- --------------------------------------------------------------------------------
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 27, 1998
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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
BALTIMORE, MARYLAND
(Address of Principal Executive Offices) 21286
(Zip Code)
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 [X] No [ ]
As of November 10, 1998, the registrant had 909,005.0 shares of Common Stock
outstanding.
<PAGE>
WELLS ALUMINUM CORPORATION
QUARTERLY REPORT ON FORM 10-Q
TABLE OF CONTENTS
Part I - Financial Information
<TABLE>
<CAPTION>
Item 1. Financial Statements (Unaudited): Page
<S> <C>
Balance Sheets as of September 27, 1998 and December 31, 1997 (audited) 1
Statements of Operations for the three months and the nine months ended
September 27, 1998 and September 28, 1997 2
Statements of Cash Flows for the nine months ended September 27, 1998
and September 28, 1997 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 16
Signatures 16
</TABLE>
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
WELLS ALUMINUM CORPORATION
BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Sep. 27, Dec. 31,
1998 1997
----------- ---------
(Unaudited)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents .................................................................... $ 7,987 $ 5,352
Accounts receivable, principally trade, less allowances of $914 and $825 ..................... 31,863 30,599
Inventories ................................................................................... 19,444 20,209
Other current assets ......................................................................... 1,346 1,444
--------- ---------
Total current assets ..................................................................... 60,640 57,604
Property, plant and equipment, at cost less accumulated depreciation ............................. 27,858 27,269
Debt issuance costs, net of accumulated amortization of $828 and $362 ........................... 3,921 4,387
Goodwill, net of accumulated amortization of $13,365 and $12,474 ................................. 33,659 34,550
Other assets ..................................................................................... 4,430 1,573
--------- ---------
Total assets .............................................................................. $ 130,508 $ 125,383
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, principally trade .......................................................... $ 16,062 $ 20,253
Accrued expenses ............................................................................. 8,335 7,362
--------- ---------
Total current liabilities ................................................................ 24,397 27,615
Long-term debt ................................................................................... 105,000 105,000
Deferred income taxes ............................................................................ 6,287 5,804
Deferred benefit plan obligations ................................................................ 3,408 3,032
--------- ---------
Total liabilities ........................................................................ 139,092 141,451
========= =========
Stockholders' equity:
Common stock, Class A, par value $0.01 per share, 1,100,000 shares
authorized and 909,005.0 share issued .................................................... 9 9
Additional paid-in capital ................................................................... 1,215 1,215
Accumulated deficit .......................................................................... (9,321) (16,805)
Additional minimum pension liabilities ....................................................... (487) (487)
--------- ---------
Total stockholders' equity ............................................................... (8,584) (16,068)
--------- ---------
Total liabilities and stockholders' equity ............................................... $ 130,508 $ 125,383
========= =========
</TABLE>
See accompanying notes.
1
<PAGE>
WELLS ALUMINUM CORPORATION
STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
Sep. 27, Sep. 28, Sep. 27, Sep. 28,
1998 1997 1998 1997
-------------- -------------- -------------- ---------
<S> <C> <C> <C> <C>
Net sales .................................................... $61,903 $72,916 $192,577 $192,954
Cost of sales ................................................ 51,890 61,543 161,166 161,425
======= ------- -------- --------
Gross profit ................................................. 10,013 11,373 31,411 31,529
Selling, general and administrative expenses ................. 2,589 4,569 10,624 12,637
Compensation from settlement of employee
stock option ............................................. -- -- -- 4,070
------- ------- -------- --------
Operating profit ............................................. 7,424 6,804 20,787 14,822
Interest expense, net of interest income ..................... 2,702 2,774 8,109 5,723
------- ------- -------- --------
Earnings before income taxes and
extraordinary item ....................................... 4,722 4,030 12,678 9,099
Income taxes ................................................. 1,989 1,714 5,194 3,951
------- ------- -------- --------
Earnings before extraordinary item ........................... 2,733 2,316 7,484 5,148
Extraordinary loss on refinancing of debt,
net of income taxes ...................................... -- 149 -- 1,292
------- ======= -------- --------
Net earnings ................................................. $ 2,733 $ 2,167 $ 7,484 $ 3,856
======= ======= ======== ========
</TABLE>
See accompanying notes.
