- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
---------
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
COMMISSION FILE NUMBER: 333-31071
WELLS ALUMINUM CORPORATION
(Exact name of Registrant as Specified in Its Charter)
MARYLAND 35-1139550
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
809 GLENEAGLES COURT, SUITE 300 21286
BALTIMORE, MARYLAND (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (410) 494-4500
-----------
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 [ ] No [x]
As of November 10, 1997, the registrant had 909,005 shares of Common
Stock outstanding.
<PAGE>
WELLS ALUMINUM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited): Page
<S> <C>
Balance Sheets as of September 28, 1997 and December 31, 1996 (audited) 1
Statements of Operations for the three months and nine months ended September 28, 1997
and September 29, 1996 2
Statements of Cash Flows for the nine months ended September 28, 1997 and September
29, 1996 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 7
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 15
SIGNATURES 16
</TABLE>
<PAGE>
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WELLS ALUMINUM CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
September 28, December 31,
(IN THOUSANDS) 1997 1996
----------------- ----------------
ASSETS (Unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 10,654 $ 277
Accounts receivable, principally trade,
less allowance for doubtful accounts 35,780 22,279
Inventories 19,219 19,838
Other current assets 540 938
------------- ------------
Total current assets 66,193 43,332
Property, plant and equipment, at cost less
accumulated depreciation 26,044 26,723
Debt issuance costs, net of accumulated amortization 4,466 2,104
Goodwill and other intangibles, net of accumulated amortization 35,676 36,567
Other assets 788 --
---------- ---------
Total assets $ 133,167 $ 108,726
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, principally trade $ 27,805 $ 19,590
Accrued expenses 9,432 5,567
---------- -----------
Total current liabilities 37,237 25,157
Long-term debt, less current portion 105,000 40,078
Deferred income taxes 5,471 5,750
Deferred benefit plan obligations 3,073 3,269
--------- -----------
Total liabilities 150,781 74,254
----------- ----------
Stockholders' equity:
Common stock, Class A, par value $.01 per share 9 8
Common stock, Class B, par value $.01 per share -- 1
Additional paid-in capital 1,215 24,390
Accumulated earnings (deficit) (18,346) 10,565
Additional minimum pension liability (492) (492)
------------ ------------
Total stockholders' equity (17,614) 34,472
---------- ----------
Total liabilities and stockholders' equity $ 133,167 $ 108,726
=========== =========
See accompanying notes.
</TABLE>
1
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WELLS ALUMINUM CORPORATION
STATEMENTS OF OPERATIONS (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
(IN THOUSANDS) Sep. 28, Sep. 29, Sep. 28, Sep. 29,
1997 1996 1997 1997
--------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net sales $ 72,916 $ 57,743 $ 192,954 $ 172,809
Cost of sales 61,543 47,959 161,425 144,908
--------- ----------- ----------- ----------
Gross profit 11,373 9,784 31,529 27,901
Selling, general and administrative
expenses 4,569 3,835 12,637 11,825
Compensation from settlement of
employee stock options -- -- 4,070 --
--------- ----------- ----------- ----------
Operating profit 6,804 5,949 14,822 16,076
Interest expense, net of interest income 2,774 1,278 5,723 4,005
--------- ----------- ----------- ----------
Earnings before income taxes and
extraordinary item 4,030 4,671 9,099 12,071
Income taxes 1,714 2,073 3,951 5,358
--------- ----------- ----------- ----------
Earnings before extraordinary item 2,316 2,598 5,148 6,713
Extraordinary loss on refinancing
of debt, net of income taxes 149 -- 1,292 --
--------- ----------- ----------- ----------
Net earnings $ 2,167 $ 2,598 $ 3,856 $ 6,713
========= =========== =========== ==========
See accompanying notes.
</TABLE>
2
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<TABLE>
<CAPTION>
WELLS ALUMINUM CORPORATION
STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended
-----------------------------
(IN THOUSANDS) Sep. 28, Sep. 29,
1997 1996
------------- ------------
OPERATING ACTIVITIES:
<S> <C> <C>
Net earnings $ 3,856 $ 6,713
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 3,173 3,027
Settlement of employee stock options 1,263 --
Deferred income taxes (117) (500)
Extraordinary loss on refinancing of debt 1,292 --
Changes in operating assets and liabilities:
Accounts receivable, net (13,501) (3,617)
Inventories 619 2,491
Accounts payable and accrued expenses 12,054 2,998
Other assets and liabilities 21 1,305
------------- ------------
Net cash provided by operating activities 8,660 12,417
------------- ------------
INVESTING ACTIVITIES:
Purchase of property, plant and equipment (1,171) (1,975)
------------- -------------
Net cash used in investing activities (1,171) (1,975)
------------- -------------
FINANCING ACTIVITIES:
Principal payments on long-term debt (69,791) (61,587)
Proceeds from long-term debt 134,700 51,900
Payment of debt issuances costs (4,816) --
Proceeds from exercise of employee stock options -- 30
Payment of special cash dividend (55,990) --
Repurchase of common stock (1,215) --
------------- ------------
Net cash provided by (used in) financing activities 2,888 (9,657)
------------- -------------
Net increase in cash 10,377 785
Cash at beginning of period 277 342
-------------- -------------
Cash at end of period $ 10,654 $ 1,127
============== =============
See accompanying notes.
