================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number 0-18050
PW EAGLE, INC.
(Exact name of registrant as specified in its Charter)
MINNESOTA 41-1642846
(State of incorporation) (I.R.S. Employer Identification No.)
222 South Ninth Street, Suite 2880
Minneapolis, Minnesota 55402
(Address of principal executive offices)
Registrant's telephone number, including area code: (612) 305-0339
Eagle Pacific Industries, Inc.
333 South Seventh Street, Suite 2430
Minneapolis, Minnesota 55402
(Former Name, Former Address and Former Fiscal Year,
If Changed Since Last Report)
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
-------- ---------
The number of shares of the registrant's Common Stock, $.01 par value
per share, outstanding as of July 24, 2000 was 8,061,275.
================================================================================
<PAGE>
PW EAGLE, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS......................................3
Condensed Statements of Operations -Three and Six Months Ended
June 30, 2000 and 1999 (Unaudited)................................3
Condensed Balance Sheets -June 30, 2000 and December 31, 1999
(Unaudited).......................................................4
Condensed Statements of Cash Flows -Six Months Ended June 30, 2000
and 1999 (Unaudited)..............................................5
Notes to Condensed Financial Statements -Three and Six Months Ended
June 30, 2000 and 1999 (Unaudited)................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..............................................11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.........16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS..................................................16
ITEM 2. CHANGES IN SECURITIES..............................................16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................................16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................17
ITEM 5. OTHER INFORMATION..................................................17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...................................17
SIGNATURES..................................................................18
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
PW EAGLE, INC.
<TABLE>
--------------------------------------------------------------------------------------------------------------------------------
Condensed Statements of Operations - Three and Six Months Ended June 30, 2000
and 1999 (Unaudited)
(In thousands, except per share amounts)
<CAPTION>
Three months ended June 30 Six months ended June 30
----------------------------------------------------------------------
2000 1999 2000 1999
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $106,748 $24,448 $199,347 $44,034
Cost of goods sold 70,087 18,216 133,374 32,361
----------------------------------------------------------------------
Gross profit 36,661 6,232 65,973 11,673
Operating expenses:
Selling expenses 8,054 2,953 15,221 5,496
General and administrative expenses 3,462 773 7,162 1,442
----------------------------------------------------------------------
11,516 3,726 22,383 6,938
----------------------------------------------------------------------
Operating income 25,145 2,506 43,590 4,735
Other (income) expense:
Interest expense 3,639 541 7,291 1,103
Other, net (183) (171) (246) (191)
Nonrecurring expenses 300 - 300 1,325
----------------------------------------------------------------------
3,756 370 7,345 2,237
----------------------------------------------------------------------
Income before income taxes 21,389 2,136 36,245 2,498
Income tax expense (benefit) 8,190 (1,868) 13,880 (1,836)
----------------------------------------------------------------------
Net income 13,199 4,004 22,365 4,334
Preferred stock dividends - 200 - 401
----------------------------------------------------------------------
Net income available for common stockholders $13,199 $3,804 $22,365 $3,933
======================================================================
Net income per common share:
Basic $1.70 $.54 $2.91 $.57
Diluted $1.24 $.42 $2.12 $.45
Weighted average number of common and common
equivalent shares outstanding:
Basic 7,763 7,015 7,674 6,868
Diluted 10,682 9,629 10,558 9,553
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
<TABLE>
PW EAGLE, INC.
