See accompanying notes to unaudited consolidated financial statements.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three Months Ended
October 31,
2000 1999
Cash flows from operating activities:
Net income (loss) $ (1,153) $ 66
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Depreciation and amortization 1,467 1,448
(Gain) loss on disposition of
property, plant and equipment (3) 33
Deferred tax expense (benefit) (766) 51
(Increase) decrease in:
Accounts receivable (998) (832)
Inventories (1,137) (3,442)
Prepaid expenses (107) (157)
Increase (decrease) in:
Accounts payable 183 (3,651)
Accrued liabilities 710 430
Net cash used in operating activities (1,804) (6,054)
Cash flows from investing activities:
Capital expenditures (2,765) (3,385)
Proceeds from sale of property, plant and equipment 6 21
Advances to stockholders (11) -
Other (2) (804)
Net cash used in investing activities (2,772) (4,168)
Cash flows from financing activities:
Proceeds from long-term debt 36,719 32,912
Principal payments on long-term debt (32,984) (26,568)
Increase (decrease) in book overdrafts (156) 3,927
Net cash provided by financing activities 3,579 10,271
Net increase (decrease) in cash (997) 49
Cash, beginning of period 1,633 180
Cash, end of period $ 636 $ 229
====== ======
See accompanying notes to unaudited consolidated financial statements.
Note 1 - General
The accompanying unaudited consolidated financial statements include the
accounts of Webco Industries, Inc. ("Webco" or together with its subsidiary,
the "Company") and its wholly owned subsidiary Phillips & Johnston, Inc. ("P&J"),
a Chicago based sales organization and value-added processor of tubular products.
All significant intercompany accounts and transactions have been eliminated in
the accompanying financial statements.
The financial statements 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, 2000, and results of operations and cash flows
for the three months ended October 31, 2000 and October 31, 1999. Results for
the three months ended October 31, 2000 are not necessarily indicative of results
that will be realized for the full fiscal year. The year-end balance sheet was
derived from the audited consolidated financial statements, but does not include
all disclosures required by generally accepted accounting principles. The
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and related notes which can be
found in the Company's Form 10-K for the year ended July 31, 2000.
Our independent accountants have performed a review of these interim financial
statements in accordance with standards established by the American Institute
of Certified Public Accountants. Pursuant to Rule 436 (c) under the Securities
Act of 1933 their report of that review should not be considered as part of any
registration statements prepared or certified by them within the meaning of
Section 7 and 11 of that Act.
Note 2 - Inventories
At October 31, 2000 and July 31, 2000, inventories were as
follows (in thousands):
October 31, 2000 July 31, 2000
Raw materials $ 16,704 $ 17,708
Work-in-process 2,105 2,155
Finished goods 15,583 13,469
Maintenance parts
and supplies 2,510 2,433
Total inventories $ 36,902 $ 35,765
======= =======
Note 3 - Contingencies
The Company is a party to various 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.
Note 4 - Common Stock and Common Stock Equivalents
Presented below is a reconciliation of the differences between actual weighted average
shares outstanding and diluted weighted average shares (in thousands, except per share
amounts).
Three Months Ended
October 31,
2000 1999
Basic EPS:
Weighted average shares outstanding 7,074 7,074
Effect of dilutive securities: Options - -
Diluted EPS:
Diluted weighted average shares outstanding 7,074 7,074
===== =====
Anti-dilutive options outstanding:
Number of options 721 717
===== =====
Weighted average exercise price $ 5.85 $ 5.99
===== =====
Note 5 - Segment Information
The Company applies the provisions of FAS 131 "Disclosures about Segments of an Enterprise and
Related Information". The Company has two reportable segments: tubing products and QuikWater,
representing the Company's two strategic business units offering different products. The Company
internally evaluates its business by facility, however, because of the similar economic
characteristics of the tubing operations, including the nature of products, processes and customers,
those operations have been aggregated for segment reporting purposes. The tubing products segment
manufactures, as well as distributes, tubular products principally made of carbon and stainless
steel. QuikWater manufactures a patented direct contact, high efficiency water heater.
The Company measures segment profit or loss as income (loss) before income taxes. Information on
the Company's segments is as follows (Dollars in thousands):
Tubing
Products QuikWater Total
Quarter-ended October 31, 2000:
Revenues $ 36,122 $ 835 $ 36,957
Segment pre-tax income or (loss) (1,676) (199) (1,875)
Quarter-ended October 31, 1999:
Revenues 32,678 644 33,322
Segment pre-tax income or (loss) 534 (430) 104
REPORT OF INDEPENDENT ACCOUNTANT
To the Board of Directors and Shareholders of
Webco Industries, Inc.
