrual primarily for the
removal and dismantling of the equipment and restoration of the leased
facility to its original state; and a $1,406 accrual for the termination
benefits of approximately 88 employees. Total costs associated with the New
Jersey facility and the sales office in England were $4,371 and $827,
respectively.
The following represents changes in the accruals since December 31, 1998:
<TABLE>
<CAPTION>
Termination Accrual for
Benefits Other Expenses
----------- --------------
<S> <C> <C>
Accrual at December 1998. . . . . . . . $1,406 $1,717
Cash payments in first quarter 1999 . . (830) (1,074)
------ ------
Accrual balance at March 31, 1999. . . $ 576 $ 643
====== ======
</TABLE>
8
<PAGE>
The remaining activity associated with the 1998 restructuring is expected to
be completed during 1999.
1997 Restructuring
------------------
During the second quarter of 1997, the Company adopted a restructuring
plan designed to reduce costs and enhance the overall competitiveness of its
European operations. In connection with this plan, the Company recorded a
pretax charge of $7,469 during its second quarter of 1997. This consisted of
restructuring costs of $10,469, less a previously recorded $3,000 charge to
cost of goods sold to provide for inventory losses related to the Company's
take-or-pay supply arrangement entered into as part of the acquisition of its
Netherlands-based PET resins business in 1995. Approximately $6,375 of the
restructuring charge was an accrual for estimated costs to modify certain
supply and service agreements at the Company's Netherlands-based PET resins
business. The restructuring accrual also included $3,594 of termination
benefits for 65 employees at its recycled fiber operation in Ireland and the
PET resins business. The following represents changes in the accruals since
December 31, 1998:
<TABLE>
<CAPTION>
Modification of Termination
Agreements Benefits Total
-------------- ----------- -----
<S> <C> <C> <C>
Accrual balance at
December 31, 1998 . . . . . . $ 163 $ 698 $ 861
Cash payments. . . . . . . . . (4) (160) (164)
------ ------ -----
Accrual balance at March 31, 1999 $ 159 $ 538 $ 697
====== ====== =====
</TABLE>
The remaining activity associated with the 1997 restructuring is expected to be
completed during 1999.
6. COMMITMENTS AND CONTINGENCIES
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 expense 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 approximately $11,000 and $25,200. In
connection with these expenditures, the Company has accrued undiscounted
liabilities of approximately $16,000 at March 31, 1999 and December 31, 1998,
which are reflected as other noncurrent liabilities in the Company's
Condensed Consolidated Balance Sheets. These accruals represent management's
best estimate of probable non-capital environmental expenditures. In
addition, aggregate future capital expenditures related to environmental
matters are expected to range from $8,900 to $27,000. 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.
The Company has entered into commitments to purchase raw material in the
ordinary course of its trade or business. The minimum payments under these
commitments approximate $19,000 per year. The commitments extend for varying
periods up to 10 years and, in general, the prices are not in excess of
current market prices.
9
<PAGE>
7. COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) is comprised of foreign
currency translation. There is no provision for U.S. federal and state
income taxes on the earnings that are permanently invested and on the related
translation adjustments. Comprehensive income (loss) was $(7,146) and $9,867
for the quarter ended March 31, 1999 and 1998, respectively.
8. SEGMENT INFORMATION
The Company's operations are classified into three principal reportable
segments that provide different products or services. The Company's three
reportable business segments are managed separately based on fundamental
differences in their operations.
Generally, the Company evaluates segment profit on the basis of operating
profit less certain charges for research and development costs,
administrative costs, and amortization expenses. The accounting policies are
the same as those described in the Company's most recently filed Form 10-K.
<TABLE>
<CAPTION>
Recycled Packaging
Fibers Products Products
Group Group Group Total
----- ----- ----- ------
Three months ended March 31, 1999
- ---------------------------------
<S> <C> <C> <C> <C>
Revenues. . . . . . . . . . . . $ 74,285 $ 82,041 $ 62,565 $ 218,891
Segment profit (loss) . . . . . 2,439 4,133 (427) 6,145
Assets (1). . . . . . . . . . . 413,666 285,620 450,429 1,149,715
</TABLE>
(1) Assets for the Packaging Products Group increased by approximately
$163,000 at March 31, 1999 compared to the amount reported in the December
31, 1998 Form 10-K, primarily due to the commencement of operations of the
first of two resin production lines at the Company's Pearl River facility in
the first quarter of 1999.
