UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1997
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15D OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________________ to ____________________.
Commission File Number: 0-23242
WEBCO INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1097133
(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
9101 West 21st Street, SAND SPRINGS, OKLAHOMA 74063
(Address of principal executive offices) (Zip Code)
(918) 241-1000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(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.
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to distribution of securities under a plan
confirmed by a court.
NOT APPLICABLE [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date: 6,339,000 shares of Common
Stock, $0.01 par value, as of December 1, 1997.
<PAGE>
WEBCO INDUSTRIES, INC.
TABLE OF CONTENTS
Page
Number
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Balance Sheets 3
Statements of Income 4
Statements of Cash Flows 5
Notes to Unaudited Financial Statements 6
Report of Review by Independent
Accountants 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 8-10
PART II OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of
Security Holders 11
Item 5. Other Information 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
<PAGE>
<TABLE>
WEBCO INDUSTRIES, INC.
BALANCE SHEETS
(Dollars in thousands, except share amounts and par value)
(Unaudited)
<CAPTION>
October 31, July 31,
ASSETS 1997 1997
<S> <C> <C>
Current assets:
Cash $ 556 $ 466
Accounts receivable, net 17,922 17,159
Inventories 27,567 26,982
Prepaid expenses 212 268
Deferred income tax asset 1,193 1,460
Total current assets 47,450 46,335
Property, plant and equipment:
Land 1,436 1,436
Buildings and improvements 11,477 11,448
Machinery and equipment 53,472 53,305
Furniture and fixtures 2,818 2,628
Construction in progress 6,721 4,896
Less accumulated depreciation and amortization (25,728) (24,972)
Net property, plant and equipment 50,196 48,741
Notes receivable from related parties 1,620 1,582
Other assets, net 1,580 1,526
Total assets $ 100,846 $ 98,184
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 9,546 $ 11,264
Accrued liabilities 3,983 3,800
Current portion of long-term debt 121 121
Total current liabilities 13,650 15,185
Long-term debt 37,720 34,108
Deferred income tax liability 6,821 6,764
Contingencies (Note 3) - -
Stockholders' equity:
Common stock, $.01 par value, 12,000,000 shares
authorized, 6,339,000 shares issued and outstanding 63 63
Additional paid-in capital 35,944 35,944
Retained earnings 6,648 6,120
------- -------
42,655 42,127
Total liabilities and stockholders' equity $ 100,846 $ 98,184
<FN>
See accompanying notes to unaudited financial statements.
</TABLE>
<PAGE>
<TABLE>
WEBCO INDUSTRIES, INC.
STATEMENTS OF INCOME
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended
October 31,
1997 1996
<S> <C> <C>
Net sales $ 31,543 $ 28,444
Cost of sales 27,160 24,668
Gross profit 4,383 3,776
Selling, general and administrative expenses 2,911 2,308
Income from operations 1,472 1,468
Interest expense 620 505
Income before income taxes 852 963
Provision for deferred income tax expense 324 366
Net income $ 528 $ 597
Net income per common share $ .08 $ .09
Weighted average common shares outstanding
and dilutive common stock equivalents 6,401 6,339
<FN>
See accompanying notes to unaudited financial statements.
</TABLE>
<PAGE>
<TABLE>
WEBCO INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<CAPTION>
Three Months Ended
October 31,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net income $ 528 $ 597
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 835 712
Loss on disposition of property,
plant and equipment 10 13
Deferred tax expense 324 366
(Increase) decrease in:
Accounts receivable (763) (1,318)
Inventories (585) (1,902)
Prepaid expenses 56 (189)
Increase (decrease) in:
Accounts payable (1,035) 734
Accrued liabilities 183 73
Net cash used in operating activities (447) (914)
Cash flows from investing activities:
Capital expenditures (2,351) (1,141)
Proceeds from sale of property, plant and equipment - 4
Advances to stockholder (38) (1,132)
Repayments of stockholder advances - 26
Other (102) (13)
Net cash used in investing activities (2,491) (2,256)
Cash flows from financing activities:
Proceeds from long-term debt 34,675 30,525
Principal payments on long-term debt (31,063) (27,982)
Increase (decrease) in book overdrafts (584) 648
Net cash provided by financing activities 3,028 3,191
Net change in cash 90 21
Cash, beginning of period 466 508
Cash, end of period $ 556 $ 529
<FN>
See accompanying notes to unaudited financial statements.