2
<PAGE>
WELLS ALUMINUM CORPORATION
STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
Sep. 27, Sep. 28,
1998 1997
---------- ---------
<S> <C> <C>
Operating activities:
Net earnings ........................................................................................ $ 7,484 $ 3,856
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization. .............................................................. 3,099 3,173
Settlement of employee stock options ........................................................ -- 1,263
Deferred income taxes ....................................................................... 530 (117)
Extraordinary loss on refinancing of debt ................................................... -- 1,292
Pension curtailment gain .................................................................... (1,564) --
Changes in operating assets and liabilities:
Accounts receivable, net ................................................................ (1,264) (13,501)
Inventories ............................................................................. 765 619
Accounts payable and accrued expenses ................................................... (3,217) 12,054
Other assets and liabilities ............................................................ (861) 21
---------- ---------
Net cash provided by operating activities ........................................................... 4,972 8,660
---------- ---------
Investing activities:
Purchase of property, plant and equipment ........................................................... (2,337) (1,171)
---------- ---------
Net cash used in investing activities ............................................................... (2,337) (1,171)
---------- ---------
Financing activities:
Principal payments on long-term debt ................................................................ -- (69,791)
Proceeds from long-term debt ........................................................................ -- 134,700
Payments of debt issuance costs ..................................................................... -- (4,816)
Payment of special cash dividend .................................................................... -- (55,990)
Repurchase of common stock .......................................................................... -- (1,215)
---------- ---------
Net cash provided by financing activities ........................................................... -- 2,888
---------- ---------
Net increase in cash and cash equivalents ........................................................... 2,635 10,377
Cash and cash equivalents at beginning of year ...................................................... 5,352 277
---------- ---------
Cash and cash equivalents at end of period .......................................................... $ 7,987 $ 10,654
========== ==========
</TABLE>
See accompanying notes.
3
<PAGE>
WELLS ALUMINUM CORPORATION
NOTES TO FINANCIAL STATEMENTS (Unaudited)
(Dollars in Thousands)
1. General
Wells Aluminum Corporation (the "Company") is a domestic
manufacturer of aluminum extruded and fabricated products for several diverse
industries including building/construction, transportation, durable goods and
equipment/electrical.
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 27, 1998.
Operating results for the interim periods of 1998 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1998.
3. Reclassification
Certain amounts previously reported have been reclassified to
conform with the 1998 presentation.
4. Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires that management make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results inevitably will differ from those estimates,
and such differences may be material to the financial statements.
5. Inventories
The aluminum component of inventories, representing 67% and 68% of
total inventories at September 27, 1998 and December 31, 1997, 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:
<TABLE>
<CAPTION>
Sep. 27, Dec. 31,
1998 1997
---------- ---------
<S> <C> <C>
Raw materials .................................................................................. $ 9,736 $ 11,840
Finished goods and work in progress ............................................................ 9,856 10,658
Supplies ....................................................................................... 492 471
---------- ---------
Sub-total .................................................................................. 20,084 22,969
Less LIFO reserve .............................................................................. (640) (2,760)
---------- ---------
Inventories ................................................................................. $ 19,444 $ 20,209
========== =========
</TABLE>
4
<PAGE>
6. Related Party Transactions
During the nine months ended September 27, 1998 and September 28,
1997, the Company purchased aluminum from CVG Industria Venezolana de Aluminio,
C.A. ("Venalum"), which was, at such times, an owner of 180,362.5 shares of the
Company's Class A common stock, in amounts of $5.4 million and $32.7 million,
respectively. The amounts payable to Venalum at September 27, 1998 and December
31, 1997 were $0 and $6.3 million.
7. Recapitalization
On May 28, 1997, the Company issued and sold $105.0 million
principal amount of 10.125% Series A Senior Notes (the "Series A Notes") due
2005. In connection with the consummation of the issuance and sale of the Series
A Notes, the Company 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 Series A Notes, the repayment of indebtedness
under an existing Bank Credit Facility, the retirement of 14.125% Senior
Subordinated Notes due 2001, and the entering into of a New Credit Facility were
part of an overall recapitalization of the Company (the "Recapitalization"). As
part of the Recapitalization, the Company used a substantial portion of the
proceeds received from the issuance and sale of the Series A 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 1997, the Company 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 Company 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.
In November 1997, the Company consummated an exchange of 100% of
the Series A Notes for $105.0 million aggregate principal amount of 10.125%
Series B Senior Notes (the "Series B Notes") due 2005, which are registered
under the Securities Act of 1933, as amended.
8. Indebtedness
At September 27, 1998 and December 31, 1997, indebtedness consisted
of $105.0 million of Series B Notes. There were no borrowings outstanding under
the New Credit Facility.
