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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 29, 2003
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 1-12164
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WOLVERINE TUBE, INC.
--------------------
(Exact name of registrant as specified in its charter)
Delaware 63-0970812
-------- ----------
(State of Incorporation) (IRS Employer Identification No.)
200 Clinton Avenue West, Suite 1000
Huntsville, Alabama 35801
- ------------------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
(256) 353-1310
--------------
(Registrant's Telephone Number, including Area Code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [X] NO [ ]
Indicate the number of shares outstanding of each class of Common Stock, as of
the latest practicable date:
Class Outstanding as of August 1, 2003
----- --------------------------------
Common Stock, $0.01 Par Value 12,279,393 Shares
FORM 10-Q
QUARTERLY REPORT
TABLE OF CONTENTS
Page No.
PART I
Item 1. Financial Statements
Condensed Consolidated Statements of Income (Unaudited)-- Three-Month and
Six-Month Periods Ended June 29, 2003 and June 30, 2002......................................1
Condensed Consolidated Balance Sheets
June 29, 2003 and December 31, 2002..........................................................2
Condensed Consolidated Statements of Cash Flows (Unaudited)-- Six-Month Periods
Ended June 29, 2003 and June 30, 2002........................................................3
Notes to Condensed Consolidated Financial Statements (Unaudited).............................4
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................................................17
Item 3. Quantitative and Qualitative Disclosures About Market Risk..................................30
Item 4. Controls and Procedures.....................................................................32
PART II
Item 1. Legal Proceedings...........................................................................33
Item 4. Submission of Matters to a Vote of Security Holders.........................................33
Item 6. Exhibits and Reports on Form 8-K............................................................33
ITEM 1. FINANCIAL STATEMENTS
WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three-month period ended: Six-month period ended:
JUNE 29, 2003 June 30, 2002 JUNE 29, 2003 June 30, 2002
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands except per share amounts)
Net sales $ 152,978 $ 152,547 $ 296,475 $ 290,090
Cost of goods sold 140,373 133,335 269,248 256,555
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit 12,605 19,212 27,227 33,535
Selling, general and administrative expenses 7,565 8,250 15,707 16,154
- -----------------------------------------------------------------------------------------------------------------------------
Income from operations 5,040 10,962 11,520 17,381
Other expenses:
Interest expense, net 5,292 5,571 10,470 9,301
Amortization and other, net 492 524 1,034 602
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (744) 4,867 16 7,478
Income tax provision (benefit) (843) 1,381 (721) 2,304
- -----------------------------------------------------------------------------------------------------------------------------
Net income 99 3,486 737 5,174
Less preferred stock dividends -- -- -- (58)
- -----------------------------------------------------------------------------------------------------------------------------
Net income applicable to common shares $ 99 $ 3,486 $ 737 $ 5,116
============================================================================================================================
Net income per common share-basic $ 0.01 $ 0.28 $ 0.06 $ 0.42
Basic weighted average number of common shares 12,277 12,251 12,270 12,200
Net income per common share-diluted $ 0.01 $ 0.28 $ 0.06 $ 0.41
Diluted weighted average number of common and
common equivalent shares 12,489 12,369 12,426 12,328
============================================================================================================================
See Notes to Condensed Consolidated Financial Statements.
1
WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 29, December 31,
2003 2002
- ------------------------------------------------------------------------------------------------------------------
(In thousands except share and per share amounts) (UNAUDITED) (Note)
ASSETS
Current assets
Cash and equivalents $ 32,305 $ 53,920
Accounts receivable, net 88,599 65,212
Inventories 93,003 85,485
Refundable income taxes 6,815 6,347
Prepaid expenses and other 10,768 8,055
- ------------------------------------------------------------------------------------------------------------------
Total current assets 231,490 219,019
Property, plant and equipment, net 208,342 208,999
Deferred charges, net 13,978 13,811
Goodwill, net 100,186 100,100
Assets held for sale 8,742 8,791
Prepaid pensions and other 4,288 --
- ------------------------------------------------------------------------------------------------------------------
Total assets $ 567,026 $ 550,720
==================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 31,164 $ 30,290
Accrued liabilities 17,850 19,293
Short-term borrowings 1,783 1,217
- ------------------------------------------------------------------------------------------------------------------
Total current liabilities 50,797 50,800
Deferred income taxes 9,518 11,902
Long-term debt 257,325 255,712
Pension liabilities 17,541 14,540
Postretirement benefit obligation 16,418 15,666
Accrued environmental remediation 1,265 1,465
- ------------------------------------------------------------------------------------------------------------------
Total liabilities 352,864 350,085
Stockholders' equity
Common stock, par value $0.01 per share; 40,000,000 shares authorized;
14,343,093 and 14,326,239 shares issued as of June
29, 2003 and December 31, 2002, respectively 143 143
Additional paid-in capital 103,376 103,213
Retained earnings 165,284 164,547
Unearned compensation (327) (302)
Accumulated other comprehensive loss (16,939) (29,591)
Treasury stock, at cost; 2,063,800 shares as of June 29, 2003
and December 31, 2002 (37,375) (37,375)
- ------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 214,162 200,635
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 567,026 $ 550,720
==================================================================================================================
Note: The Balance Sheet at December 31, 2002 has been derived from the
audited financial statements at that date but does not include all of
the information and footnotes required by accounting principles
generally accepted in the United States for complete financial
statements. See Notes to Condensed Consolidated Financial Statements.
2
WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six-month period ended:
JUNE 29, 2003 June 30, 2002
- ----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 737 $ 5,174
Adjustments to reconcile net income to net cash provided by (used for)
operating activities:
Depreciation and amortization 9,374 8,725
Deferred income taxes (1,058) 89
Other non-cash items 175 115
Changes in operating assets and liabilities:
Accounts receivable, net (19,808) (22,655)
Inventories (4,106) 11,938
Refundable income taxes (444) 802
Prepaid expenses and other (1,998) 310
Accounts payable (1,644) 7,641
Accrued liabilities including pension, postretirement
benefit and environmental (2,866) (610)
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities (21,638) 11,529
INVESTING ACTIVITIES
Additions to property, plant and equipment (2,657) (3,280)
Disposal of property, plant and equipment 3 --
- -------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (2,654) (3,280)
FINANCING ACTIVITIES
Financing fees and expenses paid (28) (8,398)
Net borrowings (payments) on revolving credit facilities 497 (98,696)
Net increase in note payable -- 1,822
Proceeds from issuance of senior notes -- 118,546
Issuance of common stock -- 69
Redemption of preferred stock -- (1,000)
Dividends paid on preferred stock -- (58)
Other financing activities (3) --
- -------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 466 12,285
Effect of exchange rate on cash and equivalents 1,830 740
- -------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) continuing operations (21,996) 21,274
Net cash provided by discontinued operations 381 1,424
- -------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents (21,615) 22,698
Cash and equivalents at beginning of period 53,920 22,739
- -------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 32,305 $ 45,437
==============================================================================================================
See Notes to Condensed Consolidated Financial Statements.
3
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 29, 2003
(Unaudited)
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Wolverine Tube, Inc. (the "Company") and its majority-owned
subsidiaries after elimination of significant intercompany accounts and
transactions. References to the "Company", "we" or "us" refer to Wolverine
Tube, Inc. and its consolidated subsidiaries, unless the context otherwise
requires. The accompanying condensed consolidated financial statements have
been prepared in accordance with instructions to Form 10-Q and do not include
all the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. The
accompanying condensed consolidated financial statements (and all information
in this report) have not been examined by independent auditors; but, in the
opinion of management, all adjustments, which consist of normal recurring
accruals necessary for a fair presentation of the results for the periods, have
been made. The results of operations for the three-month and six-month periods
ended June 29, 2003 are not necessarily indicative of the results of operations
that may be expected for the year ending December 31, 2003. For further
information, refer to the consolidated financial statements and notes included
in our Annual Report on Form 10-K for the year ended December 31, 2002.
We use our internal operational reporting cycle for quarterly financial
reporting.
NOTE 2. CONTINGENCIES
We are subject to extensive environmental regulations imposed by federal,
state, provincial and local authorities in the United States, Canada, China and
Portugal with respect to emissions to air, discharges to waterways, and the
generation, handling, storage, transportation, treatment and disposal of waste
materials, and we have received various communications from regulatory
authorities concerning environmental matters. We have accrued undiscounted
estimated environmental remediation costs of $1.3 million at June 29, 2003,
consisting primarily of $0.5 million for the Decatur, Alabama facility and $0.7
million for the Ardmore, Tennessee facility. Based on information currently
available, we believe that the ultimate costs for these matters are not
reasonably likely to have a material effect on our business, financial
condition or results of operations. However, actual costs related to
environmental matters could differ materially from the amounts we estimated and
accrued at June 29, 2003 and could result in additional exposure if these
environmental matters are not resolved as anticipated.
4
NOTE 3. INVENTORIES
Inventories are as follows:
JUNE 29, 2003 December 31, 2002
- --------------------------------------------------------------
(In thousands)
Finished products $26,177 $23,617
Work-in-process 18,998 15,862
Raw materials 17,921 14,894
Supplies 29,907 31,112
- --------------------------------------------------------------
Totals $93,003 $85,485
==============================================================
NOTE 4. INTEREST EXPENSE, NET
Interest expense is net of interest income and capitalized interest of $0.2
million and $16,100, respectively, for the three-month period ended June 29,
2003, and $0.3 million and $0.1 million, respectively, for the three-month
period ended June 30, 2002. Interest expense is net of interest income and
capitalized interest of $0.3 million and $33,200, respectively, for the
six-month period ended June 29, 2003, and $0.3 million and $0.1 million,
respectively, for the six-month period ended June 30, 2002. Interest expense in
the three-month and six-month period ended June 30, 2002 is also net of
interest income from loans to the discontinued operations of Wolverine
Ratcliffs, Inc. of $0.2 million and $0.6 million, respectively.
