-----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, IxdbybrN5XRSvKtWYt0NHj7VnV5QgXnBSYaZ1IVan5o9JN7xp/r9xInAw31FDxQS XOHFflIutwt4QwGaXTBqnQ== 0000812708-98-000004.txt : 19980511 0000812708-98-000004.hdr.sgml : 19980511 ACCESSION NUMBER: 0000812708-98-000004 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980508 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WELLMAN INC CENTRAL INDEX KEY: 0000812708 STANDARD INDUSTRIAL CLASSIFICATION: PLASTIC MAIL, SYNTH RESIN/RUBBER, CELLULOS (NO GLASS) [2820] IRS NUMBER: 041671740 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10033 FILM NUMBER: 98613429 BUSINESS ADDRESS: STREET 1: 1040 BROAD ST STE 302 CITY: SHREWSBURY STATE: NJ ZIP: 07702 BUSINESS PHONE: 9085427300 10-Q 1 FORM 10-Q FOR 1ST QUARTER 1998 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission file number 0-15899 WELLMAN, INC. ------------- (Exact name of registrant as specified in its charter) Delaware 04-1671740 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1040 Broad Street, Shrewsbury, NJ 07702 --------------------------------------- (Address of principal executive offices) (732) 542-7300 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of May 5, 1998, there were 31,155,488 shares of the registrant's 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, 1998 and 1997. . . . 3 Condensed Consolidated Balance Sheets - March 31, 1998 and December 31, 1997. . . . . . . . . . . 4 Condensed Consolidated Statements of Stockholders' Equity - For the three months ended March 31, 1998 and the year ended December 31, 1997 . . . . . . . . . . . . . . 5 Condensed Consolidated Statements of Cash Flows - For the three months ended March 31, 1998 and 1997. . . . 6 Notes to Condensed Consolidated Financial Statements . . . . . 7 - 8 ITEM 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . 9 - 14 PART II - OTHER INFORMATION ITEM 6 - Exhibits and Reports on Form 8-K . . . . . . . . . . . . . 15 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 2 WELLMAN, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
THREE MONTHS ENDED MARCH 31, ---------------- 1998 1997 ---- ---- Net sales. . . . . . . . . . . . . . . . . . . . . . $263,073 $255,148 Cost of sales. . . . . . . . . . . . . . . . . . . . 220,848 216,019 -------- -------- Gross profit . . . . . . . . . . . . . . . . . . . . 42,225 39,129 Selling, general and administrative expenses. . . . . . . . . . . . . . . . . . . . . . 19,346 20,543 -------- -------- Operating income . . . . . . . . . . . . . . . . . . 22,879 18,586 Interest expense, net. . . . . . . . . . . . . . . . 2,378 3,275 -------- -------- Earnings before income taxes . . . . . . . . . . . . 20,501 15,311 Income taxes . . . . . . . . . . . . . . . . . . . . 7,790 6,584 -------- -------- Net earnings . . . . . . . . . . . . . . . . . . . . $ 12,711 $ 8,727 ======== ======== Basic and diluted net earnings per common share. . . $ 0.41 $ 0.28 ======== ========
See notes to condensed consolidated financial statements. 3 WELLMAN, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except share data)
March 31, December 31, 1998 1997 ---------- ------------ Assets Current assets: Cash and cash equivalents. . . . . . . . . . . . $ -- $ -- Accounts receivable, less allowance of $4,984 in 1998 and $5,229 in 1997. . . . . . . . . . . 135,724 126,106 Inventories. . . . . . . . . . . . . . . . . . . 165,958 154,133 Prepaid expenses and other current assets. . . . 3,174 3,366 ---------- ---------- Total current assets. . . . . . . . . . . . . 304,856 283,605 Property, plant and equipment, at cost: Land, buildings and improvements . . . . . . . . 103,655 104,073 Machinery and equipment. . . . . . . . . . . . . 732,741 735,144 Construction in progress . . . . . . . . . . . . 303,667 251,493 ---------- ---------- 1,140,063 1,090,710 Less accumulated depreciation. . . . . . . . . . 350,250 336,230 ---------- ---------- Property, plant and equipment, net. . . . . . 789,813 754,480 Cost in excess of net assets acquired, net . . . . 267,242 269,756 Other assets, net. . . . . . . . . . . . . . . . . 11,358 11,384 ---------- ---------- $1,373,269 $1,319,225 ========== ========== Liabilities and Stockholders' Equity Current liabilities: Accounts payable . . . . . . . . . . . . . . . . $ 63,325 $ 73,070 Accrued liabilities. . . . . . . . . . . . . . . 39,060 39,590 Current portion of long-term debt. . . . . . . . 166 208 ---------- ---------- Total current liabilities . . . . . . . . . . 102,551 112,868 Long-term debt . . . . . . . . . . . . . . . . . . 451,908 394,545 Deferred income taxes and other liabilities. . . . 177,218 177,378 ---------- ---------- Total liabilities . . . . . . . . . . . . . . 