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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark one)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________to__________
Commission file number 0-15899
WELLMAN, INC.
- -----------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 04-1671740
- --------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1040 Broad Street, Suite 302
Shrewsbury, New Jersey 07702
- --------------------------------- -------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code: (732) 542-7300
--------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- ----------------------
Common Stock, New York Stock
$.001 par value Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
------- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Rule
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Aggregate market value of the voting stock held by nonaffiliates of the
registrant, computed on the basis of $21.06 per share (the closing price of
such stock on March 20, 1998 on the New York Stock Exchange): $647,348,219.
The number of shares of the registrant's Common Stock, $.001 par value,
and Class B Common Stock, $.001 par value, outstanding as of March 20, 1998
was 31,141,883 and -0-, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the 1998 Annual Meeting of Stockholders (to be
filed with the Securities and Exchange Commission on or before April 30,
1998) is incorporated by reference in Part III hereof.
2
PART I
Item 1. BUSINESS
- ------ --------
Wellman, Inc. (which, together with its subsidiaries, is herein referred
to as the "Company") is principally engaged in the manufacture and sale of
polyester products, including Fortrel(R) brand polyester textile fibers,
polyester fibers made from recycled raw materials and PermaClear(R) PET
(polyethylene terephthalate) packaging resins.
RECENT DEVELOPMENTS
- -------------------
Construction of the Company's new PET resins and polyester fiber
production facility ("Pearl River Plant") in Mississippi, which is
approximately 50% completed, is expected to commence operation in three
phases beginning in late 1998. The construction is proceeding on plan and
costs to date have approximated the construction budget. Upon completion, it
will have an initial annual capacity of approximately 470 million pounds of
PET packaging resins and 230 million pounds of polyester fiber. See "Capital
Investment Program" and Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
During the second quarter of 1997, the Company implemented a restructuring
plan to reduce costs and enhance the competitive position of its European
operations, resulting in a pretax charge of approximately $7.5 million. The
primary components of the restructuring charge relate to the modification of
certain supply and service agreements at the Company's Netherlands-based PET
resins business and termination benefits related to a workforce reduction at
the Company's Irish fiber operation. See note 6 to the consolidated
financial statements and Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
On December 30, 1997, the Company sold its subsidiary, Creative Forming,
Inc. (CFI), located in Ripon, WI, to a management and investor group. The
Company incurred a nonrecurring loss on the sale of CFI, which manufactures
thermoformed packaging and extruded sheet primarily from virgin and recycled
PET. See note 3 to the consolidated financial statements and Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The Company's Irish fiber operation experienced a fire in July 1997 that
destroyed two out of five warehouses at the site. All damages were covered
by insurance. It is the Company's intention to replace the destroyed
buildings. See note 3 to the consolidated financial statements.
PRODUCTS AND MARKETS
- --------------------
The Company's operating structure is organized in three product groups:
the Fibers Group, composed of the chemical-based polyester textile fiber
manufacturing operations; the Recycled Products Group (RPG), primarily
consisting of polyester fiber manufacturing operations in the United States
and Europe and their related recycling operations, which procure and process
waste raw materials, as well as the nylon engineering resins and wool
businesses; and the Packaging Products Group (PPG), which includes the PET
packaging resins businesses in the United States and Europe. CFI was
included in the PPG through the date of sale.
The following table presents the combined net sales (in millions) and
percentage of net sales of the Company by product group for the periods
3
indicated. In the table, intercompany transactions have been eliminated and
historical exchange rates have been applied to the data.
1997 1996 1995
-------------- -------------- --------------
Net % of Net % of Net % of
Sales Total Sales Total Sales Total
----- ----- ----- ----- ------ -----
Fibers Grp $ 419.4 38.7% $ 450.6 41.0% $ 483.9 43.6%
RPG 386.2 35.7 372.9 33.9 479.7 43.2
PPG 277.6 25.6 275.3 25.1 145.8 13.2
------- ----- ------- ------ ------ ------
TOTAL $1,083.2 100.0% $1,098.8 100.0% $1,109.4 100.0%
======== ===== ======== ===== ======== ======
- ------------
Fibers Group
- ------------
The Fibers Group manufactures chemical-based polyester staple fibers and
polyester partially-oriented yarn (POY) for sale to the textile industry.
Staple, the primary product produced, is multi-strand fiber cut into short
lengths to simulate certain properties found in natural fibers, such as
cotton and wool, and/or to meet the end product needs of the Company's
customers. POY is a continuous polyester filament. Both products are
marketed under the Fortrel(R) brand.
Staple customers include integrated textile mills and yarn spinners which
process polyester staple into yarn and fabric for a variety of applications,
including apparel, home furnishings and industrial uses. The Company
manufactures polyester textile staple from two petrochemicals, purified
terephthalic acid (PTA) and monoethylene glycol (MEG), at its Palmetto Plant
in Darlington, SC. The stated annual fiber production capacity of the
Palmetto Plant is approximately 500 million pounds.
POY is produced at the Company's Fayetteville, NC plant from fiber-grade
polyester resin manufactured from PTA and MEG at the Company's Palmetto
Plant. POY is sold to integrated textile mills and texturizers, which
further process it before making it into fabric for use in apparel, home
furnishings and industrial applications. The stated annual POY production
capacity of the Fayetteville Plant is 130 million pounds.
Recycled Products Group
- -----------------------
The major product manufactured by the RPG is polyester staple fiber for
use as fiberfill (for pillows, comforters and furniture), and in carpets,
rugs and industrial uses. Domestically, these products are made from
recycled raw materials at facilities in Johnsonville and Marion, SC. The
stated annual fiber production capacities of the Johnsonville and Marion
Plants are approximately 260 million and 30 million pounds, respectively.
The Company utilizes two categories of recycled raw materials:
postindustrial materials and postconsumer PET soft drink bottles.
Postindustrial materials include off-quality or off-spec production, trim and
other materials generated from fiber, resin or film manufacturing processes,
a portion of which is purchased from manufacturers that compete with the
Company in the sale of fiber and resin. The Company obtains postconsumer PET
bottles primarily from deposit return and curbside recycling programs.
The Company's recycling operation in Johnsonville, SC is responsible for
the procurement of these materials, which it processes into usable raw
4
materials for the fiber and engineering resins businesses. As a result, this
operation is primarily an internal supplier. The raw material mix for the
Johnsonville and Marion Plants is approximately 50% postconsumer PET bottle
flake and 50% postindustrial material.
In Europe, the RPG manufactures polyester staple fiber from recycled raw
materials through Wellman International Limited (WIL), a wholly-owned
subsidiary based in Mullagh, Republic of Ireland. The stated annual fiber
production capacity of WIL is approximately 174 million pounds. WIL's
polyester fibers are used primarily in fiberfill, nonwovens and industrial
applications. WIL exports, primarily to the United Kingdom and continental
Europe, virtually all of its fiber production.
The majority of WIL's raw materials are postindustrial materials, some of
which are obtained from suppliers who compete with WIL in the fibers business
in Europe. WIL also utilizes as raw material postconsumer PET bottles
obtained from its recycling facilities in Spijk, the Netherlands and Verdun,
France and from third party purchases. WIL's raw material mix is
approximately 40% postconsumer PET bottle flake and 60% postindustrial
material.
Including domestic and European production, the Company believes it is the
world's largest producer of polyester staple fiber made from recycled
feedstocks and the world's largest postconsumer PET bottle recycler.
The Company's Engineering Resins Division, located in Johnsonville, SC,
manufactures and markets nylon engineering resins under the Wellamid (TM)
brand to the injection molding industry. These resins are produced using
virgin, postindustrial and postconsumer nylon compounded with various
additives (glass, minerals, fire retardant, etc.) to impart desired
performance characteristics. These resins are used primarily in automotive,
lawn and garden and electrical applications.
The RPG also produces wool top and anhydrous lanolin in Johnsonville, SC.
Packaging Products Group
- ------------------------
The PPG manufactures solid-stated and amorphous PET packaging resins at
the Company's Palmetto Plant. Solid-stated PET resin is primarily used in
the manufacture of soft drink bottles and other food and beverage packaging
and is sold under the PermaClear(R) brand. Amorphous resin, which is
produced from PTA and MEG, is used internally for solid-stating (a process
which upgrades the resin) and, to a lesser extent, sold to external
customers.
The Company's domestic production capacity for amorphous resin is
approximately 500 million pounds per year, 420 million pounds of which is
solid-stated. Solid-stated capacity includes a new 200 million pounds per
year production line which commenced operation in the second quarter of 1997.
The Company also has a solid-stated PET packaging resin production
facility in Emmen, the Netherlands ("PET Resins-Europe"). The stated annual
production capacity of this facility, where PTA and MEG are also used as raw
materials, is 110 million pounds. Virtually all of the resin is sold to PET
bottle and packaging manufacturers in Europe. In 1997, the Company incurred
a restructuring charge related to the modification of certain supply and
service agreements at this operation. See note 6 to the consolidated
financial statements and Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
5
Chemical Raw Materials
- ----------------------
The Company purchases PTA under an exclusive supply contract with Amoco
Chemical Corporation, the primary domestic supplier. MEG is purchased under
a supply contract with Oxy Chem Inc. The Company also has commitments to
supply its new Pearl River Plant scheduled to commence operation in phases
beginning in late 1998. The prices of PTA and MEG, which are typically set
on a quarterly basis, have fluctuated in the past and are likely to continue
to do so in the future. See "Forward Looking Statements; Risks and
Uncertainties."
Capital Investment Program
- --------------------------
Capital expenditures in 1997 were approximately $221 million. Major
capital projects included in the 1997 expenditures were construction costs
associated with the Pearl River Plant in Mississippi, expected to commence
operation in phases beginning in late 1998, and the domestic solid-stated PET
resins expansion which commenced operation in the second quarter of 1997.
Capital expenditures are expected to total approximately $300 million over
the next two years. These expenditures primarily include the remaining
construction costs of the Pearl River Plant, the total construction cost of
which is budgeted at approximately $400 million. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
Sales and Marketing
- -------------------
Approximately 50 employees market the majority of the Company's products.
For certain fiber sales outside the United States, the Company also utilizes
representatives or agents.
The Company's polyester fibers are also promoted through various
activities, such as advertising, sales promotion, market analysis, product
development and fashion forecasting, directed to its customers and to
organizations downstream from its customers. As part of this effort, the
Company's marketing personnel encourage downstream purchasers of apparel,
home furnishings and other products to specify to their suppliers the use of
Fortrel(R) brand polyester in their products.
The Company's markets have historically displayed price and volume
cyclicality. The cost of PTA and MEG is a primary determinant of polyester
fiber and PET resins prices. The Company's sales are neither materially
dependent upon a single customer nor seasonal in nature. The polyester fiber
markets are subject to changes in, among other factors, polyester fiber
and/or textile product imports, consumer preferences and spending and retail
sales patterns, which are driven by general economic conditions.
Consequently, a downturn in either the U.S., European, or global economy or
an increase in imports of textile or polyester fiber products could adversely
affect the Company's business. Polyester textile fiber demand also may be
influenced by the relative price of substitute fibers, most notably cotton.
Major factors affecting the PET resins market include producer supply and
capacity utilization rates and demand for PET containers, primarily for soft
drinks and other beverages which may be influenced by weather and the
relative price of aluminum cans. Worldwide PET resins supply has recently
undergone significant expansion. Demand for PET resins is also driven by new
product applications and conversion from other materials. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - General."
6
Competitors
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Each of the Company's major fiber markets is highly competitive. The
Company competes primarily on the basis of product quality, customer service,
brand identity and price. Several competitors are substantially larger than
the Company and have substantially greater economic resources. The Company's
primary competitors are E.I. DuPont de Nemours & Co., the Hoechst Celanese
Corp. (HCC) subsidiary of Hoechst A.G. and Nan Ya Plastics Corp. (Nan Ya).
The Company believes it is currently the second-largest producer of polyester
staple in the United States, representing approximately 28% of U.S.
production capacity.
Primary competitors in the PET packaging resins business, which the
Company entered in 1994, are Eastman Chemical Co., Shell Chemical Co., HCC
and Nan Ya. The Company competes primarily on the basis of resin quality,
customer service and price. The Company's competitors are substantially
larger than the Company and have substantially greater economic resources.
Research and Development
- ------------------------
The Company has approximately 85 employees devoted to research,
development and technical service activities in the fiber, recycling and
resins businesses. The Company has entered into technology sharing
arrangements from time to time with various parties. Research and
development costs were approximately $19.6 million, $18.5 million and $16.9
million for 1997, 1996 and 1995, respectively.
Foreign Activities
- ------------------
The Company operates in international markets, primarily through WIL and
PET Resins-Europe. Since most of the sales are in different currencies,
changes in exchange rates may affect profit margins and sales levels of these
operations. In addition, fluctuations between currencies may also affect the
Company's reported financial results. Foreign exchange contracts and
borrowings in local currencies are utilized by the Company to manage its
foreign currency exposure. See Item 7. "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Liquidity and Capital
Resources" and notes 2 and 14 to the consolidated financial statements.
The Company's foreign businesses are subject to certain risks customarily
attendant to foreign operations and investments in foreign countries,
including restrictive action by local governments, limitations on
repatriating funds and changes in currency exchange rates. See note 15 to
the consolidated financial statements for additional information relating to
the Company's foreign activities.
