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Proc-Type: 2001,MIC-CLEAR
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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 year ended March 31, 2001 OR
[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________________to_________________
Commission file number 0-15899 |
WELLMAN, INC. (Exact name of registrant as specified in its charter) |
|
Delaware State or other jurisdiction of incorporation or organization) |
04-1671740 (I.R.S. Employer Identification No.) |
595 Shrewsbury Avenue Shrewsbury, New Jersey |
07702 |
(Address of principal executive offices) |
(Zip Code) |
Registrant 's telephone number, including area code: (732) 212-3300
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-------
As of May 7, 2001, there were 31,781,879 shares of the registrant 's Class A common stock, $.001 par value, outstanding and no shares of Class B common stock outstanding.
WELLMAN, INC. |
INDEX |
Page No. |
PART I - FINANCIAL INFORMATION |
|
ITEM 1 - Financial Statements |
Condensed Consolidated Statements of Income - For the three months ended March 31, 2001 and 2000 |
3 |
Condensed Consolidated Balance Sheets - March 31, 2001 and December 31, 2000 |
4 |
Condensed Consolidated Statements of Stockholders ' Equity - For the three months ended March 31, 2001 and the year ended December 31, 2000 |
5 |
Condensed Consolidated Statements of Cash Flows - For the three months ended March 31, 2001 and 2000 |
6 |
Notes to Condensed Consolidated Financial Statements |
7 |
|
ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations |
13 |
PART II - OTHER INFORMATION |
|
ITEM 6 - Exhibits and Reports on Form 8-K |
18 |
SIGNATURES |
19 |
WELLMAN, INC. |
CONDENSED CONSOLIDATED STATEMENTS OF INCOME |
(In thousands, except per share data) |
Three Months ended |
||
2001 |
2000 |
|
Net sales |
$288,729 |
$274,271 |
Cost of sales |
258,949 |
249,001 |
Gross profit |
29,780 |
25,270 |
Selling, general and administrative expenses |
18,501 |
16,900 |
Operating income |
11,279 |
8,370 |
Interest expense, net |
5,611 |
2,452 |
Earnings before income taxes |
5,668 |
5,918 |
Income taxes |
1,587 |
1,717 |
Net earnings |
$ 4,081 ====== |
$ 4,201 ====== |
Basic and diluted net earnings per common share |
$ 0.13 ====== |
$ 0.13 ====== |
Dividends per common share |
$ 0.09 ====== |
$ 0.09 ====== |
See Notes to Condensed Consolidated Financial Statements.
WELLMAN, INC. |
CONDENSED CONSOLIDATED BALANCE SHEETS |
(In thousands, except share data) |
March 31, |
December 31, |
|
2001 |
2000 |
|
Assets: |
||
Current assets: |
||
Cash and cash equivalents |
$ -- |
$ -- |
Accounts receivable, less allowance of $3,931 in 2001 and $3,968 in 2000 |
87,703 |
90,686 |
Inventories |
169,824 |
184,472 |
Prepaid expenses and other current assets |
2,457 |
1,638 |
Total current assets |
259,984 |
276,796 |
Property, plant and equipment, at cost: |
||
Land, buildings and improvements |
163,649 |
164,432 |
Machinery and equipment |
1,062,083 |
1,059,521 |
Construction in progress |
6,897 |
7,911 |
1,232,629 |
1,231,864 |
|
Less accumulated depreciation |
450,695 |
439,605 |
Property, plant and equipment, net |
781,934 |
792,259 |
Cost in excess of net assets acquired, net |
236,724 |
239,518 |
Other assets, net |
27,065 |
25,501 |
$1,305,707 ======== |
$1,334,074 ======== |
|
Liabilities and Stockholders' Equity: |
||
Current liabilities: |
||
Accounts payable |
$ 76,614 |
$ 83,558 |
Accrued liabilities |
29,075 |
36,774 |
Current portion of long-term debt |
-- |
5,152 |
Other |
13,789 |
14,007 |
Total current liabilities |
119,478 |
139,491 |
Long-term debt |
372,714 |
