10-Q 1 jb10q12001.txt BODY OF 1Q2001 10-Q =============================================================================== 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 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 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 16,459,468 shares of common stock outstanding at May 1, 2001. =============================================================================== COMMONWEALTH INDUSTRIES, INC. FORM 10-Q For the Quarter Ended March 31, 2001 INDEX Part I - Financial Information Item 1. Financial Statements (unaudited) Page Number ----------- Condensed Consolidated Balance Sheet as of March 31, 2001 and December 31, 2000 3 Condensed Consolidated Statement of Income for the three months ended March 31, 2001 and 2000 4 Condensed Consolidated Statement of Comprehensive Income for the three months ended March 31, 2001 and 2000 5 Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2001 and 2000 6 Notes to Condensed Consolidated Financial Statements 7-15 Item 2. Management's Discussion and Analysis of Financial Condition 16-18 and Results of Operations Part II - Other Information Item 1. Legal Proceedings 19 Item 6. Exhibits and Reports on Form 8-K 19 Signatures 20 COMMONWEALTH INDUSTRIES, INC. Condensed Consolidated Balance Sheet (in thousands except share data)
March 31, December 31, 2001 2000 -------------- ------------- Assets Current assets: Cash and cash equivalents $ 12,901 $ 11,514 Accounts receivable, net 322 111 Inventories 132,676 137,685 Prepayments and other current assets 90,087 83,730 -------------- ------------- Total current assets 235,986 233,040 Property, plant and equipment, net 253,108 258,963 Goodwill, net 159,015 160,134 Other noncurrent assets 2,859 3,203 -------------- ------------- Total assets $ 650,968 $ 655,340 ============== ============= Liabilities Current liabilities: Outstanding checks in excess of deposits $ - $ - Accounts payable 62,740 53,522 Accrued liabilities 35,226 41,056 -------------- ------------- Total current liabilities 97,966 94,578 Long-term debt 125,000 125,000 Other long-term liabilities 6,343 6,369 Accrued pension benefits 9,165 9,085 Accrued postretirement benefits 81,484 81,915 -------------- ------------- Total liabilities 319,958 316,947 -------------- ------------- Commitments and contingencies - - Stockholders' Equity Common stock, $0.01 par value, 50,000,000 shares authorized, 16,452,268 and 16,528,051 shares outstanding at March 31, 2001 and December 31, 2000, respectively 165 165 Additional paid-in capital 408,130 408,505 Accumulated deficit (68,566) (61,688) Unearned compensation - (7) Notes receivable from sale of common stock (7,063) (8,582) Accumulated other comprehensive income: Effects of cash flow hedges (1,656) - -------------- ------------- Total stockholders' equity 331,010 338,393 -------------- ------------- Total liabilities and stockholders' equity $ 650,968 $ 655,340 ============== ============= See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC. Condensed Consolidated Statement of Income (in thousands except per share data)
Three months ended March 31, ---------------------------------------- 2001 2000 --------------- -------------- Net sales $ 230,191 $ 320,965 Cost of goods sold 219,327 298,425 --------------- -------------- Gross profit 10,864 22,540 Selling, general and administrative expenses 11,742 14,645 Amortization of goodwill 1,119 1,119 --------------- -------------- Operating income (loss) (1,997) 6,776 Other income (expense), net 240 240 Interest expense, net (4,073) (5,327) --------------- -------------- Income (loss) before income taxes (5,830) 1,689 Income tax expense 225 439 --------------- -------------- Net income (loss) $ (6,055) $ 1,250 =============== ============== Basic and diluted net income (loss) per share $ (0.37) $ 0.08 =============== ============== Weighted average shares outstanding Basic 16,455 16,612 Diluted 16,455 16,637 Dividends paid per share $ 0.05 $ 0.05 See notes to condensed consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC. Condensed Consolidated Statement of Comprehensive Income (in thousands)
Three months ended March 31, ---------------------------------------- 2001 2000 ------------- ---------------- Net income (loss) $ (6,055) $ 1,250 Other comprehensive income, net of tax: Net change related to cash flow hedges (1,656) - -------------- -------------- Comprehensive income (loss) $ (7,711) $ 1,250 ============== ============== See notes to consolidated financial statements.