--------------------------------------------------------------------------------------------------------------------------------
Condensed Balance Sheets - June 30, 2000 and December 31, 1999 (Unaudited)
(In thousands, except per share amounts)
<CAPTION>
June 30, 2000 December 31, 1999
----------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 1,387 $ 2,669
Accounts receivable, net 37,789 26,159
Inventories 64,212 45,777
Deferred income taxes 642 2,487
Other 363 233
--------------------------------------------------------------------------------------------------------------------------------
Total current assets 104,393 77,325
Property and equipment, net 72,853 74,895
Other assets 12,752 15,567
--------------------------------------------------------------------------------------------------------------------------------
Total assets $ 189,998 $ 167,787
================================================================================================================================
Liabilities and Stockholders' Equity Current liabilities:
Borrowings under revolving credit facility $ 31,312 $ 30,558
Current maturities of long-term debt 10,423 10,441
Accounts payable 14,793 22,347
Accrued liabilities 19,084 12,165
--------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 75,612 75,511
Other long-term liabilities 2,631 79
Long-term debt, less current maturities 32,500 37,500
Senior subordinated debt 27,387 26,752
Commitments and contingencies
Redeemable preferred stock; 8% cumulative dividend; convertible; $1,000 - -
per share liquidation preference; $.01 par value; 10,000 shares
authorized; none issued and outstanding
Stock warrants 5,887 5,887
Stockholders' equity:
Series A preferred stock; 7% cumulative dividend; convertible; $2 per share - 38
liquidation preference; no par value; 2,000,000 shares authorized; issued
and outstanding none and 18,750 shares, respectively
Undesignated stock; $.01 par value; 14,490,000 shares authorized; none - -
issued and outstanding
Common stock; $.01 par value; 30,000,000 shares authorized; issued and 80 77
outstanding 8,061,275 and 7,721,214 shares, respectively
Class B Common stock; $.01 par value; 3,500,000 shares authorized; none - -
issued and outstanding
Additional paid-in capital 40,468 39,013
Unearned compensation (537) (587)
Notes receivable from officers and employees on common stock purchases (1,208) (1,296)
Retained earnings/(accumulated deficit) 7,178 (15,187)
--------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 45,981 22,058
--------------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 189,998 $ 167,787
================================================================================================================================
</TABLE>
See accompanying notes to condensed financial statements.
<PAGE>
PW EAGLE, INC.
<TABLE>
----------------------------------------------------------------------------------------------------------------------
Condensed Statements of Cash Flows - Six Months Ended June 30, 2000 and 1999 (Unaudited)
(In thousands)
<CAPTION>
Six months ended June 30
----------------------------------------------
2000 1999
----------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net income $22,365 $4,334
Adjustments to reconcile net income to net cash
provided by operating activities:
Gain on sale of land held for sale (241) (164)
Depreciation and amortization 4,015 1,216
Amortization of debt issue costs, discounts and premiums 1,075 96
Receivable provisions (recoveries) (177) 167
Deferred income taxes 6,041 (2,000)
Noncash compensation 444 -
Change in operating assets and liabilities (29,971) (2,628)
----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 3,551 1,021
----------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property and equipment (3,155) (1,897)
Purchase of and improvements to land held for sale - (144)
Deferred acquisition costs - 237
Proceeds from property and equipment disposals - 68
Proceeds from sale of land held for sale 581 523
Payments on notes receivable 88 -
Purchase price reduction, litigation recovery 1,000 -
----------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,486) (1,213)
----------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings under revolving credit facility 753 1,141
Repayment of long-term debt (5,018) (834)
Issuance of common stock through exercise of stock options 918 286
Payment of preferred stock dividend - (401)
----------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (3,347) 192
----------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (1,282) -
Cash and cash equivalents at beginning of period 2,669 -
----------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 1,387 $ -
----------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
Significant noncash investing and financing activities:
Preferred stock exchanged for common stock $ 38
Issuance of subordinated debt for interest payment 327
Additional paid in capital-stock compensation 380
Tax benefits related to stock options 110
Issuance of restricted stock 14
</TABLE>
See accompanying notes to unaudited condensed financial statements.
<PAGE>
PW EAGLE, INC.
--------------------------------------------------------------------------------
Notes to Condensed Financial Statements - Three and Six Months Ended June 30,
2000 and 1999 (Unaudited)
1. Presentation
On June 15, 2000, Eagle Pacific Industries, Inc., changed its name to
PW Eagle, Inc., ("the Company"). On June 19, 2000, the Company's stock began
trading on the NASDAQ National Market with the symbol PWEI.
In September 1999, Eagle Pacific Industries Inc., acquired Pacific
Western Extruded Plastics Company ("PWPipe") as described in Note 2. The
acquisition is included in the June 30, 2000, and December 31, 1999, balance
sheets and all operating results and cash flows have been included in the
statements of operations and cash flow since the acquisition.
In the opinion of management, the accompanying unaudited condensed
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position of the
Company at June 30, 2000, and the results of its operations for the three and
six month periods ended June 30, 2000 and 1999 and its cash flows for the six
month periods ended June 30, 2000 and 1999. Certain information and footnote
disclosures normally included in financial statements, prepared in accordance
with accounting principles generally accepted in the United States, have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. Although the Company's management believes that the
disclosures are adequate to make the information presented not misleading, it is
suggested that these condensed financial statements be read in conjunction with
the financial statements of the Company included with its annual report on Form
10-K for the year ended December 31, 1999.