Employees
- ---------
As of December 31, 1997, the Company employed a total of approximately
3,100 persons in the United States and Europe. At December 31, 1997, the
Union of Needletrades, Industrial and Textile Employees (UNITE) represented
983 employees at the Company's Johnsonville, SC operations. Approximately
560 of these employees were members of UNITE, whose contract with the Company
expires in July 1999. At WIL, 295 out of 435 total employees were
represented by four unions at year-end 1997. The wage agreements with these
unions each expire on April 30, 2000. Employees at the PET Resins-Europe
operation total 67, with 49 represented by three unions whose contracts
expire in May 1999. The Company believes relations with its employees are
satisfactory.
7
Environmental Matters
- ---------------------
The Company's plants are subject to numerous existing and proposed laws
and regulations designed to protect the environment from wastes, emissions
and hazardous substances. The Company believes it is either in material
compliance with all currently applicable regulations or is operating in
accordance with the appropriate variances and compliance schedules or similar
arrangements. For additional information relating to environmental matters,
see Item 7. "Management's Discussion and Analysis of Financial Position and
Results of Operations - Environmental Matters" and note 9 to the consolidated
financial statements.
Executive Officers of the Registrant
- ------------------------------------
The current executive officers of the Company are as follows:
Name and Age Position
- ------------ --------
Thomas M. Duff, 50 President, Chief Executive Officer and
Director
Clifford J. Christenson, 48 Executive Vice President, Chief Operating
Officer and Director
Keith R. Phillips, 43 Vice President, Chief Financial Officer
and Treasurer
James P. Casey, 57 Vice President; President, Fibers Group
John R. Hobson, 57 Vice President, Recycled Products Group
Mark J. Rosenblum, 44 Vice President, Chief Accounting Officer
and Controller
Ernest G. Taylor, 47 Vice President, Chief Administrative
Officer
Joseph C. Tucker, 50 Vice President, Corporate Development
Officers are elected annually by the Board of Directors. Set forth below
is certain information with respect to the Company's executive officers.
Thomas M. Duff. Mr. Duff has been President and CEO of the Company since
its inception in 1985.
Clifford J. Christenson. Mr. Christenson has been Executive Vice
President since October 1993 and Chief Operating Officer since June 1995.
Prior to October 1993 he was Chief Financial Officer and Treasurer since
joining the Company in 1985 and Vice President since 1986.
Keith R. Phillips. Mr. Phillips has been Vice President, Chief Financial
Officer and Treasurer since October 1993. Prior to October 1993 he was a
partner in Ernst & Young LLP. Mr. Phillips is a certified public accountant.
James P. Casey. Mr. Casey has been President of the Fibers Group since
October 1993. Prior to such time he was Vice President, Marketing since
March 1991.
John R. Hobson. Mr. Hobson has been Vice President, Recycled Products
Group since July 1995. Prior to such time, he served as Vice President of
8
various divisions from January 1992 to July 1995. Prior to 1992, he was
Director of International Sales and (chemical) Raw Material Purchasing.
Mark J. Rosenblum. Mr. Rosenblum has been Vice President, Controller
since September 1989, Chief Accounting Officer since August 1996 and
Controller since he joined the Company in 1985. Mr. Rosenblum is a certified
public accountant.
Ernest G. Taylor. Mr. Taylor has been Vice President, Administration
since January 1991. In November 1997 he became Vice President, Chief
Administrative Officer.
Joseph C. Tucker. Dr. Tucker has been Vice President, Corporate
Development since December 1997. Prior to such time, he served as Vice
President and General Manager of PET Resins-Europe from 1995 to 1997 and
Vice President of Manufacturing and Technology from 1993 to 1995.
Item 2. Properties
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The location and general description of the principal manufacturing
properties owned by the Company are set forth in the table below:
Principal Square
Location Functions Footage
- -------- --------- -------
Johnsonville, SC Fiber, Engineering Resins and 2.3 million
Wool Manufacturing, Recycling
Operations and Warehouse
Darlington, SC Fiber and Resins Manufacturing 1.1 million
(Palmetto) and Warehouse
Mullagh, Ireland (1) Fiber Manufacturing and Warehouse .4 million
Fayetteville, NC Fiber Manufacturing and Warehouse .3 million
Emmen, the Netherlands Resins Manufacturing and Warehouse .1 million
- --------------------
(1) WIL's credit facilities are secured by the assets of WIL.
The Company also has manufacturing, marketing and administrative
facilities in Marion, SC, Charlotte, NC, New York, NY, Bridgeport, NJ, Spijk,
the Netherlands, Yorkshire, England, Dortmund, Germany and Verdun, France.
The corporate office is located in Shrewsbury, NJ. The Company is
constructing a new plant in Hancock County, MS (Pearl River Plant). See
Item 1. "Business-Recent Developments" and Item 7. "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Item 3. Legal Proceedings
- ------ -----------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
Not applicable.
9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
- ------ -------------------------------------------------------------------
The Company's common stock is listed on the New York Stock Exchange (NYSE)
under the symbol WLM. The following table shows the high, low and closing
sales prices as reported by the NYSE and cash dividends paid per share of
common stock for the last two fiscal years.
Year High Low Close Dividend
- ---- ---- --- ----- --------
1997
- ----
Fourth Quarter $24.56 $17.94 $19.50 $0.09
Third Quarter $24.19 $17.38 $23.19 $0.09
Second Quarter $18.63 $15.13 $17.38 $0.09
First Quarter $18.38 $16.00 $17.50 $0.08
1996
- ----
Fourth Quarter $19.25 $15.88 $17.13 $0.08
Third Quarter $23.50 $17.00 $17.50 $0.08
Second Quarter $24.88 $22.13 $23.38 $0.08
First Quarter $24.38 $18.00 $23.50 $0.07
The Company had approximately 900 holders of record and, to its knowledge,
approximately 15,000 beneficial owners of its common stock as of March 20,
1998.
See note 11 to the consolidated financial statements for information
regarding common stock rights associated with the common stock.
10
Item 6. Selected Consolidated Financial Data
- ------- ------------------------------------
(In thousands, except Years Ended December 31,
per share data) 1997(1) 1996 1995 1994 1993(2)
- -----------------------------------------------------------------------------
Income Statement Data:
Net sales . . . . . . . . $1,083,188 $1,098,804 $1,109,398 $936,133 $842,064
Cost of sales. . . . . . 923,278 941,693 886,817 724,874 679,182
---------- ---------- ---------- -------- --------
Gross profit. . . . . . . 159,910 157,111 222,581 211,259 162,882
Selling, general and
administrative expenses. 83,128 88,987 89,704 89,518 86,511
Restructuring charge. . . 7,469 -- -- -- --
Interest expense, net . . 12,160 13,975 11,666 13,741 15,736
Gain (loss) on divestitures
and other, net . . . . . (5,963) -- (5,500) -- 12,386
---------- ---------- ---------- -------- --------
Earnings before income taxes
and cumulative effect of
changes in accounting
principles . . . . . . . 51,190 54,149 115,711 108,000 73,021
Income taxes. . . . . . . 20,835 27,620 41,657 43,200 32,567
---------- ---------- ---------- -------- --------
Earnings before cumulative
effect of changes in
accounting principles. . 30,355 26,529 74,054 64,800 40,454
Cumulative effect of changes
in accounting principles,
net of income taxes. . . -- -- -- -- (9,010)
---------- ---------- ---------- -------- --------
Net earnings. . . . . . . $ 30,355 $ 26,529 $ 74,054 $ 64,800 $ 31,444
========== ========== ========== ======== ========
Basic earnings per common share:
Before cumulative effect of
changes in accounting
principles . . . . . . $ 0.98 $ 0.81 $ 2.22 $ 1.96 $ 1.24
Cumulative effect of changes
in accounting principles,
net of income taxes. . -- -- -- -- (0.28)
---------- ---------- ---------- -------- --------
Basic net earnings
per share. . . . . . . $ 0.98 $ 0.81 $ 2.22 $ 1.96 $ 0.96
========== ========== ========== ======== ========
Average common
shares-basic . . . . . 31,120 32,649 33,322 32,985 32,682
Diluted earnings per common share:
Before cumulative effect of
changes in accounting
principles . . . . . . $ 0.97 $ 0.81 $ 2.20 $ 1.94 $ 1.23
Cumulative effect of changes
in accounting principles,
net of income taxes. . -- -- -- -- (0.27)
---------- ---------- ---------- -------- --------
Diluted net earnings
per share. . . . . . . $ 0.97 $ 0.81 $ 2.20 $ 1.94 $ 0.96
========== ========== ========== ======== ========
Average common
shares-diluted . . . . 31,269 32,774 33,699 33,417 32,857
Dividends (3) . . . . . . $ 10,882 $ 10,085 $ 9,003 $ 7,593 $ 5,885
11
Pro forma amounts assuming
the effects of the changes
in accounting principles are
applied retroactively:
Net earnings. . . . . NA NA NA NA $ 40,454
Basic net earnings
per share. . . . . . NA NA NA NA $ 1.24
Diluted net earnings
per share. . . . . . NA NA NA NA $ 1.23
December 31,
1997 1996 1995 1994 1993
Balance Sheet Data: ---------------------------------------------------
Total assets. . . . . .$1,319,225 $1,203,949 $1,210,673 $1,044,462 $1,015,247
Total debt. . . . . . .$ 394,753 $ 319,566 $ 279,230 $ 256,531 $ 312,767
Stockholders' equity. .$ 634,434 $ 623,928 $ 650,346 $ 577,573 $ 506,506
(1) 1997 net earnings reflect a charge of $8.1 million ($0.26 per diluted
share) of unusual and nonrecurring items.
(2) 1993 net earnings reflect a charge of $15.9 million ($0.48 per diluted
share) of accounting changes and unusual and nonrecurring items.
(3) Dividends paid were $0.35 per share in 1997, $0.31 per share in 1996,
$0.27 per share in 1995,$0.23 per share in 1994 and $0.18 per share in
1993.
12
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
- ------- -----------------------------------------------------------------
GENERAL
The Company's primary business is the manufacture and marketing of high-
quality polyester products, including Fortrel(R) brand polyester textile
fibers, polyester fibers made from recycled raw materials and PermaClear(R)
brand PET (polyethylene terephthalate) packaging resins. The Company
currently has annual capacity to manufacture approximately 1.1 billion pounds
of fiber and 610 million pounds of resins worldwide at five major production
facilities in the United States and Europe. The Company is also the world's
largest PET plastics recycler, utilizing a significant amount of recycled raw
materials in its manufacturing operations.
The Company plans to substantially increase its polyester fiber and PET
resins production capacity through the construction of its new, state-of-the-
art Pearl River Plant in Mississippi. This facility commences operation in
three phases beginning in late 1998. By the year 2001, this facility is
expected to have annual capacity to manufacture 570 million pounds of resins
and 230 million pounds of fiber. As a result, the Company's production mix
is expected to be approximately 50% fibers and 50% PET resins.
The Fibers Group produces Fortrel(R) textile fibers, which currently
represent approximately 60% of the Company's fiber production. These fibers
are used in apparel and home furnishings and are produced from two chemical
raw materials, purified terephthalic acid (PTA) and monoethylene glycol
(MEG). The other 40% of fiber production, primarily fiberfill and carpet
fibers, is manufactured by the Recycled Products Group from recycled raw
materials, including postindustrial fiber, resin and film materials and
postconsumer PET soft drink bottles. The Company's PET resins, produced by
the Packaging Products Group from PTA and MEG, are primarily used in the
manufacture of clear plastic soft drink bottles and other food and beverage
packaging.
The Company's markets are highly competitive. It competes in these
markets primarily on the basis of product quality, customer service, brand
identity and price. It believes it is the second-largest polyester staple
and third-largest POY producer in the United States and the fourth-largest
PET resins producer in North America. Several of the Company's competitors
are substantially larger than the Company and have substantially greater
economic resources.
Demand for polyester fiber historically has been cyclical, as it is
subject to changes in consumer preferences and spending, retail sales
patterns, and fiber or textile product imports, all of which are driven
primarily by general economic conditions. Global PET resins demand continues
to grow, driven by new product applications for PET and conversion from other
packaging materials to PET.
Several factors significantly affect the Company's profitability: raw
material margins, which are the difference (or spread) between product
selling prices and raw material costs; supply and demand for its products;
the prices of competing materials, such as cotton and aluminum, which can
affect demand for its products; and economic and market conditions in the
United States, Europe and other regions of the world. Prices of PTA and MEG,
primary determinants of polyester fiber and PET resins selling prices, are
cyclical. Changes in PTA and MEG prices are driven by worldwide supply and
demand.
13
Raw material margins for the chemical-based fiber and PET resins
businesses have generally been influenced by supply and demand factors.
Despite growing demand for PET resins, worldwide supply has recently
undergone significant expansion which has adversely affected profitability.
Both fiber and resins margins experience increases or decreases due to timing
of price changes and market conditions.
Raw material margins for the recycled fiber operation tend to be more
variable than those for the chemical-based businesses, primarily because
changes in recycled raw material costs do not cause changes in fiber prices.
Recycled raw material costs are primarily dependent upon worldwide supply and
demand for waste materials.
The Company's sales are neither materially dependent upon a single
customer nor seasonal in nature. Sales for PET resins, primarily for soft
drink bottles and other beverages, may be influenced by weather and the
relative price of aluminum cans. Demand, prices and raw material costs for
both fiber and PET resins may be affected by global economic conditions,
supply and demand balances, the prices of competing materials, such as
cotton, and export activity.
