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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1999
OR
| | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission File Number: 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 X No
As of May 3, 1999, the registrant had 729,892.5 shares of Common Stock
outstanding.
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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 March 28, 1999 and December 31, 1998 (audited) 1
Statements of Operations for the three months ended March 28, 1999
and March 29, 1998 2
Statements of Cash Flows for the three months ended March 28, 1999
and March 29, 1998 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results 6
of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
</TABLE>
<PAGE>
Part 1. Financial Information
Item 1. Financial Statements
WELLS ALUMINUM CORPORATION
BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
Mar. 28, Dec. 31,
1999 1998
---- ----
(Unaudited)
-----------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents ........................................ $ 8,579 $ 7,619
Accounts receivable, principally trade, less allowances of
$487 and $442 .................................................... 30,661 26,213
Inventories ...................................................... 20,119 20,394
Other current assets ............................................. 3,064 2,319
--------- ---------
Total current assets ......................................... 62,423 56,545
Property, plant and equipment, at cost less accumulated depreciation . 28,231 28,276
Debt issuance costs, net of accumulated amortization of
$1,139 and $984 ................................................ 3,610 3,765
Goodwill, net of accumulated amortization of $13,959 and $13,662 ..... 33,065 33,362
Other assets ......................................................... 2,530 2,530
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Total assets ................................................. $ 129,859 $ 124,478
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable, principally trade .............................. $ 15,926 $ 14,186
Accrued expenses .................................................. 11,904 10,053
--------- ---------
Total current liabilities .................................... 27,830 24,239
Long-term debt ....................................................... 105,000 105,000
Deferred income taxes ................................................ 5,324 5,446
Deferred benefit plan obligations .................................... 2,704 2,572
--------- ---------
Total liabilities ............................................ 140,858 137,257
--------- ---------
Stockholders' equity:
Common stock, Class A, par value $0.01 per share, 1,100,000 shares
authorized, 729,892.5 and 909,005.0 shares issued ............ 7 7
Additional paid-in capital ....................................... 10 -
Accumulated deficit .............................................. (10,041) (11,811)
Additional minimum pension liability ............................. (975) (975)
--------- ---------
Total stockholders' equity ................................... (10,999) (12,779)
--------- ---------
Total liabilities and stockholders' equity ................... $ 129,859 $ 124,478
========= ===========
</TABLE>
See accompanying notes.
1
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WELLS ALUMINUM CORPORATION
STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in Thousands)
<TABLE>
<CAPTION>
Three Months Ended
------------------
Mar. 28, Mar. 29,
1999 1998
---- ----
<S> <C> <C>
Net sales ............................................................. $ 56,155 $ 63,818
Cost of sales ......................................................... 45,870 53,694
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Gross profit ......................................................... 10,285 10,124
Selling, general and administrative expenses.......................... 4,507 3,896
--------- ---------
Operating profit ...................................................... 5,778 6,228
Interest expense, net of interest income ............................. 2,729 2,706
--------- ---------
Earnings before income taxes ......................................... 3,049 3,522
Income taxes ......................................................... 1,279 1,494
--------- ---------
Net earnings ......................................................... $ 1,770 $ 2,028
========= ===========
See accompanying notes.
2
<PAGE>
WELLS ALUMINUM CORPORATION
STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in Thousands)
Three Months Ended
------------------
Mar. 28, Mar. 29,
1999 1998
---- ----
Operating activities:
Net earnings ......................................................... $ 1,770 $2,028
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization ................................ 1,074 1,000
Deferred income taxes ........................................ (181) (126)
Changes in operating assets and liabilities:
Accounts receivable, net ................................. (4,448) 595
Inventories .............................................. 275 355
Accounts payable and accrued expenses .................... 4,567 (844)
Other assets and liabilities ............................. 393 740
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Net cash provided by operating activities ............................ 3,450 3,748
--------- -------
Investing activities:
Purchase of property, plant and equipment ........................... (576) (1,320)
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Net cash used in investing activities ................................ (576) (1,320)
--------- -------
Financing activities:
Proceeds from exercise of stock options .............................. 10 --
Payment of cash dividend .............................................. (1,924) --
--------- -------
Net cash used in financing activities ................................ (1,914) --
--------- -------
Net increase in cash and cash equivalents ............................ 960 2,428
Cash and cash equivalents at beginning of year ....................... 7,619 5,352
--------- -------
Cash and cash equivalents at end of period ........................... $ 8,579 $ 7,780
========= =======
See accompanying notes.
