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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 September 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
--------------
Commission File 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
----------
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 16,621,000 shares of common stock outstanding at November 2,
1999.
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<PAGE>
COMMONWEALTH INDUSTRIES, INC.
FORM 10-Q
For the Quarter Ended September 30, 1999
INDEX
Part I - Financial Information
Item 1. Financial Statements (unaudited) Page Number
Condensed Consolidated Balance Sheet as of September 30, 1999
and December 31, 1998 3
Condensed Consolidated Statement of Income for the three
months and nine months ended September 30, 1999 and 1998 4
Condensed Consolidated Statement of Cash Flows for the nine
months ended September 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6-9
Item 2. Management's Discussion and Analysis of Financial Condition 10-13
and Results of Operations
Part II - Other Information
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
<PAGE>
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Balance Sheet
(in thousands except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------- -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ - $ 6
Accounts receivable, net 549 228
Inventories 176,026 174,968
Prepayments and other current assets 72,421 25,367
-------------- -------------
Total current assets 248,996 200,569
Property, plant and equipment, net 275,202 269,837
Goodwill, net 165,729 169,086
Other noncurrent assets 8,092 8,907
-------------- -------------
Total assets $ 698,019 $ 648,399
============== =============
Liabilities
Current liabilities:
Outstanding checks in excess of deposits $ 3,674 $ -
Accounts payable 84,066 54,244
Accrued liabilities 39,138 31,133
-------------- -------------
Total current liabilities 126,878 85,377
Long-term debt 125,000 125,000
Other long-term liabilities 8,663 8,859
Accrued pension benefits 16,589 15,930
Accrued postretirement benefits 86,822 86,704
-------------- -------------
Total liabilities 363,952 321,870
-------------- -------------
Commitments and contingencies - -
Stockholders' Equity
Common stock, $0.01 par value, 50,000,000 shares authorized,
16,621,000 and 15,944,000 shares outstanding at
September 30, 1999 and December 31, 1998, respectively 166 159
Additional paid-in capital 409,272 398,794
Accumulated deficit (62,427) (69,621)
Unearned compensation (302) (672)
Notes receivable from sale of common stock (10,511) -
Accumulated other comprehensive income:
Minimum pension adjustment (2,131) (2,131)
-------------- -------------
Total stockholders' equity 334,067 326,529
-------------- -------------
Total liabilities and stockholders' equity $ 698,019 $ 648,399
============== =============
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Statement of Income
(in thousands except per share data)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------------ -------------------------------
1999 1998 1999 1998
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Net sales $ 275,083 $ 231,348 $ 785,358 $ 738,621
Cost of goods sold 256,729 215,390 718,935 690,436
------------- ------------ ------------- ------------
Gross profit 18,354 15,958 66,423 48,185
Selling, general and administrative expenses 13,007 11,265 37,982 31,622
Amortization of goodwill 1,119 1,119 3,357 3,357
------------- ------------ ------------- ------------
Operating income 4,228 3,574 25,084 13,206
Other income (expense), net 278 107 731 511
Interest expense, net (4,663) (5,671) (14,708) (16,887)
------------- ------------ ------------- ------------
Income (loss) before income taxes (157) (1,990) 11,107 (3,170)
Income tax expense (benefit) (1,039) 149 1,488 (1,182)
------------- ------------ ------------- ------------
Net income (loss) $ 882 $ (2,139) $ 9,619 $ (1,988)
============= ============ ============= ============
Basic and diluted net income (loss) per share $ 0.05 $ (0.13) $ 0.60 $ (0.12)
============= ============ ============= ============
Weighted average shares outstanding
Basic 16,373 15,944 16,092 15,944
Diluted 16,471 15,944 16,148 15,944
