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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
---------
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ________
--------------
Commission File No. 0-25642
COMMONWEALTH INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3245741
(State of incorporation) (I.R.S. Employer Identification No.)
500 West Jefferson Street
19th Floor
Louisville, Kentucky 40202-2823
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (502) 589-8100
----------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the proceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
-----
The registrant had 15,997,651 shares of common stock outstanding at October 29,
2002.
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COMMONWEALTH INDUSTRIES, INC.
FORM 10-Q
For the Quarter Ended September 30, 2002
INDEX
Part I - Financial Information
Item 1. Financial Statements (unaudited) Page Number
-----------
Condensed Consolidated Balance Sheet as of
September 30, 2002 and December 31, 2001 3
Condensed Consolidated Statement of Operations for the three
months and nine months ended September 30, 2002 and 2001 4
Condensed Consolidated Statement of Comprehensive Income
for the three months and nine months ended
September 30, 2002 and 2001 5
Condensed Consolidated Statement of Cash Flows for the nine
months ended September 30, 2002 and 2001 6
Notes to Condensed Consolidated Financial Statements 7-19
Item 2. Management's Discussion and Analysis of Financial Condition 20-25
and Results of Operations
Item 4. Controls and Procedures 25
Part II - Other Information
Item 1. Legal Proceedings 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Certifications 28-29
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Balance Sheet
(in thousands except share data)
September 30, December 31,
2002 2001
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ - $ 6,393
Accounts receivable, net 137 81
Inventories 116,369 119,038
Net residual interest in receivables sold 100,185 82,310
Prepayments and other current assets 4,036 3,230
------------- -------------
Total current assets 220,727 211,052
Property, plant and equipment, net 146,067 152,137
Goodwill, net 48,872 74,199
Other noncurrent assets 3,901 2,244
------------- -------------
Total assets $ 419,567 $ 439,632
============= =============
Liabilities
Current liabilities:
Outstanding checks in excess of deposits $ 351 $ -
Accounts payable 54,264 50,693
Accrued liabilities 36,564 38,876
------------- -------------
Total current liabilities 91,179 89,569
Long-term debt 125,000 125,000
Other long-term liabilities 5,511 6,899
Accrued pension benefits 3,529 4,576
Accrued postretirement benefits 77,121 79,422
------------- -------------
Total liabilities 302,340 305,466
------------- -------------
Commitments and contingencies - -
Stockholders' Equity
Common stock, $0.01 par value, 50,000,000 shares authorized,
15,997,651 and 16,459,468 shares outstanding at
June 30, 2002 and December 31, 2001, respectively 160 160
Additional paid-in capital 405,613 405,443
Accumulated deficit (283,507) (258,532)
Notes receivable from sale of common stock - (1,561)
Accumulated other comprehensive income:
Effects of cash flow hedges (5,039) (11,344)
------------- -------------
Total stockholders' equity 117,227 134,166
------------- -------------
Total liabilities and stockholders' equity $ 419,567 $ 439,632
============= =============
See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Statement of Operations
(in thousands except per share data)
Three months ended Nine months ended
September 30, September 30,
---------------------------- -----------------------------
2002 2001 2002 2001
----------- ----------- ------------ -----------
Net sales $ 253,933 $ 249,914 $ 727,519 $ 715,610
Cost of goods sold 234,571 235,366 681,933 678,890
----------- ----------- ------------ -----------
Gross profit 19,362 14,548 45,586 36,720
Selling, general and administrative expenses 12,524 11,326 34,779 34,154
Amortization of goodwill - 1,119 - 3,357
----------- ----------- ------------ -----------
Operating income (loss) 6,838 2,103 10,807 (791)
Other income (expense), net 332 289 818 647
Interest expense, net (3,704) (3,745) (11,406) (11,764)
----------- ----------- ------------ -----------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 3,466 (1,353) 219 (11,908)
Income tax expense (benefit) (2,610) 200 (2,532) 600
----------- ----------- ------------ -----------
Income (loss) before cumulative effect of
change in accounting principle 6,076 (1,553) 2,751 (12,508)
Cumulative effect of change in accounting principle - - (25,327) -
----------- ----------- ------------ -----------
Net income (loss) $ 6,076 $ (1,553) $ (22,576) $ (12,508)
=========== =========== ============ ===========
Basic net income (loss) per share:
Income (loss) before cumulative effect of
change in accounting principle $ 0.38 $ (0.09) $ 0.17 $ (0.76)
Cumulative effect of change in accounting principle - - (1.58) -
----------- ----------- ------------ -----------
Net income (loss) $ 0.38 $ (0.09) $ (1.41) $ (0.76)
=========== =========== ============ ===========
Diluted net income (loss) per share:
Income (loss) before cumulative effect of
change in accounting principle $ 0.38 $ (0.09) $ 0.17 $ (0.76)
Cumulative effect of change in accounting principle - - (1.57) -
----------- ----------- ------------ -----------
Net income (loss) $ 0.38 $ (0.09) $ (1.40) $ (0.76)
=========== =========== ============ ===========
Weighted average shares outstanding
Basic 15,998 16,459 15,992 16,457
Diluted 16,092 16,459 16,100 16,457
Dividends paid per share $ 0.05 $ 0.05 $ 0.15 $ 0.15
See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Statement of Comprehensive Income
(in thousands)
Three months ended Nine months ended
September 30, September 30,
--------------------------- ------------------------
2002 2001 2002 2001
----------- ------------ ---------- ---------
Net income (loss) $ 6,076 $ (1,553) $ (22,576) $ (12,508)
Other comprehensive income, net of tax:
Net change related to cash flow hedges:
Cumulative effect of accounting change - - - 6,619
Increase (decrease) in fair value of cash flow hedges (6,313) (15,866) (3,174) (30,621)
Reclassification adjustment for (gains) losses included
in net income 4,267 8,297 9,479 6,159
----------- ------------ ---------- ---------
Net change related to cash flow hedges (2,046) (7,569) 6,305 (17,843)
----------- ------------ ---------- ---------
Comprehensive income (loss) $ 4,030 $ (9,122) $ (16,271) $ (30,351)
=========== ============ ========== =========
See notes to consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC.
Condensed Consolidated Statement of Cash Flows
(in thousands)
Nine months ended September 30,
----------------------------------
2002 2001
----------- -------------
Cash flows from operating activities:
Net income (loss) $ (22,576) $ (12,508)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operations:
Depreciation 15,940 24,645
Amortization 762 4,305
Goodwill inpairment charge 25,327 -
Loss on disposal of property, plant and equipment 196 359
Issuance of common stock in connection with stock awards 170 106
Changes in assets and liabilities:
(Increase) in accounts receivable, net (56) (748)
Decrease in inventories 2,669 23,724
(Increase) in net residual interest in receivables sold (17,875) (54,492)
(Increase) decrease in prepayments and other current assets (806) 8,316
(Increase) in other noncurrent assets (2,419) (445)
Increase in accounts payable 3,571 7,550
Increase (decrease) in accrued liabilities 3,993 (5,667)
(Decrease) in other liabilities (4,736) (5,618)
----------- -------------
Net cash provided by (used in) operating activities 4,160 (10,473)
----------- -------------
Cash flows from investing activities:
Purchases of property, plant and equipment (10,089) (7,217)
Proceeds from sale of property, plant and equipment 23 90
----------- -------------
Net cash (used in) investing activities (10,066) (7,127)
----------- -------------
Cash flows from financing activities:
Increase in outstanding checks in excess of deposits 351 6,942
Proceeds from long-term debt 55,700 48,060
Repayments of long-term debt (55,700) (48,060)
Repayments of notes receivable from sale of common stock 1,561 1,613
Cash dividends paid (2,399) (2,469)
----------- -------------
Net cash (used in) provided by financing activities (487) 6,086
----------- -------------
Net (decrease) in cash and cash equivalents (6,393) (11,514)
Cash and cash equivalents at beginning of period 6,393 11,514
----------- -------------
Cash and cash equivalents at end of period $ - $ -
=========== =============
Supplemental disclosures:
Interest paid $ 7,551 $ 8,630
Income taxes paid (refunds received) (492) 157
Non-cash activities:
Repayment of notes receivable from sale of common stock with
common stock and subsequent retirement of common stock - 450
See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC.
