UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark one)
þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2004
OR
o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-10033
WELLMAN, INC.
| Delaware |
04-1671740 |
|
| (State or other jurisdiction of incorporation or organization) |
(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 þ No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes þ No o
As of July 30, 2004, there were 32,014,147 shares of the registrant’s Class A common stock, $.001 par value, outstanding and no shares of Class B common stock outstanding.
1
WELLMAN, INC.
INDEX
| Page No. |
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PART I — FINANCIAL INFORMATION |
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| 25 | ||||||||
| 25 | ||||||||
| 26 | ||||||||
| 27 | ||||||||
| 28 | ||||||||
| 30 | ||||||||
| Ex-31.1 Certification of CEO | ||||||||
| Ex-31.2 Certification of CFO | ||||||||
| Ex-32.1 Certification of CEO re: Section 906 | ||||||||
| Ex-32.2 Certification of CFO re: Section 906 | ||||||||
2
ITEM 1. FINANCIAL STATEMENTS
WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In millions, except per share data)
| Three Months | Six Months | |||||||||||||||
| Ended June 30, |
Ended June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net sales |
$ | 329.0 | $ | 285.3 | $ | 622.8 | $ | 572.6 | ||||||||
Cost of sales |
305.7 | 262.0 | 582.1 | 519.1 | ||||||||||||
Gross profit |
23.3 | 23.3 | 40.7 | 53.5 | ||||||||||||
Selling, general and administrative expenses |
13.8 | 17.3 | 28.3 | 34.6 | ||||||||||||
Non-capitalizable financing costs |
— | — | 40.2 | — | ||||||||||||
Provision for uncollectible accounts |
— | 0.1 | 0.3 | 0.1 | ||||||||||||
Restructuring charges |
0.8 | 0.1 | 1.1 | 1.3 | ||||||||||||
Other expense, net |
1.1 | 3.0 | 2.3 | 4.2 | ||||||||||||
Operating income (loss) |
7.6 | 2.8 | (31.5 | ) | 13.3 | |||||||||||
Interest expense, net |
10.1 | 2.3 | 17.6 | 4.3 | ||||||||||||
Earnings (loss) from continuing operations before income
taxes |
(2.5 | ) | 0.5 | (49.1 | ) | 9.0 | ||||||||||
Income tax expense (benefit) |
(1.0 | ) | 0.2 | (19.4 | ) | 3.0 | ||||||||||
Earnings (loss) from continuing operations |
(1.5 | ) | 0.3 | (29.7 | ) | 6.0 | ||||||||||
Earnings from discontinued operations, net of income tax |
— | — | — | 0.1 | ||||||||||||
Net earnings (loss) |
$ | (1.5 | ) | $ | 0.3 | $ | (29.7 | ) | $ | 6.1 | ||||||
Net earnings (loss) attributable to common stockholders: |
||||||||||||||||
Net earnings (loss) |
$ | (1.5 | ) | $ | 0.3 | $ | (29.7 | ) | $ | 6.1 | ||||||
Accretion of preferred stock |
(3.0 | ) | (0.1 | ) | (6.0 | ) | (0.1 | ) | ||||||||
Net earnings (loss) attributable to common stockholders |
$ | (4.5 | ) | $ | 0.2 | $ | (35.7 | ) | $ | 6.0 | ||||||
Basic and diluted net earnings (loss) per common share: |
||||||||||||||||
Net earnings (loss) attributable to common stockholders |
$ | (0.14 | ) | $ | 0.01 | $ | (1.13 | ) | $ | 0.19 | ||||||
Dividends per common share |
$ | 0.05 | $ | 0.09 | $ | 0.10 | $ | 0.18 | ||||||||
See Notes to Condensed Consolidated Financial Statements.
