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 March 31, 2006
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 (I.R.S. Employer
of incorporation or organization) Identification No.)
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large
accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [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 April 30, 2006, there
were 10,000,002 shares, par value $.01 per share, outstanding.
INTERNATIONAL WIRE GROUP, INC.
INDEX
PAGE
PART I. FINANCIAL INFORMATION..............................................................................1
ITEM 1. FINANCIAL STATEMENTS.......................................................................1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.....12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.................................22
ITEM 4. CONTROLS AND PROCEDURES...................................................................23
PART II. OTHER INFORMATION.................................................................................24
ITEM 1. LEGAL PROCEEDINGS.........................................................................24
ITEM 1A. RISK FACTORS..............................................................................24
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS...............................24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...........................................................24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.......................................24
ITEM 5. OTHER INFORMATION.........................................................................25
ITEM 6. EXHIBITS..................................................................................25
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL WIRE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2006 2005
------------- -------------
(IN THOUSANDS, EXCEPT FOR SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents........................................... $6,106 $ 5,422
Accounts receivable, less allowance of $2,946 and $3,036............ 102,687 98,296
Inventories......................................................... 83,959 56,874
Prepaid expenses and other.......................................... 9,852 10,112
Assets held for sale................................................ 5,171 1,975
Deferred income taxes............................................... 5,266 8,900
------------- -------------
Total current assets.............................................. 213,041 181,579
Property, plant and equipment, net..................................... 106,503 85,440
Goodwill............................................................... 71,193 71,193
Identifiable intangibles, net.......................................... 23,324 21,358
Deferred financing costs, net.......................................... 2,416 2,457
Restricted cash........................................................ 1,922 1,922
Other assets........................................................... 2,374 2,305
------------- -------------
Total assets...................................................... $420,773 $366,254
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt................................ $ - $ 228
Accounts payable.................................................... 61,512 33,865
Accrued and other liabilities....................................... 18,053 17,064
Accrued payroll and payroll related items........................... 6,035 4,737
Customers' deposits................................................. 13,417 11,428
Accrued income taxes ............................................... 1,547 197
Accrued interest ................................................... 3,722 1,838
------------- -------------
Total current liabilities......................................... 104,286 69,357
Long-term debt, less current maturities................................ 149,021 135,188
Other long-term liabilities............................................ 3,823 3,558
Deferred income taxes.................................................. 8,324 5,705
------------- -------------
Total liabilities................................................. 265,454 213,808
Stockholders' equity:..................................................
Common stock, $.01 par value, 20,000,000 shares authorized, 10,000,002
issued and outstanding............................................ 100 100
Contributed capital................................................. 175,606 175,600
Accumulated (deficit)............................................... (20,087) (21,948)
Accumulated other comprehensive (loss).............................. (300) (1,306)
------------- -------------
Total stockholders' equity........................................ 155,319 152,446
------------- -------------
Total liabilities and stockholders' equity........................ $420,773 $366,254
============= =============
See accompanying notes to the consolidated financial statements.
1
INTERNATIONAL WIRE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
---------------------------------
MARCH 31, MARCH 31,
2006 2005
--------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
Net sales.................................................... $ 166,618 $ 112,139
Operating expenses:
Cost of goods sold, exclusive of
depreciation expense shown below........................ 148,591 95,643
Selling, general and administrative expenses................. 7,664 7,946
Depreciation................................................. 2,105 2,220
Amortization................................................. 933 905
(Gain) on sale of property, plant and equipment.............. (64) --
-------------- --------------
Operating income............................................. 7,389 5,425
Other income/(expense):
Interest expense........................................ (3,257) (3,081)
Amortization of deferred financing costs................ (162) (161)
Other, net.............................................. (127) (23)
-------------- --------------
Income before income tax provision........................... 3,843 2,160
Income tax provision......................................... 1,442 2,943
-------------- --------------
Income/(loss) from continuing operations .................... 2,401 (783)
Income/(loss) from discontinued operations, net of income
taxes of $290 and ($2,513) ............................. (540) 322
-------------- --------------
Net income/(loss)............................................ $ 1,861 $ (461)
============== ==============
Basic and diluted net income/(loss) per share................ $ 0.19 $ (0.05)
============== ==============
Weighted average basic shares outstanding.................... 10,000,002 10,000,002
Weighted average diluted shares outstanding.................. 10,001,354 10,000,002
See accompanying notes to the consolidated financial statements.
2
INTERNATIONAL WIRE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
--------------------------------------------
MARCH 31, 2006 MARCH 31, 2005
--------------------- ---------------------
(IN THOUSANDS)
CASH FLOWS PROVIDED BY/(USED IN) OPERATING ACTIVITIES:
Net income/(loss).............................................. $ 1,861 $ (461)
Adjustments to reconcile net income/(loss) to net cash
provided by/(used in) operating activities:
Depreciation................................................. 2,250 2,690
Amortization................................................. 968 1,279
Amortization of deferred financing costs..................... 162 161
Provision for doubtful accounts.............................. (90) 154
Stock option expense ........................................ 6 --
(Gain) on sale of property, plant and equipment.............. (64) --
Change in assets and liabilities:
Accounts receivable........................................ 11,042 (13,883)
Inventories................................................ (8,123) (3,027)
Prepaid expenses and other assets.......................... 470 556
Accounts payable........................................... 17,427 18,597
Accrued and other liabilities.............................. (1,456) 116
Accrued payroll and payroll related items.................. 1,298 (3,824)
Customers' deposits........................................ 1,989 195
Accrued interest........................................... 1,884 1,858
Accrued income taxes....................................... 1,350 --
Other long-term liabilities................................ (64) 16
--------------------- ---------------------
Net cash provided by operating activities before
reorganization activities.......................... 30,910 4,427
CASH FLOWS USED IN REORGANIZATION ACTIVITIES...................... -- (5,367)
--------------------- ---------------------
Net cash provided by/(used in) operating activities.. 30,910 (940)
--------------------- ---------------------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures....................................... (1,692) (1,950)
Proceeds from sale of property, plant and equipment........ 201 --
Restricted cash............................................ -- 1,069
Proceeds from sale of assets held for sale................. 1,975 --
Acquisition of Phelps Dodge High Performance Conductors of
SC&GA, Inc. ................................................. (44,283) --
--------------------- ---------------------
Net cash used in investing activities................ (43,799) (881)
--------------------- ---------------------
CASH FLOWS PROVIDED BY/(USED IN) FINANCING ACTIVITIES:
Borrowings of long-term obligations........................ 82,757 6,799
Repayment of borrowings.................................... (69,152) (16,365)
Financing fees............................................. (121) (5)
Net cash provided by/(used in) financing activities.. 13,484 (9,571)
Effects of exchange rate changes on cash and cash equivalents..... 89 (23)
Net change in cash and cash equivalents.............. 684 (11,415)
Cash and cash equivalents at beginning of the period.............. 5,422 15,192
--------------------- ---------------------
Cash and cash equivalents at end of the period.................... $ 6,106 $ 3,777
===================== =====================
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 months ended
March 31, 2006 and 2005 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 included in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission for the
year ended December 31, 2005.
