UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
000-51043
(Commission File Number)
INTERNATIONAL WIRE GROUP, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 43-1705942
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) No.)
12 MASONIC AVENUE, CAMDEN, NY 13316
(Address of principal executive offices) (Zip Code)
(315) 245-3800
(Registrant's telephone number, including area code)
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 October 31, 2007, there
were 9,951,002 shares, par value $.01 per share, outstanding.
INDEX
PART I. - FINANCIAL INFORMATION..............................................1
ITEM 1. FINANCIAL STATEMENTS...........................................1
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..........................14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK....24
ITEM 4. CONTROLS AND PROCEDURES.......................................25
PART II. - OTHER INFORMATION................................................27
ITEM 1. LEGAL PROCEEDINGS.............................................27
ITEM 1A. RISK FACTORS.................................................27
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.....................................................27
ITEM 3. DEFAULTS UPON SENIOR SECURITIES...............................27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........28
ITEM 5. OTHER INFORMATION.............................................28
ITEM 6. EXHIBITS......................................................28
Certification of Principal Executive Officer................................31
Certification of Principal Financial Officer................................32
Certification of Principal Executive Officer................................33
Certification of Principal Financial Officer................................34
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INTERNATIONAL WIRE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
SEPTEMBER DECEMBER
30, 31,
2007 2006
--------- ---------
(IN THOUSANDS, EXCEPT
FOR SHARE DATA)
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 3,047 $ 3,315
Accounts receivable, less allowance of $1,214 and $1,738 ... 114,708 97,896
Inventories ................................................ 68,023 58,808
Prepaid expenses and other ................................. 6,922 7,135
Deferred income taxes ...................................... 15,396 16,701
--------- ---------
Total current assets .................................... 208,096 183,855
Property, plant and equipment, net ............................ 107,883 103,889
Goodwill ...................................................... 62,148 62,148
Identifiable intangibles, net ................................. 16,825 18,369
Deferred financing costs, net ................................. 2,480 2,955
Restricted cash ............................................... 1,499 1,559
Other assets .................................................. 3,570 2,790
--------- ---------
Total assets ............................................ $ 402,501 $ 375,565
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt ....................... $ -- $ 535
Accounts payable and other ................................. 51,356 33,513
Accrued and other liabilities .............................. 16,409 14,264
Accrued payroll and payroll related items .................. 9,048 10,401
Customers' deposits ........................................ 13,331 12,086
Accrued income taxes ....................................... 1,851 1,011
Accrued interest ........................................... 3,726 1,847
--------- ---------
Total current liabilities ............................... 95,721 73,657
Long-term debt, less current maturities ....................... 102,892 113,020
Other long-term liabilities ................................... 7,746 4,029
Deferred income taxes ......................................... 12,103 13,602
--------- ---------
Total liabilities ....................................... 218,462 204,308
--------- ---------
Stockholders' equity:
Common stock, $.01 par value, 20,000,000 shares authorized,
10,021,002 and 10,000,002 shares issued ................. 100 100
Contributed capital ........................................ 184,201 181,566
Accumulated deficit ........................................ (1,530) (11,573)
Treasury stock at cost, 84,000 shares at September 30, 2007. (1,725) --
Accumulated other comprehensive income ..................... 2,993 1,164
--------- ---------
Total stockholders' equity .............................. 184,039 171,257
--------- ---------
Total liabilities and stockholders' equity .............. $ 402,501 $ 375,565
========= =========
See accompanying notes to the condensed consolidated financial statements.
1
INTERNATIONAL WIRE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED ENDED
---------------------------- ----------------------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 30, 30, 30,
2007 2006 2007 2006
------------ ------------ ------------ ------------
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE AMOUNTS)
Net sales ........................... $ 179,994 $ 206,372 $ 554,149 $ 565,012
Operating expenses:
Cost of goods sold, exclusive of
depreciation and amortization
expense shown below .............. 156,453 182,031 483,393 500,962
Selling, general and administrative
expenses ......................... 10,745 11,575 33,462 29,224
Depreciation ........................ 3,286 3,471 9,565 7,930
Amortization ........................ 734 864 2,354 2,513
Gain on sale of property, plant and
equipment ........................ (497) (8) (491) (8)
------------ ------------ ------------ ------------
Operating income .................... 9,273 8,439 25,866 24,391
Other income/(expense):
Interest expense ................. (2,592) (3,623) (7,424) (10,257)
Amortization of deferred financing
costs ......................... (159) (654) (477) (993)
Other, net ....................... (21) (134) (13) 105
------------ ------------ ------------ ------------
Income from continuing operations
before income tax provision ...... 6,501 4,028 17,952 13,246
Income tax provision ................ 1,902 377 5,219 3,974
------------ ------------ ------------ ------------
Income from continuing operations ... 4,599 3,651 12,733 9,272
Income/(loss) from discontinued
operations, net of income tax
provision/(benefit) of ($505),
$178, ($440) and ($86) ........... 492 294 632 (202)
------------ ------------ ------------ ------------
Net income .......................... $ 5,091 $ 3,945 $ 13,365 $ 9,070
============ ============ ============ ============
Basic net income per share:
Income from continuing operations. $ 0.46 $ 0.36 $ 1.27 $ 0.93
Income/(loss) from discontinued
operations .................... 0.05 0.03 0.06 (0.02)
------------ ------------ ------------ ------------
Net income ....................... $ 0.51 $ 0.39 $ 1.33 $ 0.91
============ ============ ============ ============
Diluted net income per share:
Income from continuing operations. $ 0.45 $ 0.36 $ 1.25 $ 0.93
Income/(loss) from discontinued
operations .................... 0.05 0.03 0.06 (0.02)
------------ ------------ ------------ ------------
Net income ....................... $ 0.50 $ 0.39 $ 1.31 $ 0.91
============ ============ ============ ============
Weighted average basic shares
outstanding ...................... 9,992,606 10,000,002 9,997,986 10,000,002
Weighted average diluted shares
outstanding ...................... 10,237,647 10,006,418 10,187,582 10,002,866
See accompanying notes to the condensed consolidated financial statements.