9. Interest Expense, Net of Interest Income
Interest expense, net of interest income, is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- -----------------------
<S> <C> <C> <C> <C>
Sep. 27, Sep. 28, Sep. 27, Sep. 28,
1998 1997 1998 1997
-------- -------- -------- --------
Interest expense ........................................................... $ 2,672 $ 2,761 $ 8,017 $ 5,577
Amortization of debt issuance costs ........................................ 155 154 466 432
-------- -------- -------- --------
Sub-total ............................................................... 2,827 2,915 8,483 6,009
Interest income ............................................................. (125) (141) (374) (286)
-------- -------- -------- --------
Interest expense, net of interest income .................. $ 2,702 $ 2,774 $ 8,109 $ 5,723
======== ======== ======== ========
</TABLE>
5
<PAGE>
10. Futures Contracts and Forward Sales Contracts
In the normal course of business, the Company 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
Company enters into aluminum futures contracts (a financial hedge) based on
scheduled deliveries.
At September 27, 1998, the Company was party to $12.9 million of
aluminum futures contracts through nationally recognized brokerage firms and
major metal brokers. These aluminum futures contracts are for periods between
October 1998 and November 1999, covering 20.1 million pounds of aluminum at
prices expected to be settled financially in cash as they reach their respective
settlement dates. The Company does not engage in any speculative trading of
futures contracts.
11. Curtailment of Pension Plan
In September 1998, the Company approved the termination of the
Retirement Plan for Salaried Employees, a defined benefit plan, resulting in a
curtailment gain of $1.6 million. The gain has been included in selling, general
and administrative expenses in the Statement of Operations. The Company plans to
obtain the necessary approval from federal authorities in 1999 and settle the
plan shortly thereafter.
12. Commitments
At September 27, 1998, the Company had commitments with twelve
North American suppliers to purchase 54.6 million pounds of primary aluminum and
aluminum billet through December 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.
13. Contingencies
The Company 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 Company. 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 Company has
not anticipated any insurance proceeds or third-party payments in determining
its estimated liability for environmental remediation.
The Company is 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 Company cannot be predicted with
certainty, management does not expect that these matters will have a material
adverse effect on the Company and its operations.
14. Subsequent Event
On October 16, 1998, the Company entered into a Stock Purchase
Agreement to repurchase all of the Class A common stock of the Company owned by
Venalum for an aggregate purchase price of $3.1 million. Upon consummation of
the repurchase, Venalum will no longer own any common stock of the Company.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Wells Aluminum Corporation (the "Company") is a custom extruder,
finisher and fabricator of soft alloy aluminum products, serving principally the
building/construction, transportation, consumer durables and
equipment/electrical markets. The Company 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 discussion contains forward-looking statements which
involve risks and uncertainties. The Company'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 Company'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 Company'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 discussion of financial condition and the results of
operations for the three and nine months ended September 27, 1998 and September
28, 1997 are based on the unaudited results achieved by the Company. 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, gain from curtailment of pension plan 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
------------------------ ------------------------
Sep. 27, Sep. 28, Sep. 27, Sep. 28,
1998 1997 1998 1997
Amounts in Thousands, Except Per Pound Data --------- --------- --------- ---------
- -------------------------------------------
<S> <C> <C> <C>
Net Sales - Products .............................................. $ 61,903 $ 61,851 $ 189,048 $ 174,758
Net Sales - Metal ................................................. -- 11,065 3,529 18,196
--------- --------- --------- ---------
Net Sales ..................................................... 61,903 72,916 192,577 192,954
Cost of Sales - Products .......................................... 52,916 51,006 159,795 142,079
Cost of Sales - Metals ............................................ -- 10,918 3,492 17,792
LIFO Charges (Income) ............................................. (1,026) (381) (2,121) 1,554
--------- --------- --------- ---------
Cost of Sales ................................................. 51,890 61,543 161,166 161,425
Gross Profit ...................................................... 10,013 11,373 31,411 31,529
Operating Profit .................................................. 7,424 6,804 20,787 14,822
Net Earnings ...................................................... $ 2,733 $ 2,167 $ 7,484 $ 3,856
</TABLE>
7
<PAGE>
Other Measurement Data:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------ -----------------------
Sep. 27, Sep. 28, Sep. 27, Sep. 28,
Amounts in Thousands, Except Per Pound Data 1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C>
Pounds of Product Shipped ......................... 42,594 40,363 125,775 115,453
Gross Sales - Products ............................ $ 64,965 $ 64,083 $ 197,524 $ 181,431
Gross Sales Price per Pound ....................... 1.525 1.588 1.570 1.571
Adjusted EBITDA ................................... $ 5,776 $ 7,342 $ 19,735 23,187
Adjusted EBITDA per Pound ......................... 0.136 0.182 0.157 0.201
Average Market Price of Aluminum per Pound ........ $ .639 $ 0.780 $ 0.684 $ 0.774
Market Price of Aluminum per Pound at Period-End . -- -- 0.640 0.783
</TABLE>
Aluminum Prices. For the periods indicated, approximately 60% of
the Company's cost of sales - products reflect the cost of aluminum, its
principal raw material. The Company 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. The actual
impact on the Company from changes in aluminum prices is affected by a number of
factors including the specific timing and frequency of prices changes, the level
and turnover of aluminum inventory, and the lead and lag time between selling
price changes and cost changes in aluminum inventory. If aluminum prices
decrease (increase) over a period of several months, the market indexed prices
charged to customers may decrease (increase) more rapidly than the costs charged
from the Company's aluminum inventory.