</TABLE>
3
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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 three months ended March 28, 1999.
Operating results for the interim periods of 1999 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1999.
3. Reclassification
Certain amounts previously reported have been reclassified to conform
with the 1999 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 66% and 67% of total
inventories at March 28, 1999 and December 31, 1998, 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>
Mar. 28, Dec. 31,
1999 1998
---- ----
<S> <C> <C>
Raw materials ..................................................... $10,727 $10,233
Finished goods and work in progress ............................... 8,818 9,589
Supplies .......................................................... 574 572
------- -------
Sub-total ..................................................... 20,119 20,394
Less LIFO reserve ................................................. -- --
------- -------
Inventories .................................................... $20,119 $20,394
</TABLE>
4
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6. Related Party Transactions
During the three months ended March 29, 1998, the Company purchased
aluminum in the amount of $5.4 million from CVG Industria Venezolana de
Aluminio, C.A. ("Venalum"), who was, at such time, an owner of 180,362.5 shares
of the Company's Class A common stock. On November 13, 1998, the Company
repurchased the common stock owned by Venalum, and as of that date, Venalum no
longer owned any shares of common stock of the Company. There were no amounts
payable to Venalum at March 28, 1999 and December 31, 1998.
7. Indebtedness
At March 28, 1999 and December 31, 1998, indebtedness consisted of $105.0
million of 10.125% Series B Notes. There were no borrowings outstanding under a
revolving credit facility.
8. Interest Expense, Net of Interest Income
Interest expense, net of interest income, is as follows:
<TABLE>
<CAPTION>
Three Months Ended
------------------
Mar. 28, Mar. 29,
1999 1998
---- ----
<S> <C> <C>
Interest expense ....................................................... $ 2,671 $ 2,672
Amortization of debt issuance costs .................................... 155 156
Sub-total .......................................................... 2,826 2,828
Interest income ........................................................ (97) (122)
Interest expense, net of interest income ........................... $ 2,729 $ 2,706
</TABLE>
9. 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 March 28, 1999, the Company was party to $17.7 million of aluminum
futures contracts through nationally recognized brokerage firms and major metal
brokers. These aluminum futures contracts are for periods between April 1999 and
December 1999, covering 29.9 million pounds of aluminum at prices expected to be
settled financially in cash as they reach their respective settlement dates. The
market value of these aluminum futures contracts at March 28, 1999 was $16.8
million. The Company does not engage in any speculative trading of futures
contracts.
10. Commitments
At March 28, 1999, the Company had commitments with 11 North American
suppliers to purchase 77.6 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.
5
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11. 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.
12. Subsequent Event
In April 1999, the Company retained the investment banking firm of ING
Baring Furman Selz LLC to assist the Company in exploring strategic alternatives
to maximize shareholder value. The alternatives could include taking the Company
public, selling the Company, recapitalizing the Company or pursuing acquisitions
for profitable growth.
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 durable 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 months ended March 28, 1999 and March 29, 1998 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.
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.
6
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<TABLE>
<CAPTION>
Statement of Operations Data:
Three Months Ended
Mar. 28, Mar. 29,
Amounts in Thousands, Except Per Pound Data 1999 1998
- ------------------------------------------- ---- ----
<S> <C> <C>
Net Sales - Products .................................. $ 56,155 $ 60,287
Net Sales - Metal ..................................... -- 3,531
----------- -----------
Net Sales ......................................... 56,155 63,818
Cost of Sales - Products .............................. 45,870 50,716
Cost of Sales - Metal ................................. -- 3,498
LIFO Charges (Income) ................................. -- (520)
----------- -----------
Cost of Sales ..................................... 45,870 53,694
Gross Profit .......................................... 10,285 10,124
Operating Profit ...................................... 5,778 6,228
Net Earnings .......................................... $ 1,770 $ 2,028
Other Measurement Data:
Three Months Ended
Mar. 28, Mar. 29,
Amounts in Thousands, Except Per Pound Data 1999 1998
- ------------------------------------------- ---- ----
Pounds of Product Shipped ............................. 39,560 39,047
Gross Sales - Products ................................ $ 58,822 $ 62,590
Gross Sales Price per Pound ........................... 1.487 1.603
Adjusted EBITDA ...................................... $ 6,696 $ 6,553
Adjusted EBITDA per Pound ............................ 0.169 0.168
Average Market Price of Aluminum per Pound ........... $ 0.593 $ 0.730
Market Price of Aluminum per Pound at Period-End ..... 0.601 0.697
</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, and generally have had
little impact on the Company's level of profitability for the periods described
herein.
