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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
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Commission File No. 0-25642
COMMONWEALTH INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3245741
(State of incorporation) (I.R.S. Employer Identification No.)
500 West Jefferson Street
19th Floor
Louisville, Kentucky 40202-2823
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 589-8100
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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 proceeding 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 registrant had 15,946,500 shares of common stock outstanding at May 1, 1998.
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<PAGE>
COMMONWEALTH INDUSTRIES, INC.
FORM 10-Q
For the Quarter Ended March 31, 1998
INDEX
Part I - Financial Information
Item 1. Financial Statements (unaudited) Page Number
Condensed Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997 3
Condensed Consolidated Statements of Income for the three
months ended March 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2. Management's Discussion and Analysis of Financial Condition 8-10
and Results of Operations
Part II - Other Information
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
<PAGE>
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Balance Sheets
(in thousands except share data)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------------- -------------
<S> <C> <C>
Assets
Current assets:
Accounts receivable, net $ 377 $ 355
Inventories 185,271 171,633
Prepayments and other current assets 45,336 45,107
------------- -------------
Total current assets 230,984 217,095
Property, plant and equipment, net 265,976 266,292
Goodwill, net 172,442 173,562
Other noncurrent assets 10,263 10,472
------------- -------------
Total assets $ 679,665 $ 667,421
============= =============
Liabilities
Current liabilities:
Outstanding checks in excess of deposits $ 2,464 $ 9,122
Accounts payable 75,035 67,881
Accrued liabilities 31,666 27,168
------------- -------------
Total current liabilities 109,165 104,171
Long-term debt 129,525 125,650
Other long-term liabilities 9,514 9,675
Accrued pension benefits 13,663 13,368
Accrued postretirement benefits 85,154 84,084
------------- -------------
Total liabilities 347,021 336,948
------------- -------------
Commitments and contingencies - -
Stockholders' Equity
Common stock, $0.01 par value, 50,000,000 shares authorized,
15,946,500 and 15,941,500 shares outstanding at
March 31, 1998 and December 31, 1997, respectively 159 159
Additional paid-in capital 398,794 398,757
Accumulated deficit (64,578) (66,575)
Unearned compensation (1,035) (1,172)
Minimum pension adjustment (696) (696)
------------- -------------
Total stockholders' equity 332,644 330,473
------------- -------------
Total liabilities and stockholders' equity $ 679,665 $ 667,421
============= =============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Statements of Income
(in thousands except per share data)
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------------------
1998 1997
-------------- --------------
<S> <C> <C>
Net sales $ 248,927 $ 272,191
Cost of goods sold 230,486 248,145
-------------- --------------
Gross profit 18,441 24,046
Selling, general and administrative expenses 10,232 11,803
Amortization of goodwill 1,119 1,119
-------------- --------------
Operating income 7,090 11,124
Other income (expense), net 325 179
Interest expense, net (5,666) (8,333)
-------------- --------------
Income before income taxes 1,749 2,970
Income tax expense (benefit) (1,045) 802
-------------- --------------
Net income $ 2,794 $ 2,168
============== ==============
Basic and diluted net income per share $ 0.18 $ 0.21
============== ==============
Weighted average shares outstanding
Basic 15,947 10,206
Diluted 15,956 10,240
Dividends paid per share $ 0.05 $ 0.05
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Statements of Cash Flow
(in thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
-----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,794 $ 2,168
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization 8,508 9,170
Issuance of common stock in connection with stock awards 72 84
Loss on disposal of property, plant and equipment 5 3
Changes in assets and liabilities:
(Increase) in accounts receivable, net (22) (44,105)
(Increase) decrease in inventories (13,638) 11,365
(Increase) in prepayments and other current assets (229) (3,361)
(Increase) decrease in other noncurrent assets (76) 381
Increase (decrease) in accounts payable 7,154 (16,573)
Increase (decrease) in accrued liabilities 4,498 (3,811)
Increase in other liabilities 1,204 4,416
------------ ------------
Net cash provided by (used in) operating activities 10,270 (40,263)
------------ ------------
Cash flows from investing activities:
Net cash and cash equivalents (outflow) from acquisition - (2,874)
Purchases of property, plant and equipment (6,690) (4,367)
------------ ------------
Net cash (used in) investing activities (6,690) (7,241)
------------ ------------
Cash flows from financing activities:
(Decrease) increase in outstanding checks in excess of deposits (6,658) 18,738
Proceeds from long-term debt 4,525 28,500
Repayments of long-term debt (650) (1,250)
Proceeds from issuance of common stock - 82
Cash dividends paid (797) (510)
------------ ------------
Net cash (used in) provided by financing activities (3,580) 45,560
------------ ------------
Net (decrease) in cash and cash equivalents - (1,944)
Cash and cash equivalents at beginning of period - 1,944
------------ ------------
Cash and cash equivalents at end of period $ - $ -
============ ============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
COMMONWEALTH INDUSTRIES, INC.