Business Activity. The Company's experience indicates that pounds
of product shipped has a direct impact on profitability, since a significant
portion of the Company's operating costs are fixed. The Company defines pounds
of product shipped as the weight of all extrusions shipped, including those
pounds transferred within the Company 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 Company 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 Company, 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 Company monitors Adjusted EBITDA, as it is relevant for debt
covenant analysis under the New Credit Facility (as defined herein) and it can
also be used as a measure of the Company's ability to service its debt.
LIFO Inventory. The Company values its aluminum inventory under the
last-in, first-out method (LIFO). During periods of rising aluminum prices,
compared to historical LIFO inventory values, the Company may incur LIFO
charges, which will reduce taxable income, and when aluminum prices subsequently
decline, the Company
8
<PAGE>
may recognize LIFO income, which will increase taxable income. As a result of
fluctuations in earnings levels resulting from the application of LIFO, the
Company excludes LIFO charges and LIFO income from certain measures, such as
Adjusted EBITDA.
Excess Metal Sales. The Company'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 Company's casting facility and from the Company's obligations to purchase
fixed amounts of primary aluminum ingot and billet under long-term supply
agreements. The sale of excess metal, which also reflects aluminum price
fluctuations, has minimal effect on profit performance since the prices of metal
bought and metal sold are closely matched. Pounds of excess metal sold are not
included in the calculation of pounds of product shipped, the Company's primary
indicator of business activity. In the normal course of business, the Company
also sells secondary aluminum billet and aluminum scrap, which are not accounted
for as excess metal sales.
Reclassification of Sales and Marketing End Use Data
In 1998, the Company completed an evaluation of the markets of its
customers by the end use codes as established by the Aluminum Association and
the Aluminum Extruders Council. These end use codes are used to compile aluminum
industry statistics by specific markets. As a result of the evaluation, the
Company reclassified certain pounds shipped to its customers during 1998 and
1997 from one market designation to another designation. The analysis of pounds
shipped to a specific market contained herein is based on the consistent
application of end use codes for the periods under comparison.
Three Months Ended September 27, 1998 Compared to Three Months Ended
September 28, 1997
The Company's net sales decreased to $61.9 million in the three
months ended September 27, 1998 from $72.9 million in the three months ended
September 28, 1997, a decrease of $11.0 million or 15.1%. Net sales products was
$61.9 million for the three months ended September 27, 1998 and September 28,
1997. Gross sales of value added products, which includes painted, anodized and
fabricated products, increased $0.1 million, or 0.3%, to $35.3 million in the
three months ended September 27, 1998 from $35.2 million in the three months
ended September 28, 1997. Gross sales of mill finished extrusions increased $0.9
million, or 3.1%, to $29.8 million in the three months ended September 27, 1998
from $28.9 million in the three months ended September 28, 1997. The gross sales
price per pound decreased by 3.8%, reflecting a higher percentage of mill
finished sales as compared to value added sales, the effect of a decline of
$0.141 in the average market price per pound of aluminum and a changing customer
and product mix in value added sales, offset by an improved customer and product
mix in mill finished sales.
Pounds of product shipped increased 2.2 million pounds, or 5.4%, to
42.6 million in the three months ended September 27, 1998 from 40.4 million
pounds of product shipped in the three months ended September 28, 1997.