</TABLE>
<PAGE>
WEBCO INDUSTRIES, INC.
Notes to Unaudited Financial Statements
Note 1 - General
The accompanying unaudited condensed financial statements of Webco
Industries, Inc. (the "Company") include, in the opinion of management, all
adjustments (which are of a normal recurring nature) necessary for a fair
presentation of financial position at October 31, 1997 and results of
operations for the three months ended October 31, 1997 and October 31, 1996,
and cash flows for the three months ended October 31, 1997 and October 31,
1996. Results for the three months ended October 31, 1997 are not necessarily
indicative of results which will be realized for the full fiscal year. The
year-end balance sheet was derived from the audited financial statements but
does not include all disclosures required by generally accepted accounting
principles. The unaudited condensed financial statements should be read in
conjunction with the audited financial statements and related notes thereto
for the year ended July 31, 1997, included in the Company's Form 10-K for the
year ended July 31, 1997.
Note 2 - Inventory
In fiscal 1997, the Company changed its method of accounting for inventory
from the Last-In First-Out ("LIFO") method to the weighted average cost method.
Accordingly, the prior year financial statements have been retroactively
restated for this accounting change. The reader should refer to the Company's
1997 Form 10-K for additional information regarding this matter.
At October 31, 1997 and July 31, 1997, the components of inventory were
as follows:
October 31, 1997 July 31, 1997
Raw materials $17,897,000 $18,666,000
Work-in-process 2,362,000 2,159,000
Finished goods 6,134,000 4,947,000
Maintenance parts
and supplies 1,174,000 1,210,000
Total inventories $27,567,000 $26,982,000
Note 3 - Contingencies
The Company has been identified as a potentially responsible party in the
cleanup of two EPA Superfund cleanup sites. At October 31, 1997 the Company
estimates its remaining potential liability for remediation of the waste
disposal sites and legal costs, related to the Superfund's oversight body, to
be approximately $246,000 which has been recorded as an accrued liability.
In addition, the Company is a party to various other lawsuits and claims
arising in the ordinary course of business. Management, after review and
consultation with legal counsel, considers that any liability resulting from
these matters would not materially affect the results of operations or the
financial position of the Company.
The reader should refer to the Company's 1997 Form 10-K: Part I, Item 3 "Legal
Proceedings" for additional information regarding these matters.
<PAGE>
<AUDIT-REPORT>
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Stockholders
Webco Industries, Inc.
We have reviewed the accompanying condensed balance sheet of Webco
Industries, Inc. as of October 31, 1997, and the related condensed statements
of income for the three-month periods ended October 31, 1997 and 1996 and cash
flows for the three-month periods ended October 31, 1997 and 1996. These
financial statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet as of July 31, 1997, and the related statements
of operations, stockholders' equity and cash flows for the year then ended
(not presented herein); and in our report dated September 18, 1997, we
expressed an unqualified opinion on those financial statements. In our
opinion, the information set forth in the accompanying condensed balance sheet
as of July 31, 1997 is fairly stated in all material respects in relation to
the balance sheet from which it has been derived.
COOPERS & LYBRAND L.L.P.
Tulsa, Oklahoma
November 24, 1997
</AUDIT-REPORT>
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Webco Industries, Inc. ("Webco" or the "Company"), an Oklahoma corporation
founded in 1969 by F. William Weber, chairman of the board and chief executive
officer, is a specialty manufacturer of high-quality carbon steel tubing and
stainless steel tubing and pipe designed to industry and customer
specifications. Based on the Company's knowledge of the specialty tube
industry, management believes that Webco is the domestic market leader in the
manufacture of welded carbon heat exchanger tubing and welded carbon boiler
tubing, and the leading supplier of stainless tubing for the high efficiency
residential furnace market. Commencing in fiscal 1996, the Company
manufactures and markets, through its QuikWater division, a patented direct
contact water heater with unique environmental and energy saving advantages for
a wide variety of end use markets. The Company's products are delivered from
its three production facilities in Oklahoma and Pennsylvania and from two
distribution facilities in Oklahoma and Texas to more than 800 customers
located primarily in the continental United States, southern Canada, and
northern Mexico.