<TABLE>
<CAPTION>
Three months ended March 31, 1998
- ---------------------------------
<S> <C> <C> <C> <C>
Revenues. . . . . . . . . . . . $100,057 $104,605 $58,411 $263,073
Segment profit (loss) . . . . . 12,223 10,965 (309) 22,879
</TABLE>
Following are reconciliations to corresponding totals in the condensed
consolidated financial statements:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
Total for reportable segments . . . . . . . . . $ 6,145 $22,879
Interest expense, net . . . . . . . . . . . . . (3,332) (2,378)
---------- -------
Earnings before income taxes and cumulative
effect of accounting change. . . . . . . . . . $ 2,813 $20,501
========== =======
Assets
Total for reportable segments . . . . . . . . . $1,149,715
Corporate assets . . . . . . . . . . . . . . . 345,315
----------
$1,495,030
==========
</TABLE>
10
<PAGE>
WELLMAN, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is principally engaged in 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 packaging resins. The Company currently has annual capacity to
manufacture approximately 1.1 billion pounds of fiber and 845 million pounds
of resins worldwide at six 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 commenced operation of
the first of three production lines, a PET resin line, in the first quarter
of 1999. The second PET resin line is scheduled to commence operation in the
second quarter of 1999. See "Outlook" below.
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, PTA and MEG. The other 40% of fiber production, primarily
fiberfill and carpet fibers, is manufactured by the Recycled Products Group
(RPG) 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 (PPG) 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 fourth-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. Since late 1997, the Far
East has been experiencing a significant economic and financial crisis. This
crisis has led to higher imports of polyester fiber, fabric and apparel,
resulting in fiber price pressure in the United States and Europe, which has
adversely affected profitability. Global PET resins demand continues to
grow, driven by new product applications for PET and conversions from other
packaging materials to PET. Sales for PET resins, primarily for soft drink
bottles and other beverages, may be influenced by weather.
The Company's profitability is primarily determined by its raw material
margins (the difference between product selling prices and raw material
costs). Both fiber and resin raw material margins experience increases or
decreases primarily based on selling price and raw material cost changes,
which stem from supply and demand factors and competitive conditions. Given
11
<PAGE>
the Company's substantial unit volumes, the impact of selling price and raw
material cost changes are significant.
Supply, demand, prices and raw material costs each may be affected by
global economic and market conditions, export activity, and the prices of
competing materials. Recent and contemplated changes in ownership of certain
fiber and resin competitors have had a destabilizing influence in the
Company's markets.
RESTRUCTURING
See note 5 to the condensed consolidated financial statements for
information about recently adopted restructuring plans and details of charges
to the accruals since December 31, 1998.
Benefits derived in the first quarter 1999 from the 1998 restructuring
are estimated to be approximately $1.3 million.
RESULTS OF OPERATIONS
Net sales for the three months ended March 31, 1999 decreased 16.8% to
$218.9 million from $263.1 million for the three months ended March 31, 1998.
This decrease was primarily the result of reductions in worldwide polyester
fiber selling prices. The economic and financial troubles in the Far East
that began in 1997 have resulted in significant increases in fiber imports
from that region and intense price pressure on worldwide fiber markets. The
domestic PET resins market has not been impacted by Far East imports.
However, selling prices have recently declined due to domestic oversupply and
competitive pressures. Net sales for the Fibers Group decreased 25.8% to
$74.3 million in the 1999 period from $100.1 million in the 1998 period
primarily due to a 27.2% decline in the average selling price per pound of
polyester fiber. In addition, polyester fiber unit volumes decreased 5.7%.
Net sales for the RPG decreased 21.6% to $82.0 million in the 1999 period
from $104.6 million in the 1998 period primarily as a result of lower unit
volumes and average selling prices for recycled polyester fiber, which
declined 17.8% and 12.3%, respectively. In addition, the RPG experienced a
12.6% decline in net sales in other divisions. Net sales for the PPG
increased 7.2% to $62.6 million in the 1999 period from $58.4 million in the
1998 period due to a 40.2% increase in PET resin unit volumes, reflecting
strong demand and, to a lesser extent, the first quarter start-up of the
first resin production line at the Company's new facility in Mississippi.
