<PAGE> 1
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 October 2, 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 1-12164
-------
WOLVERINE TUBE, INC.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 63-0970812
-------- ----------
(State of Incorporation) (IRS Employer Identification No.)
1525 Perimeter Parkway, Suite 210
Huntsville, Alabama 35806
- ------------------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
(256) 353-1310
--------------
(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 [ ]
Indicate the number of shares outstanding of each class of Common Stock, as of
the latest practicable date:
Class Outstanding as of November 10, 1999
----- -----------------------------------
Common Stock, $0.01 Par Value 12,724,589 Shares
<PAGE> 2
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page No.
PART I
<S> <C> <C>
Item 1. Financial Statements
Condensed Consolidated Statements of Income (Unaudited)--
Three-Month and Nine-Month Periods Ended
October 2, 1999 and October 3, 1998......................................1
Condensed Consolidated Balance Sheets (Unaudited)--
October 2, 1999 and December 31, 1998....................................2
Condensed Consolidated Statements of Cash Flows (Unaudited)--
Nine-Month Periods Ended October 2, 1999 and October 3, 1998.............3
Notes to Condensed Consolidated Financial Statements (Unaudited).........4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations...................................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..............20
PART II
Item 1. Legal Proceedings.......................................................21
Item 6. Exhibits and Reports on Form 8-K........................................21
</TABLE>
<PAGE> 3
ITEM 1. FINANCIAL STATEMENTS
WOLVERINE TUBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Three-month period ended: Nine-month period ended:
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Net sales $164,766 $147,855 $489,928 $487,794
Cost of goods sold 161,278 129,459 440,209 418,938
- ---------------------------------------------------------------------------------------------------------------------
Gross profit 3,488 18,396 49,719 68,856
Selling, general and administrative expenses 7,966 6,128 22,745 18,677
Restructuring and other charges 19,938 11,867 19,938 11,867
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) from operations (24,416) 401 7,036 38,312
Other expenses:
Interest expense 3,319 1,808 9,617 4,596
Amortization and other, net 120 134 703 569
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and cumulative (27,855) (1,541) (3,284) 33,147
effect of accounting change
Income tax provision (benefit) (10,751) (707) (1,991) 11,738
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of (17,104) (834) (1,293) 21,409
accounting change
Cumulative effect of accounting change -- -- 5,754 --
(net of tax benefit of $2,211)
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) (17,104) (834) (7,047) 21,409
Less preferred stock dividends (70) (70) (210) (210)
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) applicable to common shares ($17,174) ($904) ($7,257) $ 21,199
=====================================================================================================================
Earnings per common share--basic:
Income (loss) before cumulative effect of ($1.32) ($0.06) ($0.12) $1.50
accounting change
Cumulative effect of accounting change -- -- (0.43) --
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share--basic ($1.32) ($0.06) ($0.55) $1.50
=====================================================================================================================
Basic weighted average number of common shares 13,003 14,133 13,247 14,110
=====================================================================================================================
Earnings per common share--diluted:
Income (loss) before cumulative effect of ($1.32) ($0.06) ($0.12) $1.48
accounting change
Cumulative effect of accounting change -- -- (0.43) --
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share--diluted ($1.32) ($0.06) ($0.55) $1.48
=====================================================================================================================
Diluted weighted average number of common and common
equivalent shares 13,003 14,284 13,247 14,291
=====================================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
1
<PAGE> 4
WOLVERINE TUBE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands except share amounts)
<TABLE>
<CAPTION>
October 2, December 31,
1999 1998
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current assets
Cash and equivalents $ 14,190 $ 78,899
Accounts receivable, net 99,017 66,231
Inventories 89,788 108,134
Refundable income taxes 13,850 --
Prepaid expenses and other 899 1,094
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 217,744 254,358
Property, plant and equipment, net 187,428 197,708
Deferred charges and intangible assets, net 92,848 87,984
Assets held for resale -- 2,989
Prepaid pensions 6,709 6,379
- ---------------------------------------------------------------------------------------------------------------------
Total assets $504,729 $549,418
=====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 40,784 $ 38,653
Accrued liabilities 14,636 12,584
Deferred income taxes 1,575 3,018
Credit facilities and other short-term borrowings 11,228 --
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 68,223 54,255
Deferred income taxes 21,669 25,903
Long-term debt 176,411 215,689
Postretirement benefit obligations 11,297 11,606
Accrued environment remediations 2,725 3,002
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 280,325 310,455
Minority interest 2,152 --
Redeemable cumulative preferred stock, par value $1 per share;
20,000 shares issued and outstanding at October 2, 1999 and
December 31, 1998 2,000 2,000
Stockholders' equity
Cumulative preferred stock, par value $1 per share; 500,000 -- --
shares authorized
Common stock, par value $0.01 per share; 40,000,000 shares 142 141
authorized, 12,716,939 and 14,147,060 shares issued as of
October 2, 1999 and December 31, 1998, respectively
Additional paid-in capital 102,022 101,514
Retained earnings 160,173 167,430
Accumulated other comprehensive income (12,508) (15,494)
Treasury stock at cost (29,577) (16,628)
- ---------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 220,252 236,963
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities, minority interest, redeemable cumulative
preferred stock and stockholders' equity $504,729 $549,418
=====================================================================================================================
</TABLE>
Note: The Balance Sheet at December 31, 1998 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements.