371,672 |
Deferred income taxes and other liabilities |
189,218 |
193,302 |
Total liabilities |
681,410 |
704,465 |
Stockholders' equity: |
||
Common stock, $0.001 par value; 55,000,000 shares authorized, 34,279,884 shares issued in 2001 and 34,257,073 in 2000 |
34 |
34 |
Class B common stock, $0.001 par value; 5,500,000 shares authorized; no shares issued |
-- |
-- |
Paid-in capital |
246,313 |
245,900 |
Accumulated other comprehensive loss |
(17,611) |
(10,663) |
Retained earnings |
445,085 |
443,862 |
Less common stock in treasury at cost: 2,500,000 shares |
(49,524) |
(49,524) |
Total stockholders' equity |
624,297 |
629,609 |
$1,305,707 ======== |
$1,334,074 ======== |
See Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY |
|
Paid-In |
Accumulated |
Retained |
Treasury |
|||
Shares |
Amount |
Capital |
Loss |
Earnings |
Stock |
Total |
|
(In thousands) |
|||||||
Balance at December 31, 1999 |
33,939 |
$34 |
$239,473 |
$ (6,019) |
$427,441 |
$(49,524) |
$611,405 |
Net earnings |
27,811 |
27,811 |
|||||
Currency translation adjustments |
(3,184) |
(3,184) |
|||||
Minimum pension liability adjustment |
(1,460) |
(1,460) |
|||||
Total comprehensive income |
23,167 |
||||||
Cash dividends ($0.36 per share) |
(11,390) |
(11,390) |
|||||
Exercise of stock options, net |
82 |
1,525 |
1,525 |
||||
Contribution of common stock to employee |
|||||||
benefit plan |
192 |
3,797 |
3,797 |
||||
Issuance of restricted stock, net |
44 |
683 |
683 |
||||
Amortization of deferred compensation, net |
|
|
422 |
|
|
|
422 |
Balance at December 31, 2000 |
34,257 |
34 |
245,900 |
(10,663) |
443,862 |
(49,524) |
629,609 |
Net earnings |
4,081 |
4,081 |
|||||
Currency translation adjustments |
(6,973) |
(6,973) |
|||||
Fair value of derivatives |
25 |
25 |
|||||
Total comprehensive loss |
(2,867) |
||||||
Cash dividends ($0.09 per share) |
(2,858) |
(2,858) |
|||||
Exercise of stock options, net |
4 |
58 |
58 |
||||
Issuance of restricted stock, net |
19 |
198 |
198 |
||||
Amortization of deferred compensation, net |
|
|
157 |
|
|
|
157 |
Balance at March 31, 2001 |
34,280 ===== |
$34 === |
$246,313 ======= |
$ (17,611) ===== |
$445,085 ======= |
$(49,524) ====== |
$624,297 ======= |
See Notes to Condensed Consolidated Financial Statements.
WELLMAN, INC. |
||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
||
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000 |
||
(In thousands) |
||
2001 |
2000 |
|
Cash flows from operating activities: |
||
Net income |
$ 4,081 |
$ 4,201 |
Adjustments to reconcile net income to net cash provided by operating activities: |
||
Depreciation |
14,434 |
14,558 |
Amortization |
2,481 |
2,473 |
Deferred income taxes and other |
(1,056) |
(1,520) |
Changes in assets and liabilities |
(4,987) |
(9,944) |
Net cash provided by operating activities |
14,953 |
9,768 |
Cash flows from investing activities: |
||
Additions to property, plant and equipment |
(6,925) |
(19,397) |
Net cash used in investing activities |
(6,925) |
(19,397) |
Cash flows from financing activities: |
||
Borrowings (repayments) under long-term debt, net |
(5,463) |
11,094 |
Dividends paid on common stock |
(2,858) |
(2,831) |
Issuance of restricted stock |
198 |
391 |
Exercise of stock options |
58 |
1,216 |
Net cash provided by (used in) financing activities |
(8,065) |
9,870 |
Effect of exchange rate changes on cash and cash equivalents |
37 |
(241) |
Increase (decrease) in cash and cash equivalents |
0 |
0 |
Cash and cash equivalents at beginning of period |
0 |
0 |
Cash and cash equivalents at end of period |
$ 0 ===== |
$ 0 ===== |
See Notes to Condensed Consolidated Financial Statements.