2
INTERNATIONAL WIRE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS
ENDED
-----------------------
SEPTEMBER SEPTEMBER
30, 2007 30, 2006
--------- ---------
(IN THOUSANDS)
CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
Net income ...................................... $ 13,365 $ 9,070
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation ................................. 9,565 8,734
Amortization ................................. 2,354 2,844
Amortization of deferred financing costs.. ... 477 993
Stock-based compensation expense ............. 2,351 1,562
Gain on sale of property, plant and
equipment ................................. (740) (447)
Gain on sale of businesses ................... -- (280)
Deferred income taxes ........................ 122 2,738
Change in operating assets and
liabilities, net of acquisitions and
divestitures:
Accounts receivable ....................... (15,476) (18,807)
Inventories ............................... (8,603) (11,863)
Prepaid expenses and other assets ......... (1,547) (1,881)
Accounts payable and other ................ 20,216 19,906
Accrued and other liabilities ............. 1,717 3,484
Accrued payroll and payroll related
items ................................... (1,502) 779
Customers' deposits ....................... 1,245 256
Accrued interest .......................... 1,879 1,599
Accrued income taxes ...................... 815 485
Other long-term liabilities ............... (45) (8)
--------- ---------
Net cash provided by operating .......... 26,193 19,164
activities
--------- ---------
CASH FLOWS USED IN INVESTING ACTIVITIES:
Capital expenditures ......................... (14,610) (7,643)
Proceeds from sale of property, plant and
equipment ................................. 2,929 1,191
Restricted cash .............................. 60 345
Proceeds from sale of businesses ............. -- 36,123
Acquisition of Phelps Dodge High
Performance Conductors of SC&GA, Inc.,
net of $45 cash acquired .................. (3,000) (52,143)
--------- ---------
Net cash used in investing activities ... (14,621) (22,127)
--------- ---------
CASH FLOWS USED IN FINANCING ACTIVITIES:
Borrowings of long-term obligations ....... 274,703 350,958
Repayment of long-term borrowings ......... (285,366) (350,424)
Repurchase of common stock ................ (1,725) --
Proceeds from the issuance of common
stock ................................... 280 --
Financing fees ............................ (2) (1,443)
--------- ---------
Net cash used in financing activities ... (12,110) (909)
--------- ---------
Effects of exchange rate changes on cash and
cash equivalents ................................ 270 377
--------- ---------
Net change in cash and cash
equivalents .......................... (268) (3,495)
Cash and cash equivalents at beginning of the
period .......................................... 3,315 5,422
--------- ---------
Cash and cash equivalents at end of the period.. ... $ 3,047 $ 1,927
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ...................................... $ 5,545 $ 9,553
========= =========
Net taxes paid (including taxes refunded of
$129 in 2006) ................................... $ 3,331 $ 711
========= =========
Amount included in accounts payable and other
for capital expenditures ........................ $ 518 $ --
========= =========
See accompanying notes to the condensed consolidated financial statements.
3
INTERNATIONAL WIRE GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
1. BUSINESS ORGANIZATION AND BASIS OF PRESENTATION
UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited interim condensed 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, results of operations and cash flows of International
Wire Group, Inc. (the "Company," "we" or "our"). The results for the three
and nine months ended September 30, 2007 and 2006 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, 2006.
Cash and cash equivalents - The Company's banking arrangements allow for
the Company to fund outstanding checks when presented to the financial
institution for payment. This cash management practice frequently results
in a net cash book overdraft position, which occurs when total issued
checks exceed available cash balances at a single financial institution.
The Company has recorded its cash disbursement accounts with a net cash
book overdraft position in accounts payable in the accompanying condensed
consolidated balance sheets. At September 30, 2007 and December 31, 2006,
the Company had net cash book overdrafts of $1,541 and $0, respectively.
Immaterial restatement - On January 1, 2007, the Company adopted the
provisions of FIN 48, which resulted in adjustment of its liability for
unrecognized tax benefits, deferred income tax assets and the January 1,
2007 balance of accumulated deficit. During the quarter ended September
30, 2007, the Company determined that it had understated the liability for
unrecognized tax benefits that was recorded upon adoption of FIN 48.
Accordingly, the Company has restated the financial statements to correct
this error by increasing the liability for unrecognized tax benefits and
the balance of accumulated deficit as of January 1, 2007 by $3,670. This
error was considered immaterial to the Company's consolidated financial
statements and had no effect on its consolidated results of operations or
cash flows.
2. ACQUISITION
On March 4, 2006, the Company entered into a Stock Purchase Agreement
("HPC 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 standard and
customized high and low temperature 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
original equipment manufacturers ("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 and a sales/distribution facility in Belgium.
On March 31, 2006, the Company completed the acquisition of all of the
outstanding common stock of HPC for $42,000 plus an estimated working
capital adjustment payment at closing of $1,676. An additional working
capital adjustment of $2,671 was paid in August 2006. The acquisition was
funded with borrowings under the Company's Revolver Credit Facility.
Additionally, the Company purchased the copper inventory held on
consignment by HPC from PD for $5,057. In addition, pursuant to the
Purchase Agreement, there was a contingency payment capped at $3,000 based
4
on performance, and in May 2007, the $3,000 payment was made. 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.
Results of operations of HPC are included in the accompanying condensed
consolidated statements of operations beginning April 1, 2006.
The total purchase price of the HPC acquisition was $55,188, and the
payment of related purchase price, fees and costs is summarized as
follows:
Purchase of common stock and estimated working capital
adjustment at closing ........................................ $43,676
Additional working capital adjustment ........................... 2,671
Purchase of consigned inventory ................................. 5,057
Contingent payment .............................................. 3,000
Fees and costs .................................................. 784
-------
$55,188
=======
The total acquisition costs have been allocated to the acquired net assets
at fair value as follows:
Current assets................................................... $34,288
Property, plant and equipment.................................... 30,789
Identifiable intangibles......................................... 460
Current liabilities, excluding deferred income taxes............. (3,065)
Deferred income taxes............................................ (6,937)
Other liabilities................................................ (347)
-------
$55,188
=======
The allocation of total acquisition cost was based on fair values as
required under Statement of Financial Accounting Standards ("SFAS") No.
141, Business Combinations, including inventory, property, plant and
equipment, identifiable intangibles and certain liabilities. The Company
finalized this allocation in the fourth quarter of 2006.
Based upon the fair value of assets acquired and liabilities assumed
compared to the total purchase price, there was an excess of fair value of
net assets acquired over purchase price, or "negative goodwill", of
$2,686. Pursuant to the provisions of SFAS No. 141, the excess was
allocated on a pro rata basis to the acquired property, plant and
equipment and identifiable intangible assets.
Identifiable intangibles represent the fair market value of alloys
(formulation of two or more metals) and trade names and trademarks. The
fair market values were determined using a discount rate to compute the
present value of the income of the identifiable intangible assets. A
discount rate of 17% was used. The identifiable intangibles of $460
consist of alloys of $92 and trade names and trademarks of $368. 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 and have been made solely for
purposes of developing such pro forma information. The pro forma
information for the nine months ended September 30, 2006 reflects
adjustments including: elimination of intercompany sales; reduction of
expenses for pension and post-retirement medical; adjustment to
depreciation relating to the adjustment to the fair market value and
adjusted useful lives of existing property, plant and equipment;
additional amortization of identifiable intangibles; adjustment of
interest expense for additional borrowings. and reflects a 38% effective
tax rate. The pro forma information is presented for illustrative purposes
only and is not necessarily indicative of the operating results or
5
financial position that would have occurred if the acquisition had been
consummated at the beginning of the period presented:
PRO FORMA
FOR THE
NINE
MONTHS
ENDED
SEPTEMBER
30,
2006
---------
Net sales........................... $591,906
Income from continuing operations... 10,295
Net income.......................... 10,093
Basic and diluted net income per
share............................ 1.01
3. RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2006, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109 ("FIN 48"), to be effective for
fiscal years beginning after December 15, 2006. This interpretation adopts
a two-step approach for recognizing and measuring tax benefits and
requires certain disclosures about uncertainties in income tax positions.