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying condensed consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not include
all the disclosures normally required by generally accepted accounting
principles. The condensed consolidated financial statements have been prepared
in accordance with Commonwealth Industries, Inc.'s (the "Company's") customary
accounting practices and have not been audited. In the opinion of management,
all adjustments necessary to fairly present the results of operations for the
reporting interim periods have been made and were of a normal recurring nature.
2. Inventories
The Company uses the first-in, first-out (FIFO) and the last-in, first-out
(LIFO) methods for valuing its inventories.
(in thousands) March 31, 1998 December 31, 1997
- -------------- --------------- -----------------
Raw materials $ 30,657 $ 30,395
Work in process 83,476 76,286
Finished goods 57,465 53,395
Expendable parts and supplies 15,181 14,884
--------- ---------
186,779 174,960
LIFO reserve (1,508) (3,327)
--------- ---------
$ 185,271 $ 171,633
========= =========
Inventories of approximately $43.6 million and $35.4 million, included in the
above totals (before the LIFO reserve) at March 31, 1998 and December 31, 1997,
respectively, are accounted for under the LIFO method of accounting.
On March 31, 1998, the Company had deferred realized losses of $5.2 million on
closed futures contracts which are recorded as an increase to the carrying value
of inventory. The Company had deferred realized losses of $1.5 million at
December 31, 1997.
3. Provision for Income Taxes
The effective income tax rate for the quarter ended March 31, 1998 is less than
the the rate for the quarter ended March 31, 1997 primarily due to a $1.5
million favorable adjustment recorded in the first quarter of 1998 to the prior
year's tax expense. The adjustment resulted from the filing of amended federal
income tax returns for prior years.
<PAGE>
4. Net Income Per Share Computations
The following is a reconciliation of the numerator and denominator of the basic
and diluted per share computations:
<TABLE>
<CAPTION>
Three months ended
------------------
March 31,
---------
1998 1997
------- -------
<S> <C> <C>
Income (numerator) amounts used for basic and diluted per share computations:
Net income $2,794 $2,168
====== ======
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 15,947 10,206
====== ======
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 15,947 10,206
Plus: dilutive effect of stock options 9 34
------ ------
Adjusted weighted average shares 15,956 10,240
====== ======
Net income per share data:
Basic and diluted $0.18 $0.21
===== =====
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion contains statements which are forward-looking rather
than historical fact. These forward-looking statements are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995
and involve risks and uncertainties that could render them materially different,
including, but not limited to, the effect of global economic conditions, the
impact of competitive products and pricing, product development and
commercialization, availability and cost of critical raw materials, the rate of
technological change, product demand and market acceptance risks, capacity and
supply constraints or difficulties, and other risks detailed in the Company's
various Securities and Exchange Commission filings.
Overview
The Company manufactures non-heat treat coiled aluminum sheet for distributors
and the transportation, construction and consumer durables end use markets and
electrical flexible conduit and prewired armored cable for the non-residential
construction and renovation markets. The Company's principal raw materials are
aluminum scrap, primary aluminum, copper and steel. Trends in the demand for
aluminum sheet products in the United States and in the prices of aluminum
primary metal, aluminum scrap and copper affect the business of the Company. The
Company's operating results also are affected by factors specific to the
Company, such as the margins between selling prices for its products and its
cost of raw material ("material margins") and its unit cost of converting raw
material into its products ("conversion cost"). While changes in aluminum and
copper prices can cause the Company's net sales to change significantly from
period to period, net income is more directly impacted by the fluctuation in
material margins.
During the first quarter of 1998, shipments of the Company's aluminum sheet
products declined by 15% from the first quarter of 1997. While overall demand
for aluminum sheet products remained strong, material margins have been under
pressure for the past eighteen months. During the first quarter of 1998, the
Company chose to sell only to those segments of markets where the Company could
compete on product quality and service and not participate in further price
erosion. During the first quarter of 1998, the Company announced two price
increases, the first beginning in April 1998 which has been fully implemented
into the market place and the second beginning in June 1998 which has been
followed by several competitors. Beginning in mid-February 1998 at the Lewisport
rolling mill, all discretionary overtime hours have been eliminated to reduce
the operating cost concurrent with the reduced sales volume.