Certain reclassifications have been made to the December 31, 1999
condensed balance sheet to conform to the June 30, 2000 presentation. Such
reclassifications have no effect on net income or stockholders' equity as
previously stated.
2. Acquisition
Effective as of September 16, 1999, the Company acquired all of the
outstanding capital stock of PWPipe, a manufacturer of PVC pipe and fittings.
PWPipe was merged into the Company. The acquisition has been accounted for as a
purchase and, accordingly, the results of operations of PWPipe for the period
subsequent to the consummation of the acquisition are included in the
accompanying financial statements.
The following unaudited pro forma income statement information has been
prepared assuming that the acquisition took place on January 1, 1998, consistent
with pro forma information included in the notes to the Company's 1999 financial
statements included in its Form 10-K for the fiscal year ended December 31,
1999. This information assumes the benefit from net operating loss carryforwards
is applied to the purchase price on January 1, 1998, and is not included in net
income. In addition, pro forma income is taxed at a rate of 38%.
<PAGE>
Unaudited Pro Forma Statements of Operations Information (In thousands, except
per share amounts):
<TABLE>
<CAPTION>
Three months ended Six months ended
June 30, 1999 June 30, 1999
-----------------------------------------------------
<S> <C> <C>
Net sales $77,212 $137,859
Net income $ 4,247 $ 5,677
Basic earning per share $ .57 $ .79
Diluted earnings per share $ .44 $ .59
</TABLE>
Included in the unaudited historical and pro forma 1999 net income and
earnings per share information are certain nonrecurring charges associated with
a proposed acquisition terminated in the first quarter of 1999. These
nonrecurring items reduce historical and pro forma net income by approximately
$800,000 for the six months ending June 30, 1999. Absent these nonrecurring
charges, pro forma basic and diluted earnings per share for the six months ended
June 30, 1999 would be approximately $.90 and $.67, respectively.
The unaudited pro forma income statement information has been prepared
for informational purposes only and may not be indicative of the operating
results that actually would have resulted had the acquisition been made on
January 1, 1998, or of the operating results that may occur in the future.
3. Balance Sheet Information
Inventories at June 30, 2000 and December 31, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
----------------------------------------------
<S> <C> <C>
Raw materials $12,230 $11,795
Finished goods 51,982 33,982
----------------------------------------------
$64,212 $45,777
==============================================
</TABLE>
Other assets at June 30, 2000 and December 31,1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
----------------------------------------------
<S> <C> <C>
Deferred financing costs, net $ 4,532 $ 5,300
Land held for sale 1,006 1,346
Goodwill, less accumulated amortization of $649 and $593,
respectively 3,819 3,874
Deferred income taxes 705 4,901
Other 2,690 146
----------------------------------------------
$12,752 $15,567
==============================================
</TABLE>
<PAGE>
4. Earnings per Common Share
The following shows the determination of income for the calculation of
the earnings per share (in thousands):
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 30
2000 1999 2000 1999
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $13,199 $4,004 $22,365 $4,334
Less preferred stock dividends - 200 - 401
--------------------------------------------------------------------------
Income available for common
stockholders, basic 13,199 3,804 22,365 3,933
Preferred stock dividends - 200 - 401
--------------------------------------------------------------------------
Income available for common
Stockholders, diluted $13,199 $4,004 $22,365 $4,334
===========================================================================
</TABLE>
The following table shows the determination of the number of common and
common equivalent shares used in the earnings per share calculation (in
thousands):
<TABLE>
<CAPTION>
Three months ended June 30 Six months ended June 30
2000 1999 2000 1999
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Number of common shares, basic 7,763 7,015 7,674 6,868
Restricted stock 186 186
Shares issued on the assumed exercise
of stock options 794 248 759 319
Shares issued on the assumed exercise
of stock warrants 1,939 1,939
Shares issued on the assumed conversion
of preferred stock - 2,366 2,366
--------------------------------------------------------------------------
Number of common and common equivalent
shares, diluted 10,682 9,629 10,558 9,553
===========================================================================
</TABLE>
Options to purchase 354,275 shares of common stock were outstanding at
June 30, 1999, but were not included in the computation of diluted EPS because
the options exercise prices were greater than the average market price of the
common shares. Conversion of the 7% convertible preferred stock and the 8%
redeemable convertible preferred stock were not assumed at June 30, 1999, since
the conversion would have an antidilutive effect on the diluted earnings per
share calculation.