Under FIN 48, the impact of an uncertain income tax position on an income
tax return must be recognized at the largest amount that is
more-likely-than-not to be sustained upon audit by the relevant taxing
authority. An uncertain income tax position will not be recognized if it
has less than a 50% likelihood of being sustained. Additionally, FIN 48
provides guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and transition. On
January 1, 2007, the Company adopted the provisions of FIN 48. As a result
of the adoption of FIN 48, the Company recognized an increase of $3,322 to
the opening balance of accumulated deficit. See Note 1.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS No. 157"). This statement defines fair value, establishes a
framework for using fair value to measure assets and liabilities and
expands disclosures about fair value measurements. The statement applies
whenever other pronouncements require or permit assets or liabilities to
be measured at fair value. SFAS No. 157 is effective for the Company's
fiscal year beginning January 1, 2008. The Company is evaluating the
impact the adoption of SFAS No. 157 will have on the Company's financial
statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Liabilities ("SFAS No. 159") -- including an
amendment to FASB Statement No. 115. This statement permits entities to
choose to measure many financial instruments and certain other items at
fair value in order to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently. SFAS No. 159 is
effective for the Company's fiscal year beginning January 1, 2008. The
Company is evaluating the impact the adoption of SFAS No. 159 will have on
the Company's financial statements.
4. INVENTORIES
The composition of inventories is as follows:
SEPTEMBER DECEMBER
30, 31,
2007 2006
------- -------
Raw materials.............................. $19,083 $16,960
Work-in-process ........................... 16,593 13,827
Finished goods ............................ 32,347 28,021
------- -------
Total inventories....................... $68,023 $58,808
======= =======
Inventories are valued at the lower of cost or current estimated market
value. Cost is determined using the last-in, first-out ("LIFO") method for
the Bare Wire and High Performance Conductors segments and the first-in,
6
first-out ("FIFO") method for the Engineered Wire Products - Europe
segment. The primary components of inventory costs include raw materials
used in the production process (copper, tin, nickel, silver, alloys and
other) and production related labor and overhead costs. Had all
inventories been valued using the FIFO cost method, inventories would have
been $39,978 and $37,245 higher as of September 30, 2007 and December 31,
2006, respectively.
5. SALE OF TEXAS FACILITY
In fiscal 2006, the Company temporarily idled one of its facilities in
Texas due to a decrease in sales demand in that region. Having met the
criteria of SFAS No. 144, these assets were classified as "held for sale"
at June 30, 2007. These assets were reported within the Bare Wire segment
and consisted of real property. The property was sold on August 2, 2007
for $2,350. A net gain on the sale of $441 was recorded in the third
quarter of fiscal 2007.
6. GOODWILL AND INTANGIBLE ASSETS
The carrying amounts of goodwill are as follows:
SEPTEMBER DECEMBER
30, 31,
2007 2006
-------- --------
Balance, beginning of period ...................... $ 62,148 $ 62,307
Reversal of deferred income tax valuation
allowance ...................................... -- (159)
-------- --------
Balance, end of period ............................ $ 62,148 $ 62,148
======== ========
At September 30, 2007 and December 31, 2006, all goodwill is included in
the Bare Wire segment. The Company completed its annual impairment test at
December 31, 2006 and concluded that goodwill was not impaired.
The components of identifiable intangibles are as follows:
SEPTEMBER 30, 2007 DECEMBER 31, 2006
------------------- -------------------
ACCUMULATED ACCUMULATED
COST AMORTIZATION COST AMORTIZATION
------- ------- ------- -------
Customer contracts and ..... $ 9,534 $ 1,877 $ 9,534 $ 1,400
relationships
Trade names and
trademarks .............. 10,568 1,531 10,568 1,135
Leases ..................... 2,671 2,626 2,671 1,958
Alloys ..................... 92 6 92 3
------- ------- ------- -------
Total identifiable
intangibles ....... $22,865 $ 6,040 $22,865 $ 4,496
======= ======= ======= =======
Amortization expense for the nine months ended September 30, 2007 and
September 30, 2006 was $1,544 and $1,539, respectively. Amortization
expense for identifiable intangibles for the next five fiscal years and
thereafter is as follows:
AMOUNT
------
2007 (remaining three months).................... $ 339
2008............................................. 1,169
2009............................................. 1,169
2010............................................. 1,169
2011............................................. 1,169
Thereafter....................................... 11,810
7. STOCK OPTION PLANS AND COMPENSATION EXPENSE
7
Effective January 1, 2006, the Company adopted Statement of Financial
Accounting Standards No. 123(R), Share-Based Payment ("SFAS No. 123(R)")
which requires measurement of compensation cost for all stock awards at
fair value on the date of grant and recognition of compensation cost
spread over the service periods for awards expected to vest. SFAS No.
123(R) was adopted using the modified-prospective transition method. Under
this method, compensation cost recognized in the nine-month periods ended
September 30, 2007 and 2006 includes: (a) compensation cost for all
unvested share-based awards granted prior to January 1, 2006, based on the
grant date fair value estimated in accordance with SFAS No. 123,
Accounting For Stock-Based Compensation, and (b) compensation cost for all
share-based awards granted subsequent to December 31, 2005, based on the
grant date fair value estimated in accordance with SFAS No. 123(R).
Stock-based compensation expense is included in selling, general and
administrative expenses in the accompanying condensed consolidated
statements of operations.
The Company uses the Black-Scholes option model to estimate fair value of
share-based awards with the following weighted average assumptions:
NINE MONTHS ENDED
---------------------------------------
SEPTEMBER 30, 2007 SEPTEMBER 30, 2006
Stock Options and Awards:
Expected life................. 6 years 6 years
Expected volatility........... 50.0% 58.0%
Dividend yield................ 0% 0%
Risk-free interest rate....... 4.2% 4.9%
The Company calculates expected volatility for stock options using
historical volatility of a group of companies in the wire and cable
industry. The risk-free interest rate is estimated based on the Federal
Reserve's historical data for the maturity of nominal treasury investments
that corresponds to the expected term of the option. The expected life was
determined using the simplified method as these awards meet the definition
of "plain-vanilla" options under the rules prescribed by Staff Accounting
Bulletin 107.
Stock option activity for the nine months ended September 30, 2007 is
summarized as follows:
WEIGHTED WEIGHTED
AVERAGE AVERAGE AGGREGATE
OPTIONS EXERCISE REMAINING INTRINSIC
OUTSTANDING PRICE TERM IN YEARS VALUE
----------- ----- ------------- -----
Outstanding at January 1, 2007.... 1,114,300 $ 15.03
Granted .......................... 42,000 $ 21.86
Exercised ........................ (21,000) $ 14.05
----------
Outstanding at September 30,
2007 ............................ 1,135,300 $ 15.30 8.9 $ 6,184
==========
Vested or expected to vest at
September 30, 2007 .............. 1,078,535 $ 15.30 8.9 $ 5,875
==========
Exercisable at September 30,
2007 ............................ 652,867 $ 14.93 8.6 $ 3,801
==========
The Company recorded stock-based compensation expense of $786, $1,018,
$2,351 and $1,562 for the three and nine months ended September 30, 2007
and 2006, respectively. As of September 30, 2007, the Company had total
unrecognized compensation costs of $1,464 which will be recognized as
compensation expense over a weighted average period of 1.5 years. The
Company estimates a 5% forfeiture rate in recording stock-based
compensation expense. As of September 30, 2007, 16,000 stock option awards
have been exercised under the 2006 Management Stock Option Plan, no stock
option awards have been exercised under the 2006 Stock Option Plan for
Non-Employee Directors, and 5,000 stock option awards have been exercised
under the grant to Lane Pennington. The stock options are non-qualified
which results in the creation of a deferred tax asset until the time the
option is exercised.