WELLMAN, INC. |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
(Information for the three months ended |
March 31, 2001 and 2000 is unaudited) |
(In thousands, except per share data) |
1. |
BASIS OF PRESENTATION |
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month period ended March 31, 2001 are not necessarily indicative of the results that may be expected for the year ended December 31, 2001.
The balance sheet at December 31, 2000 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in Wellman, Inc. 's (which, together with its subsidiaries, is herein referred to as the "Company ") annual report on Form 10-K for the year ended December 31, 2000.
2. |
EARNINGS PER COMMON SHARE |
The following table sets forth the computation of basic and diluted net earnings per common share for the periods indicated:
Three Months Ended |
||
2001 |
2000 |
|
Numerator for basic and diluted net earnings per common share: |
||
Net earnings |
$ 4,081 ====== |
$ 4,201 ====== |
Denominator: |
||
Denominator for basic net earnings per common share - weighted-average shares |
31,513 |
31,221 |
Effect of dilutive securities: |
||
Employee stock options and restricted stock |
544 |
580 |
Denominator for diluted net earnings per common share-adjusted weighted average shares |
|
|
Basic and diluted net earnings per common share |
$ 0.13 ====== |
$ 0.13 ====== |
3. |
INVENTORIES |
Inventories consist of the following:
March 31, |
December 31, |
||
2001 |
2000 |
||
Raw materials |
$ 62,954 |
$ 70,058 |
|
Finished and semi-finished goods |
95,746 |
103,495 |
|
Supplies |
11,124 |
10,919 |
|
$169,824 ======= |
$184,472 ======= |
||
4. |
ACCOUNTING CHANGES |
Effective January 1, 2001, the Company adopted Financial Accounting Standard (FAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. This Statement requires the Company to recognize all of its derivative instruments as either assets or liabilities in its balance sheet at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as either a fair value hedge, cash flow hedge or a hedge of a net investment in a foreign operation.
As described below, the Company utilized only two types of derivatives in the first quarter of 2001: fair value hedges and cash flow hedges. For derivative instruments that are designated and qualify as a fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings during the period of the change in fair values. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any, is recognized in current earnings during the period of change.
The Company utilizes interest rate swaps to synthetically manage the interest rate characteristics of certain debt. At January 1, 2001, the Company had interest rate swaps relating to $50,000 of its fixed-rate debt which exactly match the terms of the underlying debt instruments. These swaps, effectively converting the fixed-rate debt to floating-rate debt, qualify as fair value hedges. The Condensed Consolidated Balance Sheet at March 31, 2001 reflected $2,166 for the fair market value of the swaps in other assets, offset by a corresponding change in the fair value of the underlying debt.
The Company operates in international markets and utilizes derivatives to minimize the effect of changes in exchange rates. The Company's European businesses use forward foreign exchange contracts with maturities of less than twelve months to reduce the exchange risk associated with sales and accounts receivable denominated in other foreign currencies. Contracts that are identified as hedging underlying receivables are fair value hedges, whereas contracts that are identified as hedging future sales are cash flow hedges. The notional amount of the fair value contracts was approximately $14,000 and $9,100 at January 1, 2001 and March 31, 2001, respectively, and the fair value of these contracts was $633 and $245, respectively. The change in the fair value hedges were offset by changes in the fair value of the underlying receivables. There were no cash flow hedges at January 1, 2001. At March 31, 2001, the notional amount of the cash flow hedges was $2,800, and the fair value of these contracts was $25. These forward contracts resulted in $25 of unrealized gain in accumulated other comprehensive loss at March 31, 2001, which will be realized when the underlying transaction gain or loss is recognized in earnings.
There was no cumulative effect of adoption of Statement No. 133 at January 1, 2001, and the impact on earnings in the first quarter of 2001 was not material.
During the second quarter of 2000, the Company extended the estimated useful lives of certain assets to reflect time periods more consistent with actual historical experience and anticipated utilization of assets. Depreciation expense for the three months ended March 31, 2001 for these assets was approximately $900 ($0.02 per diluted share) lower compared to the three months ended March 31, 2000.