COMMONWEALTH INDUSTRIES, INC. Condensed Consolidated Statement of Cash Flows (in thousands)
Three months ended March 31, ---------------------------------- 2001 2000 ----------- ----------- Cash flows from operating activities: Net income (loss) $(6,055) $ 1,250 Adjustments to reconcile net income (loss) to net cash provided by (used in) operations: Depreciation and amortization 9,700 9,814 Loss on disposal of property, plant and equipment 478 - Issuance of common stock in connection with stock awards 75 75 Changes in assets and liabilities: (Increase) in accounts receivable, net (211) (3) Decrease in inventories 5,009 2,414 (Increase) decrease in prepayments and other current assets (6,357) 7,387 Decrease (increase) in other noncurrent assets 44 (15) Increase (decrease) in accounts payable 9,218 (15,888) (Decrease) in accrued liabilities (5,830) (7,563) (Decrease) in other liabilities (2,033) (319) ----------- ----------- Net cash provided by (used in) operating activities 4,038 (2,848) ----------- ----------- Cash flows from investing activities: Purchases of property, plant and equipment (2,897) (6,801) Proceeds from sale of property, plant and equipment - 4 ----------- ----------- Net cash (used in) investing activities (2,897) (6,797) ----------- ----------- Cash flows from financing activities: Increase in outstanding checks in excess of deposits - 9,688 Proceeds from long-term debt 32,000 40,400 Repayments of long-term debt (32,000) (40,400) Repayments of notes receivable from sale of common stock 1,069 788 Cash dividends paid (823) (831) ----------- ----------- Net cash provided by financing activities 246 9,645 ----------- ----------- Net increase in cash and cash equivalents 1,387 - Cash and cash equivalents at beginning of period 11,514 - ----------- ----------- Cash and cash equivalents at end of period $12,901 $ - =========== =========== Supplemental disclosures: Interest paid $ 900 $ 1,845 Income taxes paid (refund received) (388) 103 Non-cash activities: Repayment of notes receivable from sale of common stock with 450 - common stock and subsequent retirement of common stock 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. Inventories The Company uses the last-in, first-out (LIFO), first-in, first-out (FIFO) and average-cost accounting methods for valuing its inventories. (in thousands) March 31, 2001 December 31, 2000 -------------- --------------- ----------------- Raw materials $ 31,843 $ 50,154 Work in process 56,362 49,473 Finished goods 41,223 33,899 Expendable parts and supplies 15,724 15,850 --------- --------- 145,152 149,376 LIFO reserve (12,476) (11,691) --------- --------- $ 132,676 $ 137,685 ========= ========= Inventories of approximately $109.7 million and $116.5 million, included in the above totals (before the LIFO reserve) at March 31, 2001 and December 31, 2000, 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. 3. Provision for Income Taxes The Company recognized income tax expense of $0.2 million for the three months ended March 31, 2001 compared to income tax expense of $0.4 million for the three months ended March 31, 2000. 4. Net Income Per Share Computations The following is a reconciliation of the numerator and denominator of the basic and diluted per share computations:
Three months ended March 31, 2001 2000 ---- ---- Income (numerator) amounts used for basic and diluted per share computations: Net income (loss) $(6,055) $1,250 ======== ====== Shares (denominator) used for basic per share computations: Weighted average shares of common stock outstanding 16,455 16,612 ====== ====== Shares (denominator) used for diluted per share computations: Weighted average shares of common stock outstanding 16,455 16,612 Plus: dilutive effect of stock options - 25 ------ ------ Adjusted weighted average shares 16,455 16,637 ====== ====== Net income (loss) per share data: Basic and diluted $(0.37) $0.08 ======= ===== Options to purchase 310,000 common shares, which equate to 54,140 incremental common equivalent shares, were excluded from the calculation above for the three months ended March 31, 2001 as their effect would have been antidilutive. In addition, options to purchase 812,000 and 773,500 common shares for the three months ended March 31, 2001 and 2000, respectively, were excluded from the calculations above because the exercise prices on the options were greater than the average market price for the periods.
