-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TmOYCBxUpHn4RxTKEDb08a7cvR5BcuM7ES+n7cgOXDYJChNgreUXVJWe3ejtGoAZ StFyCJy+h9U5gJPjFJHIqQ== 0000934747-02-000026.txt : 20021112 0000934747-02-000026.hdr.sgml : 20021111 20021112105000 ACCESSION NUMBER: 0000934747-02-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020930 FILED AS OF DATE: 20021112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMONWEALTH INDUSTRIES INC/DE/ CENTRAL INDEX KEY: 0000934747 STANDARD INDUSTRIAL CLASSIFICATION: ROLLING DRAWING & EXTRUDING OF NONFERROUS METALS [3350] IRS NUMBER: 133245741 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-25642 FILM NUMBER: 02815827 BUSINESS ADDRESS: STREET 1: 500 WEST JEFFERSON STREET STREET 2: 19TH FLOOR CITY: LOUISVILLE STATE: KY ZIP: 40202-2823 BUSINESS PHONE: 502-589-8100 MAIL ADDRESS: STREET 1: 500 WEST JEFFERSON STREET STREET 2: 19TH FLOOR CITY: LOUISVILLE STATE: KY ZIP: 40202-2823 FORMER COMPANY: FORMER CONFORMED NAME: COMMONWEALTH ALUMINUM CORP DATE OF NAME CHANGE: 19941228 10-Q 1 jb10q32002.txt THIRD QUARTER 10-Q 2002 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q --------- [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ -------------- Commission File No. 0-25642 COMMONWEALTH INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 13-3245741 (State of incorporation) (I.R.S. Employer Identification No.) 500 West Jefferson Street 19th Floor Louisville, Kentucky 40202-2823 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (502) 589-8100 ---------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ____ ----- The registrant had 15,997,651 shares of common stock outstanding at October 29, 2002. ================================================================================ COMMONWEALTH INDUSTRIES, INC. FORM 10-Q For the Quarter Ended September 30, 2002 INDEX Part I - Financial Information Item 1. Financial Statements (unaudited) Page Number ----------- Condensed Consolidated Balance Sheet as of September 30, 2002 and December 31, 2001 3 Condensed Consolidated Statement of Operations for the three months and nine months ended September 30, 2002 and 2001 4 Condensed Consolidated Statement of Comprehensive Income for the three months and nine months ended September 30, 2002 and 2001 5 Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2002 and 2001 6 Notes to Condensed Consolidated Financial Statements 7-19 Item 2. Management's Discussion and Analysis of Financial Condition 20-25 and Results of Operations Item 4. Controls and Procedures 25 Part II - Other Information Item 1. Legal Proceedings 26 Item 6. Exhibits and Reports on Form 8-K 26 Signatures 27 Certifications 28-29 COMMONWEALTH INDUSTRIES, INC. Condensed Consolidated Balance Sheet (in thousands except share data)
September 30, December 31, 2002 2001 ------------- ------------- Assets Current assets: Cash and cash equivalents $ - $ 6,393 Accounts receivable, net 137 81 Inventories 116,369 119,038 Net residual interest in receivables sold 100,185 82,310 Prepayments and other current assets 4,036 3,230 ------------- ------------- Total current assets 220,727 211,052 Property, plant and equipment, net 146,067 152,137 Goodwill, net 48,872 74,199 Other noncurrent assets 3,901 2,244 ------------- ------------- Total assets $ 419,567 $ 439,632 ============= ============= Liabilities Current liabilities: Outstanding checks in excess of deposits $ 351 $ - Accounts payable 54,264 50,693 Accrued liabilities 36,564 38,876 ------------- ------------- Total current liabilities 91,179 89,569 Long-term debt 125,000 125,000 Other long-term liabilities 5,511 6,899 Accrued pension benefits 3,529 4,576 Accrued postretirement benefits 77,121 79,422 ------------- ------------- Total liabilities 302,340 305,466 ------------- ------------- Commitments and contingencies - - Stockholders' Equity Common stock, $0.01 par value, 50,000,000 shares authorized, 15,997,651 and 16,459,468 shares outstanding at June 30, 2002 and December 31, 2001, respectively 160 160 Additional paid-in capital 405,613 405,443 Accumulated deficit (283,507) (258,532) Notes receivable from sale of common stock - (1,561) Accumulated other comprehensive income: Effects of cash flow hedges (5,039) (11,344) ------------- ------------- Total stockholders' equity 117,227 134,166 ------------- ------------- Total liabilities and stockholders' equity $ 419,567 $ 439,632 ============= ============= See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC. Condensed Consolidated Statement of Operations (in thousands except per share data)
Three months ended Nine months ended September 30, September 30, ---------------------------- ----------------------------- 2002 2001 2002 2001 ----------- ----------- ------------ ----------- Net sales $ 253,933 $ 249,914 $ 727,519 $ 715,610 Cost of goods sold 234,571 235,366 681,933 678,890 ----------- ----------- ------------ ----------- Gross profit 19,362 14,548 45,586 36,720 Selling, general and administrative expenses 12,524 11,326 34,779 34,154 Amortization of goodwill - 1,119 - 3,357 ----------- ----------- ------------ ----------- Operating income (loss) 6,838 2,103 10,807 (791) Other income (expense), net 332 289 818 647 Interest expense, net (3,704) (3,745) (11,406) (11,764) ----------- ----------- ------------ ----------- Income (loss) before income taxes and cumulative effect of change in accounting principle 3,466 (1,353) 219 (11,908) Income tax expense (benefit) (2,610) 200 (2,532) 600 ----------- ----------- ------------ ----------- Income (loss) before cumulative effect of change in accounting principle 6,076 (1,553) 2,751 (12,508) Cumulative effect of change in accounting principle - - (25,327) - ----------- ----------- ------------ ----------- Net income (loss) $ 6,076 $ (1,553) $ (22,576) $ (12,508) =========== =========== ============ =========== Basic net income (loss) per share: Income (loss) before cumulative effect of change in accounting principle $ 0.38 $ (0.09) $ 0.17 $ (0.76) Cumulative effect of change in accounting principle - - (1.58) - ----------- ----------- ------------ ----------- Net income (loss) $ 0.38 $ (0.09) $ (1.41) $ (0.76) =========== =========== ============ =========== Diluted net income (loss) per share: Income (loss) before cumulative effect of change in accounting principle $ 0.38 $ (0.09) $ 0.17 $ (0.76) Cumulative effect of change in accounting principle - - (1.57) - ----------- ----------- ------------ ----------- Net income (loss) $ 0.38 $ (0.09) $ (1.40) $ (0.76) =========== =========== ============ =========== Weighted average shares outstanding Basic 15,998 16,459 15,992 16,457 Diluted 16,092 16,459 16,100 16,457 Dividends paid per share $ 0.05 $ 0.05 $ 0.15 $ 0.15 See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC. Condensed Consolidated Statement of Comprehensive Income (in thousands)
Three months ended Nine months ended September 30, September 30, --------------------------- ------------------------ 2002 2001 2002 2001 ----------- ------------ ---------- --------- Net income (loss) $ 6,076 $ (1,553) $ (22,576) $ (12,508) Other comprehensive income, net of tax: Net change related to cash flow hedges: Cumulative effect of accounting change - - - 6,619 Increase (decrease) in fair value of cash flow hedges (6,313) (15,866) (3,174) (30,621) Reclassification adjustment for (gains) losses included in net income 4,267 8,297 9,479 6,159 ----------- ------------ ---------- --------- Net change related to cash flow hedges (2,046) (7,569) 6,305 (17,843) ----------- ------------ ---------- --------- Comprehensive income (loss) $ 4,030 $ (9,122) $ (16,271) $ (30,351) =========== ============ ========== ========= See notes to consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC. Condensed Consolidated Statement of Cash Flows (in thousands)