Shipments to commercial construction increased 0.4 million pounds, primarily due
to increased shipments for several large architectural projects. In residential
construction, shipments increased 0.1 million pounds, with increased shipments
to suppliers to the mobile home and manufactured home market offsetting
decreased shipments to suppliers to the residential door and window market.
Shipments to transportation increased 0.2 million pounds, with increased
shipments to truck trailer, specialty trailer and other speciality
transportation accounts offsetting declines in delivery van accounts. In
consumer durables, shipments increased 0.5 million pounds, reflecting increased
shipments to manufacturers of pleasure boats and office furniture. Shipments to
equipment/electrical decreased 0.2 million pounds, with decreased shipments to
manufacturers of material handling systems and specialty industrial products
offsetting gains in shipments to electrical/electronic accounts. The increase of
1.2 million pounds to distributors/other resulted from increases in shipments to
distributors of specialty products serving the southeastern and midwestern
markets.
Cost of sales decreased to $51.9 million for the three months ended
September 27, 1998 from $61.5 million in the three months ended September 28,
1997, a decrease of $9.6 million or 15.6%. Cost of sales - products
9
<PAGE>
increased to $52.9 million in the three months ended September 27, 1998 from
$51.0 million in the three months ended September 28, 1997, an increase of $1.9
million or 3.7%. This increase resulted from a $1.6 million increase in
operating costs and a $0.3 million increase in aluminum costs. Variable costs
per pound increased to $0.441 in the three months ended September 27, 1998 from
$0.433 in the three months ended September 28, 1997, a change of $0.008 per
pound. This increase was primarily due to additional overtime costs in response
to the increase in sales volume and the effect of initial lower productivity
related to the use of temporary employees and the hiring of new personnel.
Gross profit decreased to $10.0 million in the three months ended
September 27, 1998 from $11.4 million in the three months ended September 28,
1997, a decrease of $1.4 million or 12.3%.
Selling, general and administrative expenses decreased to $2.6
million in the three months ended September 27, 1998 from $4.6 million in the
three months ended September 28, 1997, a decrease of $2.0 million or 43.5%. This
decrease is primarily attributable to a decrease in compensation expense of $0.6
million and a gain of $1.6 million resulting from the curtailment of the
Retirement Plan for Salaried Employees, a defined benefit plan, in September
1998.
Operating profit increased to $7.4 million in the three months
ended September 27, 1998 from $6.8 million in the three months ended September
28, 1997, an increase of $0.6 million or 8.8%.
Interest expense, net of interest income, decreased to $2.7 million
in the three months ended September 27, 1998 from $2.8 million in the three
months ended September 28, 1997, a decrease of $0.1 million, or 3.6%. Income tax
expense increased to $2.0 million in the three months ended September 27, 1998
from $1.7 million in the three months ended September 28, 1997, an increase of
$0.3 million, or 17.6%. The effective tax rates for the three months ended
September 27, 1998 and September 28, 1997 were 42.1% and 42.5%, respectively,
which differed from the federal statutory rate of 35% primarily due to the
goodwill amortization and state income taxes.
Net earnings increased to $2.7 million in the three months ended
September 27, 1998 from $2.2 million in the three months ended September 28,
1997, an increase of $0.5 million, or 22.7%. This increase was due to the above
described factors and the incurrence of an extraordinary loss of $0.2 million
(net of applicable income taxes of $0.1 million) in the three months ended
September 28, 1997 on the refinancing of debt related to the Recapitalization
(as described herein).
Adjusted EBITDA (as defined herein) decreased to $5.8 million in
the three months ended September 27, 1998 from $7.4 million in the three months
ended September 28, 1997, a decrease of $1.6 million or 21.6%. The decline in
Adjusted EBITDA consisted of a decrease in sales spread of $1.2 million and an
incremental increase in operating costs of $1.1 million, offset by $0.7 million
from increased sales volume. The decrease in sales spread was affected by the
continuing decrease in aluminum prices in the three months ended September 27,
1998, since market indexed prices charged to customers declined more rapidly
than the costs charged from aluminum inventory. Adjusted EBITDA per pound
decreased $0.046 to $0.136 in the three months ended September 27, 1998,
reflecting both the lower Adjusted EBITDA and the increased pounds of product
shipped.