<PAGE>
5. Debt
On March 15, 2000, we amended our $50.0 million revolving credit
facility to $60.0 million to increase the funds available for the operation of
the Company. The revolving credit facility reverted to $50.0 million on June 16,
2000, to more appropriately reflect our requirements.
The fair market value of long term debt continues to approximate the
carrying value at June 30, 2000, as the applicable interest rates approximate
current market rates.
6. Equity
During the first quarter of 2000, all 18,750 shares of Series A
preferred stock were converted to a like number of shares of common stock.
7. Taxes
The income tax provisions for the six months ended June 30, 2000 and
1999 were calculated based on management's then-current estimates of the annual
effective rate for the year. The annual effective tax rate for 2000 reflects the
Company's statutory federal and applicable state tax rates, or approximately
38%.
As discussed more fully in the financial statements included in the
Company's 1999 Annual Report on Form 10-K, in the quarter ended June 30, 1999,
the Company reversed approximately $2.0 million of valuation allowance related
to the Company's deferred tax assets. The reversal was based on continuing
improvements in operating results influenced by the Company's added production
capacity, and other indications that certain concerns that had previously
limited management's expectation about future taxable income no longer applied.
Under accounting principles generally accepted in the United States, (a) the
portion of the decrease in valuation related to a change in estimate of future
years' income is a discrete event in the period the change in estimate occurred
and (b) the portion of the decrease in the valuation allowance related to a
change of estimate in current year income is recorded prospectively over the
remainder of the year through elimination of the valuation allowance and a
similar amount of the deferred tax asset as income is earned. Accordingly, the
Company's federal effective tax rate for the remainder of 1999, excluding the
discrete event described in the following sentence was zero. In addition, the
valuation allowance reversal of $2.0 million in the quarter ended June 30, 1999,
relates to the change in estimate of future years' income.
8. New Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 133 "Accounting
for Derivative Instruments and Hedging Activities" is effective for fiscal years
beginning after June 15, 2000. SFAS No. 133 requires a company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of the hedged
assets, liabilities, or firm commitments are recognized through earnings or in
other comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company believes implementation of SFAS No. 133 will
not have a material effect on earnings and the financial position of the
Company.
9. Litigation Matters
On July 21, 1999, Lamson & Sessions Co. ("Lamson") filed a complaint
against the Company in United States District Court for the Northern District of
Ohio, Eastern Division, to recover alleged damages incurred by Lamson in
<PAGE>
connection with the termination of the Company's proposed acquisition of
Lamson's PVC business. As set forth in the complaint, Lamson is seeking nearly
$1 million in fees and expenses, plus an undetermined amount of damages. The
Company has denied all of Lamson's claims. Although this matter is at an early
stage, the Company believes that the outcome of this litigation will not have a
material adverse effect on its financial position and future results of
operations.
On May 26, 2000, the Company received a $1.2 million settlement payment
for "lost profits or business-related economic harm" from an action brought by
the Company against certain responsible parties. This action was associated with
environmental contamination to the Company's Tacoma, Washington property that
resulted from releases occurring on adjacent property not owned by the Company.
This property was acquired as part of the September 16, 1999 acquisition of
PWPipe. Approximately $1 million of the settlement payment was, for financial
reporting purposes, recorded as a retroactive reduction to the September 16,
1999 acquisition price of PWPipe since this represented the resolution of a
preacquisition matter. The balance of the May 26, 2000 payment was recorded as
an offset to litigation costs incurred in fiscal 2000. The Company is not a
party to proposed clean-up plans currently being structured between the State of
Washington and the responsible parties.
10. Plant Acquisition
In April 2000, the Company announced that it had entered into
agreements to purchase a 41,000 square foot PVC pipe manufacturing facility in
Phoenix, Arizona, and certain related production equipment. The Company
anticipates closing to occur on July 31, 2000. Capital expenditures, including
funding the planned July 31, 2000 closing, as well as the procurement of
additional equipment are expected to total $13.0 million over the period
beginning in the second half of fiscal 2000 through fiscal 2001. The Company
intends to fund this expansion from operating profits, and, if needed, from the
Company's revolving credit line.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<TABLE>
PW EAGLE, INC.