Nine months ended September 30, ---------------------------------- 2002 2001 ----------- ------------- Cash flows from operating activities: Net income (loss) $ (22,576) $ (12,508) Adjustments to reconcile net income (loss) to net cash provided by (used in) operations: Depreciation 15,940 24,645 Amortization 762 4,305 Goodwill inpairment charge 25,327 - Loss on disposal of property, plant and equipment 196 359 Issuance of common stock in connection with stock awards 170 106 Changes in assets and liabilities: (Increase) in accounts receivable, net (56) (748) Decrease in inventories 2,669 23,724 (Increase) in net residual interest in receivables sold (17,875) (54,492) (Increase) decrease in prepayments and other current assets (806) 8,316 (Increase) in other noncurrent assets (2,419) (445) Increase in accounts payable 3,571 7,550 Increase (decrease) in accrued liabilities 3,993 (5,667) (Decrease) in other liabilities (4,736) (5,618) ----------- ------------- Net cash provided by (used in) operating activities 4,160 (10,473) ----------- ------------- Cash flows from investing activities: Purchases of property, plant and equipment (10,089) (7,217) Proceeds from sale of property, plant and equipment 23 90 ----------- ------------- Net cash (used in) investing activities (10,066) (7,127) ----------- ------------- Cash flows from financing activities: Increase in outstanding checks in excess of deposits 351 6,942 Proceeds from long-term debt 55,700 48,060 Repayments of long-term debt (55,700) (48,060) Repayments of notes receivable from sale of common stock 1,561 1,613 Cash dividends paid (2,399) (2,469) ----------- ------------- Net cash (used in) provided by financing activities (487) 6,086 ----------- ------------- Net (decrease) in cash and cash equivalents (6,393) (11,514) Cash and cash equivalents at beginning of period 6,393 11,514 ----------- ------------- Cash and cash equivalents at end of period $ - $ - =========== ============= Supplemental disclosures: Interest paid $ 7,551 $ 8,630 Income taxes paid (refunds received) (492) 157 Non-cash activities: Repayment of notes receivable from sale of common stock with common stock and subsequent retirement of common stock - 450 See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC. Notes to Condensed Consolidated Financial Statements 1. Basis of Presentation The accompanying condensed consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all the disclosures normally required by generally accepted accounting principles. The condensed consolidated financial statements have been prepared in accordance with Commonwealth Industries, Inc.'s (the "Company's") customary accounting practices and have not been audited. In the opinion of management, all adjustments necessary to fairly present the results of operations for the reporting interim periods have been made and were of a normal recurring nature. 2. Receivables Purchase Agreement On September 26, 1997, the Company sold all of its trade accounts receivables to a 100% owned subsidiary, Commonwealth Financing Corp. ("CFC"). Simultaneously, CFC entered into a three-year receivables purchase agreement with a financial institution and its affiliate whereby CFC can sell, on a revolving basis, an undivided interest in certain of its receivables and receive up to $150.0 million from an unrelated third party purchaser at a cost of funds linked to commercial paper rates plus a charge for administrative and credit support services. The Company services the receivables for a fee in accordance with the receivables purchase agreement. In addition, under the agreement, the receivables are sold with no recourse to the Company and the Company records no discount on the sale of the receivables. During September 2000, the Company and the financial institution extended the receivables purchase agreement for an additional three-year period ending in September 2003 and in October 2002, extended the agreement for an additional year ending in September 2004. In addition during September 2001, the Company and the financial institution agreed to reduce the maximum amount which can be outstanding under the agreement to $95.0 million. At September 30, 2002 and 2001, the Company had outstanding under the agreement $20.0 million and $17.5 million, respectively, and had $100.2 million and $126.9 million, respectively, of net residual interest in the receivables sold. The fair value of the net residual interest is measured at the time of the sale and is based on the sale of similar assets. In the first nine months of 2002 and 2001, the Company received gross proceeds of $37.0 million and $30.0 million, respectively, from the sale of receivables and made gross payments of $37.0 and $81.5 million, respectively, under the agreement. 3. Inventories Inventories consist of the following (in thousands): September 30, 2002 December 31, 2001 ------------------ ----------------- Raw materials $ 19,137 $ 21,203 Work in process 42,973 45,830 Finished goods 39,499 35,978 Expendable parts and supplies 14,207 14,223 ---------- ----------- 115,816 117,234 LIFO reserve 553 1,804 ---------- ----------- $ 116,369 $ 119,038 ========== =========== The Company uses the last-in, first-out (LIFO), first-in, first-out (FIFO) and average-cost accounting methods for valuing its inventories. Inventories of approximately $86.5 million and $87.9 million, included in the above totals (before the LIFO reserve) at September 30, 2002 and December 31, 2001, respectively, are accounted for under the LIFO method of accounting while the remainder of the inventories are accounted for under the FIFO and average-cost methods. 4. Provision for Income Taxes The Company recognized an income tax benefit of $2.6 million and $2.5 million for the three months and nine months ended September 30, 2002, respectively, compared to an income tax expense of $0.2 million and $0.6 million for the three months and nine months ended September 30, 2001, respectively. The Company recorded an adjustment of $2.7 million in the three months ended September 30, 2002 to reduce prior year's income tax accruals. 5. Net Income Per Share Computations The following is a reconciliation of the numerator and denominator of the basic and diluted per share computations (in thousands except per share data):
Three months ended September 30, 2002 2001 ---- ---- Income (numerator) amounts used for basic and diluted per share computations: Income (loss) before cumulative effect of change in accounting principle $6,076 $(1,553) Cumulative effect of change in accounting principle - - ------ ------- Net income (loss) $6,076 $(1,553) ====== ======= Shares (denominator) used for basic per share computations: Weighted average shares of common stock outstanding 15,998 16,459 ====== ====== Shares (denominator) used for diluted per share computations: Weighted average shares of common stock outstanding 15,998 16,459 Plus: dilutive effect of stock options 94 - ------ ------ Adjusted weighted average shares 16,092 16,459 ====== ====== Basic and diluted per share data: Income (loss) before cumulative effect of change in accounting principle $0.38 $ (0.09) Cumulative effect of change in accounting principle - - ----- ------- Net income (loss) $0.38 $ (0.09) ===== =======
Nine months ended September 30, 2002 2001 ---- ---- Income (numerator) amounts used for basic and diluted per share computations: Income (loss) before cumulative effect of change in accounting principle $ 2,751 $(12,508) Cumulative effect of change in accounting principle (25,327) - -------- --------- Net income (loss) $(22,576) $(12,508) ========= ========= Shares (denominator) used for basic per share computations: Weighted average shares of common stock outstanding 15,992 16,457 ====== ====== Shares (denominator) used for diluted per share computations: Weighted average shares of common stock outstanding 15,992 16,457 Plus: dilutive effect of stock options 108 - ------ ------ Adjusted weighted average shares 16,100 16,457 ====== ====== Basic per share data: Income (loss) before cumulative effect of change in accounting principle $ 0.17 $(0.76) Cumulative effect of change in accounting principle (1.58) - ------- ------ Net income (loss) $(1.41) $(0.76) ======= ====== Diluted per share data: Income (loss) before cumulative effect of change in accounting principle $ 0.17 $(0.76) Cumulative effect of change in accounting principle (1.57) - ------- ------- Net income (loss) $(1.40) $(0.76) ======= ======= Options to purchase 305,500 common shares for both the three months and nine months ended September 30, 2001, which equate to 43,141 and 42,571 incremental common equivalent shares, respectively, were excluded from the diluted calculation above as their effect would have been antidilutive. In addition, options to purchase 794,000 common shares for both the three months and nine months ended September 30, 2002 and 799,500 common shares for both the three months and nine months ended September 30, 2001 were excluded from the diluted calculations above because the exercise prices on the options were greater than the average market price for the periods.