Higher volumes more than offset a 23.5% decline in the average selling price
per pound of PET resin.
Cost of sales decreased 12.1% to $194.1 million for the three months
ended March 31, 1999 from $220.8 million for the three months ended March 31,
1998, primarily due to lower worldwide chemical and recycled raw material
costs. As a percentage of sales, however, cost of sales increased to 88.7%
in the 1999 period from 83.9% in the 1998 period. As a percentage of sales,
cost of sales for the Fibers Group increased 7.1% in the 1999 period compared
to the 1998 period, primarily due to lower polyester fiber selling prices,
which were partially offset by lower chemical raw material costs. Cost of
sales as a percentage of sales for the RPG increased 3.5% in the 1999 period
compared to the 1998 period primarily due to lower polyester fiber selling
prices and production volumes, which were partially offset by lower recycled
raw material costs. As a percentage of sales, cost of sales for the PPG
increased 2.0% in the 1999 period versus the 1998 period, primarily due to
lower worldwide PET resins selling prices, which were partially offset by
lower chemical raw material costs and higher U.S. unit volumes.
12
<PAGE>
As a result of the foregoing, gross profit for the 1999 period declined
41.2% to $24.8 million in the 1999 period compared to $42.2 million in the
1998 period. The gross profit margin was 11.3% in the 1999 period compared
to 16.0% in the 1998 period.
Selling, general and administrative expenses amounted to $18.7 million,
or 8.5% of sales, in the 1999 period compared to $19.3 million, or 7.3% of
sales, in the 1998 period. This decrease was primarily due to reduced costs
in the worldwide fiber operations.
As a result of the foregoing, operating income declined 73.1% to $6.1
million in the 1999 period from $22.9 million in the 1998 period.
Interest expense was $3.3 million in the 1999 period compared to $2.4
million in the 1998 period. The increase is due to a higher level of debt
related to the Company's manufacturing operations. A significant portion of
interest was capitalized in 1998 and 1999 relating to the construction in
progress at the Company's Pearl River facility.
As a result of the foregoing, earnings for the 1999 period, before the
cumulative effect of a change in accounting principle, were $1.8 million, or
$0.06 per diluted share. Effective January 1, 1999, the Company adopted the
AICPA's Statement of Position No. 98-5, "Reporting on the Costs of Start-Up
Activities," which required the Company to begin expensing all start-up and
organization costs as incurred. Start-up and organization costs incurred
prior to the adoption of this SOP have been reported as a cumulative effect
of a change in accounting principle. The effect of the change was to
decrease net income in the first quarter of 1999 by $1,769, or $0.06 per
diluted share.
OUTLOOK
The U.S. and European fiber markets have been severely impacted by the
Far Eastern economic crisis and the resultant increase in imports of fiber,
yarn, fabric and apparel from that region. In the United States, high levels
of Asian imports are still present throughout the textile chain. As a
result, demand for polyester fiber remains weak, with higher inventory
levels, excess capacity and downward selling price pressure continuing to
affect domestic fiber producers.
Demand for domestic PET packaging resins remains relatively strong, and
imports are not material. The Company believes continued growing demand may
improve both selling prices and profit margins during 1999.
The first of two 235 million-pound resin production lines at the
Company's Pearl River facility came on-line in the first quarter of 1999.
The second resin line is scheduled to commence operation in the second
quarter of 1999. As a result, resin unit volumes are expected to increase
significantly in 1999. The start-up of the plant's 230 million-pound fiber
production line, previously scheduled for the third quarter of 1999, has been
temporarily delayed.
In 1999, the Company's results of operations will also be impacted by
certain increased expenses associated with the start-up of the Pearl River
Plant. Interest expense and depreciation expense will increase when each
production line commences operation. Interest related to the facility
incurred prior to operation was capitalized; after operation, interest is
expensed. Start-up costs to be incurred and expensed in 1999 are not
expected to be material. As a result of the foregoing, costs are expected to
increase during 1999.