</TABLE>
3
<PAGE>
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS)
1. GENERAL
Wells Aluminum Corporation (the "Corporation") is a domestic manufacturer
of aluminum extruded and fabricated products for several diverse industries
including construction, transportation, and durable goods.
2. BASIS OF PRESENTATION
The foregoing unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, these financial statements do not include all of the
disclosures required by generally accepted accounting principles for complete
financial statements. In the opinion of management, these statements include all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation of the results for the nine months ended September 28, 1997.
Operating results for the interim periods of 1997 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1997.
3. INVENTORIES
The aluminum component of inventories, representing 70% and 68% of total
inventories at September 28, 1997 and December 31, 1996, respectively, is stated
at the lower of cost or market, using the last-in, first-out method (LIFO). The
labor, overhead and supplies components of inventories are carried at the lower
of cost or market using the first-in, first-out method (FIFO). The outside
purchased parts component of inventories are carried at the lower of cost or
market using the weighted average cost method.
The components of inventories are as follows:
Sep. 28, Dec. 31,
1997 1997
----------- ------------
Raw materials $ 11,564 $ 11,073
Finished goods and work-in-progress 9,412 8,929
Supplies 486 525
----------- ------------
21,462 20,527
Less LIFO reserve (2,243) (689)
----------- ------------
$ 19,219 $ 19,838
======== ========
4. RELATED PARTY TRANSACTIONS
During the nine months ended September 28, 1997 and September 29, 1996,
the Corporation purchased aluminum from CVG Industria Venezolana de Aluminio,
C.A. ("Venalum"), an owner of 180,360.5 shares of the Corporation's Class A
common stock, in amounts of $51.0 million and $50.4 million, respectively.
Amounts payable to Venalum at September 28, 1997 and December 31, 1996 were
$12.5 million and $8.6 million, respectively.
4
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5. RECAPITALIZATION
On May 5, 1997, 125,000 shares of Class B Common Stock were converted to
125,000 shares of Class A Common Stock, increasing the total shares of Class A
Common Stock outstanding to 903,062.5.
On May 28, 1997, the Corporation issued and sold $105.0 million principal
amount of 10.125% Series A Senior Notes due 2005 (the "Notes"). In connection
with the consummation of the issuance and sale of the Notes, the Corporation
repaid existing indebtedness and entered into a New Credit Facility, a secured
working capital line of $15.0 million, which matures in 2002.
The offering of the Notes, the repayment of indebtedness under an
existing Bank Credit Facility (approximately $21.2 million outstanding as of May
28, 1997), the retirement of 14.125% Senior Subordinated Notes due 2001 (the
"Subordinated Notes"), and the entering into of a New Credit Facility were part
of an overall recapitalization of the Corporation (the "Recapitalization"). As
part of the Recapitalization, the Corporation used a substantial portion of the
proceeds received from the issuance and sale of the Notes to pay a special cash
dividend to holders of its common stock, settle existing employee stock options,
and repurchase, or offer to repurchase, shares of common stock held by certain
stockholders.
In the nine months ended September 28, 1997, the Corporation paid a
special cash dividend of $62.00 per share, or $56.0 million, to the holders of
common stock, paid an aggregate of $37.5 million related to the repayment or
retirement of debt, and paid $1.2 million for the repurchase and retirement of
152,100 shares of Class A Common Stock from certain shareholders. The
Corporation also incurred $4.1 million of compensation expense and issued
158,042.5 shares of Class A Common Stock related to the settlement of employee
stock options. The compensation expense represents the difference between fair
market value and the exercise price on the settlement of 57,000 employee stock
options and $0.9 million of bonuses paid to satisfy a portion of income taxes
incurred by option holders as a result of receiving shares of common stock.
At September 28, 1997, there were 909,005 shares of Class A Common Stock
outstanding.
6. INDEBTEDNESS
At September 28, 1997, indebtedness consisted of $105.0 million of Notes.
The Corporation retired the Subordinated Notes on July 15, 1997, using proceeds
held in escrow from the issuance and sale of the Notes. At December 31, 1996,
indebtedness consisted of $25.1 million of loans under a Bank Credit Facility
and $15.0 million of Subordinated Notes.