INSULATED WIRE SEGMENT AND DISCONTINUED OPERATIONS
Over the last several years, the Company's insulated wire segment
operating results have been adversely impacted by industry wide over
capacity 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. In addition, in the second and
fourth quarters of 2005, we were notified that significant volume with
two large customers, Viasystems International, Inc. ("Viasystems") and
Yazaki Corp., and its affiliates, respectively, would not be renewed
upon the expiration of the existing supply contracts. Throughout 2005,
the Company actively evaluated the insulated wire business and
considered alternatives affecting all or part of the insulated wire
segment. On November 30, 2005, we sold and leased selected assets of
the U.S. Insulated Wire Business to Copperfield LLC and ceased
operations. Accordingly, the U.S. Insulated Wire Business has been
presented as a discontinued operation in the accompanying consolidated
statements of operations. The Durango, Mexico plant ceased producing
insulated wire at the end of January, 2006 and was closed on March 31,
2006 and has been also included in discontinued operations for both
periods presented in the accompanying consolidated statements of
operations. The results of operations for the Cebu, Philippines
facility, the remaining insulated wire facility, is included in
continuing operations in the accompanying consolidated statements of
operations. We continue to explore strategic alternatives for the
remainder of our insulated wire segment, including the sale or closure
of the operations in Cebu, Philippines and the sale of the Durango,
Mexico facility and its machinery and equipment.
Statement of Cash Flows
The Company previously separately reported cash flow from discontinued
operations. The Company has conformed the prior year to the current
year presentation of total cash flows. There is no change to operating
cash flows for the prior year. The Consolidated Statement of Cash Flows
reflects deposits into and changes in restricted cash accounts as an
"Investing Activity." The Consolidated Statements of Cash Flows for the
three months ended March 31, 2005 previously reflected such deposits
into restricted cash accounts as a "Financing Activity." The 2005
period has been conformed to the current year basis and presentation.
This revision had no impact on the Consolidated Statements of
Operations, or the net increase (decrease) in cash and cash equivalents
included in our Consolidated Statements of Cash Flows for the period
ended March 31, 2005.
2. ACQUISITION
On March 4, 2006, the Company entered into a Stock Purchase Agreement
("Purchase Agreement") to acquire Phelps Dodge High Performance
Conductors of SC & GA, Inc. ("HPC") from Phelps Dodge Corporation
("PD"). HPC is a manufacturer of specialty high performance conductors
which are plated copper and copper alloy conductors offering both high
and low temperature standard and customized conductors as well as
specialty film, insulated conductors and miniature tubing products. The
conductors manufactured are tin, nickel and silver plated, including
some proprietary products. High temperature products are generally used
4
where high thermal stability and good solderability are required for
certain military and commercial aerospace applications. The medical
products include ultra fine alloys, which are used in medical
electronics such as ultrasound equipment and portable defibrillators.
The tubing products are used in a variety of medical devices in
medicine delivery and coronary procedures. These products are sold to
harness assembly manufactures, distributors and original equipment
manufacturers' ("OEM") in the United States, Europe and Asia primarily
serving the aerospace, medical, automotive, computer,
telecommunications, mass transportation, geophysical and electronics
markets. HPC has manufacturing operations in Inman, South Carolina and
Trenton, Georgia.
On March 31, 2006, the Company completed the acquisition of all of the
outstanding common stock of HPC for $42,000 plus a preliminary working
capital adjustment payment at closing of $1,676. The acquisition was
funded with borrowings under the Revolver Credit Facility.
Additionally, on March 31, 2006, the Company purchased the copper
inventory held on consignment by HPC from PD for $5,057, with $2,528
payable on May 15, 2006 and $2,529 payable on June 14, 2006. In
addition, pursuant to the Purchase Agreement, the Company has agreed to
a contingency payment in an amount equal to 4.88 multiplied by the
amount that HPC's 2006 EBITDA (as defined in the Purchase Agreement)
exceeds $9,400. The contingency payment is capped at $3,000. Phelps
Dodge High Performance Conductors of SC & GA, Inc. changed its name to
IWG High Performance Conductors, Inc.
This acquisition has been accounted for as a purchase on March 31,
2006. The fair value of assets and liabilities acquired are included in
the consolidated balance sheet at that date. Results of operations of
HPC will be included for periods subsequent to March 31, 2006.
The total purchase price of the HPC acquisition was $51,471 and the
payment of related purchase price, fees and costs is summarized as
follows:
Purchase of common stock and estimated working
capital at closing................................. $ 43,676
Estimated additional working capital adjustment.... 2,131
Purchase of consigned inventory ................... 5,057
Fees and costs..................................... 607
----------
$ 51,471
==========
The total acquisition costs have been allocated to the acquired net
assets as follows:
Current assets..................................... $ 34,611
Property, plant and equipment ..................... 26,734
Identifiable intangibles .......................... 2,500
Current liabilities................................ (6,406)
Deferred credit (3,000)
Deferred income taxes.............................. (2,619)
Other liabilities.................................. (349)
----------
Total $ 51,471
==========
The above allocation of total acquisition costs is preliminary and
based upon the estimate of fair values as determined under SFAS 141
including inventory, property, plant and equipment, identifiable
intangibles and certain liabilities. The Company expects to finalize
this allocation in the second quarter of 2006 including final deferred
income tax amounts.
Based upon the fair value of assets and liabilities compared to the
total purchase price, there is an excess of fair value of assets and
liabilities over purchase price, or "negative goodwill" of $3,000.
Pursuant to the provisions of FAS 141, the Company has recorded the
contingent consideration as a deferred credit at March 31, 2006. There
was no remaining negative goodwill remaining after recording this
deferred credit. When the contingency is resolved and the consideration
is issued or becomes issuable, any difference between the fair value of
the contingent consideration issued or issuable and the deferred credit
will be accounted for as follows:
5
o Any excess of the fair value of the contingent consideration
issued or issuable over the amount of the deferred credit will
be recognized as additional cost of the acquired entity.
o Any excess of the deferred credit over the fair value of the
consideration issued or issuable will first be recognized as a
pro rata reduction of the amounts that were initially assigned
to eligible acquired assets, after which any remaining
difference would be recognized as an extraordinary gain.
Identifiable intangibles as of March 31, 2006 represent the fair market
value of alloys, customer contracts and relationships and trade names
and trademarks. The fair market values were determined using a discount
rate to compute the present value of the income or cost savings of the
identifiable intangible assets. A discount rate of 17% was used. The
identifiable intangibles of $2,500 consist of alloys of $100, customer
contracts and relationships of $2,100 and trade names and trademarks of
$300. Each of the identifiable intangibles will be amortized over 20
years.
The following table shows summary unaudited pro forma results of
operations as if the Company and HPC had been combined as of the
beginning of the periods presented. The unaudited pro forma results of
operations are based on estimates and assumptions, which are
preliminary and have been made solely for purposes of developing such
pro forma information. The pro forma information is presented for
illustrative purposes only and is not necessarily indicative of the
operating results or financial position that would have occurred if the
acquisition had been consummated as of the beginning of the periods
presented:
PRO FORMA
-------------------------------
THREE MONTHS ENDED
-------------------------------
MARCH 31, MARCH 31,
2006 2005
---------------- --------------
Net sales................................... $ 193,707 $ 133,520
Income from continuing operations........... 4,140 1,312
Net income.................................. 2,939 838
Basic and diluted net income per share...... 0.29 .08
3. RECENTLY ISSUED ACCOUNTING STANDARDS
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 adoption of SFAS No. 151 did not have a
material impact on the Company's financial position or results of
operations.
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment.