5. |
RESTRUCTURING CHARGES |
1999 Restructuring |
During the second quarter of 1999, the Company implemented an overall cost reduction and productivity improvement plan to improve long-term profitability and stockholder returns. As a result, the Company recorded a pretax restructuring charge totaling $19,195 in the second quarter of 1999. The plan included a pretax charge of $11,483 for closing the Company's wool business, which consisted of an impairment charge of $8,033 to write-down those related assets to their expected fair value, an accrual for closure costs of $1,880, a $1,320 accrual for severance, and a $250 accrual for other exit costs. During 2000 and 1999, the Company was able to sell certain wool assets previously written down for $321 and $1,047, respectively. These proceeds were recorded as restructuring income in 2000 and as a reduction to the 1999 restructuring charge. The accrual for exit costs related to closing the wool business was reduced by $464 in 2000 due to lower-than-expected costs. An adjustment of $170 was recorded in 1999 to increase an accrual for exit costs related to closing the wool business. In addition, the plan included a pretax charge of $2,901 to close the Company's New York facility, which included lease termination costs and an accrual for severance. An adjustment of $828 was recorded in the fourth quarter of 1999 to reduce the accrual for lower-than-expected lease termination costs. The plan included an additional accrual for severance costs for other positions throughout the Company, which was increased by $131 in 1999 for higher-than-expected severance costs and reduced by $8 in the fourth quarter of 2000. The closure of the wool business and other cost reductions throughout the Company resulted in the termination of 132 employees and 146 employees, respectively. These positions included both plant and administrative personnel.
The 1999 restructuring plan was completed during the fourth quarter of 2000. The following represents changes in the accruals since the plan was adopted:
|
|
Closure and |
Initial accrual during the second quarter of 1999 |
$7,042 |
$3,276 |
Cash payments in 1999 |
(3,635) |
(273) |
Adjustments in 1999 |
131 |
(658) |
Accrual balance at December 31, 1999 |
3,538 |
2,345 |
Cash payments in first quarter 2000 |
(1,255) |
(258) |
Accrual balance at March 31, 2000 |
2,283 |
2,087 |
Cash Payments in April through December 2000 |
(2,275) |
(1,623) |
Adjustments in fourth quarter 2000 |
(8) |
(464) |
Accrual balance at December 31, 2000 |
$ 0 ===== |
$ 0 ===== |
1998 Restructuring |
During 1998, the Company adopted a restructuring plan to consolidate and lower the overall operating costs of the business units in the Fibers and Recycled Products Group. In connection with this plan, the Company closed the operations at a leased manufacturing facility in New Jersey and a sales office in the United Kingdom. The Company recorded a pretax charge of $6,861 in its fourth quarter of 1998, which included a $3,738 write-off of equipment and other assets to be sold or scrapped; a $1,717 accrual primarily for the removal and dismantling of the equipment and restoration of the leased facility to its original state; and a $1,406 accrual for the termination benefits of approximately 88 employees. Total costs associated with the New Jersey facility and the sales office in England were $4,371 and $827, respectively.
The 1998 restructuring plan was completed during the second quarter of 2000. The following represents changes in the accruals since December 31, 1999:
|
Accrual |
||
Accrual balance at December 31, 1999 and March 31, 2000 |
$96 |
$0 |
|
Cash payments in second quarter 2000 |
(96) |
(0) |
|
Accrual balance at June 30, 2000 |
$0 === |
$0 == |
6. |
COMMITMENTS AND CONTINGENCIES |
The Company has commitments and contingent liabilities, including environmental liabilities, letters of credit, commitments relating to certain state incentives, raw material purchase commitments, and various operating commitments, including operating lease commitments.
The Company 's operations are subject to extensive laws and regulations governing air emissions, wastewater discharges and solid and hazardous waste management activities. The Company 's policy is to expense environmental remediation costs when it is both probable that a liability has been incurred and the amount can be reasonably estimated. While it is often difficult to reasonably quantify future environmental-related expenditures, the Company currently estimates its future non-capital expenditures related to environmental matters to range between approximately $7,600 and $25,200. In connection with these expenditures, the Company has accrued undiscounted liabilities of approximately $12,200 and $13,000 at March 31, 2001 and December 31, 2000, respectively, which are reflected as other noncurrent liabilities in the Company 's Condensed Consolidated Balance Sheets. These accruals represent management 's best estimate of probable non-capital environmental expenditures. In addition, aggregate future capital expenditures related to environmental matters are expected to range from approximately $7,300 to $20,100. These non-capital and capital expenditures are expected to be incurred during the next 10 to 20 years. The Company believes that it is entitled to recover a portion of these expenditures under indemnification and escrow agreements.