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE> 5
WOLVERINE TUBE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine-month period ended:
October 2, 1999 October 3, 1998
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) ($ 7,047) $21,409
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization 11,933 13,172
Deferred income taxes (5,923) --
Non-cash portion of restructuring and other charges 14,920 8,174
Loss on disposal of assets 1,024 --
Cumulative effect of accounting change 5,754 --
Changes in operating assets and liabilities:
Accounts receivable (22,821) (11,592)
Inventories 19,709 (2,930)
Refundable income taxes (13,850) --
Prepaid expenses and other 236 (958)
Accounts payable (5,980) (6,972)
Accrued liabilities including pension, postretirement 3,962 5,083
benefit and environmental
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 1,917 25,386
INVESTING ACTIVITIES
Additions to property, plant and equipment (17,107) (24,565)
Acquisition of business assets (6,689) (33,280)
Other 97 (24)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (23,699) (57,869)
FINANCING ACTIVITIES
Financing fees -- (1,686)
Net payments on revolving credit facility (39,000) (31,999)
Principal payments on long-term debt (335) (351)
Proceeds from issuance of debt 8,215 149,683
Issuance of common stock 509 1,177
Purchase of treasury stock (12,949) (1,565)
Dividends paid (210) (210)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (43,770) 115,049
Effect of exchange rate on cash and equivalents 843 (1,775)
- ---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents (64,709) 80,791
Cash and equivalents beginning of period 78,899 15,096
- ---------------------------------------------------------------------------------------------------------------------
Cash and equivalents end of period $14,190 $ 95,887
=====================================================================================================================
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
3
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WOLVERINE TUBE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 2, 1999
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of the Company and its majority-owned subsidiaries after
elimination of significant intercompany accounts and transactions. The
accompanying condensed consolidated financial statements have been prepared in
accordance with instructions to Form 10-Q and do not include all the information
and footnotes required by generally accepted accounting principles for complete
financial statements. The accompanying condensed consolidated financial
statements (and all information in this report) have not been examined by
independent auditors; but, in the opinion of management, all adjustments, which
consist of normal recurring accruals necessary for a fair presentation of the
results for the periods, have been made. The results of operations for the three
and nine-month period ended October 2, 1999 are not necessarily indicative of
the results of operations that may be expected for the year ending December 31,
1999. For further information, refer to the consolidated financial statements
and footnotes included in the Company's annual report on Form 10-K for the year
ended December 31, 1998.
The Company uses its internal operational reporting cycle for quarterly
financial reporting.
CHANGE IN ESTIMATE
During the implementation of the Company's new information systems, the Company
reviewed the estimated useful lives of its property, plants and equipment. This
evaluation revealed that certain equipment was being depreciated over periods of
time which were shorter than their respective useful lives. Accordingly, a
change in estimate was made to the estimated useful lives of certain equipment,
which resulted in an increase of approximately $370,000 in net income in the
three month period ended October 2, 1999 and approximately $1,092,000 in net
income in the nine-month period ended October 2, 1999. The effect of this change
in estimate on the net income for the year ended December 31, 1999 is expected
to be approximately $1,444,000.
ACQUISITIONS
In July 1999, the Company combined the assets of its Fergus, Ontario facility
with certain of the assets of Ratcliffs Severn Ltd. to create the newly-formed
joint entity of Wolverine Ratcliffs, Inc. ("WRI"). The Company owns 85.9% of
WRI, and the remaining 14.1% is owned by Ratcliffs Severn Ltd. The accounts and
results of operations of WRI have been combined with those of the Company since
the date of acquisition using the purchase method of accounting.
4
<PAGE> 7
NOTE 2. CONTINGENCIES
The Company is subject to extensive U.S. and Canadian federal, state, provincial
and local environmental laws and regulations. These laws, which are constantly
changing, regulate the discharge of materials into the environment. The Company
has received various communications from regulatory authorities concerning
certain environmental matters and has currently been named as a potentially
responsible party ("PRP") at various waste disposal sites. The Company believes
that its potential liability with respect to these waste disposal sites is not
material.
The Company has accrued environmental remediation costs of $2,725,000 as of
October 2, 1999, consisting primarily of $939,000 for the Decatur, Alabama
facility, $302,000 for the Greenville, Mississippi facility, $742,000 for the
Jackson, Tennessee facility and an aggregate of $742,000 for the Ardmore,
Tennessee facility and the Shawnee, Oklahoma facility (with respect to the
Double Eagle Refinery site). Based on information currently available, the
Company believes that the costs of these matters are not reasonably likely to
have a material adverse effect on the Company's business, financial condition or
results of operations.
NOTE 3. INVENTORIES
Inventories are as follows:
<TABLE>
<CAPTION>
October 2, 1999 December 31, 1998
- -------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Finished products $13,525 $ 22,740
Work-in-process 20,530 28,401
Raw materials and supplies 55,733 56,993
- -------------------------------------------------------------------------------------
$89,788 $108,134
=====================================================================================
</TABLE>
Approximately 61% and 71% of total inventories at October 2, 1999 and December
31, 1998 are stated on the basis of last-in, first-out ("LIFO") method. During
the third quarter of 1999, liquidation of certain LIFO layers increased cost of
goods sold by $8.1 million.
NOTE 4. INTEREST EXPENSE, NET
Interest expense is net of interest income and capitalized interest of $889,000
and $1,693,000 for the three-month periods ended October 2, 1999 and October 3,
1998, respectively, and $3,050,000 and $2,582,000 for the nine-month periods
ended October 2, 1999 and October 3, 1998, respectively.
5
<PAGE> 8
NOTE 5. DEBT
The Company's unsecured $200 million Revolving Credit Facility (the "Facility")
(i) provides for an aggregate available revolving credit facility of $200
million, including a $20 million sub-limit facility available to Wolverine Tube
(Canada) Inc., (ii) matures in full in April 2002, and (iii) provides for a
floating base interest rate that is, at the Company's election, either (a) the
higher of the federal funds effective rate plus 0.50% or the prime rate, or (b)
LIBOR plus a specified margin of 0.25% to 0.875%. As of October 2, 1999, the
Company had approximately $30 million in outstanding borrowings and obligations
under the Facility and approximately $170 million in additional borrowing
availability thereunder.
The Company was party to an interest rate swap agreement which effectively fixed
the interest rate on $65,000,000 in principal amount of floating rate borrowings
provided under the Facility at a rate of 6.82% plus the specified margin of
0.25% to 1.00%. This agreement was to expire on May 7, 2002 and was based on the
three-month LIBOR. This interest rate swap was accounted for as a hedge; the
differential to be paid as interest rates change was accrued and recognized as
an adjustment to interest expense. In September 1999, the Company entered into a
cancellation agreement that terminated the interest rate swap. The resulting
loss on termination, $810,000, was included in restructuring and other charges
in the condensed consolidated statement of income.