SFAS No. 123(R) 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. 123(R) 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. 123(R), only certain pro forma disclosures of fair value were
required. The Company adopted the provisions of SFAS No. 123(R)
effective the first quarter of fiscal year 2006, which began on January
6
1, 2006. The adoption of SFAS No. 123(R) did not have a material impact
on the results of operation.
4. INVENTORIES
The composition of inventories is as follows:
MARCH 31, DECEMBER 31,
2006 2005
---------------- ----------------
Raw materials........................... $ 22,952 $ 18,274
Work-in process......................... 25,283 14,400
Finished goods.......................... 35,724 24,200
---------------- ----------------
Total inventories................... $ 83,959 $ 56,874
================ ================
Inventories are valued at the lower of cost or market. Cost is
determined using the last-in, first-out ("LIFO") method. Had
inventories been valued at the first-in, first-out ("FIFO") cost
method, inventories would have been $24,207 and $20,641 higher as of
March 31, 2006 and December 31, 2005, respectively.
Included in inventory at March 31, 2006, is $18,816 acquired in the HPC
acquisition which has been fair valued at that date in accordance with
SFAS No. 141.
5. STOCK OPTION PLANS AND EXPENSE
In the third quarter of 2005, the Company granted an option to buy
25,000 shares to the Vice-Chairman of the Board of Directors with an
exercise price at $11 per share. This grant was the only grant made in
2005 and at March 31, 2006 remains the only outstanding grant.
Effective January 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123(R) "Share-Based Payment," SFAS 123(R),
which requires companies to measure and recognize compensation expense
for all stock-based payments at fair value. SFAS 123(R) is being
applied on the modified prospective basis. Prior to the adoption of
SFAS 123(R), the Company accounted for stock-based compensation plans
under the recognition and measurement principles of Accounting
Principles Board (APB) Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations. The Company did not recognize
compensation expense related to the stock-based plans as the options
were granted with an exercise price equal to the fair market value on
the date of grant.
Under the modified prospective approach, SFAS 123(R) applies to new
awards and to awards that were outstanding on January 1, 2006 that are
subsequently modified, repurchased or cancelled. Under the modified
prospective approach, compensation cost recognized for the first
quarter of 2006 includes compensation cost for all share-based payments
granted prior to, but not yet vested on, January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of
SFAS 123(R). Prior periods were not restated to reflect the impact of
adopting the new standard.
As a result of adopting SFAS 123(R) on January 1, 2006, the net income
for the three months ended March 31, 2006, was approximately $6 lower
than if we had continued to account for stock-based compensation under
APB Opinion 25. There was no material impact on the net income per
share for the three months ended March 31, 2006.
The Company uses the Black-Scholes option model to estimate fair value
of share-based awards with the following weighted average assumptions:
7
FOR THE THREE MONTHS ENDED MARCH
31, 2006
--------------------------------
Stock Options and Awards:
Expected life 6 years
Expected volatility 52.6%
Dividend yield 0%
Risk-free interest rate 4.20%
The Company calculates expected volatility for stock options using
historical volatility. The Company estimated the forfeiture rate for
the existing single stock options to be 0%.
Stock option activity is summarized as follows (in thousands except per
share amounts):
WEIGHTED AVERAGE
OPTIONS WEIGHTED AVERAGE REMAINING AGGREGATE
OUTSTANDING EXERCISE PRICE EXERCISE PRICE TERM IN YEARS INTRINSIC VALUE
----------- -------------- -------------- ------------- ---------------
Outstanding at
January 1, 2006 25,000 $11.00 $11.00 9.7
Granted -- -- --
Exercised -- -- --
Cancelled -- -- --
Outstanding at
March 31, 2006 25,000 $11.00 $11.00 9.4 $75
Exercisable at
March 31, 2006 8,333 $11.00 $11.00 9.4 $25
As of March 31, 2006, there was $26 of total unrecognized compensation
cost related to the outstanding stock option which is expected to be
recognized over the remainder of its vesting periods.
On May 11, 2006, the Company's stockholders approved the 2006
Management Stock Option Plan and the 2006 Stock Option Plan for
Non-Employee Directors. Under the 2006 Management Stock Option Plan,
options for up to 1,300,000 shares of common stock are available for
grant to the eligible members of management. The options will be
granted at no less than 100% of fair market value of the Company's
stock on the date of the grant and have a term of no longer than 10
years. All other material items of the stock options, including without
limitation, vesting and exercisability, will be determined by the
Compensation Committee. Under the 2006 Stock Option for Non-Employee
Directors, options for up to 300,000 shares of common stock are
available for granting to nonemployee directors. These stock options
will have an exercise price equal to 100% of fair market value of the
underlying stock on the date of grant and have a term of 10 years.
6. COMPREHENSIVE INCOME/(LOSS)
Comprehensive income/(loss) is comprised of:
THREE MONTHS ENDED
--------------------------------
MARCH 31, MARCH 31,
2006 2005
--------------- --------------
Net income/(loss)............................................... $ 1,861 $ (461)
Foreign currency translation adjustment, net of taxes of $0..... 1,006 (174)
--------------- --------------
Total comprehensive income/(loss)........................... $ 2,867 $ (635)
=============== ==============
7. LONG-TERM DEBT
The composition of long-term debt is as follows:
8
MARCH 31, DECEMBER 31,
2006 2005
-------------- --------------
Senior Revolving Credit Facility................................ $ 44,021 $ 30,188
Senior Term Loan................................................ 30,000 30,000
10% Secured Senior Subordinated Notes........................... 75,000 75,000
Other........................................................... - 228
-------------- --------------
149,021 135,416
Less current maturities......................................... - 228
-------------- --------------
Long-term portion of long-term debt............................. $ 149,021 $ 135,188
============== ==============
SENIOR REVOLVING CREDIT FACILITY AND TERM LOAN
On October 20, 2004, and as amended on March 31, 2006, the Company and
the domestic subsidiaries entered into (collectively, the "Credit
Facility") (1) a credit agreement among Congress Financial Corporation
(Central), now known as Wachovia Capital 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 $130,000 subject to
borrowing availability (including, as a sub-facility of the revolving
credit facility, a $25,000 letter of credit facility) (the "Revolver
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 (the "Term Credit Facility").
Borrowings under the Revolver Credit Facility are 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. The Term Credit Facility is in the amount of $30,000. As of
March 31, 2006, letters of credit in the amount of $10,722 were
outstanding and $44,021 was drawn under the Revolver Credit Facility.
Availability under the Revolver Credit Facility was $65,498 as of March
31, 2006.
The Company's domestic subsidiaries are the primary parties to the
Credit Facility. The Company has guaranteed their obligations under the
Credit Facility. The collateral for the 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 Credit
Facility, and the liens and guarantees in respect thereof, are junior
to the Revolver 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 compliance, with a fixed charge
coverage ratio when either, (1) minimum availability under the credit
facility falls below $20,000 or (2) there is a default or event of
default. At March 31, 2006, 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 Credit Facility 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
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 on October 20, 2004 in aggregate principal
amount of $75,000. The Notes will mature on October 15, 2011.
9
Interest on the Notes accrues at the rate of 10 percent per annum and
is payable semiannually in arrears on April 15 and October 15. 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.
8. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company has three reportable segments: bare wire, engineered wire -
Europe and insulated wire. The remaining insulated wire business is
comprised of Cebu, Philippines. Previously, the Company had reported
two reportable segments: bare wire and insulated wire. Segment data for
the three months ended March 31, 2005 below has been recast to reflect
the remaining continuing operations and to conform to the current year
presentation. These segments are strategic business units organized
around three product categories that follow management's internal
organization structure. The Company evaluates segment performance based
on segment operating income.