6. Financial Instruments and Hedging Activities Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", including Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities - an amendment of FASB Statement No. 133" ("SFAS No. 133"). The Company recorded a cumulative-effect-type net gain transition adjustment of $6.6 million in accumulated other comprehensive income to recognize at fair value all derivatives that were designated as cash-flow hedging instruments upon adoption of SFAS No. 133 on January 1, 2001. This entire amount was reclassified from accumulated other comprehensive income into cost of goods sold during 2001. The Company enters into futures contracts, forward contracts and options to manage exposures to price risk related to aluminum and natural gas purchases. The Company has designated the futures contracts and forward contracts as cash flow hedges of anticipated aluminum raw material and natural gas requirements, respectively. As of September 30, 2002, approximately $4.9 million of the $5.0 million of deferred net losses are expected to be reclassified from other comprehensive income into net income as cost of goods sold over the next twelve months. A net loss of $0.05 million and $0.16 million was recognized in cost of goods sold during the three months and nine months ended September 30, 2002, respectively, and a net loss of $0.13 million and $0.16 million was recognized in cost of goods sold during the three months and nine months ended September 30, 2001, respectively, representing the amount of the hedges' ineffectiveness. As of September 30, 2002, the Company held open aluminum and natural gas futures and forward contracts having maturity dates extending through March 2004. In order to hedge a portion of its interest rate risk, the Company was a party to an interest rate swap agreement with a notional amount of $5 million under which the Company paid a fixed rate of interest and received a LIBOR-based floating rate. The interest rate swap agreement expired during September 2001 and as of September 30, 2002 the Company has no interest rate swap agreements in effect. The Company's interest rate swap agreement which expired during September 2001 did not qualify for hedge accounting under SFAS 133 and as such the change in the fair value of the interest rate swap agreement had been recognized currently as interest expense, net in the Company's consolidated statement of operations. The amount of such change in the fair value of the interest rate swap agreement was immaterial for the three months and nine months ended September 30, 2001. 7. Goodwill Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). The Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes Accounting Principles Board Opinion No. 17, "Intangible Assets" and amends Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS No. 121"), to exclude from its scope goodwill and intangible assets that are not amortized. SFAS No. 121 has subsequently been superceded by Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets ("SFAS No. 144"). SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Under SFAS No. 142, goodwill is no longer amortized but reviewed for impairment annually or more frequently if certain indicators arise, using a two-step approach. SFAS No. 142 is effective January 1, 2002 and the Company was required to complete step one of a transitional impairment test by June 30, 2002 and to complete step two of the transitional impairment test, if step one indicates that the reporting unit's carrying value exceeds its fair value, by December 31, 2002. Any impairment loss resulting from the transitional impairment test was required to be recorded as a cumulative effect of a change in accounting principle in the quarter ended March 31, 2002. Any subsequent impairment losses will be reflected in operating income in the consolidated statement of operations. The net goodwill balances attributable to each of the Company's reporting units were tested for impairment by comparing the fair value of each reporting unit to its carrying value. Fair value was determined by using the valuation technique of calculating the present value of estimated expected future cash flows (using a discount rate commensurate with the risks involved). Based upon the transitional impairment test performed upon adoption of SFAS No. 142, the Company has recorded a goodwill impairment loss of $25.3 million ($13.5 million in its aluminum products segment and $11.8 million in its electrical products segment). This non-cash goodwill impairment charge has no impact on the calculation of financial covenants under the Company's revolving credit facility. As required by SFAS No.142 and previously described, the Company recorded the goodwill write-down as a cumulative effect of a change in accounting principle as of January 1, 2002 and restated the Company's first quarter 2002 financial results. The following displays the changes in the carrying amount of goodwill in each of the Company's reportable business segments for the nine months ended September 30, 2002 (in thousands):
Electrical Aluminum Products Total -------- ---------- -------- Balance December 31, 2001 $13,470 $60,729 $74,199 Goodwill impairment loss as a result of transitional impairment test related to adoption of SFAS No. 142 (13,470) (11,857) (25,327) -------- -------- -------- Balance September 30, 2002 $ - $48,872 $48,872 ======== ======== ========
The following represents transitional disclosures relating to goodwill amortization (in thousands except per share data):
Three months ended September 30, 2002 2001 ---- ---- Reported net income (loss) $6,076 $(1,553) Add back: goodwill amortization - 1,119 ------ ------ Adjusted net income (loss) $6,076 $ (434) ====== ====== Reported basic and diluted net income (loss) per share $0.38 $(0.09) Goodwill amortization per basic and diluted per share - 0.06 ----- ------ Adjusted basic and diluted net income (loss) per share $0.38 $(0.03) ===== ====== Weighted average shares outstanding Basic 15,998 16,459 Diluted 16,092 16,459
Nine months ended September 30, 2002 2001 ---- ---- Reported income (loss) before cumulative effect of change in accounting principle $2,751 $(12,508) Cumulative effect of change in accounting principle (25,327) - -------- ------- Reported net income (loss) $(22,576) $(12,508) Add back: goodwill amortization - 3,357 -------- ------- Adjusted net income (loss) $(22,576) $(9,151) ======== ======= Basic net income (loss) per share: Reported income (loss) before cumulative effect of change in accounting principle $ 0.17 $(0.76) Cumulative effect of change in accounting principle (1.58) - ------ ------ Reported net income (loss) $(1.41) $(0.76) Goodwill amortization - 0.20 ------ ------ Adjusted net income (loss) $(1.41) $(0.56) ====== ====== Diluted net income (loss) per share: Reported income (loss) before cumulative effect of change in accounting principle $0.17 $(0.76) Cumulative effect of change in accounting principle (1.57) - ------ ------ Reported net income (loss) $(1.40) $(0.76) Goodwill amortization - 0.20 ------ ------ Adjusted net income (loss) $(1.40) $(0.56) ====== ====== Weighted average shares outstanding Basic 15,992 16,457 Diluted 16,100 16,457
The Company has no other intangible assets other than the goodwill discussed above. 8. Information Concerning Business Segments The Company has determined it has two reportable segments: aluminum and electrical products. The aluminum segment manufactures aluminum sheet for distributors and the transportation, construction, and consumer durables end-use markets. The electrical products segment manufactures flexible electrical wiring products for the commercial construction and do-it-yourself markets. The accounting policies of the reportable segments are the same as those described in Note 1, "Basis of Presentation and Summary of Significant Accounting Policies" in the Company's annual report to stockholders for the year ended December 31, 2001. All intersegment sales prices are market based. The Company evaluates the performance of its operating segments based upon operating income. The Company's reportable segments are strategic businesses that offer different products to different customer groups. They are managed separately because each business requires different technology and marketing strategies. Summarized financial information concerning the Company's reportable segments is shown in the following table for the three months and nine months ended September 30, 2002 and 2001 (in thousands). The "Other" column includes corporate related items, including elimination of intersegment transactions, and as it relates to segment operating income, income and expense not allocated to reportable segments. Total assets at September 30, 2002 include the effects of the $167.3 million non-cash asset impairment charges recorded in the fourth quarter of 2001 and the $25.3 million non-cash goodwill impairment charges ($13.5 million relating to the aluminum products segment and $11.8 million relating to the electrical products segment) recorded as a cumulative effect of a change in accounting principle as of January 1, 2002 during the second quarter of 2002. The $167.3 million non-cash asset impairment charges were all related to the aluminum products segment and composed of $85.4 million of property, plant and equipment write-downs ($1.8 million of net land and improvements, $15.7 million of net building improvements, $59.0 million of net machinery and equipment and $8.9 million of construction in progress) and $81.9 million of goodwill write-downs. See note 2 in the Company's annual report to stockholders for the year ended December 31, 2001 for additional information on the asset impairment charges and note 7 in this report for additional information on the goodwill impairment charges.