731,677 684,791 Stockholders' equity: Common stock, $0.001 par value; 55,000,000 shares authorized, 33,642,670 shares issued in 1998, 33,638,193 in 1997 . . . . . . . . . . 34 34 Class B common stock, $0.001 par value; 5,500,000 shares authorized; no shares issued . . . . . . -- -- Paid-in capital. . . . . . . . . . . . . . . . . 234,264 234,179 Accumulated other comprehensive income . . . . . (2,472) 372 Retained earnings. . . . . . . . . . . . . . . . 459,290 449,373 Less common stock in treasury at cost: 2,500,000 shares. . . . . . . . . . . . . . . . (49,524) (49,524) ---------- ---------- Total stockholders' equity. . . . . . . . . . 641,592 634,434 ---------- ---------- $1,373,269 $1,319,225 ========== ==========
See notes to condensed consolidated financial statements. 4 WELLMAN, INC. CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands, except per share data)
COMMON ACCUMULATED STOCK ISSUED OTHER --------------- PAID-IN COMPREHENSIVE RETAINED TREASURY SHARES AMOUNT CAPITAL INCOME EARNINGS STOCK TOTAL ------ ------ ------- ---------- -------- ------- ----- Balance at December 31, 1996 . 33,612 $34 $233,665 $ 9,853 $429,900 $(49,524) $623,928 Comprehensive income: Net earnings . . . . . . . . 30,355 30,355 Currency translation adjustment. . . . . . . . . (9,481) (9,481) Cash dividends ($0.35 per share) . . . . . . . . . (10,882) (10,882) Exercise of stock options. . . 25 453 453 Issuance of restricted stock . 1 16 16 Tax effect of exercise of stock options . . . . . . . . 45 45 ------ --- -------- ------- -------- -------- -------- Balance at December 31, 1997 . 33,638 $34 $234,179 $372 $449,373 $(49,524) $634,434 Comprehensive income: Net earnings . . . . . . . . 12,711 12,711 Currency translation adjustment. . . . . . . . . (2,844) (2,844) Cash dividends ($0.09 per share). . . . . . . . . . . . (2,794) (2,794) Exercise of stock options. . . 5 85 85 ------ --- -------- ------- -------- -------- -------- Balance at March 31, 1998. . . 33,643 $34 $234,264 $(2,472) $459,290 $(49,524) $641,592 ====== === ======== ======= ======== ======== ========
See notes to condensed consolidated financial statements. 5 WELLMAN, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997 (In thousands)
1998 1997 -------- -------- Cash flows from operating activities: Net earnings. . . . . . . . . . . . . . . . . . . . $ 12,711 $ 8,727 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation. . . . . . . . . . . . . . . . . . . 15,703 13,767 Amortization. . . . . . . . . . . . . . . . . . . 2,184 2,805 Deferred income taxes . . . . . . . . . . . . . . 2,710 2,868 Changes in assets and liabilities . . . . . . . . (35,590) 139 -------- -------- Net cash (used in) provided by operating activities . . . . . . . . . . . . . . . . . . . . (2,282) 28,306 -------- -------- Cash flows from investing activities: Additions to property, plant and equipment. . . . . (52,912) (35,575) Decrease in restricted cash . . . . . . . . . . . . -- 132 -------- -------- Net cash used in investing activities . . . . . . . (52,912) (35,443) -------- -------- Cash flows from financing activities: Net borrowings of long-term debt. . . . . . . . . . 57,913 8,717 Dividends paid on common stock. . . . . . . . . . . (2,794) (2,487) Exercise of stock options . . . . . . . . . . . . . 85 -- -------- -------- Net cash provided by financing activities . . . . . 55,204 6,230 -------- -------- Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . . . . (10) (179) -------- -------- Decrease in cash and cash equivalents . . . . . . . . 0 (1,086) Cash and cash equivalents at beginning of period. . . 0 2,120 -------- -------- Cash and cash equivalents at end of period. . . . . . $ 0 $ 1,034 ======== ======== Supplemental cash flow data: Cash paid during the period for: Interest (net of amounts capitalized) . . . . . . $ 2,959 $ 2,381 Income taxes. . . . . . . . . . . . . . . . . . . $ 74 $ 4,932 Non-cash investing activities financed through government grants. . . . . . . . . . . . . $ 4,795 $ 2,134
See notes to condensed consolidated financial statements. 6 WELLMAN, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Information for the three months ended March 31, 1998 and 1997 is unaudited) (In thousands) 1. BASIS OF PRESENTATION The results of operations for the three month periods are not necessarily indicative of those for the full year. In the opinion of management, the accompanying unaudited condensed consolidated financial statements are presented on a basis consistent with the audited statements, and all adjustments, which consist only of normal recurring adjustments necessary to present fairly the financial position and the results of operations for the periods indicated, have been reflected. Certain 1997 amounts have been reclassified to conform to 1998 presentation. 2. NET EARNINGS PER COMMON SHARE The following table sets forth the computation of basic and diluted earnings per share:
March 31, March 31, 1998 1997 ------ ------- Numerator for basic and diluted earnings per share: Net Income. . . . . . . . . . . . . . . $ 12,711 $ 8,727 -------- -------- Denominator: Denominator for basic earnings per share - weighted average shares. . . . 31,139 31,112 Effect of dilutive securities: Employee stock options. . . . . . . . 186 34 -------- -------- Denominator for diluted earnings per share-adjusted weighted average shares 31,325 31,146 ======== ======== Basic earnings per share. . . . . . . . . $ 0.41 $ 0.28 ======== ======== Diluted earnings per share. . . . . . . . $ 0.41 $ 0.28 ======== ========
3. INVENTORIES Inventories consist of the following:
March 31, December 31, 1998 1997 --------- --------- Raw materials. . . . . . . . . . . $ 51,451 $ 50,669 Finished and semi-finished goods . 101,204 90,210 Supplies . . . . . . . . . . . . . 13,303 13,254 -------- -------- $165,958 $154,133 ======== ========
7 4. ENVIRONMENTAL MATTERS The Company's operations are subject to extensive laws and regulations governing air emissions, wastewater discharges and solid and hazardous waste management activities. The Company's policy is to accrue 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 $10,300 and $27,000. In connection with these expenditures, the Company has accrued an amount at March 31, 1998 representing management's best estimate of probable non-capital environmental expenditures. In addition, future capital expenditures aggregating approximately $9,400 to $28,900 may be required related to environmental matters. These non-capital and capital expenditures are estimated to be incurred over the next 10 to 20 years. The Company believes that it is entitled to recover a portion of these expenditures under indemnification and escrow agreements. 5. COMPREHENSIVE INCOME Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income". This statement establishes standards for the reporting and display of comprehensive income and its components. Comprehensive income for the Company represents net income adjusted for foreign currency translation adjustments. Comprehensive income was $9,867 and $5,296 for the quarters ended March 31, 1998 and 1997, respectively. 6. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires that costs incurred during start-up activities, including organization costs, be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. Initial application of SOP 98-5 should be as of the beginning of the fiscal year in which SOP 98-5 is first adopted and should be reported as a cumulative effect of a change in accounting principle. The Company expects to adopt SOP 98-5 in the first quarter of 1999. At the present time, the Company has not completed its analysis of the impact the adoption of SOP 98-5 will have on the consolidated statement of income. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131), effective for fiscal years beginning after December 15, 1997. FAS 131 requires that a public company report financial and descriptive information about its reportable operating segments pursuant to criteria that differ from current accounting practice. Operating segments, as defined, are components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The financial information to be reported includes segment profit or loss, certain revenue and expense items and segment assets and reconciliations to corresponding amounts in the general purpose financial statements. FAS 131 also requires information about products and services, geographic areas of operation, and major customers. The Company has not completed its analysis of the effect of adoption of FAS 131 on its financial statement disclosure; however, the adoption of FAS 131 will not affect results of operations or financial position. 8 WELLMAN, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's primary business is the manufacture and marketing of high- quality polyester products, including Fortrel(R) brand polyester textile fibers, polyester fibers made from recycled raw materials and PermaClear(R) brand PET (polyethylene terephthalate) packaging resins. The Company currently has annual capacity to manufacture approximately 1.1 billion pounds of fiber and 610 million pounds of resins worldwide at five major production facilities in the United States and Europe. The Company is also the world's largest PET plastics recycler, utilizing a significant amount of recycled raw materials in its manufacturing operations. The Company plans to substantially increase its