Notes to Condensed Consolidated Financial Statements
1. Basis of Presentation
The accompanying condensed consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not include
all the disclosures normally required by generally accepted accounting
principles. The condensed consolidated financial statements have been prepared
in accordance with Commonwealth Industries, Inc.'s (the "Company's") customary
accounting practices and have not been audited. In the opinion of management,
all adjustments necessary to fairly present the results of operations for the
reporting interim periods have been made and were of a normal recurring nature.
2. Receivables Purchase Agreement
On September 26, 1997, the Company sold all of its trade accounts receivables to
a 100% owned subsidiary, Commonwealth Financing Corp. ("CFC"). Simultaneously,
CFC entered into a three-year receivables purchase agreement with a financial
institution and its affiliate whereby CFC can sell, on a revolving basis, an
undivided interest in certain of its receivables and receive up to $150.0
million from an unrelated third party purchaser at a cost of funds linked to
commercial paper rates plus a charge for administrative and credit support
services. The Company services the receivables for a fee in accordance with the
receivables purchase agreement. In addition, under the agreement, the
receivables are sold with no recourse to the Company and the Company records no
discount on the sale of the receivables. During September 2000, the Company and
the financial institution extended the receivables purchase agreement for an
additional three-year period ending in September 2003 and in October 2002,
extended the agreement for an additional year ending in September 2004. In
addition during September 2001, the Company and the financial institution agreed
to reduce the maximum amount which can be outstanding under the agreement to
$95.0 million. At September 30, 2002 and 2001, the Company had outstanding under
the agreement $20.0 million and $17.5 million, respectively, and had $100.2
million and $126.9 million, respectively, of net residual interest in the
receivables sold. The fair value of the net residual interest is measured at the
time of the sale and is based on the sale of similar assets. In the first nine
months of 2002 and 2001, the Company received gross proceeds of $37.0 million
and $30.0 million, respectively, from the sale of receivables and made gross
payments of $37.0 and $81.5 million, respectively, under the agreement.
3. Inventories
Inventories consist of the following (in thousands):
September 30, 2002 December 31, 2001
------------------ -----------------
Raw materials $ 19,137 $ 21,203
Work in process 42,973 45,830
Finished goods 39,499 35,978
Expendable parts and supplies 14,207 14,223
---------- -----------
115,816 117,234
LIFO reserve 553 1,804
---------- -----------
$ 116,369 $ 119,038
========== ===========
The Company uses the last-in, first-out (LIFO), first-in, first-out (FIFO) and
average-cost accounting methods for valuing its inventories. Inventories of
approximately $86.5 million and $87.9 million, included in the above totals
(before the LIFO reserve) at September 30, 2002 and December 31, 2001,
respectively, are accounted for under the LIFO method of accounting while the
remainder of the inventories are accounted for under the FIFO and average-cost
methods.
4. Provision for Income Taxes
The Company recognized an income tax benefit of $2.6 million and $2.5 million
for the three months and nine months ended September 30, 2002, respectively,
compared to an income tax expense of $0.2 million and $0.6 million for the three
months and nine months ended September 30, 2001, respectively. The Company
recorded an adjustment of $2.7 million in the three months ended September 30,
2002 to reduce prior year's income tax accruals.
5. Net Income Per Share Computations
The following is a reconciliation of the numerator and denominator of the basic
and diluted per share computations (in thousands except per share data):
Three months ended
September 30,
2002 2001
---- ----
Income (numerator) amounts used for basic and diluted per share computations:
Income (loss) before cumulative effect of change in accounting principle $6,076 $(1,553)
Cumulative effect of change in accounting principle - -
------ -------
Net income (loss) $6,076 $(1,553)
====== =======
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 15,998 16,459
====== ======
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 15,998 16,459
Plus: dilutive effect of stock options 94 -
------ ------
Adjusted weighted average shares 16,092 16,459
====== ======
Basic and diluted per share data:
Income (loss) before cumulative effect of change in accounting principle $0.38 $ (0.09)
Cumulative effect of change in accounting principle - -
----- -------
Net income (loss) $0.38 $ (0.09)
===== =======
Nine months ended
September 30,
2002 2001
---- ----
Income (numerator) amounts used for basic and diluted per share computations:
Income (loss) before cumulative effect of change in accounting principle $ 2,751 $(12,508)
Cumulative effect of change in accounting principle (25,327) -
-------- ---------
Net income (loss) $(22,576) $(12,508)
========= =========
Shares (denominator) used for basic per share computations:
Weighted average shares of common stock outstanding 15,992 16,457
====== ======
Shares (denominator) used for diluted per share computations:
Weighted average shares of common stock outstanding 15,992 16,457
Plus: dilutive effect of stock options 108 -
------ ------
Adjusted weighted average shares 16,100 16,457
====== ======
Basic per share data:
Income (loss) before cumulative effect of change in accounting principle $ 0.17 $(0.76)
Cumulative effect of change in accounting principle (1.58) -
------- ------
Net income (loss) $(1.41) $(0.76)
======= ======
Diluted per share data:
Income (loss) before cumulative effect of change in accounting principle $ 0.17 $(0.76)
Cumulative effect of change in accounting principle (1.57) -
------- -------
Net income (loss) $(1.40) $(0.76)
======= =======
Options to purchase 305,500 common shares for both the three months and nine
months ended September 30, 2001, which equate to 43,141 and 42,571 incremental
common equivalent shares, respectively, were excluded from the diluted
calculation above as their effect would have been antidilutive. In addition,
options to purchase 794,000 common shares for both the three months and nine
months ended September 30, 2002 and 799,500 common shares for both the three
months and nine months ended September 30, 2001 were excluded from the diluted
calculations above because the exercise prices on the options were greater than
the average market price for the periods.
6. Financial Instruments and Hedging Activities
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities", including Statement of Financial Accounting Standards No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities -
an amendment of FASB Statement No. 133" ("SFAS No. 133"). The Company recorded a
cumulative-effect-type net gain transition adjustment of $6.6 million in
accumulated other comprehensive income to recognize at fair value all
derivatives that were designated as cash-flow hedging instruments upon adoption
of SFAS No. 133 on January 1, 2001. This entire amount was reclassified from
accumulated other comprehensive income into cost of goods sold during 2001.
The Company enters into futures contracts, forward contracts and options to
manage exposures to price risk related to aluminum and natural gas purchases.