5. 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 Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in net income unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company recorded a cumulative-effect-type deferred net gain transition adjustment of $6.6 million in accumulated other comprehensive income to recognize at fair value all derivatives that are designated as cash-flow hedging instruments upon adoption of SFAS No. 133 on January 1, 2001. The Company expects to reclassify this deferred net gain from other comprehensive income into net income as cost of goods sold before December 31, 2001. The Company enters into futures contracts and options to manage exposures to price risk related to aluminum and natural gas purchases. The Company has designated these futures and option contracts as cash flow hedges of anticipated aluminum raw material and natural gas requirements. Gains, losses and premiums on these instruments that are recorded in other comprehensive income will be reclassified into net income as cost of goods sold in the periods when the related inventory is sold or gas used. As of March 31, 2001, approximately $0.9 million of the $1.7 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 $0.4 million was recognized in cost of goods sold during the three months ended March 31, 2001 representing the amount of the hedges' ineffectiveness. As of March 31, 2001, the Company held open aluminum and natural gas futures contracts and options having maturity dates extending through December 2003. In order to hedge a portion of its interest rate risk, the Company is party to an interest rate swap agreement with a notional amount of $5 million under which the Company pays a fixed rate of interest and receives a LIBOR-based floating rate. The Company's interest rate swap agreement at March 31, 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 is recognized currently as interest expense, net in the Company's consolidated income statement. The amount of such change in the fair value of the interest rate swap agreement was immaterial for the three months ended March 31, 2001. 6. 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, 2000. 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 business units 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 ended March 31, 2001 and 2000. 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.
Electrical Aluminum Products Other Total -------- ---------- -------- ---------- Three months ended March 31, 2001 --------------------------------- Net sales to external customers $199,845 $30,346 $ -- $230,191 Intersegment net sales 7,981 -- (7,981) -- Operating income (loss) 903 1,042 (3,942) (1,997) Depreciation and amortization 8,716 977 7 9,700 Total assets 552,586 95,606 2,776 650,968 Capital expenditures 2,807 90 -- 2,897 Three months ended March 31, 2000 --------------------------------- Net sales to external customers $285,346 $35,619 $ -- $320,965 Intersegment net sales 7,041 -- (7,041) -- Operating income 11,526 (897) (3,853) 6,776 Depreciation and amortization 8,685 1,022 107 9,814 Total assets 596,153 97,401 75 693,629 Capital expenditures 6,698 103 -- 6,801
7. Guarantor Financial Statements The $125 million of 10.75% senior subordinated notes due 2006 issued by the Company, and the $100 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, combining balance sheet as of March 31, 2001 and December 31, 2000, statement of income and statement of cash flows for the three months ended March 31, 2001 and 2000. Combining Balance Sheet at March 31, 2001 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- ----------- ----------- ------------ -------- Assets Current assets: Cash and cash equivalents $ -- $ 12,901 $ -- $ -- $ 12,901 Accounts receivable, net -- 257,987 -- (257,665) 322 Inventories -- 132,676 -- -- 132,676 Prepayments and other current assets 816 3,014 86,257 -- 90,087 --------- --------- --------- --------- --------- Total current assets 816 406,578 86,257 (257,665) 235,986 Property, plant and equipment, net -- 253,108 -- -- 253,108 Goodwill, net -- 159,015 -- -- 159,015 Other noncurrent assets 602,381 899 -- (600,421) 2,859 --------- --------- --------- --------- --------- Total assets $ 603,197 $ 819,600 $ 86,257 $(858,086) $ 650,968 ========= ========= ========= ========= ========= Liabilities Current liabilities: Outstanding checks in excess of deposits $ -- $ -- $ -- $ -- $ -- Accounts payable 136,671 62,740 120,994 (257,665) 62,740 Accrued liabilities 8,860 26,907 (541) -- 35,226 --------- --------- --------- --------- --------- Total current liabilities 145,531 89,647 120,453 (257,665) 97,966 Long-term debt 125,000 -- -- -- 125,000 Other long-term liabilities -- 6,343 -- -- 6,343 Accrued pension benefits -- 9,165 -- -- 9,165 Accrued postretirement benefits -- 81,484 -- -- 81,484 --------- --------- --------- --------- --------- Total liabilities 270,531 186,639 120,453 (257,665) 319,958 --------- --------- --------- --------- --------- Commitments and contingencies -- -- -- -- -- Stockholders' Equity Common stock 165 1 -- (1) 165 Additional paid-in capital 408,130 486,727 5,000 (491,727) 408,130 Accumulated deficit (68,566) 147,889 (39,196) (108,693) (68,566) Notes receivable from sale of common stock (7,063) -- -- -- (7,063) Accumulated other comprehensive income: Effects of cash flow hedges -- (1,656) -- -- (1,656) --------- --------- --------- --------- --------- Total stockholders' equity 332,666 632,961 (34,196) (600,421) 331,010 --------- --------- --------- --------- --------- Total liabilities and stockholders' equity $ 603,197 $ 819,600 $ 86,257 $(858,086) $ 650,968 ========= ========= ========= ========= =========
Combining Balance Sheet at December 31, 2000 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- ----------- ----------- ------------ -------- Assets Current assets: Cash and cash equivalents $ -- $ 11,514 $ -- $ -- $ 11,514 Accounts receivable, net -- 242,176 -- (242,065) 111 Inventories -- 137,685 -- -- 137,685 Prepayments and other current assets 797 10,566 72,367 -- 83,730 --------- --------- --------- --------- --------- Total current assets 797 401,941 72,367 (242,065) 233,040 Property, plant and equipment, net -- 258,963 -- -- 258,963 Goodwill, net -- 160,134 -- -- 160,134 Other noncurrent assets 605,054 1,135 -- (602,986) 3,203 --------- --------- --------- --------- --------- Total assets $ 605,851 $ 822,173 $ 72,367 $(845,051) $ 655,340 ========= ========= ========= ========= ========= Liabilities Current liabilities: Outstanding checks in excess of deposits $ -- $ -- $ -- $ -- $ -- Accounts payable 137,384 53,522 104,681 (242,065) 53,522 Accrued liabilities 5,074 36,288 (306) -- 41,056 --------- --------- --------- --------- --------- Total current liabilities 142,458 89,810 104,375 (242,065) 94,578 Long-term debt 125,000 -- -- -- 125,000 Other long-term liabilities -- 6,369 -- -- 6,369 Accrued pension benefits -- 9,085 -- -- 9,085 Accrued postretirement benefits -- 81,915 -- -- 81,915 --------- --------- --------- --------- --------- Total liabilities 267,458 187,179 104,375 (242,065) 316,947 --------- --------- --------- --------- --------- Commitments and contingencies -- -- -- -- -- Stockholders' Equity Common stock 165 1 -- (1) 165 Additional paid-in capital 408,505 486,727 5,000 (491,727) 408,505 Accumulated deficit (61,688) 148,266 (37,008) (111,258) (61,688) Unearned compensation (7) -- -- -- (7) Notes receivable from sale of common stock (8,582) -- -- -- (8,582) --------- --------- --------- --------- --------- Total stockholders' equity 338,393 634,994 (32,008) (602,986) 338,393 --------- --------- --------- --------- --------- Total liabilities and stockholders' equity $ 605,851 $ 822,173 $ 72,367 $(845,051) $ 655,340 ========= ========= ========= ========= =========
Combining Statement of Income for the three months ended March 31, 2001 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- --------- --------- --------- --------- Net sales $ -- $ 230,191 $ -- $ -- $ 230,191 Cost of goods sold -- 219,327 -- -- 219,327 --------- --------- --------- --------- --------- Gross profit -- 10,864 -- -- 10,864 Selling, general and administrative expenses 129 11,613 -- -- 11,742 Amortization of goodwill -- 1,119 -- -- 1,119 --------- --------- --------- --------- --------- Operating income (loss) (129) (1,868) -- -- (1,997) Other income (expense), net (2,565) 240 -- 2,565 240 Interest income (expense), net (3,361) 1,476 (2,188) -- (4,073) --------- --------- --------- --------- --------- Income (loss) before income taxes (6,055) (152) (2,188) 2,565 (5,830) Income tax expense -- 225 -- -- 225 --------- --------- --------- --------- --------- Net income (loss) $ (6,055) $ (377) $ (2,188) $ 2,565 $ (6,055) ========= ========= ========= ========= =========
