WELLMAN INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark one)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2004

		OR

o		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.

(Exact name of registrant as specified in its charter)


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 October 29, 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.

ITEM 1. FINANCIAL STATEMENTS

WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(In millions, except per share data)


	Three Months						Nine Months
	Ended September 30,						Ended September 30,
	2004			2003			2004			2003
Net sales	$	310.0		$	262.7		$	932.8		$	835.3
Cost of sales		295.5			246.2			877.6			765.3

Gross profit		14.5			16.5			55.2			70.0
Selling, general and administrative expenses		14.6			15.8			42.9			50.4
Non-capitalizable financing costs		—			—			40.2			—
Provision for uncollectible accounts		—			3.3			0.3			3.4
Restructuring charges		1.3			0.3			2.4			1.6
Other expense, net		0.6			1.2			2.9			5.4

Operating income (loss)		(2.0	)		(4.1	)		(33.5	)		9.2
Interest expense, net		10.5			2.4			28.1			6.7

Earnings (loss) from continuing operations before income taxes		(12.5	)		(6.5	)		(61.6	)		2.5
Income tax expense (benefit)		(4.9	)		(1.9	)		(24.3	)		1.1

Earnings (loss) from continuing operations		(7.6	)		(4.6	)		(37.3	)		1.4
Earnings from discontinued operations, net of income tax		—			—			—			0.1

Net earnings (loss)	$	(7.6	)	$	(4.6	)	$	(37.3	)	$	1.5

Net loss attributable to common stockholders:
Net earnings (loss)	$	(7.6	)	$	(4.6	)	$	(37.3	)	$	1.5
Accretion of preferred stock		(3.1	)		(2.9	)		(9.1	)		(3.0	)

Net loss attributable to common stockholders	$	(10.7	)	$	(7.5	)	$	(46.4	)	$	(1.5	)

Basic and diluted net loss per common share:
Net loss attributable to common stockholders	$	(0.34	)	$	(0.24	)	$	(1.47	)	$	(0.05	)

Dividends per common share	$	0.05		$	0.09		$	0.15		$	0.27

See Notes to Condensed Consolidated Financial Statements.

WELLMAN, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)


	September 30,			December 31,
	2004			2003
	(Unaudited)			(Note 1)
ASSETS:
Current assets:
Cash and cash equivalents	$	14.6		$	205.5
Accounts receivable, less allowance of $2.6 in 2004 and $3.8 in 2003		154.8			137.5
Inventories		135.1			121.1
Prepaid expenses and other current assets		20.6			12.1

Total current assets		325.1			476.2
Property, plant and equipment, at cost:
Land, buildings and improvements		138.8			138.4
Machinery and equipment		1,086.5			933.2
Construction in progress		7.0			7.2

		1,232.3			1,078.8
Less accumulated depreciation		575.2			535.8

Property, plant and equipment, net		657.1			543.0
Goodwill, net		37.1			37.3
Other assets, net		103.5			60.6

	$	1,122.8		$	1,117.1

LIABILITIES AND STOCKHOLDERS’ EQUITY:
Current liabilities:
Accounts payable	$	83.6		$	90.6
Accrued liabilities		38.4			41.1

Total current liabilities		122.0			131.7
Long-term debt		478.9			371.0
Deferred income taxes and other liabilities		102.2			148.8

Total liabilities		703.1			651.5
Stockholders’ equity:
Series A preferred stock, $0.001 par value, 5,000,000 shares authorized, 4,502,143 shares issued and outstanding		54.7			51.0
Series B preferred stock, $0.001 par value; 6,700,000 shares authorized, issued and outstanding		81.4			76.0
Class A common stock, $0.001 par value; 100,000,000 shares authorized, 34,514,147 shares issued at September 30, 2004 and 34,389,147 issued at December 31, 2003		—			—
Class B common stock, $0.001 par value, 5,500,000 shares authorized, no shares issued		—			—
Paid-in capital		245.4			245.3
Common stock warrants		4.9			4.9
Accumulated other comprehensive income		21.2			25.2
Retained earnings		61.6			112.7
Less common stock in treasury at cost:
2,500,000 shares		(49.5	)		(49.5	)

Total stockholders’ equity		419.7			465.6

	$	1,122.8		$	1,117.1

See Notes to Condensed Consolidated Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


	Series A				Series B				Class A
	Preferred				Preferred				Common
	Stock Issued				Stock Issued				Stock Issued							Common		Accumulated Other
													Paid-In			Stock		Comprehensive			Retained			Treasury
(in millions)	Shares		Amount		Shares		Amount		Shares		Amount		Capital			Warrants		Income/(Loss)			Earnings			Stock			Total
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																						(37.3	)					(37.3	)
Currency translation adjustments																			(1.1	)								(1.1	)
Fair value of derivatives																			(2.9	)								(2.9	)

Total comprehensive loss																												(41.3	)
Issuance of restricted stock										0.1		—		0.1														0.1
Cash dividends ($0.15 per share)																						(4.7	)					(4.7	)
Accretion of preferred stock				3.7				5.4														(9.1	)					—

Balance at September 30, 2004		4.5	$	54.7		6.7	$	81.4		34.5	$	—	$	245.4		$	4.9	$	21.2		$	61.6		$	(49.5	)	$	419.7

See Notes to Condensed Consolidated Financial Statements.