Nine Months Ended September 27, 1998 Compared to Nine Months Ended
September 28, 1997
The Company's net sales decreased to $192.6 million in the nine
months ended September 27, 1998 from $193.0 million in the nine months ended
September 28, 1997, a decrease of $0.4 million or 0.2%. Net sales products
increased to $189.1 million in the nine months ended September 27, 1998 from
$174.8 million in the nine months ended September 28, 1997, an increase of $14.3
million or 8.2%. Gross sales of value added products increased $6.5 million, or
6.5%, to $106.8 million in the nine months ended September 27, 1998 from $100.3
million in the nine months ended September 28, 1997. Gross sales of mill
finished extrusions increased $9.6 million, or 11.8%, to $90.7 million in the
nine months ended September 27, 1998 from $81.1 million in the nine months ended
September 28, 1997. The gross sales price per pound declined slightly,
reflecting a higher percentage of mill finished sales as compared to value added
sales, the effect of a decline of $0.090 in the average market price
10
<PAGE>
per pound of aluminum and a changing customer and product mix in value added
sales, offset by an improved customer and product mix in mill finished sales.
Pounds of product shipped increased 10.3 million pounds, or 8.9%,
to 125.8 million in the nine months ended September 27, 1998 from 115.5 million
pounds of product shipped in the nine months ended September 28, 1997. Shipments
to commercial construction increased 1.7 million pounds, primarily due to
increased shipments for several large architectural projects. In residential
construction, shipments increased 1.3 million pounds, reflecting increased
shipments to suppliers to the mobile and manufactured home market offsetting
decreased shipments to suppliers to the residential door and window market.
Shipments to transportation increased 3.6 million pounds, with increased
shipments to major truck trailer manufacturers offsetting declines in delivery
van accounts. In consumer durables, shipments increased 2.1 million pounds,
reflecting increased shipments to manufacturers of pleasure boats and office
furniture. Shipments to equipment/electrical decreased 0.3 million pounds,
primarily due to a decline in shipments to one specialty industrial account,
offset by increased shipments to electrical/electronic accounts. The increase of
1.9 million pounds to distributors/other resulted from increases in shipments to
distributors of specialty products serving the southeastern and midwestern
markets.
Cost of sales decreased to $161.2 million for the nine months ended
September 27, 1998 from $161.4 million in the nine months ended September 28,
1997, an decrease of $0.2 million or 0.1%. Cost of sales - products increased to
$159.8 million in the nine months ended September 27, 1998 from $142.1 million
in the nine months ended September 28, 1997, an increase of $17.7 million or
12.5%. This increase resulted from a $7.7 million increase in operating costs
and a $10.1 million increase in aluminum costs. Variable costs per pound
increased to $0.441 in the nine months ended September 27, 1998 from $0.421 in
the nine months ended September 28, 1997, a change of $0.020 per pound. This
increase was primarily due to additional costs associated with a major upgrade
of an extrusion press, the effect of a 4 1/2 week work stoppage at one plant
location, additional overtime costs incurred in response to the increase in
sales volume and the effect of initial lower productivity related to the use of
temporary help and the hiring of new personnel.
Gross profit decreased to $31.4 million in the nine months ended
September 27, 1998 from $31.5 million in the nine months ended September 28,
1997, a decrease of $0.1 million or 0.3%.
Selling, general and administrative expenses decreased to $10.6
million in the nine months ended September 27, 1998 from $16.7 million in the
nine months ended September 28, 1997, a decrease of $6.1 million or 36.5%. This
decrease is primarily attributable to a decrease in compensation expense of $4.8
million, of which $4.1 million related to the settlement of employee stock
options as part of the Recapitalization of the Company (as described herein),
and a gain of $1.6 million resulting from the curtailment of the Retirement Plan
for Salaried Employees, a defined benefit plan, in September 1998.
Operating profit increased to $20.8 million in the nine months
ended September 27, 1998 from $14.8 million in the nine months ended September
28, 1997, an increase of $6.0 million or 40.5%.
Interest expense, net of interest income, increased to $8.1 million
in the nine months ended September 27, 1998 from $5.7 million in the nine months
ended September 28, 1997, an increase of $2.4 million, or 42.1%. 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 increased to $5.2 million in the
nine months ended September 27, 1998 from $4.0 million in the nine months ended
September 28, 1997, an increase of $1.2 million, or 30.0%. The effective tax
rates for the nine months ended September 27, 1998 and September 28, 1997 were
41.0% and 43.4% respectively, which differed from the federal statutory rate of
35% primarily due to the goodwill amortization and state income taxes.
Net earnings increased to $7.5 million in the nine months ended
September 27, 1998 from $3.9 million in the nine months ended September 28,
1997, an increase of $3.6 million or 92.3%. This increase was due to the above
described factors and the incurrence of an extraordinary loss of $1.3 million
(net of applicable income taxes
11
<PAGE>
of $0.8 million) in the nine months ended September 28, 1997 on the refinancing
of debt related to the Recapitalization (as described herein).