13
<PAGE>
In April 1999 the Company announced plans to develop a strategy to improve
long-term profitability and stockholder returns. The strategy will be an
ongoing process to improve profitability, primarily through improved
efficiencies and reduced costs. The Company plans to review all aspects of
its operations, including its organizational structure, cost structure and
manufacturing processes.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations was $1.9 million for the three months
ended March 31, 1999 compared to $2.3 million used in operations for the
three months ended March 31, 1998.
Net cash used in investing activities, comprised solely of capital
spending, amounted to $31.6 million in the first three months of 1999
compared to $52.9 million in the first three months of 1998. Management
expects to spend between $100 million and $120 million on capital
expenditures in 1999, with the majority being spent to complete the
construction of the Pearl River facility.
Net cash provided by financing activities amounted to $29.7 million in
the 1999 period compared to $55.2 million in the 1998 period. In 1999, there
were net borrowings of $31.7 million compared to $57.9 million in 1998 as a
result of the Company's ongoing capital investment program.
The Company has a senior revolving credit facility which matures in
February 2000. As a result, certain amounts previously treated as long-term
debt have been classified as current liabilities at March 31, 1999.
Management expects to refinance this facility on a long-term basis during the
third quarter of 1999.
The Company's financing agreements contain normal financial and
restrictive covenants. Certain subsidiaries have guaranteed substantially
all of the Company's indebtedness for borrowed money. The financial
resources available to the Company at March 31, 1999 include $240 million
under its $330 million revolving credit facility, unused short-term
uncommitted lines of credit aggregating approximately $145 million, and
internally generated funds. At March 31, 1999 the Company could borrow an
additional $199 million without amending the terms of its revolving credit
facility.
During 1998, the SEC declared effective the Company's universal shelf
registration statement covering the issuance of up to $400 million of debt
and/or equity securities. No securities have been sold from this shelf
registration.
The Company believes these financial resources and other credit
arrangements will be sufficient to meet its foreseeable cash needs for
working capital, capital expenditures and dividends.
For information about the Company's derivative financial instruments, see
Item 7A. "Quantitative and Qualitative Disclosure About Market Risk" of the
Company's 1998 Form 10-K.
YEAR 2000 COMPUTER ISSUE
Overview
The "Year 2000 Computer Issue" is the result of computer programs being
written using only two digits rather than four to refer to a year. If
14
<PAGE>
uncorrected, these computer programs may not be able to distinguish between
the years 1900 and 2000 and may fail to operate or may produce unpredictable
results.
Wellman has been addressing the Year 2000 Computer Issue within its
information technology and non-information technology systems through a
Company-wide Year 2000 project. Non-information technology systems typically
include embedded technology such as computer chips within manufacturing
equipment and building security systems. The Company's Year 2000 Project
formally commenced in December 1997 and is proceeding on schedule. The
Company anticipates completing its Year 2000 project no later than June 30,
1999, which is prior to any anticipated impact on its operating systems.
Year 2000 Project
The Company organized its Year 2000 Project into five broad phases: (1)
development of a Company-wide inventory of both information technology and
embedded systems; (2) Company-wide assessment, with focus on vital and
critical items, which was completed in February 1998; (3) renovation/
remediation, which is targeted for completion by June 30, 1999; (4)
validation and testing, which is targeted for completion by June 30, 1999;
and (5) implementation. When a system passes the Company's established test
criteria, it is certified as Year 2000 ready and cleared for implementation.
The Company focuses on the following vital and critical items in its
remediation efforts: (a) information systems portfolio, (b) embedded systems,
(c) purchasing and trading partners, (d) end-user owned applications, and (e)
network and personal computers.
(a) Information systems portfolio: These have been divided into two
categories: corporate systems and manufacturing systems. Corporate systems,
which consist largely of third-party applications and, to a lesser degree,
in-house written applications, include, but are not limited to, human
resources/payroll, accounts payable, general ledger, order fulfillment
(shipping, receiving, and invoicing), electronic data interchange (EDI),
and phone/voice mail. The Company believes all of the vital and critical
corporate systems are Year 2000 ready. Manufacturing systems are located
at and support manufacturing processes at Company facilities. The Company is
currently remediating two manufacturing systems, which are approximately
85% complete, with target completions in the second quarter of 1999. The
remaining 45 systems that were classified by the Company as vital and
critical have been remediated and are either currently being tested or are
scheduled for testing with expected completion dates no later than June 30,
1999.