Results of Operations for the Three Months Ended October 31, 1997 Compared to
the Three Months Ended October 31, 1996
Net sales for the quarter ended October 31, 1997 were $31,543,000, a 10.9%
increase over the $28,444,000 for the same quarter last year. This is the
result of an 11.7% increase in the current quarter in the tonnage of tubing
sold as compared to the same period last year. This increase is a reflection
of improved market penetration in the mechanical and stainless markets. The
increase in tonnage sold was slightly offset by a decrease of .8% in the
average net sales price per ton of tubing sold. The decrease in average net
sales price per ton reflects an increase in the volume of mechanical tube
products in the sales mix and a decrease in stainless pipe prices, which
was partially off-set by an increase in the average net sales price per ton
in other stainless products.
Gross profit for the period was $4,383,000, an increase of 16.1% as
compared to $3,776,000 for the same quarter of fiscal 1996. Expressed as
a percentage of net sales, gross profit increased to 13.9% for the first
quarter of fiscal 1998 from 13.3% for the same period last year. The increase
in gross profit percentage is attributable to a decrease in the total cost
per ton of tubing sold of 1.9% generated by decreases in both the average
cost per ton of steel sheet coils and the average cost per ton to manufacture.
This was partially offset by a furnace relining project which interrupted
production at the Company's Sand Springs facility for more than a week, and by
the .8% decrease in the average net sales price per ton of tubing sold.
Selling, general and administrative expenses were $2,911,000 for the first
quarter of fiscal 1998 compared to $2,308,000 for the same quarter of fiscal
1997. During the first quarter of fiscal 1997, selling, general and
administrative expenses were partially offset by a $225,000 insurance recovery
on an EPA related claim. Other factors in fiscal 1998 contributing to the
change include an $86,000 increase in commissions generated by the increase in
net sales and a $91,000 increase in marketing costs associated with QuikWater.
<PAGE>
Income from operations for the current quarter increased slightly to
$1,472,000 (4.7% of net sales) as compared to $1,468,000 (5.2% of net sales)
for the same quarter last year. The decrease in the percentage of net sales is
primarily attributable to the increase in selling, general and administrative
expenses noted above.
Interest expense for the current period was $620,000 ($706,000 prior to
interest capitalization) as compared to interest expense of $505,000 ($577,000
prior to interest capitalization) for the same quarter last year. The increase
in interest prior to interest capitalization is the result of the average level
of debt under the bank Loan and Security Agreement for the three months ended
October 31, 1997 being $33.9 million as compared to $22.6 million for the same
period last year. The average interest rate decreased from 8.88% in the first
quarter of fiscal 1997 to 7.67% in the first quarter of fiscal 1998.
The recorded income tax expense for the quarter ended October 31, 1997 is
based upon the estimated annual effective federal and state income tax rates.
The after-tax loss attributable to QuikWater in the first quarter of
fiscal 1998 was $280,000 compared with $145,000 for fiscal 1997, or $0.04 and
$0.02 per share, respectively.
Liquidity and Capital Resources
Net cash used in operations was $447,000 for the three months ended
October 31, 1997 versus $914,000 for the three-month period ended October 31,
1996. While receivables and inventories increased during the current quarter by
$1,348,000 as a result of continued increases in sales volumes, this was at a
slower rate than during the same period last year, which increased by
$3,220,000. This quarter to quarter difference was partially offset by a
decrease in accounts payable of $1,035,000 during the current quarter as
compared to an increase of $734,000 for the same period last year.
Net cash used in investing activities for the three months ended
October 31, 1997 was $2,491,000, which was $235,000 greater than the $2,256,000
used in investing activities during the same period in fiscal 1997. Capital
expenditures made during the current period related to continued progress with
the expansion of the stainless facility, completion of the building renovation
of the facility under lease to house the Company's corporate headquarters, as
well as other projects which are expected to increase capacity and improve
productivity.
As of October 31, 1997, the Company had $7.5 million available under its
$20 million line of credit and a long-term debt-to-equity ratio of 88%. Net
borrowings under the line of credit of $3.6 million for the three months ended
October 31, 1997 were used primarily for capital projects, to support increased
levels of inventory and accounts receivable, and to reduce accounts payable.
Over the next two years, the Company will be acquiring, developing and
installing significant financial and operational computer systems. These new
systems are currently expected to replace substantially all of the Company's
existing systems and will be designed to be year 2000 compliant.
<PAGE>
Management believes that credit line availability and cash flow from
operations will provide the Company with adequate capital to fund its
currently anticipated operations and future growth, including capital
expenditures for at least the next two years. The Company expects long-term
needs to continue to be satisfied through borrowings from commercial lenders.