In August 1998, the Company issued $150 million in principal amount of 7-3/8%
Senior Notes (the "Notes") due August 1, 2008. The Notes were issued pursuant to
an Indenture, dated as of August 4, 1998, between the Company and First Union
National Bank, as Trustee. The Notes (i) have interest payment dates on February
1 and August 1 of each year, commencing February 1, 1999, (ii) are redeemable at
the option of the Company at a redemption price equal to the greater of (a) 100%
of the principal amount of the Notes to be redeemed, or (b) the sum of the
present value of the remaining scheduled payments of principal and interest
thereon from the redemption date to the maturity date, discounted to the
redemption date on a semiannual basis at a rate based upon the yield of the
specified treasury securities plus 25 basis points, plus, in each case, accrued
interest thereon to the date of redemption, (iii) are senior unsecured
obligations of the Company and are pari passu in right of payment with any
existing and future senior unsecured indebtedness of the Company, including
borrowings under the Facility, (iv) are guaranteed by certain of the Company's
subsidiaries, and (v) are subject to the terms of the Indenture, which contains
certain covenants that limit the Company's ability to incur indebtedness secured
by certain liens and to engage in sale/leaseback transactions.
In July 1999, WRI entered into a credit agreement with a Canadian bank providing
for an aggregate available credit facility of up to Canadian $15.0 million
(approximately U.S. $10 million) (the "Canadian Facility"). The Canadian
Facility is payable upon demand and bears interest at the bank's prime rate. The
Canadian Facility is secured by certain of WRI's assets. At October 2, 1999, WRI
had outstanding borrowings of approximately Canadian $8.9 million dollars
(approximately U.S. $6 million).
6
<PAGE> 9
NOTE 6. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Financial Accounting Standards Board
Statement No. 130, Reporting Comprehensive Income ("Statement 130"). Statement
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of Statement 130 had no impact on the
Company's net income or stockholders' equity. Statement 130 requires unrealized
gains or losses on the Company's foreign currency translation adjustments, which
prior to the adoption of Statement 130 were reported separately in stockholders'
equity, to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of Statement
130. During the third quarters of 1999 and 1998, total comprehensive income
(loss) amounted to ($17,539,000) and ($4,788,000), respectively. For the first
nine months of 1999 and 1998, total comprehensive income (loss) amounted to
($4,061,000) and $15,133,000, respectively.
NOTE 7. RESTRUCTURING AND OTHER CHARGES
During the third quarter of 1999, the Company recognized restructuring and other
charges of $19,938,000 ($12,461,000 net of tax). This charge included $10.0
million in expenses relating to the closing of the Company's Roxboro, North
Carolina facility, which employed approximately 100 people, of which $8.6
million of these Roxboro expenses related to the write-off of impaired assets;
$2.8 million in expenses related to the implementation of an indirect
(non-manufacturing) workforce reduction program of approximately 100 employees;
$3.6 million in expenses related to impaired assets due to a product and plant
rationalization plan; $1.9 million in expenses related to previously closed
entities, of which $1.8 million was related to write-off of impaired assets;
$0.8 million in expenses related to termination of an interest rate swap; and
$0.8 million in expenses related to professional fees and other costs primarily
associated with acquisitions that were not completed. Additionally, $14,414,000
of non-recurring charges were included in cost of goods sold in the condensed
consolidated statements of income. These charges included $8.1 million relating
to the liquidation of LIFO inventory values and $6.3 million of additional costs
associated with the realignment of the Company's manufacturing operations and
product rationalization.
During the third quarter of 1998, the Company recognized restructuring and other
charges of $11,867,000 ($7,460,000 net of tax). This charge included $7.4
million in expenses related primarily to the closing of the Company's
Greenville, Mississippi facility, of which $5.6 million in expenses related to
the write-off of impaired assets and $1.6 million in expenses related to
severance costs resulting primarily from the closing of this facility, which
employed approximately 140 people; $2.7 million in expenses primarily related to
efficiency initiatives implemented at the Company's Roxboro, North Carolina
facility, which primarily related to the impairment in value of certain
equipment; $0.9 million in expenses related to the implementation of a salaried
workforce reduction program of approximately 50 employees; and $0.9 million in
expenses related to professional fees and other costs primarily associated with
an acquisition that was not completed.
7
<PAGE> 10
NOTE 8. INDUSTRY SEGMENTS
The Company adopted Financial Accounting Standards Board Statement 131,
Disclosures About Segments of an Enterprise and Related Information, during
1998. The Company's reportable segments are based on the Company's three product
lines: commercial products, wholesale products and other products. Commercial
products consist primarily of high value added products sold directly to
original equipment manufacturers. Wholesale products are commodity-type plumbing
tube products, which are typically sold to a variety of customers. Other
products consist primarily of commodity-type rod, bar and strip products, which
are sold to a variety of customers.
Summarized financial information concerning the Company's reportable segments is
shown in the following table:
<TABLE>
<CAPTION>
Commercial Wholesale Other Consolidated
------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C>
Three-month period ended October 2, 1999
Sales $107,171 $35,056 $22,539 $164,766
Gross profit 4,019 (128) (403) 3,488
Three-month period ended October 3, 1998
Sales $107,056 $23,551 $17,248 $147,855
Gross profit 17,154 556 686 18,396
Nine-month period ended October 2, 1999
Sales $333,998 $92,559 $63,371 $489,928
Gross profit 36,980 10,312 2,427 49,719
Nine-month period ended October 3, 1998
Sales $355,080 $82,080 $50,634 $487,794
Gross profit 61,611 5,217 2,028 68,856
</TABLE>
NOTE 9. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
During the first quarter of 1999, the Company adopted the American Institute of
Certified Public Accountants' Statement of Position 98-5, Reporting on the Costs
of Start-Up Activities (the "Statement"), which requires that certain costs
related to start-up activities be expensed as incurred. In accordance with the
Statement, the Company recognized a charge for the cumulative effect of a change
in accounting principle of $8.0 million pre-tax ($5.8 million after-tax). The
implementation of the Statement required the Company to write-off the remaining
start-up costs relating primarily to the Company's Roxboro, North Carolina;
Jackson, Tennessee; and Shanghai, China facilities.