The Company has designated the futures contracts and forward contracts as cash
flow hedges of anticipated aluminum raw material and natural gas requirements,
respectively.
As of September 30, 2002, approximately $4.9 million of the $5.0 million of
deferred net losses are expected to be reclassified from other comprehensive
income into net income as cost of goods sold over the next twelve months. A net
loss of $0.05 million and $0.16 million was recognized in cost of goods sold
during the three months and nine months ended September 30, 2002, respectively,
and a net loss of $0.13 million and $0.16 million was recognized in cost of
goods sold during the three months and nine months ended September 30, 2001,
respectively, representing the amount of the hedges' ineffectiveness. As of
September 30, 2002, the Company held open aluminum and natural gas futures and
forward contracts having maturity dates extending through March 2004.
In order to hedge a portion of its interest rate risk, the Company was a party
to an interest rate swap agreement with a notional amount of $5 million under
which the Company paid a fixed rate of interest and received a LIBOR-based
floating rate. The interest rate swap agreement expired during September 2001
and as of September 30, 2002 the Company has no interest rate swap agreements in
effect. The Company's interest rate swap agreement which expired during
September 2001 did not qualify for hedge accounting under SFAS 133 and as such
the change in the fair value of the interest rate swap agreement had been
recognized currently as interest expense, net in the Company's consolidated
statement of operations. The amount of such change in the fair value of the
interest rate swap agreement was immaterial for the three months and nine months
ended September 30, 2001.
7. Goodwill
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). The
Statement addresses financial accounting and reporting for acquired goodwill and
other intangible assets and supersedes Accounting Principles Board Opinion No.
17, "Intangible Assets" and amends Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" ("SFAS No. 121"), to exclude from its scope goodwill
and intangible assets that are not amortized. SFAS No. 121 has subsequently been
superceded by Statement of Financial Accounting Standards No. 144, "Accounting
for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). SFAS No.
142 addresses how intangible assets that are acquired individually or with a
group of other assets (but not those acquired in a business combination) should
be accounted for in financial statements upon their acquisition. This Statement
also addresses how goodwill and other intangible assets should be accounted for
after they have been initially recognized in the financial statements. Under
SFAS No. 142, goodwill is no longer amortized but reviewed for impairment
annually or more frequently if certain indicators arise, using a two-step
approach. SFAS No. 142 is effective January 1, 2002 and the Company was required
to complete step one of a transitional impairment test by June 30, 2002 and to
complete step two of the transitional impairment test, if step one indicates
that the reporting unit's carrying value exceeds its fair value, by December 31,
2002. Any impairment loss resulting from the transitional impairment test was
required to be recorded as a cumulative effect of a change in accounting
principle in the quarter ended March 31, 2002. Any subsequent impairment losses
will be reflected in operating income in the consolidated statement of
operations. The net goodwill balances attributable to each of the Company's
reporting units were tested for impairment by comparing the fair value of each
reporting unit to its carrying value. Fair value was determined by using the
valuation technique of calculating the present value of estimated expected
future cash flows (using a discount rate commensurate with the risks involved).
Based upon the transitional impairment test performed upon adoption of SFAS No.
142, the Company has recorded a goodwill impairment loss of $25.3 million ($13.5
million in its aluminum products segment and $11.8 million in its electrical
products segment). This non-cash goodwill impairment charge has no impact on the
calculation of financial covenants under the Company's revolving credit
facility. As required by SFAS No.142 and previously described, the Company
recorded the goodwill write-down as a cumulative effect of a change in
accounting principle as of January 1, 2002 and restated the Company's first
quarter 2002 financial results.
The following displays the changes in the carrying amount of goodwill in each of
the Company's reportable business segments for the nine months ended September
30, 2002 (in thousands):
Electrical
Aluminum Products Total
-------- ---------- --------
Balance December 31, 2001 $13,470 $60,729 $74,199
Goodwill impairment loss as a result of transitional
impairment test related to adoption of SFAS No. 142 (13,470) (11,857) (25,327)
-------- -------- --------
Balance September 30, 2002 $ - $48,872 $48,872
======== ======== ========
The following represents transitional disclosures relating to goodwill
amortization (in thousands except per share data):
Three months ended
September 30,
2002 2001
---- ----
Reported net income (loss) $6,076 $(1,553)
Add back: goodwill amortization - 1,119
------ ------
Adjusted net income (loss) $6,076 $ (434)
====== ======
Reported basic and diluted net income (loss) per share $0.38 $(0.09)
Goodwill amortization per basic and diluted per share - 0.06
----- ------
Adjusted basic and diluted net income (loss) per share $0.38 $(0.03)
===== ======
Weighted average shares outstanding
Basic 15,998 16,459
Diluted 16,092 16,459
Nine months ended
September 30,
2002 2001
---- ----
Reported income (loss) before cumulative effect of change in accounting principle $2,751 $(12,508)
Cumulative effect of change in accounting principle (25,327) -
-------- -------
Reported net income (loss) $(22,576) $(12,508)
Add back: goodwill amortization - 3,357
-------- -------
Adjusted net income (loss) $(22,576) $(9,151)
======== =======
Basic net income (loss) per share:
Reported income (loss) before cumulative effect of change in accounting principle $ 0.17 $(0.76)
Cumulative effect of change in accounting principle (1.58) -
------ ------
Reported net income (loss) $(1.41) $(0.76)
Goodwill amortization - 0.20
------ ------
Adjusted net income (loss) $(1.41) $(0.56)
====== ======
Diluted net income (loss) per share:
Reported income (loss) before cumulative effect of change in accounting principle $0.17 $(0.76)
Cumulative effect of change in accounting principle (1.57) -
------ ------
Reported net income (loss) $(1.40) $(0.76)
Goodwill amortization - 0.20
------ ------
Adjusted net income (loss) $(1.40) $(0.56)
====== ======
Weighted average shares outstanding
Basic 15,992 16,457
Diluted 16,100 16,457
The Company has no other intangible assets other than the goodwill discussed
above.
8. Information Concerning Business Segments
The Company has determined it has two reportable segments: aluminum and
electrical products. The aluminum segment manufactures aluminum sheet for
distributors and the transportation, construction, and consumer durables end-use
markets. The electrical products segment manufactures flexible electrical wiring
products for the commercial construction and do-it-yourself markets.
The accounting policies of the reportable segments are the same as those
described in Note 1, "Basis of Presentation and Summary of Significant
Accounting Policies" in the Company's annual report to stockholders for the year
ended December 31, 2001. All intersegment sales prices are market based. The
Company evaluates the performance of its operating segments based upon operating
income.
The Company's reportable segments are strategic businesses that offer different
products to different customer groups. They are managed separately because each
business requires different technology and marketing strategies.
Summarized financial information concerning the Company's reportable segments is
shown in the following table for the three months and nine months ended
September 30, 2002 and 2001 (in thousands). The "Other" column includes
corporate related items, including elimination of intersegment transactions, and
as it relates to segment operating income, income and expense not allocated to
reportable segments. Total assets at September 30, 2002 include the effects of
the $167.3 million non-cash asset impairment charges recorded in the fourth
quarter of 2001 and the $25.3 million non-cash goodwill impairment charges
($13.5 million relating to the aluminum products segment and $11.8 million
relating to the electrical products segment) recorded as a cumulative effect of
a change in accounting principle as of January 1, 2002 during the second quarter
of 2002. The $167.3 million non-cash asset impairment charges were all related
to the aluminum products segment and composed of $85.4 million of property,
plant and equipment write-downs ($1.8 million of net land and improvements,
$15.7 million of net building improvements, $59.0 million of net machinery and
equipment and $8.9 million of construction in progress) and $81.9 million of
goodwill write-downs. See note 2 in the Company's annual report to stockholders
for the year ended December 31, 2001 for additional information on the asset
impairment charges and note 7 in this report for additional information on the
goodwill impairment charges.