We have reviewed the accompanying consolidated balance sheet of Webco Industries, Inc. and subsidiary
as of October 31, 2000, and the related consolidated statements of operations for the three-month
periods ended October 31, 2000 and 1999 and cash flows for the three-month periods ended October 31,
2000 and 1999. 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
consolidated interim 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 consolidated balance
sheet of Webco Industries, Inc. and subsidiary as of July 31, 2000, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended (not presented herein); and in our report
dated September 21, 2000, except for the third paragraph in Note 6 (A) as to which the date is November 13, 2000,
we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in
the accompanying consolidated balance sheet information as of July 31, 2000 is fairly stated in all material
respects in relation to the balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Tulsa, Oklahoma
December 4, 2000
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Webco Industries, Inc., an Oklahoma corporation, was founded in 1969 by F. William
Weber, Chairman of the Board and Chief Executive Officer. Webco is a specialty
manufacturer of high-quality carbon and stainless steel tubing products designed to
industry and customer specifications. Webco's tubing products consist primarily of:
heat exchanger tubing, carbon steel boiler tubing, stainless steel tube and pipe, and
specialty carbon steel mechanical tubing for use in consumer durable and capital goods.
Management believes that Webco is a domestic market leader in the manufacture of welded
carbon steel heat exchanger and boiler tubing, and the leading supplier of stainless
steel tubing for certain niche applications. The Company's wholly-owned subsidiary, P&J,
represents several manufacturers who produce various non-competing mechanical and
specialty tubular products made from copper, brass, aluminum, stainless and carbon steel,
among others. This access to other tubing products allows the Company to better serve its
customers by offering a full range of tubing products. Through its QuikWater division,
the Company markets a patented direct contact water heater for commercial and industrial
applications. The Company has three production facilities in Oklahoma and Pennsylvania
and five distribution facilities in Oklahoma, Texas, Illinois and Michigan, serving more
than 1,300 customers throughout North America.
Unless the context otherwise requires, the information contained in this report,
and the terms "Webco" and the "Company" when used in this report, include Webco Industries,
Inc. and its subsidiary, P&J, on a consolidated basis.
Results of Operations for the Three Months Ended October 31, 2000 Compared with the
Three Months Ended October 31, 1999
Manufactured Tubing Product sales for the quarter ended October 31, 2000 were $31,990,000,
an increase of 8.6 percent from the $29,460,000 for the same quarter last year. The $2,530,000
increase in net sales is primarily the result of a 9.6 percent increase in the average net sales
price per ton. The increase in the average net selling price is due to increased sales of
stainless tubing, which carries a higher sales price per ton. The tonnage of tubing sold was down
slightly as a result of the one-week suspension in production at the Company's Sand Springs,
Oklahoma,facility in August for maintenance projects and an annealing furnace outage and the
continuing disruptions to the operations at the Oil City, Pennsylvania plant as a result of the
installation of equipment associated with the expansion at that location. The difficulties
associated with the furnace outage in August resulted in the loss of 25 percent of the normal
production and shipments at the Sand Springs plant, and are not expected to repeat during the
second quarter of fiscal 2001. The disruptions in Oil City are expected to continue until the
completion of the expansion, which is scheduled for January 2001.
Gross profit for Manufactured Tubing Products decreased to $2,187,000, or 6.8 percent of
net sales for the first quarter of fiscal 2001 from $3,999,000 or 13.6 percent of net sales for
the same period in fiscal 2000. This is a function of the one-week suspension at the Sand Springs
facility, as explained above, and higher payrolls while training new personnel and higher operating
expenses at the Oil City facility due to the on-going plant expansion. Margins in the fiscal 2001
first quarter reflect the higher labor and overhead costs due to the low production in August at the
Sand Springs plant, continued pricing pressures on carbon products, and higher raw material costs.
Other Tubing Products sales are made primarily by Webco's subsidiary, P&J. Sales of these
products increased 28.4 percent to $4,132,000 for the period ended October 31, 2000 from $3,218,000
for the period ended October 31, 1999. Gross profit from Other Tubing Products increased to $790,000,
or 19.1 percent of net sales, for the first quarter of fiscal 2001 from $773,000, or 24.0 percent of
net sales, for the same period in fiscal 2000. The increase in sales and decline in gross profit
percentage is a result of an increase in the tonnage of tubing sold at reduced sales prices primarily
to the OEM market.