NOTE 5. DEBT
Long-term debt consists of the following:
JUNE 29, 2003 December 31, 2002
- -----------------------------------------------------------------------------------------------------------------------------
(In thousands)
Senior Notes, 10.5%, due April 2009 $ 118,000 $ 118,000
Discount on 10.5% Senior Notes, original issue discount amortized over 7 years (1,171) (1,272)
Senior Notes, 7.375%, due August 2008 138,427 137,123
Discount on 7.375% Senior Notes, original issue discount amortized over 10 years (146) (161)
Netherlands facility, 5.1%, due on demand 1,774 1,205
Other foreign facilities 2,224 2,034
- -----------------------------------------------------------------------------------------------------------------------------
259,108 256,929
Less short-term borrowings (1,783) (1,217)
- -----------------------------------------------------------------------------------------------------------------------------
Totals $ 257,325 $ 255,712
=========================================================================================================================
As of June 29, 2003, we had no outstanding obligations under our secured
revolving credit facility. We had approximately $7.6 million of standby letters
of credit outstanding that are collateralized with the secured revolving credit
facility and approximately $29.9 million (subject to a $2.0 million excess
availability requirement) in additional borrowing availability thereunder.
In October 2002, we completed an interest rate swap on $50 million notional
amount of our 7.375% Senior Notes. As of June 29, 2003, we recorded the fair
market value of the interest rate swap of $1.7 million as other assets with a
corresponding increase to the hedged debt, with equal
5
and offsetting unrealized gains and losses included in other income (expense),
net. As of December 31, 2002, we recorded the fair market value of the interest
rate swap of $0.4 million as other assets with a corresponding increase to the
hedged debt with equal and offsetting unrealized gains and losses included in
other income (expense), net.
NOTE 6. STOCK-BASED COMPENSATION PLANS
We account for our stock option compensation plans using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. No stock option
compensation expense is reflected in net income because the exercise price of
our stock options equals the market price of the underlying stock on the date
of grant. The following table illustrates the effect on net income and earnings
per share if we had applied the fair value recognition provisions of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" to our stock option compensation plans.
Three-month period ended: Six-month period ended:
JUNE 29, 2003 June 30, 2002 JUNE 29, 2003 June 30, 2002
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Net income applicable to common shares, as reported $ 99 $ 3,486 $ 737 $ 5,116
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards,
net of related tax effects (209) (875) (412) (1,122)
============================================================================================================================
Pro forma net income (loss) applicable to common shares $ (110) $ 2,611 $ 325 $ 3,994
============================================================================================================================
Earnings (loss) per share:
Basic - as reported $ 0.01 $ 0.28 $ 0.06 $ 0.42
Basic - pro forma $ (0.01) $ 0.21 $ 0.03 $ 0.33
Diluted - as reported $ 0.01 $ 0.28 $ 0.06 $ 0.41
Diluted - pro forma $ (0.01) $ 0.21 $ 0.03 $ 0.33
============================================================================================================================
NOTE 7. COMPREHENSIVE INCOME
Comprehensive income is as follows:
Three-month period ended: Six-month period ended:
JUNE 29, 2003 June 30, 2002 JUNE 29, 2003 June 30, 2002
- ----------------------------------------------------------------------------------------------------------------------------
(In thousands)
Net income $ 99 $ 3,486 $ 737 $ 5,174
Translation adjustment for financial statements
denominated in a foreign currency 7,088 3,782 12,491 3,660
Unrealized gain on cash flow hedges, net of tax 86 57 403 2,853
Minimum pension liability adjustment, net of tax (134) -- (242) --
============================================================================================================================
Comprehensive income $ 7,139 $ 7,325 $ 13,389 $ 11,687
============================================================================================================================
6
NOTE 8. INDUSTRY SEGMENTS
Our reportable segments are based on our three product groups: commercial
products, wholesale products and rod, bar and other products. Commercial
products consist primarily of high value added products sold directly to
original equipment manufacturers. Wholesale products are commodity-type
plumbing tube products, which are primarily sold to plumbing wholesalers and
distributors. Rod, bar and other consist of products sold to a variety of
customers and includes our European distribution business. We evaluate the
performance of our operating segments based on sales and gross profit; however,
we do not allocate asset amounts and items of income and expense below gross
profit or depreciation and amortization.
Summarized financial information concerning our reportable segments is shown in
the following table:
Rod, Bar
Commercial Wholesale & Other Consolidated
- ------------------------------------------------------------------------------------------------------
(In thousands)
THREE-MONTH PERIOD ENDED JUNE 29, 2003
NET SALES $115,681 $28,468 $ 8,829 $152,978
GROSS PROFIT 12,097 398 110 12,605
Three-month period ended June 30, 2002
Net sales $118,868 $24,883 $ 8,796 $152,547
Gross profit 17,317 1,355 540 19,212
SIX-MONTH PERIOD ENDED JUNE 29, 2003
NET SALES $226,001 $52,405 $18,069 $296,475
GROSS PROFIT 25,875 462 890 27,227
Six-month period ended June 30, 2002
Net sales $225,221 $46,887 $17,982 $290,090
Gross profit 29,491 2,945 1,099 33,535
NOTE 9. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
Three-month period ended: Six-month period ended:
JUNE 29, 2003 June 30, 2002 JUNE 29, 2003 June 30, 2002
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
Net income $ 99 $ 3,486 $ 737 $ 5,174
Dividends on preferred stock -- -- -- (58)
===============================================================================================================================
Net income applicable to common shares $ 99 $ 3,486 $ 737 $ 5,116
===============================================================================================================================
Basic weighted average common shares 12,277 12,251 12,270 12,200
Stock options and restricted shares 212 118 156 128
- -------------------------------------------------------------------------------------------------------------------------------
Diluted weighted average common and common
equivalent shares 12,489 12,369 12,426 12,328
===============================================================================================================================
Net income per common share - basic $ 0.01 $ 0.28 $ 0.06 $ 0.42
===============================================================================================================================
Net income per common share - diluted $ 0.01 $ 0.28 $ 0.06 $ 0.41
===============================================================================================================================
7
NOTE 10. DISCONTINUED OPERATIONS
During the year ended December 31, 2001, we decided to discontinue the
operations of Wolverine Ratcliffs, Inc. ("WRI"), which were previously included
in the rod, bar and other products segment. Accordingly, the operating results
of WRI are reported in discontinued operations in the consolidated financial
statements. In 2002, we stopped all manufacturing operations of WRI and we
liquidated substantially all of its inventory and net receivables. We began
liquidating equipment of WRI in 2002 and are continuing to pursue opportunities
to dispose of the remainder of the equipment, land and building in 2003. In the
fourth quarter of 2002, we recorded a $2.5 million ($1.6 million after tax) loss
from discontinued operations for remaining estimated closing costs in excess of
the provision for losses that we recorded in the fourth quarter of 2001. In
2002, we realized approximately $10.0 million of pretax proceeds from the
collection of receivables and sale of assets of the business, net of our cash
payments to settle the liabilities of the discontinued operations during the
twelve months ended December 31, 2002, the majority of which is recorded in
continuing operations in that certain accounts receivable and inventories were
transferred to continuing operations.
Operating results of the discontinued WRI operations, which were charged to
previously established reserves, are as follows:
Three-month period ended: Six-month period ended:
JUNE 29, 2003 June 30, 2002 JUNE 29, 2003 June 30, 2002
- -----------------------------------------------------------------------------------------------------------
(In thousands)
Net sales (returns) $ (2) $ 3,925 $ (17) $ 12,051
Loss before income tax benefit (10) (828) (36) (2,953)
Income tax benefit -- 186 -- 851
- -----------------------------------------------------------------------------------------------------------
Net loss (10) (642) (36) (2,102)
- -----------------------------------------------------------------------------------------------------------
Assets and liabilities of the discontinued WRI operations have been reflected in
the consolidated balance sheets as current or non-current based on the original
classification of these accounts, net of any necessary valuation allowances,
except that property, plant and equipment to be disposed in the amount of $3.3
million, net of a necessary valuation allowance, have been included in assets
held for sale. Although we believe we have appropriately reduced the carrying
value of the assets to their estimated recoverable amounts, net of disposal
costs where appropriate, actual results could be different and the difference
will be reported in discontinued operations in future periods.
Net liabilities of the discontinued WRI operations are as follows:
JUNE 29, 2003 December 31, 2002
- ----------------------------------------------------------------------------------------
(In thousands)
Cash and equivalents $ 3 $ 44
Other current assets 272 880
Assets held for sale 3,314 3,363
Other assets 68 122
Current liabilities (4,040) (4,321)
Other liabilities (1,050)
(897)
- ----------------------------------------------------------------------------------------
Net liabilities of discontinued operations $(1,423) $ (809)
- ----------------------------------------------------------------------------------------
8
NOTE 11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
The following tables present condensed consolidating financial information for:
(a) Wolverine Tube, Inc. (the "Parent") on a stand-alone basis; (b) on a
combined basis, the guarantors of the 10.5% Senior Notes and 7.375% Senior Notes
("Subsidiary Guarantors"), which include TF Investor, Inc.; Tube Forming, L.P.;
Wolverine Finance, LLC; Wolverine China Investments, LLC; Small Tube
Manufacturing, LLC; Wolverine Joining Technologies, LLC; WT Holding Company,
Inc. and Tube Forming Holdings, Inc.; and (c) on a combined basis, the
Non-Guarantor Subsidiaries, which include Wolverine Tube (Canada) Inc.; 3072451
Nova Scotia Company; 3072452 Nova Scotia Company; 3072453 Nova Scotia Company;
Wolverine Tube Canada Limited Partnership; Wolverine Tube (Shanghai) Co.,
Limited; Wolverine European Holdings BV; Wolverine Tube Europe BV; Wolverine
Tube, BV; Wolverine Tubagem (Portugal), Lda; Wolverine Joining Technologies
Canada, Inc.; Ratcliffs Copper and Brass Sales, Ltd.; Wolverine Europe;
Wolverine Asia, Limited; and Small Tube Europe NV. Each of the Subsidiary
Guarantors is wholly-owned by Wolverine Tube, Inc. The guarantees issued by each
of the Subsidiary Guarantors are full, unconditional, joint and several.