Electrical
Aluminum Products Other Total
-------- ---------- --------- ----------
Three months ended September 30, 2002
- -------------------------------------
Net sales to external customers $224,124 $29,809 $ -- $253,933
Intersegment net sales 7,522 -- (7,522) --
Operating income (loss) 10,840 1,137 (5,139) 6,838
Depreciation and amortization 4,950 571 -- 5,521
Total assets 324,589 93,236 1,742 419,567
Capital expenditures 6,884 11 -- 6,895
Three months ended September 30, 2001
- -------------------------------------
Net sales to external customers $220,028 $29,886 $ -- $249,914
Intersegment net sales 5,443 -- (5,443) --
Operating income (loss) 4,335 1,680 (3,912) 2,103
Depreciation and amortization 8,632 977 -- 9,609
Total assets 540,007 102,998 2,291 645,296
Capital expenditures 3,042 14 -- 3,056
Nine months ended September 30, 2002
- ------------------------------------
Net sales to external customers $641,081 $86,438 $ -- $727,519
Intersegment net sales 21,650 -- (21,650) --
Operating income (loss) 18,759 5,069 (13,021) 10,807
Depreciation and amortization 14,990 1,712 -- 16,702
Total assets 324,589 93,236 1,742 419,567
Capital expenditures 9,835 254 -- 10,089
Nine months ended September 30, 2001
- ------------------------------------
Net sales to external customers $623,252 $92,358 $ -- $715,610
Intersegment net sales 19,876 -- (19,876) --
Operating income (loss) 6,062 4,343 (11,196) (791)
Depreciation and amortization 26,012 2,931 7 28,950
Total assets 540,007 102,998 2,291 645,296
Capital expenditures 7,017 200 -- 7,217
9. Guarantor Financial Statements
The $125 million of 10.75% senior subordinated notes due 2006 issued by the
Company, and the $30 million revolving credit facility are guaranteed by the
Company's wholly-owned subsidiaries (collectively the "Subsidiary Guarantors"),
other than Commonwealth Financing Corp. ("CFC"), a Securitization Subsidiary (as
defined in the Indenture with respect to such debt) and certain subsidiaries of
the Company without substantial assets or operations. Such guarantees are full,
unconditional and joint and several. Separate financial statements of the
Subsidiary Guarantors are not presented because management has determined that
they would not be material to investors. The following supplemental financial
information sets forth on a condensed combined basis for the Parent Company
Only, Subsidiary Guarantors, Non-guarantor Subsidiaries and for the Company, a
combining balance sheet as of September 30, 2002 and December 31, 2001,
statement of operations for the three months and nine months ended September 30,
2002 and 2001 and statement of cash flows for the nine months ended September
30, 2002 and 2001.
Combining Balance Sheet at September 30, 2002
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ----------- ----------- ------------ --------
Assets
Current assets:
Cash and cash equivalents $ -- $ -- $ -- $ -- $ --
Accounts receivable, net -- 299,349 -- (299,212) 137
Inventories -- 116,369 -- -- 116,369
Net residual interest in receivables sold -- -- 100,185 -- 100,185
Prepayments and other current assets 435 3,601 -- -- 4,036
--------- --------- --------- --------- ---------
Total current assets 435 419,319 100,185 (299,212) 220,727
Property, plant and equipment, net -- 146,067 -- -- 146,067
Goodwill, net -- 48,872 -- -- 48,872
Other noncurrent assets 409,862 2,594 -- (408,555) 3,901
--------- --------- --------- --------- ---------
Total assets $ 410,297 $ 616,852 $ 100,185 $(707,767) $ 419,567
========= ========= ========= ========= =========
Liabilities
Current liabilities:
Outstanding checks in excess of deposits $ -- $ 351 $ -- $ -- $ 351
Accounts payable 156,156 54,264 143,056 (299,212) 54,264
Accrued liabilities 6,875 30,446 (757) -- 36,564
--------- --------- --------- --------- ---------
Total current liabilities 163,031 85,061 142,299 (299,212) 91,179
Long-term debt 125,000 -- -- -- 125,000
Other long-term liabilities -- 5,511 -- -- 5,511
Accrued pension benefits -- 3,529 -- -- 3,529
Accrued postretirement benefits -- 77,121 -- -- 77,121
--------- --------- --------- --------- ---------
Total liabilities 288,031 171,222 142,299 (299,212) 302,340
--------- --------- --------- --------- ---------
Commitments and contingencies -- -- -- -- --
Stockholders' Equity
Common stock 160 1 -- (1) 160
Additional paid-in capital 405,613 486,727 5,000 (491,727) 405,613
Accumulated deficit (283,507) (36,059) (47,114) 83,173 (283,507)
Accumulated other comprehensive income:
Effects of cash flow hedges -- (5,039) -- -- (5,039)
--------- --------- --------- --------- ---------
Total stockholders' equity 122,266 445,630 (42,114) (408,555) 117,227
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 410,297 $ 616,852 $ 100,185 $(707,767) $ 419,567
========= ========= ========= ========= =========
Combining Balance Sheet at December 31, 2001
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ----------- ----------- ------------ --------
Assets
Current assets:
Cash and cash equivalents $ -- $ 6,393 $ -- $ -- $ 6,393
Accounts receivable, net -- 271,074 -- (270,993) 81
Inventories -- 119,038 -- -- 119,038
Net residual interest in receivables sold -- -- 82,310 -- 82,310
Prepayments and other current assets 435 2,795 -- -- 3,230
--------- --------- --------- --------- ---------
Total current assets 435 399,300 82,310 (270,993) 211,052
Property, plant and equipment, net -- 152,137 -- -- 152,137
Goodwill, net -- 74,199 -- -- 74,199
Other noncurrent assets 424,830 611 -- (423,197) 2,244
--------- --------- --------- --------- ---------
Total assets $ 425,265 $ 626,247 $ 82,310 $(694,190) $ 439,632
========= ========= ========= ========= =========
Liabilities
Current liabilities:
Accounts payable $ 148,971 $ 50,693 $ 122,022 $(270,993) $ 50,693
Accrued liabilities 5,784 33,997 (905) -- 38,876
--------- --------- --------- --------- ---------
Total current liabilities 154,755 84,690 121,117 (270,993) 89,569
Long-term debt 125,000 -- -- -- 125,000
Other long-term liabilities -- 6,899 -- -- 6,899
Accrued pension benefits -- 4,576 -- -- 4,576
Accrued postretirement benefits -- 79,422 -- -- 79,422
--------- --------- --------- --------- ---------
Total liabilities 279,755 175,587 121,117 (270,993) 305,466
--------- --------- --------- --------- ---------
Commitments and contingencies -- -- -- -- --
Stockholders' Equity
Common stock 160 1 -- (1) 160
Additional paid-in capital 405,443 486,727 5,000 (491,727) 405,443
Accumulated deficit (258,532) (24,724) (43,807) 68,531 (258,532)
Notes receivable from sale of common stock (1,561) -- -- -- (1,561)
Accumulated other comprehensive income:
Effects of cash flow hedges -- (11,344) -- -- (11,344)
--------- --------- --------- --------- ---------
Total stockholders' equity 145,510 450,660 (38,807) (423,197) 134,166
--------- --------- --------- --------- ---------
Total liabilities and stockholders' equity $ 425,265 $ 626,247 $ 82,310 $(694,190) $ 439,632
========= ========= ========= ========= =========
Combining Statement of Income for the three months ended September 30, 2002
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- --------- --------- --------- ---------
Net sales $ -- $ 253,933 $ -- $ -- $ 253,933
Cost of goods sold -- 234,571 -- -- 234,571
--------- --------- --------- --------- ---------
Gross profit -- 19,362 -- -- 19,362
Selling, general and administrative expenses 51 12,473 -- -- 12,524
Amortization of goodwill -- -- -- -- --
--------- --------- --------- --------- ---------
Operating income (loss) (51) 6,889 -- -- 6,838
Other income (expense), net 6,904 332 -- (6,904) 332