Dividends paid per share $ 0.05 $ 0.05 $ 0.15 $ 0.15
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Statement of Cash Flows
(in thousands)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------------
1999 1998
------------ --------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 9,619 $ (1,988)
Adjustments to reconcile net income (loss) to net cash provided by operations:
Depreciation and amortization 26,619 25,941
Issuance of common stock in connection with stock awards 44 72
Loss on disposal of property, plant and equipment 7 301
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net (321) 92
(Increase) in inventories (1,058) (14,303)
(Increase) decrease in prepayments and other current assets (47,054) 11,632
(Increase) in other noncurrent assets (85) (165)
Increase in accounts payable 29,822 4,638
Increase in accrued liabilities 8,005 4,926
Increase in other liabilities 581 3,079
------------ --------------
Net cash provided by operating activities 26,179 34,225
------------ --------------
Cash flows from investing activities:
Purchases of property, plant and equipment (27,441) (21,723)
Proceeds from sale of property, plant and equipment 7 32
------------ --------------
Net cash (used in) investing activities (27,434) (21,691)
------------ --------------
Cash flows from financing activities:
Increase (decrease) in outstanding checks in excess of deposits 3,674 (9,122)
Proceeds from long-term debt 43,800 42,025
Repayments of long-term debt (43,800) (37,675)
Cash dividends paid (2,425) (2,392)
------------ --------------
Net cash provided by (used in) financing activities 1,249 (7,164)
------------ --------------
Net (decrease) increase in cash and cash equivalents (6) 5,370
Cash and cash equivalents at beginning of period 6 -
------------ --------------
Cash and cash equivalents at end of period $ - $ 5,370
============ ==============
Supplemental disclosures:
Interest paid $11,397 $ 13,799
Income taxes paid 2,338 292
Non-cash activities:
Issuance of common stock for notes receivable $10,511 $ -
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
Effective January 1, 1999, the Company changed its inventory accounting method
for certain inventories from the first-in, first-out (FIFO) method to the
last-in, first-out (LIFO) method and modified the LIFO calculation for the
inventories historically recorded under the LIFO method. The Company believes
the adoption of the LIFO method for all aluminum sheet inventories is preferable
as LIFO is the inventory method most prevalent in the industry, provides a
consistent inventory accounting method for aluminum sheet inventories, and
results in more appropriate matching of cost of goods sold with related
revenues.
The effect of this change in accounting principle was to decrease net income
reported for the three months and nine months ended September 30, 1999 by $10.0
million and $8.6 million, or $0.61 and $0.53 per share, respectively. The
Company has omitted the disclosure of the cumulative effect of this change on
retained earnings as of the date of the change and the pro forma effects of
retroactive application due to such amounts not being determinable.
(in thousands) September 30, 1999 December 31, 1998
- -------------- ------------------ -----------------
Raw materials $ 44,065 $ 34,908
Work in process 79,088 74,960
Finished goods 45,624 49,079
Expendable parts and supplies 16,042 14,910
--------- ---------
184,819 173,857
LIFO reserve (8,793) 3,659
--------- ---------
176,026 177,516
Lower of cost or market reserve - (2,548)
--------- ---------
$ 176,026 $ 174,968
========= =========
Inventories of $148.0 million and $38.1 million, included in the above totals
(before the LIFO reserve and lower of cost or market reserve) at September 30,
1999 and December 31, 1998, respectively, are accounted for under the LIFO
method of accounting while the remainder of the inventories are accounted for
under the FIFO and average-cost methods.
On September 30, 1999, the Company did not have any deferred realized gains or
losses recorded as an adjustment to the carrying value of inventory. The Company
had deferred realized losses of $2.2 million at December 31, 1998 which were
recorded as an increase to the carrying value of inventory.