Sales for QuikWater were $835,000 for the first quarter of fiscal 2001, which is 29.7 percent
more than the $644,000 in sales for the same period in fiscal 2000. Gross profit for QuikWater was
$179,000, or 21.4 percent of net sales, for the first quarter of fiscal 2001 as compared to $167,000,
or 25.9 percent of net sales, for the same period of fiscal 2000. The increase in sales is a result
of improved market conditions for the QuikWater product due to changes in certain environmental standards.
The gross profit percentage decline is a reflection of the new outsourcing arrangement for the
manufacturing of the units.
Selling, general and administrative expenses were $3,781,000 for the first quarter of fiscal 2001
compared to $4,078,000 for the same quarter of fiscal 2000. The decrease in the current quarter is
primarily the result of a $74,000 decrease in legal fees related to Thermatool (See Part II, Item 1, Legal
Proceedings of this form 10Q) and certain labor matters, a $38,000 decrease in information technology
expenses incurred in support of the new ERP system, and a $159,000 decrease in administrative labor and
overhead expenses realized as a result of implementing certain cost saving measures.
Interest expense for the current period was $1,250,000 ($1,370,000 prior to interest capitalization)
as compared to interest expense of $757,000 ($859,000 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, 2000 being $47.7
million as compared to $41.4 million for the same period last year. In addition, the related average interest
rate increased to 9.87 percent in the first quarter of fiscal 2001 from 7.57 percent in the first quarter of
fiscal 2000. The Company has historically elected for its term debt and a significant portion of its outstanding
revolver to bear interest at a floating rate based on LIBOR. Higher borrowing levels have resulted from increased
inventories, implementation of the ERP system, and the expansions in Oil City, Pennsylvania, and Mannford, Oklahoma.
Due to the current LIBOR and prime rate levels and the Company's amended bank agreement with its primary lendor, the
Company expects a higher average interest rate in the second quarter of fiscal 2001 and for the remainder of the
current fiscal year when compared to prior year results.
The recorded income tax benefit for the quarter ended October 31, 2000 is based upon the estimated annual
combined effective federal and state income tax rates.
Liquidity and Capital Resources
Net cash used in operations was $1,804,000 for the three months ended October 31, 2000 versus net cash used
in operations of $6,054,000 for the three month period ended October 31, 1999. Receivables increased $998,000 during
the current period and $832,000 for the same period last year, primarily due to stronger sales in the later half of
the quarter. Inventories increased $1,137,000 for the period ended October 31, 2000 primarily due to increases in
stainless steel finished goods. Inventories increased $3,442,000 for the period ended October 31, 1999 due to
strategic purchases of raw materials, which were made in anticipation of rising prices. Accounts payable increased
$183,000 during the current period and decreased $3,651,000 for the same period last year, however, the prior period
decrease was principally offset by an increase of $3,927,000 in book overdrafts. In addition, accrued liabilities
increased by $710,000 for the period ended October 31, 2000, compared to an increase of $430,000 during the same period
last year.
Net cash used in investing activities for the three months ended October 31, 2000 was $2,772,000, which was
$1,396,000 less than the $4,168,000 used in investing activities during the same period in fiscal 1999. Capital
expenditures made during the current period related to progress with the expansion of the Oil City facility.
The Company's capital requirements have historically been to fund equipment purchases and for general working
capital needs resulting from the growth that the Company has experienced. The Company has followed an aggressive
capital expenditure plan as part of its growth strategy and to enable it to continue to be a leader in tubular
manufacturing technologies. The Company is currently completing the expansion in Oil City and will thereafter
focus on debt reduction and working capital management. The Company currently intends to retain earnings to
support this strategy and does not anticipate paying dividends in the forseeable future.
The Company's financing arrangements provide for a term loan of $25 million, a line of credit of $25 million
and a capital expenditure ("CAPEX") facility in the amount of $5 million to finance equipment at the Oil City,
Pennsylvania plant. As of October 31, 2000, the Company had $24.4 million outstanding on the term loan, $20.8 million
under the revolving line of credit and $4.0 million outstanding on the CAPEX facility. These loans mature on August 31,
2002, and are collateralized by substantially all of the Company's assets other than the Sand Springs real estate. The
Company may have borrowings and outstanding letters of credit ($1,128,000 at October 31, 2000) under the revolving credit
facility up to the lesser of $25 million or an amount determined by a formula based on the amount of eligible inventories
and accounts receivable. At October 31, 2000, $3.0 million was available for borrowing under this line of credit and $1.0
million was available for borrowing under the CAPEX loan. Principal payments of $208,000, plus interest, are due on the
term loan each month until maturity. Beginning in November 2000, principal payments on the CAPEX facility of $83,000,
plus interest, will be due each month until maturity.