Forward Looking Statements
Certain statements in this Form 10-Q constitute "forward looking"
statements within the Company's interpretation of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other important factors that could cause
the actual results, performance or achievements of the Company, or industry
results, to differ materially from any future results, performance or
achievements expressed or implied herein. Such risks, uncertainties and
factors include, among others: general economic and business conditions,
interest rate fluctuations, the Company's ability to access capital markets,
industry capacity, industry trends, competition, raw material costs and
availability, the loss of any significant customers, the successful
implementation of business strategies, availability of qualified personnel,
and changes in, or the failure or inability to comply with government
regulations.
Impact of New Financial Accounting Pronouncements
In February 1997 the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" and No. 129, "Disclosure of Information About
Capital Structure". Statement No. 128 specifies the computation, presentation,
and disclosure requirements for earnings per share and is substantially similar
to the standard recently issued by the International Accounting Standards
Committee. Statement No. 129 consolidates the existing requirements to
disclose certain information about an entity's capital structure. Both
statements are effective for financial statements issued for periods ending
after December 15, 1997. Based on the Company's present capital structure and
common stock equivalents (stock options), the Company does not believe that the
implementation of these new standards will have a material impact on its
financial statements.
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been identified as a potentially responsible party in the
cleanup of two EPA Superfund cleanup sites. At October 31, 1997 the Company
estimates its remaining potential liability for remediation of the waste
disposal sites and legal costs to be approximately $246,000, which has been
recorded as an accrued liability.
In August 1997, the Company filed an action, Webco Industries, Inc. vs.
Thermatool Corporation and Alpha Industries, Inc., relating to certain cut-off
equipment sold to the Company and installed on Mill 3, which did not perform to
manufacturer specifications. The case, filed in the United States District
Court for the Northern District of Oklahoma (Case No. 97-CV-708H(W)), seeks
recoveries including, but not limited to, the cost of the equipment, lost
profits, lost market share and other damages suffered by the Company. There
can be no assurance that the Company will prevail in all or in part of its
action, or that if successful, any recoveries will be commensurate with the
damages suffered by the Company.
In addition, the Company is a party to various other lawsuits and claims
arising in the ordinary course of business. Management, after review and
consultation with legal counsel, considers that any liability resulting from
these matters would not materially affect the results of operations or the
financial position of the Company.
The reader should refer to the Company's 1997 10-K: Part I, Item 3: "Legal
Proceedings" for additional information regarding these matters.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 15: Letter Regarding Unaudited Interim Financial
Information
B. Reports on Form 8-K
None
<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.
WEBCO INDUSTRIES, INC.
December 5, 1997 /s/F. William Weber
F. William Weber
Chairman
Chief Executive Officer
Director
December 5, 1997 /s/Dana S Weber
Dana S. Weber
President
Chief Operating Officer
Director
December 5, 1997 /s/Michael P. Howard
Michael P. Howard
Treasurer
Chief Financial Officer
Vice President of Finance and Administration
<PAGE>
EXHIBIT 15
WEBCO INDUSTRIES, INC.
LETTER REGARDING UNAUDITED INTERIM FINANCIAL INFORMATION
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Webco Industries, Inc.
Registration on Form S-3
We are aware that our report dated November 24, 1997 on our review of the
interim financial information of Webco Industries, Inc. for the periods ended
October 31, 1997 and 1996, and included in this Form 10-Q is incorporated by
reference in the Company's registration statement on Form S-3 (File no.
333-22779). Pursuant to Rule 436(c) under the Securities Act of 1933, this
report should not be considered a part of the registration statement prepared
or certified by us within the meaning of Sections 7 and 11 of that Act.
Coopers & Lybrand L.L.P.
Tulsa, Oklahoma
December 4, 1997
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1998
<PERIOD-END> OCT-31-1997
<CASH> 556
<SECURITIES> 0
<RECEIVABLES> 17922
<ALLOWANCES> 0
<INVENTORY> 27567
<CURRENT-ASSETS> 47450
<PP&E> 75924
<DEPRECIATION> 25728
<TOTAL-ASSETS> 100846
<CURRENT-LIABILITIES> 13650
<BONDS> 37720
0
0
<COMMON> 63
<OTHER-SE> 42592
<TOTAL-LIABILITY-AND-EQUITY> 100846
<SALES> 31543
<TOTAL-REVENUES> 31543
<CGS> 27160
<TOTAL-COSTS> 27160
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 620
<INCOME-PRETAX> 852
<INCOME-TAX> 324
<INCOME-CONTINUING> 528
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 528
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>