Electrical Aluminum Products Other Total -------- ---------- --------- ---------- Three months ended September 30, 2002 - ------------------------------------- Net sales to external customers $224,124 $29,809 $ -- $253,933 Intersegment net sales 7,522 -- (7,522) -- Operating income (loss) 10,840 1,137 (5,139) 6,838 Depreciation and amortization 4,950 571 -- 5,521 Total assets 324,589 93,236 1,742 419,567 Capital expenditures 6,884 11 -- 6,895 Three months ended September 30, 2001 - ------------------------------------- Net sales to external customers $220,028 $29,886 $ -- $249,914 Intersegment net sales 5,443 -- (5,443) -- Operating income (loss) 4,335 1,680 (3,912) 2,103 Depreciation and amortization 8,632 977 -- 9,609 Total assets 540,007 102,998 2,291 645,296 Capital expenditures 3,042 14 -- 3,056 Nine months ended September 30, 2002 - ------------------------------------ Net sales to external customers $641,081 $86,438 $ -- $727,519 Intersegment net sales 21,650 -- (21,650) -- Operating income (loss) 18,759 5,069 (13,021) 10,807 Depreciation and amortization 14,990 1,712 -- 16,702 Total assets 324,589 93,236 1,742 419,567 Capital expenditures 9,835 254 -- 10,089 Nine months ended September 30, 2001 - ------------------------------------ Net sales to external customers $623,252 $92,358 $ -- $715,610 Intersegment net sales 19,876 -- (19,876) -- Operating income (loss) 6,062 4,343 (11,196) (791) Depreciation and amortization 26,012 2,931 7 28,950 Total assets 540,007 102,998 2,291 645,296 Capital expenditures 7,017 200 -- 7,217
9. Guarantor Financial Statements The $125 million of 10.75% senior subordinated notes due 2006 issued by the Company, and the $30 million revolving credit facility are guaranteed by the Company's wholly-owned subsidiaries (collectively the "Subsidiary Guarantors"), other than Commonwealth Financing Corp. ("CFC"), a Securitization Subsidiary (as defined in the Indenture with respect to such debt) and certain subsidiaries of the Company without substantial assets or operations. Such guarantees are full, unconditional and joint and several. Separate financial statements of the Subsidiary Guarantors are not presented because management has determined that they would not be material to investors. The following supplemental financial information sets forth on a condensed combined basis for the Parent Company Only, Subsidiary Guarantors, Non-guarantor Subsidiaries and for the Company, a combining balance sheet as of September 30, 2002 and December 31, 2001, statement of operations for the three months and nine months ended September 30, 2002 and 2001 and statement of cash flows for the nine months ended September 30, 2002 and 2001. Combining Balance Sheet at September 30, 2002 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- ----------- ----------- ------------ -------- Assets Current assets: Cash and cash equivalents $ -- $ -- $ -- $ -- $ -- Accounts receivable, net -- 299,349 -- (299,212) 137 Inventories -- 116,369 -- -- 116,369 Net residual interest in receivables sold -- -- 100,185 -- 100,185 Prepayments and other current assets 435 3,601 -- -- 4,036 --------- --------- --------- --------- --------- Total current assets 435 419,319 100,185 (299,212) 220,727 Property, plant and equipment, net -- 146,067 -- -- 146,067 Goodwill, net -- 48,872 -- -- 48,872 Other noncurrent assets 409,862 2,594 -- (408,555) 3,901 --------- --------- --------- --------- --------- Total assets $ 410,297 $ 616,852 $ 100,185 $(707,767) $ 419,567 ========= ========= ========= ========= ========= Liabilities Current liabilities: Outstanding checks in excess of deposits $ -- $ 351 $ -- $ -- $ 351 Accounts payable 156,156 54,264 143,056 (299,212) 54,264 Accrued liabilities 6,875 30,446 (757) -- 36,564 --------- --------- --------- --------- --------- Total current liabilities 163,031 85,061 142,299 (299,212) 91,179 Long-term debt 125,000 -- -- -- 125,000 Other long-term liabilities -- 5,511 -- -- 5,511 Accrued pension benefits -- 3,529 -- -- 3,529 Accrued postretirement benefits -- 77,121 -- -- 77,121 --------- --------- --------- --------- --------- Total liabilities 288,031 171,222 142,299 (299,212) 302,340 --------- --------- --------- --------- --------- Commitments and contingencies -- -- -- -- -- Stockholders' Equity Common stock 160 1 -- (1) 160 Additional paid-in capital 405,613 486,727 5,000 (491,727) 405,613 Accumulated deficit (283,507) (36,059) (47,114) 83,173 (283,507) Accumulated other comprehensive income: Effects of cash flow hedges -- (5,039) -- -- (5,039) --------- --------- --------- --------- --------- Total stockholders' equity 122,266 445,630 (42,114) (408,555) 117,227 --------- --------- --------- --------- --------- Total liabilities and stockholders' equity $ 410,297 $ 616,852 $ 100,185 $(707,767) $ 419,567 ========= ========= ========= ========= =========
Combining Balance Sheet at December 31, 2001 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- ----------- ----------- ------------ -------- Assets Current assets: Cash and cash equivalents $ -- $ 6,393 $ -- $ -- $ 6,393 Accounts receivable, net -- 271,074 -- (270,993) 81 Inventories -- 119,038 -- -- 119,038 Net residual interest in receivables sold -- -- 82,310 -- 82,310 Prepayments and other current assets 435 2,795 -- -- 3,230 --------- --------- --------- --------- --------- Total current assets 435 399,300 82,310 (270,993) 211,052 Property, plant and equipment, net -- 152,137 -- -- 152,137 Goodwill, net -- 74,199 -- -- 74,199 Other noncurrent assets 424,830 611 -- (423,197) 2,244 --------- --------- --------- --------- --------- Total assets $ 425,265 $ 626,247 $ 82,310 $(694,190) $ 439,632 ========= ========= ========= ========= ========= Liabilities Current liabilities: Accounts payable $ 148,971 $ 50,693 $ 122,022 $(270,993) $ 50,693 Accrued liabilities 5,784 33,997 (905) -- 38,876 --------- --------- --------- --------- --------- Total current liabilities 154,755 84,690 121,117 (270,993) 89,569 Long-term debt 125,000 -- -- -- 125,000 Other long-term liabilities -- 6,899 -- -- 6,899 Accrued pension benefits -- 4,576 -- -- 4,576 Accrued postretirement benefits -- 79,422 -- -- 79,422 --------- --------- --------- --------- --------- Total liabilities 279,755 175,587 121,117 (270,993) 305,466 --------- --------- --------- --------- --------- Commitments and contingencies -- -- -- -- -- Stockholders' Equity Common stock 160 1 -- (1) 160 Additional paid-in capital 405,443 486,727 5,000 (491,727) 405,443 Accumulated deficit (258,532) (24,724) (43,807) 68,531 (258,532) Notes receivable from sale of common stock (1,561) -- -- -- (1,561) Accumulated other comprehensive income: Effects of cash flow hedges -- (11,344) -- -- (11,344) --------- --------- --------- --------- --------- Total stockholders' equity 145,510 450,660 (38,807) (423,197) 134,166 --------- --------- --------- --------- --------- Total liabilities and stockholders' equity $ 425,265 $ 626,247 $ 82,310 $(694,190) $ 439,632 ========= ========= ========= ========= =========
Combining Statement of Income for the three months ended September 30, 2002 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- --------- --------- --------- --------- Net sales $ -- $ 253,933 $ -- $ -- $ 253,933 Cost of goods sold -- 234,571 -- -- 234,571 --------- --------- --------- --------- --------- Gross profit -- 19,362 -- -- 19,362 Selling, general and administrative expenses 51 12,473 -- -- 12,524 Amortization of goodwill -- -- -- -- -- --------- --------- --------- --------- --------- Operating income (loss) (51) 6,889 -- -- 6,838 Other income (expense), net 6,904 332 -- (6,904) 332 Interest income (expense), net (3,469) 807 (1,042) -- (3,704) --------- --------- --------- --------- --------- Income (loss) before income taxes and cumulative effect of change in accounting principle 3,384 8,028 (1,042) (6,904) 3,466 Income tax expense (benefit) (2,692) 82 -- -- (2,610) --------- --------- --------- --------- --------- Income (loss) before cumulative effect of change in accounting principle 6,076 7,946 (1,042) (6,904) 6,076 Cumulative effect of change in accounting principle -- -- -- -- -- --------- --------- --------- --------- --------- Net income (loss) $ 6,076 $ 7,946 $ (1,042) $ (6,904) $ 6,076 ========= ========= ========= ========= =========