Accordingly, separate financial statements of the wholly-owned Subsidiary
Guarantors are not presented because the Subsidiary Guarantors are jointly,
severally and unconditionally liable under the guarantees, and we believe
separate financial statements and other disclosures regarding the Subsidiary
Guarantors are not material to investors. Furthermore, there are no significant
legal restrictions on the Parent's ability to obtain funds from its subsidiaries
by dividend or loan.
The parent is comprised of Alabama, Oklahoma, Tennessee, and Mississippi
manufacturing operations and certain corporate management, sales and marketing,
information services and finance functions.
9
WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 29, 2003
(Unaudited)
- -----------------------------------------------------------------------------------------------------------------------------------
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
- -----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Net sales $ 81,597 $ 32,823 $ 49,900 $ (11,342) $ 152,978
Cost of goods sold 77,181 28,480 46,054 (11,342) 140,373
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 4,416 4,343 3,846 -- 12,605
Selling, general and administrative expenses 5,716 821 1,028 -- 7,565
- -----------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (1,300) 3,522 2,818 -- 5,040
Other (income) expenses:
Interest expense, net 5,481 (4) (185) -- 5,292
Amortization and other, net 1,469 (2,441) 1,464 -- 492
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes (8,250) 5,967 1,539 -- (744)
Income tax provision (benefit) (2,755) 2,075 (163) -- (843)
- -----------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (5,495) 3,892 1,702 -- 99
- -----------------------------------------------------------------------------------------------------------------------------------
Equity in earnings of subsidiaries 5,594 -- -- (5,594) --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 99 $ 3,892 $ 1,702 $ (5,594) $ 99
- -----------------------------------------------------------------------------------------------------------------------------------
WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2002
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
Subsidiary Non-Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Net sales $ 81,459 $ 33,746 $ 47,554 $(10,212) $152,547
Cost of goods sold 72,614 28,995 41,938 (10,212) 133,335
- ------------------------------------------------------------------------------------------------------------------------------
Gross profit 8,845 4,751 5,616 -- 19,212
Selling, general and administrative expenses 6,700 737 813 -- 8,250
- ------------------------------------------------------------------------------------------------------------------------------
Operating income 2,145 4,014 4,803 -- 10,962
Other (income) expenses:
Interest expense, net 5,738 (6) (161) -- 5,571
Amortization and other, net 996 (1,215) 743 -- 524
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes (4,589) 5,235 4,221 -- 4,867
Income tax provision (benefit) (1,757) 2,007 1,131 -- 1,381
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (2,832) 3,228 3,090 -- 3,486
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from discontinued operations,
net of tax -- (729) 729 -- --
Equity in earnings of subsidiaries 6,318 -- -- (6,318) --
- ------------------------------------------------------------------------------------------------------------------------------
Net income $ 3,486 $ 2,499 $ 3,819 $ (6,318) $ 3,486
- ------------------------------------------------------------------------------------------------------------------------------
10
WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 29, 2003
(Unaudited)
- --------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Net sales $ 158,356 $ 65,304 $ 95,931 $ (23,116) $ 296,475
Cost of goods sold 148,506 56,337 87,521 (23,116) 269,248
- --------------------------------------------------------------------------------------------------------------------------------
Gross profit 9,850 8,967 8,410 -- 27,227
Selling, general and administrative expenses 12,025 1,622 2,060 -- 15,707
- --------------------------------------------------------------------------------------------------------------------------------
Operating income (loss) from continuing
operations (2,175) 7,345 6,350 -- 11,520
Other (income) expenses:
Interest expense, net 10,737 (7) (260) -- 10,470
Amortization and other, net 3,639 (5,430) 2,825 -- 1,034
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes (16,551) 12,782 3,785 -- 16
Income tax provision (benefit) (5,534) 4,569 244 -- (721)
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (11,017) 8,213 3,541 -- 737
Equity in earnings of subsidiaries 11,754 -- -- (11,754) --
================================================================================================================================
Net income $ 737 $ 8,213 $ 3,541 $ (11,754) $ 737
================================================================================================================================
WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Net sales $ 152,227 $ 66,500 $ 91,228 $ (19,865) $ 290,090
Cost of goods sold 138,941 57,389 80,090 (19,865) 256,555
- --------------------------------------------------------------------------------------------------------------------------------
Gross profit 13,286 9,111 11,138 -- 33,535
Selling, general and administrative expenses 13,034 1,524 1,596 -- 16,154
- --------------------------------------------------------------------------------------------------------------------------------
Operating income from continuing operations 252 7,587 9,542 -- 17,381
Other (income) expenses:
Interest expense, net 9,825 (11) (513) -- 9,301
Amortization and other, net 1,382 (2,155) 1,375 -- 602
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes (10,955) 9,753 8,680 -- 7,478
Income tax provision (benefit) (3,995) 3,821 2,478 -- 2,304
- --------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (6,960) 5,932 6,202 -- 5,174
Income (loss) from discontinued operations,
net of tax -- (729) 729 -- --
Equity in earnings of subsidiaries 12,134 -- -- (12,134) --
- --------------------------------------------------------------------------------------------------------------------------------
Net income $ 5,174 $ 5,203 $ 6,931 $ (12,134) $ 5,174
================================================================================================================================
11
WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 29, 2003
(Unaudited)
- ------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands)
ASSETS
Current assets
Cash and equivalents $ 2,490 $ -- $ 29,815 $ -- $ 32,305
Accounts receivable, net 8,206 55,769 24,624 -- 88,599
Inventories 49,183 18,770 25,050 -- 93,003
Refundable income taxes 13,548 (5,072) (1,661) -- 6,815
Prepaid expenses and other 7,916 2,295 557 -- 10,768
- -----------------------------------------------------------------------------------------------------------------------------
Total current assets 81,343 71,762 78,385 -- 231,490
Property, plant and equipment, net 136,423 32,312 39,607 -- 208,342
Deferred charges, net 12,166 295 1,517 -- 13,978
Goodwill, net 23,154 75,521 1,511 -- 100,186
Assets held for sale 5,428 -- 3,314 -- 8,742
Prepaid pensions and other 4,275 -- 13 -- 4,288
Investments in subsidiaries 393,084 302 -- (393,386) --
- -----------------------------------------------------------------------------------------------------------------------------
Total assets $ 655,873 $ 180,192 $ 124,347 $(393,386) $ 567,026
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 16,175 $ 3,803 $ 11,186 $ -- $ 31,164
Accrued liabilities 11,654 1,164 5,032 -- 17,850
Short-term borrowings -- -- 1,783 -- 1,783
Intercompany balances 122,089 (116,107) (5,982) -- --
- -----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 149,918 (111,140) 12,019 -- 50,797
Deferred income taxes 11,271 7,385 (9,138) -- 9,518
Long-term debt 255,110 -- 2,215 -- 257,325
Pension liabilities 13,859 -- 3,682 -- 17,541
Postretirement benefit obligation 10,297 -- 6,121 -- 16,418
Accrued environmental remediation 1,256 -- 9 -- 1,265
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities 441,711 (103,755) 14,908 -- 352,864
- -----------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 214,162 283,947 109,439 (393,386) 214,162
- -----------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 655,873 $ 180,192 $ 124,347 $(393,386) $ 567,026
=============================================================================================================================
12
WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2002
- -------------------------------------------------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------------
(In thousands)
Assets
Current assets
Cash and equivalents $ 22,461 $ -- $ 31,459 $ -- $ 53,920
Accounts receivable, net 275 43,027 21,910 -- 65,212
Inventories 47,731 15,964 21,790 -- 85,485
Refundable income taxes 10,796 (2,703) (1,746) -- 6,347
Prepaid expenses and other 5,032 2,496 527 -- 8,055
- ------------------------------------------------------------------------------------------------------------------------
Total current assets 86,295 58,784 73,940 -- 219,019
Property, plant and equipment, net 140,036 33,727 35,236 -- 208,999
Deferred charges, net 12,411 23 1,377 -- 13,811
Goodwill, net 23,154 75,521 1,425 -- 100,100
Assets held for sale 5,428 -- 3,363 -- 8,791
Investments in subsidiaries 368,585 302 -- (368,887) --
- ------------------------------------------------------------------------------------------------------------------------
Total assets $ 635,909 $ 168,357 $ 115,341 $(368,887) $ 550,720
- ------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable $ 18,310 $ 2,714 $ 9,267 $ (1) $ 30,290
Accrued liabilities 10,831 1,001 7,461 -- 19,293
Short-term borrowings -- -- 1,217 -- 1,217
Intercompany balances 116,757 (118,477) 1,720 -- --
- ------------------------------------------------------------------------------------------------------------------------
Total current liabilities 145,898 (114,762) 19,665 (1) 50,800
Deferred income taxes 12,321 7,385 (7,804) -- 11,902
Long-term debt 253,689 -- 2,023 -- 255,712
Pension liabilities 11,307 -- 3,233 -- 14,540
Postretirement benefit obligation 10,602 -- 5,064 -- 15,666
Accrued environmental remediation 1,457 -- 8 -- 1,465
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities 435,274 (107,377) 22,189 (1) 350,085
- ------------------------------------------------------------------------------------------------------------------------
Stockholders' equity 200,635 275,734 93,152 (368,886) 200,635
- ------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 635,909 $ 168,357 $ 115,341 $(368,887) $ 550,720
========================================================================================================================
13
WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 29, 2003
(Unaudited)
- -------------------------------------------------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ------------------------------------------------------------------------------------------------------------------------