3. Provision for Income Taxes
The Company recognized an income tax benefit of $1.0 million and an income tax
expense of $1.5 million for the three months and nine months ended September 30,
1999, respectively, compared to an income tax expense of $0.1 million and an
income tax benefit of $1.2 million for the three months and nine months ended
September 30, 1998, respectively. Included in the income tax benefit for the
nine months ended September 30, 1998 is a $1.5 million favorable adjustment
recorded in the first quarter of 1998 as the result of 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
------------------
September 30,
-------------
1999 1998
---- ----
<S> <C> <C>
Income (numerator) amounts used for basic and diluted per share computations:
Net income (loss) $ 882 $(2,139)
===== ========
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 16,373 15,944
====== ======
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 16,373 15,944
Plus: dilutive effect of stock options 98 -
------ ------
Adjusted weighted average shares 16,471 15,944
====== ======
Net income (loss) per share data:
Basic and diluted $0.05 $(0.13)
===== =======
Nine months ended
------------------
September 30,
-------------
1999 1998
---- ----
Income (numerator) amounts used for basic and diluted per share computations:
Net income (loss) $ 9,619 $(1,988)
======= ========
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 16,092 15,944
====== ======
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 16,092 15,944
Plus: dilutive effect of stock options 56 -
------ ------
Adjusted weighted average shares 16,148 15,944
====== ======
Net income (loss) per share data:
Basic and diluted $0.60 $(0.12)
===== =======
Options to purchase 5,000 and 186,000 common shares, which equate to 35 and
4,447 incremental common equivalent shares, were excluded from the calculation
above for the three months and nine months ended September 30, 1998,
respectively, as their effect would have been antidilutive. In addition, options
to purchase 274,000 and 545,000 common shares for the three months ended
September 30, 1999 and 1998, respectively, and 529,500 and 545,000 common shares
for the nine months ended September 30, 1999 and 1998, respectively, were
excluded from the calculations above because the exercise prices on the options
were greater than the average market price for the periods.
</TABLE>
<PAGE>
5. Information Concerning Business Segments
The Company has adopted Statement of Financial Accounting Standards No.131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS No.
131"). Under SFAS No. 131, the Company has determined it has two reportable
segments: aluminum and electrical conduit. The aluminum segment manufactures
aluminum sheet for distributors and the transportation, construction, and
consumer durables end-use markets. The electrical conduit segment manufactures
flexible electrical wiring products for the commercial and do-it-yourself
markets.
The accounting policies of the reportable segments are the same as those
described in Note 1, "Basis of Presentation and Summary of Significant
Accounting Policies" in the Company's annual report to stockholders for the year
ended December 31, 1998. All intersegment sales prices are market based. The
Company evaluates the performance of its operating segments based upon operating
income.
The Company's reportable segments are strategic business units that offer
different products to different customer groups. They are managed separately
because each business requires different technology and marketing strategies.
Summarized financial information concerning the Company's reportable segments is
shown in the following table for the three months and nine months ended
September 30, 1999 and 1998. The "Other" column includes corporate related
items, including elimination of intersegment transactions, and as it relates to
segment operating income, income and expense not allocated to reportable
segments.