----------------------------------------------------------------------------------------------------------------------
The following table sets forth items from our Statements of Operations as a
percentage of net sales:
<CAPTION>
Three months ended June 30 Six months ended June 30
---------------------------------------------------------------------------
2000 1999 2000 1999
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 65.7 74.5 66.9 73.5
Gross profit 34.3 25.5 33.1 26.5
Operating expenses 10.7 15.2 11.2 15.8
Operating income 23.6 10.3 21.9 10.7
Other expenses 3.6 1.5 3.7 5.1
Income before income taxes 20.0 8.8 18.2 5.6
Income tax expense (benefit) 7.6 (7.6) 7.0 (4.2)
Net income 12.4% 16.4% 11.2% 9.8%
</TABLE>
We posted record net sales for the three and six month periods ending
June 30, 2000, increasing 337% and 353%, respectively, compared to the same
periods in 1999. Our acquisition of PWPipe in September 1999, and increasing
pipe prices due to strong demand and increasing raw material prices were
responsible for the growth in revenues. Pipe pounds sold for the three and six
month periods ending June 30, 2000 rose 188% and 201%, respectively, compared to
the same periods in 1999. In addition, pipe prices for the three and six month
periods ending June 30, 2000 increased 52% and 50%, respectively, as compared to
the same periods in 1999.
Gross profits, as a percentage of net sales, increased for the three
and six month periods ending June 30, 2000, by 8.8% and 6.6%, respectively, as
compared to the same periods in 1999. The increase in gross profit is primarily
due to a combination of strong demand for pipe, rising resin and pipe prices,
and significant capacity and process improvement investments we made during the
past two years being deployed in 1999 and 2000. PVC prices increased due to a
strong demand for resin and increasing raw material costs, and strong demand for
pipe allowed us to increase pipe prices at a rate greater than resin price
increases. In addition, we continue to recognize synergies from the integration
of the Eagle Pacific and PWPipe businesses.
Operating expenses, as a percentage of net sales, decreased for the
three and six month periods ending June 30, 2000 by 4.5% and 4.6%, respectively,
compared to the same periods in 1999. The decrease in operating expenses is the
result of a strong focus on cost control, and increased sales in combination
with certain fixed operating expenses.
The income tax provisions for the six months ended June 30, 2000 and
1999 were calculated based on management's then-current estimates of the annual
effective rate for the year. The annual effective tax rate for 2000 reflects the
Company's statutory federal and applicable state tax rates, or approximately
38%.
As discussed more fully in the financial statements included in the
Company's 1999 Annual Report on Form 10-K, in the quarter ended June 30, 1999,
the Company reversed approximately $2.0 million of valuation allowance related
to the Company's deferred tax assets. The reversal was based on continuing
improvements in operating results influenced by the Company's added production
capacity, and other indications that certain concerns that had previously
limited management's expectation about future taxable income no longer applied.
Under accounting principles generally accepted in the United States, (a) the
portion of the decrease in valuation related to a change in estimate of future
years' income is a discrete event in the period the change in estimate occurred
and (b) the portion of the decrease in the valuation allowance related to a
change of estimate in current year income is recorded prospectively over the
remainder of the year through elimination of the valuation allowance and a
similar amount of the deferred tax asset as income is earned. Accordingly, the
Company's federal effective tax rate for the remainder of 1999, excluding the
discrete event described in the following sentence was zero. In addition, the
<PAGE>
valuation allowance reversal of $2.0 million in the quarter ended June 30, 1999,
relates to the change in estimate of future years' income.
Supplemental Discussion and Analysis of Pro Forma Results of Operations
The following is supplemental discussion and analysis of our pro forma
results of operations for the three month and six month periods ending June 30,
1999, compared with the actual results of operations for the three and six month
periods ended June 30, 2000, assuming that the acquisition took place on January
1, 1998, consistent with pro forma information included in the notes to the
Company's 1999 financial statements included in its Form 10-K for the fiscal
year ended December 31, 1999. The pro forma results may not be indicative of
results that actually would have occurred had the acquisition taken place at the
beginning of the period presented or of results which may occur in the future.