8
<PAGE> 11
NOTE 10. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three-month period ended: Nine-month period ended:
October 2, October 3, October 2, October 3,
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Income (loss) before cumulative effect of ($17,104) ($834) ($1,293) $21,409
accounting change
Cumulative effect of accounting change -- -- (5,754) --
(net of income tax benefit)
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) (17,104) (834) (7,047) 21,409
Preferred dividends (70) (70) (210) (210)
==========================================================================================================================
Net income (loss) applicable to common shares ($17,174) ($904) ($7,257) $21,199
==========================================================================================================================
Basic weighted common shares outstanding 13,003 14,133 13,247 14,110
Employee stock options -- 151 -- 181
- --------------------------------------------------------------------------------------------------------------------------
Diluted weighted average common and common equivalent
shares outstanding 13,003 14,284 13,247 14,291
==========================================================================================================================
Earnings per share-basic:
Income (loss) before cumulative effect of accounting change ($1.32) ($0.06) ($0.12) $1.50
Cumulative effect of accounting change -- -- (0.43) --
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share ($1.32) ($0.06) ($0.55) $1.50
==========================================================================================================================
Earnings per share-diluted:
Income (loss) before cumulative effect of accounting change ($1.32) ($0.06) ($0.12) $1.48
Cumulative effect of accounting change -- -- (0.43) --
- --------------------------------------------------------------------------------------------------------------------------
Net income (loss) per common share ($1.32) ($0.06) ($0.55) $1.48
==========================================================================================================================
</TABLE>
NOTE 11. STOCK REPURCHASE PLAN
The Board of Directors has authorized the Company to purchase up to 2,000,000
shares of the Company's outstanding stock in the open market from time to time
as market conditions may warrant. The aggregate purchase price for such
purchases of common stock shall not exceed $50,000,000. As of October 2, 1999
the Company had repurchased 1,471,700 shares under its share repurchase program,
representing an aggregate purchase price of $29,577,000.
9
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED OCTOBER 2, 1999 COMPARED TO
THREE-MONTH PERIOD ENDED OCTOBER 3, 1998
For the three-month period ended October 2, 1999 consolidated net sales were
$164.8 million, compared with $147.9 million in the three-month period ended
October 3, 1998. The increase in net sales for the three-month period this year
versus last year was primarily due to increased volumes of commercial, wholesale
and strip products, as well as higher average copper prices. The cost of copper
is generally passed along to the Company's customers and is included in the cost
of goods sold. The average COMEX price of copper was $0.78 per pound in the most
recent three-month period, compared with $0.75 per pound in the same period a
year ago. The primary impact to the Company of higher copper prices is higher
net sales and cost of goods sold. The Company uses various strategies to
minimize the effect of copper prices on the Company's earnings.
Total pounds shipped for the three-month period of 1999 increased 13.5% to 99.3
million pounds, compared with 87.5 million pounds in the three-month period a
year ago. Shipments of commercial tube products increased 2.5%, primarily as a
result of increased shipments of industrial tube used in the residential air
conditioning industry. The increase in shipments of industrial tube was somewhat
offset by reduced shipments of technical tube products. Shipments of the
Company's wholesale products for the three-month period of 1999 increased 35.2%
to 25.5 million pounds with improvement in both the U.S. and Canadian markets.
Rod, bar and strip product shipments for the three-month period of 1999
increased 25.7% from the three-month period a year ago, primarily as a result of
increased shipments of strip product from the newly formed WRI joint entity.
Consolidated gross profit decreased 81% to $3.5 million in the three-month
period of 1999 compared to $18.4 million in the three-month period of 1998. For
the three-month period of 1999, non-recurring charges of $14.4 million were
recognized in cost of goods sold. These charges primarily consisted of $8.1
million relating to the liquidation of LIFO inventory values resulting from
planned inventory reductions and $6.3 million of additional costs associated
with the realignment of the Company's manufacturing operations and product
rationalization. For the three-month period of 1998, non-recurring charges of
$2.1 million were recognized in cost of goods sold. These charges primarily
consisted of $1.4 million of costs associated with the closing of the Company's
Greenville, Mississippi facility and $0.7 million of costs associated with
efficiency initiatives implemented at the Company's Roxboro, North Carolina
facility. Excluding the effect of the non-recurring charges in both years,
consolidated gross profit decreased 13% to $17.9 million in the third quarter of
1999 from $20.6 million in the third quarter of 1998. This decrease was
primarily the result of decreased shipments of technical tube that are included
in commercial products, which are generally the Company's highest margin
10
<PAGE> 13
products. To a lesser extent, higher costs associated with the
slower-than-anticipated ramp-up of the Jackson, Tennessee facility affected
gross profit. Increased shipments of wholesale products and rod, bar and strip
products partially offset the reduction of gross profit resulting from the
decreased shipments of technical tube.
Consolidated selling, general and administrative expenses for the three-month
period of 1999 were $8.0 million, as compared to $6.1 million in the three-month
period of 1998. This increase was primarily the result of incremental
depreciation on the Company's new research and development center, information
systems software, increased employee compensation expenses relating to
performance incentives and relocation costs and increased foreign currency
losses.
During the third quarter of 1999, the Company recognized restructuring and other
charges of $19.9 million ($12.5 million net of tax). This charge included $10.0
million in expenses relating to the closing of the Company's Roxboro, North
Carolina facility, which employs approximately 100 people, of which $8.6 million
in expenses related to the write-off of impaired assets; $2.8 million in
expenses related to the implementation of an indirect (non-manufacturing)
workforce reduction program of approximately 100 employees; $3.6 million in
expenses related to impaired assets due to a product and plant rationalization
plan; $1.9 million in expenses related to previously closed entities, of which
$1.8 million was related to the write-off of impaired assets; $0.8 million in
expenses related to the termination of an interest rate swap; and $0.8 million
in professional fees and other costs, primarily associated with acquisitions
that were not completed.