8. STOCK REPURCHASE PROGRAM
On September 4, 2007, the Company announced that its Board of Directors
approved a stock repurchase program whereby the Company was authorized to
repurchase $3,700 of its common stock through open market or privately
negotiated transactions from time to time. The share repurchase program
may be increased in the future or suspended or terminated at any time. The
8
funding for the stock repurchases will be from the Company's operating
cash flow and/or borrowings under its Revolver Credit Facility.
During the third quarter of 2007, the Company repurchased 84,000 shares
pursuant to this repurchase program for an aggregate cost, including
broker commissions, of $1,725, or at an average price of $20.53 per share.
At September 30, 2007, the Company has 84,000 shares of repurchased stock
which is reported as treasury stock and as a reduction of stockholders'
equity.
9. COMPREHENSIVE INCOME
Comprehensive income is comprised of:
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
--------------------- ---------------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 30, 30, 30,
2007 2006 2007 2006
------- ------- ------- -------
Net income .................... $ 5,091 $ 3,945 $13,365 $ 9,070
Foreign currency translation
adjustment ................. 1,350 (473) 1,829 1,571
------- ------- ------- -------
Total comprehensive income.. $ 6,441 $ 3,472 $15,194 $10,641
======= ======= ======= =======
10. NET INCOME PER SHARE
Net income per share is calculated using the weighted average number of
common shares outstanding during the period. For purposes of computing
weighted average dilutive shares outstanding, the Company uses the
treasury stock method as required by Statement of Financial Accounting
Standards No. 128, Earnings Per Share (as amended). The following table
provides a reconciliation of the number of shares outstanding for basic
and dilutive earnings per share:
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
----------------------- -----------------------
SEPTEMBER SEPTEMBER SEPTEMBER SEPTEMBER
30, 30, 30, 30,
2007 2006 2007 2006
---------- ---------- ---------- ----------
Weighted average shares
outstanding-basic........ 9,992,606 10,000,002 9,997,986 10,000,002
Dilutive effect of
stock options ........... 245,041 6,416 189,596 2,864
---------- ---------- ---------- ----------
Weighted average
shares
outstanding-dilutive .... 10,237,647 10,006,418 10,187,582 10,002,866
========== ========== ========== ==========
Weighted average shares outstanding for the three month periods ended
September 30, 2007 and 2006 exclude 55,304 and 1,041,300 options, because
they are anti-dilutive under the treasury stock method. Weighted average
shares outstanding for the nine month periods ended September 30, 2007 and
2006 exclude 50,462, and 578,500 options, because they are anti-dilutive
under the treasury stock method.
11. LONG-TERM DEBT
The composition of long-term debt is as follows:
SEPTEMBER DECEMBER
30, 31,
2007 2006
-------- --------
Senior Revolver Credit Facility .................. $ 27,892 $ 38,020
10% Secured Senior Subordinated Notes ............ 75,000 75,000
9
Other ............................................ -- 535
-------- --------
Total long-term debt ............................. 102,892 113,555
Less current maturities .......................... -- 535
-------- --------
Long-term portion of long-term debt .............. $102,892 $113,020
======== ========
SENIOR REVOLVER CREDIT FACILITY
The Company and its domestic subsidiaries are parties to a credit
agreement (the "Revolver Credit Facility") with Wachovia Capital Financial
Corporation (Central), formerly known as Congress Financial Corporation
(Central), as administrative agent, and several banks and financial
institutions parties. The Revolver Credit Facility is a senior revolver
credit facility in the amount of up to $200,000 subject to borrowing
availability (including, as a sub-facility of the Revolver Credit
Facility, a $25,000 letter of 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. As of September 30, 2007, letters of credit in the amount of
$15,472 were outstanding and $27,892 was drawn under the Revolver Credit
Facility. Availability under the Revolver Credit Facility was $112,423 as
of September 30, 2007. The Company's domestic subsidiaries are the primary
parties to the Revolver Credit Facility. The Company has guaranteed their
obligations under the Revolver Credit Facility. The collateral for the
Revolver 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 Company may choose to pay interest on advances under the Revolver
Credit Facility at either a Eurodollar rate or a base rate plus the
following applicable margin: (1) for base rate Revolver Credit Facility
advances, 0.00 percent, (2) for Eurodollar rate advances, 1.25 percent to
1.75 percent per annum, subject to adjustment in accordance with a pricing
grid based on excess availability and (3) for letters of credit, 1.50
percent per annum. The default rate is 2.00 percent above the rate
otherwise applicable. The Company also has an annual commitment fee of
0.25 percent on the unused balance of its Revolver Credit Facility and an
issuance letter of credit fee equal to 2.00 percent.
The Revolver Credit Facility requires the Company to observe conditions,
affirmative covenants and negative covenants (including financial
covenants). These covenants include limitations on the Company's ability
to pay dividends, make acquisitions, dispose of assets, incur additional
indebtedness, incur guarantee obligations, create liens, make investments,
engage in mergers, pledge assets as collateral, repurchase, redeem or
acquire its common stock subject to a $5,000 limit, change the nature of
its business or engage in certain transactions with affiliates. In
addition, the Company's subsidiaries are restricted from making dividends
and other restricted payments (which may include payments of intercompany
indebtedness) to the Company for purposes other than the payment of
reasonable compensation to officers, employees and directors for services
rendered to the Company's subsidiaries in the ordinary course of business,
payments by the Company's subsidiaries for actual and necessary reasonable
out-of-pocket legal and accounting, insurance, marketing, payroll and
similar types of services paid for by the Company on behalf of the
Company's subsidiaries, in the ordinary course of their respective
businesses or as the same may be directly attributable to the Company's
subsidiaries, for the payment of taxes by or on behalf of the Company, and
the payments by the Company's subsidiaries for the payment of fees,
principal and interest on the Notes described below. The Company must also
comply with a fixed charge coverage ratio when either (1) the minimum
availability under the credit facility falls below $30,000 or (2) there is
a default or event of default.
On October 26, 2007, the Company amended the Revolver Credit Facility,
such that the Company was made an additional Borrower (as defined in the
amendment documents).
The Company's Revolver Credit Facility commitment expires on August 22,
2011.
The Company may prepay the loans or reduce the commitments under its
Revolver Credit Facility in a minimum amount of $5,000 and additional
integral amounts in multiples of $1,000 in respect of the Revolver Credit
10
Facility. The commitments under the Revolver Credit Facility may not be
reduced by more than $10,000 in any twelve-month period.
The Company must prepay the loans under the Revolver Credit Facility by
the following amounts (subject to certain exceptions):
o An amount equal to 100 percent of the net proceeds of any incurrence
of indebtedness by the Company or any of its subsidiaries;
o An amount equal to 100 percent of the net proceeds of any
non-ordinary course sale or other disposition by the Company or any
of its subsidiaries of any assets, except for certain exceptions.