Demand for the Company's electrical conduit and cable products continued to
exceed the Company's ability to supply these products during the first quarter
of 1998. While the Company has been adding additional electrical cable armoring
capacity since the second quarter of 1997, this capacity has yet to reach full
production due to the time involved in employee training. The strong market for
electrical conduit also allowed the Company to concentrate on higher margin
products during the first quarter of 1998, even though net sales volume was
little changed from the same period last year. The Company expects to continue
to ramp up the existing production equipment while embarking on further capacity
expansions throughout 1998.
During March 1998, the Company ceased negotiations with Noranda Aluminum,
Inc. regarding the purchase of Noranda's Scottsboro, Alabama aluminum rolling
mill.
Results of Operations for the three months ended March 31, 1998 and 1997 Net
Sales. Net sales for the quarter ended March 31, 1998, decreased 9% to $249
million (including $30.7 million from Alflex) from $272 million (including $32.1
million from Alflex) for the same period in 1997. The decrease is due to the
reduced sales volumes at all facilities. Unit sales volume of aluminum decreased
15% to 218.9 million pounds for the first quarter of 1998 from 258.1 million
pounds for the first quarter of 1997. Aluminum sales volume decreased due to the
reasons outlined in the "overview" section, additionally sales volumes at the
Company's continuous cast aluminum sheet operations were below last year's level
due to tighter inventory management by customers and unusually wet weather that
reduced construction activity in various parts of the United States in the first
quarter of 1998. Alflex unit sales volume was 125.6 million feet for the first
quarter of 1998 versus 125.2 million feet for the comparable period in 1997.
Gross Profit. Gross profit for the quarter ended March 31, 1998, decreased to
$18.4 million from $24.0 million for the same period in 1997. This decrease was
attributable to decreased sales volumes. The Company's unit manufacturing costs
increased compared to the same period in 1997 as a result of the lower volumes
which more than offset any efficiencies due to mill optimization practices.
Material margins which were higher in the first quarter of 1998 than in the
first quarter of 1997 partially offset the impact of lower volumes.
Operating Income. The Company produced operating income of $7.1 million for the
first quarter of 1998 compared with $11.1 million for the first quarter of 1997.
Selling, general and administrative expenses during the first quarter of 1998
were $10.2 million, compared with $11.8 million for the same period in 1997.
This decrease was a result of the realization of various operating synergies
envisioned at the time of the CasTech acquisition.
Net Income. Net income was $2.8 million for the quarter ended March 31, 1998,
compared with $2.2 million for the same period in 1997. Interest expense was
$5.7 million for the quarter ended March 31, 1998 compared to $8.3 million for
the first quarter of 1997, a decrease of $2.6 million. The decrease in the
Company's interest expense is due to the reduction in borrowings as a result of
the Company's equity offering coupled with the reduced interest rates due to the
accounts receivable securitization facility. Both transactions are described in
the "Liquidity and Capital Resources" section following. Income tax benefit was
$1.0 million in the first quarter of 1998 compared to an income tax expense of
$0.8 million for the same period in 1997. The change is primarily due to a $1.5
million favorable adjustment recorded in the first quarter of 1998 to the prior
year's tax expense. The adjustment resulted from the filing of amended federal
income tax returns for prior years.
Liquidity and Capital Resources
The Company's sources of liquidity are cash flows from operations and the
Company's accounts receivable securitization facility described below and
borrowings under its $100 million revolving credit facility. The Company
believes these sources will be sufficient to fund its working capital
requirements, capital expenditures, debt service and dividend payments at least
through 1998.
On September 29, 1997, the Company completed a common stock offering of 5.75
million shares at a public offering price of $18 per share. The net proceeds
from the offering of approximately $97.7 million were used to repay the entire
amount outstanding under the Company's term loan agreement, totaling $95.0
million, as well as $2.7 million outstanding under the Company's revolving
credit facility.
On September 26, 1997, the Company sold all of its trade accounts receivables to
a 100% owned subsidiary, Commonwealth Financing Corp. ("CFC"). Simultaneously,
CFC entered into a three-year accounts receivable securitization facility with a
financial institution and its affiliate whereby CFC can sell, on a revolving
basis, an undivided interest in certain of its receivables and receive up to
$150.0 million from an unrelated third party purchaser at a cost of funds linked
to commercial paper rates plus a charge for administrative and credit support
services. At March 31, 1998, the Company had received $150.0 million under the
agreement and had $36.4 million of net residual interest in the securitized
receivables which is included in other current assets in the Company's
consolidated financial statements.
