UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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 September 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- -----------------
000-51043
(Commission File Number)
INTERNATIONAL WIRE GROUP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 43-1705942
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12 MASONIC AVE.
CAMDEN, NY 13316
(315) 245-3800
(Address, including zip code, and telephone number,
including area code, of Registrant's principal
executive offices)
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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
APPLICABLE ONLY TO ISSUES INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of October 31, 2005, there
were 10,000,002 shares, par value $.01 per share, outstanding.
INTERNATIONAL WIRE GROUP, INC.
INDEX
PART I. - FINANCIAL INFORMATION..................................................................................1
Item 1. Financial Statements (Unaudited)...............................................................1
Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004.....................1
Consolidated Statements of Operations for the three and nine months ended
September 30, 2005 and 2004...........................................................2
Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and
2004..................................................................................3
Notes to Consolidated Financial Statements.....................................................4
Item 2. Management's Discussion And Analysis Of Financial Condition And Results Of Operations.........15
Item 3. Quantitative and Qualitative Disclosure About Market Risk.....................................27
Item 4. Controls and Procedures.......................................................................28
PART II. - OTHER INFORMATION....................................................................................28
Item 1. Legal Proceedings.............................................................................28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds...................................28
Item 3. Defaults Upon Senior Securities...............................................................28
Item 4. Submission of Matters to a Vote of Security Holders...........................................28
Item 5. Other Information.............................................................................28
Item 6. Exhibits......................................................................................29
Signatures.............................................................................................30
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL WIRE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------ ------------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents........................................... $6,725 $15,192
Accounts receivable, less allowance of $3,079 and $4,060............ 99,534 70,609
Inventories......................................................... 69,354 83,319
Prepaid expenses and other.......................................... 10,697 11,118
------------ ------------
Total current assets.............................................. 186,310 180,238
Property, plant and equipment, net..................................... 96,387 104,132
Goodwill............................................................... 71,359 71,359
Identifiable intangibles, net.......................................... 21,889 27,898
Deferred financing costs, net.......................................... 2,619 3,075
Restricted cash........................................................ 1,987 3,107
Other assets........................................................... 3,389 4,398
------------ ------------
Total assets...................................................... $383,940 $394,207
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations......................... $428 $1,341
Accounts payable.................................................... 40,900 12,751
Accrued and other liabilities....................................... 15,327 23,374
Accrued payroll and payroll related items........................... 5,617 6,190
Customers' deposits................................................. 12,607 12,376
Accrued interest ................................................... 3,707 1,703
------------ ------------
Total current liabilities......................................... 78,586 57,735
Long-term obligations, less current maturities......................... 147,047 165,308
Other long-term liabilities............................................ 3,722 4,783
------------ ------------
Total liabilities................................................. 229,355 227,826
------------ ------------
Stockholders' equity:..................................................
Common stock, $.01 par value, 20,000,000 shares authorized, 10,000,002
issued and outstanding............................................ 100 100
Contributed capital................................................. 175,600 175,600
Accumulated (deficit)............................................... (20,558) (10,762)
Accumulated other comprehensive income/(loss)....................... (557) 1,443
------------ ------------
Total stockholders' equity........................................ 154,585 166,381
------------ ------------
Total liabilities and stockholders' equity........................ $383,940 $394,207
============ ============
See accompanying notes to the consolidated financial statements.
1
INTERNATIONAL WIRE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
COMPANY COMPANY COMPANY COMPANY
---------------- ---------------- ---------------- ---------------
FOR THE THREE FOR THE THREE FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2005 2004 2005 2004
---------------- ---------------- ---------------- ---------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
Net sales.................................................... $ 172,809 $ 132,924 $ 485,897 $ 414,381
Operating expenses:
Cost of goods sold, exclusive of
depreciation expense shown below........................ 153,157 112,155 433,357 354,686
Selling, general and administrative expenses................. 9,499 8,022 30,156 25,402
Depreciation................................................. 2,734 5,357 8,099 15,360
Amortization................................................. 1,139 725 3,561 2,326
Reorganization expenses...................................... -- 2,400 -- 10,584
Impairment and plant closing charges......................... 5,836 183 8,489 595
Gain/(loss) on sale of property plant and equipment.......... 1 (67) 8 (105)
---------------- ---------------- ---------------- ---------------
Operating income............................................. 443 4,149 2,227 5,533
Other income/(expense):
Interest expense (excluding interest of $9,061
and $18,812 on liabilities subject to compromise for
the three and nine months ended September 30, 2004). (3,521) (1,725) (10,537) (15,403)
Amortization of deferred financing costs................ (162) (426) (484) (5,122)
Other, net.............................................. (70) (79) (94) (200)
---------------- ---------------- ---------------- ---------------
Income/(loss) before income tax provision.................... (3,310) 1,919 (8,888) (15,192)
Income tax provision......................................... 337 145 908 642
---------------- ---------------- ---------------- ---------------
Net income/(loss)............................................ $ (3,647) $ 1,774 $ (9,796) $ (15,834)
================ ================ ================ ===============
Basic and diluted net income/(loss) per share................ $ (.36) $ 1,774 $ (.98) $ (15,834)
================ ================ ================ ===============
Weighted average basic and diluted shares outstanding 10,000,002 1,000 10,000,002 1,000
See accompanying notes to the consolidated financial statements.
2
INTERNATIONAL WIRE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SUCCESSOR PREDECESSOR
--------- -----------
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
------------------ ------------------
(IN THOUSANDS)
CASH FLOWS PROVIDED BY/(USED IN) OPERATING ACTIVITIES:
Net loss....................................................... $ (9,796) $ (15,834)
Adjustments to reconcile net loss to net cash
provided by/(used in) operating activities:
Depreciation................................................. 8,099 15,360
Amortization................................................. 3,561 2,326
Amortization of deferred financing costs..................... 484 5,122
Provision for doubtful accounts.............................. 333 242
(Gain)/loss on sale of property, plant and equipment......... (8) 105
Impairment of long-lived assets.............................. 8,331 --
Change in assets and liabilities:
Accounts receivable........................................ (30,738) (19,259)
Inventories................................................ 13,167 (12,687)
Prepaid expenses and other assets.......................... (562) (3,455)
Accounts payable........................................... 28,728 3,390
Accrued and other liabilities.............................. (412) 10,889
Accrued payroll and payroll related items.................. (573) 1,990
Customers' deposits........................................ 231 1,459
Accrued interest........................................... 2,004 7,613
Other long-term liabilities................................ (822) 256
------------------ ------------------
Net cash provided by/(used in) continuing operations 22,027 (2,483)
Net cash used in discontinued operations..................... (541) (551)
------------------ ------------------
Net cash provided by/(used in) operating activities
before reorganization activities................... 21,486 (3,034)
CASH FLOWS USED IN REORGANIZATION ACTIVITIES...................... (6,582) (7,242)
------------------ ------------------
Net cash provided by/(used in) operating activities.. 14,904 (10,276)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures.............................................. (5,563) (7,471)
Proceeds from sale of property, plant and equipment............... 13 195
------------------ ------------------
Net cash used in investing activities................ (5,550) (7,276)
CASH FLOWS PROVIDED BY/(USED IN) FINANCING ACTIVITIES:
Borrowings of long-term obligations........................ 28,239 92,000
Repayment of borrowings.................................... (47,413) (90,501)
Restricted cash............................................ 1,120 (1,643)
Financing fees............................................. (28) (2,549)
------------------ ------------------
Net cash used in financing activities................ (18,082) (2,693)
Effects of exchange rate changes on cash and cash equivalents..... 261 322
------------------ ------------------
Net change in cash and cash equivalents.............. (8,467) (19,923)
Cash and cash equivalents at beginning of the period.............. 15,192 25,981
------------------ ------------------
Cash and cash equivalents at end of the period.................... $ 6,725 $ 6,058
================== ==================
See accompanying notes to the consolidated financial statements.
3
INTERNATIONAL WIRE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT PER SHARE DATA)
(UNAUDITED)
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
The unaudited interim consolidated financial statements reflect all
adjustments, consisting only of normal recurring adjustments that are,
in the opinion of management, necessary for a fair presentation of the
financial position and results of operations of International Wire
Group, Inc. (the "Company"). The results for the three and nine months
ended September 30, 2005 and 2004 are not necessarily indicative of the
results that may be expected for a full fiscal year. These financial
statements should be read in conjunction with the audited consolidated
financial statements and notes thereto as of December 31, 2004 and 2003
and for the periods from October 20, 2004 through December 31, 2004,
and January 1, 2004 through October 19, 2004 and for the years ended
December 31, 2003 and 2002. For further information, see the Company's
financial statements, including the accounting policies and notes
thereto, included in Amendment No. 4 to the Company's registration
statement on Form S-1 (File No. 333-120736) filed on August 2, 2005.
FRESH-START BASIS OF PRESENTATION
The accompanying consolidated financial statements have been presented
in accordance with the American Institute of Certified Public
Accountants' ("AICPA") Statement of Position ("SOP") 90-7, Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code, as
amended. As a result of adopting fresh-start reporting upon emerging
from Chapter 11 of the U.S. Bankruptcy Code on October 20, 2004,
International Wire Group, Inc.'s financial statements are not
comparable with those prepared for the periods before the plan of
reorganization was confirmed, including the historical financial
statements included herein. References to "Predecessor" refer to
International Wire Group, Inc. through October 19, 2004. References to
"Successor" refer to International Wire Group, Inc. on and after
October 20, 2004.
2. VOLUNTARY BANKRUPTCY FILING AND PLAN OF REORGANIZATION
On March 24, 2004, the Predecessor entered into a lock-up and voting
agreement with a majority in principal amount of the bondholders
including the members of an Ad Hoc Committee of Bondholders and its
then largest equity holder to effect a pre-negotiated plan of
reorganization. In order to consummate its reorganization, the
Predecessor and all of its domestic subsidiaries filed voluntary
petitions under Chapter 11 of the U.S. Bankruptcy Code in the
Bankruptcy Court in the Southern District of New York (the "Filing").
The cases were consolidated and were jointly administered under case
number 04-11991 (BRL). The Predecessor's non-U.S. subsidiaries were not
part of the filing. In addition, the Predecessor entered into a
debtor-in-possession financing agreement with Highbridge/Zwirn Special
Opportunities Fund, L.P. and a group of senior lenders. Such financing
agreement provided for $140,000 of debtor-in-possession financing
consisting of a $90,000 revolving loan and a $50,000 term loan. The
debtor-in-possession financing ("DIP") was used to repay $82,000 of
Senior Secured Notes plus accrued interest, premium and fees and
provided working capital during the reorganization process.