7. INTEREST EXPENSE
Interest expense, net of interest income, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sep. 28, Sep. 29, Sept. 28, Sep. 29,
1997 1996 1997 1996
------------------------ ---------------------
<S> <C> <C> <C> <C>
Interest expense $ 2,915 $1,287 $ 6,009 $4,014
Interest (income) (141) (9) (286) (9)
-------- ------- -------- -------
$ 2,774 $1,278 $ 5,723 $4,005
</TABLE>
8. FUTURES CONTRACTS AND FORWARD SALES CONTRACTS
In the normal course of business, the Corporation enters into forward
sales contracts with certain customers for the sale of fixed quantities of
finished products at scheduled intervals. The aluminum cost component of the
5
<PAGE>
forward sales contract is fixed for the duration of the contract, based on
forward market prices at the inception of the contract. In order to hedge its
exposure to aluminum price volatility under these forward sales contracts, the
Corporation enters into aluminum futures contracts (a financial hedge) based on
scheduled deliveries.
At September 28, 1997, the Corporation was party to $2.7 million of
aluminum futures contracts through nationally recognized brokerage firms and
major metal brokers. These aluminum futures contracts are for periods between
October 1997 and November 1998, covering 3.7 million pounds of aluminum at
prices expected to be settled financially in cash as they reach their respective
settlement dates. The Corporation does not engage in any speculative trading of
futures contracts.
9. COMMITMENTS AND CONTINGENCIES
At September 28, 1997, the Corporation has commitments with Venalum to
purchase 24.0 million pounds of aluminum through December 1997 at current market
prices at the delivery dates. Management expects that such quantity of aluminum
will be utilized in the normal course of operations during the term of this
agreement.
The Corporation has received notice of claims asserting potential
liability under various federal and state environmental laws. The Corporation
accrues for losses associated with environmental remediation obligations when
such losses are probable and reasonably estimable. Based upon information that
is currently available, management does not expect that the resolution of
environmental claims will have a material adverse effect on the Corporation.
However, given the inherent uncertainties in evaluating environmental exposure,
it is not possible to predict the amount of future costs of environmental claims
which may be subsequently determined. The Corporation has not anticipated any
insurance proceeds or third-party payments in determining its estimated
liability for environmental remediation.
The Corporation is also a party to a number of other lawsuits and claims
arising out of the conduct of its business. Although the ultimate results of
lawsuits and other proceedings against the Corporation cannot be predicted with
certainty, management does not expect that these matters will have a material
adverse effect on the Corporation and its operations.
10. SUBSEQUENT EVENTS
At November 7, 1997, the Corporation has commitments with four North
American suppliers to purchase 65.5 million tons of aluminum from January 1998
through January 1999 at current market prices at the delivery dates. Management
expects that such quantity of aluminum will be utilized in the normal course of
operations during the terms of these agreements.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Wells Aluminum Corporation (the "Corporation") is a custom extruder,
finisher and fabricator of soft alloy aluminum products, serving principally the
building and construction, transportation and consumer durable markets. The
Corporation operates a network of seven facilities with 12 extrusion presses,
located in six states in the midwestern and southeastern United States, and also
has its own casting facility for aluminum billet.
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Corporation's actual results or future events could
differ materially from those anticipated in these forward-looking statements as
a result of certain factors, including, but not limited to, raw material costs
and availability (primarily aluminum), labor market conditions, the
Corporation's level of utilization of its extrusion, finishing and fabrication
capacities, and the impact of capacity utilization on costs, whether and to what
extent the Corporation's capital expenditures can facilitate reductions in
variable costs, the highly competitive nature of the extrusion industry, and
developments with respect to contingencies such as environmental matters and
litigation.
BASIS OF PRESENTATION
The following discussions of financial condition and the results of
operations for the three months and the nine months ended September 28, 1997 and
September 29, 1996 are based on the unaudited results achieved by the
Corporation. The following tables set forth for the periods indicated, net
sales, gross profit, operating profit and net earnings, and for performance and
other measurements, pounds of product shipped, gross sales price per pound,
Adjusted EBITDA (as defined below) and Adjusted EBITDA per pound. The table also
includes average market prices of aluminum per pound and market price of
aluminum per pound at period-end.
Adjusted EBITDA is defined as earnings before interest expense, income
taxes and depreciation and amortization, and excludes LIFO charges or income,
extraordinary items and compensation from settlement of employee stock options.
Adjusted EBITDA should not be considered in isolation of, nor in substitute for,
net income, cash flows from operations, or other income or cash flow data
prepared in accordance with generally accepted accounting principles.