SECURED SENIOR SUBORDINATED NOTES
The 10% 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 second-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. 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.
12. INCOME TAXES
During the third quarter, the 2007 annual effective tax rate was increased
to 32.7%, exclusive of discrete items for the nine months ended September
30, 2007, due to changes in certain estimates used to calculate the annual
effective tax rate.
On January 1, 2007, the Company adopted the provisions of FIN 48. The
total amount of the liability for unrecognized tax benefits as of the date
of adoption was $4,577, which is included in "Other long-term
liabilities." As a result of the adoption of FIN 48, the Company
recognized an increase in the liability for unrecognized tax benefits, net
of deferred income taxes, as of January 1, 2007 with a corresponding
increase in the Company's accumulated deficit totaling $3,322.
As of September 30, 2007, the Company's liability for unrecognized tax
benefits totaled $4,754, which includes interest and penalties. The total
unrecognized tax benefits balance at September 30, 2007 is comprised of
tax benefits that, if recognized, would affect the effective rate.
The Company recognizes interest and penalties accrued related to
unrecognized tax benefits in income tax expense. During the year ended
December 31, 2006, the Company recognized approximately $58 in penalties
and interest. The Company had $58 accrued for the payment of interest and
penalties at December 31, 2006. Upon adoption of FIN 48 on January 1,
2007, the Company decreased its accrual for interest and penalties to $8.
The Company is subject to taxation in the United States and various state
and foreign jurisdictions. The Company's tax years from 2001 to 2006 are
subject to examination by the taxing authorities due to the Company's net
operating loss carryforwards.
13. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company's three reportable segments are Bare Wire, Engineered Wire
Products-Europe, and High Performance Conductors. 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.
11
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 OEM's 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. The Company may provide such copper to its customers or use
their copper in the fabrication process. 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 Products-Europe segment manufactures and engineers
connections and 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 products.
The High Performance Conductors segment, which resulted from the Company's
acquisition described in Note 2, manufactures specialty high performance
conductors which include tin, nickel and silver plated copper and copper
alloy conductors including high and low temperature standard and
customized conductors as well as specialty film insulated conductors and
miniature tubing products.
Summarized financial information for the Company's reportable segments is
as follows:
ENGINEERED
WIRE HIGH
PRODUCTS- PERFORMANCE
BARE WIRE EUROPE CONDUCTORS CORPORATE ELIMINATIONS TOTAL
--------- ------ ---------- --------- ------------ -----
NET SALES
Three months ended
September 30, 2007...... $ 135,071 $ 15,757 $ 29,786 $ -- $ (620) $ 179,994
Three months ended
September 30, 2006...... 166,356 12,801 27,263 -- (48) 206,372
Nine months ended
September 30, 2007...... 413,651 49,794 92,189 -- (1,485) 554,149
Nine months ended
September 30, 2006...... 469,275 39,739 56,291 -- (293) 565,012
OPERATING INCOME/(LOSS)
Three months ended
September 30, 2007...... 5,548 959 3,554 (788) -- 9,273
Three months ended
September 30, 2006...... 5,429 1,107 2,923 (1,020) -- 8,439
Nine months ended
September 30, 2007...... 14,965 3,483 10,275 (2,857) -- 25,866
Nine months ended
September 30, 2006...... 16,749 3,326 5,885 (1,569) -- 24,391
GOODWILL
September 30, 2007 ......... 62,148 -- -- -- -- 62,148
December 31, 2006 .......... 62,148 -- -- -- -- 62,148
TOTAL ASSETS
September 30, 2007 ......... 268,843 43,837 67,460 32,695 (10,334) 402,501
December 31, 2006 .......... 247,778 40,115 62,863 32,161 (7,352) 375,565
The following table presents sales by period and by geographic region
based on the country in which the legal subsidiary is domiciled:
FOR THE THREE FOR THE NINE
MONTHS ENDED MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2007 2006 2007 2006
-------- -------- -------- --------
United States ....... $163,121 $189,091 $499,839 $515,957
Europe .............. 16,873 17,281 54,310 49,055
-------- -------- -------- --------
Total .......... $179,994 $206,372 $554,149 $565,012
======== ======== ======== ========
12
The following table presents property, plant and equipment, net, by
geographic region based on the location of the asset:
SEPTEMBER 30, DECEMBER 31,
2007 2006
-------- --------
United States ........................ $ 97,519 $ 94,568
Europe ............................... 10,364 9,321
-------- --------
Total ........................... $107,883 $103,889
======== ========
14. RELATED PARTY TRANSACTIONS
The Company sells a portion of its production scrap to Prime Materials
Recovery, Inc. ("Prime") and Prime also performs certain scrap processing
services for the Company. 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 $3,486 and $7,866 for the three months ended September 30, 2007
and 2006, respectively, and $13,059 and $19,144 for the nine months ended
September 30, 2007 and 2006, respectively. The outstanding trade
receivables were $2,533 and $2,564 at September 30, 2007 and December 31,
2006, respectively. The Company incurred scrap conversion costs from Prime
of $37 and $0 for the three months ended September 30, 2007 and 2006,
respectively, and $451 and $0 for the nine months ended September 30, 2007
and 2006, respectively. There were no outstanding trade payables at both
September 30, 2007 and December 31, 2006. Sales to and purchases from
Prime were made at terms comparable to those of other companies in the
industry.
15. 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 OEM's
for certain claims and damages related to certain water inlet hoses
supplied by and through the Company's former wire harness business
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 OEM's 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 OEM's 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 International, Inc. in March 2000, 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
13
determining the balance sheet reserve. There are no recoveries from third
parties considered in determining the balance sheet reserve. The following
table summarizes the number of uninsured claims received, resolved and
pending as of and for the periods ended September 30, 2007, December 31,
2006 and December 31, 2005 (in thousands, except number of claims):
VALUE OF
NO. OF ALLEGED
CLAIMS DAMAGES
------- -------
As of December 31, 2005 .............................. 310 $ 3,611
For the year ended December 31, 2006:
New uninsured claims ............................ 668 6,956
Resolved uninsured claims ....................... (681) (6,386)
------- -------
As of December 31, 2006 .............................. 297 4,181
For the nine months ended September 30, 2007:
New uninsured claims ............................ 110 1,974
Resolved uninsured claims ....................... (297) (3,755)
------- -------
As of September 30, 2007 ............................. 110 $ 2,400
======= =======
For the periods prior to April 1, 2002, the Company's product liability
coverage is in excess of the insured claims outstanding. As of September
30, 2007 and December 31, 2006, the total of such claims was less than
$2,000 with an estimated liability related to these claims of less than
$500. As of September 30, 2007 and December 31, 2006, the Company had
$75,000 of remaining insurance coverage under its excess umbrella policies
for each of the insured years prior to April 1, 2002.