On October 20, 2004, the Predecessor's Second Amended and Restated
Joint Plan of Reorganization under Chapter 11 of the Bankruptcy Code
(the "Plan") was confirmed and the Company emerged. The Plan involved
the exchange of approximately $305,000 of principal amount plus accrued
interest of the Company's 11.75 percent and 14 percent Senior
Subordinated Notes for 96 percent of the Common Stock of the Successor
and $75,000 of new 10 percent Secured Senior Subordinated Notes to be
issued pursuant to the Plan. All of the outstanding common stock of the
Predecessor was converted into 4 percent of the Common Stock of the
Successor. All other liabilities were unimpaired and were paid with
4
interest, as applicable. In addition, the Company entered into an
agreement with a group of lenders for a $140,000 senior credit
facility, the proceeds of which were utilized to refinance the
Company's obligations under the DIP facility and provide funding for
working capital and other general corporate purposes.
Under Chapter 11, certain claims against the debtor in existence prior
to the filing of the petition for relief under federal bankruptcy laws
are stayed while the debtor continues business operations as a
debtor-in-possession. These claims are considered "liabilities subject
to compromise." The primary categories of liabilities subject to
compromise as of March 24, 2004 were the following:
Accrued interest................................................. $ 29,252
Senior subordinated notes, excluding unamortized premium......... 305,000
--------------
Total............................................................ $ 334,252
==============
The Predecessor incurred reorganization expenses primarily related to
professional fees as follows:
JANUARY 1
THROUGH
SEPTEMBER 30,
2004
--------------
Consulting....................................................... $ 3,235
Legal............................................................ 3,684
Key Employee Retention Plan...................................... 2,873
Deferred financing fees.......................................... 1,548
Premium on 11.75 percent Series B Senior Subordinated Notes...... (2,673)
Other............................................................ 1,917
--------------
$ 10,584
==============
3. FRESH-START REPORTING
In accordance with SOP 90-7, the Successor adopted fresh-start
reporting as the holders of the existing voting shares of the
Predecessor immediately prior to filing and confirmation of the Plan
received less than 50 percent of the voting shares of the emerging
entity, and its reorganization value immediately before the
confirmation of the Plan was less than the total of its allowed claims
and post-petition liabilities. For accounting purposes, the Plan was
consummated on October 20, 2004. In accordance with fresh-start
reporting, the Successor has adjusted its assets and liabilities to
their estimated fair value at October 20, 2004, with the excess of the
Successor's reorganization value over the fair value of its tangible
and identifiable intangible assets and liabilities reported as goodwill
in the consolidated balance sheet.
Reorganization value, as defined by SOP 90-7 is "the fair value of the
entity before considering liabilities and approximates the amount a
willing buyer would pay for the assets of the entity immediately after
the restructuring." At October 20, 2004, this value was derived by
adding the fair value of all liabilities (approximately $62,500) not
included in the calculation of the enterprise value (all liabilities
except funded long-term debt) and additional debt (approximately
$6,000) to the enterprise value (approximately $342,500) of the
Successor to arrive at the $411,000 reorganization value of the
reorganized entity. Once this value was determined, the Company
determined the fair value of tangible fixed assets and specifically
identifiable intangible assets. Once these valuations were completed,
the Company allocated the reorganization value to the fair value of its
assets. As stated above, the excess of the Successor's reorganization
value over the fair value of its tangible and intangible assets has
been recorded as goodwill in the amount of approximately $71,400.
At October 20, 2004, the liabilities of the Successor consisted
primarily of post-petition current liabilities, outstanding
pre-petition claims, $96,581 under the Senior Revolving Credit and Term
Loan Facility (Note 9) and $75,000 of Senior Secured Subordinated
Notes. The Successor's consolidated balance sheet included no beginning
5
retained earnings/deficit, and accumulated depreciation and
amortization were reduced to $0 at October 20, 2004 in connection with
recording the property, plant, and equipment and identifiable
intangibles at estimated fair value.
As required under SOP 90-7, the Company determined the fair market
value of its identifiable intangible assets at October 20, 2004. The
Company allocated $16,234 to customer contracts and relationships,
$14,200 to trade names and trademarks and $2,671 to leases. The total
effect of fresh start adjustments on identifiable intangible assets
from the Predecessor at October 19, 2004 to the Successor at October
20, 2004 was a net increase of $30,124.
4. RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
In November 2004 (revised in December 2004), the FASB issued SFAS No.
151, Inventory Costs -- an amendment of ARB No. 43, Chapter 4 to be
effective for inventory costs incurred during fiscal years beginning
after June 15, 2005, with early adoption permitted. SFAS No. 151 amends
the guidance in Accounting Research Bulleting ("ARB") No. 43, Chapter
4, Inventory Pricing, to clarify the accounting for abnormal amounts of
idle facility expense, freight, handling costs, and wasted material
(spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that ".
. . under some circumstances, items such as idle facility expense,
excessive spoilage, double freight, and rehandling costs may be so
abnormal as to require treatment as current period charges. . . ." SFAS
No. 151 requires those items be recognized as current period charges
regardless of whether they meet the criterion of "so abnormal." In
addition, FAS No. 151 requires the allocation of fixed production
overheads to the costs of conversion be based on the normal capacity of
the production facilities. The Company does not expect the adoption of
SFAS No. 151 to have a material impact on its financial position or
results of operations.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment.
SFAS No. 123R establishes standards for the accounting for transactions
in which an entity exchanges its equity instruments for goods or
services. This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in
share-based payment transactions. SFAS No. 123R requires that the fair
value of such equity instruments be recognized as an expense in the
historical financial statements as services are performed. Prior to
SFAS No. 123R, only certain pro forma disclosures of fair value were
required. The Company will adopt the provisions of SFAS No. 123R
effective the first quarter of fiscal year 2006, which begins on
January 1, 2006. The Company does not expect the adoption of SFAS No.
123R will have a material impact on the results of operation.
In March 2005, the FASB issued FASB Interpretation ("FIN") No. 47,
Accounting for Conditional Asset Retirement Obligations, which is an
interpretation of SFAS No. 143, Accounting for Asset Retirement
Obligations. This Interpretation clarifies terminology within SFAS No.
143 and requires an entity to recognize a liability for the fair value
of a conditional asset retirement obligation when incurred if the
liability's fair value can be reasonably estimated. This Interpretation
is effective for fiscal years ending after December 15, 2005. The
Company does not expect adoption of this Interpretation to have a
material impact on its financial condition or results of operations.
In December 2004, the FASB issued SFAS No. 153, Exchanges of
Nonmonetary Assets, an amendment to APB Opinion No. 29, to be for
nonmonetary asset exchanges occurring in fiscal periods beginning after
June 15, 2005. The guidance in APB Opinion No. 29, Accounting for
Nonmonetary Transactions, is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the
assets exchanged. The guidance in that Opinion, however, included
certain exceptions to that principle. SFAS No. 153 amends Opinion 29 to
eliminate the exception for nonmonetary exchanges of similar productive
assets and replaces it with a general exception for exchanges of
nonmonetary assets that do not have commercial substance. A nonmonetary
exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the
exchange. The adoption of SFAS No. 153 did not have a material impact
on its financial position or results of operations.
6
5. INVENTORIES
The composition of inventories is as follows:
SEPTEMBER 30, DECEMBER 31,
2005 2004
------------- ------------
Raw materials............................. $ 21,091 $ 21,922
Work-in process........................... 21,159 22,234
Finished goods............................ 27,104 39,163
------------- ------------
Total inventories..................... $ 69,354 $ 83,319
============= ============
Inventories are valued at the lower of cost or market. Cost is
determined using the last-in, first-out ("LIFO") method. The LIFO
reserves were $14,763 and $5,587 as of September 30, 2005 and December
31, 2004, respectively.
6. STOCK OPTION PLANS
As allowed under SFAS No. 123, Accounting for Stock-Based Compensation,
the Successor and Predecessor applied APB Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations in
accounting for its stock option plans. Accordingly, no compensation
cost had been recognized as options were issued at exercise prices
equal to the estimated market value at date of grant. Had compensation
cost for the respective option plans been determined based upon the
fair value at the grant date for awards under these plans consistent
with the methodology prescribed under SFAS No. 123, the Successor's and
Predecessor's net loss for the nine months ended September 30, 2005 and
2004, would approximate the following:
SUCCESSOR PREDECESSOR
NINE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
2005 2004
------------- -------------
PRO FORMA NET LOSS:
Reported net loss................................................. $ (9,796) $ (15,834)
Less: Total stock-based employee compensation expense determined
under fair value based methods for all awards,
net of related tax effects...................................... - (147)
------------- -------------
Pro forma net loss................................................ $ (9,796) $ (15,981)
============= =============
There were no option grants in 2004 and all Predecessor options were
cancelled upon emergence from bankruptcy on October 20, 2004 in
accordance with the Plan. In the third quarter of 2005, the Successor
granted 25,000 options to the Vice-Chairman of the Board of Directors
with an exercise price at $11 per share. Compensation cost for these
options using their fair value would not have been material for the
three months or nine months ended September 30, 2005.
7. IMPAIRMENT AND PLANT CLOSING CHARGES
Impairment and plant closing charges consist of the following:
7
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
---------------- ---------------- --------------- ----------------
COMPANY COMPANY COMPANY COMPANY
FOR THE THREE FOR THE THREE FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2005 2004 2005 2004
---------------- ---------------- --------------- ----------------
Impairment....................... $ 5,783 $ -- $ 8,331 $ 48
Plant closing.................... 53 183 158 547
---------------- ---------------- --------------- ----------------
Total......................... $ 5,836 $ 183 $ 8,489 $ 595
================ ================ =============== ================
During the third quarter of 2005, the Company began discussions and
negotiations to sell selected assets of the insulated wire segment.
While negotiations have not been concluded and we continue to operate
these assets, based on these discussions and other factors, the Company
determined that certain property, plant and equipment and long-lived
customer relationship intangibles were impaired. Based on estimates of
future cash flow, including estimates of proceeds on disposal to be
derived from these assets, the Company recorded an impairment charge of
$5,783 and wrote-down the carrying values of property, plant and
equipment by $4,108 and customer relationship intangibles by $1,675 in
the third quarter of 2005.
On June 29, 2005, Viasystems (see Note 12), which represented 19% and
18% of net sales for the insulated wire segment for the three and nine
months ended September 30, 2005, respectively, notified the Company
that they were electing not to renew their insulated wire supply
agreement with the Company and that this agreement would terminate in
accordance with its terms on December 31, 2005. As a result, the
Company determined that certain long-lived customer relationship
intangibles for this segment were impaired. These assets derive their
values primarily from the projected cash flows. Based on the
termination of this agreement, future cash flows were deemed to be
negatively affected and resulted in the decline in value of the
segment's identified intangibles. In conjunction therewith, the Company
recorded an impairment charge of $2,548 in the second quarter of 2005.
Plant closing charges for the nine months ended September 30, 2005 and
2004 related to the closing of a plant in Kendallville, Indiana in June
2003, the closing of a plant in El Paso, Texas in March 2004, the
closing of a second plant in Kendallville, Indiana in April 2004, the
closing of a plant in Beynost, France in March 2005, and other
previously closed plants were $158 and $547, respectively.