Consolidated net interest expense for the three-month period in 1999 increased
to $3.3 million from $1.8 million in the three-month period of 1998. This
increase was primarily the result of increased interest expense associated with
the issuance of the Company's $150 million in principal amount of 7-3/8% Senior
Notes due 2008 in August 1998 (the "Senior Notes").
The Company recognized a tax benefit of $10.7 million in the third quarter of
1999 and $0.7 million in the third quarter of 1998, primarily resulting from the
recognition of non-recurring charges included in cost of goods sold and
restructuring and other charges described above. Excluding the effect of the tax
benefit and the associated non-recurring and restructuring and other charges
recognized in both quarters, the effective tax rate for the third quarter of
1999 was 33.6%, as compared with 36.0% for the third quarter of 1998.
Excluding non-recurring charges included in cost of goods sold and restructuring
and other charges recognized in both quarters, consolidated net income was $4.3
million, or $0.33 per basic share, in the third quarter of 1999, compared to
$8.0 million, or $0.55 per diluted share or $0.56 per basic share, in the third
quarter of 1998. Consolidated net loss for the three-month period of 1999 was
$17.1 million, or $1.32 per diluted share, compared to a net loss of $0.8
million, or $0.06 per diluted share, in the three-month period a year ago.
11
<PAGE> 14
NINE-MONTH PERIOD ENDED OCTOBER 2, 1999 COMPARED TO
NINE-MONTH PERIOD ENDED OCTOBER 3, 1998
For the nine-month period ended October 2, 1999, consolidated net sales were
$489.9 million, compared with $487.8 million in the nine-month period ended
October 3, 1998. The increase in net sales for the first nine months of 1999 was
primarily due to increased volumes in commercial, wholesale and strip products,
which was partially offset by lower average copper prices during the nine-month
period. The average COMEX price of copper was $0.70 per pound in the most recent
nine-month period, compared with $0.77 per pound in the same period a year ago.
The primary impact to the Company of lower copper prices is lower net sales and
cost of goods sold. The Company uses various strategies to minimize the effect
of copper prices on the Company's earnings.
Total pounds shipped for the nine-month period of 1999 increased by 16.9 million
pounds to 296.5 million pounds, compared with 279.6 million pounds in the
nine-month period a year ago. Shipments of commercial tube products were flat
compared to the same nine-month period a year ago. Technical tube shipments have
decreased from prior year levels as the Company experienced a significant,
unexpected decline in demand for these products from its major customers. The
decrease in commercial tube products was partially offset by increased shipments
of industrial tube used in the residential air conditioning industry. Shipments
of the Company's wholesale products for the nine-month period of 1999 increased
10.2%, with improvements in both the U.S. and Canadian markets. Rod, bar and
strip product shipments for the nine-month period of 1999 increased 26.8% from
the nine-month period a year ago due to increased shipments of strip products to
the Canadian mint during the first half of 1999 and increased shipments of strip
products from the newly formed WRI joint entity in the third quarter of 1999.
Consolidated gross profit decreased 27.8% to $49.7 million in the nine-month
period of 1999 compared to $68.9 million in the nine-month period of 1998. As
previously discussed, during the nine-month periods of 1999 and 1998, the
Company recognized non-recurring charges to cost of goods sold totaling $14.4
million and $2.1 million, respectively. Excluding the effect of the
non-recurring charges in both years, gross profit decreased 9.7% to $64.1
million in the nine-month period of 1999 compared to $71.0 million in the
nine-month period of 1998. The decrease was primarily the result of decreased
shipments of technical tube that are included in commercial products, which are
generally the Company's highest margin products. In addition, costs associated
with the slower-than-anticipated ramp-up of the Jackson, Tennessee facility
affected gross profit to a lesser extent. Increased fabrication charges from
wholesale products and rod, bar and strip products partially offset the
reduction in gross profit resulting from the decreased shipments of technical
tube.
Consolidated selling, general and administrative expenses for the nine-month
period of 1999 were $22.7 million, as compared to $18.7 million in the
nine-month period of 1998. This increase was primarily the result of incremental
depreciation on the Company's new research and development center and
information systems software, increased employee compensation
12
<PAGE> 15
expenses relating to performance incentives and relocation costs, foreign
currency losses and increased marketing and professional fees.
Consolidated net interest expense for the nine-month period in 1999 increased to
$9.6 million from $4.6 million in the nine-month period of 1998. This increase
was primarily the result of increased interest expense associated with the
issuance of the Senior Notes.
For the nine-month period of 1999, the Company recognized a tax benefit of $2.0
million resulting from the recognition of non-recurring and restructuring and
other charges described above. Excluding the effect of the tax benefit and the
associated non-recurring and restructuring and other charges recognized in both
years, the effective tax rate in the nine-month period of 1999 was 35.2%,
compared with 35.9% in the nine-month period of 1998.
During the nine-month period of 1999, the Company recognized a charge for the
cumulative effect of a change in accounting principle of $8.0 million pre-tax
($5.8 million after tax). The Company adopted the American Institute of
Certified Public Accountants Statement of Position 98-5, Reporting on the Costs
of Start-Up Activities (the "Statement"). The implementation of the Statement
required the Company to write-off the remaining start-up costs relating
primarily to the Company's Roxboro, North Carolina, Jackson, Tennessee and
Shanghai, China facilities.
Excluding non-recurring and restructuring and other charges recognized in both
years, and the cumulative effect of an accounting change recognized in 1999,
consolidated net income was $20.1 million, or $1.50 per share, for the
nine-month period of 1999 as compared to $30.2 million, or $2.10 per diluted
share, for the nine-month period of 1998. Consolidated net loss for the
nine-month period of 1999 was $7.0 million, or $0.55 per diluted share, compared
to a consolidated net income of $21.4 million, or $1.48 per diluted share, in
the nine-month period a year ago. Loss before the cumulative effect of an
accounting change in the nine-month period of 1999 was $1.3 million, or $0.12
per diluted share.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $1.9 million in the first nine
months of 1999 as compared to $25.3 million in the first nine months of 1998.
The decrease in cash provided by operations in the first nine months of 1999 was
primarily due to decreased net income exclusive of the cumulative effect of the
accounting change and an increase in accounts receivable offset by a decrease in
inventory. The $22.8 million increase in net accounts receivable from December
31, 1998 was primarily due to increased sales over year-end 1998 levels.