Combining Statement of Income for the three months ended September 30, 2001 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- --------- --------- --------- --------- Net sales $ -- $ 249,914 $ -- $ -- $ 249,914 Cost of goods sold -- 235,366 -- -- 235,366 --------- --------- --------- --------- --------- Gross profit -- 14,548 -- -- 14,548 Selling, general and administrative expenses 49 11,277 -- -- 11,326 Amortization of goodwill -- 1,119 -- -- 1,119 --------- --------- --------- --------- --------- Operating income (loss) (49) 2,152 -- -- 2,103 Other income (expense), net 1,863 289 -- (1,863) 289 Interest income (expense), net (3,367) 1,214 (1,592) -- (3,745) --------- --------- --------- --------- --------- Income (loss) before income taxes and cumulative effect of change in accounting principle (1,553) 3,655 (1,592) (1,863) (1,353) Income tax expense -- 200 -- -- 200 --------- --------- --------- --------- --------- Income (loss) before cumulative effect of change in accounting principle (1,553) 3,455 (1,592) (1,863) (1,553) Cumulative effect of change in accounting principle -- -- -- -- -- --------- --------- --------- --------- --------- Net income (loss) $ (1,553) $ 3,455 $ (1,592) $ (1,863) $ (1,553) ========= ========= ========= ========= =========
Combining Statement of Income for the nine months ended September 30, 2002 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- --------- --------- --------- --------- Net sales $ -- $ 727,519 $ -- $ -- $ 727,519 Cost of goods sold -- 681,933 -- -- 681,933 --------- --------- --------- --------- --------- Gross profit -- 45,586 -- -- 45,586 Selling, general and administrative expenses 224 34,555 -- -- 34,779 Amortization of goodwill -- -- -- -- -- --------- --------- --------- --------- --------- Operating income (loss) (224) 11,031 -- -- 10,807 Other income (expense), net 10,685 818 -- (10,685) 818 Interest income (expense), net (10,402) 2,303 (3,307) -- (11,406) --------- --------- --------- --------- --------- Income (loss) before income taxes and cumulative effect of change in accounting principle 59 14,152 (3,307) (10,685) 219 Income tax expense (benefit) (2,692) 160 -- -- (2,532) --------- --------- --------- --------- --------- Income (loss) before cumulative effect of change in accounting principle 2,751 13,992 (3,307) (10,685) 2,751 Cumulative effect of change in accounting principle (25,327) (25,327) -- 25,327 (25,327) --------- --------- --------- --------- --------- Net income (loss) $ (22,576) $ (11,335) $ (3,307) $ 14,642 $ (22,576) ========= ========= ========= ========= =========
Combining Statement of Income for the nine months ended September 30, 2001 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- --------- --------- --------- --------- Net sales $ -- $ 715,610 $ -- $ -- $ 715,610 Cost of goods sold -- 678,890 -- -- 678,890 --------- --------- --------- --------- --------- Gross profit -- 36,720 -- -- 36,720 Selling, general and administrative expenses 225 33,929 -- -- 34,154 Amortization of goodwill -- 3,357 -- -- 3,357 --------- --------- --------- --------- --------- Operating income (loss) (225) (566) -- -- (791) Other income (expense), net (2,227) 647 -- 2,227 647 Interest income (expense), net (10,056) 3,881 (5,589) -- (11,764) --------- --------- --------- --------- --------- Income (loss) before income taxes and cumulative effect of change in accounting principle (12,508) 3,962 (5,589) 2,227 (11,908) Income tax expense -- 600 -- -- 600 --------- --------- --------- --------- --------- Income (loss) before cumulative effect of change in accounting principle (12,508) 3,362 (5,589) 2,227 (12,508) Cumulative effect of change in accounting principle -- -- -- -- -- --------- --------- --------- --------- --------- Net income (loss) $ (12,508) $ 3,362 $ (5,589) $ 2,227 $ (12,508) ========= ========= ========= ========= =========
Combining Statement of Cash Flows for the nine months ended September 30, 2002 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- ---------- ---------- --------- ---------- Cash flows from operating activities: Net income (loss) $(22,576) $(11,335) $ (3,307) $ 14,642 $(22,576) Adjustments to reconcile net income (loss) to net cash provided by operations: Depreciation -- 15,940 -- -- 15,940 Amortization -- 762 -- -- 762 Goodwill impairment charge 25,327 25,327 -- (25,327) 25,327 Loss on disposal of property, plant and equipment -- 196 -- -- 196 Issuance of common stock in connection with stock awards 170 -- -- -- 170 Equity in undistributed net income of subsidiaries (10,685) -- -- 10,685 -- Changes in assets and liabilities: (Increase) decrease in accounts receivable, net -- (28,275) -- 28,219 (56) Decrease in inventories -- 2,669 -- -- 2,669 (Increase) in net residual interest in receivables sold -- -- (17,875) -- (17,875) (Increase) in prepayments and other current assets -- (806) -- -- (806) Decrease (increase) in other noncurrent assets 326 (2,745) -- -- (2,419) Increase (decrease) in accounts payable 7,185 3,571 21,034 (28,219) 3,571 Increase in accrued liabilities 1,091 2,754 148 -- 3,993 (Decrease) in other liabilities -- (4,736) -- -- (4,736) -------- -------- -------- -------- -------- Net cash provided by operating activities 838 3,322 -- -- 4,160 -------- -------- -------- -------- -------- Cash flows from investing activities: Purchases of property, plant and equipment -- (10,089) -- -- (10,089) Proceeds from sale of property, plant and equipment -- 23 -- -- 23 -------- -------- -------- -------- -------- Net cash (used in) investing activities -- (10,066) -- -- (10,066) -------- -------- -------- -------- -------- Cash flows from financing activities: Increase in outstanding checks in excess of deposits -- 351 -- -- 351 Proceeds from long-term debt -- 55,700 -- -- 55,700 Repayments of long-term debt -- (55,700) -- -- (55,700) Repayments of notes receivable from sale of common stock 1,561 -- -- -- 1,561 Cash dividends paid (2,399) -- -- -- (2,399) -------- -------- -------- -------- -------- Net cash (used in) provided by financing activities (838) 351 -- -- (487) -------- -------- -------- -------- -------- Net (decrease) in cash and cash equivalents -- (6,393) -- -- (6,393) Cash and cash equivalents at beginning of period -- 6,393 -- -- 6,393 -------- -------- -------- -------- -------- Cash and cash equivalents at end of period $ -- $ -- $ -- $ -- $ -- ======== ======== ======== ======== ========
Combining Statement of Cash Flows for the nine months ended September 30, 2001 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- ---------- ---------- --------- ---------- Cash flows from operating activities: Net income (loss) $(12,508) $ 3,362 $ (5,589) $ 2,227 $(12,508) Adjustments to reconcile net income (loss) to net cash provided by (used in) operations: Depreciation -- 24,645 -- -- 24,645 Amortization 7 4,298 -- -- 4,305 Loss on disposal of property, plant and equipment -- 359 -- -- 359 Issuance of common stock in connection with stock awards 106 -- -- -- 106 Equity in undistributed net income of subsidiaries 2,227 -- -- (2,227) -- Changes in assets and liabilities: (Increase) decrease in accounts receivable, net -- (67,884) -- 67,136 (748) Decrease in inventories -- 23,724 -- -- 23,724 (Increase) in net residual interest in receivables sold -- -- (54,492) -- (54,492) Decrease in prepayments and other current assets 248 8,068 -- -- 8,316 Decrease (increase) in other noncurrent assets 326 (771) -- -- (445) Increase (decrease) in accounts payable 6,766 7,550 60,370 (67,136) 7,550 Increase (decrease) in accrued liabilities 3,684 (9,062) (289) -- (5,667) (Decrease) in other liabilities -- (5,618) -- -- (5,618) -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities 856 (11,329) -- -- (10,473) -------- -------- -------- -------- -------- Cash flows from investing activities: Purchases of property, plant and equipment -- (7,217) -- -- (7,217) Proceeds from sale of property, plant and equipment -- 90 -- -- 90 -------- -------- -------- -------- -------- Net cash (used in) investing activities -- (7,127) -- -- (7,127) -------- -------- -------- -------- -------- Cash flows from financing activities: Increase in outstanding checks in excess of deposits -- 6,942 -- -- 6,942 Proceeds from long-term debt -- 48,060 -- -- 48,060 Repayments of long-term debt -- (48,060) -- -- (48,060) Repayments of notes receivable from sale of common stock 1,613 -- -- -- 1,613 Cash dividends paid (2,469) -- -- -- (2,469) -------- -------- -------- -------- -------- Net cash (used in) provided by financing activities (856) 6,942 -- -- 6,086 -------- -------- -------- -------- -------- Net (decrease) in cash and cash equivalents -- (11,514) -- -- (11,514) Cash and cash equivalents at beginning of period -- 11,514 -- -- 11,514 -------- -------- -------- -------- -------- Cash and cash equivalents at end of period $ -- $ -- $ -- $ -- $ -- ======== ======== ======== ======== ========