Plant closing activity for the nine months ended September 30, 2005 and
2004 is comprised of:
INSULATED
WIRE BARE WIRE
NINE MONTHS ENDED SEPTEMBER 30, 2005 CORPORATE PRODUCTS PRODUCTS CONSOLIDATED
------------------------------------ ------------- ---------------- -------------- --------------
Balance, beginning of period...................... $ -- $ -- $ 1,632 $ 1,632
------------- ---------------- -------------- --------------
Charges to operations:..........................
Facility shut-down costs........................ -- 158 -- 158
Personnel and severance costs................... -- -- -- --
------------- ---------------- -------------- --------------
158 -- 158
------------- ---------------- -------------- --------------
Cash payments:
Facility shut-down costs........................ -- (158) -- (158)
Personnel and severance costs................... -- -- (1,522) (1,522)
------------- ---------------- -------------- --------------
-- (158) (1,522) (1,680)
------------- ---------------- -------------- --------------
Balance, end of period............................ $ -- $ -- $ 110 $ 110
============= ================ ============== ==============
8
INSULATED
WIRE BARE WIRE
NINE MONTHS ENDED SEPTEMBER 30, 2004 CORPORATE PRODUCTS PRODUCTS CONSOLIDATED
------------------------------------ ------------- ---------------- -------------- --------------
Balance, beginning of period..................... $ 266 $ 41 $ -- $ 307
------------- ---------------- -------------- --------------
Charges to operations:
Facility shut-down costs....................... -- 175 215 390
Personnel and severance costs.................. -- 157 -- 157
------------- ---------------- -------------- --------------
-- 332 215 547
Cash payments:
Facility shut-down costs....................... -- (216) (215) (431)
Personnel and severance costs.................. (247) (157) -- (404)
------------- ---------------- -------------- --------------
(247) (373) (215) (835)
------------- ---------------- -------------- --------------
Balance, end of period........................... $ 19 $ -- $ -- $ 19
============= ================ ============== ==============
8. COMPREHENSIVE LOSS
Comprehensive loss is comprised of:
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2005 2004 2005 2004
----------------- ----------------- ---------------- ---------------
Net income/(loss)....................................... $ (3,647) $ 1,774 $ (9,796) $ (15,834)
Foreign currency translation adjustment,
net of taxes of $0.................................... 70 447 (2,000) 169
----------------- ----------------- ---------------- ---------------
Total comprehensive income/(loss)................... $ (3,577) $ 2,221 $ (11,796) $ (15,665)
================= ================= ================ ===============
9
9. LONG-TERM OBLIGATIONS
The composition of long-term obligations is as follows:
SEPTEMBER 30, DECEMBER 31,
2005 2004
-------------- -------------
Senior Revolving Credit Facility.......... $ 42,047 $ 60,308
Senior Term Loan.......................... 30,000 30,000
10% Secured Senior Subordinated Notes..... 75,000 75,000
Other..................................... 428 1,341
-------------- -------------
147,475 166,649
Less current maturities................... 428 1,341
-------------- -------------
$ 147,047 $ 165,308
============== =============
SENIOR REVOLVING CREDIT FACILITY AND TERM LOAN
Concurrently with the consummation of the Predecessor's reorganization,
on October 20, 2004, the Successor and the domestic subsidiaries
entered into (1) a credit agreement among Congress Financial
Corporation (Central), as administrative agent, and the several banks
and financial institutions parties thereto, which provides for a
five-year senior revolving credit facility in an amount of up to
$110,000 (including, as a sub-facility of the revolving credit
facility, a $25,000 letter of credit facility), and (2) a credit
agreement among Silver Point Finance LLC, as administrative agent, and
the several banks and financial institutions parties thereto, which
provides for a $30,000 five-year senior term loan facility. Initial
proceeds from this facility were used to repay the debtor-in-possession
financing of $91,905, reorganization costs of $1,263 and for working
capital or other general corporate purposes.
The credit facility currently provides for a revolving credit facility
of up to $110,000 (with a letter of credit sub-facility of $25,000)
tied to a borrowing base, which is calculated by reference to, among
other things, eligible accounts receivable, eligible inventory and
eligible real property and equipment and a term loan in the amount of
$30,000. As of September 30, 2005, letters of credit in the amount of
$9,922 were outstanding and $42,047 was drawn under its revolving
credit facility. Availability under the credit facility was $58,031(the
maximum) as of September 30, 2005.
The Company's domestic subsidiaries are the primary parties to the
credit facility. The Company has guaranteed its obligations under the
credit facility. The collateral for the senior credit facility includes
all or substantially all of the Company's and its domestic
subsidiaries' assets, including 65 percent of the capital stock of, or
other equity interests in, the Company's foreign subsidiaries. The term
loans, and the liens and guarantees in respect thereof, are junior to
the revolving credit facility, and the liens and guarantees in respect
thereof.
The Company's credit facility requires the Company to observe
conditions, affirmative covenants and negative covenants (including
financial covenants), including the following financial covenants
tested only under certain circumstances, (1) minimum availability under
the revolving credit facility and (2) maximum total leverage. At
September 30, 2005, the Company is in compliance with the terms of the
credit facility.
The Company's revolving credit facility commitment expires on October
20, 2009. The term loan is required to be repaid in full at maturity on
October 20, 2009.
SECURED SENIOR SUBORDINATED NOTES
The 10 percent Secured Senior Subordinated Notes due 2011 ("Notes")
are: senior subordinated obligations of the Company; senior in right of
payment to any of future subordinated obligations; guaranteed by the
Company's domestic subsidiaries; and secured by a third-priority lien
on all or substantially all of the Company's and its domestic
10
subsidiaries' assets, including 65 percent of the capital stock of, or
other equity interests in, the Company's foreign subsidiaries. The
Company issued the Notes pursuant to the Plan on October 20, 2004 in
aggregate principal amount of $75,000. The Notes will mature on October
15, 2011.
Interest on the Notes accrues at the rate of 10 percent per annum and
is payable semiannually in arrears on October 15 and April 15,
commencing on April 15, 2005. Interest on overdue principal accrues at
2 percent per annum in excess of the above rate.
The indenture governing the Notes contains restrictive covenants which,
among other things, limit the Company's ability and some of its
subsidiaries to (subject to exceptions): incur additional debt; pay
dividends or distributions on, or redeem or repurchase capital stock;
restrict dividends or other payments; transfer or sell assets; engage
in transactions with affiliates; create certain liens; engage in
sale/leaseback transactions; impair the collateral for the Notes; make
investments; guarantee debt; consolidate, merge or transfer all or
substantially all of its assets and the assets of the Company's
subsidiaries; and engage in unrelated businesses.
10. INCOME TAXES
The American Jobs Creation Act of 2004 (the "Jobs Act"), enacted on
October 22, 2004, provides for a temporary 85% dividends received
deduction on certain foreign earnings repatriated during a one-year
period. The deduction would result in an approximate 5.25% federal tax
rate on the repatriated earnings. To qualify for the deduction, the
earnings must be reinvested in the United States pursuant to a domestic
reinvestment plan established by the Company's chief executive officer
and approved by the Company's board of directors. Certain other
criteria in the Jobs Act must also be satisfied.
The Company has evaluated the extent of its foreign earnings that may
be repatriated under the repatriation provisions of the Jobs Act,
whether it will repatriate any such earnings and if so, the amount that
will be repatriated. The amount of undistributed foreign earnings was
approximately $7,500 as of September 30, 2005. Deferred U.S. income
taxes and foreign withholding taxes are not provided on the
undistributed cumulative earnings of foreign subsidiaries as such
earnings are considered to be permanently reinvested in those
operations. The Company has determined that no foreign earnings will be
repatriated under the Jobs Act.
11. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company has two reportable segments: bare wire and insulated wire.
These segments are strategic business units organized around two
product categories that follow management's internal organization
structure.
The bare wire segment manufactures bare and tin-plated copper wire
products (or conductors) used to transmit digital, video and audio
signals or conduct electricity and sells to insulated wire
manufacturers and various industrial OEMs for use in computer and data
communications products, general industrial, energy, appliances,
automobiles and other applications.
The insulated wire segment manufactures and sells insulated wire
products (copper conductors insulated with plastic or other polymeric
compounds) to automotive and appliance manufacturers for use in the
assembly of wire harnesses that are installed in both automobiles and
appliances. The insulted wire segment also participates in several
niche businesses in the high temperature silicone and medical equipment
markets.
Summarized financial information for the Company's reportable segments
is as follows:
11
INSULATED
BARE WIRE WIRE CORPORATE ELIMINATIONS TOTAL
--------- ---- --------- ------------ -----
NET SALES
Successor-three months ended September 30, 2005...... $ 109,038 $ 65,240 $ -- $ (1,469) $ 172,809
Predecessor-three months ended September 30, 2004.... 79,818 54,586 -- (1,480) 132,924
Successor-nine months ended September 30, 2005....... 309,739 180,039 -- (3,881) 485,897
Predecessor-nine months ended September 30, 2004..... 247,720 171,803 -- (5,142) 414,381
OPERATING INCOME/(LOSS)
Successor-three months ended September 30, 2005...... 6,189 (4,940) (706) (100) 443
Predecessor-three months ended September 30, 2004.... 7,145 (573) (2,423) -- 4,149
Successor-nine months ended September 30, 2005....... 17,670 (10,429) (4,914) (100) 2,227
Predecessor-nine months ended September 30, 2004..... 18,677 (2,358) (10,786) -- 5,533
GOODWILL
September 30, 2005................................... 71,359 -- -- -- 71,359
December 31, 2004.................................... 71,359 -- -- -- 71,359
TOTAL ASSETS
September 30, 2005................................... 269,690 105,119 10,395 (1,264) 383,940
December 31, 2004.................................... 268,879 105,939 20,936 (1,547) 394,207
The following table presents sales by period and by geographic region
based on the country in which the legal subsidiary is domiciled.
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- ----------------------------------
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
---------------- ---------------- --------------- ----------------
2005 2004 2005 2004
---------------- ---------------- --------------- ----------------
United States.............. $ 132,866 $ 100,555 $ 375,986 $ 314,901
Europe..................... 8,554 8,329 29,074 28,723
Mexico..................... 11,347 6,128 29,401 18,752
Philippines................ 20,042 17,912 51,436 52,005
---------------- ---------------- --------------- ----------------
Total.................... $ 172,809 $ 132,924 $ 485,897 $ 414,381
================ ================ =============== ================
The following table presents property, plant and equipment, net by
geographic region based on the location of the asset:
SEPTEMBER 30, DECEMBER 31,
2005 2004
--------------- ---------------
United States............................... $ 71,547 $ 78,294
Europe...................................... 8,324 9,479
Mexico...................................... 8,787 8,831
Philippines................................. 7,729 7,528
--------------- ---------------
Total................................... $ 96,387 $ 104,132
=============== ===============
12
12. RELATED PARTY TRANSACTIONS
In connection with the sale of the Company's former wire harness
business to Viasystems International, Inc. ("Viasystems") ("Wire
Harness Sale"), the Company entered into an agreement to supply
substantially all of their insulated wire requirements through December
2003 (which has been extended to December 2005). At the time of the
sale, the Company and Viasystems were commonly controlled by affiliates
of Hicks, Muse, Tate & Furst Incorporated. In conjunction with the Plan
and as of October 20, 2004, affiliates of Hicks, Muse, Tate & Furst
Incorporated no longer control the Company. The Company had sales to
Viasystems of $12,433 and $9,545 for the three months ended September
30, 2005 and 2004 and $32,989 and $31,063 for the nine months ended
September 30, 2005 and 2004, respectively. The outstanding trade
receivables were $6,911 and $6,510 at September 30, 2005 and December
31, 2004, respectively. Mr. Robert A. Hamwee is a director of both the
Company and Viasystems. On June 29, 2005, Viasystems notified the
Company that they were electing not to renew their insulated wire
supply agreement with the Company and that this agreement would
terminate in accordance with its terms on December 31, 2005. See Note
7.