Statement of Operations Data:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- ----------------------
Amounts in Thousands Sep. 28, Sep. 29, Sept. 28, Sep. 29,
Except Per Pound Data 1997 1996 1997 1996
---------- --------- --------- ----------
<S> <C> <C> <C> <C>
Net Sales - Products $ 61,851 $ 54,794 $ 174,758 $ 159,247
Net Sales - Metal 11,065 2,949 18,196 13,562
---------- --------- --------- ----------
Net Sales 72,916 57,743 192,954 172,809
Cost of Sales - Products 51,006 45,570 142,079 133,049
Cost of Sales - Metal 10,918 3,004 17,792 13,608
LIFO Charges (Income) (381) (615) 1,554 (1,749)
---------- --------- --------- ----------
Cost of Sales 61,543 47,959 161,425 144,908
Gross Profit 11,373 9,784 31,529 27,901
Operating Profit 6,804 5,949 14,822 16,076
--------- -------- --------- ---------
Net Earnings $ 2,167 $ 2,598 $ 3,856 $ 6,713
</TABLE>
7
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Other Measurement Data:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- -----------------------
Amounts in Thousands Sep. 28, Sep. 29, Sept. 28, Sep. 29,
Except Per Pound Data 1997 1996 1997 1996
-------------------- -----------------------
<S> <C> <C> <C> <C>
Pounds of Product Shipped 40,363 36,505 115,453 103,826
Gross Sales - Products 64,083 57,089 181,431 165,935
Gross Sales - Price per Pound 1.588 1.564 1.571 1.598
Adjusted EBITDA 7,342 6,229 23,187 16,982
Adjusted EBITDA per Pound 0.182 0.171 0.201 0.164
Average Market Price of Aluminum
per Pound 0.780 0.701 0.744 0.740
Market Price of Aluminum per Pound
at Period-End ---- ---- 0.783 0.652
</TABLE>
ALUMINUM PRICES. For the periods indicated, approximately 60% of the
Corporation's cost of sales - products reflect the cost of aluminum, its
principal raw material. The Corporation seeks to manage aluminum price
fluctuations, which can be volatile, principally either by passing aluminum
prices through to customers by systematic market indexed pricing or by fixing
the cost of aluminum by hedging against committed fixed price sales to
customers. As a result, increases and decreases in aluminum prices have
generally caused similar increases and decreases in selling prices, sales and
costs of sales, and generally have had little impact on the Corporation's level
of profitability for the periods described herein.
BUSINESS ACTIVITY. The Corporation's experience indicates that pounds of
product shipped has a direct impact on profitability, since a significant
portion of the Corporation's operating costs are fixed. The Corporation defines
pounds of product shipped as the weight of all extrusions shipped, including
those pounds transferred within the Corporation from which it manufactures
fabricated parts, components and assemblies, but excluding the pounds of
aluminum related to excess metal sales as described herein.
FINANCIAL AND OTHER MEASURES. The Corporation believes that its abilities
to manage its sales spread (gross sales minus aluminum costs), control variable
spending and minimize its fixed cost structure are significant determinants of
profitability and resultant cash flow. The Corporation, therefore, monitors its
sales spread per pound, variable costs per pound and fixed costs per pound,
focusing on operating profit as a key performance measure. In addition, the
Corporation monitors Adjusted EBITDA, as it is relevant for debt covenant
analysis under the New Credit Agreement and it can also be used as a measure of
the Corporation's ability to service its debt.
LIFO INVENTORY. The Corporation values its aluminum inventory under the
last-in, first-out (LIFO) method. During periods of rising aluminum prices,
compared to historical LIFO inventory values, the Corporation may incur LIFO
charges, which will reduce taxable income, and when aluminum prices subsequently
decline, the Corporation may recognize LIFO income, which will increase taxable
income. As a result of fluctuations in earnings levels resulting from the
application of LIFO, the Corporation excludes LIFO charges and LIFO income from
certain measures, such as Adjusted EBITDA.
EXCESS METAL SALES. The Corporation's policy is to sell excess metal
(primary aluminum ingot and billet) on the open market when necessary to
maintain aluminum inventory levels consistent with near-term business needs.
Imbalances in inventory can arise from the ongoing and efficient operation of
the Corporation's casting facility and from the Corporation's obligations to
purchase fixed amounts of primary aluminum ingot and billet under a long-term
supply agreement with CVG Industria Venezolana de Aluminio, C.A. ("Venalum").
The sale of excess metal, which also reflects aluminum price fluctuations, has
minimal effect on profit performance since the prices of metal bought
8
<PAGE>
and metal sold are closely matched. Pounds of excess metal sold are not included
in the calculation of pounds of product shipped, the Corporation's primary
indicator of business activity. In the normal course of business, the
Corporation also sells secondary aluminum billet and aluminum scrap, which are
not accounted for as excess metals sales.
THREE MONTHS ENDED SEPTEMBER 28, 1997 COMPARED TO THREE MONTHS ENDED SEPTEMBER
29, 1996
The Corporation's net sales increased to $72.9 million in the three months
ended September 28, 1997 from $57.7 million in the three months ended September
29, 1996, an increase of $15.2 million or 26.3%. Net sales products increased to
$61.9 million in the three months ended September 28, 1997 from $54.8 million in
the three months ended September 29, 1996, an increase of $7.1 million or 13.0%.