Combining Statement of Income for the three months ended March 31, 2000 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- --------- --------- --------- --------- Net sales $ -- $ 320,965 $ -- $ -- $ 320,965 Cost of goods sold -- 298,425 -- -- 298,425 --------- --------- --------- --------- --------- Gross profit -- 22,540 -- -- 22,540 Selling, general and administrative expenses 222 14,423 -- -- 14,645 Amortization of goodwill -- 1,119 -- -- 1,119 --------- --------- --------- --------- --------- Operating income (loss) (222) 6,998 -- -- 6,776 Other income (expense), net 4,789 240 -- (4,789) 240 Interest income (expense), net (3,317) 916 (2,926) -- (5,327) --------- --------- --------- --------- --------- Income (loss) before income taxes 1,250 8,154 (2,926) (4,789) 1,689 Income tax expense (benefit) -- 439 -- -- 439 --------- --------- --------- --------- --------- Net income (loss) $ 1,250 $ 7,715 $ (2,926) $ (4,789) $ 1,250 ========= ========= ========= ========= =========
Combining Statement of Cash Flows for the three months ended March 31, 2001 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- ---------- ---------- --------- ---------- Cash flows from operating activities: Net income (loss) $ (6,055) $ (377) $ (2,188) $ 2,565 $ (6,055) Adjustments to reconcile net income (loss) to net cash provided by operations: Depreciation and amortization 7 9,693 -- -- 9,700 Loss on disposal of property, plant and equipment -- 478 -- -- 478 Issuance of common stock in connection with stock awards 75 -- -- -- 75 Equity in undistributed net income of subsidiaries -- 2,565 -- (2,565) -- Changes in assets and liabilities: (Increase) decrease in accounts receivable, net -- (15,811) -- 15,600 (211) Decrease in inventories -- 5,009 -- -- 5,009 (Increase) decrease in prepayments and other current assets (19) 7,552 (13,890) -- (6,357) Decrease (increase) in other noncurrent assets 2,673 (2,629) -- -- 44 (Decrease) increase in accounts payable (713) 9,218 16,313 (15,600) 9,218 Increase (decrease) in accrued liabilities 3,786 (9,381) (235) -- (5,830) (Decrease) in other liabilities -- (2,033) -- -- (2,033) -------- -------- -------- -------- -------- Net cash (used in) provided by operating activities (246) 4,284 -- -- 4,038 -------- -------- -------- -------- -------- Cash flows from investing activities: Purchases of property, plant and equipment -- (2,897) -- -- (2,897) Proceeds from sale of property, plant and equipment -- -- -- -- -- -------- -------- -------- -------- -------- Net cash (used in) investing activities -- (2,897) -- -- (2,897) -------- -------- -------- -------- -------- Cash flows from financing activities: Proceeds from long-term debt -- 32,000 -- -- 32,000 Repayments of long-term debt -- (32,000) -- -- (32,000) Repayments of notes receivable from sale of common stock 1,069 -- -- -- 1,069 Cash dividends paid (823) -- -- -- (823) -------- -------- -------- -------- -------- Net cash provided by financing activities 246 -- -- -- 246 -------- -------- -------- -------- -------- Net increase in cash and cash equivalents -- 1,387 -- -- 1,387 Cash and cash equivalents at beginning of period -- 11,514 -- -- 11,514 -------- -------- -------- -------- -------- Cash and cash equivalents at end of period $ -- $ 12,901 $ -- $ -- $ 12,901 ======== ======== ======== ======== ========
Combining Statement of Cash Flows for the three months ended March 31, 2000 (in thousands)
Parent Company Subsidiary Non-guarantor Combined Only Guarantors Subsidiaries Eliminations Totals --------- ---------- ---------- --------- ---------- Cash flows from operating activities: Net income (loss) $ 1,250 $ 7,715 $ (2,926) $ (4,789) $ 1,250 Adjustments to reconcile net income (loss) to net cash provided by operations: Depreciation and amortization 216 9,598 -- -- 9,814 Issuance of common stock in connection with stock awards 75 -- -- -- 75 Equity in undistributed net income of subsidiaries -- (4,789) -- 4,789 -- Changes in assets and liabilities: (Increase) decrease in accounts receivable, net 2,255 (4,130) -- 1,872 (3) Decrease in inventories -- 2,414 -- -- 2,414 Decrease (increase) in prepayments and other current assets 117 8,820 (1,550) -- 7,387 (Increase) decrease in other noncurrent assets (4,940) 4,925 -- -- (15) (Decrease) increase in accounts payable -- (18,143) 4,127 (1,872) (15,888) Increase (decrease) in accrued liabilities 1,070 (8,982) 349 -- (7,563) (Decrease) in other liabilities -- (319) -- -- (319) -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities 43 (2,891) -- -- (2,848) -------- -------- -------- -------- -------- Cash flows from investing activities: Purchases of property, plant and equipment -- (6,801) -- -- (6,801) Proceeds from sale of property, plant and equipment -- 4 -- -- 4 -------- -------- -------- -------- -------- Net cash (used in) investing activities -- (6,797) -- -- (6,797) -------- -------- -------- -------- -------- Cash flows from financing activities: Increase in outstanding checks in excess of deposits -- 9,688 -- -- 9,688 Proceeds from long-term debt -- 40,400 -- -- 40,400 Repayments of long-term debt -- (40,400) -- -- (40,400) Repayments of notes receivable from sale of common stock 788 -- -- -- 788 Cash dividends paid (831) -- -- -- (831) -------- -------- -------- -------- -------- Net cash (used in) provided by financing activities (43) 9,688 -- -- 9,645 -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents -- -- -- -- -- Cash and cash equivalents at beginning of period -- -- -- -- -- -------- -------- -------- -------- -------- Cash and cash equivalents at end of period $ -- $ -- $ -- $ -- $ -- ======== ======== ======== ======== ========
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act, as amended and involve risks and uncertainties that could render them materially different, including, but not limited to, the effect of global economic conditions, the impact of competitive products and pricing, product development and commercialization, availability and cost of critical raw materials, the rate of technological change, product demand and market acceptance risks, 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 quarter of 2001, shipments of the Company's aluminum sheet products decreased by 31% from the first quarter of 2000. Demand for the Company's aluminum sheet products decreased in the first quarter of 2001 due to the Company's customers reducing inventories built last year and the increasingly soft business conditions generally throughout the economy and specifically across the Company's various markets. Despite the softness in demand, material margins increased slightly in the first quarter compared to the first quarter of 2000. Part of the increase in the material margins is due to improvements in product mix and the Company's ability to utilize lower-cost raw materials. Demand for the Company's electrical products also decreased during the first quarter of 2001. Shipments were down 22% compared to the first quarter of 2000 due to the weak customer demand. Material margins, however, increased due to increased selling prices on armored cable products. The higher material margins more than offset the effect of the decline in shipment volume and higher manufacturing unit costs compared to the first quarter of 2000 and returned the Company's electrical products business unit to an operating profit for the first quarter of 2001. Results of Operations for the three months ended March 31, 2001 and 2000 Net Sales. Net sales for the quarter ended March 31, 2001, decreased 28% to $230.2 million (including $30.3 million from Alflex) from $321.0 million (including $35.6 million from Alflex) for the same period in 2000. The decrease is due to continued weak customer demand affecting virtually all of the Company's markets versus a strong first quarter of 2000. Unit sales volume of aluminum decreased 31% to 190.0 million pounds for the first quarter of 2001 from 274.3 million pounds for the first quarter of 1999. Alflex unit sales volume was 128.4 million feet for the first quarter of 2001 versus 164.5 million feet for the comparable period in 2000, a decline of 22%. Gross Profit. Gross profit for the quarter ended March 31, 2001, decreased to $10.9 million (4.7% of net sales) from $22.5 million (7.0% of net sales) for the same period in 2000. This decrease was related entirely to the aluminum business unit as manufacturing inefficiencies related to lower volume, severance charges of approximately $2.0 million related to workforce reductions and significantly higher energy costs more than offset the slight improvement in material margins. Despite the higher energy costs, the Alflex business unit increased its gross profit for the first quarter of 2001 versus the first quarter of 2000 due to improved material margins. Operating Income. The Company had an operating loss of $2.0 million for the first quarter of 2001 compared with operating income of $6.8 million for the first quarter of 2000. The decrease was related entirely to the aluminum business unit's gross profit decline as described in the preceding paragraph as the Alflex business unit had operating income of $1.0 million in the first quarter of 2001 compared to an operating loss of $0.9 million in the first quarter of 2000. Selling, general and administrative