Interest income (expense), net (3,469) 807 (1,042) -- (3,704)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 3,384 8,028 (1,042) (6,904) 3,466
Income tax expense (benefit) (2,692) 82 -- -- (2,610)
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle 6,076 7,946 (1,042) (6,904) 6,076
Cumulative effect of change in accounting principle -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ 6,076 $ 7,946 $ (1,042) $ (6,904) $ 6,076
========= ========= ========= ========= =========
Combining Statement of Income for the three months ended September 30, 2001
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- --------- --------- --------- ---------
Net sales $ -- $ 249,914 $ -- $ -- $ 249,914
Cost of goods sold -- 235,366 -- -- 235,366
--------- --------- --------- --------- ---------
Gross profit -- 14,548 -- -- 14,548
Selling, general and administrative expenses 49 11,277 -- -- 11,326
Amortization of goodwill -- 1,119 -- -- 1,119
--------- --------- --------- --------- ---------
Operating income (loss) (49) 2,152 -- -- 2,103
Other income (expense), net 1,863 289 -- (1,863) 289
Interest income (expense), net (3,367) 1,214 (1,592) -- (3,745)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle (1,553) 3,655 (1,592) (1,863) (1,353)
Income tax expense -- 200 -- -- 200
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle (1,553) 3,455 (1,592) (1,863) (1,553)
Cumulative effect of change in accounting principle -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ (1,553) $ 3,455 $ (1,592) $ (1,863) $ (1,553)
========= ========= ========= ========= =========
Combining Statement of Income for the nine months ended September 30, 2002
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- --------- --------- --------- ---------
Net sales $ -- $ 727,519 $ -- $ -- $ 727,519
Cost of goods sold -- 681,933 -- -- 681,933
--------- --------- --------- --------- ---------
Gross profit -- 45,586 -- -- 45,586
Selling, general and administrative expenses 224 34,555 -- -- 34,779
Amortization of goodwill -- -- -- -- --
--------- --------- --------- --------- ---------
Operating income (loss) (224) 11,031 -- -- 10,807
Other income (expense), net 10,685 818 -- (10,685) 818
Interest income (expense), net (10,402) 2,303 (3,307) -- (11,406)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle 59 14,152 (3,307) (10,685) 219
Income tax expense (benefit) (2,692) 160 -- -- (2,532)
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle 2,751 13,992 (3,307) (10,685) 2,751
Cumulative effect of change in accounting principle (25,327) (25,327) -- 25,327 (25,327)
--------- --------- --------- --------- ---------
Net income (loss) $ (22,576) $ (11,335) $ (3,307) $ 14,642 $ (22,576)
========= ========= ========= ========= =========
Combining Statement of Income for the nine months ended September 30, 2001
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- --------- --------- --------- ---------
Net sales $ -- $ 715,610 $ -- $ -- $ 715,610
Cost of goods sold -- 678,890 -- -- 678,890
--------- --------- --------- --------- ---------
Gross profit -- 36,720 -- -- 36,720
Selling, general and administrative expenses 225 33,929 -- -- 34,154
Amortization of goodwill -- 3,357 -- -- 3,357
--------- --------- --------- --------- ---------
Operating income (loss) (225) (566) -- -- (791)
Other income (expense), net (2,227) 647 -- 2,227 647
Interest income (expense), net (10,056) 3,881 (5,589) -- (11,764)
--------- --------- --------- --------- ---------
Income (loss) before income taxes and cumulative
effect of change in accounting principle (12,508) 3,962 (5,589) 2,227 (11,908)
Income tax expense -- 600 -- -- 600
--------- --------- --------- --------- ---------
Income (loss) before cumulative effect of
change in accounting principle (12,508) 3,362 (5,589) 2,227 (12,508)
Cumulative effect of change in accounting principle -- -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ (12,508) $ 3,362 $ (5,589) $ 2,227 $ (12,508)
========= ========= ========= ========= =========
Combining Statement of Cash Flows for the nine months ended September 30, 2002
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ---------- ---------- --------- ----------
Cash flows from operating activities:
Net income (loss) $(22,576) $(11,335) $ (3,307) $ 14,642 $(22,576)
Adjustments to reconcile net income (loss) to
net cash provided by operations:
Depreciation -- 15,940 -- -- 15,940
Amortization -- 762 -- -- 762
Goodwill impairment charge 25,327 25,327 -- (25,327) 25,327
Loss on disposal of property, plant and equipment -- 196 -- -- 196
Issuance of common stock in connection with stock awards 170 -- -- -- 170
Equity in undistributed net income of subsidiaries (10,685) -- -- 10,685 --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net -- (28,275) -- 28,219 (56)
Decrease in inventories -- 2,669 -- -- 2,669
(Increase) in net residual interest in receivables sold -- -- (17,875) -- (17,875)
(Increase) in prepayments and other current assets -- (806) -- -- (806)
Decrease (increase) in other noncurrent assets 326 (2,745) -- -- (2,419)
Increase (decrease) in accounts payable 7,185 3,571 21,034 (28,219) 3,571
Increase in accrued liabilities 1,091 2,754 148 -- 3,993
(Decrease) in other liabilities -- (4,736) -- -- (4,736)
-------- -------- -------- -------- --------
Net cash provided by operating activities 838 3,322 -- -- 4,160
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment -- (10,089) -- -- (10,089)
Proceeds from sale of property, plant and equipment -- 23 -- -- 23
-------- -------- -------- -------- --------
Net cash (used in) investing activities -- (10,066) -- -- (10,066)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Increase in outstanding checks in excess of deposits -- 351 -- -- 351
Proceeds from long-term debt -- 55,700 -- -- 55,700
Repayments of long-term debt -- (55,700) -- -- (55,700)
Repayments of notes receivable from sale of common stock 1,561 -- -- -- 1,561
Cash dividends paid (2,399) -- -- -- (2,399)
-------- -------- -------- -------- --------
Net cash (used in) provided by financing activities (838) 351 -- -- (487)
-------- -------- -------- -------- --------
Net (decrease) in cash and cash equivalents -- (6,393) -- -- (6,393)
Cash and cash equivalents at beginning of period -- 6,393 -- -- 6,393
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ -- $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
Combining Statement of Cash Flows for the nine months ended September 30, 2001
(in thousands)
Parent
Company Subsidiary Non-guarantor Combined
Only Guarantors Subsidiaries Eliminations Totals
--------- ---------- ---------- --------- ----------
Cash flows from operating activities:
Net income (loss) $(12,508) $ 3,362 $ (5,589) $ 2,227 $(12,508)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operations:
Depreciation -- 24,645 -- -- 24,645
Amortization 7 4,298 -- -- 4,305
Loss on disposal of property, plant and equipment -- 359 -- -- 359
Issuance of common stock in connection with stock awards 106 -- -- -- 106
Equity in undistributed net income of subsidiaries 2,227 -- -- (2,227) --
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, net -- (67,884) -- 67,136 (748)
Decrease in inventories -- 23,724 -- -- 23,724
(Increase) in net residual interest in receivables sold -- -- (54,492) -- (54,492)
Decrease in prepayments and other current assets 248 8,068 -- -- 8,316
Decrease (increase) in other noncurrent assets 326 (771) -- -- (445)
Increase (decrease) in accounts payable 6,766 7,550 60,370 (67,136) 7,550
Increase (decrease) in accrued liabilities 3,684 (9,062) (289) -- (5,667)
(Decrease) in other liabilities -- (5,618) -- -- (5,618)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities 856 (11,329) -- -- (10,473)