(b) Embedded systems: These include items such as programmed logic
controllers, drives, and process controllers. Based on its assessment, the
Company believes that approximately 90% of its embedded systems have no date-
related issues. The remaining 10% of the Company's embedded systems are in
the process of being tested or remediated. Of the 10%, the Company has
completed its testing of approximately 95%, and less than 5% of those tested
required remediation.
(c) Purchasing and trading partners: The Company has surveyed all of
its vital and critical trading partners (suppliers and customers) concerning
their Year 2000 efforts in general. EDI trading partners have been surveyed
specifically with regards to the compliance of their software. The Company
has received written responses to its surveys but is aware that these written
responses may not accurately represent the Year 2000 compliance status of a
trading partner. Certain targeted suppliers are being interviewed
personally. As part of this project, contracts are being reviewed and
rewritten where necessary to include Year 2000 clauses.
15
<PAGE>
(d) End-user owned applications: There are various end-user written
desktop applications throughout the Company's locations. The vast majority
of these applications are not vital and critical to the business. Of those
that are vital and critical to operations, the Company believes that the
majority have no Year 2000 date issues. For those that are vital and
critical (with date issues), a desktop remediation tool has been selected and
is being used as needed.
(e) Network and personal computers: Approximately 99% of the Company's
vital and critical local area network servers and personal computers are
believed to be Year 2000 ready. The remainder are being replaced with
compliant hardware.
Costs
The remediation costs of the Company's Year 2000 Project were
approximately $400 in the three months ended March 31, 1999, and total
remediation costs for 1999 are not expected to exceed $1,100.
Risks
Due to the numerous uncertainties inherent in the Year 2000 Computer
Issue, the Company cannot ensure, despite its ongoing communications with its
trading partners, that its most important suppliers and customers will be
Year 2000 compliant on time. The failure of critical suppliers or customers
to timely correct their Year 2000 computer problems could materially and
adversely affect the Company's operations and financial condition, even
resulting in interruption of normal business operations if a critical
supplier is unable to meet contractual obligations in a timely way. The
Company is in the process of preparing, but has not completed, contingency
plans which will involve, among other actions, managing inventories and
adjusting staffing strategies. The Company expects to complete its
contingency plans during the second quarter of 1999.
Based on current plans and efforts to date, the Company does not
anticipate that the Year 2000 issue will have a material effect on results of
operations or financial condition. However, the above expectations are
subject to uncertainties. For example, if the Company is unsuccessful in
identifying or remediating all Year 2000 problems in its critical operations,
or if it is affected by the inability of suppliers or major customers to
continue operations due to such a problem, then the Company's results of
operations or financial condition could be materially impacted.
Forward-looking statements contained in this Year 2000 Computer Issue
section should be read in conjunction with the Company's disclosures under
the heading "Forward Looking Statements; Risks and Uncertainties" below.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities" (FAS
133), effective for fiscal years beginning after June 15, 1999. The Company
expects to adopt FAS 133 in January 2000. The Company has not yet determined
what the effect of FAS 133 will be on its results of operations or financial
position. However, the statement could increase volatility in earnings and
comprehensive income.
16
<PAGE>
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 1999 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
financial markets, interest rates and foreign currency exchange rates; work
stoppages; natural disasters; U.S., European, Far Eastern and global economic
conditions and changes in laws and regulations; Year 2000 compliance; prices
of competing products; 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, 1998.
17
<PAGE>
PART II - OTHER INFORMATION
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.
18
<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 12, 1999 By /s/ Keith R. Phillips
------------- ------------------------
Keith R. Phillips
Chief Financial Officer,
Vice President and Treasurer
(Principal Financial Officer)
Dated May 12, 1999 By /s/ Mark J. Rosenblum
------------- ------------------------
Mark J. Rosenblum
Chief Accounting Officer,
Vice President and Controller
(Principal Accounting Officer)
19
<PAGE>
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<PERIOD-END> MAR-31-1999
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