Sales of value added products increased $1.6 million, or 4.7%, to $35.4 million
with sales of fabricated products increasing 6.9%. Sales of mill finished
extrusions increased 23.1%, primarily due to increased shipments of mill
finished products to truck and trailer manufacturers, pleasure boat
manufacturers and several distributor accounts. The gross sales price per pound
increased by 1.5%, due to an increase of $0.079 in the average market price per
pound of aluminum which was offset by the effect of a higher sales mix of mill
finished extrusions.
Pounds of product shipped increased 3.9 million pounds, or 10.7%, to 40.4
million in the three months ended September 28, 1997 from 36.5 million pounds of
product shipped in the three months ended September 29, 1996. Shipments to
commercial construction increased 0.2 million pounds, with volume increases in
many product categories offsetting the loss of a curtain wall and store front
account, the completion of a contract involving a bridge renovation project and
the loss of a commercial door account. In residential construction, shipments
were up 1.4 million pounds with increased shipments to door and window
manufacturers and to the mobile home sector despite a decision to shift capacity
to the more profitable distributor market. Shipments to transportation increased
2.2 million pounds, due to increased business with major truck, utility vehicle
and trailer manufacturers. In consumer durables, shipments were down 0.2 million
pounds with an increase in demand for pleasure boats more than offset by a
decrease in demand for other consumer durables. Shipments to
equipment/electrical increased 0.1 million pounds due to the continuing strong
performance of several niche accounts. The increase of 0.2 million pounds to
distributors/other resulted mainly from continuing sales efforts to increase
custom extrusion business with select distributors, including a Puerto Rico
based distributor who is expanding throughout the Caribbean basin.
Cost of sales increased to $61.5 million for the three months ended
September 28, 1997 from $48.0 million in the three months ended September 29,
1996, an increase of $13.5 million or 28.1%. Cost of sales - products increased
to $51.0 million for the three months ended September 28, 1997 from $45.6
million for the three months ended September 29, 1996, an increase of $5.4
million or 11.8%. This increase resulted from a $1.2 million increase in
operating costs and a $4.2 million increase in aluminum costs. Variable costs
per pound, however, decreased to $0.433 in the three months ended September 28,
1997 from $0.446 in the three months ended September 29, 1996, an improvement of
$0.013 per pound. This improved performance was due to effective capacity
utilization, continuing extrusion press and casting efficiencies, and control of
variable spending.
Gross profit increased to $11.4 million in the three months ended
September 28, 1997 from $9.8 million in the three months ended September 29,
1996, an increase of $1.6 million or 16.3%.
Selling, general and administrative expenses increased to $4.6 million in
the three months ended September 28, 1997 from $3.8 million in the three months
ended September 29, 1996, an increase of $0.8 million or 21.1%. This increase is
primarily attributable to an increase of $0.4 million in incentive compensation
and an increase of $0.1 million in sales and marketing expenses, both related to
the increased level of business activity. Other general and administrative
expenses increased by $0.3 million.
Operating profit increased to $6.8 million in the three months ended
September 28, 1997 from $5.9 million in the three months ended September 29,
1996, a increase of $0.9 million or 15.3%.
9
<PAGE>
Interest expense, net of interest income, increased to $2.8 million in the
three months ended September 28, 1997 from $1.3 million in the three months
ended September 29, 1996, an increase of $1.5 million. This increase was mainly
attributable to the increase in debt outstanding and higher effective interest
rates as a result of the Recapitalization, offset in part by an increase in
interest income. Income tax expense decreased to $1.7 million in the three
months ended September 28, 1997 from $2.1 million in the three months ended
September June 30, 1996, a decrease of $0.4 million. The effective tax rates for
the three months ended September 28, 1997 and September 29, 1996 were 43% and
44%, respectively, which differed from the federal statutory rate of 35% due to
the goodwill amortization and state income taxes.
In the three months ended September 28, 1997, the Corporation incurred an
extraordinary loss of $0.1 million (net of applicable income taxes of $0.1
million) on the refinancing of debt related to the Recapitalization.
As a result of the above factors, net earnings decreased to $2.2 million
in the three months ended September 28, 1997 from $2.6 million in the three
months ended September 29, 1996, a decrease of $0.4 million or 15.4%.
Adjusted EBITDA, as previously defined herein, increased to $7.3 million
in the three months ended September 28, 1997 from $6.2 million in the three
months ended September 29, 1996, an increase of $1.1 million or 17.7%. The
improvement in Adjusted EBITDA consisted of $1.2 million from increased sales
volume and $0.3 million from a net reduction in operating costs (as previously
discussed), offset by a decrease in sales spread of $0.4 million. Adjusted
EBITDA per pound, in turn, increased $0.011 to $.182 for the three months ended
September 28, 1997 since the increase in Adjusted EBITDA was substantially
greater than the increase in pounds shipped.