3
WELLMAN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
| June 30, | December 31, | |||||||
| 2004 | 2003 | |||||||
| (Unaudited) |
(Note 1) |
|||||||
ASSETS: |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 13.3 | $ | 205.5 | ||||
Accounts receivable, less allowance of $2.6 in 2004 and $3.8 in 2003 |
172.0 | 137.5 | ||||||
Inventories |
130.1 | 121.1 | ||||||
Prepaid expenses and other current assets |
21.6 | 12.1 | ||||||
Total current assets |
337.0 | 476.2 | ||||||
Property, plant and equipment, at cost: |
||||||||
Land, buildings and improvements |
138.4 | 138.4 | ||||||
Machinery and equipment |
1,083.8 | 933.2 | ||||||
Construction in progress |
6.1 | 7.2 | ||||||
| 1,228.3 | 1,078.8 | |||||||
Less accumulated depreciation |
560.4 | 535.8 | ||||||
Property, plant and equipment, net |
667.9 | 543.0 | ||||||
Goodwill, net |
37.0 | 37.3 | ||||||
Other assets, net |
107.9 | 60.6 | ||||||
| $ | 1,149.8 | $ | 1,117.1 | |||||
LIABILITIES AND STOCKHOLDERS’ EQUITY: |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 95.7 | $ | 90.6 | ||||
Accrued liabilities |
31.9 | 41.1 | ||||||
Total current liabilities |
127.6 | 131.7 | ||||||
Long-term debt |
486.3 | 371.0 | ||||||
Deferred income taxes and other liabilities |
108.4 | 148.8 | ||||||
Total liabilities |
722.3 | 651.5 | ||||||
Stockholders’ equity: |
||||||||
Series A preferred stock, $0.001 par value, 5,000,000 shares authorized, 4,502,143
shares issued and outstanding |
53.4 | 51.0 | ||||||
Series B preferred stock, $0.001 par value; 6,700,000 shares authorized, issued and
outstanding |
79.6 | 76.0 | ||||||
Class A
common stock, $0.001 par value; 100,000,000 shares authorized,
34,389,147 shares issued |
— | — | ||||||
Class B common stock, $0.001 par value, 5,500,000 shares authorized, no shares
issued |
— | — | ||||||
Paid-in capital |
245.3 | 245.3 | ||||||
Common stock warrants |
4.9 | 4.9 | ||||||
Accumulated other comprehensive income |
20.0 | 25.2 | ||||||
Retained earnings |
73.8 | 112.7 | ||||||
Less common stock in treasury at cost: 2,500,000 shares |
(49.5 | ) | (49.5 | ) | ||||
Total stockholders’ equity |
427.5 | 465.6 | ||||||
| $ | 1,149.8 | $ | 1,117.1 | |||||
See Notes to Condensed Consolidated Financial Statements.
4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
| Accumulated | ||||||||||||||||||||||||||||||||||||||||||||||||
| Series A | Series B | Class A | Common | Other | ||||||||||||||||||||||||||||||||||||||||||||
| Preferred | Preferred | Common | Paid-In | Stock | Comprehensive | Retained | Treasury | |||||||||||||||||||||||||||||||||||||||||
| Stock Issued |
Stock Issued |
Stock Issued |
Capital |
Warrants |
Income/(Loss) |
Earnings |
Stock |
Total |
||||||||||||||||||||||||||||||||||||||||
| (in millions) |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2002 |
34.4 | $ | — | $ | 248.5 | $ | (3.2 | ) | $ | 230.9 | $ | (49.5 | ) | $ | 426.7 | |||||||||||||||||||||||||||||||||
Net loss |
(96.6 | ) | (96.6 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Currency translation adjustments |
27.3 | 27.3 | ||||||||||||||||||||||||||||||||||||||||||||||
Minimum pension liability
adjustments |
(0.8 | ) | (0.8 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Fair value of derivatives |
1.9 | 1.9 | ||||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive loss |
(68.2 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($0.36 per share) |
(11.5 | ) | (11.5 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of Series A preferred
stock |
4.5 | $ | 48.7 | 48.7 | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of Series B preferred
stock |
6.7 | $ | 72.4 | 72.4 | ||||||||||||||||||||||||||||||||||||||||||||
Equity transaction costs |
(9.0 | ) | (9.0 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Accretion of preferred stock |
2.3 | 3.6 | (5.9 | ) | — | |||||||||||||||||||||||||||||||||||||||||||
Beneficial conversion charge |
4.2 | (4.2 | ) | — | ||||||||||||||||||||||||||||||||||||||||||||
Issuance of restricted stock, net |
0.2 | 0.2 | ||||||||||||||||||||||||||||||||||||||||||||||
Amortization of deferred
compensation, net |
1.4 | 1.4 | ||||||||||||||||||||||||||||||||||||||||||||||
Issuance of common stock
warrants |
$ | 4.9 | 4.9 | |||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2003 |
4.5 | 51.0 | 6.7 | 76.0 | 34.4 | — | 245.3 | 4.9 | 25.2 | 112.7 | (49.5 | ) | 465.6 | |||||||||||||||||||||||||||||||||||
Net loss |
(29.7 | ) | (29.7 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Currency translation adjustments |
(3.0 | ) | (3.0 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Fair value of derivatives |
(2.2 | ) | (2.2 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Total comprehensive loss |
(34.9 | ) | ||||||||||||||||||||||||||||||||||||||||||||||
Cash dividends ($0.10 per share) |
(3.2 | ) | (3.2 | ) | ||||||||||||||||||||||||||||||||||||||||||||
Accretion of preferred stock |
2.4 | 3.6 | (6.0 | ) | — | |||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2004 |
4.5 | $ | 53.4 | 6.7 | $ | 79.6 | 34.4 | $ | — | $ | 245.3 | $ | 4.9 | $ | 20.0 | $ | 73.8 | $ | (49.5 | ) | $ | 427.5 | ||||||||||||||||||||||||||
(unaudited) |
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See Notes to Condensed Consolidated Financial Statements.