polyester fiber and PET resins production capacity through the construction of its new, state-of-the- art Pearl River Plant in Mississippi. This facility is expected to commence operation in three phases beginning in late 1998. By the year 2002, this facility is expected to have annual capacity to manufacture approximately 570 million pounds of resins and 230 million pounds of fiber. As a result, the Company's production mix is expected to be approximately 50% fibers and 50% PET resins. The Fibers Group produces Fortrel(R) textile fibers, which currently represent approximately 60% of the Company's fiber production. These fibers are used in apparel and home furnishings and are produced from two chemical raw materials, purified terephthalic acid (PTA) and monoethylene glycol (MEG). The other 40% of fiber production, primarily fiberfill and carpet fibers, is manufactured by the Recycled Products Group from recycled raw materials, including postindustrial fiber, resin and film materials and postconsumer PET soft drink bottles. The Company's PET resins, produced by the Packaging Products Group from PTA and MEG, are primarily used in the manufacture of clear plastic soft drink bottles and other food and beverage packaging. The Company's markets are highly competitive. It competes in these markets primarily on the basis of product quality, customer service, brand identity and price. It believes it is the second-largest polyester staple and third-largest POY producer in the United States and the fourth-largest PET resins producer in North America. Several of the Company's competitors are substantially larger than the Company and have substantially greater economic resources. Demand for polyester fiber historically has been cyclical, as it is subject to changes in consumer preferences and spending, retail sales patterns, and fiber or textile product imports, all of which are driven primarily by general economic conditions. Global PET resins demand continues to grow, driven by new product applications for PET and conversion from other packaging materials to PET. Several factors significantly affect the Company's profitability: raw material margins, which are the difference (or spread) between product selling prices and raw material costs; supply and demand for its products; the prices of competing materials, such as cotton and aluminum, which can affect demand for its products; and economic and market conditions in the United States, Europe and other regions of the world. Prices of PTA and MEG, primary determinants of polyester fiber and PET resins selling prices, are cyclical. Changes in PTA and MEG prices are driven by worldwide supply and demand. 9 Raw material margins for the chemical-based fiber and PET resins businesses have generally been influenced by supply and demand factors. Despite growing demand for PET resins, worldwide supply has recently undergone significant expansion which has adversely affected profitability. Both fiber and resins margins experience increases or decreases due to timing of price changes and market conditions. Raw material margins for the recycled fiber operation tend to be more variable than those for the chemical-based businesses, primarily because changes in recycled raw material costs do not cause changes in fiber prices. Recycled raw material costs are primarily dependent upon worldwide supply and demand for recycled materials. The Company's sales are neither materially dependent upon a single customer nor seasonal in nature. Sales for PET resins, primarily for soft drink bottles and other beverages, may be influenced by weather and the relative price of aluminum cans. Demand, prices and raw material costs for both fiber and PET resins may be affected by global economic conditions, supply and demand balances, the prices of competing materials, such as cotton and aluminum, and export activity. THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 1997 Net sales for the three months ended March 31, 1998 increased 3.1% to $263.1 million from $255.1 million for the three months ended March 31, 1997. This increase was primarily a result of higher sales volumes for recycled polyester fiber and higher selling prices for PET resins offsetting lower overall polyester fiber selling prices and the loss of sales of Creative Forming, Inc. (CFI), which was sold in December 1997. Sales for the Fibers Group decreased 5.1% to $100.1 million in the 1998 period from $105.4 million in the 1997 period due to lower polyester fiber selling prices. Sales for the Recycled Products Group (RPG) increased 10.4% to $104.6 million in the 1998 period from $94.7 million in the 1997 period due to higher worldwide polyester fiber sales volumes