In September 2002, the Company began selling a portion of its
production scrap to Prime Materials Recovery, Inc. ("Prime"). Prime is
a closely held company and its major shareholder, chairman and director
was President and Chief Operating Officer through May 31, 2005 and
became Chief Executive Officer as of September 1, 2005 of the Company.
In addition, the Vice President of Finance of the Company holds a
minority ownership interest and is a director. The Company had sales to
Prime of $2,673 and $3,268 for the three months ended September 30,
2005 and 2004 and $7,987 and $10,754 for the nine months ended
September 30, 2005 and 2004, respectively. The outstanding trade
receivables were $707 and $276 at September 30, 2005 and December 31,
2004, respectively. Sales to Prime were made at terms comparable to
those of other companies in the industry.
13. LITIGATION
In February 2002, the Company initiated an action in the Circuit Court
of Cook County, Chancery Division (Case No. 02CH2470) located in
Chicago, Illinois, titled International Wire Group, Inc. v. National
Union Fire Insurance Company of Pittsburgh, Pennsylvania, AIG Technical
Services, Inc., Aon Corporation and Aon Risk Services of Missouri, Ltd.
(The "AIG Litigation"). The Company alleges in the complaint in such
action, among other things, that National Union is obligated to defend
and indemnify and otherwise provide insurance coverage to the Company
and the various original equipment manufacturers for certain claims and
damages related to certain water inlet hoses supplied by and through
the Company pursuant to two (2) $25,000 excess insurance policies
issued to the Company by National Union. In July 2003, a ruling was
rendered in this matter. The trial court ruled in favor of the Company
and ruled that National Union/AIG is obligated to defend and indemnify
and otherwise provide insurance coverage to the Company and various
original equipment manufacturers for certain claims and damages related
to certain water inlet hoses supplied by and through the Company
pursuant to the two (2) $25,000 excess insurance policies issued to the
company by National Union. National Union/AIG filed for an appeal of
the decision.
In December 2003, the Company and the Predecessor's former parent
company reached an agreement with National Union, AIG Technical
Services, Aon Corporation and Aon Risk Services of Missouri to settle
pending matters in the AIG Litigation. Under the settlement agreement,
National Union agreed to provide full defense and indemnity to the
Company and certain original equipment manufacturers for all claims for
damages that have occurred between April 1, 2000 and March 31, 2002
related to certain water inlet hoses supplied by and through the
Company pursuant to the two (2) $25,000 excess insurance policies
issued to the Company by National Union. All other aspects of the
settlement are subject to the confidentiality provisions of the
settlement agreement.
In connection with the Wire Harness Sale, the Company agreed to
indemnify Viasystems for certain claims and litigation including any
claims related to the claims for water inlet hoses. Net cash outflows
related to these claims are included as discontinued operations in the
consolidated statements of cash flows. The Company's policy is to
record the probable and reasonably estimable loss related to the
product liability claims. Over time, the level of claims, insurance
coverage and settlements has varied. Accordingly, the Company has
13
revised its estimated liability outstanding, or balance sheet reserve,
based on actual claims reported and costs incurred and its estimate of
claims and cost incurred but not reported. The Company has reached
global settlements with various claimants related to such claims which
are also considered in determining the balance sheet reserve. There are
no recoveries from third parties considered in determining the balance
sheet reserve. The following table summarizes the number of uninsured
claims received, resolved and pending as of and for the periods ended
September 30, 2005, December 31, 2004 and October 19, 2004 (in
thousands except number of claims):
VALUE OF
NO. OF ALLEGED
CLAIMS DAMAGES
---------- --------------
As of December 31, 2003 (Predecessor)..................................... 1,693 $ 15,725
For the period January 1, 2004 through October 19, 2004 (Predecessor):
New uninsured claims.................................................... 523 5,896
Resolved uninsured claims............................................... (1,870) (18,181)
---------- --------------
As of October 19, 2004 (Predecessor)...................................... 346 3,440
For the period October 20, 2004 through December 31, 2004 (Successor):
New uninsured claims.................................................... 42 516
Resolved uninsured claims............................................... (--) (--)
---------- --------------
As of December 31, 2004 (Successor)....................................... 388 3,956
For the nine months ended September 30, 2005 (Successor):
New uninsured claims.................................................... 1,405 14,178
Resolved uninsured claims............................................... (1,513) (14,514)
---------- --------------
As of September 30, 2005 (Successor)...................................... 280 $ 3,620
========== ==============
For the periods prior to April 1, 2002, the Company's product liability
coverage is in excess of the insured claims outstanding. As of
September 30, 2005 and December 31, 2004, the total of such claims was
less than $2,000 with an estimated liability related to these claims of
less than $500. As of September 30, 2005 and December 31, 2004, the
Company had $75,000 of remaining insurance coverage under its excess
umbrella policies for each of the insured years prior to April 1, 2002.
For the periods ended September 30, 2005, December 31, 2004 and October
19, 2004 the aggregate settlement costs, cost of administering and
litigation and average cost per resolved claim were as follows:
SUCCESSOR SUCCESSOR PREDECESSOR
-------------------- --------------------- -------------------
FOR THE NINE OCTOBER 20, 2004 JANUARY 1, 2004
MONTHS ENDED THROUGH THROUGH
SEPTEMBER 30, 2005 DECEMBER 31, 2004 OCTOBER 19, 2004
-------------------- --------------------- -------------------
Aggregate settlement costs.................. $ 266 $ -- $ 3,294
Cost of administering and litigating........ $ 275 $ 5 $ 392
Average cost per resolved claim............. $ -- $ -- $ 1
The Company had a reserve of $1,752 and $2,293 as of September 30, 2005
and December 31, 2004, respectively, related to the estimated future
payments to be made to the claimants in the settlement of the remaining
incurred claims and claims incurred but not reported. The majority of
payments are expected to be made over approximately the next three
years. Due to the uncertainties associated with these product claims,
such as greater than expected amount of unreported claims and amounts
to be paid under reached global settlements, the future costs of final
settlement of these claims may differ from the liability currently
accrued. However, in the Company's opinion, the impact of final
settlement of these claims on future operations, financial position and
cash flows should not be material.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and the notes thereto included in this Form
10-Q.
The Company has made forward-looking statements in this Form 10-Q that are based
on management's beliefs and assumptions and on information currently available
to management. Forward-looking statements include the information concerning the
Company's possible or assumed future results of operations, business strategies,
financing plans, competitive position, potential growth opportunities, the
effects of competition, outlook, objectives, plans, intentions and goals. For
those statements, the Company claims the protection of the safe harbor for
forward-looking statements provided for by Section 21E of the Securities
Exchange Act of 1934, as amended. Forward-looking statements include all
statements that are not historical facts and can be identified by the use of
forward-looking terminology such as the words "believes," "expects," "may,"
"will," "should," "seeks," "pro forma," "anticipates," "intends," "plans,"
"estimates," or the negative of any thereof or other variations thereof or
comparable terminology, or by discussions of strategy or intentions.
Forward-looking statements involve risks, uncertainties and assumptions. Actual
results may differ materially from those expressed in these forward-looking
statements. Undue reliance should not be placed on any forward-looking
statements. The Company does not have any intention or obligation to update
forward-looking statements after it files this Form 10-Q.
Many important factors could cause the Company's results to differ materially
from those expressed in forward-looking statements. These factors include, but
are not limited to, fluctuations in the Company's operating results and customer
orders, unexpected decreases in demand or increases in inventory levels, changes
in the price of copper, copper premiums and compound costs, the Company's
competitive environment, the Company's reliance on its largest customers, risks
associated with the Company's international operations, the status of the
insulated wire division and other factors. For additional information regarding
risk factors, see the disclosures provided in "Risk Factors" set forth in
Amendment No. 4 to the Company's registration statement on Form S-1 (File No.
333-120736) filed on August 2, 2005.
OVERVIEW
We, together with our subsidiaries, manufacture and market wire products,
including bare and tin-plated copper wire and insulated copper wire products,
for other wire suppliers and original equipment manufacturers or "OEMs". Our
products include a broad spectrum of copper wire configurations and gauges with
a variety of electrical and conductive characteristics and are utilized by a
wide variety of customers primarily in the appliance, automotive, electronics
and data communications and general industrial/energy industries. We manufacture
and distribute our products at 19 facilities located in the United States,
Mexico, France, Italy and the Philippines. We operate our business in the
following segments:
Bare Wire Products. Our bare and tin-plated copper wire products (or conductors)
are used to transmit digital, video and audio signals or conduct electricity and
are sold to a diverse customer base of over 1,000 insulated wire manufacturers
and various industrial OEMs for use in computer and data communications
products, general industrial, energy, appliances, automobiles and other
applications.
Insulated Wire Products. Our insulated wire products (copper conductors
insulated with plastic or other polymeric compounds) are primarily manufactured
for the automotive and appliance end-user markets. Our insulated wire products
are used in the assembly of wire harnesses that are installed in both
automobiles and appliances. A wire harness is comprised of an assembly of wires
with connectors and terminals that transmit electricity between two or more end
points. We also participate in niche businesses, including high temperature
silicone and medical equipment markets.
Demand for our products is directly related to two primary factors:
15
o demand for the end products in which our products are
incorporated; and
o our ability to compete with other suppliers in the industries
we serve.
Important indicators of demand for all of our products include a number of
general economic factors such as gross domestic product, interest rates and
consumer confidence. In specific industries, management also monitors the
following factors:
o Automobiles - North American industry production statistics,
which are influenced by labor relations issues, regulatory
requirements and trade agreements. From January 1, 2005 to
September 30, 2005, automotive industry production volumes
were down 1.8% compared to the same period for 2004.
o Appliances - U.S. industry shipment statistics for items such
as refrigerators, freezers, washers, dryers, ranges and
dishwashers. These statistics are impacted by replacement
rates for existing appliances, housing starts, existing home
sales and mortgage refinancing rates. From January 1, 2005 to
September 30, 2005, industry shipments are up 1.4% compared to
the same period for 2004.
o Electronics/data communications and industrial/energy - while
the end user applications are very diverse, some of the
contributing factors of demand in the markets include
technology spending and major industrial and/or infrastructure
projects, including build-out of computer networks, mining
development, oil exploration and production projects, mass
transit and general commercial and industrial real estate
development.