RESULTS OF OPERATIONS - 1997 COMPARED TO 1996
Net sales for 1997 remained unchanged as compared to 1996 at $1.1 billion
primarily as a result of higher sales volumes offsetting lower selling
prices. Sales for the Fibers Group decreased 6.9% to $419.4 million in 1997
from $450.6 million in 1996 due to significantly lower polyester fiber
selling prices which more than offset slightly higher sales volumes. Sales
for the Recycled Products Group (RPG) increased 3.6% to $386.2 million in
1997 from $372.9 million in 1996 due to increased polyester fiber sales
volumes and higher sales in other divisions which offset worldwide declines
in polyester fiber selling prices. Sales volumes in 1996 were negatively
impacted by a 12-week strike at the Company's Irish fiber operation, which
kept the facility closed from mid-July through early October. Despite
substantially higher domestic sales volumes, sales for the Packaging Products
Group (PPG) increased only slightly to $277.6 million in 1997 from $275.3 in
1996 as a result of significantly lower worldwide PET resins selling prices.
In the second quarter of 1997, the Company commenced operation of an
additional 200 million pounds per year PET resins production line at its
Darlington, S.C. plant.
Gross profit increased 1.8% to $159.9 million in 1997 from $157.1 million
in 1996. The gross profit margin for 1997 was 14.7% compared to 14.3% for
1996. This was primarily the result of increased profitability in the RPG
which offset lower profitability in the Fibers Group and PPG. The Company's
gross profit in 1996 was negatively impacted by a charge of $7 million to
establish an inventory reserve resulting from large declines in raw material
costs and a 12-week strike at the Company's Irish fiber operation. Gross
profit for the Fibers Group decreased primarily as a result of significantly
lower polyester fiber selling prices offsetting lower overall costs. Gross
profit for the RPG increased significantly in 1997 due in part to increased
sales volumes at the Company's Irish fiber operation as a result of the 1996
period being negatively impacted by the aforementioned strike. In addition,
the increase is attributable to substantially lower worldwide raw material
costs and higher domestic sales volumes for fiber, and increased gross profit
in other divisions. Despite higher domestic sales volumes resulting from the
aforementioned capacity expansion and lower raw material costs, gross profit
for the PPG decreased significantly in 1997 principally due to significantly
lower worldwide PET resins selling prices.
14
Selling, general and administrative expenses amounted to $83.1 million in
1997, or 7.7% of sales, compared to $89.0 million in 1996, or 8.1% of sales.
The decrease is due to reduced costs at the Company's European operations
resulting from the restructuring plan implemented in the second quarter of
1997 (see below) as well as the Company's continued efforts to reduce overall
spending.
During the second quarter of 1997, the Company implemented a restructuring
plan to reduce costs and enhance the competitive position of its European
operations, resulting in a pretax charge of approximately $7.5 million. The
primary components of the restructuring charge relate to the modification
of certain supply and service agreements at the Company's Netherlands-based
PET resins business and termination benefits related to a workforce reduction
at the Company's Irish fiber operation. See note 6 to the consolidated
financial statements.
As a result of the foregoing, operating income was $69.3 million in 1997,
or $76.8 million excluding the restructuring charge, compared to $68.1
million in 1996.
Net interest expense decreased to $12.2 million in 1997 from $14.0 million
in 1996. The decrease in interest expense was due principally to higher
interest capitalization resulting from the Company's ongoing capacity
expansion program. See note 7 to the consolidated financial statements.
In the fourth quarter of 1997, the Company recorded a pretax loss of $6.0
million which decreased net earnings by $3.8 million, or $0.12 per diluted
share. The loss is comprised of two parts: a loss on the sale of a
subsidiary and a gain from an insurance reimbursement related to a warehouse
fire at the Company's Irish fiber operation in July 1997. See note 3 to the
consolidated financial statements.
The effective income tax rate was 40.7% in 1997 compared to 51% in 1996.
The rate decreased primarily as a result of increased earnings at the
Company's Irish fiber operation, which is subject to significantly lower tax
rates than the U.S. operations, and the reduction in foreign operating
losses for which no tax benefit had been provided.
As a result of the foregoing, net earnings for 1997 were $30.4 million, or
$0.97 per diluted share. Excluding the one-time charges, net earnings for
1997 were $38.5 million, or $1.23 per diluted share, compared to $26.5
million, or $0.81 per diluted share in 1996.
OUTLOOK
Demand for the Company's polyester fibers is expected to remain healthy in
1998. However, domestic fiber profit margins remain at historically low
levels primarily due to continued downward pressure on selling prices, which
may continue in 1998.
Domestic PET resins sales volumes are expected to increase in 1998
primarily due to the completion of a domestic expansion in the second quarter
of 1997 and the scheduled start-up of the first PET resins production line at
the Company's Pearl River Plant in late 1998. The Company believes that
profit margins in this business will continue to recover in 1998 over the
historically low levels in 1997.
Operating profit in 1998 is expected to benefit from a restructuring plan
the Company implemented at its European operations in the second quarter of
15
1997 through which it modified a PET resins take-or-pay supply agreement at
the Netherlands facility and reduced staffing at the Irish fiber operation.
To date, the Company has experienced little effect from the financial
troubles of the Far East which began in 1997. However, the Company is
uncertain what effect the present situation will have on future operations.
RESULTS OF OPERATIONS - 1996 COMPARED TO 1995
Net sales for 1996 remained unchanged as compared to 1995 at $1.1 billion.
This was generally the result of increased sales volumes and lower selling
prices. Sales for the Fibers Group decreased 6.9% to $450.6 million in 1996
from $483.9 million in 1995 due to significantly lower polyester fiber
selling prices which more than offset improved fiber sales volumes during the
latter part of 1996. Sales for the RPG decreased 22.3% to $372.9 million
from $479.7 million due primarily to a 12-week strike at the Company's Irish
fiber operation, which kept the facility closed from mid-July through early
October; and the disposition of certain businesses which had sales in 1995 of
$47.5 million. In addition, the decline in RPG's sales was a result of lower
polyester fiber selling prices for the domestic and Irish fiber operations.
Sales for the PPG increased 88.8% to $275.3 million in 1996 from $145.8
million in 1995 due to higher sales volumes resulting from the December 31,
1995 acquisition of a Netherlands-based PET resins business and the mid-1995
expansion of domestic PET resins capacity. This increased volume more than
offset significantly lower worldwide PET resins selling prices.
Gross profit decreased 29.4% to $157.1 million in 1996 from $222.6 million
in 1995. The gross profit margin for 1996 was 14.3% compared to 20.1% for
1995. Gross profit for the Fibers Group decreased primarily as a result of
significantly lower fiber selling prices due to weak textile demand in the
first half of the year which more than offset lower chemical raw material
costs. Gross profit for the RPG also decreased in 1996 from 1995 primarily
due to reduced profit at the Company's Irish fiber operation stemming from
weak business conditions compounded by the strike, and the discontinuance of
gross profit from divested businesses. This more than offset increased
profits for the domestic recycled fiber business as a result of lower raw
material costs. Despite higher sales volumes resulting from the
aforementioned acquisition of the Netherlands-based PET resins business and
domestic PET resins expansion, the gross profit for the PPG decreased in 1996
due to significantly lower worldwide PET resins selling prices, which more
than offset lower raw material costs. These factors contributed to a loss at
the Netherlands-based PET resins operation. The Company's gross profit for
1996 was also negatively impacted by a $7 million inventory charge resulting
from large declines in raw material costs and selling prices, including a $3
million charge related to the PET resins take-or-pay arrangement.
Selling, general and administrative expenses amounted to $89.0 million in
1996, or 8.1% of sales, compared to $89.7 million in 1995, or 8.1% of sales.
As a result of the foregoing, operating income decreased to $68.1 million
in 1996 compared to $132.9 million in 1995.
Net interest expense for 1996 increased to $14.0 million from $11.7
million for 1995. Interest expense increased as a result of higher average
outstanding borrowings which were partially offset by higher interest
capitalization resulting from the Company's long-term capital investment
program.
16
The effective income tax rate was 51% in 1996 compared to 36% in 1995.
This resulted from lower pretax earnings, lower earnings at the Irish
manufacturing operations which benefit from a favorable tax rate, and a
pretax loss at the European PET resins operation which has no tax benefit.
See note 8 to the consolidated financial statements.
As a result of the foregoing, net earnings for 1996 were $26.5 million, or
$0.81 per diluted share, compared to $74.1 million, or $2.20 per diluted
share, in 1995.
ENVIRONMENTAL MATTERS
The Company's operations are subject to extensive laws and regulations
governing air emissions, wastewater discharges and solid and hazardous waste
management activities. The Company takes a proactive approach in addressing
the applicability of these laws and regulations as they relate to its
manufacturing operations and in proposing and implementing any remedial plans
that may be necessary. The Company has identified certain situations that
will require future capital and non-capital expenditures to maintain or
improve compliance with current environmental laws and regulations as well as
to support planned future expansion. The majority of the identified
situations are found at the Company's largest manufacturing facilities and
primarily deal with groundwater remediation, quality of air emissions and
wastewater treatment processes.
The Company's policy is to expense environmental remediation costs when it
is both probable that a liability has been incurred and the amount can be
reasonably estimated. While it is often difficult to reasonably quantify
future environmental-related expenditures, the Company currently estimates
its future non-capital expenditures related to environmental matters to range
between $9.8 million and $25.2 million. In connection with these
expenditures, the Company has accrued management's best estimate of probable
non-capital environmental expenditures. In addition, aggregate future
capital expenditures related to environmental matters are expected to range
from $9.3 million to $28.6 million. These non-capital and capital
expenditures are expected to be incurred during the next 10 to 20 years.
The Company believes that it is entitled to recover a portion of these
expenditures under indemnification and escrow agreements. During 1997, 1996
and 1995, costs associated with environmental remediation and ongoing
assessment were not significant. See notes 1 and 9 to the consolidated
financial statements.
The measurement of liability is based on an evaluation of currently
available facts with respect to each individual situation and takes into
consideration factors such as existing technology, presently enacted laws and
regulations and prior experience in remediation of contaminated sites. As
assessments and remediation progress at individual sites, these liabilities
are reviewed periodically and adjusted to reflect additional technical and
legal information which becomes available.
The Company believes it is either in material compliance with all
currently applicable regulations or is operating in accordance with the
appropriate variances and compliance schedules or similar arrangements.
Subject to the imprecision in estimating future environmental costs, the
Company believes that compliance with current laws and regulations will not
require significant capital expenditures or have a material adverse effect on
its consolidated financial position or results of operations. See "Forward
Looking Statements; Risks and Uncertainties."
17
YEAR 2000
The Year 2000 Issue is the result of computer programs written using two
digits rather than four to define the applicable year. Any of the Company's
computer 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 system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
Based on a recent assessment, the Company determined that it will be
required to modify certain portions of its software and process equipment so
that its computer systems will function properly with respect to dates in the
year 2000 and thereafter. The Company presently believes that with
modifications to existing software the Year 2000 Issue will not pose
significant operational problems for its computer systems. However, if such
modifications are not made, or are not completed timely, the Year 2000 Issue
could have a material impact on the operations of the Company.
The Company expects to complete its Year 2000 project by mid 1999, which
is prior to any anticipated impact on its operating systems. The total
project cost, which will be expensed as incurred, is not expected to have a
material effect on the results of operations. See "Forward Looking
Statements; Risks and Uncertainties."
LIQUIDITY AND CAPITAL RESOURCES
The Company generated cash from operations of $128.1 million in 1997
compared to $151.9 million in 1996.
Net cash used in investing activities amounted to $197.8 million in 1997
compared to $135.2 million in 1996. Capital spending amounted to $221.2
million in 1997 and $126.0 million in 1996, reflecting the Company's ongoing
capital investment program. Proceeds from divestitures and other amounted to
$18.3 million in 1997 and $4.2 million in 1996.
Net cash provided by financing activities amounted to $67.9 million in
1997 compared to net cash used of $18.4 million in 1996. Net borrowings
were $78.3 million in 1997 compared to $40.3 million in 1996. In 1996, the
Company completed the repurchase of 2.5 million shares of its common stock in
the open market at a cost of $49.5 million.
With the completion of the PET resins capacity expansion at the
Darlington, SC plant in the second quarter of 1997, the remainder of the
Company's ongoing capital investment program consists primarily of the
construction of its Pearl River Plant in Mississippi. The total capitalized
cost of the facility is estimated to be approximately $450 million,
consisting of approximately $400 million of construction costs plus
Mississippi state grants and capitalized interest. This facility,
approximately 50% completed, is expected to be operational in three phases
beginning in late 1998. The Company's planned capital expenditures in 1998
are estimated to range between $210 and $230 million, with aggregate capital
expenditures through the end of 1999 estimated at approximately $300 million.
The exact amount and timing of the capital spending is difficult to predict
since certain projects may extend into 1999 or beyond depending upon
equipment delivery and construction schedules. To receive certain incentives
provided by the state of Mississippi, the Company, in conjunction with the
Mississippi Business Finance Corporation, expects to issue a series of
taxable Rural Economic Development Bonds.
18
The Company's financing agreements contain normal financial and
restrictive covenants. The most restrictive of these covenants permits a
maximum leverage ratio of 55%, requires EBITDA to exceed 3.5 times interest
expense and requires the Company to maintain a certain net worth. The
financial resources available to the Company at December 31, 1997 include
$310 million under its $330 million revolving credit facility, unused
short-term uncommitted lines of credit aggregating approximately $250
million, and internally generated funds. The Company is pursuing other forms
of financing including the issuance of public or private debt securities.
The Company believes these financial resources and other credit arrangements
will be sufficient to meet its foreseeable working capital, capital
expenditure and dividend payment requirements.