Adjusted EBITDA (as defined herein) decreased to $19.7 million in
the nine months ended September 27, 1998 from $23.2 million in the nine months
ended September 28, 1997, a decrease of $3.5 million or 15.1%. The decline in
Adjusted EBITDA consisted of an increase in sales spread of $0.8 million and an
incremental increase in operating costs of $6.5 million, offset by $2.2 million
from increased sales volume. Adjusted EBITDA per pound decreased $0.044 to
$0.157 in the nine months ended September 27, 1998, reflecting both the lower
Adjusted EBITDA and the increased pounds of product shipped.
Liquidity and Capital Resources
The Company 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.
As of September 27, 1998, the Company had $105.0 million of Series
B Notes (as defined herein) outstanding and no borrowings under the New Credit
Facility (as defined herein). The significant indebtedness incurred by the
Company as a result of the Recapitalization in May 1997 has several important
consequences, the foremost being that interest expense is substantially higher
than prior to the Recapitalization. The ability of the Company to satisfy its
obligations pursuant to such indebtedness, including the Series B Notes and the
Indenture under which these notes were issued, will be dependent upon the
Company's future performance, which, in turn, will be subject to management,
financial and other business factors affecting the business and operations of
the Company, some of which are not in the Company's control. The Company's
liquidity may also be impacted by environmental and other regulatory matters.
The Company 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.
Cash Flows from Operating Activities
Cash provided by operations for the nine months ended September 27,
1998 was $5.0 million as compared to $8.7 million for the nine months ended
September 28, 1997, a decrease of $3.7 million or 31.0%. Cash flow decreased
primarily as a result of a decrease in accounts payable, changes in
non-recurring items related to the settlement of employee stock options, and the
extraordinary loss on refinancing of debt as part of the Recapitalization (as
described herein).
Total working capital at September 27, 1998 was $36.2 million
compared to $30.0 million at December 31, 1997, an increase of $6.2 million or
20.7%. Cash and cash equivalents increased $2.6 million to $8.0 million due in
part to the terms and conditions of the Series B Notes outstanding. Changes in
other working capital accounts reflected factors such as the impact of increased
business activity, the timing of incentive compensation payments, the effect of
declining aluminum prices, and the timing of interest payments.
Cash Flows from Investing Activities
Expenditures for property, plant and equipment for the nine months
ended September 27, 1998 and September 28, 1997 were $2.3 million and $1.2
million, respectively. The Company curtailed its capital expenditure program
during the first six months of 1997 due to the Recapitalization. The Company
anticipates that expenditures for property, plant and equipment will approach
$3.0 million in 1998 and will average $3.5 million per annum in the following
four years. In 1998, approximately $2.2 million of the annual $3.0 million
expenditure is expected to be invested in productivity improvements and capacity
enhancements, with the remainder expected to
12
<PAGE>
be used for maintenance capital. In the following four 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 Company issued and sold $105.0 million
principal amount of 10.125% Series A Senior Notes (the "Series A Notes") due
2005. The Company is required to make semi-annual payments of interest on the
Series A Notes on June 1 and December 1 of each year. The Company used a portion
of the proceeds from the issuance of the Series A Notes to repay an existing
credit facility and to retire its 14.125% Senior Subordinated Notes (the
"Subordinated Notes") due 2001. Upon the issuance of the Series A Notes, the
Company entered into a New Credit Facility (the "New Credit Facility"), which
provides a secured working capital line of $15.0 million that matures on the
last business day of June 2002. Under the New Credit Facility, the Company is
required to make payments of interest on a monthly or quarterly basis.
The offering of the Series A Notes, the repayment of the existing
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 Company
(the "Recapitalization"). As part of the Recapitalization, the Company used a
substantial portion of the proceeds received from the issuance and sale of the
Series A 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 1997, the Company 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 Company 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.
On November 7, 1997, the Company consummated an exchange of 100% of
the Series A Notes for $105.0 aggregate principal amount of 10.125% Series B
Senior Notes (the "Series B Notes") due 2005 which are registered under the
Securities Act of 1933, as amended. The Company is required to make semi-annual
payments of interest on the Series B Notes on June 1 and December 1 of each
year.