For the periods ended September 30, 2007 and December 31, 2006, the
aggregate settlement costs, cost of administering and litigating and
average cost per resolved claim were as follows:
FOR THE FOR
NINE MONTHS THE YEAR
ENDED ENDED
SEPTEMBER 30, DECEMBER 31,
2007 2006
---------- ----------
Aggregate settlement costs .................. $109 $482
Cost of administering and litigating ........ $110 $215
Average cost per resolved claim ............. $ 1 $ 1
The Company had a reserve of $1,031 and $1,250 as of September 30, 2007
and December 31, 2006, respectively, related to the estimated future
payments to be made to the claimants in the settlement of the remaining
incurred claims and claims incurred but not reported. The majority of
payments are expected to be made over approximately the next three years.
Due to the uncertainties associated with these product claims, such as
greater than expected amount of unreported claims and amounts to be paid
under reached global settlements, the future costs of final settlement of
these claims may differ from the liability currently accrued. However, in
the Company's opinion, the impact of final settlement of these claims on
future operations, financial position and cash flows should not be
material.
The Company is a party to various legal proceedings and administrative
actions, all of which are of an ordinary or routine nature incidental to
the operations of the Company. The Company does not believe that such
proceedings and actions would materially affect the Company.
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
14
information concerning the Company's possible or assumed future results of
operations, business strategies, financing plans, competitive position,
potential growth opportunities, 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,
changes in the price of copper, tin, nickel and silver, copper premiums
and alloys, 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, limitations due to our 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, 2006.
OVERVIEW
We, together with our subsidiaries, manufacture and market wire products,
including bare and tin-plated copper wire, engineered wire products and
high performance conductors for other wire suppliers and original
equipment manufacturers or "OEM's". 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 aerospace, appliance, automotive, electronics/data
communications, general industrial/energy and medical device industries.
As of September 30, 2007, we manufacture and distribute our products at 15
facilities located in the United States, Belgium, France and Italy. For
the period ended September 30, 2007, we operated our business in the
following three segments:
o Bare Wire. 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 OEM's 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 products.
o High Performance Conductors. Our High Performance Conductors segment
manufacturers specialty high performance conductors which include
tin, nickel and silver-plated copper and copper alloy conductors
including high and low temperature standard and customized
conductors as well as specialty film insulated conductors and
miniature tubing products. This segment resulted from our
acquisition of Phelps Dodge High Performance Conductors of SC & GA,
Inc. ("HPC") on March 31, 2006.
Demand for our products is directly related to two primary factors:
o demand for the end products in which our products are incorporated;
and
15
o our ability to compete with other suppliers in the industries we
serve.
Important indicators of demand for all of our products include a number of
general economic factors such as gross domestic product, interest rates
and consumer confidence. In specific industries, management also monitors
the following factors:
o 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 nine months of 2007, North
American automotive industry production volumes decreased 3.4%
compared to the same period for 2006.
o Additional demand factors for the High Performance Conductors
segment include commercial aircraft build rates; military defense,
aircraft and electronics deliveries; industrial process and control
equipment demand; and medical electronics and device market demand.
Deliveries of large aircraft continued to increase during the first
nine months of 2007 driven predominately by Boeing. The demand for
industrial products was driven by projects in the chemical and
energy processing segment. Medical products demand continues to be
driven by the increase in preventive treatments and minimally
invasive procedures as well as rapid technology development.
We compete with other suppliers of wire products on the basis of price,
quality, delivery and the ability to provide a sufficient array of
products to meet most of our customers needs. We believe our
state-of-the-art production equipment permits us to provide a high quality
product while also permitting us to efficiently manufacture our products,
which assists in our ability to provide competitively priced products.
Also, we invest in engineering and product development so that we can
continue to provide our customers with the array of products and features
they demand. Finally, we have located our production facilities near many
of our customers' manufacturing facilities which allows us to meet our
customers' delivery demands, including assisting with inventory management
for just-in-time production techniques.
A portion of our revenue 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. The remainder of our
sales included non-customer owned copper ("owned copper"). Accordingly,
for these sales, copper is included in both sales and cost of sales.
Our expenses in producing these products fall into three main categories -
raw materials, including copper, silver, nickel, tin and alloys, 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 remained consistent
with 2006 levels as a result of a combination of continued sustained
demand from China and India and continued unprecedented levels of
investment fund involvement. The average price of copper based upon The
New York Mercantile Exchange, Inc. ("COMEX") decreased to $3.48 per pound
for the three months ended September 30, 2007 from $3.54 per pound for the
three months ended September 30, 2006, or 2%. We attempt, where possible,
to minimize the impact of these copper price 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 an approximate $2.7 million impact on our
16
working capital. Increased working capital requirements cause us to
increase our borrowings, which increases our interest expense.
Copper prices continue to fluctuate. The average copper price for the nine
months ended September 30, 2007 of $3.21 per pound was higher than the
COMEX price of $2.85 as of December 31, 2006. The price of copper on the
COMEX was $3.11 per pound on November 12, 2007.
Tin is also a component in our products in the Bare Wire and HPC segments.
For the three months ended September 30, 2007, the average price of tin
increased by 70% compared to the three months ended September 30, 2006.
The HPC segment also uses silver and nickel. For the three months ended
September 30, 2007, the average price of silver increased by 9% and the
average price of nickel increased by 4% compared to the three months ended
September 30, 2006. The cost of silver, nickel and tin is generally
passed-through to our customers through a variety of pricing mechanisms.
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.
STOCK REPURCHASE PROGRAM
On September 4, 2007, the Company announced that its Board of Directors
approved a stock repurchase program whereby the Company was authorized to
repurchase $3.7 million of its common stock through open market or
privately negotiated transactions from time to time. The share repurchase
program may be increased in the future or suspended or terminated at any
time. The funding for the stock repurchases will be from the Company's
operating cash flow and/or borrowings under its Revolver Credit Facility.
Through the end of the third quarter of 2007, the Company has repurchased
84,000 shares of common stock at an aggregate cost, including broker
commissions, of $1.7 million, resulting in an average purchase price of
$20.53 per share.