The following table sets forth our selected pro forma operating
statement data for the three and six months ended June 30, 1999 compared to
actual results for the comparable periods in 2000:
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three months ended June 30
--------------------------------------------------------------------------
Amounts Percentages
--------------------------------------------------------------------------
2000 1999 2000 1999
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $106,748 $77,212 100.0% 100.0%
Cost of goods sold 70,087 56,746 65.7 73.5
Gross profit 36,661 20,466 34.3 26.5
Operating expenses 11,516 10,904 10.7 14.1
Operating income 25,145 9,562 23.6 12.4
Interest expense 3,639 2,834 3.4 3.7
Other 117 (122) .2 (0.2)
Income before income taxes 21,389 6,850 20.0 8.9
Income tax expense 8,190 2,603 7.6 3.4
Net income $13,199 $4,247 12.4% 5.5%
EBITDA $27,075 $11,523 25.4% 14.9%
Earnings per share
Basic $1.70 $.57
Diluted $1.24 $.44
Weighted average common and common
equivalent shares outstanding
Basic 7,763 7,348
Diluted 10,682 9,712
</TABLE>
<TABLE>
<CAPTION>
Six months ended June 30
--------------------------------------------------------------------------
Amounts Percentages
--------------------------------------------------------------------------
2000 1999 2000 1999
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $199,347 $137,859 100.0% 100.0%
Cost of goods sold 133,374 101,163 66.9 73.4
Gross profit 65,973 36,696 33.1 26.6
Operating expenses 22,383 20,111 11.2 14.6
Operating income 43,590 16,585 21.9 12.0
<PAGE>
Interest expense 7,291 6,142 3.7 4.5
Other 54 1,286 - 0.9
Income before income taxes 36,245 9,157 18.2 6.6
Income tax expense 13,880 3,480 7.0 2.5
Net income $ 22,365 $ 5,677 11.2% 4.1%
EBITDA $ 47,551 $ 18,963 23.9% 13.8%
Earnings per share
Basic $ 2.91 $ .79
Diluted $ 2.12 $ .59
Weighted average common and common
equivalent shares outstanding
Basic 7,674 7,201
Diluted 10,558 9,636
</TABLE>
The principal factors underlying the changes and trends set forth above
in the pro forma and actual results of operations information are consistent
with our historical operation information discussed earlier in this section,
with the exception of the decrease in pounds sold during the three and six month
periods ending June 30, 2000 of 15% and 9%, respectively, as compared to the
same periods in 1999 on a pro forma basis. This decrease is primarily a result
of adverse weather conditions that occurred during the late winter in the
western United States that inhibited many contractors' ability to install pipe,
inventory corrections by pipe distributors, and, we believe, rising interest
rates that have inhibited housing starts and some major construction projects.
This decrease in sales is primarily restricted to the potable water and sewer
market. However, selling prices have increased due to increases in the price of
PVC resin and strong demand for finished goods over the last twelve months. In
addition, we have realized the result of significant capacity and process
improvement investments made by both PWPipe and Eagle Pacific Industries, Inc.
over the last two years being deployed in 1999 and 2000.
"EBITDA" represents income before interest, taxes, depreciation and
amortization. EBITDA, as a percentage of net sales increased for the three and
six month periods ending June 30, 2000 by 10.5% and 10.1%, respectively,
compared to the pro forma results for the same periods in 1999. Historical
EBITDA for the three and six month periods ending June 30, 1999 was $3,233 and
$4,698, respectively.
The pro forma results of operations reflect pro forma interest expense
at rates that approximate that which we would have experienced on pro forma debt
levels that would have been outstanding over the pro forma period. The pro forma
results do not reflect any anticipated cost savings or any synergies that are
anticipated from our acquisition of PWPipe, and there can be no assurance that
any such cost savings will occur.
Had our acquisition been consummated on January 1, 1998, we believe the
valuation allowances related to deferred tax assets for our net operating loss
carryforwards would have been decreased at that date as part of the purchase
accounting for the acquisition. Accordingly, the pro forma results of operations
reflect a consistent pro forma overall effective income tax rate of 38%.
Included in the unaudited historical and pro forma six month period
ended June 30, 1999 net income and earnings per share information is a
nonrecurring charge related to the termination of a proposed acquisition during
the first quarter of 1999. This nonrecurring item reduces historical and pro
forma net income by approximately $800,000. Absent these nonrecurring charges,
pro forma basic and diluted earnings per share would be approximately $.90 and
$.67, respectively, for the six months ending June 30, 1999.
<PAGE>
Financial Condition
We had working capital of $28.8 million at June 30, 2000, and had
excess borrowing capacity under our revolving credit facility of $19.2 million.
Cash generated by operating activities was $3.6 million in the first
six months of 2000 compared to $1.0 million in 1999. The $3.6 million cash
generated by operations is net of $30.0 million of cash used in operating
activities primarily to fund the growth in accounts receivable, as a result of
increased sales, and growth of inventories.
We used $1.5 million and $1.2 million for investing activities for the
six months ended June 30, 2000 and 1999, respectively. The primary use of cash
in 2000 and 1999 was capital expenditures.