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 bare wire segment is in the
primary business of copper fabrication. While the Company bills its
customers for copper it provides, it does not distinguish in its
records these customer types and it is therefore not practical to
provide such disclosure.
The engineered wire-Europe segment manufactures and engineers bare
copper wire products (or conductors) to conduct electricity either for
power or for grounding purposes and are sold to a diverse customer base
of various OEM's for use in electrical appliances, power supply,
aircraft and railway, and automotive.
The insulated wire segment manufactures and sells insulated wire
products (copper conductors insulated with plastic or other polymeric
compounds) to automotive manufacturers for use in the assembly of wire
harnesses that are installed in automobiles.
The Company is currently evaluating the segment reporting for the
acquired HPC business.
Summarized financial information for the Company's reportable segments
is as follows:
10
ENGINEERED INSULATED
BARE WIRE WIRE-EUROPE HPC WIRE CORPORATE ELIMINATIONS TOTAL
--------- ----------- --- ---- --------- ------------ -----
NET SALES
Three months ended March 31, 2006... $ 132,056 $ 12,666 $ -- $ 22,055 $ -- $ (159) $ 166,618
Three months ended March 31, 2005... 86,848 10,452 -- 16,111 -- (1,272) 112,139
OPERATING INCOME/(LOSS)
Three months ended March 31, 2006... 6,008 1,061 -- 329 (9) -- 7,389
Three months ended March 31, 2005... 5,136 786 -- 740 (1,237) -- 5,425
GOODWILL
March 31, 2006...................... 71,193 -- -- -- -- -- 71,193
December 31, 2005................... 71,193 -- -- -- -- -- 71,193
TOTAL ASSETS
March 31, 2006...................... 259,292 40,788 63,845 43,428 17,318 (3,898) 420,773
December 31, 2005................... 254,351 28,230 -- 67,075 17,614 (1,016) 366,254
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
-----------------------------------------
MARCH 31, MARCH 31,
2006 2005
------------------- -------------------
United States............................. $ 131,857 $ 85,576
Europe.................................... 12,666 10,452
Philippines............................... 22,095 16,111
------------------- -------------------
Total................................... $ 166,618 $ 112,139
=================== ===================
The following table presents property, plant and equipment, net by
geographic region based on the location of the asset:
MARCH 31, DECEMBER 31,
2006 2005
------------- ---------------
United States................................ $ 90,271 $ 64,693
Europe....................................... 8,657 7,916
Mexico....................................... -- 5,118
Philippines.................................. 7,575 7,713
------------- ---------------
Total.................................... $ 106,503 $ 85,440
============= ===============
9. RELATED PARTY TRANSACTIONS
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
is the Chief Executive Officer 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 $3,706 and $2,800
for the three months ended March 31, 2006 and 2005, respectively. The
outstanding trade receivables were $1,069 and $823 at March 31, 2006
11
and December 31, 2005, respectively. Sales to Prime were made at terms
comparable to those of other companies in the industry.
10. 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 OEMs 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 OEMs 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 its 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 OEMs 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 sale of the Company's former wire harness
business to Viasystems, the Company agreed to indemnify Viasystems for
certain claims and litigation including any claims related to the
claims for water inlet hoses. 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 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
March 31, 2006, December 31, 2005 and December 31, 2004 (in thousands,
except number of claims):
VALUE OF
NO. OF ALLEGED
CLAIMS DAMAGES
---------- -------------
As of December 31, 2004 ............................. 388 $ 3,956
For the year ended December 31, 2005:
New uninsured claims............................... 1,526 15,158
Resolved uninsured claims.......................... (1,604) (15,503)
---------- -------------
As December 31, 2005................................. 310 3,611
New uninsured claims............................... 221 2,088
Resolved uninsured claims.......................... (97) (758)
---------- -------------
As March 31, 2006.................................... 434 $ 4,941
========== =============
For the periods prior to April 1, 2002, the Company's product liability
coverage is in excess of the insured claims outstanding. As of March
31, 2006 and December 31, 2005, the total of such claims was less than
12
$2,000 with an estimated liability related to these claims of less than
$500. As of March 31, 2006 and December 31, 2005, 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 March 31, 2006 and December 31, 2005, the
aggregate settlement costs, cost of administering and litigation and
average cost per resolved claim were as follows:
FOR THE THREE FOR THE YEAR
MONTHS ENDED ENDED
MARCH 31, 2006 DECEMBER 31, 2005
-------------- -----------------
Aggregate settlement costs.................. $ 80 $ 340
Cost of administering and litigating........ $ 80 $ 360
Average cost per resolved claim............. $ -- $ --
The Company had a reserve of $1,405 and $1,566 as of March 31, 2006 and
December 31, 2005, 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 two 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.
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.
We make 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. We do not have any intention or obligation to update forward-looking
statements after the filing of this Form 10-Q.
Many important factors could cause our results to differ materially from those
expressed in forward-looking statements. These factors include, but are not
limited to, fluctuations in our operating results and customer orders,
unexpected decreases in demand or increases in inventory levels, our dependence
on the automotive industry, changes in the price of copper, copper premiums and
compound costs, the failure of our acquisitions and expansion plans to perform
as expected, the competitive environment, our reliance on our significant
customers, lack of long-term contracts, substantial dependence on business
outside of the U.S. and risks associated with our international operations, the
status of the insulated wire division, limitations due to our substantial
indebtedness, loss of key employees or the deterioration in our relationship
with employees, litigation claims, liability from environmental laws and
regulations and other factors. For additional information regarding risk
factors, see our discussion in Part I, Item 1A of our Annual Report on Form 10-K
for the year ended December 31, 2005.
13
OVERVIEW
We, together with our subsidiaries, manufacture and market wire products,
including bare and tin-plated copper wire, engineered wire, high performance
conductors 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 17 facilities located in the United States, Mexico, France, Italy and the
Philippines, including two plants acquired with HPC. For the period ended March
31, 2006, we operated our business in the following three segments:
o 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
o Engineered Wire Products - Europe. Our bare copper wire products are
engineered and used to conduct electricity either for power or for
grounding purposes and are sold to a diverse customer base of various
OEM's for use in electrical appliances, power supply, aircraft and
railway and automotive.
o Insulated Wire Products. Our insulated wire products (copper
conductors insulated with plastic or other polymeric compounds) are
primarily manufactured for the automotive end-user markets. Our
insulated wire products are used in the assembly of wire harnesses
that are installed in automobiles. A wire harness is comprised of an
assembly of wires with connectors and terminals that transmit
electricity between two or more end points.
o The Company is currently evaluating the segment reporting for the HPC
acquisition.
Demand for our products is directly related to two primary factors:
o Demand for the end products in which our products are incorporated.
o Our abilities to compete with other suppliers in the industry served.
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 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.
o Automobiles - North American industry production statistics, which are
influenced by labor relations issues, regulatory requirements and
trade agreements. For the first quarter of 2006, automotive industry
production volumes increased 7% compared to the same period for 2005.
o With the HPC acquisition, additional factors will include commercial
aircraft shipments, military aircraft deliveries and electro-medical
equipment demand rates.
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
14
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 at any time.