17
RESULTS OF OPERATIONS
The following table sets forth certain unaudited statements of operations
data in millions of dollars and percentage of net sales for the periods
indicated. The Company's former insulated wire business is included in
discontinued operations.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
--------------------------------------- ----------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2007 2006 2007 2006
----------------- ------------------ ------------------ ------------------
Net sales.................................... $ 180.0 100.0% $ 206.4 100.0% $ 554.1 100.0% $ 565.0 100.0%
Operating expenses:
Cost of goods sold,
exclusive of
depreciation and
amortization expense
shown below ............................ 156.5 86.9 182.0 88.2 483.4 87.2 501.0 88.7
Selling, general and
administrative
expenses ............................... 10.7 5.9 11.6 5.6 33.5 6.0 29.2 5.2
Depreciation and
amortization ........................... 4.0 2.2 4.4 2.1 11.9 2.1 10.4 1.8
(Gain) on sale of
property, plant, and
equipment ................................... (0.5) (0.2) 0.0 0.0 (0.6) (0.0) 0.0 0.0
------- ------- -------- ------- -------- ------- -------- -------
Operating income ............................ 9.3 5.2 8.4 4.1 25.9 4.7 24.4 4.3
Other income/(expense):
Interest expense ....................... (2.6) (1.4) (3.6) (1.7) (7.4) (1.3) (10.2) (1.8)
Amortization of
deferred
financing costs .................... (0.2) (0.2) (0.7) (0.3) (0.5) (0.1) (1.0) (0.2)
Other, net ............................. 0.0 0.0 (0.1) (0.2) (0.1) (0.1) 0.1 0.0
------- ------- -------- ------- -------- ------- -------- -------
Income from continuing
operations before
income tax provision.. ................. 6.5 3.6 4.0 1.9 17.9 3.2 13.3 2.3
Income tax provision ........................ 1.9 1.0 0.4 0.2 5.2 0.9 4.0 0.7
------- ------- -------- ------- -------- ------- -------- -------
Income from continuing
operations ............................. 4.6 2.6 3.6 1.7 12.7 2.3 9.3 1.6
Income/(loss) from
discontinued
operations ............................. 0.5 0.2 0.3 0.2 0.7 0.1 (0.2) (0.0)
------- ------- -------- ------- -------- ------- -------- -------
Net income................................. $ 5.1 2.8% $ 3.9 1.9% $ 13.4 2.4% $ 9.1 1.6%
======= ======= ======== ======= ======== ======= ======== =======
We have three reportable segments: Bare Wire, Engineered Wire
Products-Europe, and High Performance Conductors. The following table sets
forth unaudited net sales and operating income for the periods presented
in millions of dollars and percentages of totals:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
---------------------------------------- ----------------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2007 2006 2007 2006
----------------- ----------------- ----------------- -----------------
Net sales:
Bare Wire ........................... $ 135.1 75% $ 166.4 81% $ 413.6 75% $ 469.3 83%
Engineered Wire
Products -
Europe .......................... 15.7 9 12.8 6 49.8 9 39.7 7
High Performance
Conductors ...................... 29.8 17 27.3 13 92.2 16 56.3 10
Eliminations ........................ (0.6) (1) (0.1) -- (1.5) -- (0.3) --
-------- ---- -------- ---- -------- ---- -------- ----
Total ........................... $ 180.0 100% $ 206.4 100% $ 554.1 100% $ 565.0 100%
======== ==== ======== ==== ======== ==== ======== ====
Operating income:
Bare Wire............................ $ 5.5 55% $ 5.4 57% $ 15.0 52% $ 16.8 65%
Engineered Wire
Products -
Europe .......................... 1.0 10 1.1 12 3.5 12 3.3 13
High Performance
Conductors ...................... 3.6 35 2.9 31 10.2 36 5.9 22
-------- ---- -------- ---- -------- ---- -------- ----
Subtotal......................... 10.1 100% 9.4 100% 28.7 100% 26.0 100%
==== ==== ==== ====
Corporate............................ (0.8) (1.0) (2.8) (1.6)
-------- -------- -------- --------
Total............................ $ 9.3 $ 8.4 $ 25.9 $ 24.4
======== ======== ======== ========
18
THREE MONTHS ENDED SEPTEMBER 30, 2007 VERSUS THREE MONTHS ENDED SEPTEMBER
30, 2006
Net sales were $180.0 million and $206.4 million for the three months
ended September 30, 2007 and 2006, respectively. Sales for the three
months ended September 30, 2007 were $26.4 million, or 12.8%, lower than
comparable 2006 levels, as a result of a higher proportion of tolled
copper shipped in the 2007 period compared to the 2006 period ($31.7
million) and a decrease in the average cost and selling price of copper
($0.1 million). These factors were partially offset by higher volume ($2.5
million), higher customer pricing/mix ($1.9 million) and the impact of a
stronger euro versus the U.S. dollar ($1.0 million). The average price of
copper based upon COMEX decreased to $3.48 per pound for the three months
ended September 30, 2007 from $3.54 per pound for the three months ended
September 30, 2006.
Bare Wire segment net sales for the three months ended September 30, 2007
were $135.1 million, or a decrease of $31.3 million, or 18.8%, from net
sales of $166.4 million for the comparable 2006 period. This decrease was
primarily the result of lower volume to customers supplying the
electronics/data communications and appliance markets ($1.8 million), the
impact of a higher proportion of tolled copper shipped in the 2007 period
compared to the 2006 period ($31.7 million) and a decrease in the average
cost and selling price of copper ($0.1 million). These decreases were
partially offset by the impact of higher volume to customers supplying the
industrial/energy and automotive markets ($0.4 million) and increased
customer pricing/mix, including higher tin prices ($1.9 million). Of the
total pounds processed for the three months ended September 30, 2007 and
2006, respectively, 54.2% and 42.8% were from customers' tolled copper.
Engineered Wire Products-Europe net sales of $15.7 million for the three
months ended September 30, 2007 were $2.9 million, or 22.7%, higher than
sales of $12.8 million for the 2006 period. This increase was the result
of $0.1 million for the increase in the average cost and selling price of
copper, $1.0 million from the impact of a stronger euro versus the U.S.
dollar and $1.8 million from increased volume from improved customer
demand in all major markets.
High Performance Conductors net sales of $29.8 million for the three
months ended September 30, 2007 were $2.5 million, or 9.2%, higher than
sales of $27.3 million for the 2006 period. This increase was the result
of $2.6 million from increased volume from improved customer demand in the
aerospace and medical device markets and higher silver, nickel and tin
prices which were partially offset by the impact of a decrease in the
average cost and selling price of copper ($0.1 million).
Cost of goods sold, exclusive of depreciation and amortization, as a
percentage of sales decreased to 86.9% for the three months ended
September 30, 2007 from 88.2% for the same period in 2006. The decrease of
1.3 percentage points was due to the impact of a higher proportion of
tolled copper sales in 2007 compared to 2006 (2.0 percentage points) and
higher customer pricing/mix (0.9 percentage points), partially offset by a
decreased contribution from High Performance Conductors (0.3 percentage
points) and Engineered Wire Products - Europe (0.2 percentage points) and
higher tin and production costs (1.1 percentage points).
Selling, general and administrative expenses were $10.7 million for the
three months ended September 30, 2007 compared to $11.6 million for the
same period in 2006. This decrease of $0.9 million was primarily from $0.8
million of reduced transportation costs and $0.5 million of lower bad
debts partially offset by $0.4 million of other cost increases. These
expenses, as a percent of net sales, increased to 5.9% for the three
months ended September 30, 2007 from 5.6% for the three months ended
September 30, 2006, primarily from the impact of lower sales from a higher
proportion of tolled copper in 2007 compared to 2006 partially offset by
previously-mentioned cost reductions.
Depreciation and amortization was $4.0 million for the three months ended
September 30, 2007 compared to $4.4 million for the same period in 2006.
This decrease of $0.4 million was the result of lower depreciation in the
Bare Wire segment due to fully depreciated items and the closing of the
Texas plant in late 2006 partially offset by the effect of property,
plant, and equipment additions.
Gain on sale of property, plant and equipment was $0.5 million in the 2007
period and $0.0 in the three months ended September 30, 2006. The 2007
gain represents the gain on the sale of a facility in Texas. There were no
similar gains in the 2006 period.