In order to receive certain state grants, the Company agreed to meet certain conditions, including capital expenditures and employment levels at its Pearl River facility. During the three months ending March 31, 2001 and 2000, the Company recognized grant income of approximately $1,750 and $2,000, respectively. The Company had deferred grant income of $12,000 and $19,000 at March 31, 2001 and 2000, respectively, which it expects to recognize as these conditions are satisfied. The deferred income is included in other current liabilities and other liabilities in the Company's Condensed Consolidated Balance Sheets.
7. |
FOREIGN CURRENCY TRANSLATION AND OTHER COMPREHENSIVE LOSS |
The financial statements of foreign subsidiaries have been translated into U.S. dollar equivalents in accordance with FASB Statement No. 52, "Foreign Currency Translation." All balance sheet accounts have been translated using the exchange rates in effect at the balance sheet date. Income statement amounts have been translated using the average exchange rate for the year. The gains and losses resulting from the changes in exchange rates from period to period have been reported in other comprehensive income (loss). The effect on the Condensed Consolidated Statements of Operations of transaction gains and losses is insignificant for all periods presented.
Accumulated other comprehensive loss is comprised of foreign currency translation, a minimum pension liability, and a gain from the fair value of derivatives. Substantially all of the earnings associated with the Company's investments in foreign entities are considered to be permanently invested, and no provision for U.S. federal and state income taxes on those earnings or translation adjustments has been provided.
Accumulated other comprehensive loss consists of the following components:
Foreign |
||||
Currency |
Minimum |
Fair Value |
||
Translation |
Pension |
of |
Comprehensive |
|
Adjustments |
Liability |
Derivatives |
(Loss) |
|
Balance at December 31, 1999 |
$ (6,019) |
0 |
$ (6,019) |
|
Other comprehensive loss |
(3,184) |
$ (1,460) |
-- |
(4,644) |
Balance at December 31, 2000 |
(9,203) |
(1,460) |
0 |
(10,663) |
Other comprehensive income (loss) |
(6,973) |
-- |
25 |
(6,948) |
Balance at March 31, 2001 |
$ (16,176) ======= |
$ (1,460) ====== |
$ 25 ====== |
$ (17,611) ======= |
8. |
SEGMENT INFORMATION |
The Company's operations are classified into two reportable operating segments: the Fibers and Recycled Products Group (FRPG) and the Packaging Products Group (PPG).
The FRPG manufactures:
The PPG manufactures solid-stated and amorphous PET resins. Solid-stated PET resin is primarily used in the manufacture of soft drink bottles and other food and beverage packaging. Amorphous resin, which is predominantly produced from purified terephthalic acid and monoethylene glycol, is used internally for solid-stating (a process which upgrades and purifies the resin) and, to a lesser extent, is sold to external customers.
Generally, the Company evaluates segment profit (loss) on the basis of operating profit (loss) less certain charges for research and development costs, administrative costs, and amortization expenses. The accounting policies are the same as those described in the Company 's most recently filed Form 10-K.
|
|
|
|
Revenues |
$153,102 |
$ 135,627 |
$ 288,729 |
Segment profit (loss) |
(5,425) |
16,704 |
11,279 |
Assets |
838,228 |
431,060 |
1,269,288 |
Three months ended March 31, 2000 |
|||
Revenues |
$157,830 |
$ 116,441 |
$ 274,271 |
Segment profit |
4,885 |
3,485 |
8,370 |
Assets |
628,324 |
431,202 |
1,059,526 |
Following are reconciliations to corresponding totals in the accompanying Condensed Consolidated Financial Statements:
Three Months Ended March 31, |
||||
Segment Profit |
2001 |
2000 |
||
Total for reportable segments |
$ 11,279 |
$ 8,370 |
||
Interest expense, net |
(5,611) |
(2,452) |
||
Earnings before income taxes |
$ 5,668 ======== |
$ 5,918 ======== |
||
Assets |
||||
Total for reportable segments |
$1,269,288 |
$1,059,526 |
||
Corporate assets(1) |
36,419 |
273,254 |
||
$1,305,707 ======== |
$1,332,780 ======== |
|||
(1) |
Corporate assets include prepaid expenses, construction in progress and other assets not allocated to the segments. |
WELLMAN, INC. |
MANAGEMENT 'S DISCUSSION AND ANALYSIS OF |
FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
GENERAL |
We are principally engaged in the manufacture and marketing of high-quality polyester products, including Fortrel® brand polyester textile fibers, polyester fibers made from recycled raw materials and PermaClear® brand PET (polyethylene terephthalate) packaging resins. Our current annual manufacturing capacity is approximately 1.1 billion pounds of fiber and 1.1 billion pounds of resins at six major production facilities in the United States and Europe. We are also the world 's largest PET plastics recycler, utilizing a significant amount of recycled raw materials in our manufacturing operations.