(In thousands)
OPERATING ACTIVITIES
Net income $ 737 $ 8,214 $ 3,541 $(11,755) $ 737
Depreciation and amortization 6,201 1,732 1,441 -- 9,374
Other non-cash items (894) 19 (8) -- (883)
Equity in earnings of subsidiaries (11,755) -- -- 11,755 --
Changes in operating assets and liabilities (11,594) (10,229) (9,043) -- (30,866)
- -----------------------------------------------------------------------------------------------------------------------
Net cash used for operating activities (17,305) (264) (4,069) -- (21,638)
INVESTING ACTIVITIES
Additions to property, plant and equipment (1,981) (317) (359) -- (2,657)
Other -- -- 3 -- 3
- -----------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (1,981) (317) (356) -- (2,654)
FINANCING ACTIVITIES
Financing fees and expenses paid (28) -- -- -- (28)
Net borrowings (payments) on revolving credit
facilities (1,002) 1,002 497 -- 497
Intercompany borrowings (payments) 890 (421) (469) -- --
Other financing activities -- -- (3) -- (3)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing
activities (140) 581 25 -- 466
Effect of exchange rate on cash and
equivalents (546) -- 2,376 -- 1,830
- -----------------------------------------------------------------------------------------------------------------------
Net cash used by continuing operations (19,972) -- (2,024) -- (21,996)
Net cash provided by discontinued operations -- -- 381 -- 381
- -----------------------------------------------------------------------------------------------------------------------
Net decrease in cash and equivalents (19,972) -- (1,643) -- (21,615)
Cash and equivalents at beginning of period 22,462 -- 31,458 -- 53,920
=======================================================================================================================
Cash and equivalents at end of period $ 2,490 $ -- $ 29,815 $ -- $ 32,305
=======================================================================================================================
14
WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2002
(Unaudited)
- ---------------------------------------------------------------------------------------------------------------------------------
SUBSIDIARY NON-GUARANTOR
PARENT GUARANTORS SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ----------------------------------------------------------------------------------------------------------------------------------
(In thousands)
OPERATING ACTIVITIES
Income from continuing operations $ 5,174 $ 5,933 $ 6,201 $ (12,134) $ 5,174
Depreciation and amortization 5,793 1,654 1,278 -- 8,725
Other non-cash items 204 -- -- -- 204
Equity in earnings of subsidiaries (12,134) -- -- 12,134 --
Changes in operating assets and liabilities 15,008 (13,527) (4,055) -- (2,574)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating
activities 14,045 (5,940) 3,424 -- 11,529
INVESTING ACTIVITIES
Additions to property, plant and equipment (2,313) (305) (662) -- (3,280)
Other -- (1) 1 -- --
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (2,313) (306) (661) -- (3,280)
FINANCING ACTIVITIES
Financing fees and expenses paid (8,398) -- -- -- (8,398)
Net payments on revolving credit facilities (97,907) -- (789) -- (98,696)
Intercompany borrowings (payments) (4,065) 6,975 (2,910) -- --
Net increase in note payable -- -- 1,822 -- 1,822
Proceeds from issuance of senior notes 118,546 -- -- -- 118,546
Issuance of common stock 69 -- -- -- 69
Redemption of preferred stock (1,000) -- -- -- (1,000)
Dividends paid on preferred stock (58) -- -- -- (58)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing
activities 7,187 6,975 (1,877) -- 12,285
Effect of exchange rate on cash and
equivalents -- -- 740 -- 740
- --------------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing operations 18,919 729 1,626 -- 21,274
Net cash provided by (used for) discontinued
operations -- (729) 2,153 -- 1,424
- --------------------------------------------------------------------------------------------------------------------------------
Net increase in cash and equivalents 18,919 -- 3,779 -- 22,698
Cash and equivalents at beginning of period -- -- 22,739 -- 22,739
================================================================================================================================
Cash and equivalents at end of period $ 18,919 $ -- $ 26,518 $ -- $ 45,437
================================================================================================================================
15
NOTE 12. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards, or SFAS, No. 149, "Amendment of
Statement 133 on Derivative Instruments and Hedging Activities." This statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, and is effective for
contracts entered into or modified after June 30, 2003. We do not expect the
provisions of SFAS No. 149 to have a significant effect on our financial
position or operating results.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and is
effective for financial instruments entered into or modified after May 31, 2003,
and otherwise is effective beginning July 1, 2003. We do not expect the
provisions of SFAS No. 150 to have a significant effect on our financial
position or operating results.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is a discussion of our results of operations and financial
condition. This discussion should be read in conjunction with our Condensed
Consolidated Financial Statements and notes thereto.
OVERVIEW
The results of the first half of 2003 are reflective of a number of challenges
facing our company, namely lower than anticipated volumes, an unfavorable mix of
demand for our products, selling price pressures and cost escalations.
While we continue to successfully penetrate our markets, gain market share and
strengthen our global market positions, our progress on these fronts has been
overshadowed by the impacts of a weak economy, stagnant commercial construction
in the United States, cooler than normal weather in the spring and early summer
of 2003 and an unfavorable shift of product demand. Product demand has shifted
towards our lower value wholesale products driven by demand in the housing
industry and away from our higher value commercial products that are influenced
more by commercial construction and industrial demand.
We have experienced modest selling price pressure across most of our product
lines and intense selling price pressure for our wholesale products. Wholesale
pricing in the United States was at its lowest point in the second quarter of
2003 since the second quarter of 1997. Average selling prices for our wholesale
products sold in the United States, excluding metal, were down 31% in the first
half of 2003 compared to the first half of 2002, yet we increased the volume of
our shipments of product sold in the United States by 27% in the same time
period. We were also negatively impacted by a weak U.S. dollar against a strong
Canadian dollar in the first half of 2003 versus 2002 because approximately
fifty percent of the goods manufactured in our Canadian operations are sold into
the U.S. market and are denominated in U.S. dollars.
Going into 2003, we anticipated some increases in cost including salaries,
worker's compensation, healthcare, insurance and pension expenses. Actual cost
increases in 2003 for these expenses were in line with our expectations. Over
the past several years we have put in place a number of cost reduction,
efficiency and process improvement initiatives that have helped to offset these
cost increases. However, in 2003 we have had additional unanticipated cost
escalations for natural gas and copper scrap as well as for the impact of
translating Canadian cost into U.S. dollars, considering the strong Canadian
dollar. All of these cost increases coupled with lower than anticipated volumes,
a weaker mix and reduced selling prices, have yielded results well below those
achieved in 2002 and well below the results we anticipated for 2003.
RESULTS OF OPERATIONS
THREE-MONTH PERIOD ENDED JUNE 29, 2003 COMPARED TO
THREE-MONTH PERIOD ENDED JUNE 30, 2002
Consolidated net sales increased by $0.5 million, or 0.3%, to $153.0 million for
the second quarter ended June 29, 2003 from $152.5 million for the quarter ended
June 30, 2002. Pounds
17
shipped increased by 0.6 million pounds, or 0.7%, to 85.7 million in the second
quarter of 2003 from 85.1 million in 2002. The average COMEX copper price for
the second quarter of 2003 was $0.75 per pound, as compared to $0.74 per pound
in the second quarter of 2002, an increase of approximately 0.8%.
Pounds of commercial products shipped decreased by 1.8 million pounds, or 3.0%,
to 58.0 million in the second quarter of 2003 from 59.8 million in the second
quarter of 2002. This decrease was due primarily to reduced shipments of
industrial tube as well as more modest decreases in shipments of fabricated
products, technical tube and joining products. Shipments of industrial tube in
the second quarter of 2003 related to heating, ventilation, and air conditioning
("HVAC") did not meet our expectations due to the cooler than normal spring and
early summer of 2003 in North America. However, HVAC related shipments in the
second quarter of 2003 increased compared to the second quarter of 2002 due to
orders from new customers. Shipments of industrial tube for non-HVAC
applications in the second quarter of 2003 were negatively impacted by a 20%
decrease in demand for general industrial tube products in the second quarter of
2003 compared to the second quarter of 2002 due to weakness in the overall
industrial economy. Sales of commercial products decreased $3.2 million, or
2.7%, to $115.7 million in the second quarter of 2003 from $118.9 million in
2002. This decrease in sales was attributable primarily to decreased shipments
of industrial tube. Revenues per pound for commercial products were essentially
the same for both the second quarter of 2003 and 2002. Gross profit from
commercial products decreased by $5.2 million, or 30.1%, to $12.1 million in the
second quarter of 2003 from $17.3 million in 2002, attributable to the reduction
in shipments as well as specific escalations of cost that are discussed in more
detail below.
Pounds of wholesale products shipped increased by 3.4 million pounds, or 16.7%,
to 23.5 million in the second quarter of 2003 from 20.1 million in 2002 due to
our efforts to expand our customer base for these products. Sales of wholesale
products increased $3.6 million, or 14.4%, to $28.5 million in the second
quarter of 2003 from $24.9 million in 2002, due to the increase in shipments,
partially offset by a decrease in revenues per pound. Overall revenues per pound
were down $0.03 to $1.21 in the second quarter of 2003 versus $1.24 in the
second quarter of 2002. However, the increased shipments were predominantly in
the United States market where revenues per pound were down $0.09 per pound to
$1.12 in the second quarter of 2003. Gross profit from wholesale products
decreased $1.0 million, or 70.6%, to $0.4 million in the second quarter of 2003
from $1.4 million in 2002, due primarily to selling price pressures in this
commodity market as well as specific escalations of cost that are discussed in
more detail below, offset somewhat by increased volumes.