<TABLE>
<CAPTION>
Electrical
Aluminum Conduit Other Total
-------- ---------- ----- ---------
Three months ended September 30, 1999
- -------------------------------------
<S> <C> <C> <C> <C>
Net sales to external customers $243,327 $31,756 $ -- $275,083
Intersegment net sales 8,137 -- (8,137) --
Operating income 4,853 2,449 (3,074) 4,228
Depreciation and amortization 8,090 751 118 8,959
Total assets 584,176 113,774 69 698,019
Capital expenditures 5,310 1,702 -- 7,012
Three months ended September 30, 1998
- -------------------------------------
Net sales to external customers $198,234 $33,114 $ -- $231,348
Intersegment net sales 6,062 -- (6,062) --
Operating income 1,478 4,310 (2,214) 3,574
Depreciation and amortization 7,807 779 122 8,708
Total assets 571,022 99,922 384 671,328
Capital expenditures 5,998 1,321 -- 7,319
Nine months ended September 30, 1999
- ------------------------------------
Net sales to external customers $692,453 $92,905 $ -- $785,358
Intersegment net sales 21,478 -- (21,478) --
Operating income 25,665 7,368 (7,949) 25,084
Depreciation and amortization 23,783 2,536 300 26,619
Total assets 584,176 113,774 69 698,019
Capital expenditures 17,992 9,449 -- 27,441
Nine months ended September 30, 1998
- ------------------------------------
Net sales to external customers $644,911 $93,710 $ -- $738,621
Intersegment net sales 18,902 -- (18,902) --
Operating income 7,347 11,887 (6,028) 13,206
Depreciation and amortization 23,262 2,335 344 25,941
Total assets 571,022 99,922 384 671,328
Capital expenditures 18,495 3,228 -- 21,723
</TABLE>
<PAGE>
6. Stockholders'Equity
In July 1999, the Company adopted an Executive Stock Purchase Incentive
Program (the "Program") which had been authorized by the Company's stockholders
at the Company's annual meeting of stockholders held in April 1999. Under the
Program, the Company extended credit to certain key executives to purchase the
Company's common stock at fair market value. The loans are secured by the shares
acquired and are repayable with full-recourse to the executives. The Program
provides for the key executives to earn repayment of a portion of the notes,
based on achieving annual and cumulative performance objectives as set forth by
the Management Development and Compensation Committee of the Board of Directors.
The notes bear interest at 5.96 percent per annum. The principal amount of each
loan is payable in four equal installments on December 31 in each of the years
2003, 2004, 2005 and 2006, in each case together with accrued and unpaid
interest. A total of 677,000 shares were issued during August 1999 which
represents approximately 4% of the common shares outstanding at September 30,
1999. The outstanding principal balance of the notes at September 30, 1999 was
$10,511,000 and is classified as a reduction of stockholders' equity.
<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 commodities 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 nine months of 1999, shipments of the Company's aluminum sheet
products increased by 17% from the first nine months of 1998. These increased
shipments were made possible by capital projects at the Company's Uhrichsville,
Ohio rolling mill and productivity gains at the Company's Lewisport, Kentucky
rolling mill. While overall demand for aluminum sheet products remained strong,
material margins for the first nine months of 1999 declined from the fourth
quarter of 1998 levels due to higher acquisition costs for scrap aluminum. The
Company increased its maintenance spending in its aluminum operations during the
nine months of 1999, especially in the hot mill department, to support higher
volumes, increase machine reliability, and increase the probability of excellent
quality and service to the Company's customers.
Demand for the Company's electrical conduit and cable products continues to be
strong; however, the supply of these products has increased as a result of
expansions of existing production by competitors, and the entry of new
participants into the market. As a result, material margins for the Company's
electrical conduit and cable products have come under pressure during the first
nine months of 1999 and are below the levels achieved last year. Demand for the
Company's armored cable products, in particular, continues to be strong. Value
added products such as MC cable represented a higher ratio of Alflex's first
nine months 1999 sales compared to the same period in the prior year. In
addition, the Company opened a new plant in Rocky Mount, North Carolina during
the second quarter of 1999. This move increased production and enhanced the
Company's competitive position by placing that capacity closer to attractive
markets along the eastern United States.
Results of Operations for the three months and nine months ended
September 30, 1999 and 1998
Net Sales. Net sales for the quarter ended September 30, 1999, increased 19% to
$275 million (including $31.8 million from Alflex) from $231 million (including
$33.1 million from Alflex) for the same period in 1998. Net sales for the nine
month period ended September 30, 1999, were $785 million (including $92.9
million from Alflex), a 6% increase from the $739 million recorded in the first
nine months of 1998 (including $93.7 million from Alflex). The increase is due
to higher shipments which was partially offset by lower aluminum and copper
prices. Unit sales volume of aluminum increased 27% to 267.9 million pounds for
the third quarter of 1999 from 211.3 million pounds for the third quarter of
1998. Unit sales volume of aluminum was 780.6 million pounds for the first nine
months of 1999, an increase of 17% from the 664.9 million pounds for the first
nine months of 1998. Alflex unit sales volume was 148.3 million feet for the
third quarter of 1999 and 430.7 million feet for the first nine months of 1999,
increases of 5% and 9%, respectively, over 141.1 million feet and 393.8 million
feet, respectively, for the comparable periods in 1998.