Our operations are classified into two reportable operating segments: the Fibers and Recycled Products Group (FRPG) and the Packaging Products Group (PPG).
The FRPG produces Fortrel® textile fibers, which currently represent approximately 60% of our fiber production. These fibers, used in apparel, home furnishings, and non-wovens, are produced from two chemical raw materials: purified terephthalic acid (PTA) and monoethylene glycol (MEG). The other 40% of our fiber production, primarily fiberfill and carpet fibers, is manufactured from recycled raw materials, including post-consumer PET containers, resin and film materials and post-industrial fiber. Our PET resins, produced by the PPG from PTA and MEG, are primarily used in the manufacture of clear plastic soft drink bottles and other food and beverage packaging.
Each of our markets is highly competitive. We compete in these markets primarily on the basis of product quality, price, customer service, and brand identity. We believe we are the largest polyester staple producer in the United States and the third-largest PET packaging resins producer in North America. Several of our competitors are substantially larger than we are and have substantially greater economic resources.
Demand for polyester fiber historically has been cyclical. It is subject to changes in consumer preferences and spending, retail sales patterns, and fiber or textile product imports. Since late 1997, imports of products throughout the textile chain have impacted the United States fibers markets. This, along with declining domestic demand, has adversely affected profitablility. Global PET resins demand continues to grow, driven by new product applications for PET and conversions from other packaging materials to PET.
Our profitability is primarily determined by our raw material margins (the difference between product selling prices and raw material costs). Both fiber and PET resin raw material margins increase or decrease as a result of supply and demand factors and competitive conditions. Given our substantial unit volumes, the impact on profitability of changes in raw material margins is significant. A $.01 change in raw material margin on approximately 2.2 billion pounds of fiber and resin volume results in an annual change of approximately $22.0 million in pretax income.
Selling prices and raw material costs each may be affected by actions of our competitors, global economic and market conditions, export and import activity, and the prices of competing materials.
Seasonal factors, such as weather and the vacation and holiday closings of our facilities or those of our customers, may also affect our operations.
RESTRUCTURING CHARGES |
During the second quarter of 1999, we implemented an overall cost reduction and productivity improvement plan to improve long term profitability and stockholder returns. We recorded a pretax restructuring charge totaling $17.4 million ($11.9 million after tax) or $0.38 per diluted share. Pursuant to the plan, we closed our New York office and our wool business in Johnsonville, SC during 1999 and began implementing other cost reduction and productivity improvement initiatives throughout our businesses. The restructuring, which was funded from operating cash flows, was completed in 2000. See note 5 to the Condensed Consolidated Financial Statements for details of the accruals and changes in the accruals since the plan was adopted. The 1999 cost reduction portion of the plan has been achieved and productivity improvements are expected to benefit future periods.
RESULTS OF OPERATIONS |
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED |
Net sales for the three months ended March 31, 2001 increased 5.3% to $288.7 million from $274.3 million for the prior year period. This increase was primarily due to higher PPG sales. Net sales for the PPG increased 16.5% to $135.6 million in the 2001 period from $116.4 million in the 2000 period, reflecting significantly improved selling prices and increased volume in our PET resins business. Net sales for the FRPG decreased 3.0% to $153.1 million in the 2001 period from $157.8 million in the 2000 period, due primarily to lower volumes more than offsetting slightly higher selling prices from the prior period.