We compete with other suppliers of wire products on the basis of price, quality,
delivery and the ability to provide a sufficient array of products to meet most
of our customers needs. We believe our state of the art production equipment
permits us to provide a high quality product while also permitting us to
efficiently manufacture our products, which assists in our ability to provide
competitively priced products. Also, we invest in engineering, research and
development so that we can continue to provide our customers with the array of
products and features they demand. Finally, we have located our production
facilities near many of our customers' manufacturing facilities which allows us
to meet our customers' delivery demands, including assisting with inventory
management for just-in-time production techniques
A portion of our revenues is derived from processing customer-owned ("tolled")
copper. The value of tolled copper is excluded from both our sales and costs of
sales, as title to these materials and the related risks of ownership do not
pass to us.
Our expenses in producing these products fall into three main categories - raw
materials, including copper and insulating material (PVC and XPLE compounds),
labor and to a lesser extent utilities. Copper is the primary raw material
incorporated in all of our products. As a world traded commodity, copper prices
have historically been subject to fluctuations. Copper prices are affected by a
number of factors, including worldwide demand, mining and transportation
capacity and political instability. Copper supply is generally affected by the
number and capacity of the mines that produce copper. For instance, production
problems at a single major mine can impact worldwide supply and prices. Copper
prices have increased from 2004 levels as a result of a combination of higher
demand in China and disruption in mining production from several factors
including an earthquake in Chile and labor stoppages at certain mines in Africa,
Canada and the U.S. The average price of copper based upon The New York
Mercantile Exchange, Inc. ("COMEX") increased to $1.70 per pound for the three
months ended September 30, 2005 from $1.29 per pound for the three months ended
September 30, 2004. We attempt, where possible, to minimize the impact of these
fluctuations on our profitability through pass-through arrangements with our
customers, which are based on similar variations of monthly copper price
formulas. However, a severe increase in the price of copper can have a negative
impact on our liquidity. Currently, a $0.10 per pound fluctuation in the price
of copper will have a $3.5 million impact on our working capital. Additionally,
the pricing formulas for our insulated wire customers do not include adjustments
for the fluctuations in the premiums charged to convert copper cathode to copper
rod and deliver it to the required location. We believe that higher premiums may
continue and that we may be unable to pass-through these costs to our customers
for the foreseeable future. For the year ended December 31, 2004, the premium to
16
convert copper cathode to copper rod increased by 16.0%. For the nine months
ended September 30, 2005, the premium to convert copper cathode to copper rod
increased by another 19.9%.
Other major raw materials we consume include PVC and XPLE compounds. The prices
of these items are generally affected by world oil prices and world-wide supply
and demand and have increased significantly in 2004 and 2005. World oil prices
are impacted by a number of factors, including seasonal fluctuations, political
instability and meteorological events. For the year ended December 31, 2004, the
price of a barrel of oil increased 34.4%. Correspondingly, from January 1, 2004
to January 1, 2005, the price of PVC compounds, XPLE compounds and silicone
compounds increased 24.6%, 21.4% and 19.3%, respectively. The prices of PVC
compounds have increased an additional 5.7% from January 1, 2005 to September
30, 2005. Further, the prices of PVC and XLPE are expected to increase another
14% and 8%, respectively, in the fourth quarter of 2005. Our contracts with
customers for insulated wire do not include adjustments for fluctuations in the
price of oil, PVC compounds, XPLE compounds or silicone compounds. We believe
that higher compound costs may continue and that we may be unable to
pass-through these costs to our customers for the foreseeable future.
Our labor and utility expenses are directly tied to our level of production.
While the number of employees we use in our operations has fluctuated with sales
volume, our cost per employee continues to rise with increases in wages and the
costs of providing medical coverage, worker's compensation and other fringe
benefits to employees. The cost of providing medical coverage is impacted by
continued inflation in medical products and services. Utility rates vary by
season and the prices for coal, natural gas and other similar commodities which
are used in the generation of power. We attempt to manage our utility rates
through usage agreements which affect our power usage during peak usage hours.
We have recently incurred increased utility costs related to the increase in
natural gas prices and the increased prices are expected for at least the
remainder of 2005.
INSULATED WIRE DIVISION
Over the last several years, the Company's insulated wire division operating
results have been adversely impacted by industry wide overcapacity and increased
material costs that, with the exception of copper price increases, cannot be
passed through to customers under most of our current customer contracts.
On June 29, 2005, Viasystems, which represented $41.4 million, or 19%, of our
pro forma insulated wire net sales for the year ended December 31, 2004 and
$33.0 million, or 18%, of our insulated wire net sales for the nine months ended
September 30, 2005, notified us that they were electing not to renew their
insulated wire supply agreement and that this agreement would terminate in
accordance with its terms on December 31, 2005.
Our largest customer, Yazaki Corp. and its affiliates ("Yazaki"), represented
$76.1 million, or 35%, of our pro forma insulated wire net sales for the year
ended December 31, 2004 and $68.2 million, or 38%, of our insulated wire net
sales for the nine months ended September 30, 2005. The majority of these sales,
but not all, are under contracts that expire on December 31, 2005. In July 2005,
Yazaki began the process of soliciting bids from us and our competitors. As of
November 14, 2005, we have extended the contract with Yazaki to supply insulated
wire from our Cebu, Philippines plant until December 31, 2006. Sales to Yazaki
from our Cebu, Philippines plant represented $47.2 million, or 21%, of our pro
forma insulated wire net sales for the year ended December 31, 2004 and $34.4
million, or 19%, of our insulated wire net sales for the nine months ended
September 30, 2005. As of November 14, 2005, Yazaki has informed us that we are
not the winning bidder for the remaining contract business. The remaining Yazaki
contracts represented $16.8 million, or 8% of our pro forma insulated wire net
sales for the year ended December 31, 2004 and $15.2 million, or 9%, of our
insulated wire net sales for the nine months ended September 30, 2005. In
addition to the contracts with Yazaki, we also receive purchase orders for other
volume from Yazaki. These purchase orders represented $12.1 million, or 6% of
our pro forma insulated wire net sales for the year ended December 31, 2004 and
$18.6 million, or 10%, of our insulated wire net sales for the nine months ended
September 30, 2005. Yazaki is not obligated to continue placing these purchase
orders with us.
We are actively evaluating the business and may rationalize division capacity,
downsize, transfer certain facilities to our bare wire division, shut down
unprofitable facilities, sell some or all of the division, wind down some or all
of the division, a combination of the above, or pursue other alternatives
affecting all or part of the insulated wire division. During the third quarter
of 2005, the Company began discussions and negotiations to sell selected assets
of the insulated wire division. While negotiations have not been concluded and
we continue to operate these assets, based on these discussions and other
17
factors, the Company determined that certain property, plant and equipment and
long-lived customer relationship intangibles were impaired. Based on estimates
of future cash flow, including estimates of proceeds on disposal to be derived
from these assets, the Company recorded an impairment charge of $5,783 and
wrote-down the carrying values of property, plant and equipment by $4,108 and
customer relationship intangibles by $1,675 in the third quarter of 2005. Should
the Company not conclude these negotiations on terms currently expected, such
actions may result in additional impairments or restructuring charges which may
have a material impact on our results of operations, cash flows and financial
position.
RESULTS OF OPERATIONS
As is more fully discussed in Note 3 - Fresh-Start Reporting of the Notes to our
Consolidated Financial Statements, we adopted fresh-start reporting pursuant to
the guidance provided by the American Institute of Certified Pubic Accountant's
Statement of Position 90-7, Financial Reporting by Entities in Reorganization
Under the Bankruptcy Code ("SOP 90-7"). For financial reporting purposes, the
effective date of the reorganization was October 20, 2004 and our results of
operations and cash flows have been separated as pre-October 20 and post-October
20, 2004 due to a change in basis of accounting in the underlying assets and
liabilities. We refer to our results prior to October 20, 2004 as a result for
the Predecessor Company, and we refer to our results after October 20, 2004 as
results for the Successor Company.
For the reasons describe in Note 3 to our Consolidated Financial Statements and
due to other non-recurring adjustments, the Predecessor Company's financial
statements for the periods prior to our emergence from bankruptcy may not be
comparable to the Company's subsequent financial statements, and our results of
operations prior to emergence from bankruptcy, including the period from January
1 through October 19, 2004, are not indicative of future results. Readers
should, therefore, review this material with caution and not rely on the
information concerning the Predecessor Company as being indicative of our future
results or providing an accurate comparison of financial performance.
The following table sets forth certain statement of operations data in millions
of dollars and percentage of net sales for the periods indicated:
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
COMPANY COMPANY COMPANY COMPANY
------------------ ------------------ ------------------ ------------------
FOR THE THREE FOR THE THREE FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004 SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
------------------ ------------------ ------------------ ------------------
Net sales.............................. $172.8 100.0% $132.9 100.0% $485.9 100.0% $414.4 100.0%
Operating expenses:
Cost of goods sold, exclusive of
depreciation expense shown below...... 153.1 88.6 112.2 84.4 433.4 89.2 354.7 85.6
Selling, general and administrative 9.5 5.5 8.0 6.0 30.2 6.1 25.4 6.1
expenses..............................
Depreciation and amortization.......... 3.9 2.2 6.1 4.6 11.6 2.4 17.7 4.3
Reorganization expenses................ 0.0 0.0 2.4 1.8 0.0 0.0 10.6 2.6
Impairment and plant closing charges... 5.9 3.4 0.2 0.1 8.5 1.8 0.6 0.1
Gain/(loss) on sale of property, plant
and equipment......................... 0.0 0.0 (0.1) (0.1) 0.0 0.0 (0.1) 0.0
------- ------- ------- ------- ------- ------- ------- -------
Operating income....................... 0.4 0.3 4.1 3.1 2.2 0.5 5.5 1.3
Other income/(expense):
Interest expense (excluding interest
of $9.1 and $18.8 on liabilities
subject to compromise for the three
and nine months ended September 30,
2004)................................. (3.5) (2.1) (1.7) (1.3) (10.5) (2.2) (15.4) (3.7)
Amortization of deferred financing
costs................................. (0.1) (0.1) (0.4) (0.3) (0.5) (0.1) (5.1) (1.2)
Other, net............................ (0.1) 0.0 (0.1) (0.1) (0.1) 0.0 (0.2) 0.0
------- ------- ------- ------- ------- ------- ------- -------
Income/(loss) before income tax
provision.............................. (3.3) (1.9) 1.9 1.4 (8.9) (1.8) (15.2) (3.6)
------- ------- ------- ------- ------- ------- ------- -------
Income tax provision................... 0.3 0.2 0.1 0.0 0.9 0.2 0.6 0.2
------- ------- ------- ------- ------- ------- ------- -------
Net income/(loss)...................... $(3.6) (2.1%) $1.8 1.4% $(9.8) (2.0%) $(15.8) (3.8%)
======= ======= ======= ======= ======= ======= ======= =======
18
We have two reportable segments: bare wire and insulated wire. The following
table sets forth net sales and operating income / (loss) for the periods
presented in millions of dollars and percentages of totals:
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
COMPANY COMPANY COMPANY COMPANY
------------------ ------------------ ------------------ ------------------
FOR THE THREE FOR THE THREE FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 2005 SEPTEMBER 30, 2004 SEPTEMBER 30, 2005 SEPTEMBER 30, 2004
------------------ ------------------ ------------------ ------------------
Net sales..............................