Repurchase of Common Stock
On October 16, 1998, the Company entered into a Stock Purchase
Agreement to repurchase all of the Class A common stock of the Company owned by
CVG Industria Venezolana de Aluminio, C.A. ("Venalum") for an aggregate purchase
price of $3.1 million. Upon consummation of the repurchase, Venalum will no
longer own any common stock of the Company.
Futures Contracts and Forward Sales Contracts
In the normal course of business, the Company 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
Company enters into aluminum futures contracts (a financial hedge) based on
scheduled deliveries.
13
<PAGE>
At September 27, 1998, the Company was party to $12.9 million of
aluminum futures contracts through nationally recognized brokerage firms and
major metal brokers. These aluminum futures contracts are for periods between
October 1998 and November 1999, covering 20.1 million pounds of aluminum at
prices expected to be settled financially in cash as they reach their respective
settlement dates. The Company does not engage in any speculative trading of
futures contracts.
LIFO Adjustment and Inflation
The largest component of the Company'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 Company does not believe that inflation has had a
significant impact on its results of operations for the three months and nine
months ended September 27, 1998 and September 28, 1997.
Seasonality
The Company 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.
Year 2000 Systems Compliance
The Company has undertaken a number of initiatives to ensure that
its computer systems, microprocessors, electronic data interchange (EDI)
systems, and other computer based applications are compliant with the Year 2000
requirements. The Year 2000 issue stems from the fact that many computer
programs were written with two, rather than four, digits to the identify the
applicable year. As a result, computer programs with time-sensitive software may
recognize a two-digit code for any year in the next century as related to this
century; for example, "00" entered into a date-field for the year 2000 may be
interpreted as the year 1900, resulting in system failures or miscalculations
and disruptions of operations, including, among other things, a temporary
inability to process transactions or engage in other normal business activities.
The Company has completed an evaluation of its centralized main
computer system and related software and manufacturing equipment and facilities
and has determined that this system and the software and manufacturing equipment
and facilities are compliant with the Year 2000 requirements. The Company is in
the process of evaluating its other computer systems, microprocessors, EDI
systems and other computer based applications for Year 2000 compliance. The
Company expects to complete any required Year 2000 remediation prior to any
anticipated impact on its operations. The Company believes that with
modifications to existing software and conversions to new systems, where
required, the Year 2000 issue will not pose significant operational problems for
its computer systems, manufacturing equipment or facilities. However, if such
modifications or conversions are not made, or they are not completed timely, the
Year 2000 issue could have a material impact on the operations of the Company.
The Company is also contacting vendors and customers to determine
the extent to which the Company's interface systems are vulnerable to the
failure of such companies to remediate their own Year 2000 issues. There is no
guarantee that the systems of the Company's vendors and customers will be
modified or converted on a timely basis by such companies and that such Year
2000 issues would not have a material impact on the operations of the Company.
The Company is currently inquiring of its significant suppliers and
subcontractors that do not share information systems with the Company ("external
agents"). To date, the Company is not aware of any external agent with a Year
2000 issue that would materially impact the Company's results of operations,
liquidity, or capital resources. However, the Company has no means of ensuring
that external agents will be Year 2000 compliant. The
14
<PAGE>
inability of external agents to complete their Year 2000 resolution process in a
timely fashion could materially impact the Company. The effect of non-compliance
by external agents is not determinable.
Management of the Company believes it has an effective program in
place to resolve the Year 2000 issue in a timely manner. As noted above, the
Company has not yet completed all necessary phases of the Year 2000 program. The
Company does not believe the remaining phases would significantly impact the
Company's ability to take customer orders, manufacture and ship products,
invoice customers or collect payments. However, disruptions in the economy
generally resulting from Year 2000 issues could materially adversely affect the
Company. The Company could be subject to litigation for computer systems product
failure, for example, equipment shutdown or failure to properly date business
records. The amount of potential liability and lost revenue cannot be reasonably
estimated at this time.
The Company plans to evaluate and determine whether a contingency
plan is necessary in 1999.
Commitments
At September 27, 1998, the Company had commitments with twelve
North American suppliers to purchase 54.6 million pounds of primary aluminum and
aluminum billet through December 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.
Contingencies
The Company has received notice of claims asserting potential
liability under various federal and state environmental laws. The Company
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 Company.
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 Company has not anticipated any
insurance proceeds or third-party payments in determining its estimated
liability for environmental remediation.
The Company is 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 Company cannot be predicted with
certainty, management does not expect that these matters will have a material
adverse effect on the Company and its operations.
15
<PAGE>
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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
quarter covered by this report.
(c) All other items were not applicable.
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)
Date: November 10, 1998
16
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