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section should be read in conjunction with the condensed consolidated financial statements and notes thereto included in item 1 of this report in addition to the consolidated financial statements of the Company and the notes thereto included in the Company's annual report to stockholders for the year ended December 31, 2001, including footnote 1 which describes the Company's significant accounting policies including its use of estimates. See the caption entitled "Application of Critical Accounting Policies" in this section for further information. The following discussion contains statements which are forward-looking rather than historical fact. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Legislation Reform Act of 1995 and involve risks and uncertainties that could render them materially different, including, but not limited to, the effect of global economic conditions, the ability to achieve the level of cost savings or productivity improvements anticipated by management, the effect (including possible increases in the cost of doing business) resulting from war and terrorist activities or political uncertainties, the impact of competitive products and pricing, product development and commercialization, availability and cost of critical raw materials, capacity and supply constraints or difficulties, the success of the Company in implementing its business strategy, and other risks as detailed in the Company's various Securities and Exchange Commission filings. Overview The Company manufactures non-heat treat coiled aluminum sheet for distributors and the transportation, construction and consumer durables end use markets and electrical flexible conduit and prewired armored cable for the commercial construction and renovation markets. The Company's principal raw materials are aluminum scrap, primary aluminum, copper and steel. Trends in the demand for aluminum sheet products in the United States and in the prices of aluminum primary metal, aluminum scrap and copper commodities affect the business of the Company. The Company's operating results also are affected by factors specific to the Company, such as the margins between selling prices for its products and its cost of raw material ("material margins") and its unit cost of converting raw material into its products ("conversion cost"). While changes in aluminum and copper prices can cause the Company's net sales to change significantly from period to period, net income is more directly impacted by the fluctuation in material margins. During the first nine months of 2002, shipments of the Company's aluminum sheet products increased by 12% from the first nine months of 2001. This is the third consecutive quarter of higher year-over-year shipment volume following a downturn that began in the second quarter of 2000 and extended throughout 2001. The positive impact of this increased volume, combined with lower depreciation and amortization charges, more than offset the impact of lower material margins in the first nine months of 2002 versus the first nine months of 2001 and helped to increase profitability of the aluminum business unit for both the third quarter and first nine months of 2002 compared to the same periods in 2001. Material margins which had been declining somewhat in the first six months of 2002, increased in the third quarter of 2002 compared to the third quarter of 2001 and the first and second quarters of 2002 due to firmer pricing for aluminum prices coupled with lower metal costs and better scrap availability. Demand for the Company's electrical products decreased during the first nine months of 2002. Shipments were down 5% compared to the first nine months of 2001 as business conditions remained competitive and commercial construction activity declined, however shipments were up 3% in the third quarter of 2002 compared to the third quarter of 2001 which was the first such increase in two years. Material margins for the first nine months of 2002 increased 3% from the first nine months of 2001, but decreased 8% in the third quarter of 2002 from the second quarter of 2002. The reduction in material costs per foot in the first nine months of 2002 compared to the first nine months of 2001 more than offset the lower net selling prices and contributed to the material margin improvement in the first nine months of 2002 versus the first nine months of 2001. The Company's electrical products business continued to report operating profits which were increased over the first nine months of 2001 principally due to a decrease in selling, general and administrative expenses and the elimination of goodwill amortization expense in 2002. However, in the third quarter of 2002 operating profits were down compared to the third quarter of 2001 primarily due to a third quarter 2002 adjustment of employee healthcare costs as well as a decrease in the composite selling price. During the second quarter of 2002, the Company completed its previously announced transitional test of goodwill as called for under Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). Pursuant to this test, the Company recorded a charge of $25.3 million or $1.58 per diluted share (before and after tax), as a cumulative effect of a change in accounting principle, to reflect the impairment of goodwill on the balance sheet as of January 1, 2002. The Company's restated net loss for the first quarter of 2002, giving effect to the change in accounting principle, was $29.8 million or $1.86 per diluted share. See the caption entitled "Cumulative effect of change in accounting principle" in the following section and note 7 to the condensed consolidated financial statements for additional information. Application of Critical Accounting Policies The Company's discussion and analysis of financial condition and results of operation is based upon the Company's condensed consolidated financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company's most critical accounting policies require the use of estimates relating to the valuation of property, plant and equipment and goodwill, assumptions for computing pension and postretirement benefits obligations, allowance for uncollectible accounts receivable and environmental liabilities. Results of Operations for the three months and nine months ended September 30, 2002 and 2001 Net Sales. Net sales for the quarter ended September 30, 2002, increased 2% to $254 million (including $29.8 million from Alflex) from $250 million (including $29.9 million from Alflex) for the same period in 2001. The increase is due to an increase in aluminum shipments which more than offset a decrease in the net selling prices. Unit sales volume of aluminum increased 5% to 232.8 million pounds for the third quarter of 2002 from 221.4 million pounds for the third quarter of 2001. Alflex unit sales volume was 130.3 million feet for the third quarter of 2002, an increase of 3% versus 126.9 million feet for the comparable period in 2001. Net sales for the nine-month period ended September 30, 2002, were $728 million (including $86.4 million from Alflex), a 2% increase from the $716 million recorded in the first nine months of 2001 (including $92.4 million from Alflex). The increase is due to the increased shipments resulting from increased demand for aluminum products across all of the Company's aluminum products' markets. Unit sales volume of aluminum was 680.2 million pounds for the first nine months of 2002, an increase of 12% from the 609.0 million pounds for the first nine months of 