Bare Wire............................. $109.0 63% $79.8 60% $309.7 64% $247.7 60%
Insulated Wire........................ 65.2 38 54.6 41 180.0 37 171.8 41
Elimination........................... (1.4) (1) (1.5) (1) (3.8) (1) (5.1) (1)
------- ------- ------- ------- ------- ------- ------- -------
Total............................... $172.8 100% $132.9 100% $485.9 100% $414.4 100%
======= ======= ======= ======= ======= ======= ======= =======
Operating income/(loss)
Bare Wire............................. $6.2 516% $7.1 109% $17.6 244% $18.6 114%
Insulated Wire........................ (5.0) (416) (0.6) (9) (10.4) (144) (2.3) (14)
------- ------- ------- ------- ------- ------- ------- -------
Subtotal............................ 1.2 100% 6.5 100% 7.2 100% 16.3 100%
======= ======= ======= =======
Corporate and eliminations ........... (0.8) (2.4) (5.0) (10.8)
------- ------- ------- -------
Total............................... $0.4 $4.1 $2.2 $5.5
======= ======= ======= =======
THREE MONTHS ENDED SEPTEMBER 30, 2005 VERSUS THREE MONTHS ENDED SEPTEMBER 30,
2004
Net sales were $172.8 million and $132.9 million for the three months ended
September 2005 and 2004, respectively. Sales for the three months ended
September 30, 2005 were $39.9 million, or 30.0%, above comparable 2004 levels as
a result of a $25.5 million impact from an increase in the average cost and
selling price of copper, a $13.0 million impact from a lower proportion of
customers' tolled copper in the 2005 period compared to the 2004 period and a
$2.4 million increase in sales to automotive customers. These factors were
partially offset by a $0.7 million decrease in volume with electronics/data
communications customers and a $0.3 million reduction due to lower automotive
customer pricing. The average price of copper based upon COMEX increased to
$1.70 per pound for the three months ended September 30, 2005 from $1.29 per
pound for the three months ended September 30, 2004.
Bare wire segment net sales for the three months ended September 30, 2005 were
$109.0 million, or an increase of $29.2 million or 36.6%, from sales of $79.8
million for the comparable 2004 period. This increase was primarily the result
of the previously mentioned increase in the average cost and selling price of
copper which had an impact of $16.7 million, $13.0 million from the impact of a
lower proportion of customers' tolled copper in the 2005 period compared to the
2004 period and higher volume to customers supplying the automotive market of
$0.2 million. These factors were partially offset by lower volume to customers
supplying the electronics/data communication market of $0.7 million. Of the
total pounds processed for the three months ended September 30, 2005 and 2004
respectively, 38.0% and 50.9% were from customers' tolled copper.
Insulated wire segment net sales for the three months ended September 30, 2005
were $65.2 million compared to $54.6 million in the three months ended September
30, 2004, for an increase of $10.6 million, or 19.4%. Higher sales resulted from
increased automotive volume of $2.1 million together with the previously
mentioned higher average cost and selling price of copper of $8.8 million,
partially offset by lower automotive customer pricing of $0.3 million. Higher
automotive volume was primarily due to increased industry-wide production rates
year-over-year and customers' inventory replenishments. Industry-wide automotive
production was up 1.0% for the three months ended September 30, 2005 compared to
the three months ended September 30, 2004.
Cost of goods sold as a percentage of sales increased to 88.6% for the three
months ended September 30, 2005 from 84.4% for the same period in 2004. The
increase of 4.2 percentage points was primarily due to the increase in the
19
average cost and selling price of copper of 2.0 percentage points; the impact of
a lower proportion of customers' tolled copper in the 2005 period compared to
the 2004 period of 1.2 percentage points; higher insulating compound material
costs of 0.7 percentage points; increased utility rates of 0.6 percentage
points; increased copper rod premium for insulated wire products of 0.2
percentage points; 0.2 percentage points from higher costs in the European
operations; 0.2 percentage points from lower customer pricing; and partially
offset by 0.4 percentage points from an insurance settlement and 0.5 percentage
points from product mix and other cost reductions.
Selling, general and administrative expenses were $9.5 million for the three
months ended September 30, 2005, compared to $8.0 million for the same period in
2004. Included in the 2005 period were $0.5 million of expense under the
Insulated Wire Division retention plan and other costs associated with the
process of seeking strategic alternatives for the Insulated Wire Division, $0.1
million for expenses related to our S-1 registration statement and $0.2 million
for costs associated with Sarbanes-Oxley compliance. These increases together
with higher professional fees were partially offset by lower expenses for
personnel related costs. Selling, general and administrative expenses, as a
percent of net sales, decreased from 6.0% for the three months ended September
30, 2004 to 5.5% for the three months ended September 30, 2005, primarily from
the effect of higher copper costs and selling prices and a lower proportion of
customers' tolled copper in 2005.
Depreciation and amortization was $3.9 million for the three months ended
September 30, 2005, compared to $6.1 million for the same period in 2004. The
decrease of $2.2 million was primarily due to lower depreciation on property,
plant and equipment as the result of the adoption of "fresh start" reporting
under SOP 90-7 as the carrying values were adjusted to fair market values as of
October 20, 2004. This reduction was partially offset by increased amortization
of identifiable intangibles.
Reorganization expenses relating to the Chapter 11 bankruptcy filing and the
related process preceding the bankruptcy filing were $0.0 million for the three
months ended September 30, 2005, compared to $2.4 million for the same period in
2004.
Impairment and plant closing charges for the three months ended September 30,
2005 were $5.9 million and $0.2 million in the three months ended September 30,
2004. Included in the 2005 period was $5.8 million of an impairment charge for
long-lived assets of the Insulated Wire Division. The remaining amounts
represent plant closing charges from costs associated with previously closed
plants.
Operating income/(loss) for the three months ended September 30, 2005 was $0.4
million compared to $4.1 million for the 2004 period, or a decrease of $3.7
million. This decrease was primarily the result of the impact of the higher cost
of goods sold and selling, general and administrative expenses and the $5.8
million impairment charge for the insulated wire segment. These factors were
partially offset by reduced depreciation and lower reorganization expenses. Bare
wire segment's operating income of $6.2 million for the 2005 period decreased
from the 2004 period by $0.9 million, or 12.7%, primarily from lower sales
volume levels and increased costs in the European operations, partially offset
by lower depreciation. Insulated wire segment's operating (loss) was ($5.0)
million for the three months ended September 30, 2005 compared to ($0.6) million
in the 2004 period. This increase in loss of $4.4 million was the result of the
higher costs for insulating compound materials and copper rod premium costs and
the aforementioned impairment charge. These factors were partially offset by
higher sales volume and lower depreciation. Operating income in the 2005 period
also increased by $1.6 million from lower reorganization expenses partially
offset by retention plan expense, other costs associated with the Insulated Wire
Division strategic alternatives, the S-1 registration expenses and
Sarbanes-Oxley compliance costs.
Interest expense was $3.5 million and $1.7 million for the three months ended
September 30, 2005 and 2004, respectively, for an increase of $1.8 million. This
increase was primarily due to the non-recognition of $9.1 million interest on
our $305 million of 11.75% and 14% Senior Subordinated Notes, which were subject
to compromise in the 2004 period, coupled with the 10% interest on our $75
million of new notes. In addition, interest rates are slightly higher on our
senior credit facility in 2005 compared to the DIP financing in 2004.
Amortization of deferred financing costs decreased $0.3 million to $0.1 million
for the three months ended September 30, 2005 from $0.4 million for the 2004
period as the result of lower deferred financing fees related to our new senior
credit facility compared to the DIP financing in 2004.
20
Income tax provisions were $0.3 million and $0.1 million for the three months
ended September 30, 2005 and 2004, respectively. The tax provisions represent
certain state and foreign income taxes only.
Net income/(loss) of ($3.6) million and $1.8 million were recorded for the three
months ended September 30, 2005 and 2004, respectively. The decrease of net
income of $5.4 million in the three months ended September 30, 2005 was the
result of lower operating income and increased interest expense partially offset
by lower amortization of deferred financing fees.
NINE MONTHS ENDED SEPTEMBER 30, 2005 VERSUS NINE MONTHS ENDED SEPTEMBER 30, 2004
Net sales were $485.9 million for the nine months ended September 30, 2005
compared to $414.4 million for the nine months ended September 30, 2004. Sales
for the nine months ended September 30, 2005 were $71.5 million, or 17.3%, above
comparable 2004 levels as a result of a $56.2 million impact from an increase in
the average cost and selling price of copper, a $29.1 million impact of a lower
proportion of customers' tolled copper in the 2005 period compared to the 2004
period, partially offset by a $12.9 million decrease in volume, primarily with
automotive, appliance and electronics/data communications customers, and a $0.9
million decrease in sales due to lower automotive customer pricing. The average
price of copper based upon COMEX increased to $1.57 per pound for the nine
months ended September 30, 2005 from $1.25 per pound for the nine months ended
September 30, 2004.
Bare wire segment net sales for the nine months ended September 30, 2005 were
$309.7 million, or an increase of $62.0 million or 25.0%, from sales of $247.7
million for the comparable 2004 period. This increase was primarily the result
of the previously mentioned increase in the average cost and selling price of
copper which had an impact of $35.6 million, $29.1 million from the impact of a
lower proportion of customers' tolled copper in the 2005 period compared to the
2004 period and higher volume to customers supplying the automotive and
industrial/energy market of $2.0 million. These factors were partially offset by
lower volume to customers supplying the electronics/data communication and
appliance markets of $4.7 million. Of the total pounds processed for the nine
months ended September 30, 2005 and 2004 respectively, 40.0% and 45.8% were from
customers' tolled copper.
Insulated wire segment net sales for the nine months ended September 30, 2005
were $180.0 million compared to $171.8 million in the nine months ended
September 30, 2004, for an increase of $8.2 million, or 4.8%, from comparable
2004 period. Higher sales resulted from the previously mentioned higher average
cost and selling price of copper which had an impact of $20.6 million partially
reduced by lower automotive and appliance sales volume of $11.5 million, which
was due to reduced industry-wide production rates year-over-year and customers'
inventory adjustments, and lower automotive customer pricing of $0.9 million.
Industry-wide automotive production was down 1.8% for the nine months ended
September 30, 2005 compared to the nine months ended September 30, 2004.