The Company's $200 million unsecured credit agreement (the "Credit Agreement")
(i) provides for an aggregate available revolving credit facility of $200
million, including a $20 million sub-limit facility available to Wolverine Tube
(Canada) Inc., (ii) matures in full in April 2002, and (iii) provides for a
floating base interest rate that is, at the Company's election, either (a) the
higher of the federal funds effective rate plus 0.50% or the prime rate, or (b)
LIBOR plus a specified margin of 0.25% to 0.875%. As of October 2, 1999 the
Company had approximately $30 million in outstanding borrowings and obligations
under the Credit Agreement and approximately $170 million in additional
borrowing availability thereunder.
13
<PAGE> 16
In the ordinary course of business the Company enters into various types of
transactions that involve contracts and financial instruments with off-balance
sheet risk. The Company enters into these financial instruments to manage
financial market risk, including foreign exchange risk, commodity price risk for
certain customers and interest rate risk. The Company is exposed to loss on the
forward contracts in the event of non-performance by the customer whose orders
are covered by such contracts. However, the Company does not anticipate
non-performance by such customers. The Company accounts for its interest rate
swaps as a hedge. Accordingly, gains and losses are recognized as interest
expense. The Company enters into these financial instruments utilizing
over-the-counter as opposed to exchange-traded instruments. The Company
mitigates the risk that counter parties to these over-the-counter agreements
will fail to perform by only entering into agreements with major international
financial institutions.
Capital expenditures were $17.1 million for the first nine months of 1999
compared to $24.6 million for the first nine months of 1998. The Company
currently expects to spend approximately $27 million in the aggregate in 1999
under its existing capital program. The Company believes that it will be able to
satisfy its existing working capital needs, interest obligations, stock
repurchases and capital expenditure requirements with cash flow from operations
and funds available from the Credit Agreement.
IMPACT OF YEAR 2000
The Company utilizes a number of computer software programs and operating
systems throughout its organization, including applications used in order
processing, shipping and receiving, accounts payable and receivable processing,
financial reporting and various other administrative functions. The Company
recognizes the need to ensure that its operations will not be adversely impacted
by applications and processing issues related to the upcoming calendar year 2000
(the "Year 2000 Issue"). The Year 2000 Issue is the result of computer programs
that have been written to recognize two-digit, rather than four-digit, date
codes to define the applicable year. To the extent that the Company's software
applications contain source codes that are unable to appropriately interpret a
code using "00" as the upcoming year 2000 rather than 1900, the Company could
experience system failures or miscalculations that could disrupt operations and
cause a temporary inability to process transactions, send and process invoices
or engage in similar normal business activities.
Based on an assessment of its systems during 1998, the Company determined that
it would be required to modify or replace significant portions of its software
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
made to its existing software and certain conversions to new software, the Year
2000 Issue will not pose significant operational problems for its computer
systems. In addition, the Company's systems and operations are dependent, in
part, on interaction with systems operated or provided by vendors or other
third-parties, and the Company has surveyed substantially all of those parties
about their progress in identifying and addressing problems that their computer
systems may face in connection with the Year 2000 Issue. The Company believes
that it has no exposure for contingencies related to the Year 2000 Issue for the
products it has sold.
14
<PAGE> 17
The Company's plan to address the Year 2000 Issue (the "Plan") was structured to
identify exposure in three areas: information technology, operating equipment
with embedded chips or software, and third-party vendors. In addition, the Plan
involved the following four phases for each of the exposure areas: assessment,
remediation, testing and implementation. With respect to information technology,
the Company has fully completed its assessment of this area. This assessment
indicated that most of the Company's significant information technology systems
could be affected, particularly the general ledger, billing, payables and
inventory systems. The Company has completed the remediation phase for the
information technology area and has completed the software replacement phase.
The Company has completed 100% of its testing and has implemented 100% of its
remediation systems. The testing phase for all significant systems was completed
by September 30, 1999. All remediation and implementation of systems was fully
tested and operational by October 29, 1999.
The Company has also completed the assessment and remediation phases for its
operating equipment with embedded chips or software. The remediation phase was
completed by June 30, 1999. Testing and implementation of affected equipment was
completed by September 30, 1999.
The assessment of third-party vendors and customers and their exposure to the
Year 2000 Issue is 100% complete for systems that directly interface with the
Company and for all other material exposure. The Company has completed surveying
all significant third-parties with whom it conducts business, has completed
remediation efforts on the effected systems and has completed the testing and
implementation phases. The Company has also queried its significant suppliers
that do not share any information systems with the Company ("external agents").
To date, the Company has not been made aware of any external agent with a Year
2000 Issue that could materially impact the Company's business, financial
condition or results of operations. The Company, however, has no means of
ensuring that external agents will be Year 2000 compliant. The inability of
external agents to complete their Year 2000 resolution processing in a timely
fashion could materially impact the Company's business, financial condition or
results of operations. The effect of non-compliance by external agents is not
determinable by the Company.
The Company utilized both internal and external resources to reprogram, or
replace, and test its software for Year 2000 modifications. The total cost of
the Year 2000 project was estimated at $6.4 million and was funded through
operating cash flows. Of the total project cost, approximately $6.2 million is
attributable to the purchase of new software, which is being capitalized. The
remaining $0.2 million, which was expensed as incurred, is not expected to have
a material effect on the Company's business, financial condition or results of
operations. The Company engaged an independent consultant (the "Consultant") to
review the adequacy, completeness and feasibility of the Plan. The Consultant
made recommendations regarding improvements to the Plan. The Company reviewed
and responded to these recommendations. Subsequently, the Consultant reviewed
the Company's responses to these recommendations and has monitored the Company's
execution of the Plan.