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,
7
<PAGE>
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 a revolving credit facility
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 (LIFO) method. 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 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 metals
sales.
Three Months Ended March 28, 1999 Compared to Three Months Ended March 29, 1998
The Company's net sales decreased to $56.2 million in the three months
ended March 28, 1999 from $63.8 million in the three months ended March 29,
1998, a decrease of $7.6 million or 11.9%. Net sales - products decreased to
$56.2 million in the three months ended March 28, 1999 from $60.3 million for
the three months ended March 29, 1998, a decrease of $4.1 million or 6.8%. Gross
sales of value added products, which includes painted, anodized and fabricated
products, increased $1.5 million, or 4.5%, to $35.0 million in the three months
ended March 28, 1999 from $33.5 million in the three months ended March 29,
1998. Gross sales of mill finished extrusions decreased $5.3 million, or 18.2%,
to $23.8 million in the three months ended March 28, 1999 from $29.1 million in
the three months ended March 29, 1998. The gross sales price per pound decreased
by 7.2%, reflecting the effect of a decline of $0.137 in the average market
price per pound of aluminum and a changing customer and product mix in mill
finished sales, offset by a higher percentage of value added sales as compared
to mill finished sales and an improved customer and product mix in value added
sales.
Pounds of product shipped increased 0.6 million pounds, or 1.5%, to 39.6
million in the three months ended March 28, 1999 from 39.0 million pounds of
product shipped in the three months ended March 29, 1998. Shipments to
commercial construction increased 0.9 million pounds, due to increased shipments
of storefront systems in the architectural products market. In residential
construction, shipments increased 0.9 million pounds, with increased shipments
to residential window and door accounts and storm door accounts offset by
decreased shipments to suppliers to the mobile home and manufactured home
market. Shipments to transportation decreased 0.7 million pounds, due to
decreased shipments to a major truck trailer account. In consumer durables,
shipments decreased 0.2 million pounds, reflecting decreased shipments to
several office furniture accounts. Shipments to equipment/electrical decreased
0.9 million pounds due to decreased shipments to a manufacturer of material
handling systems. The increase of 0.6 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 $45.9 million for the three months ended March
28, 1999 from $53.7 million in the three months ended March 29, 1998, a decrease
of $7.8 million or 14.5%. Cost of sales - products decreased to $45.9 million in
the three months ended March 28, 1999 from $50.7 million in the three months
ended March 28, 1998, a decrease of $4.8 million or 9.5%. This decrease resulted
from a $5.2 million decrease in aluminum costs
8
<PAGE>
offset by a $0.4 million increase in operating costs. Variable costs per pound
increased to $0.443 in the three months ended March 28, 1999 from $0.435 in the
three months ended March 29, 1998, a change of $0.008 per pound. This increase
was primarily due to increased labor costs, shipping costs and extrusion die
costs incurred as a result of a changing sales mix to lighter extrusion shapes.
Gross profit increased to $10.3 million in the three months ended March
28, 1999 from $10.1 million in the three months ended March 29, 1998, an
increase of $0.2 million or 2.0%.
Selling, general and administrative expenses increased to $4.5 million in
the three months ended March 28, 1999 from $3.9 million in the three months
ended March 29, 1998, an increase of $0.6 million or 15.4%. This increase is
attributable to increases in compensation expense of $0.3 million, marketing
costs of $0.1 million and other administrative expenses of $0.2 million.
Operating profit decreased to $5.8 million in the three months ended
March 28, 1999 from $6.2 million in the three months ended March 29, 1998, a
decrease of $0.4 million or 6.5%.