which more than offset continued declines in worldwide polyester fiber selling prices. Sales for the Packaging Products Group (PPG) increased 6.2% in the 1998 period to $58.4 million from $55.0 million in the year-ago period due to higher worldwide PET resins selling prices and increased domestic sales volumes which offset decreased sales volumes at the Company's European resins operation and the divestiture of CFI, which had sales in the first quarter of 1997 of $5.2 million. In the second quarter of 1997, the Company commenced operation of an additional 200 million pounds per year PET resin production line at its Darlington, SC plant. Gross profit for the three months ended March 31, 1998 increased 7.9% to $42.2 million from $39.1 million for the comparable 1997 period. The gross profit margin for the 1998 period was 16.1% compared to 15.3% for the 1997 period. This increase was primarily the result of increased profitability in the PPG, which offset lower profitability in the Fibers Group. Gross profit for the Fibers Group decreased in the 1998 period as compared to the 1997 period due primarily to lower polyester fiber selling prices, which more than offset lower costs. Gross profit for the RPG remained unchanged in the first quarter of 1998 as compared to the same period in 1997 due to higher worldwide sales volumes and lower raw material costs at the Company's Irish fiber operation which offset lower worldwide polyester fiber selling prices and increased domestic raw material costs. Gross profit for the PPG increased significantly in the 1998 period compared to the 1997 period due primarily to higher PET resins selling prices. Selling, general and administrative expense amounted to $19.3 million, or 7.4% of sales, for 1998 decreasing from $20.5 million, or 8.1% of sales, for 10 1997. The decrease is due to reduced costs at the Company's European operations resulting from the restructuring plan implemented in the second quarter of 1997 and the divestiture of CFI in December 1997. As a result of the foregoing, operating income was $22.9 million for the first three months of 1998 compared to $18.6 million for the first three months of 1997. Interest expense was $2.4 million for the 1998 period compared to $3.3 million for the 1997 period. The decrease in interest expense is due to higher interest capitalization resulting from the Company's ongoing capital investment program. The effective tax rate was 38.0% in the first quarter of 1998 compared to 43.0% for the comparable 1997 period. The tax rate decreased primarily as a result of an overall increase in earnings in conjunction with increased earnings at the Company's Irish fiber operation, which is subject to significantly lower tax rates than the U.S. operations, and the reduction in foreign operating losses for which no tax benefit had been provided. As a result of the foregoing, net earnings in the first three months of 1998 were $12.7 million, or $0.41 per basic and diluted share, compared to $8.7 million, or $0.28 per basic and diluted share, for the first three months of 1997. OUTLOOK The worldwide polyester fiber market has begun to experience some effect from the financial troubles of the Far East. In the U.S., higher imports of polyester fiber and apparel have led to sluggish demand and intense price competition. This situation is expected to continue, and gradually affect the European polyester fiber market, during the second half of 1998. Domestic fiber profit margins are expected to remain at low levels primarily due to continued downward pressure on selling prices. PET resins sales volumes are expected to increase in 1998 primarily due to the completion of a domestic expansion in the second quarter of 1997 and the scheduled start-up of the first PET resins production line at the Company's Pearl River Plant in Mississippi in late 1998. The start-up of the Pearl River Plant and other worldwide capacity expansions due on-line in the second half of 1998 may result in downward pressure on selling prices and profit margins during that period. Nevertheless, the Company believes that profit margins in this business will recover in 1998 from the historically low levels in 1997. LIQUIDITY AND CAPITAL RESOURCES Net cash used in operations was $2.3 million for the three months ended March 31, 1998 compared to cash generated from operations of $28.3 million for the three months ended March 31, 1997. The decrease in cash from operations was primarily the result of changes in working capital items. Net cash used in investing activities amounted to $52.9 million in the 1998 period compared to $35.4 million in the comparable 1997 period. Capital spending amounted to $52.9 million in the 1998 period compared to $35.6 million in the 1997 period reflecting the Company's ongoing capital investment program. Net cash provided by financing activities amounted to $55.2 million in the 1998 period compared to $6.2 million in the 1997 period. In 1998, there were net borrowings of $57.9 million compared to $8.7 million in 1997. 