Capital expenditures were $6.7 million during the quarter ended March 31, 1998.
At March 31, 1998, the Company had commitments of $10.2 million for the purchase
or construction of capital assets. Total capital expenditures for the year 1998
are expected to be approximately $30 million, principally related to upgrading
the Company's manufacturing and other facilities and meeting environmental
requirements.
Risk Management
The Company offers its customers multiple pricing methods, including fixed firm
prices. Purchases of metal for forward delivery as well as hedging with futures
contracts and options are used to reduce the Company's aggregate exposure to the
risk of changes in metal prices. This is accomplished by establishing at the
time of a customer's order a fixed margin between the cost of the metal and the
Company's price of the product to the customer. Gains and losses resulting from
changes in the market value of these futures contracts and options increase or
decrease cost of sales at the time of revenue recognition. At March 31, 1998,
the Company held purchase and sales commitments through 1998 totaling $64
million and $348 million, respectively. The Company held futures contracts,
marked-to-market at March 31, 1998, with a net unrealized loss of $5.1 million.
Before entering into futures contracts and options, the Company reviews the
credit rating of the counterparty and assesses any possible credit risk. While
the Company is exposed to certain losses in the event of non-performance by the
counterparties to these agreements, the Company does not anticipate
non-performance by such counterparties.
The Company has entered into interest rate swap agreements with a notional
amount of $66 million. With respect to these agreements, the Company pays a
fixed rate of interest and receives a LIBOR-based floating rate.
Recently Issued Accounting Pronouncements
Also in June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). The Statement requires
that segment reporting for public reporting purposes be conformed to the segment
reporting used by management for internal purposes. SFAS No. 131 also adds a
requirement for the presentation of certain segment data on a quarterly basis
starting in 1999. The Company will adopt SFAS No. 131 in the Company's year-end
1998 reporting as required.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits" ("SFAS No. 132"). The Statement
revises employers' disclosures about pension and other postretirement benefit
plans. The Company will adopt SFAS No. 132 in the Company's year-end 1998
reporting as required.
Management is currently evaluating the impact of these two Statements on the
Company's future financial reporting, but expects the impact to be immaterial.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to non-environmental legal proceedings and administrative
actions all of which are of an ordinary routine nature incidental to the
operations of the Company. Although it is impossible to predict the outcome of
any legal proceeding, in the opinion of management such proceedings and actions
should not, individually or in aggregate, have a material adverse effect on the
Company's financial condition, results of operations or cash flows, although
resolution in any year or quarter could be material to the results of operation
for that period.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Computation of Net Income Per Share.
27 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended March 31, 1998.
<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.
COMMONWEALTH INDUSTRIES, INC.
By: /s/ Donald L. Marsh, Jr.
------------------------
Donald L. Marsh, Jr.
Executive Vice President, Chief Financial
Officer and Secretary
Date: May 1, 1998
<PAGE>
Exhibit Index
Exhibit
Number Description
11 Computation of Net Income Per Share.
27 Financial Data Schedule.
Commonwealth Industries, Inc.
Computation of Net Income Per Share
(in thousands except per share data)
<TABLE>
<CAPTION>
<S> <C> <C>
Three months ended March 31, 1998 1997
Income (numerator) amounts used for basic and diluted per share computations:
Net income $ 2,794 $ 2,168
============= ==========
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 15,947 10,206
============= ==========
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 15,947 10,206
Plus: dilutive effect of stock options 9 34
------------- ----------
Adjusted weighted average shares 15,956 10,240
============= ==========
Net income per share data:
Basic and diluted $ 0.18 $ 0.21
============= ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Mar-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 377
<ALLOWANCES> 0
<INVENTORY> 185,271
<CURRENT-ASSETS> 230,984
<PP&E> 517,947
<DEPRECIATION> 251,971
<TOTAL-ASSETS> 679,665
<CURRENT-LIABILITIES> 109,165
<BONDS> 129,525
0
0
<COMMON> 159
<OTHER-SE> 332,485
<TOTAL-LIABILITY-AND-EQUITY> 679,665
<SALES> 248,927
<TOTAL-REVENUES> 248,927
<CGS> 230,486
<TOTAL-COSTS> 230,486
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,666
<INCOME-PRETAX> 1,749
<INCOME-TAX> (1,045)
<INCOME-CONTINUING> 2,794
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,794
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