2001. Alflex unit sales volume was 374.8 million feet for the first nine months of 2002, a decrease of 5%, versus 393.4 million feet for the comparable period in 2001. Gross Profit. Gross profit for the quarter ended September 30, 2002, increased to $19.4 million (7.6% of net sales) from $14.5 million (5.8% of net sales) for the same period in 2001. Gross profit for the nine months ended September 30, 2002 was $45.6 million (6.3% of net sales) versus $36.7 million (5.1% of net sales) for the comparable period in 2001. The third quarter and nine-month increases were related entirely to the aluminum business unit and due primarily to increased volumes and greater manufacturing efficiencies, improving material margins in the third quarter, lower natural gas rates, lower outside processing costs plus lower depreciation expense as a result of asset impairment charges recorded in the fourth quarter of 2001. All the above factors more than offset the lower material margins experienced during the first half of 2002 which were due to the tighter scrap spreads for the six months of 2002 versus the same period in 2001. These scrap spreads widened during the third quarter of 2002 as scrap availability increased and coupled with lower primary metal costs and firmer pricing for aluminum products translated into higher material margins in the third quarter of 2002 versus the third quarter of 2001 and the first two quarters of 2002. Alflex's gross profit for the first nine months of 2002 versus the first nine months of 2001 was down as decreased net sales revenue resulting from decreased shipments and lower selling prices offset the improved material margins. Operating Income. The Company had operating income of $6.8 million for the third quarter of 2002 compared with operating income of $2.1 million for the third quarter of 2001. For the nine-month period ended September 30, 2002, the Company had operating income of $10.8 million, versus an operating loss of $0.8 million for the first nine months of 2001. The increase in operating income was related primarily to the Aluminum business unit which had operating income of $10.8 million and $18.8 million in the third quarter and first nine months of 2002, respectively, compared to operating income of $4.3 million and $6.1 million in the third quarter and first nine months of 2001, respectively. The increases were primarily due to the factors described in the gross profit section in the preceding paragraph and the elimination of goodwill amortization in 2002 which more than offset an increase in selling, general and administrative expenses. Depreciation and amortization was $4.1 million lower in the third quarter of 2002 versus the third quarter of 2001 and $12.2 million lower in the first nine months of 2002 compared to the first nine months of 2001. Selling, general and administrative expenses during the third quarter of 2002 were $12.5 million, compared with $11.3 million for the same period in 2001 and were $34.8 million for the nine months ended September 30, 2002, compared with $34.2 million for the same period in 2001. The increase in selling, general and administrative expenses is primarily due to increased professional service costs associated with the Company's information system redesign and accruals for employee incentive plans which more than offset lower depreciation as a result of asset impairment charges recorded in the fourth quarter of 2001 on assets which the depreciation expense is classified in selling, general and administrative expenses. Cumulative effect of change in accounting principle. A non-cash goodwill impairment charge of $25.3 million was recorded as a cumulative effect of change in accounting principle as of January 1, 2002 under SFAS No.142. See note 7 to the condensed consolidated financial statements for additional information. Net Income. The Company had net income of $6.1 million for the quarter ended September 30, 2002, compared with a net loss of $1.6 million for the same period in 2001. The Company's net loss for the nine months ended September 30, 2002 was $22.6 million compared with a net loss of $12.5 million for the first nine months of 2001. Interest expense was $3.7 million for both the third quarter of 2002 and the third quarter of 2001 and $11.4 million for the nine months ended September 30, 2002, compared with $11.8 million for the first nine months of 2001. The decrease in the nine months amount was primarily due to lower interest rates under the Company's receivables purchase agreement combined with a reduction in amounts outstanding under the agreement which more than offset a reduction in investment interest income. The Company had an income tax benefit of $2.6 million in the third quarter of 2002 compared to income tax expense of $0.2 million for the same period in 2001 and an income tax benefit of $2.5 million for the nine months ended September 30, 2002, compared to income tax expense of $0.6 million for the same period in 2001. The decrease in income tax expense was due to a $2.7 million adjustment recorded in the third quarter of 2002 to reduce prior years' income tax accruals. Liquidity and Capital Resources The Company's sources of liquidity are cash flows from operations, the Company's receivables purchase agreement described below and borrowings under its $30 million revolving credit facility. The Company believes these sources will be sufficient to fund its working capital requirements, capital expenditures, debt service and dividend payments at least through 2003. During 1997, the Company sold all of its trade accounts receivables to a 100% owned subsidiary, Commonwealth Financing Corp. ("CFC"). Simultaneously, CFC entered into a three-year receivables purchase agreement with a financial institution and its affiliate, whereby CFC sells, on a revolving basis, an undivided interest in certain of its receivables and receives up to $150.0 million from an unrelated third party purchaser at a cost of funds linked to commercial paper rates plus a charge for administrative and credit support services. During 2000, the Company and the financial institution extended the receivables purchase agreement for an additional three-year period ending in September 2003 and in October 2002, extended the agreement for an additional year ending in September 2004. In addition during September 2001, the Company and the financial institution agreed to reduce the size of the facility to $95.0 million. At September 30, 2002 and 2001, the Company had outstanding under the agreement $20.0 million and $17.5 million, respectively, and had $100.2 million and $126.9 million, respectively, of net residual interest in receivables sold. The fair value of the net residual interest is measured at the time of the sale and is based on the sale of similar assets. In the first nine months of 2002 and 2001, the Company received gross proceeds of $37.0 million and $30.0 million, respectively, from the sale of receivables and made gross payments of $37.0 million and $81.5 million, respectively, under the agreement. The Company's operations provided cash flows of $4.2 million for the nine months ended September 30, 2002 compared to using $10.5 million in the nine months ended September 30, 2001. Working capital increased to $129.5 million at September 30, 2002 from $123.5 million at September 30, 2001. Capital expenditures were $6.9 million during the quarter ended September 30, 2002 and $10.1 million for the nine months ended September 30, 2002. At September 30, 2002, the Company had commitments of $16.0 million for the purchase or construction of capital assets. Total capital expenditures for the year 2002 are expected to be approximately $18.9 million, all generally related to upgrading and expanding the Company's manufacturing and other facilities, acquiring and enhancing software and hardware as part of the Company's information system redesign project and meeting environmental requirements. The indicated annual rate of dividends being paid on the Company's Common Stock is $0.20 per share, or an annual total of approximately $3.2 million. The following schedules summarize the Company's contractual cash obligations and unused availability of financing sources at September 30, 2002 (in thousands).