The Company has entered into two types of financial instruments to
minimize its interest rate exposure. One instrument, with a notional amount
of $150 million, was designed to provide a fixed 10 year interest rate of
6.42% (exclusive of corporate spreads) on $150 million of debt if issued on
December 31, 1997 and approximately 6.51% (exclusive of corporate spreads) if
issued on March 31, 1998. The Company has also entered into interest rate
swaps to fix the interest rate on variable rate borrowings, thereby
eliminating substantial interest rate risk. The agreements are for $200
million, $100 million of which were in effect at December 31, 1997, and $100
million with starting dates ranging between February and May 1998. Maturity
dates are a minimum of 5 years and a maximum of 10 years after the starting
date of the swaps. The swaps will effectively fix the rate of interest
between 6.10% and 6.20% on $200 million of borrowings. In aggregate, the
Company estimates it would have had to pay approximately $14.2 million to
terminate these agreements at December 31, 1997.
The Company has entered into forward foreign currency contracts to
exchange Dutch guilders for U.S. dollars with an aggregate notional amount of
$21.8 million at December 31, 1997 in order to reduce the related impact of
foreign currency translation adjustments. This has the effect of converting
a portion of U.S. debt to local currency (guilder) debt. The Company has
designated these contracts as a hedge of a net investment in a foreign
entity. At December 31, 1997, the Company estimates it would receive
approximately $0.7 million, if these contracts were terminated.
The Company has also entered into forward foreign currency contracts to
exchange U.S. dollars for German marks with an aggregate notional amount of
$12.6 million at December 31, 1997. These contracts are designed to reduce
(hedge) the impact of foreign currency fluctuations relative to fixed asset
purchase commitments and have maturity dates ranging from January 1998
through March 1999. At December 31, 1997, the Company would have had to
pay approximately $1.4 million to terminate these contracts.
The Company's European businesses utilize foreign currency debt and
forward currency contracts to hedge certain of their accounts receivable and
accounts payable denominated in other foreign currencies. At December 31,
1997, the notional amount of the forward foreign currency contracts was $15.5
million and the cost to terminate these contracts was not significant.
The Company's estimates with respect to the values of its derivative
instruments are based on readily available dealer quotes.
19
NEW ACCOUNTING STANDARDS
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" (FAS 131), effective for fiscal years
beginning after December 15, 1997. FAS 131 requires that a public company
report financial and descriptive information about its reportable operating
segments pursuant to criteria that differ from current accounting practice.
Operating segments, as defined, are components of an enterprise for which
separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and
in assessing performance. The financial information to be reported includes
segment profit or loss, certain revenue and expense items and segment assets
and reconciliations to corresponding amounts in the general purpose financial
statements. FAS 131 also requires information about products and services,
geographic areas of operation, and major customers. The Company has not
completed its analysis of the effect of adoption of FAS 131 on its financial
statement disclosure; however, the adoption of FAS 131 will not affect
results of operations or financial position.
FORWARD LOOKING STATEMENTS; RISKS AND UNCERTAINTIES
Statements contained in this Form 10-K that are not historical facts are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. In addition, words such as
"believes," "anticipates," "expects" and similar expressions are intended to
identify forward-looking statements. The Company cautions that a number of
important factors could cause actual results for 1998 and beyond to differ
materially from those expressed in any forward-looking statements made by or
on behalf of the Company. Such statements contain a number of risks and
uncertainties, including, but not limited to, demand and competition for
polyester fiber and PET resins, availability and cost of raw materials,
levels of production capacity and announced changes thereto, changes in
interest rates and foreign currency exchange rates, work stoppages, natural
disasters, U.S., European and global economic conditions and changes in laws
and regulations, prices of competing products, such as cotton and aluminum,
and the Company's ability to complete expansions and other capital projects
on time and budget and to maintain the operations of its existing production
facilities. The Company cannot assure that it will be able to anticipate or
respond timely to changes which could adversely affect its operating results
in one or more fiscal quarters. Results of operations in any past period
should not be considered indicative of results to be expected in future
periods. Fluctuations in operating results may result in fluctuations in the
price of the Company's common stock.
In addition to those described above, the more prominent risks and
uncertainties inherent in the Company's business are set forth below.
However, this section does not discuss all possible risks and uncertainties
to which the Company is subject, nor can it be assumed necessarily that there
are no other risks and uncertainties which may be more significant to the
Company.
Impact of Economic Conditions
Capacity utilization, which is the demand for product divided by its
supply, is a critical factor affecting the Company's financial performance.
Demand for polyester fiber historically has been cyclical because it is
subject to changes in consumer preferences and spending, retail sales
patterns, and fiber or textile product imports, all of which are driven
20
primarily by general economic conditions. Demand, prices and raw material
costs for both fiber and PET resins may be affected by global economic
conditions. Supply is expanding for both fiber and resins in the United
States. While expectations are that growth in demand will approximate growth
in supply, any significant expansion in supply over demand could reduce
profitability. A material change in demand, supply or in general economic
conditions or uncertainties regarding future economic prospects could have a
material adverse effect on the Company's results of operations.
Impact of Far Eastern Financial Crisis
In the fourth quarter of 1997, the Far Eastern economies, which are the
largest and were, until recently, the fastest growing polyester market,
experienced a significant economic and financial crisis. This crisis is
expected to affect the size of the market and future expansions. Given the
inherent uncertainties surrounding the Far Eastern polyester markets, it is
unknown what effect the crisis will have on the U.S. polyester fiber and
resins markets. However, given the size of the Far Eastern markets, the
impact could be significant and this could have a material adverse effect on
the Company's results of operations.
Dependency on Availability of Raw Materials
The Company's operations are substantially dependent on the availability
of its two primary raw materials, PTA and MEG. The Company currently relies
on a single source for the supply of PTA and a limited number of sources for
MEG. The effect of the loss of any of such sources, of a disruption in their
business or failure to meet the Company's product needs on a timely basis
would depend primarily upon the length of time necessary to find a suitable
alternative source. At a minimum, temporary shortages in needed raw
materials could have a material adverse effect on the Company's results of
operations. There can be no assurance that precautions taken by the Company
would be adequate or that an alternative source of supply could be located or
developed in a timely manner.
Construction Program
The Company is currently constructing a new PET resins and polyester fiber
production facility in Mississippi at a total estimated capitalized cost of
approximately $450 million. The facility, which is expected to commence
operations in three phases beginning in late 1998, will have an initial
annual capacity of approximately 470 million pounds of PET packaging resins
and 230 million pounds of polyester fiber. However, there can be no
assurance that the Company will be able to commence operations as scheduled,
that it will not encounter significant disruptions in its operations, that
the facility will operate as effectively as expected, or that the Company
will be able to sell at acceptable prices the added volumes from this
facility.
Environmental Matters
Actual costs to be incurred for identified environmental situations in
future periods may vary from the estimates, given inherent uncertainties in
evaluating environmental exposures due to unknown conditions, changing
government regulations and legal standards regarding liability and evolving
related technologies.
21
Year 2000
In addition to the Company's procedures relating to the Year 2000 (see
"Year 2000" above), the Company has initiated formal communications with all
of its significant suppliers and large customers to determine the extent to
which the Company's interface systems are vulnerable to those third parties'
failure to remediate their own Year 2000 Issues. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted and would not have an adverse effect on the
Company's systems.
The costs of the Company's Year 2000 project and the date on which the
Company believes it will complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third party modification plans and other factors. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes and similar uncertainties.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
- ------- ---------------------------------------------------------
Not applicable.
22
Item 8. Financial Statements and Supplementary Data
- ------ -------------------------------------------
WELLMAN, INC.
Index to Consolidated Financial Statements and Consolidated Financial
Statement Schedules
Consolidated Statements of Income for the years ended
December 31, 1997, 1996 and 1995 24
Consolidated Balance Sheets as of December 31, 1997 and 1996 25
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1997, 1996 and 1995 26
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 27
Notes to Consolidated Financial Statements 28
Report of Independent Auditors 44
Consolidated financial statement schedules for the years ended
December 31, 1997, 1996 and 1995:
II -- Valuation and qualifying accounts 45
All other schedules are omitted since the required information is not
present or is not present in amounts sufficient to require submission of the
schedules, or because the information required is included in the
consolidated financial statements and notes thereto.
23
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
------------------------
(In thousands, except per share data) 1997 1996 1995
- ----------------------------------------------------------------------------
Net sales. . . . . . . . . . . . . . . . . .$1,083,188 $1,098,804 $1,109,398
Cost of sales. . . . . . . . . . . . . . . . 923,278 941,693 886,817
--------- -------- ---------
Gross profit . . . . . . . . . . . . . . . . 159,910 157,111 222,581
Selling, general and administrative expenses 83,128 88,987 89,704
Restructuring charges. . . . . . . . . . . . 7,469 -- --
---------- ---------- ---------
Operating income . . . . . . . . . . . . . . 69,313 68,124 132,877
Interest expense, net. . . . . . . . . . . . 12,160 13,975 11,666
Loss on divestitures and other, net. . . . . 5,963 -- 5,500
---------- ---------- ---------
Earnings before income taxes . . . . . . . . 51,190 54,149 115,711
Income taxes . . . . . . . . . . . . . . . . 20,835 27,620 41,657
---------- ---------- ---------
Net earnings . . . . . . . . . . . . . . . .$ 30,355 $ 26,529 $ 74,054
========== ========== =========
Basic net earnings per common share. . . . .$ 0.98 $ 0.81 $ 2.22
========== ========== =========
Weighted average common shares-basic . . . . 31,120 32,649 33,322
========== ========== =========
Diluted net earnings per common share. . . .$ 0.97 $ 0.81 $ 2.20
========== ========== =========
Weighted average common shares-diluted . . . 31,269 32,774 33,699
========== ========== =========
See notes to consolidated financial statements.
24
CONSOLIDATED BALANCE SHEETS
December 31,
In thousands, except share data) 1997 1996
- ----------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents. . . . . . . . . . . . $ -- $ 2,120
Accounts receivable, less allowance of $5,229
in 1997 and $2,611 in 1996. . . . . . . . . . . . . 126,106 132,296
Inventories. . . . . . . . . . . . . . . . . . . . . 154,133 158,685
Prepaid expenses and other current assets. . . . . . 3,366 3,947
---------- ----------
Total current assets. . . . . . . . . . . . . . . 283,605 297,048
Property, plant and equipment, at cost:
Land, buildings and improvements . . . . . . . . . . 104,073 102,093
Machinery and equipment. . . . . . . . . . . . . . . 735,144 696,995
Construction in progress . . . . . . . . . . . . . . 251,493 94,583
---------- ----------
1,090,710 893,671
Less accumulated depreciation. . . . . . . . . . . . 336,230 296,043
---------- ----------
Property, plant and equipment, net. . . . . . . . 754,480 597,628
Cost in excess of net assets acquired, net . . . . . . 269,756 290,450
Other assets, net. . . . . . . . . . . . . . . . . . . 11,384 18,823
---------- ----------
$1,319,225 $1,203,949
========== ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable . . . . . . . . . . . . . . . . . .$ 73,070 $ 64,019
Accrued liabilities. . . . . . . . . . . . . . . . . 39,590 41,320
Current portion of long-term debt. . . . . . . . . . 208 159
---------- ----------
Total current liabilities . . . . . . . . . . . . 112,868 105,498
Long-term debt . . . . . . . . . . . . . . . . . . . . 394,545 319,407
Deferred income taxes and other liabilities. . . . . . 177,378 155,116
---------- ----------
Total liabilities . . . . . . . . . . . . . . . . 684,791 580,021
Stockholders' equity:
Common stock, $0.001 par value; 55,000,000
shares authorized, 33,638,193 shares issued
in 1997, 33,612,464 in 1996 . . . . . . . . . . . . 34 34
Class B common stock, $0.001 par value; 5,500,000
shares authorized; no shares issued . . . . . . . . -- --
Paid-in capital. . . . . . . . . . . . . . . . . . . 234,179 233,665
Foreign currency translation adjustments . . . . . . 372 9,853
Retained earnings. . . . . . . . . . . . . . . . . . 449,373 429,900
Less common stock in treasury at cost:
2,500,000 shares. . . . . . . . . . . . . . . . . . (49,524) (49,524)
---------- ----------
Total stockholders' equity. . . . . . . . . . . . 634,434 623,928
---------- ----------
$1,319,225 $1,203,949
========== ==========
See notes to consolidated financial statements.
25
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
COMMON STOCK ISSUED CURRENCY
--------------- PAID-IN TRANSLATION RETAINED TREASURY
SHARES AMOUNT CAPITAL ADJUSTMENTS EARNINGS STOCK TOTAL
------ ------ ------- ----------- -------- ----- --------
Balance at December 31, 1994. . 33,192 $ 33 $ 224,352 $ 4,783 $ 348,405 $ --- $ 577,573
Net earnings. . . . . . . . . . 74,054 74,054
Cash dividends ($0.27 per share) (9,003) (9,003)
Exercise of stock options . . . 90 846 846
Issuance of common stock to
employee benefit plans . . . . 158 4,190 4,190
Issuance of restricted stock. . 1 34 34
Tax effect of exercise of stock
options. . . . . . . . . . . . 586 586
Currency translation adjustments 2,066 2,066
------ ---- --------- ------- --------- -------- ---------
Balance at December 31, 1995. . 33,441 $ 33 $ 230,008 $ 6,849 $ 413,456 $ --- $ 650,346
Net earnings. . . . . . . . . . 26,529 26,529
Cash dividends ($0.31 per share) (10,085) (10,085)
Exercise of stock options . . . 49 861 861
Issuance of common stock to
employee benefit plans . . . . 121 1 2,669 2,670
Issuance of restricted stock. . 1 26 26
Tax effect of exercise of stock
options. . . . . . . . . . . . 101 101
Currency translation adjustments 3,004 3,004
Purchase of treasury stock. . . (49,524) (49,524)
------ ---- -------- ------- --------- -------- --------
Balance at December 31, 1996. . 33,612 $ 34 $ 233,665 $ 9,853 $429,900 $(49,524) $ 623,928
Net earnings. . . . . . . . . . 30,355 30,355
Cash dividends ($0.35 per share) (10,882) (10,882)
Exercise of stock options . . . 25 453 453
Issuance of restricted stock. . 1 16 16
Tax effect of exercise of stock
options. . . . . . . . . . . . 45 45
Currency translation adjustments (9,481) (9,481)
------ ---- -------- -------- ------- -------- ---------
Balance at December 31, 1997. . 33,638 $ 34 $ 234,179 $ 372 $449,373 $(49,524) $ 634,434
====== ==== ======== ======= ======== ======== =========
See notes to consolidated financial statements.