Our expenses in producing these products fall into three main categories - raw
materials, including copper, silver and nickel and insulating material
(polyvinyl chloride ("PVC") and cross-linked polyethylene ("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 2005 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 $2.25 per pound for the three
months ended March 31, 2006 from $1.47 per pound for the three months ended
March 31, 2005. Copper prices continue to increase in 2006, and the price of
copper on the COMEX was $4.03 per pound as of May 11, 2006. 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 $4.4 million impact on
our working capital. Increase working capital requirements cause us to increase
our borrowings, which increases our interest expense. 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 insulated
wire customers for the foreseeable future. For the year ended December 31, 2005,
the premium to convert copper cathode to copper rod for continuing insulated
wire operations increased by 25.4%. With the HPC acquisition, other raw
materials used include tin, silver and nickel. The cost of silver and nickel
components in our products is generally passed-through to our customers. From
March 31, 2005 to March 31, 2006, the price of silver has increased by 60.1% and
the price of nickel decreased by 5.6%. From March 31, 2006 to April 30, 2006,
the prices of silver and nickel increased by 17.7% and 20.8%, respectively.
We also consume PVC and XPLE compounds. The prices of these items are generally
affected by world oil prices and world-wide supply and demand. The prices of PVC
compounds and XPLE compounds increased significantly in 2005, but, as of April
30, 2006, have not increased so far in 2006. World oil prices are impacted by a
number of factors, including seasonal fluctuations, political instability and
meteorological events. From March 31, 2005 to March 31, 2006, the price of a
barrel of oil increased 16.4%. As of April 30, 2005, the price of a barrel of
oil increased 6.8% from March 31, 2006. Our contracts with customers for
insulated wire do not include adjustments for fluctuations in the price of oil,
PVC and XPLE compounds. We believe higher compound costs may increase later in
2006 if world oil prices continue to increase 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, workers' 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 most of 2006.
U.S. INSULATED WIRE BUSINESS SALE AND REMAINING INSULATED WIRE BUSINESS
On November 30, 2005, we entered into an Asset Purchase Agreement with
Copperfield, LLC. Pursuant to that agreement, on November 30, 2005, we:
15
o Sold the inventory, equipment, spare parts and certain other assets
located at our Avilla, Indiana facility and three facilities located
in El Paso, Texas;
o Sold our Avilla, Indiana facility, transferred leases for two of our
El Paso, Texas facilities and leased a third El Paso, Texas facility
to Copperfield (the third facility was subsequently sold to
Copperfield on February 21, 2006 for $2 million); and
o Transferred certain contracts related to these facilities.
Under the agreement, we received net proceeds of $15 million after the working
capital adjustment. We retained our accounts receivable, accounts payable and
all other liabilities which were $17.2 million, net at November 30, 2005.
We continue to explore strategic alternatives for the remainder of our insulated
wire business, which is comprised of operations in Cebu, Philippines that may
include its sale or closure. The Durango plant ceased producing insulated wire
at the end of January, 2006 and closed on March 31, 2006. Accordingly, results
of operation for this plant are included in discontinued operations and its
long-lived assets are held for sale.
ACQUISITION
On March 4, 2006, we entered into a Stock Purchase Agreement ("Purchase
Agreement") to acquire Phelps Dodge High Performance Conductors of SC & GA, Inc.
("HPC") from Phelps Dodge Corporation ("PD"). HPC is a manufacturer of specialty
high performance conductors which are plated copper and copper alloy conductors
offering both high and low temperature standard and customized conductors as
well as specialty film insulated conductors and miniature tubing products. The
conductors manufactured are tin, nickel and silver plated, including some
proprietary products. High temperature products are generally used where high
thermal stability and good solderability are required for certain military and
commercial aerospace applications. The medical products include ultra fine
alloys, which are used in medical electronics such as ultrasound equipment and
portable defibrillators. The tubing products are used in a variety of medical
devices in medicine delivery and coronary procedures. These products are sold to
harness assembly manufacturers, distributors and OEM's in the United States,
Europe and Asia primarily serving the aerospace, medical, automotive, computer,
telecommunications, mass transportation, geophysical and electronics markets.
HPC has manufacturing operations in Inman, South Carolina and Trenton, Georgia.
On March 31, 2006, we completed the acquisition of all of the outstanding common
stock of HPC for $42 million plus a working capital adjustment estimated at
closing to be $1.7 million. We funded the acquisition with borrowings under our
Revolver Credit Facility. Additionally, we purchased the copper inventory held
on consignment by HPC from PD for $5.1 million. In addition, pursuant to the
Purchase Agreement, we have agreed to a contingency payment in an amount equal
to 4.88 multiplied by the amount that HPC's 2006 EBITDA (as defined in the
Purchase Agreement) exceeds $9.4 million. The contingency payment is capped at
$3 million. In connection with the closing of the transaction, Phelps Dodge High
Performance Conductors of SC & GA, Inc. changed its name to IWG High Performance
Conductors, Inc. This acquisition continues the execution of our strategy to
expand our product offerings with silver and nickel plated products and to sell
into new markets, including aerospace and medical, as we wind-down and exit the
insulated wire business.
The Company is currently evaluating segment reporting for the acquired company.
The future operating results and cash flows generated by HPC will depend upon
demand from the end markets, including commercial aircraft shipments, military
aircraft deliveries and medical equipment demand rates as well as our ability to
compete with other supplies. The continued increase in the costs to obtain
copper, silver and nickel will increase our working capital requirements.
RESULTS OF OPERATIONS
The following table sets forth certain unaudited statement of operations data in
millions of dollars and percentage of net sales for the periods indicated:
16
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31,
2006 2005
------------------- ---------------------
Net sales....................................... $166.6 100.0% $112.1 100.0%
Operating expenses: ............................
Cost of goods sold, exclusive of depreciation
expense shown below............................ 148.6 89.2% 95.6 85.3%
Selling, general and administrative expenses.... 7.7 4.6% 8.0 7.1%
Depreciation and amortization................... 3.0 1.8% 3.1 2.8%
(Gain) on sale of property, plant and equipment. (0.1) 0.0% (0.0) 0.0%
-------- -------- -------- --------
Operating income................................ 7.4 4.4% 5.4 4.8%
Other income/(expense):
Interest expense............................... (3.3) (2.0)% (3.1) (2.8)%
Amortization of deferred financing costs....... (0.2) (0.1)% (0.2) (0.1)%
Other, net..................................... (0.1) 0.0% (0.0) (0.0)%
-------- -------- -------- --------
Income before income tax provision.............. 3.8 2.3% 2.1 1.9%
Income tax provision............................ 1.4 0.9% 2.9 2.6%
-------- -------- -------- --------
Income/(loss) from continuing operations........ 2.4 1.4% (0.8) (0.7)%
Income/(loss) from discontinued operations...... (0.5) (0.3)% 0.3 0.3%
-------- -------- -------- --------
Net income/(loss)............................... $1.9 1.1% ($0.5) (0.4)%
======== ======== ======== ========
We have three reportable segments: bare wire, engineered wire-Europe and
insulated wire. The following table sets forth unaudited net sales and operating
income / (loss) for the periods presented in millions of dollars and percentages
of totals:
FOR THE THREE FOR THE THREE
MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31,
2006 2005
------------------ -------------------
Net sales:
Bare Wire............................. $132.0 79% $86.8 78%
Engineered Wire - Europe ............. 12.7 8% 10.5 9%
Insulated Wire........................ 22.1 13% 16.1 14%
Elimination........................... (0.2) 0% (1.3) (1)%
-------- ------ -------- ------
Total............................... $166.6 100% $112.1 100%
======== ====== ======== ======
Operating income/(loss):
Bare Wire............................. $6.0 81% $5.1 77%
Engineered Wire - Europe ............. 1.1 15% 0.8 12%
Insulated Wire........................ 0.3 4% 0.7 11%
-------- ------ -------- ------
Subtotal............................ 7.4 100% 6.6 100%
====== ======
Corporate and eliminations ........... -- (1.2)
-------- --------
Total............................... $7.4 $5.4
======== ========
THREE MONTHS ENDED MARCH 31, 2006 VERSUS THREE MONTHS ENDED MARCH 31, 2005
Net sales were $166.6 million and $112.1 million for the three months ended
March 31, 2006 and 2005, respectively. Sales for the three months ended March
31, 2006 were $54.5 million, or 48.6% above comparable 2005 levels as a result
of a $34.8 million increase in the average cost and selling price of copper,
$8.0 million from the impact of a higher level of owned copper in the 2006
period compared to the 2005 period, a $10.6 million increase in volume, and $1.1
million of higher customer pricing. The average price of copper based upon COMEX
increased to $2.25 per pound for the three months ended March 31, 2006 from
$1.47 per pound for the three months ended March 31, 2005.