Pounds of rod and bar products shipped decreased by 1.0 million pounds, or
18.9%, to 4.2 million in the second quarter of 2003 from 5.2 million in 2002 due
to a weak industrial environment in the United States. Sales of rod, bar and
other products remained approximately the same, increasing $33,000, or 0.4%, to
$8.8 million in the second quarter of 2003. Other products are primarily those
products sold from our distribution center in the Netherlands. Sales dollars
from our distribution center in The Netherlands increased approximately $1.4
million in the second quarter of 2003 due to increased volume as well as the
favorable impact of the stronger Euro, but this increase was largely offset by a
decrease in the volume of rod and bar products sold in North America. Gross
profit from rod, bar and other products decreased $0.4 million, or 79.6%, to
$0.1 million in the second quarter of 2003 from $0.5 million in 2002, due to
decreased shipments and modest selling price decreases of rod and bar products,
partially offset
18
by an increase in gross profit from the activities of our distribution center in
The Netherlands. Gross profit was also negatively impacted by specific
escalations of cost that are discussed in the following paragraph.
Consolidated gross profit decreased $6.6 million or 34.4% to $12.6 million in
the second quarter of 2003 from $19.2 million in 2002. Gross profit in the
second quarter of 2003 was negatively impacted by the aforementioned reduced
volumes of commercial products, primarily related to industrial tube, and by
selling price reductions, primarily related to wholesale products. We also had
approximately $2.4 million of additional cost in the second quarter of 2003
compared to 2002 related to natural gas, healthcare, pensions, worker's
compensation and insurance expenses. Gross profit was also negatively impacted
by the increased cost and reduced availability of copper scrap. Copper scrap
prices have increased and availability has decreased in the second quarter of
2003 compared to the second quarter of 2002 for several reasons. First, there is
a reduced amount of copper scrap being generated due to a slowdown in industrial
production, and secondly, China is consuming far more of the available copper
scrap. Gross profit benefited from a $0.8 million receipt of cash in a class
action litigation settlement in the copper market.
Our manufacturing cost per pound increased $0.05 per pound to $0.81 per pound in
the second quarter of 2003 as compared to $0.76 per pound in the second quarter
of 2002 due to the escalations in cost discussed above as well as approximately
$1.4 million of additional cost due to the currency translation impact on cost
to manufacture for our Canadian operations. However, since approximately fifty
percent of the goods manufactured in our Canadian operations are sold into the
U.S. market with most of the remainder sold into Canada, the negative impact to
gross profit in the second quarter of 2003 from currency translation and the
strong Canadian dollar was significantly less than the negative impact on cost.
Consolidated selling, general and administrative expenses for the second quarter
of 2003 decreased by $0.7 million, or 8.3%, to $7.6 million, compared with $8.3
million in 2002, while remaining approximately five percent of sales for both
the second quarter of 2003 and 2002. The decrease in selling, general and
administrative expenses was mainly due to a $0.6 million reduction in employee
related expenses, primarily incentive pay that is tied to financial performance.
Consolidated net interest expense decreased by $0.3 million or 5.0%, to $5.3
million in the second quarter of 2003 from $5.6 million in 2002. Interest
expense decreased $0.3 million in the second quarter of 2003 compared to 2002
due to the benefit of our interest rate swap on $50 million notional amount of
our 7.375% Senior Notes that we entered into in the fourth quarter of 2002.
Interest expense decreased another $0.3 million in the second quarter of 2003 as
compared to 2002 because we have purchased $15.2 million of our Senior Notes
since the second quarter of 2002. Consolidated net interest expense is net of
interest income and capitalized interest of $0.2 million and $16,100,
respectively, for the three-month period ended June 29, 2003 and $0.3 million
and $0.1 million, respectively, for the three-month period ended June 30, 2002.
Consolidated net interest expense in the second quarter of 2002 is also net of
interest income from loans to the discontinued operations of Wolverine
Ratcliffs, Inc. of $0.2 million.
Amortization and other, net was $0.5 million of expense in both the second
quarter of 2003 and the second quarter of 2002. Amortization and other, net in
the second quarter of 2003 and 2002 included $0.1 million and $0.2 million of
foreign currency losses, respectively. These foreign currency losses are largely
attributable to fluctuations in the Canadian to U.S. dollar exchange
19
rate. Amortization and other, net in the second quarter of 2002 also included
$0.1 million of income related to the administration and collection of
receivables sold to us by our discontinued operations. Amortization expense was
$0.4 million in the second quarter of 2003 as compared to $0.3 million in the
second quarter of 2002.
A net tax benefit of $0.8 million was recorded in the second quarter of 2003 as
compared to tax expense of $1.4 million in the second quarter of 2002. The
effective tax rate in the second quarter of 2002 was 28.4%. The net tax benefit
recorded in the second quarter of 2003 reflects i) lower effective tax rates
from state tax planning activities; ii) federal tax benefits generated in the
higher effective tax rate jurisdiction of the United States, in which we had
pre-tax losses; and iii) foreign tax expense generated in foreign jurisdictions
in which we had income and where the tax rates are lower due to tax holidays. A
valuation allowance was recorded against all state net operating losses
generated in the second quarter of 2003.
SIX-MONTH PERIOD ENDED JUNE 29, 2003 COMPARED TO
SIX-MONTH PERIOD ENDED JUNE 30, 2002
Consolidated net sales increased by $6.4 million, or 2.2%, to $296.5 million for
the six-month period ended June 29, 2003 from $290.1 million for the six-month
period ended June 30, 2002. Pounds shipped increased by 5.7 million pounds, or
3.5%, to 166.8 million in 2003 from 161.1 million in 2002. The average COMEX
copper price for 2003 was $0.75 per pound, as compared to $0.73 per pound in
2002, an increase of approximately 3.0%.
Pounds of commercial products shipped increased by 2.7 million pounds, or 2.4%,
to 114.2 million in 2003 from 111.5 million in 2002. This increase was primarily
due to an increase in shipments of industrial tube and to a much lesser degree
an increase in shipments of technical tube, partially offset by modest declines
in shipments of alloy products, joining products and fabricated products.
Shipments of industrial tube were strong in the first quarter of 2003 due to our
success in obtaining market penetration for this product in the United States.
However, in the second quarter of 2003 shipments of industrial tube did not meet
our expectations due partially to the cooler than normal spring and early summer
of 2003 in North America and were lower than shipments in the second quarter of
2002 due to a 20% decrease in demand for general industrial tube products due to
weakness in the overall industrial economy. Technical tube shipments have
benefited in 2003 from our market penetration into Europe and Asia, but overall
growth has been tempered by weak demand in North America due to a low level of
commercial construction activity. Sales of commercial products increased $0.8
million, or 0.3%, to $226.0 million in 2003 from $225.2 million in 2002. This
increase in sales was attributable to increased shipments of technical tube and
industrial tube, a favorable mix of fabricated products, as well as an increase
in COMEX copper prices, partially offset by lower volumes and reductions in unit
fabrication revenues for alloy products and joining products. The reduction in
unit fabrication revenues was due to modest selling price reductions as well as
to changes in product mix. Gross profit from commercial products decreased by
$3.6 million, or 12.3%, to $25.9 million in 2003 from $29.5 million in 2002,
attributable to specific escalations of cost that are discussed in more detail
below.
Pounds of wholesale products shipped increased by 4.9 million pounds, or 12.6%,
to 43.5 million in 2003 from 38.6 million in 2002 due to our efforts to expand
our customer base for these products. Sales of wholesale products increased $5.5
million, or 11.8%, to $52.4 million in 2003
20
from $46.9 million in 2002, due to the increase in shipments, partially offset
by a decrease in revenues per pound. Overall revenues per pound were flat at
$1.21 in both 2003 and 2002, reflecting an increase in COMEX copper prices
offset by a reduction in selling prices. However, the increased shipments in
2003 were predominantly in the United States market where revenues per pound
were down $0.08 per pound to $1.13 in 2003. Gross profit from wholesale products
decreased $2.5 million, or 84.3%, to $0.5 million in 2003 from $2.9 million in
2002, due primarily to selling price pressures in this commodity market as well
as specific escalations of cost that are discussed in more detail below, offset
somewhat by increased volumes.
Pounds of rod and bar products shipped decreased by 1.9 million pounds, or
17.7%, to 9.0 million in 2003 from 10.9 million in 2002 due to a weak industrial
environment in the United States. Sales of rod, bar and other products increased
$0.1 million, or 0.5%, to $18.1 million in 2003 from $18.0 million in 2002.
Other products are primarily those products sold from our distribution center in
the Netherlands. Sales dollars from our distribution center in The Netherlands
increased approximately $1.9 million in 2003 primarily due to the favorable
impact of the stronger Euro as well as increased volume, but this increase was
largely offset by a decrease in the volume of rod and bar products sold in North
America. Gross profit from rod, bar and other products decreased $0.2 million,
or 19.0%, to $0.9 million in 2003 from $1.1 million in 2002, due to decreased
shipments of rod and bar products, partially offset by an increase in gross
profit from the activities of our distribution center in The Netherlands. Gross
profit was also impacted by specific escalations of cost that are discussed in
the following paragraph.