5
WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(UNAUDITED)
(In millions)
| 2004 |
2003 |
|||||||
Cash flows from operating activities: |
||||||||
Net earnings (loss) |
$ | (29.7 | ) | $ | 6.1 | |||
Adjustments to reconcile net earnings (loss) to net
cash used in operating activities: |
||||||||
Depreciation |
27.8 | 23.1 | ||||||
Amortization |
7.0 | 1.5 | ||||||
Amortization in interest expense, net |
1.9 | 0.6 | ||||||
Deferred income taxes and other |
(20.9 | ) | (5.1 | ) | ||||
Gain on sale of business |
— | (0.5 | ) | |||||
Non-capitalizable financing costs |
21.0 | — | ||||||
Changes in operating assets and liabilities |
(50.1 | ) | (53.6 | ) | ||||
Net cash used in operating activities |
(43.0 | ) | (27.9 | ) | ||||
Cash flows from investing activities: |
||||||||
Additions to property, plant and equipment |
(4.3 | ) | (6.1 | ) | ||||
Purchase of sale-leaseback assets |
(150.0 | ) | — | |||||
Pre-payment of raw material contract |
(77.1 | ) | — | |||||
Proceeds from sale of business |
— | 1.1 | ||||||
Net cash used in investing activities |
(231.4 | ) | (5.0 | ) | ||||
Cash flows from financing activities: |
||||||||
Borrowings (repayments) under long-term debt, net |
115.0 | (71.5 | ) | |||||
Termination of swaps |
(11.9 | ) | — | |||||
Dividends paid on common stock |
(3.2 | ) | (5.7 | ) | ||||
Debt issuance costs |
(18.0 | ) | (16.0 | ) | ||||
Issuance of restricted stock |
— | 0.2 | ||||||
Issuance of preferred stock (Series A & B) and warrants |
— | 126.0 | ||||||
Net cash provided by financing activities |
81.9 | 33.0 | ||||||
Effect of exchange rate changes on cash and cash equivalents |
0.3 | (0.1 | ) | |||||
Increase (decrease) in cash and cash equivalents |
(192.2 | ) | — | |||||
Cash and cash equivalents at beginning of period |
205.5 | — | ||||||
Cash and cash equivalents at end of period |
$ | 13.3 | $ | 0 | ||||
Supplemental cash flow data: |
||||||||
Cash paid during the period for: |
||||||||
Interest (net of amounts capitalized) |
$ | 13.9 | $ | 5.2 | ||||
Income taxes |
$ | 0.5 | $ | 0.6 | ||||
See Notes to Condensed Consolidated Financial Statements.
6
WELLMAN, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(In millions, 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 and six-month period ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004.
The Condensed Consolidated Balance Sheet (“Balance Sheet”) at December 31, 2003 has been derived from the audited consolidated 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, 2003.
Certain 2003 amounts have been reclassified to conform to the 2004 presentation.