Cost of sales increased 4.0% to $258.9 million for the three months ended March 31, 2001 from $249.0 million for the three months ended March 31, 2000. For the PPG, cost of sales as a percentage of sales decreased significantly in the 2001 period compared to the 2000 period, resulting from significantly higher PET resin selling prices and lower production costs. This was offset in part by higher chemical raw material costs and energy costs. For the FRPG, cost of sales as a percentage of sales increased in the 2001 period compared to the 2000 period, resulting from higher plant costs due to lower production volumes and significantly higher waste-based raw material costs and energy costs.
Improved earnings from our PET resins businesses were offset by decreased profitability in our domestic fibers businesses. As a result, gross profit increased to $29.8 million for the three months ended March 31, 2001 compared to $25.3 million for the three months ended March 31, 2000. The gross profit margin was 10.3% in the 2001 period compared to 9.2% in the 2000 period.
Selling, general and administrative expenses were $18.5 million, or 6.4% of sales, in the 2001 period compared to $16.9 million, or 6.2% of sales, in the 2000 period.
As a result of the foregoing, we reported operating income of $11.3 million for the three months ended March 31, 2001 compared to $8.4 million for the three months ended March 31, 2000.
Net interest expense was $5.6 million in the 2001 period compared to $2.5 million in the 2000 period. The increase was due to significantly less interest being capitalized with the completion of our Pearl River facility in 2000.
Our effective tax rate for the three months ended March 31, 2001 was 28.0% compared to 29.0% for the three months ended March 31, 2000. Our effective tax rates reflect tax benefits derived from operations outside the United States which are taxed at rates lower than the U.S. statutory rate of 35.0%.
As a result of the foregoing, we reported net income of $4.1 million, or $0.13 per diluted share, for the three months ended March 31, 2001, compared to $4.2 million, or $0.13 per diluted share, for the three months ended March 31, 2000.
OUTLOOK |
The following statements are forward-looking statements and should be read in conjunction with "Forward-Looking Statements; Risks and Uncertainties" below.
We expect our net income in the second quarter 2001 to be significantly higher than the $0.13 per diluted share in the first quarter 2001. Increased earnings in our PET resins businesses are expected to more than offset lower earnings in our fiber businesses.
Our domestic and European resins businesses are expected to benefit from higher selling prices and improved margins. PET resins capacity utilization continues to improve worldwide. In the next few years demand for PET resins is expected to continue to grow in the NAFTA region at a faster rate than capacity. As a result, we expect to benefit from higher North American capacity utilization.
Our domestic fibers business continues to be impacted by high imports throughout the textile chain and declining domestic consumption. In Europe, portions of the textile market are experiencing a slow-down. In addition, our worldwide raw material costs are increasing. As a result, we expect reduced profitability in our fiber businesses due to lower volumes and reduced margins.
LIQUIDITY AND CAPITAL RESOURCES |
Net cash provided by operations was $15.0 million for the three months ended March 31, 2001 compared to $9.8 million provided by operations for the three months ended March 31, 2000. This increase is primarily due to lower inventories partially offset by reductions in accounts payable and accrued liabilities.
Net cash used in investing activities amounted to $6.9 million in the first three months of 2001 compared to $19.4 million in the first three months of 2000. The 2001 amount represents capital expenditures at our facilities. The 2000 expenditures related primarily to the construction of our Pearl River facility in Mississippi, which was completed in 2000. We expect capital expenditures for 2001 to be between $30.0 to $40.0 million.
Net cash used in financing activities amounted to $8.1 million in the 2001 period compared to net cash provided by financing activities of $9.9 million in the 2000 period. Net repayments of long-term debt amounted to $5.5 million in the 2001 period compared to net borrowings of $11.1 million in the 2000 period. This resulted from lower capital expenditures and improved cash flow from operations in 2001.
The financial resources available to us at March 31, 2001 include approximately $264.0 million under our revolving credit facilities ($125.0 million expiring September 30, 2001 and $139.0 million expiring September 30, 2003) and unused short-term uncommitted lines of credit, the public and private debt and equity markets, and internally generated funds. Based on our debt level as of March 31, 2001, we could have had an average of approximately $256.6 million of additional debt outstanding during the period without amending the terms of our debt agreements. Our current financing sources are primarily dependent on the bank and commercial paper markets since these are the lowest cost funds available. The availability and cost of these funds can change in a short period of time for a variety of reasons. As a result, we cannot be sure that low cost financing will be available. However, we believe our financial resources will be sufficient to meet our foreseeable needs for working capital, capital expenditures and dividends. For a more complete description of the prominent risks and uncertainties inherent in our business, see our Form 10-K for the year ended December 31, 2000.