NINE MONTHS ENDED SEPTEMBER 28, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 29,
1996
The Corporation's net sales increased to $193.0 million in the nine months
ended September 28, 1997 from $172.8 million in the nine months ended September
29, 1996, an increase of $20.2 million or 11.7%. Net sales products increased to
$174.8 million in the nine months ended September 28, 1997 from $159.2 million
in the nine months ended September 29, 1996, an increase of $15.6 million or
9.8%. Sales of valued added products increased $2.9 million, or 3.0%, to $100.3
million with sales of fabricated products increasing 7.5%. Sales of mill
finished extrusions increased 18.5%, primarily due to increased shipments of
mill finished products to truck, trailer and utility vehicle manufacturers, and
several material handling and distributor accounts. The gross sales price per
pound declined 1.7%, due to the effect of a higher sales mix of mill finished
extrusions which was partially offset by an increase of $0.034 in the average
market price per pound of aluminum.
Pounds of product shipped increased 11.7 million pounds, or 11.3%, to
115.5 million in the nine months ended September 28, 1997 from 103.8 million
pounds of product shipped in the nine months ended September 29, 1996. Shipments
to commercial construction decreased 1.8 million pounds, largely due to the loss
of a curtain wall and store front account, the completion of a contract
involving a bridge renovation project and the loss of a commercial door account.
In residential construction, shipments increased 1.3 million pounds with
increased shipments to door and window manufacturers offsetting slightly
decreased shipments to the mobile home sector reflecting a decision to shift
capacity to the more profitable distributor sector. Shipments to transportation
increased 5.3 million pounds, due to increased business with major truck,
utility vehicle and trailer manufacturers. In consumer durables, shipments were
down 1.1 million pounds with an increase in demand for office furniture more
than offset by a decrease in demand for pleasure boats and other consumer
durables. Shipments to equipment/electrical increased 2.2 million pounds due to
continuing strong performance of several niche accounts, particularly those
related to materials handling. The increase of 5.8 million pounds to
distributors/other resulted mainly from continuing sales efforts to increase
custom extrusion business with select distributors.
Cost of sales increased to $161.4 million for the nine months ended
September 28, 1997 from $144.9 million in the nine months ended September 29,
1996, an increase of $16.5 million or 11.4%. Cost of sales - products increased
to $142.1 million for the nine months ended September 28, 1997 from $133.0
million for the nine months ended September 29, 1997, an increase of $9.1
million or 6.8%. This increase resulted from a $2.8 million increase
10
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in operating costs and a $6.2 million increase in aluminum costs. Variable costs
per pound, however, decreased to $0.421 in the nine months ended September 28,
1997 from $0.444 in the nine months ended September 29, 1996, an improvement of
$0.023 per pound. This improved performance was due to effective capacity
utilization, continuing extrusion press and casting efficiencies, and control of
variable spending.
Gross profit increased to $31.5 million in the nine months ended September
28, 1997 from $27.9 million in the nine months ended September 29, 1996, an
increase of $3.6 million or 12.9%.
Selling, general and administrative expenses, including compensation from
the settlement of employee stock options, increased to $16.7 million in the nine
months ended September 28, 1997 from $11.8 million in the nine months ended
September 29, 1996, an increase of $4.9 million or 41.5%. This increase is
primarily attributable to an increase of $4.1 million in compensation related to
the settlement of employee stock options as part of the Recapitalization and
also increases of $0.4 million in incentive compensation and $0.2 million in
sales and marketing expenses, both related to the increased level of business
activity. Other general and administrative expenses increased by $0.2 million.
Operating profit decreased to $14.8 million in the nine months ended
September 28, 1997 from $16.1 million in the nine months ended September 29,
1996, a decrease of $1.3 million or 8.1%.
Interest expense, net of interest income, increased to $5.7 million in the
nine months ended September 28, 1997 from $4.0 million in the nine months ended
September 29, 1996, an increase of $1.7 million. This increase was mainly
attributable to the increase in debt outstanding and higher effective interest
rates as a result of the Recapitalization, offset in part by an increase in
interest income. Income tax expense decreased to $4.0 million in the nine months
ended September 28, 1997 from $5.4 million in the nine months ended September
29, 1996, a decrease of $1.4 million. The effective tax rates for the nine
months ended September 28, 1997 and September 29, 1996 were 43% and
44%,respectively, which differed from the federal statutory rate of 35% due to
the goodwill amortization and state income taxes.
In the nine months ended September 28, 1997, the Corporation incurred an
extraordinary loss of $1.3 million (net of applicable income taxes of $0.8
million) on the refinancing of debt related to the Recapitalization.
As a result of the above factors, net earnings decreased to $3.9 million
in the nine months ended September 28, 1997 from $6.7 million in the six months
ended June 30, 1996, a decrease of $2.8 million or 41.8%.
Adjusted EBITDA, as previously defined herein, increased to $23.2 million
in the nine months ended September 28, 1997 from $17.0 million in the nine
months ended September 29, 1996, an increase of $6.2 million or 36.5%. The
improvement in Adjusted EBITDA consisted of $3.6 million from increased sales
volume and $3.2 million from a net reduction in operating costs (as previously
discussed), offset by a decrease of $0.3 million in sales spread. Adjusted
EBITDA per pound, in turn, increased $0.037 to $0.201 for the nine months ended
September 28, 1997 since the increase in Adjusted EBITDA was substantially
greater than the increase in pounds shipped.