Appliance sales decreased to our customers supplying the appliance market in
both the U.S. and Mexico.
Cost of goods sold as a percentage of sales increased to 89.2% for the nine
months ended September 30, 2005 from 85.6% for the same period in 2004. The
increase of 3.6 percentage points was primarily due to: the increase in the
average cost and selling price of copper of 1.4 percentage points; the impact of
a lower proportion of customers' tolled copper in the 2005 period compared to
the 2004 period of 0.9 percentage points; higher insulating compound material
costs of 1.1 percentage points; increased copper rod premium for insulated wire
products of 0.2 percentage points; increased utility rates in the third quarter
of 0.2 percentage point; 0.2 percentage points from lower customer pricing; and
0.2 percentage points from higher costs in the European operations. These
increases were partially offset by product mix and other cost reductions of 0.6
percentage points.
Selling, general and administrative expenses were $30.2 million and $25.4
million for the nine months ended September 30, 2005 and 2004, respectively.
Included in the 2005 period were $2.6 million of expense under the Insulated
Wire Division and the bankruptcy retention plans and other costs associated with
the process of seeking strategic alternatives for the Insulated Wire Division, a
$1.4 million charge for payments to be made to our former Chief Executive
Officer under his employment agreement, $0.9 million for expenses related to our
S-1 registration statement and $0.4 million for costs associated with
Sarbanes-Oxley compliance. These increases together with higher professional
fees were partially offset by lower accruals for personnel related costs, volume
related shipping and freight costs and bad debt provision. Selling, general and
administration expenses, as a percent of net sales, were 6.1% for both the nine
months ended September 30, 2005 and 2004 as the effect of higher copper costs
21
and selling prices and a lower proportion of customers' tolled copper in the
2005 period was offset by the aforementioned increased costs in the 2005 period.
Depreciation and amortization was $11.6 million for the nine months ended
September 30, 2005, compared to $17.7 million for the same period in 2004. This
decrease of $6.1 million was primarily due to lower depreciation on property,
plant and equipment as the result of the adoption of "fresh start" reporting
under SOP 90-7 as the carrying values were adjusted to fair market values as of
October 20, 2004. This reduction was partially offset by increased amortization
of identifiable intangibles.
Reorganization expenses relating to the Chapter 11 bankruptcy filing and the
related process preceding the bankruptcy filing were $10.6 million for the nine
months ended September 30, 2004. There were no similar expenses in the 2005
period.
Impairment and plant closing charges for the nine months ended September 30,
2005 were $8.5 million and $0.6 million in the nine months ended September 30,
2004. The 2005 period included $8.3 million of impairment charges for
identifiable intangible assets and property, plant and equipment related to the
insulated wire segment as a result of the loss of future sales volume after the
end of the supply agreement with Viasystems on December 31, 2005 and other
indicators of impairment of certain other long-lived assets. Plant closing
charges for the nine months ended September 30, 2005 and 2004 were $0.2 million
and $0.6 million, respectively from costs associated with previously closed
plants.
Operating income for the nine months ended September 30, 2005 was $2.2 million
compared to $5.5 million for the 2004 period, or a decrease of $3.3 million.
This decrease was primarily from the higher cost of goods sold, increased
selling, general and administrative expenses and the impairment charge in the
2005 period partially offset by lower reorganization expenses. Bare wire
segment's operating income for the nine months ended September 30, 2005 was
$17.6 million compared to $18.6 million in the 2004 period, or a decrease of
$1.0 million from lower sales volume and increased costs in the European
operations, partially offset by lower depreciation. Insulated wire segment's
operating (loss) of ($10.4) million for the nine months ended September 30, 2005
compared to ($2.3) million in the 2004 period, or an increase in loss of $8.1
million, primarily resulted from lower sales volume, higher costs for insulating
compound materials and copper rod premium costs and the $8.3 million impairment
charges recorded in the second and third quarters. These factors were partially
offset by lower depreciation. Operating income in the 2005 period was higher
than 2004 by $5.8 million from lower reorganization expenses partially offset by
retention plans expense, other costs associated with the Insulated Wire Division
strategic alternatives, payments to be made to our former Chief Executive
Officer, S-1 registration expenses and Sarbanes-Oxley compliance costs.
Interest expense was $10.5 million and $15.4 million for the nine months ended
September 30, 2005 and 2004, respectively, for a decrease of $4.9 million. This
decrease was primarily due to the exchange of $305 million of our 11.75% and 14%
Senior Subordinated Notes (which were subject to compromise in the 2004 period)
for $75 million of new notes and equity, as well as, lower interest rates on our
senior credit facility and DIP compared to the 10.375% Senior Secured Notes and
the 11.75% and 14% Senior Subordinated Notes during the period January 1, 2004
to March 24, 2004.
Amortization of deferred financing cost decreased $4.6 million to $0.5 million
for the nine months ended September 30, 2005 from $5.1 million for the 2004
period as the result of lower amortization of deferred financing fees related to
our new senior credit facility compared to the DIP financing facility in 2004 of
$0.8 million and the write-off of deferred financing fees and discount related
to our 10.375% Senior Secured Notes that were repaid before maturity on March
24, 2004 of $3.8 million.
Income tax provisions were $0.9 million and $0.6 million for the nine months
ended September 30, 2005 and 2004, respectively. The tax provisions represent
certain state and foreign income taxes only.
Net loss of $9.8 million and $15.8 million were recorded for the nine months
ended September 30, 2005 and 2004, respectively. The decrease of $6.0 million in
the nine months ended September 30, 2005 was the result of lower interest
expense and lower amortization of deferred financing fees, partially offset by
lower operating income.
22
FINANCIAL CONDITION
At the end of the third quarter, total cash and cash equivalents was $6.7
million, down $8.5 million from year-end 2004. During the first nine months of
2005, we used $6.6 million of cash to pay for reorganization activities and used
other net cash proceeds to pay down our revolver.
Accounts receivable increased $28.9 million from year-end 2004 primarily as the
result of increased copper prices. Days sales outstanding improved at the end of
the third quarter compared to year-end 2004. The allowance for doubtful accounts
as a percentage of accounts receivable decreased from 0.6% at December 31, 2004
to 0.3% as of September 30, 2005 primarily from an improvement in the overall
collectibility of our receivables.
Inventories of $69.4 million, as of September 30, 2005, decreased by $14.0
million from December 31, 2004 from a 4.9 million pound planned reduction of
copper and a $9.2 million increase in the LIFO reserve as the result of higer
copper prices. Accordingly, inventory turns improved in the 2005 period compared
to 2004.
Accounts payable were $40.9 million as of September 30, 2005, or an increase of
$28.1 million from December 31, 2004 levels, as trade vendor terms were
re-established after emerging from Chapter 11 bankruptcy and the effect of
higher copper prices in 2005.
CRITICAL ACCOUNTING POLICIES
The process of preparing financial statements in conformity with accounting
principles generally accepted in the United States requires us to use estimates
and assumptions regarding certain types of our assets, liabilities, revenues and
expenses. We base these estimates and assumptions upon the best information
available at the time of the estimates or assumptions. Actual results could
change materially from our estimates and assumptions. The following is a
discussion of certain of our critical accounting policies and the related
management estimates and assumptions necessary in determining the value of
related assets or liabilities.
REVENUE RECOGNITION
We recognize revenue when all of the following criteria are satisfied:
persuasive evidence of an arrangement exists; risk of loss and title transfer to
the customer; the price is fixed and determinable; and collectibility is
reasonably assured. Generally, sales and related cost of goods sold are included
in income when goods are delivered to customers in accordance with the invoice
terms F.O.B. destination for bare wire products and when goods are shipped to
customers in accordance with invoice terms F.O.B. shipping point for insulated
wire products. A provision for product returns is recorded based on historical
experience and any notification received of pending returns. Such returns have
historically been within our expectations and the provisions established.
We recognize revenue from services performed to process customer-owned
("tolled") copper. Such revenue is recognized at the time the product is
received by the customer. The value of tolled copper is excluded from both sales
and cost of goods sold, as title to these materials and the related risks of
ownership do not pass to us.
ACCOUNTS RECEIVABLE
We perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customer's current creditworthiness, as
determined by our review of their current credit information. We continuously
monitor collections and payments from our customers and maintain a provision for
estimated credit losses based upon our historical experience and any specific
customer collection issues that have been identified. While such credit losses
have historically been within our expectations and the provisions established,
we cannot guarantee that the historical credit loss rates will continue in the
future. Since we have a number of relatively large customers, a significant
change in the liquidity or financial position of one of these customers could
have a material adverse impact on the collectibility of our accounts receivables
and our future operating results.
23
INVENTORIES
Inventories are valued at the lower of cost, determined using the last in, first
out ("LIFO") method, or the current estimated market value of the inventory.
Because the main component of our products is copper, a worldwide traded
commodity, the estimated fair market value of the inventory is subject to wide
fluctuations. Any significant decline in the average COMEX price of copper can
result in an inventory valuation adjustment.
DEFERRED TAXES
We establish deferred tax assets and liabilities based on profits or losses in
each jurisdiction in which we operate. Associated valuation allowances reflect
the likelihood of the recoverability of these assets. Our judgment of the
recoverability of these assets is based primarily on our estimate of current and
expected future earnings as well as prudent and feasible tax planning
strategies. Any reversal of valuation allowance that existed at October 20,
2004, the date we emerged from bankruptcy, will first offset goodwill, then
intangible assets and then increase additional paid-in capital in accordance
with SOP 90-7.
As a result of the reorganization, the Company underwent an ownership change
within the meaning of Section 382 of the Internal Revenue Code (IRC). As a
result, the Company is subject to an annual limitation of approximately $8
million on the amount of NOL and credit carryforwards and other built-in losses,
consisting principally of the bad debt reserves and amortization deductions,
which the Company may utilize in the U.S.
A debtor is not required to include gain on the discharge of debt in income if
the debt discharge occurs in bankruptcy. However, IRC Section 108 requires that
the debtor's NOL, capital and credit carryovers first be reduced and then tax
basis in assets be reduced. The Company expects to reduce available current year
tax losses and NOL carryforwards by approximately $102 million as a result of
the bankruptcy reorganization. After consideration of this reduction, the
Company expects to have NOL carryforwards of approximately $45 million as of
December 31, 2004, available to offset future federal taxable income. These NOL
carryforwards expire in varying amounts in the years 2010 to 2023 if not
utilized.
LONG LIVED ASSETS
We review the net realizable value of our long-lived assets through an
assessment of the estimated future cash flows related to those assets. In the
event we determine that the carrying values of long-lived assets are in excess
of estimated gross future cash flows for those assets, we will write-down the
value of the assets to a level commensurate with a discounted cash flow analysis
of the estimated future cash flows. As for goodwill, we compare the carrying
value of our reporting units to the fair value of such units based primarily on
the reporting unit's cash flows. To the extent the carrying value exceeds such
fair value, the respective goodwill is written down to its fair value.