Interest expense, net of interest income, was $2.7 million in the three
months ended March 28, 1999 and the three months ended March 29, 1998. Income
tax expense decreased to $1.3 million in the three months ended March 28, 1999
from $1.5 million in the three months ended March 29, 1998, a decrease of $0.2
million, or 13.3%. The effective tax rates for the three months ended March 28,
1999 and March 29, 1998 were 41.9% and 42.4%, respectively, which differed from
the federal statutory rate of 35% primarily due to the goodwill amortization and
state income taxes.
Net earnings decreased to $1.8 million in the three months ended March
28, 1999 from $2.0 million in the three months ended March 29, 1998, a decrease
of $0.2 million, or 10.0%.
Adjusted EBITDA (as defined herein) increased to $6.7 million in the
three months ended March 28, 1999 from $6.6 million in the three months ended
March 29, 1998, an increase of $0.1 million or 1.5%. The increase in Adjusted
EBITDA consisted of increases in sales volume of $0.2 million and sales spread
of $1.0 million, offset by an increase in operating costs of $1.1 million. Sales
spread increased in spite of a continuing decrease in aluminum prices in the
three months ended March 28, 1999, which resulted in market indexed prices
charged to customers declining more rapidly than the costs charged from aluminum
inventory. Adjusted EBITDA per pound increased slightly to $0.169 in the three
months ended March 28, 1999, reflecting both the higher Adjusted EBITDA and the
increase in 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 March 28, 1999, the Company had $105.0 million of Series B Notes
outstanding and no borrowings under a revolving credit facility. 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.
9
<PAGE>
The Company believes that cash flow from operating activities, together
with borrowings available under its revolving 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 three months ended March 28, 1999 was
$3.5 million as compared to $3.7 million for the three months ended March 29,
1998, a decrease of $0.2 million or 5.4%. Cash flow decreased primarily as a
result of reduced net earnings and an increase in net working capital.
Total working capital at March 28, 1999 was $34.6 million compared to
$32.3 million at December 31, 1998, an increase of $2.3 million or 7.1%. Changes
in working capital accounts, including a $1.0 million increase in cash and cash
equivalents, 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 three months ended
March 28, 1999 and March 29, 1998 were $0.6 million and $1.3 million,
respectively. The higher expenditure for the three months ended March 29, 1998
reflected funds spent on a major upgrade of an extrusion press which was
completed in February 1998. The Company anticipates that expenditures for
property, plant and equipment will approach $4.0 million in 1999 and will
average $3.5 million per annum in the following four years. In 1999,
approximately $3.0 million of the annual $4.0 million expenditure is expected to
be invested in productivity improvements and capacity enhancements, with the
remainder expected to 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
In January 1999, the Company paid a cash dividend of $2.64 per share, or
$1.9 million, to the holders of its Class A common stock. In March 1999, the
Company received $10,000 resulting from the exercise of 1,250 stock options at
an exercise price of $8.00 per option.
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 March 28, 1999, the Company was party to $17.7 million of aluminum
futures contracts through nationally recognized brokerage firms and major metal
brokers. These aluminum futures contracts are for periods between April 1999 and
December 1999, covering 29.9 million pounds of aluminum at prices expected to be
settled financially in cash as they reach their respective settlement dates. The
market value of these aluminum futures contracts at March 28, 1999 was $16.8
million. The Company does not engage in any speculative trading of futures
contracts.
10
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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 ended March
28, 1999 and March 29, 1998.
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 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 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 on which the Company's
systems rely 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 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
11
<PAGE>
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, computer equipment shutdown or
failure to properly date business records. The amount of potential liability and
lost revenue cannot be reasonably estimated at this time.
Except as described above, the Company has not developed a contingency
plan for the reasonably likely worst case scenario concerning the Year 2000
issue. If a Year 2000 problem were to occur that the Company could not
successfully resolve, it could have a material adverse effect on the results of
operations and financial condition of the Company.
Commitments
At March 28, 1999, the Company had commitments with 11 North American
suppliers to purchase 77.6 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See "Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations - Futures Contracts and Forward Sales Contracts."
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.
12
<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)
Date: May 3, 1999
13
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