For information about our derivative financial instruments, see Item 7A. "Quantitative and Qualitative Disclosure About Market Risk " of our Form 10-K for the year ended December 31, 2000.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS |
Effective January 1, 2001, we adopted Financial Accounting Standard (FAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. This Statement requires us to recognize all of our derivative instruments as either assets or liabilities in our balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. We utilized only two types of derivatives in the first quarter of 2001: fair value hedges and cash flow hedges.
At January 1, 2001, we had interest rate swaps to effectively convert $50.0 million of fixed-rate debt to floating-rate debt. The swaps qualify as fair value hedges and exactly match the terms of the underlying debt instruments. Our Condensed Consolidated Balance Sheet at March 31, 2001 reflected $2.2 million for the fair market value of the swaps in other assets, offset by a corresponding change in the fair value of the underlying debt.
We primarily utilize forward exchange contracts with maturities of less than twelve months to reduce the exchange risk associated with sales and accounts receivable denominated in other foreign currencies. Contracts that are identified as hedging underlying receivables are fair value hedges, whereas contracts that are identified as hedging future sales are cash flow hedges. The notional amount of the fair value contracts was approximately $14.0 million and $9.1 million at January 1, 2001 and March 31, 2001, respectively, and the fair value of these contracts was $0.6 million and $0.2 million, respectively. The change in the fair value hedges were offset by changes in the fair value of the underlying receivables. There were no cash flow hedges at January 1, 2001. At March 31, 2001, the notional amount of the cash flow hedges was $2.8 million, and the fair value of these contracts was $.025 million. These forward contracts resulted in $.025 million of unrealized gain in accumulated other comprehensive loss at March 31, 2001, which will be realized when the underlying transaction gain or loss is recognized in earnings.
There was no cumulative effect of adoption of Statement No. 133 at January 1, 2001, and the impact on earnings in the first quarter of 2001 was not material.
FORWARD-LOOKING STATEMENTS; RISKS AND UNCERTAINTIES |
Statements contained in this Form 10-Q that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. In addition, words such as "believes, " "anticipates, " "expects " and similar expressions are intended to identify forward-looking statements. These statements are made as of the date of this report based upon current expectations, and we undertake no obligation to update this information. These forward-looking statements contain a number of risks and uncertainties, including, but not limited to: demand and competition for polyester fiber and PET resins; the financial condition of our customers; availability and cost of raw materials; availability and cost of petrochemical feedstock necessary for the production process; changes in financial markets; interest rates, credit ratings, and foreign currency exchange rates; U.S. European, Far Eastern and global economic conditions; prices and volumes of imports; work stoppages; levels of production capacity and profitable operations of assets; changes in laws and regulations; prices of competing products; natural disasters; and our ability to complete expansions and other capital projects on time and budget and to maintain the operations of our existing production facilities. Actual results may differ materially from those expressed herein. Results of operations in any past period should not be considered indicative of results to be expected in future periods. Fluctuations in operating results may result in fluctuations in the price of our common stock.
For a more complete description of the prominent risks and uncertainties inherent in our business, see our Form 10-K for the year ended December 31, 2000.
PART II - OTHER INFORMATION |
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K |
(a) Exhibits. |
4(a) |
Pursuant to Item 601(b)(4)(iii) of Regulation S-K, the registrant has not filed herewith any instrument with respect to long-term debt which does not exceed 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. The registrant hereby agrees to furnish a copy of any such instrument to the Securities and Exchange Commission upon request. |
(b) Reports on Form 8-K. |
None. |
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.
Dated May 11, 2001 |
WELLMAN, INC. By /s/ Keith R. Phillips________________________ Chief Financial Officer and Vice President (Principal Financial Officer) |
Dated May 11, 2001 |
By /s/ Mark J. Rosenblum_______________________ Chief Accounting Officer, Vice President and Controller (Principal Accounting Officer) |
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