Consolidated gross profit decreased $6.3 million or 18.8% to $27.2 million in
2003 from $33.5 million in 2002. Gross profit in 2003 was negatively impacted by
the aforementioned selling price reductions, primarily related to wholesale
products. We also had approximately $2.9 million of additional cost in 2003
compared to 2002 related to natural gas, healthcare, pensions, worker's
compensation and insurance expenses. Gross profit was also negatively impacted
by the increased cost and reduced availability of copper scrap. Copper scrap
prices have increased and availability has decreased in 2003 compared to 2002
for several reasons. First, there is a reduced amount of copper scrap being
generated due to a slowdown in industrial production, and secondly, China is
consuming far more of the available copper scrap. Gross profit benefited from a
$0.8 million receipt of cash in a class action litigation settlement in the
copper market.
Our manufacturing cost per pound increased $0.02 per pound to $0.81 per pound in
2003 as compared to $0.79 per pound in 2002 due to the escalations in cost
discussed above as well as approximately $2.2 million of additional cost due to
the currency translation impact on cost to manufacture for our Canadian
operations. However, since approximately fifty percent of the goods manufactured
in our Canadian operations are sold into the U.S. market with most of the
remainder sold into Canada, the negative impact to gross profit in the first six
months of 2003 from currency translation and the strong Canadian dollar was
significantly less than the negative impact on cost.
Consolidated selling, general and administrative expenses for 2003 decreased by
$0.5 million, or 2.8%, to $15.7 million, compared with $16.2 million in 2002,
while remaining approximately five percent of sales for both 2003 and 2002. The
decrease in selling, general and administrative expenses was mainly due to a
$0.7 million reduction in employee related expenses, primarily incentive pay
that is tied to financial performance. Selling, general and administrative
expenses in the first half of 2002 included $0.5 million of charges for
professional fees pertaining to the
21
industry-wide competition related Department of Justice investigation. Salary
and wage costs increased $0.4 million in 2003 as compared to 2002 primarily due
to the fact that selling, general and administrative expenses in the first
quarter of 2002 included a 10% pay reduction for salaried employees.
Consolidated net interest expense increased by $1.2 million or 12.6%, to $10.5
million in 2003 from $9.3 million in 2002. Interest expense increased $1.2
million in 2003 because on March 27, 2002, we issued $120.0 million in principal
amount of 10.5% Senior Notes replacing approximately $98.7 million of borrowings
under our old revolving credit facility which had an average interest rate of
4.9% in the first quarter of 2002. Consolidated net interest expense is net of
interest income and capitalized interest of $0.3 million and $33,200,
respectively, for 2003 and $0.3 million and $0.1 million, respectively, for
2002. Consolidated net interest expense in 2002 is also net of interest income
from loans to the discontinued operations of Wolverine Ratcliffs, Inc. of $0.6
million. Interest expense was reduced $0.6 million in 2003 compared to 2002 due
to the benefit of our interest rate swap on $50 million notional amount of our
7.375% Senior Notes that we entered into in the fourth quarter of 2002.
Amortization and other, net was $1.0 million of expense in 2003, as compared to
$0.6 million of expense in 2002. Amortization and other, net in 2003 and 2002
included $0.2 million and $0.3 million of foreign currency losses, respectively.
These foreign currency losses are largely attributable to fluctuations in the
Canadian to U.S. dollar exchange rate. Amortization and other, net in 2002 also
included $0.3 million of income related to the administration and collection of
receivables sold to us by our discontinued operations. Amortization expense was
$0.7 million in 2003 as compared to $0.5 million in 2002.
A net tax benefit of $0.7 million was recorded in 2003 as compared to tax
expense of $2.3 million in 2002. The effective tax rate in 2002 was 30.8%. The
net tax benefit recorded in 2003 reflects i) lower effective tax rates from
state tax planning activities; ii) federal tax benefits generated in the higher
effective tax rate jurisdiction of the United States, in which we had pre-tax
losses; and iii) foreign tax expense generated in foreign jurisdictions in which
we had income and where the tax rates are lower due to tax holidays. A valuation
allowance was recorded against all state net operating losses generated in 2003.
LIQUIDITY AND CAPITAL RESOURCES
The primary source of our liquidity for the six months ended June 29, 2003 was
cash on hand at the beginning of the year of $53.9 million. The primary uses of
our funds for the six months ended June 29, 2003 were $21.6 million for
continuing operations and $2.7 million for investments in our property, plant
and equipment.
The primary sources of our liquidity for the six months ended June 30, 2002 were
cash on hand at the beginning of the year of $22.7 million, $118.5 million from
the issuance of our 10.5% Senior Notes, borrowings under our revolving credit
facilities and $11.5 million of cash provided by operating activities. We issued
the 10.5% Senior Notes and entered into the new secured revolving credit
facility on March 27, 2002 to replace our old revolving credit facility. The
primary uses of our funds for the first six-month period of 2002 were $98.7
million to repay our revolving credit facilities, $8.4 million of financing fees
related to the issuance of our 10.5%
22
Senior Notes and new secured revolving credit facility, $3.3 million for
investments in our property, plant and equipment and $1.0 million related to the
mandatory redemption of our preferred stock.
For the first six months of 2003, we used $21.6 million of cash for continuing
operating activities compared to the same six-month period in 2002 in which we
generated $11.5 million of cash from operating activities. Cash was used by
operations in 2003 primarily to fund a $4.1 million increase in inventories and
a $19.8 million increase in accounts receivable. In the first six months of
2002, we generated cash from operating activities primarily by reducing
inventories by $11.9 million, increasing accounts payable by $7.6 million and
producing net income of $5.2 million, partially offset by a $22.7 million
increase in accounts receivable. Inventories increased in 2003 due to
accelerated purchases of copper scrap in June in order to take advantage of
favorable pricing, carrying additional strip inventory at our Jackson facility
as we transitioned from a European supplier to a domestic supplier, experiencing
less than anticipated demand for some of our products and modest increases in
metal prices. Accounts receivable increased in both 2003 and 2002 as we
participate in a seasonal business that typically produces greater sales in the
first and second quarters compared to the second half of the year. The reduction
in accounts payable in 2003 reflects the timing of the receipts and payments for
copper inventories and the curtailment of purchases late in the second quarter
of 2003 as business slowed.
As of June 29, 2003, we had no outstanding obligations under our secured
revolving credit facility. We had approximately $7.6 million of standby letters
of credit outstanding that are collateralized with the secured revolving credit
facility and approximately $29.9 million (subject to a $2.0 million excess
availability requirement) in additional borrowing availability thereunder.
In the first quarter of 2003, we and our lenders executed an amendment to the
secured revolving credit facility to change the minimum consolidated EBITDA
requirement on a rolling four-quarter basis for each quarter of 2003 from $50.0
million to $40.0 million for the first three quarters of 2003 and $42.0 million
for the fourth quarter of 2003. The need for the amendment was due to a lack of
improvement in market and economic conditions from what had been expected and in
anticipation that violations of the minimum consolidated EBITDA covenant would
occur. The minimum consolidated EBITDA requirement on a rolling four-quarter
basis for each quarter of 2004 of $55.0 million remains unchanged.
In light of our results in the first half of 2003 and the uncertainty and
general weakness in the outlook for commercial construction and the industrial
economy as a whole for the remainder of 2003, it is possible that violations of
our minimum consolidated EBITDA covenant as amended could occur in the second
half of 2003. If necessary, we believe that we will be able to reach an
agreeable solution with our lenders so that we will be able to retain a
borrowing availability under our secured revolving credit facility sufficient to
meet the needs of our operations.
In the second half of 2003, we expect to generate cash flow from continuing
operations primarily from a reduction of inventories and accounts receivable as
well as a refund of approximately $8.5 million from the filing of our 2002
federal U.S. income tax return. We are also currently negotiating a metal
consignment program that, if successfully concluded, could generate
approximately $10.0 to $15.0 million of additional cash proceeds in the second
half of 2003.
Capital expenditures were $2.7 million in the first six months of 2003 as
compared to $3.3 million in the first six months of 2002. We currently expect to
spend up to $10 million for
23
capital items in the year 2003. Our capital expenditures include asset
replacement, environmental compliance and asset improvement items.
The ratio of current assets to current liabilities was 4.6 at June 29, 2003 and
3.8 at June 30, 2002. Our cash and cash equivalent balances as of June 29, 2003
and December 31, 2002 were $32.3 million and $53.9 million, respectively, of
which $29.8 million and $31.5 million, respectively were held by our facilities
located outside of the United States. We believe we would have to pay the
differential between foreign taxes and U.S. taxes on funds located outside of
the United States upon repatriating these funds to the United States. However,
we do not anticipate repatriating these funds in the foreseeable future and
accordingly have not accrued the differential tax liability.
Thus, with the continuing borrowing availability anticipated under our secured
revolving credit facility, our cash balances, anticipated cash flow from our
continuing operations and the possibility of additional proceeds from a metal
consignment program, we believe that we will be able to satisfy our existing
working capital needs, interest obligations and capital expenditure
requirements. We will continue to monitor our cash balances and forecasted cash
flows and evaluate opportunities to purchase our Senior Notes in the open
market. However, we have not made any such purchases to date in 2003. We also
will evaluate making non-mandatory cash contributions to our pensions plans. In
February 2003, we transferred $4.3 million to a rabbi trust to partially fund
the vested benefit obligations to certain executives under our Supplemental
Executive Retirement Plan. The funds in the rabbi trust are accounted for on the
balance sheet within non-current assets and under the `Prepaid pensions and
other' caption.
ENVIRONMENTAL
Our facilities and operations are subject to extensive environmental laws and
regulations. During the six months ended June 29, 2003, we spent approximately
$0.2 million on environmental matters, which included remediation costs,
monitoring costs, legal and other costs. We had a reserve of $1.3 million for
undiscounted environmental remediation costs which is reflected in our Condensed
Consolidated Balance Sheet. Based on currently available information, we believe
that the ultimate costs of the environmental matters described below are not
reasonably likely to have a material adverse effect on our business, financial
condition or results of operations. However, actual costs related to
environmental matters could differ materially from the amounts we estimated and
accrued at June 29, 2003 and could result in additional exposure if these
environmental matters are not resolved as anticipated.