15
<PAGE> 18
Based on the information currently available to the Company, the Company does
not anticipate that the cost of additional compliance efforts would be material
to its business, financial condition or results of operations; however, there
can be no assurance that the Company's systems, or those of its vendors,
customers or other third-parties, will not encounter unanticipated issues with
respect to Year 2000 compliance or that the impact of such issues will not have
a material adverse effect on the Company's business, financial condition or
results of operations.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain of the statements and subject areas contained herein in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
are not based on historical or current facts deal with or may be impacted by
potential future circumstances and developments. Such statements and the
discussion of such subject areas involve, and are therefore qualified by, the
inherent risks and uncertainties surrounding future expectations generally, and
also may materially differ from the Company's actual future experience involving
any one or more of such subject areas. The Company has attempted to identify, in
context, certain of the factors that it currently believes may cause actual
future experience and results to differ from current expectations regarding the
relevant statement or subject area. The Company's operations and results may be
subject to the effect of other risks and uncertainties in addition to the
relevant qualifying factors identified herein, including but not limited to,
cyclicality and seasonality in the industries to which the Company sells its
products, the impact of competitive products and pricing, extraordinary
fluctuations in the pricing and supply of the Company's raw materials,
volatility of commodities markets, unanticipated developments in the areas of
environmental compliance, unanticipated developments in the process of assessing
and addressing issues relating to the year 2000 issue and other risks and
uncertainties identified from time to time in the Company's reports filed with
the Securities and Exchange Commission.
16
<PAGE> 19
ENVIRONMENTAL
The Company's facilities and operations are subject to extensive environmental
laws and regulations. During the nine-month period ended October 2, 1999, the
Company spent approximately $0.4 million on environmental matters which included
remediation costs, monitoring costs and legal and other costs. The Company has a
reserve of approximately $2.7 million for environmental remediation costs which
is reflected in the Company's Condensed Consolidated Balance Sheet at October 2,
1999. Based upon information currently available, the Company believes that the
costs of the environmental matters described below are not reasonably likely to
have a material adverse effect on the Company's business, financial condition or
results of operations.
Oklahoma City, Oklahoma
The Company is one of a number of Potentially Responsible Parties ("PRPs") named
by the United States Environmental Protection Agency (the "EPA") with respect to
the soil and groundwater contamination at the Double Eagle Refinery Superfund
site in Oklahoma City, Oklahoma. The costs associated with the cleanup of this
site will be entirely borne by the PRP group (the "Group"), as the site owner
has filed for bankruptcy protection. In March 1993, twenty-three PRP's named
with respect to the soil contamination of the site, including the Company,
submitted a settlement offer to the EPA. Settlement negotiations between the
Group and the EPA are continuing, and a settlement and consent order is
currently being contemplated among the PRPs, the EPA and the State of Oklahoma
which would provide for each PRP's liability to be limited to a prorata share of
an aggregate amount based on the EPA'a worst-case cost scenario to remediate the
site. Under the current proposal, the Company's settlement amount is estimated
to be $390,000.
Decatur, Alabama
The Company is subject to an order under Section 3008(h) of the Resource
Conservation and Recovery Act to perform a facilities investigation of its site
in Decatur, Alabama, including a portion of the site where wastes were buried
(the "Burial Site"). The Company recently received approval from the EPA on a
Corrective Measures Study ("CMS") that Henley (a former owner of the facility)
had submitted to the EPA regarding the Burial Site. The CMS proposes continued
monitoring and site maintenance. The remaining monitoring, legal and other costs
are estimated to be $939,000. The cost to the Company to comply with the CMS, as
currently presented, will not have a material adverse effect on the Company's
business, financial condition or results of operations.
Ardmore, Tennessee
On December 28, 1995, the Company entered into a Consent Order and Agreement
with the Tennessee Division of Superfund (the "Tennessee Division"), relating to
the Ardmore, Tennessee facility (the "Ardmore facility"), under which the
Company agreed to conduct a preliminary investigation regarding whether volatile
organics detected in and near the municipal drinking water supply are related to
the Ardmore facility and, if necessary, to undertake an appropriate
17
<PAGE> 20
response. That investigation has disclosed contamination, including elevated
concentrations of certain volatile organic compounds, in the shallow residuum
groundwater zone at the Ardmore facility. Under the terms of the Consent Order
and Agreement, the Company submitted a Remedial Investigation and Feasibility
Study ("RI/FS") work plan, which was accepted by the Tennessee Division, and the
Company has initiated the RI/FS. Based on the available information, the Company
preliminarily estimates a range of between $319,000 and $1,100,000 to complete
the investigation and remediation of this site.
A report of a 1995 EPA site inspection of the Ardmore facility recommended
further action for the site. The Company believes, however, that because the
Tennessee Division is actively supervising an ongoing investigation of the
Ardmore facility, it is unlikely that the EPA will intervene and take additional
action. If the EPA should intervene, however, the Company could incur additional
costs for any further investigation or remedial action required.
Greenville, Mississippi
Following the Company's acquisition of its Greenville, Mississippi facility (the
"Greenville facility"), a preliminary investigation disclosed volatile organic
contaminants in soil and groundwater at the site. Based on further
investigation, it appears that the contamination has not spread off-site. The
Company entered into a Consent Order with the Mississippi Department of
Environmental Quality (the "MDEQ") for a pilot study program which will help
determine the effectiveness of certain technology tentatively identified for
remediation and which will also help define the scope of remediation for the
site. The pilot study program concluded on June 1, 1997. The Company entered
into a final consent agreement with the MDEQ on July 15, 1997. Remediation
efforts began in the third quarter of 1997 and are expected to take
approximately three years. The Company recently submitted a report of
remediation activities, requesting that the MDEQ allow it to cease and desist
such remediation. However, there can be no assurance that remediation efforts
will be allowed to be discontinued after three years, and operations,
maintenance and other expenses of the remediation system may continue for a
longer period of time. Through October 3, 1998, applicable costs of testing and
remediation required at the Greenville facility had been shared with the former
owners of the facility pursuant to the terms of an Escrow Agreement established
at the time the facility was acquired. Subsequent to October 3, 1998, the
Company released the former owners of the facility from liability related to the
remediation of the Greenville facility following the receipt of a $145,000
settlement payment. The Company estimates the remaining investigative and
remedial costs could total $296,000 under the remediation plan the Company
adopted, but these costs could increase if additional remediation is required.