Gross Profit. Gross profit for the quarter ended September 30, 1999, increased
to $18.4 million from $16.0 million for the same period in 1998. Gross profit
for the nine months ended September 30, 1999 was $66.4 million versus $48.2
million for the comparable period in 1998. This increase was attributable to
increased sales volumes and higher material margins. The Company's unit
manufacturing costs decreased compared to the same period in 1998 as a result of
the higher volumes and material margins were higher in the first nine months of
1999 than in the first nine months of 1998.
Operating Income. The Company produced operating income of $4.2 million for the
third quarter of 1999 compared with $3.6 million for the third quarter of 1998.
For the nine month period ended September 30, 1999, operating income was $25.1,
up from $13.2 million for the first nine months of 1998. Selling, general and
administrative expenses during the third quarter of 1999 were $13.0 million,
compared with $11.3 million for the same period in 1998 and were $38.0 million
for the nine months ended September 30, 1999, compared with $31.6 million for
the same period in 1998. The increase was due to increases at Alflex associated
with higher sales volume and the infrastructure required to support the growth
of this business. Other factors contributing to the increase in selling, general
and administrative expenses were an increase in pension expense, increased costs
related to Year 2000 compliance, a new variable compensation plan, a new
executive compensation plan related to the Company's executive stock purchase
incentive program and additional office expenses due to renovation and expansion
of office facilities.
Net Income. Net income was $0.9 million for the quarter ended September 30,
1999, compared with a net loss of $2.1 million for the same period in 1998. Net
income for the nine months ended September 30, 1999 was $9.6 million compared
with a net loss of $2.0 million for the first nine months of 1998. Interest
expense was $4.7 million for the quarter ended September 30, 1999, compared to
$5.7 million for the same period in 1998 and $14.7 million for the nine months
ended September 30, 1999, compared with $16.9 million for the first nine months
of 1998. These decreases in the Company's interest expense are primarily due to
the reduction in amounts outstanding under the Company's accounts receivable
securitization facility. Income tax benefit was $1.0 million in the third
quarter of 1999 compared to an income tax expense of $0.1 million for the same
period in 1998 and an income tax expense of $1.5 million for the nine months
ended September 30, 1999, compared to an income tax benefit of $1.2 million for
the same period in 1998. Included in the income tax benefit for the nine months
ended September 30, 1998 is a $1.5 million favorable adjustment recorded in the
first quarter of 1998 as the result of 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, 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 1999.
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 sells, on a revolving
basis, an undivided interest in certain of its receivables and receives 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 September 30, 1999, the Company had outstanding $93.0 million under
the agreement and had $64.5 million of net residual interest in the securitized
receivables. The net residual interest in the securitized receivables is
included in other current assets in the Company's consolidated financial
statements.
Capital expenditures were $7.0 million during the quarter ended September 30,
1999 and $27.4 million for the nine months ended September 30, 1999. At
September 30, 1999, the Company had commitments of $15.3 million for the
purchase or construction of capital assets. Total capital expenditures for the
year 1999 are expected to be approximately $36 million, all generally related to
upgrading and expanding the Company's manufacturing and other facilities,
including the completion of Alflex's new production and distribution facility in
North Carolina, and meeting environmental requirements.
Risk Management
The price of aluminum is subject to fluctuations due to unpredictable factors in
the worldwide market. To reduce this market risk, the Company purchases and
sells futures contracts and options on the London Metal Exchange ("LME") based
on its net metal position. The Company's metal position consists of inventories,
purchase commitments, committed and anticipated sales, with the net amount
hedged using LME futures contracts and options. At September 30, 1999, the
Company held purchase and sales commitments through 2000 totaling $99 million
and $286 million, respectively. The Company held futures contracts,
marked-to-market at September 30, 1999, with a net unrealized gain of $4.0
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 $15 million. With respect to these agreements, the Company pays a
fixed rate of interest and receives a LIBOR-based floating rate.