Decatur, Alabama
In 1999, we negotiated a new Consent Order under Section 3008(h) of the Resource
Conservation and Recovery Act. This order incorporated the Corrective Measures
Study, commonly referred to as the CMS, submitted to the Environmental
Protection Agency, or the EPA, regarding a waste burial site at the Decatur,
Alabama facility. The order also included an upgrade to an existing chrome
ground water remediation system. The CMS proposed current monitoring and site
maintenance. The 2002 Annual Groundwater Monitoring and Effectiveness Report
submitted to the EPA shows that the area of groundwater plume has receded
significantly. The report also shows continued reductions in the concentration
level of contamination. Both of these are attributed to the effectiveness of the
vacuum enhancement modifications made to the groundwater recovery system.
24
Part of the ground water contamination plume had previously been detected
underneath a section of property not owned by us. There are monitoring wells and
recovery wells on this property. However, these wells have not been activated
because the level of contamination currently is below regulated levels. To date,
we have not received or been threatened by any claim from the owner of this
property. In December 2002, we took a sample from this property that indicated
there were no longer detectable levels of chrome beyond our property boundary.
We have scheduled the next sampling from this property for late 2003. If the
owner of this property makes a claim, we could incur additional costs.
On May 31, 2001, the EPA ordered modifications to the previously approved CMS
and operations and maintenance plan to include continued monitoring of the
burial site and the development of a contingency plan if contamination is
detected. In addition, the EPA requested that we have a deed restriction placed
on the burial site area to restrict any future development. We filed a deed
restriction on 4.35 acres of the 165 acre manufacturing facility site in
February 2002. The cost to us to comply with the CMS, as currently approved, is
not expected to have an adverse effect on our business, financial condition or
results of operations.
In July of 2000, we notified the EPA and the Alabama Department of Environmental
Management that we detected low levels of volatile organic compounds and
petroleum hydrocarbons in the ground water at the Decatur, Alabama facility
during the expansion of the facility. On June 13, 2001, we received a letter
from the Alabama Department of Environmental Management stating that a
preliminary assessment would be forthcoming which we have yet to receive from
the department. We expect to further define the extent of any contamination and
execute any necessary remedies in conjunction with the department's forthcoming
assessment. We may voluntarily institute a pump and treat system in order to
begin remediation of the contamination.
The estimated remaining investigative, monitoring, remedial, legal and other
costs related to the environmental matters at our Decatur, Alabama facility are
$0.5 million as of June 29, 2003.
Ardmore, Tennessee
On December 28, 1995, we entered into a Consent Order and Agreement with the
Tennessee Division of Superfund, or Tennessee Division, relating to the Ardmore,
Tennessee facility, under which we agreed to conduct a preliminary investigation
on whether volatile organic compounds detected in and near the municipal
drinking water supply are related to the Ardmore facility and, if necessary, to
undertake an appropriate response. That investigation revealed contamination,
including elevated concentrations of volatile organic compounds, in the soil in
areas of the Ardmore facility and also revealed elevated levels of certain
volatile organic compounds in the shallow residuum ground water zone at the
Ardmore facility.
Under the terms of the order, we submitted a Remedial Investigation and
Feasibility Study work plan, which was accepted by the Tennessee Division, and
we have initiated this work plan. The Tennessee Division approved the
Groundwater Assessment Plan as a supplement to the work plan, and additional
groundwater sampling to determine the lateral and vertical extent of possible
contamination began in July 2000. The data from the ground water assessment, the
subsequent risk assessment and a preliminary review of remedial alternatives
completed the work plan portion of the project which was submitted to the
Tennessee Division on April 26, 2002. The Tennessee Division responded with
comments on the Remedial Investigation and Feasibility
25
Study on November 8, 2002. We and our consultants have prepared a response to
the Tennessee Division's comments and have scheduled a meeting with the
Tennessee Division on August 13, 2003 to discuss their comments and our response
with their risk assessment team. We continue the monitoring and analysis program
in compliance with the consent agreement.
On June 13, 2001, we purchased 22 acres immediately north of the Ardmore
facility because of the potential migration of ground water contamination to
this property. We believe that owning the property will reduce both potential
liability and long-term remediation costs. We are proposing to the Tennessee
Division that an interim corrective measure be implemented at the facility. The
interim measure will consist of a system to extract water and vapors from the
areas of highest concentration. The system can be expanded to conduct additional
remediation if required. Based on recent testing efforts at the facility and the
available information, we preliminarily estimate as of June 29, 2003 that it
will cost between $0.4 million and $2.9 million to complete the investigation
and develop the remediation plans for this site.
The water currently delivered to residents by the municipality is treated prior
to human consumption, and thus does not contain volatile organic compounds above
acceptable drinking water standards. We do not know whether the municipality may
have delivered untreated water to its water consumers. However, due to dilution
with non-contaminated water, which we believe occurs in the operation of the
municipal well system, we believe that it is unlikely that any consumer was
exposed in the past to volatile organic compounds above acceptable drinking
water standards. To date, we have not received or been threatened by any claim
from the municipality or its residents with respect to the drinking water.
A report of a 1995 EPA site inspection of the Ardmore facility recommended
further action for the site. We believe, however, that because the Tennessee
Division is actively supervising an ongoing investigation of the Ardmore
facility, it is unlikely that the EPA will intervene and take additional action.
If the EPA should intervene, however, we could incur additional costs for any
further investigation or remedial action required.
Greenville, Mississippi
Following our acquisition of the Greenville, Mississippi facility, a preliminary
investigation disclosed certain volatile organic compounds in soil and ground
water at the site. We entered into a consent agreement with the Mississippi
Department of Environmental Quality on July 15, 1997. We began remediation
efforts in the third quarter of 1997 and expected these efforts to last
approximately three years. In February 2000, we submitted a report of
remediation activities and were granted approval by the Mississippi department
to cease active remediation and begin post-closure monitoring. However, there
can be no assurance that the department will allow us to permanently discontinue
remediation efforts, and operations, maintenance and other expenses of the
remediation system may continue for a longer period of time. Through October 3,
1998, applicable costs of testing and remediation required at the Greenville
facility had been shared with the former owners of the facility pursuant to the
terms of an escrow agreement established at the time the facility was acquired.
Subsequent to October 3, 1998, we released the former owners of the facility
from liability related to the remediation of the Greenville facility after
receiving a $145,000 settlement payment. We estimate as of June 29, 2003 that
the remaining investigative and remedial costs could total $14,500 under the
remediation plan we adopted, but these costs could increase if additional
remediation is required.
26
On November 21, 2002, the Mississippi Commission on Environmental Quality
approved a Brownfield agreement order with us. We believe that this program will
provide for the most regulatory flexibility in reaching a site closure. On
December 11, 2002, we donated the property to Washington County, Mississippi to
be used for economic development. We maintain the environmental liability as
defined in the Brownfield agreement. We anticipate long-term monitoring of the
site to continue until the concentration of contaminants reach the Mississippi
department's target goals.
Altoona, Pennsylvania
We have entered our Altoona, Pennsylvania facility into the State of
Pennsylvania Department of Environmental Protection Act II Program. The program
addresses contamination issues related to closed hazardous waste lagoons and oil
contamination of soil at this facility. The previous owner closed the hazardous
waste lagoons in 1982. The program is a voluntary site remediation program,
which allows us to direct the site evaluation and any eventual remediation.
Remaining costs to complete the investigation phase of the program are estimated
to be $27,500. Once the investigation phase is completed, a decision on
remediation, if any, will be made. Based upon our preliminary report to the
Pennsylvania Department of Environmental Protection no active remediation is
anticipated at this site; however, some additional testing and modeling will be
required. The additional testing and modeling are included in the estimated
cost. We anticipate submitting a final remedial investigation report to the
Pennsylvania Department of Environmental Protection in late 2003. It was our
belief that the previous owner had indemnified us for any liability in the
matter. In November 2002, we reached an out of court settlement concerning the
indemnification with Millennium Chemicals, formerly National Distillers. As part
of this agreement Millennium Chemicals has been released from all claims.
In 1998, we entered into a consent agreement with the municipality with regard
to its wastewater discharge limits. We anticipate that we will be able to
resolve the violation of the wastewater discharge limits through the use of
wastewater discharge credits from the municipality. However, if this method is
unsuccessful, we may have to install equipment that is estimated to cost
approximately $0.3 million.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain of the statements contained in this report are made pursuant to the
"Safe Harbor" provisions of the Private Securities Litigation Reform Act of
1995. Forward-looking statements include statements regarding our goals,
beliefs, plans or current expectations, taking into account the information
currently available to our management. Forward-looking statements include all
statements that do not relate solely to current or historical fact. For example,
when we use such words as "anticipate," "intend," "expect," "believe," "plan,"
"may," "should," "would" or other words that convey uncertainty of future events
or outcome, we are making forward-looking statements. All statements which
address operating performance, events or developments that we expect or
anticipate will occur in the future, including statements relating to future
sales, earnings, operating performance, property, plant and equipment
expenditures and sources and uses of cash, are forward-looking statements. These
forward-looking statements are subject to various risks and uncertainties that
could cause actual results to differ materially from those stated or implied by
such forward-looking statements. We undertake no obligation to publicly
27
release any revision of any forward-looking statements contained herein to
reflect events or circumstances occurring after the date hereof or to reflect
the occurrence of unanticipated events.