Financing activities used cash of $3.3 million in 2000, and provided
$.2 million in 1999 for the six months ended June 30, 2000 and 1999,
respectively. The increase of cash used in 2000 is a direct result of increased
borrowings under the revolving credit facility to fund working capital needs
associated with growth.
We had commitments for capital expenditures of approximately $2.2
million at June 30, 2000, which are expected to be funded from operating
profits. This excludes planned expenditures associated with our acquisition and
expansion of a manufacturing facility located in Phoenix, as discussed in the
following paragraph. Additional sources of liquidity, if needed to fund capital
expenditures, include our revolving credit line, additional long-term debt
financing and the sale of our equity securities under either a private or public
offering. We believe we have the financial resources needed to meet our current
and future business requirements, including capital expenditures for expanding
manufacturing capacity and working capital requirements.
On April 6, 2000, we announced the signing of purchase agreements to
acquire a 41,000 square foot PVC pipe manufacturing facility in Phoenix, Arizona
and certain related production equipment located in the facility from Uponor ETI
(Uponor). The acquisition is expected to close on July 31, 2000. Uponor had
previously announced its intention to sell the facility in conjunction with
capacity additions in its other facilities. We have long been active in the
Phoenix market, servicing it primarily from our facilities in southern
California. The acquisition of this facility will enable us to better serve our
customers throughout the Southwest. While the volume for 2000 will not be
significant, we expect the production from the Phoenix facility will grow to
approximately 65 million pounds to match that of our other facilities. Total
capital expenditures, including funding the planned July 31, 2000 closing, as
well as the procurement of additional equipment are expected to total $13.0
million, over the period beginning in the second half of fiscal 2000 through
fiscal 2001. We intend to fund this expansion from operating profits, and, if
needed, our revolving credit line.
Outlook
The statements contained above and set forth below in this Outlook
section are based on our current expectations. These statements are
forward-looking, and actual results may differ materially from our current
expectations.
We continue to experience strong demand for our electrical,
telecommunications and irrigation products, but during the last six months there
has been a softening of demand for our potable water and sewer products. We
believe that our industry is becoming more rational and is less likely to
experience the large cyclical swings that it has experienced in the past. In
addition, our long-term strategy of having both geographical and product line
diversity should also moderate the cyclical swings. Our belief is based in part
on the results of the last six months. Although the demand for waterworks
<PAGE>
products has softened, the price has not seen the large fluctuations that we
have experienced historically. In addition, the strength of the electrical and
telecommunications product lines has more than offset the softness in the
waterworks marketplace.
We expect the demand for plastic pipe to grow as acceptance of plastic
pipe over metal pipe continues and the overall economy continues to grow.
Industry growth projections call for sales growth rates for plastic pipe of
three percent or greater per year through 2003. We have historically been, and
expect in the future to be, able to grow at rates in excess of the industry
averages, due to our emphasis on customer satisfaction and product quality. Our
strategy has been, and continues to be, to concentrate growth initiatives in
higher profit products and geographic regions.
Our gross margin percentage is sensitive to PVC and PE raw material
resin prices and the demand for PVC and PE pipe. Historically when resin prices
are rising or stable, our margins and sales volume have been higher. Conversely,
when resin prices are falling, our sales volumes and margins have been lower.
Gross margins also suffer when the supply of PVC and PE pipe increases faster
than demand. We believe that supply and demand in the plastic pipe industry is
currently balanced. Industry experts are not predicting any significant
increases or decreases in resin prices for the balance of the year.
Consequently, absent a slowdown in the economy that impacts our industry, we
would expect to experience generally stable prices for our products and strong
results for the balance of 2000.
Due to the commodity nature of PVC resin and PVC pipe and the dynamic
supply and demand factors worldwide, historically the markets for both PVC resin
and PVC pipe have been very cyclical with significant fluctuations in prices and
gross margins. Generally, after a period of rising or stable prices, capacity
has increased to exceed demand with a resulting decrease in prices and gross
margins. Over the last ten years, there have been consolidations in both
markets, particularly with respect to PVC resin manufacturers. During the same
period, the capacity of the PVC resin producers has increased from just over
nine billion pounds to almost 16 billion pounds today. Published PVC resin
prices have fluctuated from a high of about $.44 per pound in 1988 to about $.26
per pound in 1992 to almost $.40 per pound in 1995 to a low of about $.25 per
pound in 1999 to about $.40 per pound at the end of June 2000. Except for
incremental capacity increases at existing facilities, the only announced new
PVC resin capacity in the industry is a new 1.3 billion pound facility scheduled
to commence operations in 2001.