Year 2000 Readiness Disclosure
The Company is entering the final stages of a company-wide program to make its
computer systems year 2000 compliant. The Year 2000 issue is the result of
computer programs being written using two digits rather than four to define the
applicable year. Any of the Company's programs that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000.
This could result in a major system failure or miscalculations.
As of September 30, 1999, approximately 99 percent of the Company's core
business computer systems were Year 2000 compliant. All computer systems, which
includes mainframe, server, desktop and portable computers, embedded systems, in
addition to the core business applications, are expected to be Year 2000
compliant by the end of 1999. The total cost of the program is estimated to be
$8.0 million, of which the Company has incurred approximately $7.8 million
through September 30, 1999, and is being funded through operating cash flows.
Maintenance or modification costs are expensed as incurred, while the cost of
systems being replaced is capitalized and amortized over the new system's useful
life. The Company presently believes that, with these modifications and
replacements, the Year 2000 issues will not pose significant operational
problems for the Company. However, if such modifications and replacements in
critical operations are not completed timely, the Year 2000 issues may have a
material impact on the results of operations or financial condition of the
Company.
The Company recognizes the importance of readiness for potential worst case
scenarios relating to the Year 2000 issues. The Company is developing
contingency plans to minimize the effects of potential outside Year 2000
failures on the Company's operations. The Company relies on a number of
customers and suppliers, including banks, telecommunication providers,
utilities, and other providers of goods and services. The inability of these
third parties to conduct their business for a significant period of time due to
the Year 2000 issue could have a material adverse impact on the Company's
operations. The Company is continuing to assess the Year 2000 readiness of its
most critical customers and suppliers. There can be no assurance that the
systems of other companies that interact with the Company will be sufficiently
Year 2000 compliant. If a major supplier or customer is unable to supply raw
materials or receive the Company's products, the Company's results of operations
or financial condition could be materially impacted.
The Company has notified recipients of previously made Year 2000 statements that
these statements, and any other Year 2000 statements released by the Company,
are retroactively identified and labeled in their entirety as Year 2000
Readiness Disclosures pursuant to Section 7(b) of the Year 2000 Information and
Readiness Disclosure Act of 1998. By doing so, these prior statements are
relieved from tort liability.
Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). The Statement establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative's fair value be recognized
currently in net income unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. The Company
currently expects to adopt SFAS No. 133 in the Company's first quarter 2001
reporting, as required by the Financial Accounting Standards Board's Statement
of Financial Accounting Standard No. 137, issued in June 1999, which defers SFAS
No. 133's effective date by one year. Management is currently evaluating the
impact of SFAS No. 133 on the Company's future financial reporting.
<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
27 Financial Data Schedule.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended September 30,
1999.
<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: November 10, 1999
<PAGE>
Exhibit Index
Exhibit
Number Description
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Sep-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 549
<ALLOWANCES> 0
<INVENTORY> 176,026
<CURRENT-ASSETS> 248,996
<PP&E> 567,443
<DEPRECIATION> 292,241
<TOTAL-ASSETS> 698,019
<CURRENT-LIABILITIES> 126,878
<BONDS> 125,000
0
0
<COMMON> 166
<OTHER-SE> 333,901
<TOTAL-LIABILITY-AND-EQUITY> 698,019
<SALES> 785,358
<TOTAL-REVENUES> 785,358
<CGS> 718,935
<TOTAL-COSTS> 718,935
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 225
<INTEREST-EXPENSE> 14,708
<INCOME-PRETAX> 11,107
<INCOME-TAX> 1,488
<INCOME-CONTINUING> 9,619
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,619
<EPS-BASIC> 0.60
<EPS-DILUTED> 0.60
</TABLE>