17
Bare wire segment net sales for the three months ended March 31, 2006 were
$132.0 million, or an increase of $45.2 million or 52.1% from sales of $86.8
million for the comparable 2005 period. This increase was primarily the result
of higher volume to customers supplying all major markets of $5.6 million, the
increase in the average cost and selling price of copper of $30.8 million, $8.0
million from the impact of a higher level of owned copper sales in the 2006
period compared to the 2005 period and an $0.8 million increase in customer
pricing. Of the total pounds processed for the three months ended March 31, 2006
and 2005, respectively, 45.1% and 42.5% were from customers' tolled copper.
Engineered wire-Europe sales of $12.7 million for the three months ended March
31, 2006 were $2.2 million, or 21.0%, higher than sales of $10.5 million for the
2005 period. This increase was the result of $1.6 million for the increase in
the average cost and selling price of copper and $0.6 million from increased
volume from stronger customer demand.
Insulated wire segment net sales for the three months ended March 31, 2006 were
$22.1 million compared to $16.1 million in the three months ended March 31,
2005, for an increase of $6.0 million, or 37.3% from the comparable 2005 period.
Higher sales resulted from higher average cost and selling price of copper of
$2.4 million, increased volume to automotive customers of $3.3 and $0.3 million
of increased customer pricing.
Cost of goods sold, exclusive of depreciation, as a percentage of sales increase
to 89.2% for the three months ended March 31, 2006 from 85.3% for the same
period in 2005. The increase of 3.9 percentage points was due to the increase in
the average cost and selling price of copper of 2.9 percentage points, the
impact of a higher level of owned copper sales in the 2006 period compared to
the 2005 period of 0.9 percentage points and higher utility costs in the
domestic bare wire segment of 1.2 percentage points partially offset by
increased customer pricing of 0.9 percentage points and lower costs in Europe of
0.2 percentage points.
Selling, general and administrative expenses were $7.7 million for the three
months ended March 31, 2006, compared to $8.0 million for the same period in
2005. This decrease of $0.3 million was the result of $1.2 million lower
retention plan costs in 2006 compared to 2005 partially offset by $0.5 million
of higher personnel related costs and $0.4 million of volume related amounts.
These expenses, as a percent of net sales, decrease to 4.6% for the three months
ended March 31, 2006 from 7.1% for the three months ended March 31, 2005,
primarily from the effect of higher copper costs and selling prices and a higher
level of owned copper sales.
Depreciation and amortization was $3.0 million for the three months ended March
31, 2006 compared to $3.1 million for the same period in 2005, from slightly
lower depreciation on property, plant and equipment.
Operating income for the three months ended March 31, 2006 was $7.4 million
compared to $5.4 million for the 2005 period, or an increase of $2.0 million,
primarily from increased sales volume and higher customer pricing partially
offset by increased utility costs. Bare wire segment's operating income of $6.0
million for the 2006 period increased by $0.9 million, or 17.6% compared to the
2005 period, primarily from an increased contribution from volume levels and
higher customer pricing partially offset by increased utility costs. Engineered
wire - Europe operating income was $1.1 million, or an increase of $0.3 million,
or 37.5%, from the 2005 period. This increase was primarily from increased sales
volume and higher overhead absorption. Insulated wire segment's operating income
of $0.3 million for the three months ended March 31, 2006 compared to $0.7
million in the 2005 period, or a decrease of $0.4 million, as higher sales
volume was offset by increased manufacturing costs. Operating income in the 2006
period also increased by $1.2 million from lower retention plans expense and
other costs associated with the Insulated Wire Division strategic alternatives
in the 2006 period compared to the 2005 period.
Interest expense was $3.3 million for the three months ended March 31, 2006
compared to $3.1 million for the three months ended March 31, 2005. This
increase of $0.2 million was the result of higher interest rates offsetting the
impact of lower levels of borrowing.
Amortization of deferred financing cost was $0.2 million for both the three
months ended March 31, 2006 and 2005 and represents the amortization of the
deferred fees related to the our Credit Facility.
Income tax provisions were $1.4 million and $2.9 million for the three months
ended March 31, 2006 and 2005, respectively. The 2005 provision includes the
impact of no longer considering the unremitted earnings of the Philippines
operations to be permanently reinvested outside the U.S.
18
Income/(loss) from discontinued operations was ($0.5) million and $0.3 million
for the three months ended March 31, 2006 and 2005, respectively. The decrease
of $0.8 million was the result of lower volume and the closing of the Durango,
Mexico plant.
Net income/(loss) of $1.9 million and ($0.5) million were recorded for the three
months ended March 31, 2006 and 2005, respectively. The improvement of $2.4
million in the three months ended March 31, 2006 was the result of higher
operating income and reduced income tax provision partially offset by an
increased loss from discontinued operations.
FINANCIAL CONDITION
At the end of the first quarter, total cash and cash equivalents was $6.1
million, up $0.7 million from year-end 2005. During the first three months of
2006 cash levels remained fairly constant as we used excess cash to reduce
outstanding long-term debt borrowings.
Accounts receivable increased $4.4 million from year-end 2005. Excluding the
accounts receivable of $15.1 million acquired from HPC, accounts receivable
decreased $10.7 million primarily as the result of collections of U.S. insulated
wire receivables retained from the sale of the U.S. insulated wire division to
Copperfield, partially offset by increased copper prices. Days sales outstanding
improved at the end of the first quarter of 2006 compared to year-end 2005 and
decreased from 50 days to 47 days. The allowance for doubtful accounts as a
percentage of accounts receivable remained constant from 0.3% at December 31,
2005 and as of March 31, 2006 reflecting no substantial change in the overall
collectibility of our receivables.
Inventories of $84.0 million as of March 31, 2006 increased by $27.1 million
from December 31, 2005 including $18.8 million acquired with HPC. The remaining
increase of $8.3 million was from a 5.6 million pound increase of copper to
support higher volume levels partially offset by a $3.6 million increase in the
LIFO reserve as the result of higher copper prices. Despite the increased levels
of inventory, inventory turns increased in the 2006 first quarter compared to
2005 from higher sales levels.