During fiscal year 2000 and as of July 31, 2000, the Company was in non-compliance with certain of the financial
covenants contained in the loan agreement and on November 13, 2000 obtained waivers from the lenders. In addition to
granting the waivers, the lenders modified and reduced the debt coverage and indebtedness ratio loan covenants up to
January 31, 2002. An additional covenant was added requiring the Company to maintain a minimum borrowing base availability
without considering the $25 million revolving loan cap. The covenant levels for all periods including and subsequent to
January 31, 2002 are unchanged by the amendment.
The Company has arranged financing with various public agencies related to the Oil City facility, of which, $1.6
million is outstanding and an additional $1.5 million remains available for borrowing as of October 31, 2000. The agency
loans are collateralized by the underlying real estate and/or equipment and the guarantee of the prinicpal stockholder/
officer. The notes mature over a 4 to 10 year period and bear interest at rates ranging from 3 to 5 percent.
P&J has a line of credit agreement for $2,000,000 and a term loan of $500,000 with its primary lender. As of October
31, 2000, the Company had $345,000 outstanding under the line of credit and $369,000 outstanding on the term loan. The
line of credit matures on November 30, 2000, and the term loan matures in April 2004. Both loans are collateralized by
P&J's assets. At October 31, 2000, $1.65 million was available for borrowing under the line of credit.
In the past, the Company has funded its capital growth expenditures with a combination of cash flow from operations and
debt. The remaining available borrowing on the CAPEX facility (approximately $1.0 million) is committed to funding the
purchase of ordered equipment for the Oil City plant. Additional public agency funding will be used to pay down higher
cost debt facilities.
Safe Harbor for Forward Looking Statements: Certain statements in this Form 10-Q, including statements preceded by, or
predicated upon the words "expects" and "believes", constitute "forward-looking statements" within the meaning 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,
competition from imports, changes in manufacturing technology, industry capacity, domestic competition, raw material
costs and availability, loss of significant customers and customer and vendor work stoppages, and technical and data
processing capabilities of customers and vendors. The reader should refer to Part I, Item 1:"Forward Looking Statements"
of the Company's Form 10-K for the year ended July 31, 2000 for additional information regarding this matter.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
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
specifications. The case, filed in the United States District Court for the Northern District of Oklahoma (Case No.
97-CV-708H (W)), sought recoveries including, but not limited to, the cost of the equipment and other incidental and
consequential damages, including lost profits, suffered by the Company. On May 27, 1999 a jury awarded the Company
$1.1 million in its claims against Thermatool. On December 1, 1998, the court ruled that the Company could not
collect lost profits and certain other incidental and consequential damages, and limited the Company's possible
recovery to the purchase price of the equipment plus the cost of improvements and interest. The damages awarded by
the jury, accordingly, do not include lost profits by the Company. Now that the first trial has been decided in
the Company's favor, the Company has appealed the pre-trial order that prevented the Company from recovering lost
profits, and has appealed the trial court's denial of attorneys' fees and pre-judgment interest. There can be no
assurances that the Company will be successful on appeal or that if successful, lost profits or other damages awarded
by the appeals court or in the succeeding trial, if any, will be commensurate with actual lost profits and damages
and expenses suffered by the Company. Thermatool has appealed the jury's verdict and there can be no assurances as
to what the outcome of that appeal will be.
The Company is also 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 Company maintains
liability insurance against risks arising out of the normal course of business.
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 15.1: Letter Regarding Unaudited Interim Financial Information.
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.
WEBCO INDUSTRIES, INC.
December 15, 2000 /s/Michael P. Howard
Michael P. Howard
Treasurer
Chief Financial Officer
Vice President of Finance and Administration
EXHIBIT 15.1
WEBCO INDUSTRIES, INC.
LETTER RE 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 and S-8
We are aware that our report dated December 4, 2000, on our review of the interim financial information
of Webco Industries, Inc. for the periods ended October 31, 2000 and 1999, and included in this Form 10-Q
is incorporated by reference in the Company's registration statements on Form S-3 (File nos. 333-22779 and
333-67923) and S-8 (File no. 333-49219).
PricewaterhouseCoopers LLP
Tulsa, Oklahoma
December 15, 2000