WELLMAN, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
(In millions)


	2004			2003
Cash flows from operating activities:
Net earnings (loss)	$	(37.3	)	$	1.5
Adjustments to reconcile net earnings (loss) to net cash used in operating activities:
Depreciation		41.7			35.0
Amortization		11.0			3.6
Amortization in interest expense, net		2.9			1.0
Deferred income taxes and other		(26.3	)		(8.8	)
Gain on sale of business		—			(0.5	)
Non-capitalizable financing costs		21.0			—
Changes in operating assets and liabilities		(43.0	)		(39.9	)

Net cash used in operating activities		(30.0	)		(8.1	)

Cash flows from investing activities:
Additions to property, plant and equipment		(6.9	)		(10.5	)
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		(234.0	)		(9.4	)

Cash flows from financing activities:
Borrowings (repayments) under long-term debt, net		107.3			(82.6	)
Termination of swaps		(11.9	)		—
Dividends paid on common stock		(4.7	)		(8.6	)
Debt issuance costs		(18.0	)		—
Issuance of restricted stock		0.1			0.2
Issuance of preferred stock (Series A & B) and warrants		—			126.0
Financing costs		—			(16.2	)

Net cash provided by financing activities		72.8			18.8

Effect of exchange rate changes on cash and cash equivalents		0.3			(0.1	)

Increase (decrease) in cash and cash equivalents		(190.9	)		1.2
Cash and cash equivalents at beginning of period		205.5			—

Cash and cash equivalents at end of period	$	14.6		$	1.2

Supplemental cash flow data:
Cash paid during the period for:
Interest (net of amounts capitalized)	$	23.4		$	5.3
Income taxes	$	0.6		$	0.8

See Notes to Condensed Consolidated Financial Statements.

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 nine-month period ended September 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 nine months ended September 30, 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:


	September 30,		December 31,
	2004		2003
Raw materials	$	52.1	$	35.3
Finished and semi-finished goods		76.0		77.9
Supplies		7.0		7.9

	$	135.1	$	121.1

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 (polyethylene terephthalate) 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. In the nine months ended September 30, 2003, the Company recorded termination costs of $1.6 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 $0.2 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 nine months ended September 30, 2004, the Company incurred severance costs of $2.4 associated with this plan, of which $0.6 related to the PPG and $1.8 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 nine months of 2004		2.4
Cash payments		(6.5	)
Currency translation adjustments		(0.1	)

Accrual balances at September 30, 2004	$	1.9

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, NET

Other expense, net consisted of the following amounts for the periods indicated:


	Three months ended				Nine months ended
	September 30,				September 30,
	2004		2003		2004		2003
Legal costs related to the Department of Justice investigation of the polyester staple fiber industry	$	1.3	$	1.2	$	3.6	$	4.2
Accelerated stock option vesting		—		—		—		1.2


	Page No.
PART I — FINANCIAL INFORMATION

ITEM 1 - Financial Statements (Unaudited, except where noted)

Condensed Consolidated Statements of Operations — For the three and nine months ended September 30, 2004 and 2003		3

Condensed Consolidated Balance Sheets — September 30, 2004 and December 31, 2003 (Audited)		4

Condensed Consolidated Statements of Stockholders’ Equity — For the nine months ended September 30, 2004 and the year ended December 31, 2003 (Audited)		5

Condensed Consolidated Statements of Cash Flows — For the nine months ended September 30, 2004 and 2003		6

Notes to Condensed Consolidated Financial Statements		7

ITEM 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations		15

ITEM 3 - Quantitative and Qualitative Disclosure About Market Risk		23

ITEM 4 - Controls and Procedures		23

PART II — OTHER INFORMATION

ITEM 1 - Legal Proceedings		24

ITEM 6 - Exhibits and Reports on Form 8-K		25

SIGNATURES		26
EX-31.1 Section 302 Certification C.E.O.
EX-31.2 Section 302 Certification C.F.O.
EX-32.1 Section 906 Certification C.E.O.
EX-32.2 Section 906 Certification C.F.O.

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