While we expect the demand for PVC pipe to continue to increase over
the long term, we also expect that the industry will continue to be subject to
cyclical fluctuations and times when supply will exceed demand driving prices
and gross margins down. These conditions could result from a general economic
slowdown either domestically or elsewhere in the world or capacity increases in
either the PVC resin or PVC pipe markets. As a result of the size of both the
PVC resin and PVC pipe markets, and the consolidation that has occurred in these
industries, we believe that fluctuations in prices from capacity increases are
likely to be less extreme than they have been historically. General economic
conditions both in the United States and abroad will, however, continue to have
a significant impact on our prices and gross margins.
For financial reporting purposes, the Company's cumulative deferred tax
asset recorded in prior years totaling approximately $13.5 million associated
with net operating loss carryforwards, has been fully utilized, including
approximately $4.0 million in the first half of fiscal 2000. We have, and will
continue to, evaluate tax reporting compliance relating to the past and fiscal
2000 utilization of the net operating loss carryforwards, and believe we have
complied in all respects. A failure to meet the requirements could result in a
loss or limitation of the utilization of carryforwards, which could have a
material adverse effect on our financial position and results of operations in
future periods.
The statements contained in this Outlook section are forward looking
statements that involve a number of risks and uncertainties. Some of the factors
that could cause actual results to differ materially include, but are not
limited to, raw material cost and supply fluctuations, inflation, lower than
expected economic growth, competition, availability of working capital and
adverse weather conditions.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to certain market risks on outstanding interest rate
long-term debt obligations totaling $53 million of our $74 million of long-term
variable rate debt at June 30, 2000. Market risk is the potential loss arising
from adverse changes in market rates and prices, such as interest rates. Market
risk is estimated as the potential increase in fair value resulting from a
hypothetical one percent increase in interest rates, which would result in an
annual interest expense increase of approximately $530,000.
We do not enter into derivatives or other financial instruments for
trading or speculative purposes. We only enter into financial instruments to
manage and reduce the impact of changes in interest on our credit facility. In
November 1999, under covenants of our senior credit facility, we entered into a
fixed rate agreement for three years with a LIBOR rate of 6.46%. The contract
has a notional amount of $21.3 million.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On July 21, 1999, Lamson & Sessions Co. filed a complaint against the
Company in United States District Court for the Northern District of Ohio,
Eastern Division to recover alleged damages incurred by Lamson in connection
with the termination of the Company's proposed acquisition of Lamson's PVC
business. As set forth in the complaint, Lamson is seeking nearly $1 million in
fees and expenses, plus an undetermined amount of damages. The Company has
denied all of Lamson's claims. Although this matter is at an early stage, the
Company believes that the outcome of this litigation will not have a material
adverse effect on its financial position and future results of operations.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's shareholders was held on April 27,
2000. The following proposals were approved:
(a) The number of directors for the ensuing year was set at five by a
vote of 7,058,316 shares in favor, with 91,449 shares against and 14,099 shares
abstaining.
(b) Harry W. Spell was elected a Class III director to serve until the
2003 Annual Meeting of Shareholders with 7,138,159 shares voted in favor and
25,705 votes withheld. Other directors whose term of office as a director
continued after the meeting are: George R. Long, Richard W. Perkins, Bruce A.
Richard and William H. Spell.
(c) A 547,000 share increase in the number of shares reserved for grant
under the Company's 1997 Stock Option Plan was approved by a vote of 4,482,139
shares in favor, with 248,021 shares against, 32,629 shares abstaining and
2,401,075 shares represented by broker nonvotes.
<PAGE>
(d) An amendment to the Company's Articles of Incorporation to change
the Company's name to "PW Eagle, Inc." was approved by a vote of 7,065,380
shares in favor, with 66,971 shares against and 31,513 shares abstaining.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit Number Description
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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.
PW Eagle, Inc.
By /s/ William H. Spell
---------------------------------------------------------------
William H. Spell
Chief Executive Officer
By /s/ Roger R. Robb
---------------------------------------------------------------
Roger R. Robb
Chief Financial Officer
(Principal Financial and Accounting Officer)
Dated: July 31, 2000
<PAGE>
EXHIBIT INDEX
PW Eagle, Inc.
Form 10-Q for Quarter Ended June 30, 2000
Exhibit Number Description
27 Financial Data Schedule