26
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
(In thousands) 1997 1996 1995
Cash flows from operating activities: ----- ----- ----
Net earnings . . . . . . . . . . . . . . . .$ 30,355 $ 26,529 $ 74,054
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation . . . . . . . . . . . . . . . 61,351 56,260 53,522
Amortization . . . . . . . . . . . . . . . 11,014 11,685 11,863
Deferred income taxes. . . . . . . . . . . 10,625 8,496 9,435
Common stock issued for stock plans. . . . 16 2,696 4,224
Loss on divestitures and other, net. . . . 5,963 -- 5,500
Changes in assets and liabilities, net of
effects from businesses acquired and divested:
Accounts receivable. . . . . . . . . . . (3,291) 15,760 (11,474)
Inventories. . . . . . . . . . . . . . . (3,128) 32,783 (59,602)
Prepaid expenses and other current assets 343 620 (7,200)
Other assets . . . . . . . . . . . . . . 662 (2,347) (727)
Accounts payable and accrued liabilities (10,845) (9,657) 35,444
Other liabilities. . . . . . . . . . . . 12,346 1,514 (138)
Other. . . . . . . . . . . . . . . . . . 12,742 7,562 3,860
-------- -------- --------
Net cash provided by operating activities. 128,153 151,901 118,761
-------- -------- --------
Cash flows from investing activities:
Additions to property, plant and equipment .(221,187) (126,009) (104,696)
Decrease in restricted cash. . . . . . . . . 5,016 879 1,680
Businesses acquired. . . . . . . . . . . . . -- (14,250) (64,249)
Proceeds from divestitures and other . . . . 18,321 4,184 16,230
-------- -------- --------
Net cash used in investing activities. . .(197,850) (135,196) (151,035)
-------- -------- --------
Cash flows from financing activities:
Borrowings under long-term debt. . . . . . . 78,303 40,303 22,834
Repayments of long-term debt . . . . . . . . -- -- (200)
Purchase of treasury stock . . . . . . . . . -- (49,524)
Dividends paid on common stock . . . . . . . (10,882) (10,085) (9,003)
Exercise of stock options. . . . . . . . . . 453 861 846
-------- -------- --------
Net cash provided by (used in) financing
activities. . . . . . . . . . . . . . . . 67,874 (18,445) 14,477
-------- -------- --------
Effect of exchange rate changes on cash and
cash equivalents. . . . . . . . . . . . . . . (297) (33) 134
-------- -------- --------
(Decrease) in cash and cash equivalents. . . . (2,120) (1,773) (17,663)
Cash and cash equivalents at beginning of year 2,120 3,893 21,556
-------- -------- --------
Cash and cash equivalents at end of year . . .$ 0 $ 2,120 $ 3,893
======== ======== ========
Supplemental cash flow data:
Cash paid during the year for:
Interest (net of amounts capitalized). . .$ 14,435 $ 15,273 $ 14,320
Income taxes . . . . . . . . . . . . . . . .$ 12,979 $ 8,994 $ 35,263
Non-cash investing activities financed
through government grants . . . . . . . . .$ 24,454 $ 3,226 $ --
See notes to consolidated financial statements.
27
Notes to Consolidated Financial Statements
(In thousands, except share and per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Wellman, Inc. (the Company) is an international manufacturing company
operating primarily in the United States, Ireland and the Netherlands. The
Company's principal line of business is the manufacture of high-quality
polyester products, including Fortrel(R) brand polyester textile fibers,
polyester fibers made from recycled raw materials and PermaClear(R) PET
(polyethylene terephthalate) packaging resins. Total polyester fiber sales
represented approximately 65% of the Company's 1997 sales. The principal
markets for polyester fibers are apparel, home furnishings, carpet and
industrial manufacturers in the United States and Europe. The principal
markets for PET resins are United States and Europe-based manufacturers of
various types of plastic containers.
Basis of Presentation
The consolidated financial statements include the accounts of Wellman,
Inc. and its subsidiaries. All material intercompany transactions have been
eliminated.
Certain 1996 and 1995 amounts have been reclassified to conform to the
1997 presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Revenue Recognition
Sales to customers are recorded when goods are shipped.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the last-in, first-out (LIFO) method for approximately $110,036 and
$98,000 of inventory at December 31, 1997 and 1996, respectively, and the
first-in, first-out (FIFO) method for the remainder. For slow-moving and
off-quality waste raw material which is valued using the LIFO dollar value
method, the lower of cost or market is determined using the item-by-item
method.
Property, Plant and Equipment
Property, plant and equipment is carried at cost. Depreciation is
provided based on the estimated useful lives of the related assets and is
computed on the straight-line method. Estimated useful lives for buildings
and improvements are 15 to 30 years and 5 to 13 years for machinery and
equipment.
28
Cost in Excess of Net Assets Acquired
Cost in excess of net assets acquired is amortized on the straight-line
method over periods ranging from 30 to 40 years. Accumulated amortization
amounted to approximately $70,947 and $64,391 at December 31, 1997 and 1996,
respectively.
The Company's accounting policy regarding the assessment of the
recoverability of the carrying value of goodwill and other intangibles is to
review the carrying value of goodwill and other intangibles if the facts and
circumstances suggest that they may be impaired. If this review indicates
that goodwill and other intangibles will not be recoverable, as determined
based on undiscounted future cash flows of the Company, the carrying value of
goodwill and other intangibles will be reduced to estimated fair value. No
impairments were noted in 1997.
Other Assets
Other assets are comprised of deferred charges related to certain of the
Company's debt agreements and other intangible assets that are amortized over
periods ranging from one to 20 years. Additionally, other assets include
cash restricted for use obtained from borrowings under economic development
revenue bonds in the amount of approximately $0 and $5,000 at December
31, 1997 and 1996, respectively.
Impairment of Long-lived Assets
The Company accounts for the impairment of long-lived assets under FASB
Statement No. 121, "Accounting for the Impairment of Long-lived Assets and
for Long-lived Assets to be Disposed of" (FAS 121). FAS 121 requires
impairment losses to be recorded on long-lived assets used in operations when
indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. Long-lived assets to be disposed of are carried at the lower of cost
or fair value less cost to sell when the Company is committed to a plan of
disposal.
Income Taxes
Income taxes have been provided using the liability method. Under this
method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and
liabilities. Deferred income taxes resulting from such differences are
recorded based on the enacted tax rates that will be in effect when the
differences are expected to reverse.
Environmental Expenditures
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable and the costs can be
reasonably estimated. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed or charged to the aforementioned liability.
Derivative Financial Instruments
The Company uses interest rate swaps and other financial instruments to
synthetically manage the interest rate characteristics of its currently
outstanding debt and future debt. These instruments generally fix floating
29
rate debt at specified interest rates and enable the Company to significantly
eliminate the effect of a change in interest rates from the date it entered
into these transactions.
For the interest-rate swaps, the differential to be paid or received
as interest rates change is recognized as an adjustment of interest expense
related to the debt. The related amount payable to or receivable from
counterparties is included in other liabilities or assets. The fair value of
the agreements and changes in the fair value as a result of changes in market
interest rates are not recognized in the financial statements.
Gains and losses on terminations of interest-rate agreements are deferred
as an adjustment to the carrying amount of the debt and amortized as an
adjustment to interest expense related to the debt over the remaining term of
the original contract life. In the event of the early extinguishment of a
designated current or anticipated debt obligation, any realized or unrealized
gain or loss from the interest-rate agreements would be recognized in income
coincident with the termination of the aforementioned obligation.
The Company uses forward foreign exchange contracts for three purposes.
First, to mitigate the translation exposure that results from investments in
certain foreign subsidiaries; second, to minimize the effects of foreign
currency fluctuations for certain purchase contracts which require payment in
foreign currencies; and third, to minimize the effect changes in foreign
currencies have on certain components of working capital.
Realized and unrealized gains and losses related to forward foreign
exchange contracts used to reduce the risk of certain designated foreign
investments are included in the cumulative translation account in
stockholders' equity. Forward points incurred in these contracts are
recorded as an adjustment to interest expense amortized on a straight-line
basis. Realized gains and losses related to forward foreign exchange
contracts utilized to reduce the effect of foreign currency fluctuations on
purchases are recorded as an adjustment to the cost of the asset. Realized
and unrealized gains and losses related to forward foreign exchange contracts
utilized to reduce the effect of foreign currency fluctuations on working
capital are recognized and offset foreign exchange gains or losses on the
underlying exposure. If the forward foreign exchange contract notional
amounts exceed the amount of the designated foreign investment, purchase
commitment, or working capital component, realized and unrealized gains or
losses on the excess amount are recognized in earnings. The related amounts
due to or from counterparties are included in other assets or liabilities.
The Company also uses an equity-linked investment to hedge its exposure to
compensation expense related to a Supplemental Employee Retirement Plan
(SERP). This equity-linked investment, on which the value fluctuates based
on the market price of the Company's stock, is marked to market and gains or
losses are recognized as an offset to compensation expense related to the
SERP.
Foreign Currency Translation
The financial statements of foreign entities have been translated into
U.S. dollar equivalents in accordance with the Financial Accounting Standards
Board's (FASB) Statement No. 52, "Foreign Currency Translation." Adjustments
resulting from the translation of the financial statements of foreign
entities are excluded from the determination of earnings and accumulated in a
separate component of stockholders' equity.
30
Research and Development Costs
Research and development costs are expensed as incurred. Such costs were
approximately $19,600, $18,500 and $16,900 for 1997, 1996 and 1995,
respectively.
Grant Accounting
The Company's Pearl River Plant under construction in Mississippi has
received various grants, including capital and operating grants, from the
state of Mississippi and other local authorities. The capital grants without
stipulated operating requirements are recorded as a reduction of property,
plant and equipment. The capital grants with stipulated operating
requirements are recorded as deferred revenue and amortized into income as
the requirements stipulated in the grant are satisfied. The operating grants
are recorded as a reduction of operating expenses in the period the reduction
occurs. The impact of grants on the 1997, 1996, and 1995 results of
operations was immaterial.
Stock Based Compensation
The Company grants stock options for a fixed number of shares to employees
and directors with an exercise price equal to or greater than the fair value
of the shares at the date of grant. The Company accounts for stock option
grants in accordance with APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and, accordingly, recognizes no compensation expense for the
stock option grants.
Earnings Per Common Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share." Statement 128 replaced the calculation of primary
and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes
any dilutive effects of stock options. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement 128 requirements.
Cash and Cash Equivalents
The Company considers all short-term investments purchased with a maturity
of three months or less to be cash equivalents for purposes of the
consolidated statements of cash flows.
New Accounting Standards
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" (FAS 131), effective for fiscal years
beginning after December 15, 1997. FAS 131 requires that a public company
report financial and descriptive information about its reportable operating
segments pursuant to criteria that differ from current accounting practice.
Operating segments, as defined, are components of an enterprise for which
separate financial information is available that is evaluated regularly by
the chief operating decision maker in deciding how to allocate resources and
in assessing performance. The financial information to be reported includes
segment profit or loss, certain revenue and expense items and segment assets
31
and reconciliations to corresponding amounts in the general purpose financial
statements. FAS 131 also requires information about products and services,
geographic areas of operation, and major customers. The Company has not
completed its analysis of the effect of adoption of FAS 131 on its financial
statement disclosure; however, the adoption of FAS 131 will not affect
results of operations or financial position.
2. ACQUISITION
On December 31, 1995, the Company acquired the Netherlands-based PET
Resins business (the Business) of Akzo Nobel (Akzo) for a purchase price of
approximately $78,500. The acquisition has been accounted for under the
purchase method and the results of the operations of the acquired business
have been included in the consolidated financial statements since the date
of acquisition. The purchase price was allocated based on estimated fair
values at the date of the acquisition. The excess of the purchase price over
assets acquired (goodwill) is being amortized on a straight-line basis over
30 years.
Although unlikely, the Company may be required to make contingent payments
to Akzo based on contribution margin as defined in the agreement. The cost
of any subsequent payments will be allocated to goodwill.
The pro forma effects of the acquisition for 1995 have not been presented
due to the immaterial impact of operations of the Business on the Company's
consolidated financial statements.
In connection with the acquisition, the Company entered into a contract to
purchase PET resins under a take-or-pay arrangement. The contract required
that 134,000 pounds be purchased on a declining basis during the period from
1997 to 2000. During the second quarter of 1997, the Company recorded a
restructuring charge which included the estimated costs for the modification
of this take-or-pay arrangement as well as certain supply and service
agreements at its Netherlands-based operation. The modification reduced the
number of pounds required to be purchased during the contract period to an
immaterial amount (see note 6).