LIQUIDITY AND CAPITAL RESOURCES
The Corporation has historically obtained funds from its operations,
augmented by borrowings under various credit agreements. Aluminum price changes
increase or decrease working capital requirements since the dollar value of
accounts receivable, inventories and accounts payable reflect these changes.
Working capital requirements are generally higher during periods of higher
aluminum prices.
CASH FLOWS FROM OPERATING ACTIVITIES
Cash provided by operations for the nine months ended September 28, 1997
and September 29, 1996 was $8.7 million and $12.4 million, respectively, a
decrease of $3.7 million or 29.8%. Cash flow decreased as a result of
11
<PAGE>
reduced net earnings, reflecting the non-recurring compensation charge and
increased interest costs. In addition, cash flow decreased as a result of
increases in accounts receivable and inventories resulting from increased levels
of business activity and increased aluminum prices.
Total working capital at September 28, 1997 was $29.0 million compared to
$18.2 million at December 31, 1996, an increase of $10.8 million or 59.3%. Cash
and cash equivalents increased $10.4 million due in part to the terms and
conditions of the Notes outstanding (see Cash Flows from Financing Activities),
including the payment of interest semiannually on December 1 and June 1.
Increases in other working capital accounts reflected the impact of increased
business activity, the effect of rising aluminum prices, and the impact of
increased debt outstanding and higher interest rates. As discussed above,
changes in aluminum prices are typically passed through to customers.
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment for the nine months ended
September 28, 1997 and September 29, 1996 were $1.2 million and $2.0 million,
respectively. The Corporation curtailed its capital expenditure program during
the first six months of 1997 due to the Recapitalization. The Corporation
anticipates that expenditures for property, plant and equipment will approach
$2.0 million in 1997 and will average $3.5 million per annum for the next five
years. Approximately $2.5 million of the annual $3.5 million expenditure is
expected to be invested in productivity improvements and capacity enhancements,
with the remainder expected to be used for maintenance capital.
CASH FLOWS FROM FINANCING ACTIVITIES
On May 28, 1997, the Corporation issued and sold $105.0 million principal
amount of 10.125% Series A Senior Notes due 2005 (the "Notes"). The Corporation
is required to make semi-annual payments of interest on the Notes. The
Corporation used a portion of the proceeds from the issuance of the Notes to
repay an existing Credit Facility (approximately $21.2 million outstanding as of
May 28, 1997) and to retire its 14.125% Senior Subordinated Notes due 2001 (the
"Subordinated Notes"). Upon the issuance of the Notes, the Corporation entered
into a New Credit Facility, a secured working capital line of $15.0 million,
which matures June 1, 2002. Under the New Credit Facility, the Corporation is
required to make payments of interest on a monthly or quarterly basis. As of
September 28, 1997, there were no loans outstanding under the New Credit
Facility.
The offering of the Notes, the repayment of the Old Credit Facility, the
retirement of the Subordinated Notes, and the entering into of a New Credit
Facility were part of an overall recapitalization of the Corporation (the
"Recapitalization"). As part of the Recapitalization, the Corporation used a
substantial portion of the proceeds received from the issuance and sale of the
Notes to pay a special cash dividend to holders of its common stock, settle
existing employee stock options, and repurchase, or offer to repurchase, shares
of common stock held by certain stockholders.
In the nine months ended September 28, 1997, the Corporation paid a
special cash dividend of $62.00 per share, or $56.0 million, to holders of
common stock, paid an aggregate of $37.5 million for the repayment and
retirement of debt, and paid $1.2 million for the repurchase and retirement of
152,100 shares of Class A Common Stock from certain shareholders. The
Corporation also incurred $4.1 million of compensation expense and issued
158,042.5 shares of Class A Common Stock related to the settlement of employee
stock options. The compensation expense represents the difference between fair
market value and the exercise price on the settlement of 57,000 employee stock
options and $0.9 million of bonuses paid to satisfy a portion of income taxes
incurred by options holders as a result of receiving shares of common stock.
On November 7, 1997, the Corporation consummated an exchange of 100% of
the Notes for $105.0 million aggregate principal amount of 10.125% Series B
Senior Notes due 2005, which are registered under the Securities Act of 1933, as
amended.
12
<PAGE>
INDEBTEDNESS AND LIQUIDITY
As of September 28, 1997, the Corporation had $105 million of Notes
outstanding and no borrowings under the New Credit Facility. The significant
indebtedness incurred by the Corporation as a result of the Recapitalization
will have several important consequences, the foremost being that interest
expense will be substantially higher than prior to the Recapitalization. The
ability of the Corporation to satisfy its obligations pursuant to such
indebtedness, including pursuant to the New Notes and the Indenture, will be
dependent upon the Corporation's future performance, which, in turn, will be
subject to management, financial and other business factors affecting the
business and operations of the Corporation, some of which are not in the
Corporation's control. The Corporation's liquidity may also be impacted by
environmental and other regulatory matters.