expenses during the first quarter of 2001 were $11.7 million, compared with $14.6 million for the same period in 2000. Contributing to the decrease were reduced incentive compensation expenses and lower selling expenses. Net Income. The Company had a net loss of $6.1 million for the quarter ended March 31, 2001, compared to net income of $1.3 million for the same period in 2000. Interest expense was $4.1 million for the quarter ended March 31, 2001, compared $5.3 million recorded in the first quarter of 2000. The decrease was primarily due to a reduction in amounts outstanding under the Company's accounts receivable securitization facility. There was income tax expense of $0.2 million in the first quarter of 2001 compared to income tax expense of $0.4 million for the same period in 2000. Liquidity and Capital Resources The Company's sources of liquidity are cash flows from operations, the Company's accounts receivable securitization facility described below and borrowings under its $100 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 2001. 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 accounts receivable securitization facility 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 accounts receivable securitization facility for an additional three-year period ending in September 2003. At March 31, 2001, the Company had outstanding $49.0 million under the agreement and had $86.3 million of net residual interest in the securitized receivables which is included in other current assets in the Company's consolidated financial statements. 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 quarter of 2001, the Company received gross proceeds of $30.0 million from the sale of receivables and made gross payments of $50.0 million under the agreement. The Company's operations provided cash flows of $4.0 million for the three months ended March 31, 2001 compared to using $2.8 million in the three months ended March 31, 2000. Working capital increased to $138.0 million at March 31, 2001 from $127.0 million at March 31, 2000. Capital expenditures were $2.9 million during the quarter ended March 31, 2001. At March 31, 2001, the Company had commitments of $0.4 million for the purchase or construction of capital assets. Total capital expenditures for the year 2001 are expected to be approximately $15 million, all generally related to upgrading and expanding the Company's manufacturing and other facilities and meeting environmental requirements. 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 and options on the London Metal Exchange ("LME"). At March 31, 2001, the Company held purchase and sales commitments through September 2002 totaling $45 million and $160 million, respectively. The Company also uses futures contracts and options to reduce its risks associated with its natural gas requirements. As described in note 5 to the 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 its aluminum and natural gas futures contracts and options as cash flow hedges. Before entering into futures 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 is party to an interest rate swap agreement with a notional amount of $5 million under which the Company pays a fixed rate of interest and receives a LIBOR-based floating rate. The Company's interest rate swap agreement at March 31, 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 is recognized currently as interest expense, net in the Company's consolidated income statement. The amount of such change in the fair value of the interest rate swap agreement was immaterial for the three months ended March 31, 2001. Recently Issued Accounting Pronouncements In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" ("SFAS No. 140"). The Statement is effective for transfers and servicing of financial assets and extinguishment of liabilities occurring after March 31, 2001. SFAS No. 140 also includes provisions that require additional disclosures in the financial statements for fiscal years ending after December 15, 2000. Additional disclosures were included in note 2 to the consolidated financial statements included in the Company's annual report to stockholders. This Statement is not expected to have a material impact on the Company's results of operations or financial position. 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 are no exhibits. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ended March 31, 2001. 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, Chief Financial Officer and Secretary Date: May 4, 2001