Also, in conjunction with this acquisition, the Company has entered into
forward foreign currency contracts to exchange Dutch guilders for U.S.
dollars in order to reduce the related impact of foreign currency translation
adjustments (see note 14).
3. DIVESTITURES AND OTHER
On December 30, 1997, the Company sold its thermoformed packaging and
extruded sheet operation located in Ripon, WI for approximately $15,900
resulting in a pretax loss of $8,384. This loss is reported net of a $2,421
gain from an insurance reimbursement related to a warehouse fire at the
Company's Irish fiber operation in July 1997. Together, these events
decreased net earnings by approximately $3,800, or $0.12 per diluted share.
The Company plans to replace the destroyed buildings.
In the first quarter of 1996, the Company sold its polyester bonded
batting and needle-punched fabric operations located in Charlotte, NC and
Commerce, CA for their approximate book value. In August 1995, the Company
sold substantially all of the businesses of its New England CRInc. (CRInc.)
subsidiary for approximately $16,230. The Company recorded a pretax loss on
the sale of $5,500, which decreased 1995 net earnings by approximately
$3,400, or $0.10 per diluted share.
32
The operating results of the divested businesses have not had a material
impact on the Company's consolidated financial statements.
4. INVENTORIES
Inventories consist of the following:
December 31,
1997 1996
------ ------
Raw materials . . . . . . . . . . . $ 50,669 $ 65,552
Finished and semi-finished goods. . 90,210 78,280
Supplies. . . . . . . . . . . . . . 13,254 14,853
-------- --------
$154,133 $158,685
======== ========
At December 31, 1997 and 1996, current replacement cost of inventories
valued using the LIFO method was not in excess of their carrying value.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
December 31,
1997 1996
------ ------
Payroll and other compensation. . . $ 7,494 $ 7,573
Retirement plans. . . . . . . . . . 7,681 5,176
Property and other taxes. . . . . . 4,757 4,841
Interest. . . . . . . . . . . . . . 1,621 3,065
Other . . . . . . . . . . . . . . . 18,037 20,665
------- -------
$39,590 $41,320
======= =======
6. RESTRUCTURING CHARGES
During the second quarter of 1997, the Company implemented a restructuring
plan designed to reduce costs and enhance the overall competitiveness of its
European operations, resulting in a pretax charge of $7,469. Approximately
$4,600 of the restructuring charge is estimated costs for the modification
of certain supply and service agreements at the Company's Netherlands-based
PET resins business. This includes the modification of its take-or-pay
supply arrangement, reducing the number of pounds required to be purchased
during the period from 1997 to 2000 from 134,000 to an immaterial amount.
The restructuring charge also includes $2,400 in termination benefits for 61
employees at its recycled fiber operation in Ireland. Approximately $5,600
was charged against the restructuring accrual during 1997.
33
7. BORROWING ARRANGEMENTS
Long-term debt consists of the following:
December 31,
1997 1996
------ ------
Revolving credit loan facility and competitive
bid loans. . . . . . . . . . . . . $ 20,000 $ 75,000
Uncommitted lines of credit . . . . 214,865 59,699
Serialized senior unsecured notes,
9.18% - 9.26%, due 1998-1999 . . . 80,000 100,000
Economic development revenue bonds, at variable
interest rates, due 2010-2022. . . 49,680 54,500
8.41% senior unsecured note, due 2000 30,000 30,000
Other . . . . . . . . . . . . . . . 208 367
-------- --------
394,753 319,566
Less current portion . . . . . 208 159
-------- --------
$394,545 $319,407
======== ========
On February 8, 1995, the Company entered into an unsecured $330,000
Revolving Credit Loan (the Facility) maturing in February 2000 that replaced
a reducing revolving loan facility. The terms of the Facility provide the
Company the ability to borrow under competitive bid loans (CBLs) which reduce
the availability under the Facility and bear interest at the offering bank's
prevailing interest rate. The Facility has no scheduled principal repayments
and any borrowings under non-CBLs bear interest, at the Company's option, at
(1) the higher of (a) the prime rate or (b) the federal funds rate plus
0.50%, (2) the LIBOR rate plus applicable margin or (3) the CD rate plus
applicable margin. At December 31, 1997, the average interest rate on
borrowings under the Facility was approximately 6.0% and the amount available
to the Company was $310,000.
Terms, rates and maturity dates for the uncommitted lines of credit are
agreed upon by the Bank and the Borrower at each borrowing date. At December
31, 1997, the maturities on the domestic outstanding borrowings ranged from
15 to 86 days with interest rates ranging from 5.97% to 6.20%. At year-end,
the Company had $250,000 available under these lines.
The economic development revenue bonds (the Bonds) are tenderable by the
holders and are secured by letters of credit aggregating approximately
$50,895 at December 31, 1997. The average interest rate on the Bonds at
December 31, 1997 was approximately 3.83%.
The Bonds and borrowings under the Facility, serialized senior unsecured
notes, CBLs and uncommitted lines of credit are classified as long-term in
accordance with the Company's intention and ability to refinance such
obligations on a long-term basis.
The Company has entered into two types of financial instruments to
minimize its interest rate exposure. One instrument, with a notional amount
of $150,000, was designed to provide a fixed 10 year interest rate of 6.42%
(exclusive of corporate spreads) on $150,000 of debt if issued on December
31, 1997 and approximately 6.51% if issued on March 31, 1998. The Company
has also entered into interest rate swaps to fix the interest rate on
variable rate borrowings thereby eliminating substantial interest rate risk.
The agreements are for $200,000, $100,000 of which were in effect at December
31, 1997, and $100,000 with starting dates ranging between February and May
34
1998. Maturity dates are a minimum of 5 years and a maximum of 10 years
after the starting date of the swaps. The swaps will effectively fix the
rates of interest between 6.10% and 6.20% on $200,000 of borrowings. In
aggregate, the Company estimates it would have had to pay approximately
$14,200 to terminate these agreements at December 31, 1997.
The Company's financing agreements contain normal financial and
restrictive covenants. The most restrictive of these covenants permits a
maximum leverage ratio of 55%, requires EBITDA to exceed 3.5 times interest
expense and requires the Company to maintain a certain net worth.
Aggregate maturities of long-term debt for the next five years are as
follows: 1998 -- $208; 1999 -- $40,000; 2000 -- $304,865; 2001 -- $0 and
2002 -- $0.
The carrying amounts of the Company's borrowings under its variable rate
credit agreements approximate their fair value. The fair values of the
Company's fixed rate credit agreements are estimated using discounted cash
flow analyses based on the Company's current incremental borrowing rates for
similar types of borrowing arrangements. The fair value of the Company's
fixed rate debt exceeded the carrying value by approximately $4,200 at
December 31, 1997. Prepayment of the fixed rate debt could result in
significant penalties.
During 1997, 1996 and 1995, the Company capitalized interest of $9,820,
$4,755, and $3,125, respectively, as part of the cost of capital projects
under construction. Interest expense (net) includes interest income of
$2,402, $2,935 and $2,563 for 1997, 1996 and 1995, respectively.
8. INCOME TAXES
For financial reporting purposes, earnings (loss) before income taxes are
as follows:
Years Ended December 31,
1997 1996 1995
------ ------ ------
United States. . . . . . . . . . . . . $53,170 $68,463 $ 83,206
Foreign. . . . . . . . . . . . . . . . (1,980) (14,314) 32,505
------- -------- --------
$51,190 $54,149 $115,711
======= ======== ========
Significant components of the provision for income taxes are as follows:
Years Ended December 31,
1997 1996 1995
Current: ------ ------ ------
Federal. . . . . . . . . . . . . . . $ 8,630 $17,625 $24,900
State. . . . . . . . . . . . . . . . 419 955 3,847
Foreign. . . . . . . . . . . . . . . 1,161 544 3,475
------- ------- -------
10,210 19,124 32,222
------- ------- -------
Deferred:
Federal. . . . . . . . . . . . . . . $ 9,244 $ 7,846 $ 8,085
State. . . . . . . . . . . . . . . . 1,241 1,098 1,205
Foreign. . . . . . . . . . . . . . . 140 (448) 145
------- ------- -------
10,625 8,496 9,435
------- ------- -------
$20,835 $27,620 $41,657
======= ======= =======
35
The difference between the provision for income taxes and income taxes
computed at the statutory income tax rate is explained as follows:
Years Ended December 31,
1997 1996 1995
---- ---- ----
Computed at statutory rate. . . . . . . 35.0% 35.0% 35.0%
State taxes, net of federal benefit . . 1.9 2.5 2.9
Differences in income tax rates between
the United States and foreign countries (5.0) (1.2) (6.3)
Amortization of cost in excess of net
assets acquired. . . . . . . . . . . . 6.0 5.7 2.7
Foreign losses for which no tax benefit
has been provided. . . . . . . . . . . 2.1 10.5 --
Other, net . . . . . . . . . . . . .. . .7 (1.5) 1.7
---- ---- ----
Effective tax rate. . . . . . . . . . . 40.7% 51.0% 36.0%
==== ==== ====
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. The tax
effects of these differences are as follows:
December 31,
1997 1996
---- ----
Inventory . . . . . . . . . . . . . . . $ 6,087 $ 5,170
Depreciation. . . . . . . . . . . . . . 109,670 100,872
Foreign . . . . . . . . . . . . . . . . 3,823 3,956
Other . . . . . . . . . . . . . . . . . 10,114 10,060
-------- -------
Total deferred tax liabilities. . . . . 129,694 120,058
-------- -------
Pension . . . . . . . . . . . . . . . . 2,686 3,009
State deferred benefits . . . . . . . . 5,274 4,695
Long-term liabilities . . . . . . . . . 5,642 7,277
Foreign net operating loss carryforward 6,776 5,693
Other . . . . . . . . . . . . . . . . . 9,505 9,115
-------- -------
Total deferred tax assets . . . . . . . 29,883 29,789
Valuation allowance . . . . . . . . . . 6,776 5,693
-------- -------
Net deferred tax assets . . . . . . . . 23,107 24,096
-------- -------
Net deferred tax liabilities. . . . . . $106,587 $ 95,962
======== =======
Deferred taxes have not been provided for approximately $110,827 of
undistributed earnings of foreign subsidiaries. The Company intends to
reinvest such undistributed earnings for an indefinite period except for
distributions upon which incremental taxes would not be material. If all
such earnings were distributed, the Company would be subject to both U.S.
income taxes (subject to an adjustment for foreign tax credits) and foreign
withholding taxes. Determination of the amount of unrecognized deferred U.S.
income tax liability is not practicable because of the complexities
associated with its hypothetical calculation.
At December 31, 1997 the Company had foreign net operating loss
carryforwards (NOLs) of approximately $19,361 for income tax purposes that
may be carried forward indefinitely. The NOLs resulted from operations of
36
its European PET resins business. The use of the NOLs is limited to future
taxable income of the European PET resins business. For financial reporting
purposes, no tax benefit (a deferred tax asset) has been provided for these
losses.
9. ENVIRONMENTAL MATTERS
The Company's operations are subject to extensive laws and regulations
governing air emissions, wastewater discharges and solid and hazardous waste
management activities. As discussed in note 1, the Company's policy is to
expense environmental remediation costs when it is both probable that a
liability has been incurred and the amount can be reasonably estimated.
While it is often difficult to reasonably quantify future environmental-
related expenditures, the Company currently estimates its future non-capital
expenditures related to environmental matters to range between approximately
$9,800 and $25,200 on an undiscounted basis. In connection with these
expenditures, the Company has accrued management's best estimate of probable
non-capital environmental expenditures. In addition, aggregate future
capital expenditures related to environmental matters are expected to range
from approximately $9,300 to $28,600. These non-capital and capital
expenditures are expected to be incurred over the next 10 to 20 years. The
Company believes that it is entitled to recover a portion of these
expenditures under indemnification and escrow agreements.
10. RETIREMENT PLANS
The Company has defined benefit plans and defined contribution pension
plans that cover substantially all employees. The Company also has an
employee stock ownership plan (ESOP) covering substantially all domestic
employees. The defined contribution plan and the ESOP provide for Company
contributions based on the earnings of eligible employees. Expense related
to the defined contribution plan amounted to approximately $8,014, $7,481,
and $8,351 for the years ended December 31, 1997, 1996 and 1995,respectively.
Expense related to the ESOP amounted to approximately $2,274, $2,369 and
$2,253 for the years ended December 31, 1997, 1996 and 1995, respectively.