We test for goodwill impairment annually and between annual tests if an event
occurs or if circumstances change that would more likely than not reduce the
fair value of a reporting unit below the unit's carrying amount. Performing the
impairment test requires us to estimate the fair values using the present value
of estimated future cash flows. We will perform our annual impairment test for
2005 in the fourth quarter of 2005. A significant downward revision in the
estimated fair value of future cash flows could result in a material impairment
of our remaining goodwill.
RECENTLY ISSUED ACCOUNTING STANDARDS
See Note 4 to our Consolidated Financial Statements for a discussion of recently
issued accounting standards that are not yet effective for us.
24
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL AND CASH FLOWS
Net cash provided by continuing operations was $22.0 million for the nine months
ended September 30, 2005, compared to net cash used by continuing operations of
$2.5 million for the nine months ended September 30, 2004. This improvement of
$24.5 million was primarily the result of increased accounts payable terms from
trade vendors of $25.3 million after emerging from Chapter 11 bankruptcy and a
decrease in inventories of $25.9 million due to planned reductions in levels of
copper and a $9.2 million increase in the LIFO reserve. These factors were
partially offset by higher accounts receivable of $11.5 million resulting from
increased copper prices, the payment of accrued payroll related items of $2.6
million in the 2005 period and lower accrued liabilities and other items of
$12.6 million.
Net cash used in discontinued operations was $0.6 million in both the nine
months ended September 30, 2005 and 2004 and represented payments associated
with legal claims with respect to hoses.
Net cash used in reorganization activities was $6.6 million in the nine months
ended September 30, 2005 compared to $7.2 million in the 2004 period. This
decrease of $0.6 million resulted from the final payments of legal and
professional fees under the Chapter 11 bankruptcy as approved by the court in
the 2005 period, which were lower than expenditures in the 2004 period.
Net cash used in investing activities for capital expenditures was $5.6 million
for the nine months ended September 30, 2005, compared to $7.5 million for the
nine months ended September 30, 2004, primarily from a decrease for normal
replacement and cost reduction expenditures.
Net cash used in financing activities was $18.1 million for the nine months
ended September 30, 2005, compared to net cash used in financing activities of
$2.7 million for the nine months ended September 30, 2004. The increase was
primarily the result of net payments of $19.2 million under our senior revolving
credit facility in the 2005 period compared to debtor-in-possession borrowings
of $86.6 million in 2004, which was used to repay $82.0 million of Senior
Secured Notes in the 2004 period.
FINANCING ARRANGEMENTS
Concurrently with the consummation of our reorganization, we and our domestic
subsidiaries entered into (1) a credit agreement which provides for a five-year
senior revolving credit facility in an amount up to $110.0 million (including as
a sub-facility of the revolving credit facility, a $25 million letter of credit
facility), and (2) a credit agreement which provides for a $30.0 million
five-year senior term loan facility. The proceeds of the facilities were used to
repay our DIP facility and for working capital and other general corporate
purposes. We also issued the $75 million of 10% Secured Senior Subordinated
Notes to the former holders of our Subordinated Notes. For a description of the
terms of these facilities and the Notes, see Note 9 to the unaudited
Consolidated Financial Statements.
LIQUIDITY
We require cash for working capital, capital expenditures, debt service and
taxes. Our working capital requirements generally increase when demand for our
products increase or when copper, copper premiums or compound costs material
increase significantly or rapidly. Currently, a $0.10 per pound fluctuation in
the price of copper will have a $3.5 million impact on our working capital. The
average price of copper based upon COMEX increased to $1.70 per pound for the
three months ended September 30, 2005 from $1.29 per pound for the three months
ended September 30, 2004.
Our principal sources of cash are generated from operations and availability
under our debt financing arrangements. We expect that ongoing requirements for
working capital, capital expenditures, debt service and taxes will be funded
from operating cash flow and borrowings under our $110 million revolving credit
facility dated October 20, 2004.
25
As of September 30, 2005, we had $6.7 million of unrestricted cash and cash
equivalents. Actual borrowings availability under our revolving credit facility
is subject to a borrowing base calculation, generally based upon a percentage of
eligible accounts receivable, inventory and property, plant and equipment. As of
September 30, 2005, our borrowing base was $111.3 million and our outstanding
indebtedness under the revolving credit facility (including outstanding letters
of credit) was $52.0 million, resulting in a remaining availability as of such
date of $58.0 million (the maximum).
For the year ended December 31, 2005, we anticipate that our capital
expenditures will be approximately $7.0 to $9.0 million. In addition, for full
year 2005, we expect that our debt service obligations will be approximately
$15.3 million. We expect our cash on hand, operating cash flow, together with
available borrowings under the senior revolving credit facility, will be
sufficient to meet our anticipated future operating expenses, capital
expenditures and debt service requirements. However, our ability to generate
sufficient cash flow to meet our operating needs could be affected by general
economic, financial, competitive, legislative, regulatory, business and other
factors beyond our control. Any significant reduction in customer demand for our
products, change in competitive conditions, increases in our major material
components including copper and insulating materials, or adverse changes in
economic conditions in the U.S. or worldwide could impact our ability to
generate sufficient cash flow to fund operations.
OFF-BALANCE SHEET ARRANGEMENTS
We have not historically utilized off-balance sheet financing arrangements and
have no such arrangements as of September 30, 2005. However, we do finance the
use of certain facilities and equipment under lease agreements provided by
various institutions. Since the terms of these agreements meet the definition of
operating lease agreements, the sum of future lease payments is not reflected on
our consolidated balance sheets. As of September 30, 2005, the future minimum
lease payments under these arrangements totaled $2.8 million.
26
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We do not ordinarily hold market risk sensitive instruments for trading
purposes. We do, however, recognize market risk from interest rate, foreign
currency exchange and commodity price exposure.
INTEREST RATE RISK
At September 30, 2005, approximately $72.0 million of $147.5 million of
long-term debt, specifically, $72.0 million of borrowings under our senior
credit facility, bear interest at variable rates. A hypothetical 1% increase in
variable interest rates would reduce annual income by $0.7 million based on the
debt outstanding as of September 30, 2005. We are not currently engaged in any
hedging activities.
FOREIGN CURRENCY RISK
We have operations in Mexico, France, Italy and the Philippines. Our operations
may, therefore, be subject to volatility because of currency fluctuations. Sales
and expenses are denominated in local currencies for the French and Italian
operations. The U.S. Dollar is the functional currency for Mexico and the
Philippines operations. As a result, these operations are subject to market risk
with respect to fluctuations in the relative value of currencies. We evaluate
from time-to-time various currency hedging programs that could reduce the risk.
In terms of foreign currency translation risk, we are exposed primarily to the
euro, the Mexican peso and the Philippine peso. Our net foreign currency
investment in foreign subsidiaries and affiliates translated into United States
dollars using month-end exchange rates at September 30, 2005 and year-end
exchange rates at December 31, 2004, was $70.8 million and $62.4 million,
respectively.
At September 30, 2005, we had no financial instruments outstanding that were
sensitive to changes in foreign currency rates.
COMMODITY PRICE RISK
The principal raw material used by us is copper, which is purchased in the form
of 5/16-inch rod from the major copper producers in North American, Europe and
Asia. Copper rod prices are based on market prices, which are generally
established by reference to the COMEX prices, plus a premium charged to convert
copper cathode to copper rod and deliver it to the required location. As a
worldwide traded commodity, copper prices have historically been subject to
fluctuations. While fluctuations in the price of copper may directly affect the
per unit prices of our products, these fluctuations have not had, nor are
expected to have, a material impact on our profitability due to copper price
pass-through arrangements that we have with our customers. These sales
arrangements are based on similar variations of monthly copper price formulas.
Use of these copper price formulas minimizes the differences between raw
material copper costs charged to the cost of sales and the pass-through pricing
charge to customers. However, a severe increase in the price of copper could
negatively impact our short-term liquidity because of the period of time between
our purchase of copper at an increased price and the time at which we receive
cash payments after selling end products to customers reflecting the increased
price. These formulas for our insulated wire customers do not, however, include
adjustments for the fluctuations in the premiums charged to convert copper
cathode to copper rod and deliver it to the required locations. In 2004, the
premium to convert copper cathode to copper rod increased by 16.0%. For the nine
months ended September 30, 2005, the premium to convert copper cathode to copper
rod increased by another 19.9%. We believe that higher premiums may continue.
Other major raw materials we consume include PVC compounds, XPLE compounds,
silicone compounds and tin. The prices of these items are generally affected by
world oil prices and worldwide supply and demand and increased significantly in
2004 and 2005. World oil prices are impacted by a number of factors, including
seasonal fluctuations, political instability and meteorological events. In 2004,
the price of a barrel of oil increased 34.4%. Correspondingly, in 2004, the
price of PVC compounds, XPLE compounds, silicone compounds and tin increased
24.6%, 21.4%, 19.3% and 32.6% respectively. The prices of PVC compounds have
increased an additional 5.7% from January 1, 2005 to September 30, 2005.
Further, the price of PVC and XPLE compounds are expected to increase another
14% and 8%, respectively, in the fourth quarter of 2005. Our contracts with
27
customers for insulated wire do not include adjustments for fluctuations in the
price of oil, PVC compounds, XPLE compounds, silicone compounds or tin. From
January 1, 2005 to September 30, 2005, the price of a barrel of oil increased
58% and we believe higher compound costs may continue.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this Quarterly Report on Form
10-Q. Based on that evaluation, our chief executive officer and chief financial
officer concluded that our disclosure controls and procedures are effective to
provide reasonable assurance that information we are required to disclose in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and that such information is accumulated
and communicated to our management, including our chief executive officer and
chief financial officer, as appropriate, to allow timely decisions regarding
required disclosure.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in our internal control over financial reporting that
occurred during the period covered by this Quarterly Report on Form 10-Q that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the quarter ended September 30, 2005, there have been no material
developments in the Company's legal proceedings. For more detailed information,
see Note 13 to our Consolidated Financial Statements and the disclosures
provided in "Business--Legal Proceedings" set forth in Amendment No. 4 to the
Company's registration statement on Form S-1 (File No. 333-120736) filed on
August 2, 2005.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
28
ITEM 6. EXHIBITS
Exhibit
Number Description
------ -----------
31.1 Certification of Principal Executive Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2 Certification of Principal Financial Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1 Certification of Principal Executive Officer Required by Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended,
and 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer Required by Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended,
and 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
29
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INTERNATIONAL WIRE GROUP, INC.
Dated: November 14, 2005 By: /s/ GLENN J. HOLLER
-------------------------------
Name: Glenn J. Holler
Title: Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
30
EXHIBIT INDEX
Exhibit
Number Description
------ -----------
31.1 Certification of Principal Executive Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2 Certification of Principal Financial Officer Required by Rule
13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1 Certification of Principal Executive Officer Required by Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended,
and 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Financial Officer Required by Rule
13a-14(b) of the Securities Exchange Act of 1934, as amended,
and 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.