2. DISCONTINUED OPERATIONS
In March 2003, the Company sold the assets of its small recycled fine denier polyester staple fiber business with a manufacturing facility in Marion, South Carolina, which was previously reported as a discontinued operation in the Company’s financial statements. For the three months ended March 31, 2003, the Company reported net sales from discontinued operations of $0.7 and a loss from discontinued operations before income tax benefit of $0.3 ($0.2 after taxes). The net cash proceeds totaled $1.1, which resulted in a gain of $0.5 ($0.3 after taxes). The gain was recognized during the first quarter of 2003 and included in discontinued operations in the Company’s Condensed Consolidated Statement of Operations (“Statement of Operations”).
3. INVENTORIES
Inventories consisted of the following:
| June 30, | December 31, | |||||||
| 2004 |
2003 |
|||||||
Raw materials |
$ | 40.8 | $ | 35.3 | ||||
Finished and semi-finished goods |
81.9 | 77.9 | ||||||
Supplies |
7.4 | 7.9 | ||||||
| $ | 130.1 | $ | 121.1 | |||||
7
4. RESTRUCTURING CHARGES
During 2003, the Company announced various cost reduction plans in order to improve operating results and enhance stockholder value. These cost reduction efforts were in response to reduced profitability as a result of increased raw material costs, declines in PET resin selling prices in the Packaging Products Group (PPG) and a continuing decline in the Fibers and Recycled Products Group (FRPG) operating results.
January 2003
In January 2003, the FRPG commenced a plan to restructure its operations, which included a reduction in the number of employees and other cost savings initiatives at the Company’s three fiber manufacturing facilities. During the first half of 2003, the Company recorded termination costs of $1.3 and paid $1.2 in its FRPG segment related to this plan. These costs were reflected in operating income (loss) in the Statements of Operations. An additional $0.6 of severance costs was accrued and paid during the remainder of 2003. The plan was fully implemented in 2003.
November 2003
In November 2003, the Company announced a plan with Company-wide cost reduction initiatives that included eliminating levels of management, reducing the number of employees, and other organizational and administrative consolidations and changes. During the first half of 2004, the Company incurred severance costs of $1.1 associated with this plan, of which $0.1 related to the PPG and $1.0 related to the FRPG. These costs were reflected in operating income (loss) in the Statements of Operations. The following represents changes in the accruals since the plan was adopted.
| Severance | ||||
| Costs |
||||
Accruals during 2003 |
$ | 8.1 | ||
Cash payments in 2003 |
(2.0 | ) | ||
Accrual balances at December 31, 2003 |
6.1 | |||
Accruals during the first half of 2004 |
1.1 | |||
Cash payments |
(6.2 | ) | ||
Currency translation adjustments |
(0.1 | ) | ||
Accrual balances at June 30, 2004 |
$ | 0.9 | ||
The remaining accrual should be fully paid out during the remainder of 2004. In addition, pension expense of $0.2 was recorded as a restructuring charge in the FRPG during the fourth quarter of 2003 due to the termination of employees.
5. OTHER EXPENSE
Other expense consisted of legal costs related to the Department of Justice investigation of the polyester staple fiber industry and expense in 2003 associated with the acceleration of stock option vesting. Legal costs totaled $1.1 and $2.3 for the three and six-month periods ended June 30, 2004, respectively, and $1.8 and $3.0 for the three and six-month periods ended June 30, 2003, respectively. Expense associated with the accelerated stock option vesting totaled $1.2 in both the three and six-month periods ended June 30, 2003.
8
6. NET EARNINGS (LOSS) PER COMMON SHARE
The following table sets forth the computation of basic and diluted net earnings (loss) attributable to common stockholders per common share for the periods indicated:
| Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Numerator for basic and diluted net earnings (loss) attributable to
common stockholders per common share: |
||||||||||||||||
Net earnings (loss) attributable to common stockholders
from continuing operations |
$ | (4.5 | ) | $ | 0.2 | $ | (35.7 | ) | $ | 5.9 | ||||||
Net earnings (loss) attributable to common stockholders
from discontinued operations |
— | — | — | 0.1 | ||||||||||||
Net earnings (loss) attributable to common stockholders |
$ | (4.5 | ) | $ | 0.2 | $ | (35.7 | ) | $ | 6.0 | ||||||
Denominator: |
||||||||||||||||
Denominator for basic net earnings (loss) attributable to
common stockholders per common share—weighted
average shares |
31.6 | 31.6 | 31.6 | 31.6 | ||||||||||||
Effect of dilutive securities: |
||||||||||||||||
Employee stock options and restricted stock |
& | |||||||||||||||