Payments Due By Period ------------------------------------------------------------ Contractual Cash Obligations Total Less than 1 year 1-3 years 4-5 years After 5 years - ------------------------------------------------------------------------------------------------------------ Long-term debt $125,000 $ -- $ -- $125,000 $ -- Operating leases 13,158 3,517 4,460 1,783 3,398 Standby letters of credit 2,839 2,839 -- -- -- Outstanding obligation under Receivables purchase Agreement 20,000 20,000 -- -- ---------------------------------------------------------------------- Total contractual cash obligations $160,997 $26,356 $4,460 $126,783 $3,398 ====================================================================== Amount of Availability Per Period Unused Availability of Total Amounts ------------------------------------------------------------ Financing Sources Available Less than 1 year 1-3 years 4-5 years Over 5 years - ------------------------------------------------------------------------------------------------------------ Unused revolving credit Facility $ 27,161 $ -- $27,161 $ -- $ -- Unused availability under Receivables purchase agreement 75,000 -- 75,000 -- -- ---------------------------------------------------------------------- Total available $102,161 $ -- $102,161 $ -- $ -- ======================================================================
The Company has approximately 8 1/4 years remaining on a 10-year guaranteed supply agreement with Glencore Ltd. ("Glencore"), a leading diversified trading and industrial company, for the purchase of primary aluminum. Under the agreement, the Company committed to purchase a minimum of 1.2 billion pounds of P1020/99.7% aluminum at current market prices from Glencore over the 10-year term beginning in January 2001. At September 30, 2002, the Company held firm-priced aluminum purchase and sales commitments through April 2004 totaling $8 million and $167 million, respectively. The Company hedges the impact of changes in prices related to these commitments as explained in the section entitled "Risk Management" which follows. Risk Management The price of aluminum is subject to fluctuations due to unpredictable factors on the worldwide market. To reduce this market risk, the Company follows a policy of hedging its anticipated raw material purchases based on firm-priced sales and purchase orders by purchasing and selling futures contracts, forward contracts and options on the London Metal Exchange ("LME"). The Company also uses forward contracts and options to reduce its risks associated with its natural gas requirements. As described in note 6 to the condensed consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") effective January 1, 2001 and has designated virtually all of its aluminum and natural gas futures contracts and forward contracts as cash flow hedges. Gains and losses on these instruments that are deferred in other comprehensive income are reclassified into net income as cost of goods sold in the periods when the hedged transactions occur. As of September 30, 2002, approximately $4.9 million of the $5.0 million of deferred net losses are expected to be reclassified from other comprehensive income into net income as cost of goods sold over the next twelve months. A net loss of $0.05 million and $0.16 million was recognized in cost of goods sold during the three months and nine months ended September 30, 2002, respectively, and a net loss of $0.13 million and $0.16 million was recognized in cost of goods sold during the three months and nine months ended September 30, 2001, respectively, representing the amount of the hedges' ineffectiveness. As of September 30, 2002, the Company held open aluminum and natural gas futures and forward contracts having maturity dates extending through March 2004. Before entering into futures contracts, forward contracts and options, the Company reviews the credit rating of the counterparty and assesses any possible credit risk. While the Company is exposed to certain losses in the event of non-performance by the counterparties to these agreements, the Company does not anticipate non-performance by such counterparties. In order to hedge a portion of its interest rate risk, the Company was a party to an interest rate swap agreement with a notional amount of $5 million under which the Company paid a fixed rate of interest and received a LIBOR-based floating rate. The interest rate swap agreement expired during September 2001 and as of September 30, 2002 the Company had no interest rate swap agreements in effect. The Company's interest rate swap agreement which expired during September 2001 did not qualify for hedge accounting under SFAS 133 and as such the change in the fair value of the interest rate swap agreement had been recognized currently as interest expense, net in the Company's consolidated statement of operations. The amount of such change in the fair value of the interest rate swap agreement was immaterial for the three months and nine months ended September 30, 2001. Recently Issued Accounting Pronouncements In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143"). The Statement addresses financial and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. Management does not expect the adoption of this Statement to have a material impact on the Company's results of operations or financial position. In October 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144"). The Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes SFAS No. 121, and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a "segment of a business" (as previously defined in that Opinion). This Statement also amends Accounting Research Bulletin No. 51, "Consolidated Financial Statements", to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The objectives of SFAS No. 144 are to address significant issues relating to the implementation of SFAS No. 121 and to develop a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. The Company adopted SFAS No. 144 in the first quarter of 2002, as required. The Statement's initial adoption did not have a material impact on the Company's results of operations or financial position. In June 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"(" SFAS No. 146"). The Statement nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity," under which a liability for an exit cost was recognized at the date of an entity's commitment to an exit plan. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized at fair value when the liability is incurred. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002. Item 4. Controls and Procedures The Company's certifying officers have concluded based on their evaluation of the Company's disclosure controls and procedures that the disclosure controls and procedures are effective in ensuring that material information relating to the Company, including its consolidated subsidiaries, is made known to the certifying officers by others within those entities, particularly during the period in which this Form 10-Q was being prepared and that both non-financial and financial information required to be disclosed by the Company in its periodic reports is recorded, processed, summarized and reported in a timely fashion. The evaluation was conducted within 90 days of the filing date of this Form 10-Q. In addition, there were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation. PART II OTHER INFORMATION Item 1. Legal Proceedings The Company is a party to non-environmental legal proceedings and administrative actions all of which are of an ordinary routine nature incidental to the operations of the Company. Although it is impossible to predict the outcome of any legal proceeding, in the opinion of management such proceedings and actions should not, individually or in aggregate, have a material adverse effect on the Company's financial condition, results of operations or cash flows, although resolution in any year or quarter could be material to the results of operation for that period. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits There were no exhibits (b) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ended September 30, 2002. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMMONWEALTH INDUSTRIES, INC. By: /s/ Donald L. Marsh, Jr. ------------------------ Donald L. Marsh, Jr. Executive Vice President and Chief Financial Officer Date: November 12, 2002 CERTIFICATIONS I, Mark V. Kaminski, certify that: 1. I have reviewed this quarterly report on form 10-Q of Commonwealth Industries, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ Mark V. Kaminski -------------------- Mark V. Kaminski President and Chief Executive Officer CERTIFICATIONS (continued) I, Donald L. Marsh, Jr., certify that: 1. I have reviewed this quarterly report on form 10-Q of Commonwealth Industries, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ Donald L. Marsh, Jr. ------------------------- Donald L. Marsh, Jr. Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----