With respect to expectations of future sales, earnings, operating performance,
property, plant and equipment expenditures and sources and uses of cash, factors
that could affect actual results include, without limitation:
- our significant amount of debt and the restrictive covenants
contained in our debt agreements;
- our ability to service our debt and incur additional debt;
- our ability to dispose of our properties held for sale and
realize their carrying values;
- our ability to achieve growth rates and profit projections
assumed in the valuation of our goodwill;
- the impact of interest rates on the valuations of our pension
liabilities and goodwill;
- cyclicality, seasonality and weather conditions, which affect
the sales of our products;
- the timing and magnitude of recovery from the current economic
downturn;
- the persistence of low levels of U.S. commercial construction
activity;
- the impact of competitive factors in our industry, including
the effect of pricing, product lines and other actions taken
by our competitors;
- our ability to maintain our relationships with our major
customers;
- a reduction in demand for our products;
- our ability to achieve and the timeliness with which we
achieve anticipated results from our Project 21 capital
improvement plan, cost reduction initiatives, product and
process development activities, productivity initiatives,
global expansion activities, market share penetration efforts
and working capital management programs;
- our potential exposure to environmental liabilities;
- economic, political and currency risks relating to our
international operations;
- our ability and the ability of our customers to maintain
satisfactory relations with union employees;
- extraordinary fluctuations in the markets for raw materials;
- extraordinary fluctuations in the cost and availability of
fuel and energy resources;
- risks to our competitive position from changing technology or
the loss of our intellectual property;
28
- business and economic risks relating to government regulations
that impact our industry;
- the mix of our geographic and product revenues;
and various other factors, many of which are beyond our ability to control or
predict.
29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various market risks, including changes in interest rates,
commodity prices and foreign currency rates. Market risk is the potential loss
arising from adverse changes in market rates and prices. We do not enter into
derivatives or other financial instruments for trading or speculative purposes.
In the ordinary course of business, we enter into various types of transactions
involving financial instruments to manage and reduce the impact of changes in
commodity prices and foreign exchange rates.
Interest Rate Risk
The fair market value of long-term fixed interest rate debt is subject to
interest rate risk. Generally, the fair market value of fixed interest rate debt
will increase as interest rates fall and decrease as interest rates rise. The
estimated fair value of our total long-term fixed interest rate debt as of June
29, 2003 was $258 million, versus a carrying value of $255 million. The
estimated fair market value of our debt is based upon the indicative bid price
for our Senior Notes which approximates their trade value. The yield implicit in
the value of the 7.375% Senior Notes is 8.36% and 8.66% for the 10.5% Senior
Notes. A 1% increase from prevailing interest rates would result in a decrease
in fair value of this debt by approximately $10 million as of June 29, 2003.
In October 2002, we completed an interest rate swap on $50 million notional
amount of our 7.375% Senior Notes. The terms of the interest rate swap are
semi-annual payment dates of February 1 and August 1, a floating rate option of
the six-month LIBOR rate plus a spread of 3.76% and a termination date of August
1, 2008. As of June 29, 2003, we recorded the fair market value of the interest
rate swap of $1.7 million as other assets with a corresponding increase to the
hedged debt, with equal and offsetting unrealized gains and losses included in
other income (expense), net. For the three and six month periods ended June 29,
2003, the interest rate swap effectively converted $50 million of fixed rate
7.375% Senior Notes to a variable rate of 4.886% and 5.106%, respectively.
Commodity Price Risk
In connection with the sale of some raw materials, principally copper, we have
entered into commodity forward contracts as we have deemed appropriate to reduce
the risk of price increases with respect to both firm-price sale commitments and
anticipated sales. These forward contracts are accounted for in accordance with
SFAS No. 133 Accounting For Derivative Instruments and Hedging Activities (as
subsequently amended by SFAS Nos. 137 and 138). As of June 29, 2003, we had
entered into contracts hedging the raw material requirements for committed and
anticipated future sales through December 2004 having a notional value of $18.3
million. The estimated fair value of these outstanding contracts based upon
forward rates at June 29, 2003 was approximately $1.1 million as of June 29,
2003. A 10.0% decline in commodity prices would decrease the estimated fair
value of these outstanding contracts by $1.9 million at June 29, 2003.
30
We also have entered into commodity forward contracts as we have deemed
appropriate to reduce the risk of price decreases with respect to firm-price
purchase commitments. These forward contracts are accounted for in accordance
with SFAS No. 133. As of June 29, 2003, we had entered into contracts hedging
the raw material requirements for committed future purchases through August 2003
having a notional value of $1.2 million. The estimated fair value of these
outstanding contracts based upon forward rates at June 29, 2003 was
approximately $21,700 as of June 29, 2003. A 10.0% increase in commodity prices
would decrease the estimated fair value of these outstanding contracts by $0.1
million at June 29, 2003.
We have entered into commodity forward contracts to sell copper with a notional
value of $26.4 million in December 2003. We entered into these forward contracts
in order to mitigate the impact of fluctuating copper prices with regard to the
valuation of our inventory balances. These forward contracts were not designated
as effective hedges and therefore they are marked to market each month with
gains and losses recorded in cost of goods sold. The estimated fair value of
these outstanding contracts based upon forward rates at June 29, 2003 was a loss
of approximately $0.4 million as of June 29, 2003. A 10.0% increase in commodity
prices would decrease the estimated fair value of these outstanding contracts by
$2.6 million at June 29, 2003.
In connection with the purchase of natural gas, we have entered into commodity
futures contracts for natural gas to reduce our risk of future price increases.
These contracts are accounted for in accordance with SFAS No.133 and
accordingly, realized gains and losses are recognized in cost of goods sold when
the hedged natural gas purchases occur. Gains and losses on natural gas futures
contracts that are designated as cash flow hedges are recognized in
comprehensive income until the anticipated natural gas purchase occurs or is no
longer probable. As of June 29, 2003, we had commodity futures contracts to
purchase natural gas for the period August 2003 through October 2004 with a
notional amount of $5.4 million and an unrealized loss of $0.3 million, based on
futures prices as of June 29, 2003. The effect of a 10.0% decline in commodity
prices as of June 29, 2003 for these futures contracts would result in a
potential loss in fair value of approximately $0.5 million.
Foreign Currency Risk
Some of our operations use foreign exchange forwards to hedge fixed purchase and
sales commitments denominated in a foreign currency. Our foreign currency
exposures relate primarily to nonfunctional currency assets and liabilities
denominated in Euros and British Pound Sterling. We do not enter into forward
exchange contracts for trading purposes. These forward contracts and the
underlying hedged receivables and payables are carried at their fair values with
any associated gains and losses recognized in current period earnings. As of
June 29, 2003, we had forward exchange contracts outstanding to purchase foreign
currency with a notional amount of $3.5 million and to sell foreign currency
with a notional amount of $3.1 million. As of June 29, 2003, we had an
unrealized loss of $0.3 million associated with these forward contracts. The
potential loss in fair value for these forward contracts from a hypothetical
10.0% adverse change in quoted foreign currency exchange rates would be
approximately $0.6 million.
31
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of management, including our
Chief Executive Officer, Dennis J. Horowitz, and our Chief Financial Officer,
James E. Deason, we carried out an evaluation of the effectiveness of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as
of the end of the period covered by this report. Based upon that evaluation,
Messrs. Horowitz and Deason have concluded that, as of the end of the period
covered by this report, our disclosure controls and procedures have been
designed and are effective to provide reasonable assurance that information we
are required to disclose in the reports we file or submit under the Exchange Act
is recorded, processed, summarized and reported within the time periods
specified in the rules and forms of the Securities and Exchange Commission.
These disclosure controls and procedures include, without limitation, controls
and procedures designed to provide reasonable assurance that information we are
required to disclose in such reports is accumulated and communicated to our
management, including Messrs. Horowitz and Deason, as appropriate to allow
timely decisions regarding required disclosure. The design of any system of
controls is based in part upon certain assumptions about the likelihood of
future events. There can be no assurance that any design will succeed in
achieving its stated goal under all potential future conditions, regardless of
how remote.
Based upon the evaluation of our management, which was conducted with the
participation of Messrs. Horowitz and Deason, there has been no change in our
internal control over financial reporting during the period covered by this
report that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
32
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material legal proceeding developments during the three-month
period ended June 29, 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 14, 2003, the Company held its Annual Meeting of Stockholders. The
matters voted on at the meeting and the results of those votes are as follows:
1. Election of Directors.
Votes For Votes Withheld
--------- --------------
Chris A. Davis 11,095,652 308,800
W. Barnes Hauptfuhrer 11,094,237 310,215
Dennis J. Horowitz 11,074,425 330,027
Other Directors whose term of office continued after the meeting were John L.
Duncan, Jan K. Ver Hagen, James E. Deason, Thomas P. Evans and Gail O. Neuman.
2. Appointment of Ernst & Young LLP as Independent Auditors.
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
10,904,434 496,128 3,890
3. Approve and adopt the Wolverine Tube, Inc. 2003 Equity Incentive Plan.
Votes For Votes Against Votes Abstained
--------- ------------- ---------------
6,855,291 2,251,828 13,291
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Wolverine Tube, Inc. 2003 Equity Incentive Plan.
10.2 First Amendment to Wolverine Tube, Inc. 2003 Equity Incentive Plan.
31.1 Certification of the Chief Executive Officer pursuant to Section 302 of
the Sarbanes- Oxley Act of 2002.
33
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
A current report on Form 8-K related to the reporting of the Company's
results of operations and financial condition for the quarter ended
March 30, 2003 was furnished to the SEC on April 24, 2003.
A current report on Form 8-K related to the reporting of the Company's
results of operations and financial condition for the quarter ended
June 29, 2003 was furnished to the SEC on July 30, 2003.
SIGNATURE
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 thereto duly authorized.
Wolverine Tube, Inc.
By: /s/ James E. Deason
-----------------------------------
Name: James E. Deason
Title: Executive Vice President, Chief Financial Officer,
Secretary and Director
Dated: August 12, 2003
34