-------- -------- -------- -------- --------
Cash flows from investing activities:
Purchases of property, plant and equipment -- (7,217) -- -- (7,217)
Proceeds from sale of property, plant and equipment -- 90 -- -- 90
-------- -------- -------- -------- --------
Net cash (used in) investing activities -- (7,127) -- -- (7,127)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Increase in outstanding checks in excess of deposits -- 6,942 -- -- 6,942
Proceeds from long-term debt -- 48,060 -- -- 48,060
Repayments of long-term debt -- (48,060) -- -- (48,060)
Repayments of notes receivable from sale of common stock 1,613 -- -- -- 1,613
Cash dividends paid (2,469) -- -- -- (2,469)
-------- -------- -------- -------- --------
Net cash (used in) provided by financing activities (856) 6,942 -- -- 6,086
-------- -------- -------- -------- --------
Net (decrease) in cash and cash equivalents -- (11,514) -- -- (11,514)
Cash and cash equivalents at beginning of period -- 11,514 -- -- 11,514
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ -- $ -- $ -- $ -- $ --
======== ======== ======== ======== ========
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This section should be read in conjunction with the condensed consolidated
financial statements and notes thereto included in item 1 of this report in
addition to the consolidated financial statements of the Company and the notes
thereto included in the Company's annual report to stockholders for the year
ended December 31, 2001, including footnote 1 which describes the Company's
significant accounting policies including its use of estimates. See the caption
entitled "Application of Critical Accounting Policies" in this section for
further information. The following discussion contains statements which are
forward-looking rather than historical fact. These forward-looking statements
are made pursuant to the safe harbor provisions of the Private Securities
Legislation Reform Act of 1995 and involve risks and uncertainties that could
render them materially different, including, but not limited to, the effect of
global economic conditions, the ability to achieve the level of cost savings or
productivity improvements anticipated by management, the effect (including
possible increases in the cost of doing business) resulting from war and
terrorist activities or political uncertainties, the impact of competitive
products and pricing, product development and commercialization, availability
and cost of critical raw materials, capacity and supply constraints or
difficulties, the success of the Company in implementing its business strategy,
and other risks as detailed in the Company's various Securities and Exchange
Commission filings.
Overview
The Company manufactures non-heat treat coiled aluminum sheet for distributors
and the transportation, construction and consumer durables end use markets and
electrical flexible conduit and prewired armored cable for the commercial
construction and renovation markets. The Company's principal raw materials are
aluminum scrap, primary aluminum, copper and steel. Trends in the demand for
aluminum sheet products in the United States and in the prices of aluminum
primary metal, aluminum scrap and copper commodities affect the business of the
Company. The Company's operating results also are affected by factors specific
to the Company, such as the margins between selling prices for its products and
its cost of raw material ("material margins") and its unit cost of converting
raw material into its products ("conversion cost"). While changes in aluminum
and copper prices can cause the Company's net sales to change significantly from
period to period, net income is more directly impacted by the fluctuation in
material margins.
During the first nine months of 2002, shipments of the Company's aluminum sheet
products increased by 12% from the first nine months of 2001. This is the third
consecutive quarter of higher year-over-year shipment volume following a
downturn that began in the second quarter of 2000 and extended throughout 2001.
The positive impact of this increased volume, combined with lower depreciation
and amortization charges, more than offset the impact of lower material margins
in the first nine months of 2002 versus the first nine months of 2001 and helped
to increase profitability of the aluminum business unit for both the third
quarter and first nine months of 2002 compared to the same periods in 2001.
Material margins which had been declining somewhat in the first six months of
2002, increased in the third quarter of 2002 compared to the third quarter of
2001 and the first and second quarters of 2002 due to firmer pricing for
aluminum prices coupled with lower metal costs and better scrap availability.
Demand for the Company's electrical products decreased during the first nine
months of 2002. Shipments were down 5% compared to the first nine months of 2001
as business conditions remained competitive and commercial construction activity
declined, however shipments were up 3% in the third quarter of 2002 compared to
the third quarter of 2001 which was the first such increase in two years.
Material margins for the first nine months of 2002 increased 3% from the first
nine months of 2001, but decreased 8% in the third quarter of 2002 from the
second quarter of 2002. The reduction in material costs per foot in the first
nine months of 2002 compared to the first nine months of 2001 more than offset
the lower net selling prices and contributed to the material margin improvement
in the first nine months of 2002 versus the first nine months of 2001. The
Company's electrical products business continued to report operating profits
which were increased over the first nine months of 2001 principally due to a
decrease in selling, general and administrative expenses and the elimination of
goodwill amortization expense in 2002. However, in the third quarter of 2002
operating profits were down compared to the third quarter of 2001 primarily due
to a third quarter 2002 adjustment of employee healthcare costs as well as a
decrease in the composite selling price.
During the second quarter of 2002, the Company completed its previously
announced transitional test of goodwill as called for under Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"). Pursuant to this test, the Company recorded a charge of $25.3
million or $1.58 per diluted share (before and after tax), as a cumulative
effect of a change in accounting principle, to reflect the impairment of
goodwill on the balance sheet as of January 1, 2002. The Company's restated net
loss for the first quarter of 2002, giving effect to the change in accounting
principle, was $29.8 million or $1.86 per diluted share. See the caption
entitled "Cumulative effect of change in accounting principle" in the following
section and note 7 to the condensed consolidated financial statements for
additional information.
Application of Critical Accounting Policies
The Company's discussion and analysis of financial condition and results of
operation is based upon the Company's condensed consolidated financial
statements, which have been prepared in conformity with accounting principles
generally accepted in the United States of America. The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The Company's most critical accounting policies require the use of
estimates relating to the valuation of property, plant and equipment and
goodwill, assumptions for computing pension and postretirement benefits
obligations, allowance for uncollectible accounts receivable and environmental
liabilities.