Benefits under the Wellman International Limited (WIL) and PET Resins-
Europe defined benefit plans are based on employees' compensation and length
of service, while benefits under defined benefit plans covering domestic
employees are based on employees' compensation and length of service or at
stated amounts based on length of service. The Company's policy is to fund
amounts which are actuarially determined to provide the plans with sufficient
assets to meet future benefit payment requirements. Assets of the domestic
plans are invested primarily in equity securities, debt securities and money
market instruments. For international plans, assets are invested in insured
products. The pension costs (benefits) of the domestic and foreign defined
benefit plans consist of the following:
Years Ended December 31,
1997 1996 1995
------ ------ ------
Service cost. . . . . . . . . . . . . . $1,408 $ 598 $ 646
Interest cost on projected benefit
obligations. . . . . . . . . . . . . . 4,669 4,761 4,659
Actual return on plan assets. . . . . . (9,513) (6,587) (9,772)
Net amortization and deferral . . . . . 3,154 481 5,356
------ ------ ------
$ (282) $ (747) $ 889
====== ====== ======
37
The following table sets forth the funded status and amounts included in
the Company's consolidated balance sheets at December 31, 1997 and 1996 for
the domestic and foreign defined benefit pension plans:
1997 1996
Actuarial present value of benefit obligations: ---- -----
Vested benefit obligations. . . . . . $59,268 $62,039
======= =======
Accumulated benefit obligations . . . $59,885 $62,338
======= =======
Projected benefit obligations . . . . $69,373 $71,469
Plan assets at fair market value. . . . 87,161 75,745
------- -------
Funded status . . . . . . . . . . . . . 17,788 4,276
Unrecognized net gain . . . . . . . . . (20,347) (8,940)
Unrecognized net liability at transition 409 489
Unrecognized prior service cost . . . . (954) (1,070)
------- -------
Accrued pension costs . . . . . . . . . $(3,104) $(5,245)
======= =======
Assumptions used in determining the projected benefit obligation as of
December 31 were as follows:
1997 1996 1995
Domestic plans ------ ------- ------
Discount rate 7.25% 7.25% 7.25%
Future compensation increase 3.25% 4.25% 4.25%
Rate of return on plan assets 9.0% 9.0% 9.0%
WIL
Discount rate 6.0% 7.0% 7.5%
Future compensation increase 3.5% 4.5% 5.0%
Rate of return on plan assets 6.0% 7.0% 7.5%
PET Resins-Europe
Discount rate 6.0% 6.0% --
Future compensation increase 3.0% 3.0% --
Rate of return on plan assets 6.0% 6.0% --
11. STOCKHOLDERS' EQUITY
The Company has stock option plans (the Plans) which authorize the grant
of non-qualified stock options (NQSOs). At December 31, 1997, the maximum
number of common shares authorized for grant under the Plans is 2,029,000.
For all options granted in connection with the Plans, the option period
extends for 11 years from the date of grant with the shares vesting at 20%
per year over the first five years. The option price for such options is
equal to the fair value of the Company's common stock at the date of grant.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options. Under APB 25,
because the exercise price of the Company's employee stock options at least
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized. The alternative fair value accounting
provided for under FASB Statement No. 123, "Accounting for Stock-Based
Compensation," requires use of option valuation models for determining
compensation expense.
Pro forma information regarding net earnings and earnings per common share
is required by Statement 123, which also requires that the information be
38
determined as if the Company has accounted for its employee stock options
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated as of the date of
grant using a Black-Scholes option pricing model with the following
assumptions for 1997, 1996 and 1995, respectively: risk-free interest rate
of 5.84%, 6.33% and 5.63%; a dividend yield of .95%, .84% and .75%;
volatility factors of the expected market price of the Company's common stock
of .424, .433 and .447; and a weighted-average expected life of the option of
7 years. The weighted-average fair value of options granted in 1997, 1996
and 1995 was $9.21, $8.62 and $11.59, respectively.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of traded
options, and because changes in the subjective input assumptions can
materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the
fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information follows:
1997 1996 1995
----- ----- ------
Pro forma net earnings $29,051 $25,889 $74,037
Pro forma basic earnings per common share $ 0.93 $ 0.79 $ 2.22
Pro forma diluted earnings per common share $ 0.93 $ 0.79 $ 2.20
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until
2000.
A summary of the Company's stock option activity and related information
for the three years ended December 31, 1997 follows:
Weighted
Average Price
Shares Per Share
------ ---------
Outstanding December 31, 1994. . . . . . . . . . 1,867,631 $21.89
Granted. . . . . . . . . . . . . . . . . . . . 428,000 22.75
Exercised. . . . . . . . . . . . . . . . . . . (89,597) 9.44
Cancelled. . . . . . . . . . . . . . . . . . . (57,560) 23.35
--------- ------
Outstanding December 31, 1995. . . . . . . . . . 2,148,474 22.54
Granted. . . . . . . . . . . . . . . . . . . . 643,900 17.00
Exercised. . . . . . . . . . . . . . . . . . . (49,386) 17.44
Cancelled. . . . . . . . . . . . . . . . . . . (31,490) 25.32
--------- ------
Outstanding December 31, 1996. . . . . . . . . . 2,711,498 21.28
Granted. . . . . . . . . . . . . . . . . . . . 8,000 18.94
Exercised. . . . . . . . . . . . . . . . . . . (25,050) 18.06
Cancelled. . . . . . . . . . . . . . . . . . . (244,120) 22.20
--------- ------
Outstanding December 31, 1997. . . . . . . . . . 2,450,328 $21.22
========= ======
39
At December 31, 1997, 1996 and 1995, options for 1,562,685, 1,326,595 and
1,040,301 shares, respectively, were exercisable. At December 31, 1997,
2,029,000 shares were available for future option grants. The following
summarizes information related to stock options outstanding at December 31,
1997:
Range of exercise prices $11.63 to $19.88 $20.63 to $34.38
---------------- ----------------
Number outstanding at December 31, 1997 1,348,298 1,102,030
Weighted average remaining contractual life 7.3 years 7.2 years
Weighted average exercise price of
options outstanding $17.48 $25.79
Number exercisable at December 31, 1997 809,635 753,050
Weighted average exercise price of
options exercisable $17.75 $26.06
On August 6, 1991, the Board of Directors declared a dividend of one
common stock purchase right (a Right) for each outstanding share of common
stock. Each Right, when exercisable, will entitle the registered holder to
purchase from the Company one share of common stock at an exercise price of
$90 per share (the Purchase Price), subject to certain adjustments. The
Rights are not represented by separate certificates and are only exercisable
when a person or group of affiliated or associated persons acquires or
obtains the right to acquire 20% or more of the Company's outstanding common
shares (an Acquiring Person) or announces a tender or exchange offer that
would result in any person or group beneficially owning 20% or more of the
Company's outstanding common shares. In the event any person becomes an
Acquiring Person, the Rights would give holders the right to buy, for the
Purchase Price, common stock with a market value of twice the Purchase Price.
The Rights expire on August 5, 2001, unless extended by the Board of
Directors or redeemed earlier by the Company at a redemption price of $0.01
per Right.
Although the Rights should not interfere with a business combination
approved by the Board of Directors, they may cause substantial dilution to a
person or group that attempts to acquire the Company on terms not approved by
the Board, except pursuant to an offer conditioned on a substantial number of
Rights being acquired.
12. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted
earnings per share: 1997 1996 1995
------ ------- ------
Numerator for basic and diluted
earnings per share:
Net Income $ 30,355 $ 26,529 $ 74,054
-------- -------- --------
Denominator:
Denominator for basic earnings per
share - weighted average shares 31,120 32,649 33,322
Effect of dilutive securities:
Employee stock options 149 125 377
-------- -------- --------
Denominator for diluted earnings per
share - adjusted weighted average share 31,269 32,774 33,699
======== ======== ========
Basic earnings per share $ 0.98 $ 0.81 $ 2.22
======== ======== ========
Diluted earnings per share $ 0.97 $ 0.81 $ 2.20
======== ======== ========
40
13. COMMITMENTS AND CONTINGENCIES
Approximate minimum rental commitments under noncancelable leases
(principally for buildings and equipment) during each of the next five years
and thereafter are as follows: 1998 -- $6,865; 1999 -$5,276; 2000 -
$4,872; 2001 -- $4,538; 2002 -- $3,747 and thereafter -- $6,086.
Rent expense for cancelable and noncancelable operating leases was $6,232
$6,059, and $5,778 for the years ended December 31, 1997, 1996 and 1995,
respectively.
The Company has made certain commitments to expand its polyester
production capacity, including the construction of its Pearl River Plant
in Mississippi, with the first stage expected to be completed in late 1998.
The anticipated construction cost to complete this facility at December 31,
1997 is approximately $190,000.
See notes 7 and 9 for information related to the outstanding letters of
credit and environmental matters, respectively.
The Company is involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, the ultimate
disposition of the matters will not have a material adverse effect, if any,
on the Company's consolidated financial position or results of operations.
14. FINANCIAL INSTRUMENTS
The Company has entered into forward foreign currency contracts to
exchange Dutch guilders for U.S. dollars with an aggregate notional amount of
$21,800 and $48,800 at December 31, 1997 and 1996, respectively, in order to
reduce the related impact of foreign currency translation adjustments. The
Company has designated these contracts as a hedge of a net investment in a
foreign entity.
The Company entered into forward foreign currency contracts to exchange
U.S. dollars for German marks with an aggregate notional amount of $12,600
and $33,600 at December 31, 1997 and 1996, respectively. These contracts are
designed to reduce (hedge) the impact of foreign currency fluctuations
relative to fixed asset purchase commitments and have maturity dates ranging
from January 1998 through March 1999.
The Company's European businesses utilize foreign currency debt and
forward currency contracts to hedge certain of their accounts receivable and
accounts payable denominated in other foreign currencies. The notional
amount of such contracts was $15,500 and $21,600 at December 31, 1997 and
1996, respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of foreign currency and
interest rate contracts described above and in notes 2 and 7 and temporary
cash investments and trade accounts receivable. The counterparties to the
contractual arrangements are a diverse group of major financial institutions
with which the Company also has other financial relationships. The Company
is exposed to credit loss in the event of nonperformance by these
counterparties. However, the Company does not anticipate nonperformance by
the other parties, and no material loss would be expected from nonperformance
by any one of such counterparties. The Company places its temporary cash
41
investments with high credit quality institutions. Concentration of credit
risk with respect to trade accounts receivable is managed by an in-house
professional credit staff or is insured. The Company performs periodic
credit evaluations of its customers' financial condition and generally does
not require collateral.
Fair Value of Financial Instruments
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments.
Cash and cash equivalents, accounts receivable, accounts payable and
equity-linked investment: The carrying amounts reported in the consolidated
balance sheets approximate their fair value.
Borrowing arrangements: See note 7.
Interest rate instruments: The fair value of interest rate instruments
is the estimated amounts that the Company would receive or pay to terminate
the agreements at the reporting date, taking into account current interest
rates and the current creditworthiness of the counterparties.
All of the Company's estimates of fair value and termination cost/benefit
for its derivative financial instruments are based on readily available
dealer quotes as to the amounts the Company would receive or pay to terminate
the contracts.
The following table summarizes the carrying amounts and estimated fair
values of the Company's financial instruments at December 31, 1997 and 1996:
1997 1996
------------------ -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
Nonderivatives
Cash and cash equivalents $ 0 $ 0 $ 2,120 $ 2,120
Accounts receivable 126,106 126,106 132,296 132,296
Accounts payable 73,070 73,070 64,019 64,019
Borrowing arrangements 394,753 398,953 319,566 325,325
Derivatives-receive (pay):
Interest rate instruments (91) (14,152) -- (487)
Forward foreign currency
contracts 322 (893) -- 932
Equity-linked investment 2,131 2,131 -- --
15. BUSINESS SEGMENT AND GEOGRAPHIC AREAS
The Company operates in one business segment: principally the manufacture
and sale of polyester products, including Fortrel(R) brand polyester textile
fibers, polyester fibers made from recycled raw materials and PermaClear(R)
PET packaging resins.
Net sales and operating income for the years ended December 31, 1997, 1996
and 1995 and identifiable assets at the end of each year, classified by the
major geographic areas in which the Company operates, are as follows:
42
1997 1996 1995
Net sales ------ ------ ------
U.S. . . . . . . . . . . . . . . . . $ 898,787 $ 885,193 $ 952,663
Europe . . . . . . . . . . . . . . . 184,401 213,611 156,735
---------- ---------- ----------
$1,083,188 $1,098,804 $1,109,398
========== ========== ==========
Operating income (loss)
U.S. . . . . . . . . . . . . . . . . $ 74,389 $ 83,390 $ 101,623
Europe . . . . . . . . . . . . . . . (5,076) (15,266) 31,254
---------- ---------- ----------
$ 69,313 $ 68,124 $ 132,877
========== ========== ==========
Identifiable assets
U.S. . . . . . . . . . . . . . . . . $1,217,517 $1,082,077 $1,011,952
Europe . . . . . . . . . . . . . . . 101,708 121,872 198,721
---------- ---------- ----------
$1,319,225 $1,203,949 $1,210,673
========== ========== ==========
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information for the years ended December 31, 1997 and
1996 is summarized as follows:
- -----------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, Total
Quarter ended 1997 1997(1) 1997 1997(2) 1997
- -----------------------------------------------------------------------------
Net sales $255,148 $279,211 $264,682 $284,147 $1,083,188
Gross profit 39,939 42,088 38,851 39,032 159,910
Net earnings 8,727 5,301 9,775 6,552 30,355
Basic net earnings
per common share $ 0.28 $ 0.17 $ 0.31 $ 0.21 $ 0.98
Diluted net earnings
per common share $ 0.28 $ 0.17 $ 0.31 $ 0.21 $ 0.97
- -----------------------------------------------------------------------------
March 31, June 30, Sept. 30, Dec. 31, Total
Quarter ended 1996 1996 1996(3) 1996 1996
- -----------------------------------------------------------------------------
Net sales $ 301,001 $ 283,850 $ 265,383 $ 248,570 $1,098,804
Gross profit 44,647 45,341 29,081 38,042 157,111
Net earnings (loss) 11,709 11,729 (2,830) 5,921 26,529
Basic net earnings (loss)
per common share $0.35 $0.35 $(0.09) $0.19 $0.81
Diluted net earnings (loss)
per common share $0.35 $0.35 $(0.09) $0.19 $0.81
(1) Quarterly net earnings reflect a pretax restructuring charge of $7,469
which decreased net earnings by approximately $4,300 ($0.14 per diluted
share).