Accounts payable were $61.5 million as of March 31, 2006, or an increase of
$27.6 million from December 31, 2005 levels, as trade vendor terms were fully
re-established from a major copper vender, the effect of higher copper prices in
2006, more pounds purchased and $10.5 million from the HPC acquisition including
the purchase of consigned copper from Phelps Dodge.
CRITICAL ACCOUNTING POLICIES
Effective January 1, 2006, the Company adopted Statement of Financial Accounting
Standards No. 123(R) "Shared-Based Payment," SFAS 123(R), which requires
companies to measure and recognize compensation expense for all stock-based
payments at fair value. SFAS 123(R) is being applied on the modified prospective
basis. Prior to the adoption of SFAS 123(R), the Company accounted for
stock-based compensation plans under the recognition and measurement principles
of Accounting Principles Board (APB) Opinion 25, Accounting for Stock Issued to
Employees, and related interpretations. The Company did not recognize
compensation expense related to the stock-based plans as the options were
granted with an exercise price equal to the fair market value on the date of
grant.
Under the modified prospective approach, SFAS 123(R) applies to new awards and
to awards that were outstanding on January 1, 2006 that are subsequently
modified, repurchased or cancelled. Under the modified prospective approach,
compensation cost recognized for the first quarter 2006 includes compensation
cost for all share-based payments granted prior to, but not yet vested on,
January 1, 2006, based on the grant-date fair value estimated in accordance with
the provision of SFAS 123(R). Prior periods were not restated to reflect the
impact of adopting the new standard.
As a result of adopting SFAS 123(R) on January 1, 2006, the net income for the
three months ended March 31, 2006, was approximately $6 lower than if we had
continued to account for stock-based compensation under APB Opinion 25. There
was no material impact on the net income per share for the three months ended
March 31, 2006.
19
RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004 (revised in December 2004), the FASB issued SFAS No. 151,
Inventory Costs - and 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 Bulletin ("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, SFAS 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 adoption of
SFAS No. 151 did not have a material impact on our financial position or results
of operations.
In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment. SFAS No.
123(R) 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. 123(R) 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.
123(R), only certain pro forma disclosures of fair value were required. The
Company adopted the provisions of SFAS No. 123(R) effective the first quarter of
fiscal year 2006, which began on January 1, 2006. The adoption of SFAS No.
123(R) did not have a material impact on the results of operations.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL AND CASH FLOWS
Net cash provided by operating activities was $30.9 million for the three months
ended March 31, 2006, compared to net cash used by operating activities of $0.9
million for the three months ended March 31, 2005. This improvement of $31.8
million was primarily the result of decreased accounts receivable of $24.9
million, higher accrued payroll and payroll related items of $5.1 million and
lower reorganization operations of $5.4 million partially offset by other, net
of $3.6 million. The decrease in accounts receivable was the result of
collections of retained U.S. insulated wire receivables and a lower days sales
outstanding partially offset by the effects of higher copper prices.
Net cash used in investing activities was $43.8 million for the three months
ended March 31, 2006, compared to $0.9 million for the three months ended March
31, 2005. This increase in net cash used of $42.9 million resulted primarily
from the acquisition of HPC for $44.3 million. Capital expenditures were $1.7
million for the three months ended March 31, 2006 and $2.0 million for the three
months ended March 31, 2005.
Net cash provided by financing activities was $13.5 million for the three months
ended March 31, 2006, compared to net cash used in financing activities of $9.6
million for the three months ended March 31, 2005. The increase was primarily
the result of net borrowings of $44.3 million for the above mentioned
acquisition reduced by $30.7 million of net repayments for the three months
ended March 31, 2006. For the three months ended March 31, 2005, there were $9.6
million of net repayments.
FINANCING ARRANGEMENTS
On October 20, 2004, and as amended on March 31, 2006 in connection with the
acquisition of HPC, we and our domestic subsidiaries entered into (collectively,
the "Credit Facility") (1) an amended credit agreement which provides for a
five-year senior revolver credit facility in an amount up to $130.0 million
subject to borrowing availability (including as a sub-facility of the revolver
credit facility, a $25 million letter of credit facility) (the "Revolver Credit
Facility"), and (2) a credit agreement which provides for a $30.0 million
five-year senior term loan facility (the "Term Credit Facility"). We also issued
the Notes to the former holders of our subordinated notes in connection with our
reorganization in October 2004. For a description of the terms of these
facilities and the Notes, see Note 7 to the unaudited Consolidated Financial
Statements.
20
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 $4.4 million impact on our working capital. The
average price of copper based upon COMEX increased to $2.25 per pound for the
three months ended March 31, 2006 from $1.47 per pound for the three months
ended March 31, 2005. Copper prices continue to increase in 2006, and the price
of copper on the COMEX was $4.03 per pound as of May 11, 2006. In addition,
certain copper fabricators have shortened payment terms due to the recent rise
in copper prices in May 2006.
Our principal sources of cash are generated from operations and availability
under our debt financing arrangements. We increased our Revolver Credit Facility
by $20 million in connection with the HPC acquisition.
Due to the recent significant increase in copper prices and the reduction in
vendor terms from certain copper fabricators, we have begun discussions with our
Credit Facility lenders to increase the size of our Credit Facility to provide
additional working capital in order to provide us with the necessary
availability and flexibility. Our existing Credit Facility and funds from
operating cash flow may be insufficient to meet our ongoing requirements for
working capital, capital expenditures, debt service and taxes if copper prices
continue at, or increase further from, the recent historical high levels or
there is further contraction in vendor terms from copper fabricators.
As of March 31, 2006, we had $6.1 million of unrestricted cash and cash
equivalents. Actual borrowings availability under our Revolver 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
March 31, 2006, our borrowing base was $120.7 million and our outstanding
indebtedness under the Revolver Credit Facility (including outstanding letters
of credit) was $55.2 million, resulting in a remaining availability as of such
date of $65.5 million.
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,
reduction in vendor terms from our suppliers, increases in prices of our major
material components including copper, silver, nickel and insulating materials,
increases in other expenses such as utility costs, 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 March 31, 2006. 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 March 31, 2006, the future minimum lease
payments under these arrangements totaled $2.6 million.
21
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 March 31, 2006, approximately $74.0 million of $149.0 million of long-term
debt, specifically, $74.0 million of borrowings under our Credit Facility, bear
interest at variable rates. A hypothetical 1% increase in variable interest
rates would increase our interest rate expense by $0.7 million based on the debt
outstanding as of March 31, 2006. 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 March 31, 2006 and year-end exchange
rates at December 31, 2005, was $87.6 million and $86.9 million, respectively.
At March 31, 2006, 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 America, 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. The average price of copper based upon COMEX increased to $2.25
per pound for the three months ended March 31, 2006 from $1.47 per pound for the
three months ended March 31, 2005. Copper prices continue to increase in 2006,
and the price of copper on the COMEX was $4.03 per pound as of May 11, 2006.
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.
Currently, a $0.10 per pound fluctuation in the price of copper will have a $4.4
million impact on our working capital. Additionally, 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. For the year ended December 31, 2005, the
premium to convert copper cathode to copper rod for continuing insulated wire
operations increased by another 25.4%. We believe that higher premiums may
continue.
Other major raw materials we consume include PVC compounds and XPLE compounds.