The Corporation currently believes that cash flow from operating
activities, together with borrowings available under the New Credit Facility,
will be sufficient to fund currently anticipated working capital needs and
capital expenditure requirements for at least several years. However, there can
be no assurance that this will be the case.
FUTURES CONTRACTS AND FORWARD SALES CONTRACTS
In the normal course of business, the Corporation enters into forward
sales contracts with certain customers for the sale of fixed quantities of
finished products at scheduled intervals. The aluminum cost component of the
forward sales contract is fixed for the duration of the contract, based on
forward market prices at the inception of the contract. In order to hedge its
exposure to aluminum price volatility under these forward sales contracts, the
Corporation enters into aluminum futures contracts (a financial hedge) based on
scheduled deliveries.
At September 28, 1997, the Corporation was party to $2.7 million of
aluminum futures contracts through nationally recognized brokerage firms and
major metal brokers. These aluminum futures contracts are for periods between
October 1997 and November 1998, covering 3.7 million pounds of aluminum at
prices expected to be settled financially in cash as they reach their respective
settlement dates. The Corporation does not engage in any speculative trading of
futures contracts.
LIFO ADJUSTMENT AND INFLATION
The largest component of the Corporation's cost of sales is aluminum, its
principal raw material. Aluminum costs can be volatile, and reported results may
vary due to LIFO adjustments, as previously discussed. With the exception of
LIFO adjustments, the Corporation does not believe that inflation has had a
significant impact on its results of operations for the three months and the
nine months ended September 28, 1997 and September 29, 1996.
SEASONALITY
The Corporation generally does not experience significant seasonality in
its business. However, working capital requirements are often higher and
operating results are often lower during the fourth quarter principally due to
reduced shipments of product and increased inventory due to the decrease in
sales during the holiday season and increased accounts receivable due to
customers delaying payment until after the year-end.
COMMITMENTS
At September 28, the Corporation has commitments with Venalum to purchase
24.0 million pounds of aluminum through December 1997 at current market prices
at the delivery dates. At November 7, 1997, the Corporation has commitments with
four North American suppliers to purchase 65.5 million tons of aluminum from
January 1998 through January 1999 at current market prices at the delivery
dates. Management expects that such quantities of aluminum will be utilized in
the normal course of operations during the terms of these agreements.
13
<PAGE>
CONTINGENCIES
The Corporation has received notice of claims asserting potential
liability under various federal and state environmental laws. The Corporation
accrues for losses associated with environmental remediation obligations when
such losses are probable and reasonably estimable. Based upon information that
is currently available, management does not expect that the resolution of
environmental claims will have a material adverse effect on the Corporation.
However, given the inherent uncertainties in evaluating environmental exposure,
it is not possible to predict the amount of future costs of environmental claims
which may be subsequently determined. The Corporation has not anticipated any
insurance proceeds or third-party payments in determining its estimated
liability for environmental remediation.
The Corporation is also a party to a number of other lawsuits and claims
arising out of the conduct of its business. Although the ultimate results of
lawsuits and other proceedings against the Corporation cannot be predicted with
certainty, management does not expect that these matters will have a material
adverse effect on the Corporation and its operations.
14
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibits 3.1 through 10.2 are incorporated herein by reference to the
exhibit with the corresponding number filed as part of the Corporation's
Registration Statement on Form S-4, as amended (File No. 333-31071).
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
3.1 Articles of Restatement of the Certificate of Incorporation
of Wells Aluminum Corporation (the "Corporation".
3.2 By-laws of the Corporation.
4.1 Indenture, dated as of May 28, 1997, between the Corporation
and State Street Bank and Trust Corporation (formerly known
as Fleet National Bank) (the "Trustee").
4.2 Form of 101/8% Series A and Series B Senior Notes due 2005,
dated as of May 28, 1997 (incorporated by reference to
Exhibit 4.1).
4.3 Registration Rights Agreement, dated as of May 28, 1997,
between the Corporation and Merrill Lynch & Co.
10.1 Amendment and Restated Credit Agreement, dated as of May 28,
1997, among the Corporation, the lending institutions party
thereto and Credit Agricole Indosuez, as agent.
10.2 Amended and Restated General Security Agreement, dated as of
May 28, 1997, between the Corporation and Credit Agricole
Indosuez.
27.1 Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K have been filed by the Corporation during the last
quarter of the period covered by this report.
All other items were not applicable.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WELLS ALUMINUM CORPORATION
By: /s/ W. Russell Asher
-----------------------------
W. Russell Asher
Senior Vice President and Chief Financial Officer
(Principal Accounting Officer)
Dated: November 10, 1997
16
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