11 With the completion of the PET resins capacity expansion at the Darlington, SC plant in the second quarter of 1997, the major portion of the Company's ongoing capital investment program is the construction of its Pearl River Plant in Mississippi. The total capitalized cost of the facility is estimated to be approximately $450 million, consisting of approximately $400 million of construction costs plus Mississippi state grants and capitalized interest. This facility, approximately 62% completed, is expected to be operational in three phases beginning in late 1998. The Company's planned capital expenditures in 1998 are estimated to range between $210 and $230 million. The exact amount and timing of the capital spending is difficult to predict since certain projects may extend into 1999 or beyond depending upon equipment delivery and construction schedules. To receive certain incentives provided by the state of Mississippi, the Company, in conjunction with the Mississippi Business Finance Corporation, issued taxable Rural Economic Development Bonds in May 1998. The Company's financing agreements contain normal financial and restrictive covenants. The financial resources available to the Company at March 31, 1998 include $215 million under its $330 million revolving credit facility, unused short-term uncommitted lines of credit aggregating approximately $276.9 million, and internally generated funds. The Company is pursuing other forms of financing including the issuance of public or private debt securities. The Company believes these financial resources and other credit arrangements will be sufficient to meet its foreseeable working capital, capital expenditure and dividend payment requirements. The Company has entered into two types of financial instruments. One instrument, with a notional amount of $150 million, was designed to provide a fixed 10-year interest rate of 6.51% (exclusive of corporate spreads) on $150 million of debt if issued on March 31, 1998 and approximately 6.61% (exclusive of corporate spreads) if issued on June 30, 1998. The Company has also entered into interest rate swaps to fix the interest rate on variable rate borrowings. The agreements are for $200 million, $150 million of which were in effect at March 31, 1998, and $50 million with a starting date in May 1998. Maturity dates are a minimum of 5 years and a maximum of 10 years after the starting date of the swaps. The swaps will effectively fix the rate of interest between 6.10% and 6.20% on $200 million of borrowings. In aggregate, the Company estimates it would have had to pay approximately $15.7 million to terminate these agreements at March 31, 1998. The Company has entered into forward foreign currency contracts to exchange Dutch guilders for U.S. dollars with an aggregate notional amount of $21.8 million at March 31, 1998 in order to reduce the related impact of foreign currency translation adjustments. This has the effect of converting a portion of U.S. debt to local currency (guilder) debt. The Company has designated these contracts as a hedge of a net investment in a foreign entity. At March 31, 1998, the Company estimates it would have received approximately $0.4 million if these contracts were terminated. The Company has also entered into forward foreign currency contracts to exchange U.S. dollars for German marks with an aggregate notional amount of $8.1 million at March 31, 1998. These contracts are designed to reduce (hedge) the impact of foreign currency fluctuations relative to fixed asset purchase commitments and have maturity dates ranging from April 1998 through March 1999. At March 31, 1998, the Company would have had to pay approximately $.9 million to terminate these contracts. The Company's European businesses utilize foreign currency debt and forward currency contracts to hedge certain of their accounts receivable and accounts payable denominated in other foreign currencies. At March 31, 1998, the 12 notional amount of the forward foreign currency contracts was $12.5 million and the cost to terminate these contracts was approximately $.7 million. The Company's estimates with respect to the values of its derivative instruments are based on readily available dealer quotes. YEAR 2000 Based on a recent assessment, the Company determined that it will be required to modify certain portions of its software and process equipment so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The Company presently believes that with modifications to existing software the Year 2000 Issue will not pose significant operational problems for its computer systems. The Company expects to complete its Year 2000 project by mid 1999, which is prior to any anticipated impact on its operating systems. The total project cost, which will be expensed as incurred, is not expected to have a material effect on the results of operations. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In April 1998, the AICPA issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5). SOP 98-5 requires that costs incurred during start-up activities, including organization costs, be expensed as incurred. SOP 98-5 is effective for financial statements for fiscal years beginning after December 15, 1998. Initial application of SOP 98-5 should be as of the beginning of the fiscal year in which SOP 98-5 is first adopted and should be reported as a cumulative effect of a change in accounting principle. The Company expects to adopt SOP 98-5 in the first quarter of 1999. At the present time, the Company has not completed its analysis of the impact the adoption of SOP 98-5 will have on the consolidated statement of income. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (FAS 131), effective for fiscal years beginning after December 15, 1997. FAS 131 requires that a public company report financial and descriptive information about its reportable operating segments pursuant to criteria that differ from current accounting practice. Operating segments, as defined, are components of an enterprise for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The financial information to be reported includes segment profit or loss, certain revenue and expense items and segment assets and reconciliations to corresponding amounts in the general purpose financial statements. FAS 131 also requires information about products and services, geographic areas of operation, and major customers. The Company has not completed its analysis of the effect of adoption of FAS 131 on its financial statement disclosure; however, the adoption of FAS 131 will not affect results of operations or financial position. FORWARD-LOOKING STATEMENTS; RISKS AND UNCERTAINTIES Statements contained in this Form 10-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. The Company cautions that a number of important factors could cause actual results for 1998 and beyond to differ materially from those expressed in any forward-looking statements made by or 13 on behalf of the Company. Such statements contain a number of risks and uncertainties, including, but not limited to, demand and competition for polyester fiber and PET resins, availability and cost of raw materials, levels of production capacity and announced changes thereto, changes in interest rates and foreign currency exchange rates, work stoppages, natural disasters, U.S., European and global economic conditions and changes in laws and regulations, prices of competing products, such as cotton and aluminum, and the Company's ability to complete expansions and other capital projects on time and budget and to maintain the operations of its existing production facilities. The Company cannot assure that it will be able to anticipate or respond timely to changes which could adversely affect its operating results in one or more fiscal quarters. Results of operations in any past period should not be considered indicative of results to be expected in future periods. Fluctuations in operating results may result in fluctuations in the price of the Company's common stock. For a more complete description of the prominent risks and uncertainties inherent in the Company's business, see the Company's Form 10-K for the year ended December 31, 1997. 14 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. 27 Financial Data Schedule. (b) Reports on Form 8-K. None. 15 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. WELLMAN, INC. Dated May 8, 1998 By /s/ Keith R. Phillips -------------- ------------------------ Keith R. Phillips Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer) Dated May 8, 1998 By /s/ Mark J. Rosenblum ------------- ------------------------ Mark J. Rosenblum Vice President, Chief Accounting Officer and Controller (Principal Accounting Officer) 16 EX-27 2 FDS
5 ART. 5 FDS for first quarter 1998 10-Q 1,000 3-MOS DEC-31-1998 MAR-31-1998 0 0 140,708 4,984 165,958 304,856 1,140,063 350,250 1,373,269 102,551 451,908 0 0 34 641,558 1,373,269 263,073 263,073 220,848 220,848 19,346 0 2,378 20,501 7,790 12,711 0 0 0 12,711 0.41 0.41
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