Results of Operations for the three months and nine months ended
September 30, 2002 and 2001
Net Sales. Net sales for the quarter ended September 30, 2002, increased 2% to
$254 million (including $29.8 million from Alflex) from $250 million (including
$29.9 million from Alflex) for the same period in 2001. The increase is due to
an increase in aluminum shipments which more than offset a decrease in the net
selling prices. Unit sales volume of aluminum increased 5% to 232.8 million
pounds for the third quarter of 2002 from 221.4 million pounds for the third
quarter of 2001. Alflex unit sales volume was 130.3 million feet for the third
quarter of 2002, an increase of 3% versus 126.9 million feet for the comparable
period in 2001. Net sales for the nine-month period ended September 30, 2002,
were $728 million (including $86.4 million from Alflex), a 2% increase from the
$716 million recorded in the first nine months of 2001 (including $92.4 million
from Alflex). The increase is due to the increased shipments resulting from
increased demand for aluminum products across all of the Company's aluminum
products' markets. Unit sales volume of aluminum was 680.2 million pounds for
the first nine months of 2002, an increase of 12% from the 609.0 million pounds
for the first nine months of 2001. Alflex unit sales volume was 374.8 million
feet for the first nine months of 2002, a decrease of 5%, versus 393.4 million
feet for the comparable period in 2001.
Gross Profit. Gross profit for the quarter ended September 30, 2002, increased
to $19.4 million (7.6% of net sales) from $14.5 million (5.8% of net sales) for
the same period in 2001. Gross profit for the nine months ended September 30,
2002 was $45.6 million (6.3% of net sales) versus $36.7 million (5.1% of net
sales) for the comparable period in 2001. The third quarter and nine-month
increases were related entirely to the aluminum business unit and due primarily
to increased volumes and greater manufacturing efficiencies, improving material
margins in the third quarter, lower natural gas rates, lower outside processing
costs plus lower depreciation expense as a result of asset impairment charges
recorded in the fourth quarter of 2001. All the above factors more than offset
the lower material margins experienced during the first half of 2002 which were
due to the tighter scrap spreads for the six months of 2002 versus the same
period in 2001. These scrap spreads widened during the third quarter of 2002 as
scrap availability increased and coupled with lower primary metal costs and
firmer pricing for aluminum products translated into higher material margins in
the third quarter of 2002 versus the third quarter of 2001 and the first two
quarters of 2002. Alflex's gross profit for the first nine months of 2002 versus
the first nine months of 2001 was down as decreased net sales revenue resulting
from decreased shipments and lower selling prices offset the improved material
margins.
Operating Income. The Company had operating income of $6.8 million for the third
quarter of 2002 compared with operating income of $2.1 million for the third
quarter of 2001. For the nine-month period ended September 30, 2002, the Company
had operating income of $10.8 million, versus an operating loss of $0.8 million
for the first nine months of 2001. The increase in operating income was related
primarily to the Aluminum business unit which had operating income of $10.8
million and $18.8 million in the third quarter and first nine months of 2002,
respectively, compared to operating income of $4.3 million and $6.1 million in
the third quarter and first nine months of 2001, respectively. The increases
were primarily due to the factors described in the gross profit section in the
preceding paragraph and the elimination of goodwill amortization in 2002 which
more than offset an increase in selling, general and administrative expenses.
Depreciation and amortization was $4.1 million lower in the third quarter of
2002 versus the third quarter of 2001 and $12.2 million lower in the first nine
months of 2002 compared to the first nine months of 2001. Selling, general and
administrative expenses during the third quarter of 2002 were $12.5 million,
compared with $11.3 million for the same period in 2001 and were $34.8 million
for the nine months ended September 30, 2002, compared with $34.2 million for
the same period in 2001. The increase in selling, general and administrative
expenses is primarily due to increased professional service costs associated
with the Company's information system redesign and accruals for employee
incentive plans which more than offset lower depreciation as a result of asset
impairment charges recorded in the fourth quarter of 2001 on assets which the
depreciation expense is classified in selling, general and administrative
expenses.
Cumulative effect of change in accounting principle. A non-cash goodwill
impairment charge of $25.3 million was recorded as a cumulative effect of change
in accounting principle as of January 1, 2002 under SFAS No.142. See note 7 to
the condensed consolidated financial statements for additional information.
Net Income. The Company had net income of $6.1 million for the quarter ended
September 30, 2002, compared with a net loss of $1.6 million for the same period
in 2001. The Company's net loss for the nine months ended September 30, 2002 was
$22.6 million compared with a net loss of $12.5 million for the first nine
months of 2001. Interest expense was $3.7 million for both the third quarter of
2002 and the third quarter of 2001 and $11.4 million for the nine months ended
September 30, 2002, compared with $11.8 million for the first nine months of
2001. The decrease in the nine months amount was primarily due to lower interest
rates under the Company's receivables purchase agreement combined with a
reduction in amounts outstanding under the agreement which more than offset a
reduction in investment interest income. The Company had an income tax benefit
of $2.6 million in the third quarter of 2002 compared to income tax expense of
$0.2 million for the same period in 2001 and an income tax benefit of $2.5
million for the nine months ended September 30, 2002, compared to income tax
expense of $0.6 million for the same period in 2001. The decrease in income tax
expense was due to a $2.7 million adjustment recorded in the third quarter of
2002 to reduce prior years' income tax accruals.
Liquidity and Capital Resources
The Company's sources of liquidity are cash flows from operations, the Company's
receivables purchase agreement described below and borrowings under its $30
million revolving credit facility. The Company believes these sources will be
sufficient to fund its working capital requirements, capital expenditures, debt
service and dividend payments at least through 2003.
During 1997, the Company sold all of its trade accounts receivables to a 100%
owned subsidiary, Commonwealth Financing Corp. ("CFC"). Simultaneously, CFC
entered into a three-year receivables purchase agreement with a financial
institution and its affiliate, whereby CFC sells, on a revolving basis, an
undivided interest in certain of its receivables and receives up to $150.0
million from an unrelated third party purchaser at a cost of funds linked to
commercial paper rates plus a charge for administrative and credit support
services. During 2000, the Company and the financial institution extended the
receivables purchase agreement for an additional three-year period ending in
September 2003 and in October 2002, extended the agreement for an additional
year ending in September 2004. In addition during September 2001, the Company
and the financial institution agreed to reduce the size of the facility to $95.0
million. At September 30, 2002 and 2001, the Company had outstanding under the
agreement $20.0 million and $17.5 million, respectively, and had $100.2 million
and $126.9 million, respectively, of net residual interest in receivables sold.
The fair value of the net residual interest is measured at the time of the sale
and is based on the sale of similar assets. In the first nine months of 2002 and
2001, the Company received gross proceeds of $37.0 million and $30.0 million,
respectively, from the sale of receivables and made gross payments of $37.0
million and $81.5 million, respectively, under the agreement.
The Company's operations provided cash flows of $4.2 million for the nine months
ended September 30, 2002 compared to using $10.5 million in the nine months
ended September 30, 2001. Working capital increased to $129.5 million at
September 30, 2002 from $123.5 million at September 30, 2001.
Capital expenditures were $6.9 million during the quarter ended September 30,
2002 and $10.1 million for the nine months ended September 30, 2002. At
September 30, 2002, the Company had commitments of $16.0 million for the
purchase or construction of capital assets. Total capital expenditures for the
year 2002 are expected to be approximately $18.9 million, all generally related
to upgrading and expanding the Company's manufacturing and other facilities,
acquiring and enhancing software and hardware as part of the Company's
information system redesign project and meeting environmental requirements.