The prices of these items are generally affected by world oil prices and
worldwide supply and demand. The prices of PVC compounds and XPLE compounds
increased significantly in 2005, but, as of April 30, 2006, have not increased
so far in 2006. World oil prices are impacted by a number of factors, including
seasonal fluctuations, political instability and meteorological event. From
March 31, 2005 to March 31, 2006, the price of a barrel of oil increased by
16.4%. As of April 30, 2006, the price of a barrel of oil increased 6.8% from
March 31, 2006. Our contracts with customers for insulated wire do not include
22
adjustments for fluctuations in the price of oil, PVC compounds or XPLE
compounds. We believe higher compound costs may increase later in 2006 if world
oil prices continue to increase.
With the HPC acquisition, other raw materials used include tin, silver and
nickel. The cost of silver and nickel components in our products is generally
passed-through to our customers. From March 31, 2005 to March 31, 2006, the
price of silver has increased by 60.1% and the price of nickel has decreased by
5.6%. From March 31, 2006 to April 30, 2006, the prices of silver and nickel
have increased by 17.7% and 20.8%, respectively.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer, with the participation
of other members of management, conducted an evaluation of the effectiveness of
the design and operation of the disclosure controls and procedures pursuant to
Rules 13a-15(b) and 15d-15(b) under the Securities and Exchange Act of 1934. As
previously described in our Annual Report on Form 10-K for the year ended
December 31, 2005, we have a material weakness described below related to
deferred income tax accounting. Because this material weakness continues to
exist at March 31, 2006, our officers concluded that, as of the end of the
period covered by this report, our disclosure controls and procedures were not
effective. Notwithstanding the material weakness discussed below, our management
has concluded that the financial statements included in this Form 10-Q fairly
present in all material respects our financial position and its results of
operations for the periods presented in conformity with generally accepted
accounting principles.
A material weakness is a control deficiency or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. As of December 31, 2005, we did not maintain effective controls
over the evaluation and completeness of our deferred tax assets and liabilities,
the associated valuation allowances established in previous years to reflect the
likelihood of the recoverability of net deferred tax assets and the income tax
provision (benefit) for continuing and discontinuing operations. Specifically,
we did not have effective controls in place to identify the differences between
book and tax accounting for fixed assets and certain inventory reserves and LIFO
inventories. This control deficiency resulted in audit adjustments to our 2005
annual consolidated financial statements with respect to income taxes. In
addition, this control deficiency could result in a material misstatement to the
aforementioned accounts such as deferred tax assets, deferred tax liabilities,
goodwill and income tax provision (benefit) that would result in a material
misstatement to our annual or interim consolidated financial statements that
would not be prevented or detected. Accordingly, management has determined that
this control deficiency constitutes a material weakness, which still exists as
of March 31, 2006.
REMEDIATION PLAN
Our plans to address this material weakness include a special project which we
expect to staff with qualified outside tax and accounting consultants in the
second quarter of 2006 as well as additional internal and external resources for
the 2006 quarter and year-end closings. Although we have solicited bids from
outside consultants, we have not yet engaged a consultant.
Effective December 31, 2006 or 2007, depending upon our market capitalization on
June 30, 2006, Section 404 of the Sarbanes-Oxley Act of 2002 and rules and
regulations of the SEC thereunder require us to, among other things, annually
assess and report on the effectiveness of our internal control over financial
reporting, and evaluate and disclose changes in our internal control over
financial reporting quarterly. We are currently performing the system and
process evaluation and testing required (and any necessary remediation) in an
effort to prepare for compliance with the management certification and auditor
attestation requirements of Section 404.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
Except as otherwise discussed above, 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.
23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the quarter ended March 31, 2006, there have been no material
developments in the Company's legal proceedings. For more detailed information,
see Note 17 to our Consolidated Financial Statements and the disclosures
provided in "Item 3 --Legal Proceedings" set forth our Annual Report on Form
10-K for the year ended December 31, 2005.
ITEM 1A. RISK FACTORS.
In addition to the other information set forth in this report, you should
carefully consider the factors discussed in Part I, Item 1A. "Risk Factors" in
our Annual Report on Form 10-K for the year ended December 31, 2005, which could
materially affect our business, financial condition or future results. The Risk
Factors included in our 2005 Annual Report on Form 10-K have not materially
changed other than as set forth below. The risks described in our Annual Report
on Form 10-K and below are not the only risks we face. Additional risks and
uncertainties not currently known to us or that we currently deem to be
immaterial also may materially adversely affect our business, financial
condition and/or operating results.
THE PRICE OF COPPER, THE PRINCIPAL RAW MATERIAL USED IN OUR PRODUCTS, IS SUBJECT
TO PRICE FLUCTUATIONS AND MAY NEGATIVELY IMPACT OUR LIQUIDITY OR CAUSE OUR
CUSTOMERS TO DECREASE THEIR ORDERS.
The principal raw material used in our products is copper, which is purchased in
the form of 5/16-inch rod from the major copper producers in North America,
Europe and Asia. Copper rod prices are based on market prices, which are
generally established by reference to the New York Mercantile Exchange, Inc.
("COMEX") prices. As a world traded commodity, copper prices have historically
been subject to fluctuations. For the year 2005, the average price of copper
increased by 30.4% over the average price for the year 2004. Copper prices
continue to increase in 2006, and the price of copper on the COMEX was $4.03 per
pound as of May 11, 2006. Although we have copper price pass-through
arrangements with our customers, 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. Additionally, higher copper prices may cause our suppliers to shorten
payment terms, and certain copper fabricators have shortened payment terms due
to the recent rise in copper prices in May 2006.
High copper prices may also reduce demand from our customers. Since we generally
do not obtain long-term purchase commitments (as discussed in a separate risk
factor), our customers may cancel, reduce or delay their orders in response to
higher copper prices.
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
There were no matters submitted to a vote of security holders during the first
quarter of 2006. Our Annual Meeting of Stockholders was held on May 11, 2006. At
the Annual Meeting, stockholders voted on four matters and each matter was
approved. The number of shares voted with respect to each matter required to be
reported herein are as follows:
1. Election of Directors
Rodney D. Kent For: 9,669,540 Withheld: 25,300
Mark K. Holdsworth For: 9,694,840 Withheld: 0
24
William Lane Pennington For: 9,669,540 Withheld: 25,300
Peter Blum For: 9,694,840 Withheld: 0
David M. Gilchrist, Jr. For: 9,694,840 Withheld: 0
Robert A. Hamwee For: 9,694,840 Withheld: 0
Lowell W. Robinson For: 9,694,840 Withheld: 0
John T. Walsh For: 9,694,840 Withheld: 0
2. Ratification the Audit Committee's selection of PricewaterhouseCoppers LLP as
our independent registered public accounting firm.
For: 9,694,840 Against: 0 Abstain: 0 Broker Non-Votes: 0
3. Approval of International Wire Group, Inc. 2006 Management Stock Option Plan.
For: 8,891,479 Against: 4,281 Abstain: 0 Broker Non-Votes: 799,080
4. Approval of International Wire Group, Inc. 2006 Stock Option Plan for
Nonemployee Directors.
For: 8,891,479 Against: 4,281 Abstain: 0 Broker Non-Votes: 799,080
ITEM 5. OTHER INFORMATION
None.
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.
25
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: May 15, 2006 By: /s/ GLENN J. HOLLER
---------------------------------------------
Name: Glenn J. Holler
Title: Senior Vice President,
Chief Financial Officer
(Principal Financial and Accounting Officer)
and Secretary
26
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.
27