(2) Quarterly net earnings reflect a pretax charge of $5,963 related to the
sale of a subsidiary which was partially offset by a gain from an
insurance reimbursement at the Company's Irish fiber operation.
This charge decreased net earnings by approximately $3,800 ($0.12 per
diluted share).
(3) Quarterly net earnings reflect a pretax inventory charge of $7,000
resulting from declining raw material costs and selling prices which
decreased net earnings by approximately $4,300 ($0.13 per diluted
share), and an additional $4,400 ($0.14 per diluted share) in income
taxes related to a change in estimate to reflect a higher than expected
tax rate for the year.
43
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Wellman, Inc.
We have audited the accompanying consolidated balance sheets of Wellman,
Inc. as of December 31, 1997 and 1996, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also included
the financial statement schedules listed in the Index at Item 8. These
consolidated financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedules based on our audits. We did
not audit the financial statements and schedules of a wholly owned subsidiary
of the Company, which statements reflect total assets constituting 6% in 1997
and 7% in 1996 and total revenues constituting 10% in 1997, 10% in 1996 and
14% in 1995 of the related consolidated totals. Those financial statements
and schedules were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to data included for such
wholly owned subsidiary, is based solely on the report of other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management as well as evaluating the overall
financial statement presentation. We believe that our audits and the report
of other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Wellman, Inc. at
December 31, 1997 and 1996, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended December
31, 1997, in conformity with generally accepted accounting principles. Also,
in our opinion, based on our audits and the report of other auditors, the
related financial statement schedules, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
ERNST & YOUNG LLP
February 12, 1998
44
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
Years Ended December 31, 1997, 1996 and 1995
(In thousands)
Balance at Charged to Balance
Beginning Costs and at End
Description of Year Expenses Other Deductions of Year
----------- --------- -------- ----- ---------- -------
Allowance for doubtful
accounts receivable:
Year ended
December 31, 1997 $2,611 $2,187 $ 824(c) $ 393(b) $5,229
====== ====== ====== ====== ======
Year ended
December 31, 1996 $5,335 $1,813 $ (961)(a) $3,576(b) $2,611
====== ====== ======= ====== ======
Year ended
December 31, 1995 $4,733 $1,391 $1,301(a) $2,090(b) $5,335
====== ====== ====== ====== ======
(a) Primarily foreign currency translation adjustments, except for purchase
accounting adjustments of approximately ($930) and $1,250 for 1996 and 1995,
respectively, related to the acquisition discussed in note 2 to the
consolidated financial statements.
(b) Accounts written off.
(c) Primarily recovered of accounts previously written off.
45
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
- ------- ---------------------------------------------------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------- --------------------------------------------------
"Election of Directors" and "Section 16(a) Beneficial Ownership Reporting
Compliance and Other Information" in the Company's Proxy Statement for the
1998 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission on or before April 30, 1998 are hereby incorporated by
reference herein.
Item 11. Executive Compensation
- ------- ----------------------
"Compensation of Directors and Officers" in the Company's Proxy Statement
for the 1998 Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission on or before April 30, 1998 is hereby incorporated by
reference herein. Such incorporation by reference shall not be deemed to
specifically incorporate by reference the information referred to in Item
402(a)(8) of Regulation S-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------- --------------------------------------------------------------
"Introduction" and "Election of Directors" in the Company's Proxy
Statement for the 1998 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission on or before April 30, 1998 are hereby
incorporated by reference herein.
Item 13. Certain Relationships and Related Transactions
- ------- ----------------------------------------------
"Compensation of Directors and Officers" in the Company's Proxy Statement
for the 1998 Annual Meeting of Stockholders to be filed with the Securities
and Exchange Commission on or before April 30, 1998 is hereby incorporated by
reference herein.
46
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
- ------- ----------------------------------------------------------------
(a) 1. Financial Statements
--------------------
The consolidated financial statements included in Item 8 are filed
as part of this annual report.
2. Financial Statement Schedules
-----------------------------
The consolidated financial statement schedule included in Item 8
is filed as part of this annual report.
3. Exhibits
--------
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the registrant
has not filed herewith any instrument with respect to long-term debt
which does not exceed 10% of the total assets of the registrant and
its subsidiaries on a consolidated basis. The registrant hereby
agrees to furnish a copy of any such instrument to the Securities
and Exchange Commission upon request.
Exhibit Number Description
- -------------- -----------
3(a)(1) Restated Certificate of Incorporation (Exhibit 3.1 of the
Company's Registration Statement on Form S-1, File No. 33-13458,
refiled as Exhibit 3(a)(1) of the Company's Form 10-K for the year
ended December 31, 1993 incorporated by reference herein)
3(a)(2) Certificate of Amendment to Restated Certificate of Incorporation
(Exhibit 3(a)(2) of the Company's Registration Statement on Form
S-4, File No. 33-31043, refiled as Exhibit 3(a)(2) of the
Company's Form 10-K for the year ended December 31, 1993
incorporated by reference herein)
3(a)(3) Certificate of Amendment to Restated Certificate of Incorporation
(Exhibit 28 of the Company's Registration Statement on Form S-8,
File No. 33-38491, refiled as Exhibit 3(a)(3) of the Company's
Form 10-K for the year ended December 31, 1993 incorporated by
reference herein)
3(a)(4) Certificate of Amendment to Restated Certificate of Incorporation
(Exhibit 3(a)(4) of the Company's Form 10-K for the year ended
December 31, 1993 incorporated by reference herein)
3(b) By-laws, as amended (Exhibit 3(b) of the Company's Form 10-K for
the year ended December 31, 1993 incorporated by reference herein)
4(a)(1) Loan Agreement dated February 8, 1995 by and between the Company
and Fleet National Bank, as agent, and certain other financial
institutions (Exhibit 4(a) of the Company's Form 10-K for the year
ended December 31, 1994 incorporated by reference herein)
47
4(a)(2) First Amendment to Loan Agreement dated June 4, 1997 by and among
the Company and Fleet National Bank, as agent, and certain other
financial institutions
4(b) Loan Agreement between South Carolina Jobs - Economic Development
Authority (the "Authority") and the Company dated as of December
1, 1990 (Exhibit 4(n) of the Company's Form 10-K for the year
ended December 31, 1990 incorporated by reference herein)
4(c) Registration Rights Agreement dated as of August 12, 1985 by and
among the Company, Thomas M. Duff and others (Exhibit 4.7 of the
Company's Registration Statement on Form S-1, File No. 33-13458,
incorporated by reference herein)
4(d) Loan Agreement between the Authority and the Company, dated as of
December 1, 1992 (Exhibit 4(w) of the Company's Form 10-K for the
year ended December 31, 1992 incorporated by reference herein)
4(e) First Supplemental Loan Agreement between the Authority and the
Company dated as of April 1, 1991 (Exhibit 4(a) of the Company's
Form 10-Q for the quarter ended June 30, 1991 incorporated by
reference herein)
4(f) Note Purchase Agreement dated as of June 14, 1991 between the
Company and the Purchasers named in Schedule I thereto (Exhibit
4(b) of the Company's Form 10-Q for the quarter ended June 30,
1991 incorporated by reference herein)
4(g)(1) Rights Agreement dated as of August 6, 1991 between the Company
and First Chicago Trust Company of New York, as Rights Agent
(Exhibit 1 of the Company's Form 8-K dated as of August 6, 1991
incorporated by reference herein)
4(g)(2) Amendment to Rights Agreement dated February 26, 1996 between the
Company and Continental Stock Transfer and Trust Company (Exhibit
4.1 of the Company's Form 8-K dated February 28, 1996 incorporated
by reference herein)
4(h) Loan Agreement between the Authority and the Company dated as of
June 1, 1992 (Exhibit 4(u) of the Company's Form 10-Q for the
quarter ended June 30, 1992 incorporated by reference herein)
4(i) Note Purchase Agreement between the Company and Teachers Insurance
and Annuity Association of America dated July 28, 1992 (Exhibit
4(v) of the Company's Form 10-Q for the quarter ended June 30,
1992 incorporated by reference herein)
4(j) Loan Agreement between the Company and Centric Capital Corporation
dated as of November 19, 1997
48
Executive Compensation Plans and Arrangements
- ---------------------------------------------
10(a) Wellman, Inc. 1985 Amended and Restated Incentive Stock Option Plan
(Exhibit 4 of the Company's Registration Statement on Form S-8/S-3,
File No. 33-54077, incorporated by reference herein)
10(b)(1) Employment Agreement dated as of January 1, 1990 between the
Company and Thomas M. Duff (Exhibit 10(b)(1) of the Company's Form
10-K for the year ended December 31, 1994 incorporated by reference
herein)
10(b)(2) Third Amendment to Employment Agreement dated as of January 1,
1997 between the Company and Thomas M. Duff (Exhibit 10(a) of
the Company's Form 10-Q for the quarter ended March 31, 1997
incorporated by reference herein)
10(c) Employment Agreement dated as of December 1, 1994 between the
Company and Clifford J. Christenson (Exhibit 10(c) of the Company's
Form 10-K for the year ended December 31, 1994 incorporated by
reference herein)
10(d) Employment Agreement dated as of December 1, 1994 between the
Company and Keith R. Phillips (Exhibit 10(e) of the Company's Form
10-K for the year ended December 31, 1994 incorporated by reference
herein)
10(e) Employment Agreement dated as of December 1, 1994 between the
Company and James P. Casey (Exhibit 10(f) of the Company's Form
10-K for the year ended December 31, 1994 incorporated by reference
herein)
10(f) Employment Agreement dated as of May 21, 1996 between the Company
and John R. Hobson (Exhibit 10(a) of the Company's Form 10-Q for
the period ended June 30, 1996 incorporated by reference herein)
10(g) Directors Stock Option Plan dated as of December 2, 1991
(Exhibit 4(a) of the Company's Registration Statement on Form S-8,
File No. 33-44822, incorporated by reference herein)
10(h) Management Incentive Compensation Plan, as amended
10(i) Summary of Executive Life Insurance Plan (Exhibit 10.22 of the
Company's Registration Statement on Form S-1, File No. 33-13458,
incorporated by reference herein)
10(j) Description of Directors' Restricted Stock Plan (Exhibit 10(k)
of the Company's Form 10-K for the year ended December 31, 1994
incorporated by reference herein)
10(k) Directors Deferred Compensation Plan (Exhibit 10(l) of the
Company's Form 10-K for the year ended December 31, 1994
incorporated by reference herein)
10(l) Amended and Restated Directors' Retirement Plan (Exhibit 10(m)
of the Company's Form 10-K for the year ended December 31, 1994
incorporated by reference herein)
49
10(m) Executive Retirement Restoration Plan, as amended
10(n) Wellman, Inc. 1997 Stock Option Plan (Exhibit 10(b) of the
Company's Form 10-Q for the quarter ended June 30, 1997
incorporated by reference herein)
10(o) Deferred Compensation and Restricted Stock Plan
Other Material Agreements
- -------------------------
10(p) Letter Agreement, relating to certain environmental matters, dated
August 17, 1987, by and among Fiber Industries, Inc. (FI), Hoechst
Celanese Corp. (HCC) and Celanese Fibers Inc. (Celanese) (Exhibit
10.3 of FI's Registration Statement on Form S-1, File No. 33-20626,
incorporated herein by reference)
10(q) Trademark Assignment and License, dated January 28, 1988, by and
among FI, HCC and Celanese (Exhibit 10.14 of FI's Registration
Statement on Form S-1, File No. 33-20626, incorporated herein by
reference)
10(r) Inducement Agreement dated April 16, 1996, by and among Wellman of
Mississippi, Inc., the Mississippi Department of Economic and
Community Development acting for and on behalf of the State of
Mississippi, the Mississippi Business Financial Corporation and
certain other parties (Exhibit 10(u) of the Company's Form 10-K for
the year ended December 31, 1996 incorporated by reference herein)
21 Subsidiaries
23(a) Consent of Ernst & Young LLP
23(b) Consent of KPMG
27(a) Financial Data Schedule
27(b) Restated Financial Data Schedules
28(a) Report of KPMG
(b) Reports on Form 8-K
-------------------
None.
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on March 25,
1998.
WELLMAN, INC.
/s/ Thomas M. Duff
------------------------------
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 25, 1998.
Signatures Title
---------- -----
/s/ Thomas M. Duff
- -------------------------- President, Chief Executive Officer and
Thomas M. Duff Director (Principal Executive Officer)
/s/ Keith R. Phillips
- -------------------------- Vice President, Chief Financial Officer and
Keith R. Phillips Treasurer (Principal Financial Officer)
/s/ Mark J. Rosenblum
- -------------------------- Vice President, Chief Accounting Officer and
Mark J. Rosenblum Controller (Principal Accounting Officer)
/s/ James B. Baker
- -------------------------- Director
James B. Baker
/s/ C. William Beckwith Director
- --------------------------
C. William Beckwith
/s/ Clifford J. Christenson Director
- --------------------------
Clifford J. Christenson
/s/ Peter H. Conze Director
- --------------------------
Peter H. Conze
/s/ Allan R. Dragone Director
- --------------------------
Allan R. Dragone
/s/ Richard F. Heitmiller Director
- --------------------------
Richard F. Heitmiller
/s/ Jonathan M. Nelson Director
- -------------------------
Jonathan M. Nelson
51
/s/ James E. Rogers Director
- -------------------------
James E. Rogers
/s/ Raymond C. Tower Director
- -------------------------
Raymond C. Tower
/s/ Roger A. Vandenberg Director
- -------------------------
Roger A. Vandenberg
52