The indicated annual rate of dividends being paid on the Company's Common Stock
is $0.20 per share, or an annual total of approximately $3.2 million.
The following schedules summarize the Company's contractual cash obligations and
unused availability of financing sources at September 30, 2002 (in thousands).
Payments Due By Period
------------------------------------------------------------
Contractual Cash Obligations Total Less than 1 year 1-3 years 4-5 years After 5 years
- ------------------------------------------------------------------------------------------------------------
Long-term debt $125,000 $ -- $ -- $125,000 $ --
Operating leases 13,158 3,517 4,460 1,783 3,398
Standby letters of credit 2,839 2,839 -- -- --
Outstanding obligation under
Receivables purchase
Agreement 20,000 20,000 -- --
----------------------------------------------------------------------
Total contractual cash obligations $160,997 $26,356 $4,460 $126,783 $3,398
======================================================================
Amount of Availability Per Period
Unused Availability of Total Amounts ------------------------------------------------------------
Financing Sources Available Less than 1 year 1-3 years 4-5 years Over 5 years
- ------------------------------------------------------------------------------------------------------------
Unused revolving credit
Facility $ 27,161 $ -- $27,161 $ -- $ --
Unused availability under
Receivables purchase
agreement 75,000 -- 75,000 -- --
----------------------------------------------------------------------
Total available $102,161 $ -- $102,161 $ -- $ --
======================================================================
The Company has approximately 8 1/4 years remaining on a 10-year guaranteed
supply agreement with Glencore Ltd. ("Glencore"), a leading diversified trading
and industrial company, for the purchase of primary aluminum. Under the
agreement, the Company committed to purchase a minimum of 1.2 billion pounds of
P1020/99.7% aluminum at current market prices from Glencore over the 10-year
term beginning in January 2001.
At September 30, 2002, the Company held firm-priced aluminum purchase and sales
commitments through April 2004 totaling $8 million and $167 million,
respectively. The Company hedges the impact of changes in prices related to
these commitments as explained in the section entitled "Risk Management" which
follows.
Risk Management
The price of aluminum is subject to fluctuations due to unpredictable factors on
the worldwide market. To reduce this market risk, the Company follows a policy
of hedging its anticipated raw material purchases based on firm-priced sales and
purchase orders by purchasing and selling futures contracts, forward contracts
and options on the London Metal Exchange ("LME"). The Company also uses forward
contracts and options to reduce its risks associated with its natural gas
requirements.
As described in note 6 to the condensed consolidated financial statements, the
Company adopted Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS No. 133") effective
January 1, 2001 and has designated virtually all of its aluminum and natural gas
futures contracts and forward contracts as cash flow hedges.
Gains and losses on these instruments that are deferred in other comprehensive
income are reclassified into net income as cost of goods sold in the periods
when the hedged transactions occur. As of September 30, 2002, approximately $4.9
million of the $5.0 million of deferred net losses are expected to be
reclassified from other comprehensive income into net income as cost of goods
sold over the next twelve months. A net loss of $0.05 million and $0.16 million
was recognized in cost of goods sold during the three months and nine months
ended September 30, 2002, respectively, and a net loss of $0.13 million and
$0.16 million was recognized in cost of goods sold during the three months and
nine months ended September 30, 2001, respectively, representing the amount of
the hedges' ineffectiveness. As of September 30, 2002, the Company held open
aluminum and natural gas futures and forward contracts having maturity dates
extending through March 2004.
Before entering into futures contracts, forward contracts and options, the
Company reviews the credit rating of the counterparty and assesses any possible
credit risk. While the Company is exposed to certain losses in the event of
non-performance by the counterparties to these agreements, the Company does not
anticipate non-performance by such counterparties.
In order to hedge a portion of its interest rate risk, the Company was a party
to an interest rate swap agreement with a notional amount of $5 million under
which the Company paid a fixed rate of interest and received a LIBOR-based
floating rate. The interest rate swap agreement expired during September 2001
and as of September 30, 2002 the Company had no interest rate swap agreements in
effect. The Company's interest rate swap agreement which expired during
September 2001 did not qualify for hedge accounting under SFAS 133 and as such
the change in the fair value of the interest rate swap agreement had been
recognized currently as interest expense, net in the Company's consolidated
statement of operations. The amount of such change in the fair value of the
interest rate swap agreement was immaterial for the three months and nine months
ended September 30, 2001.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS No. 143"). The Statement addresses financial and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002. Management
does not expect the adoption of this Statement to have a material impact on the
Company's results of operations or financial position.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" ("SFAS No. 144"). The Statement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This Statement supersedes SFAS No. 121, and the accounting and reporting
provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results
of Operations - Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions",
for the disposal of a "segment of a business" (as previously defined in that
Opinion). This Statement also amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements", to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. The objectives of
SFAS No. 144 are to address significant issues relating to the implementation of
SFAS No. 121 and to develop a single accounting model, based on the framework
established in SFAS No. 121, for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. The Company adopted SFAS No.
144 in the first quarter of 2002, as required. The Statement's initial adoption
did not have a material impact on the Company's results of operations or
financial position.
In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities"(" SFAS No. 146"). The Statement nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit an Activity," under which
a liability for an exit cost was recognized at the date of an entity's
commitment to an exit plan. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized at fair value when
the liability is incurred. The provisions of this statement are effective for
exit or disposal activities that are initiated after December 31, 2002.
Item 4. Controls and Procedures
The Company's certifying officers have concluded based on their evaluation of
the Company's disclosure controls and procedures that the disclosure controls
and procedures are effective in ensuring that material information relating to
the Company, including its consolidated subsidiaries, is made known to the
certifying officers by others within those entities, particularly during the
period in which this Form 10-Q was being prepared and that both non-financial
and financial information required to be disclosed by the Company in its
periodic reports is recorded, processed, summarized and reported in a timely
fashion. The evaluation was conducted within 90 days of the filing date of this
Form 10-Q. In addition, there were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluation.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to non-environmental legal proceedings and administrative
actions all of which are of an ordinary routine nature incidental to the
operations of the Company. Although it is impossible to predict the outcome of
any legal proceeding, in the opinion of management such proceedings and actions
should not, individually or in aggregate, have a material adverse effect on the
Company's financial condition, results of operations or cash flows, although
resolution in any year or quarter could be material to the results of operation
for that period.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
There were no exhibits
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended September 30,
2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMMONWEALTH INDUSTRIES, INC.
By: /s/ Donald L. Marsh, Jr.
------------------------
Donald L. Marsh, Jr.
Executive Vice President and
Chief Financial Officer
Date: November 12, 2002
CERTIFICATIONS
I, Mark V. Kaminski, certify that:
1. I have reviewed this quarterly report on form 10-Q of Commonwealth
Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of date within 90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Mark V. Kaminski
--------------------
Mark V. Kaminski
President and Chief Executive
Officer
CERTIFICATIONS (continued)
I, Donald L. Marsh, Jr., certify that:
1. I have reviewed this quarterly report on form 10-Q of Commonwealth
Industries, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of date within 90 days prior to the filing date of this quarterly
report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 12, 2002
/s/ Donald L. Marsh, Jr.
-------------------------
Donald L. Marsh, Jr.
Executive Vice President and
Chief Financial Officer