Jackson, Tennessee
In connection with the Company's acquisition of its Jackson, Tennessee facility
(the "Jackson facility"), a preliminary investigation disclosed soil and/or
groundwater contamination at this site. The Company had performed a Phase I
Environmental Audit and identified the existence of volatile organic
contaminants; however, the extent of any such contamination has not been fully
determined. Investigation at the site is being conducted pursuant to a consent
order with the State of Tennessee by a prior owner of the property. Based on
currently available information, the
18
<PAGE> 21
Company preliminarily estimates that remediation costs could amount up to
$740,000. However, certain of the remediation costs may be reimbursed pursuant
to the terms of an indemnification agreement between the Company and the
previous owners of the Jackson facility.
Altoona, Pennsylvania
The Company has entered into the State of Pennsylvania Department of
Environmental Protection Act II Program (the "Program"). The Program was entered
to address issues of contamination from closed hazardous waste lagoons and oil
contamination of soil. The chrome lagoons were closed in 1982. The Program is a
voluntary site remediation program which allows the Company to direct the site
evaluation and any eventual remediation. Preliminary costs are estimated at
$150,000 to complete the investigation phase of the Program. Once the
investigation phase is completed, a decision on remediation will be made.
Insufficient information exists at this point to estimate any remediation costs
or if remediation will be required. The Company is fully indemnified by the
previous owner for any costs associated with the Program, thus no liability has
been recorded at October 2, 1999.
Other
The Company has been identified by the EPA as one of a number of PRPs at
Superfund sites in Athens, Alabama and in Criner, Oklahoma. The Company believes
that its potential liability with respect to these Superfund sites is not
material. There can be no assurance, however, that the Company will not be named
a PRP at additional Superfund sites in the future, or that the costs associated
with those sites would not be substantial.
The Company believes that it faces no significant liability for the Athens,
Alabama site because it has removed all of the material that it contributed to
the site. The Company believes that it faces no significant liability for the
Criner, Oklahoma site because Henley, the prior owner of the site, has retained
liability for all cleanup costs resulting from past disposal of used oil at the
Criner, Oklahoma site pursuant to an indemnification agreement between the
Company and Henley. Henley, which is not affiliated with the Company, has
discharged these obligations to date.
19
<PAGE> 22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISKS
The Company is exposed to various market risks, including interest rates and
derivative commodity instruments. The Company enters into financial instruments
to manage and reduce the impact of changes in interest rates and commodity
prices.
INTEREST RATE SWAP AGREEMENTS
From time to time the Company enters into interest rate swap agreements to
modify the interest characteristics of its outstanding debt. Each interest rate
swap agreement is designated as a hedge with the principal balance and term of a
specific debt obligation. These agreements involve the exchange of amounts based
on a fixed interest rate for amounts based on variable interest rates over the
life of the agreement, without an exchange of the notional amount on which the
payments are based. The differential to be paid as interest rates change is
accrued and recognized as an adjustment of interest expense related to debt (the
accrual accounting method). The fair value of the swap agreements and changes in
the fair value as a result of changes in market interest rates are not
recognized in the financial statements. Through September 28, 1999, the Company
was party to an interest rate swap agreement.
DERIVATIVE COMMODITY INSTRUMENTS
In connection with the purchase of certain raw materials, principally copper, on
behalf of certain customers for future manufacturing requirements, the Company
has entered into commodity-forward contracts as deemed appropriate for these
customers to reduce the Company's risk of future price increases. These forward
contracts are accounted for as hedges and, accordingly, gains and losses are
deferred and recognized in cost of sales as part of the product cost. The amount
of forward contracts and their respective fair value have materially changed
since year-end 1998 primarily due to changes in copper prices. At December 31,
1998 the Company had entered into contracts hedging certain future commodity
purchases through December 31, 2000 of approximately $42.1 million. The
estimated fair value of these outstanding contracts was approximately $37.5
million at December 31, 1998. At October 2, 1999 the Company had entered into
contracts hedging certain future commodity purchases through December 31, 2000
of approximately $44.1 million. The estimated fair value of these outstanding
contracts was approximately $49.1 million at October 2, 1999. A 10% adverse
change in commodity prices at October 2, 1999 would decrease the fair value of
these outstanding contracts to $44.2 million.
20
<PAGE> 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material legal proceeding developments during the three-month
period ended October 2, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedule (for SEC use only)
(b) Reports
The Company filed no reports on Form 8-K during the three-month period
ended October 2, 1999.
21
<PAGE> 24
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 thereto duly authorized.
WOLVERINE TUBE, INC.
By: /s/ James E. Deason
------------------------
Name: James E. Deason
Title: Executive Vice President, Chief Financial Officer,
Secretary and Director
Dated: November 15, 1999
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED STATEMENTS OF INCOME OF WOLVERINE TUBE, INC. FOR THE NINE
MONTH PERIOD ENDED OCTOBER 2, 1999 AND THE CONDENSED CONSOLIDATED BALANCE SHEET
OF WOLVERINE TUBE, INC. AT OCTOBER 2, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH STATEMENT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> OCT-02-1999
<CASH> 14,190
<SECURITIES> 0
<RECEIVABLES> 99,017<F1>
<ALLOWANCES> 0
<INVENTORY> 89,788
<CURRENT-ASSETS> 217,744
<PP&E> 187,428<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 504,729
<CURRENT-LIABILITIES> 68,223
<BONDS> 176,411
2,000
0
<COMMON> 142
<OTHER-SE> 220,110
<TOTAL-LIABILITY-AND-EQUITY> 504,729
<SALES> 489,928
<TOTAL-REVENUES> 489,928
<CGS> 440,209
<TOTAL-COSTS> 440,209
<OTHER-EXPENSES> 43,386
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,617
<INCOME-PRETAX> (3,284)
<INCOME-TAX> (1,991)
<INCOME-CONTINUING> (1,293)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 5,754
<NET-INCOME> (7,047)
<EPS-BASIC> (0.55)
<EPS-DILUTED> (0.55)
<FN>
<F1>The values for the tags Receivables and PP&E are shown net of their respective
allowance accounts.
</FN>
</TABLE>