19
Operating income for the three months ended September 30, 2007 was $9.3
million compared to $8.4 million for the 2006 period, or an increase of
$0.9 million, or 10.7%, primarily from higher sales volume at High
Performance Conductors, reduced selling, general, and administrative
expenses, lower depreciation and amortization, and the gain on sale of
property, plant, and equipment. Bare Wire segment's operating income of
$5.5 million for the 2007 period was slightly higher than operating income
of $5.4 million for the 2006 period, primarily from increased customer
pricing/mix, reduced operating expenses and lower depreciation and
amortization. Engineered Wire Products-Europe operating income was $1.0
million, or a decrease of $0.1 million from the 2006 period as the result
of a lower gross profit rate which offset higher sales volume. High
Performance Conductors operating income was $3.6 million, or an increase
of $0.7 million from the 2006 period of $2.9 million primarily from
increased sales volume. Operating income in the 2007 period also increased
by $0.2 million from a reduced charge for stock-based compensation
expense.
Interest expense was $2.6 million for the three months ended September 30,
2007 compared to $3.6 million for the three months ended September 30,
2006. This decrease of $1.0 million was the result of the impact of lower
levels of borrowings from improved operating cashflows and a lower cost
debt structure.
Amortization of deferred financing costs was $0.2 million for the three
months ended September 30, 2007 compared to $0.7 million for the three
months ended September 30, 2006. This decrease of $0.5 million was the
result of the write-off of fees associated with the term credit facility
with Silver Point Financial, LLC (the "Term Credit Facility") that was
terminated in August 2006.
Income tax provision was $1.9 million and $0.4 million for the three
months ended September 30, 2007 and 2006, respectively. The Company's
effective tax rate was 29.2% for the three months ended September 30, 2007
and 9.4% for the three months ended September 30, 2006. The lower
effective tax rate in 2006 was the result of an adjustment of the expected
annual effective tax rate due to state and international tax strategies
which did not reoccur in 2007.
Income from continuing operations was $4.6 million and $3.6 million for
the three months ended September 30, 2007 and 2006, respectively, or an
increase of $1.0 million primarily from increased operating income and
reduced interest expense which were partially offset by a higher effective
income tax rate.
Income from discontinued operations was $0.5 million and $0.3 million for
the three months ended September 30, 2007 and 2006, respectively. The 2007
amount includes adjustments to the 2007 effective tax rate and interest
accrued under FIN 48. The 2006 amount included the results of the
Insulated Wire business that was sold in July 2006.
As a result of the aforementioned changes, net income was $5.1 million, or
$0.51 per basic and $0.50 per diluted share, and $3.9 million, or $0.39
per basic and diluted share, for the three months ended September 30, 2007
and 2006, respectively.
NINE MONTHS ENDED SEPTEMBER 30, 2007 VERSUS NINE MONTHS ENDED SEPTEMBER
30, 2006
Net sales were $554.1 million and $565.0 million for the nine months ended
September 30, 2007 and 2006, respectively. Sales for the nine months ended
September 30, 2007 were $10.9 million, or 1.9%, below comparable 2006
levels, as a result of a higher proportion of tolled copper shipped in the
2007 period compared to the 2006 period ($79.4 million) and lower volume
($1.7 million). These factors were partially offset by an increase in the
average cost and selling price of copper ($31.3 million), higher customer
pricing/mix ($4.4 million), the impact of a stronger euro versus the U.S.
dollar ($3.3 million) and the acquisition of HPC ($31.2 million) on March
31, 2006. The average price of copper based upon COMEX increased to $3.21
per pound for the nine months ended September 30, 2007 from $3.06 per
pound for the nine months ended September 30, 2006.
Bare Wire segment net sales for the nine months ended September 30, 2007
were $413.6 million, or a decrease of $55.7 million, or 11.9%, from sales
of $469.3 million for the comparable 2006 period. This decrease was
primarily the result of lower volume to customers supplying the appliance
market ($8.7 million) and the impact of a higher proportion of tolled
copper shipped in the 2007 period compared to the 2006 period ($79.4
million). These decreases were partially offset by the impact of an
increase in the average cost and selling price of copper ($28.0 million)
20
and increased customer pricing/mix, including higher tin prices ($4.4
million). Of the total pounds processed for the nine months ended
September 30, 2007 and 2006, respectively, 51.0% and 43.7% were from
customers' tolled copper.
Engineered Wire Products-Europe net sales of $49.8 million for the nine
months ended September 30, 2007 were $10.1 million, or 25.4%, higher than
sales of $39.7 million for the 2006 period. This increase was the result
of $2.8 million for the increase in the average cost and selling price of
copper, $3.3 million impact of a stronger euro versus the U.S. dollar and
$4.0 million from increased volume from improved customer demand in all
major markets.
High Performance Conductors net sales of $92.2 million for the nine months
ended September 30, 2007 were $35.9 million, or 63.8%, higher than sales
of $56.3 million for the 2006 period. This increase was the result of $0.5
million of increase in the average cost and selling price of copper, $4.2
million of increased volume from improved customer demand in the aerospace
and medical device markets, higher silver, nickel and tin prices and $31.2
million of HPC results for the three months ended March 31, 2007 with no
similar sales for the three months ended March 31, 2006 as HPC was
acquired on March 31, 2006.
Cost of goods sold, exclusive of depreciation and amortization, as a
percentage of sales decreased to 87.2% for the nine months ended September
30, 2007 from 88.7% for the same period in 2006. The decrease of 1.5
percentage points was due to the impact of a higher proportion of toll
copper sales in 2007 compared to 2006 (1.8 percentage points), higher
customer pricing/mix (0.8 percentage points) and the favorable
contribution of HPC sales (0.2 percentage points) partially offset by the
increase in the average cost and selling price of copper (0.8 percentage
points), a lower contribution for Engineered Wire Products - Europe (0.1
percentage points), and increased tin costs and lower overhead absorption
(0.4 percentage points).
Selling, general and administrative expenses were $33.5 million for the
nine months ended September 30, 2007 compared to $29.2 million for the
same period in 2006. This increase of $4.3 million was the result of $2.5
million from the HPC acquisition on March 31, 2006, $0.8 million of
stock-based compensation expense and $1.1 million of higher professional
fees and $0.6 million of increased transportation costs partially offset
by $0.7 million lower expenses primarily bad debts. These expenses, as a
percent of net sales, increased to 6.0% for the nine months ended
September 30, 2007 from 5.2% for the nine months ended September 30, 2006,
primarily from the impact of the effect of a higher proportion of tolled
copper in 2007 compared to 2006 and the previously-mentioned cost
increases.
Depreciation and amortization was $11.9 million for the nine months ended
September 30, 2007 compared to $10.4 million for the same period in 2006.
This increase of $1.5 million was the result of the HPC acquisition ($1.4
million) and higher depreciation on other property, plant and equipment
additions net of disposals ($0.1 million).
Operating income for the nine months ended September 30, 2007 was $25.9
million compared to $24.4 million for the 2006 period, or an increase of
$1.5 million, primarily due to the contribution of the HPC acquisition.
Bare Wire segment's operating income of $15.0 million for the 2007 period
decreased by $1.8 million, or 10.7%, from $16.8 million for the comparable
2006 period, primarily from lower sales volume, increased tin costs, lower
overhead absorption and higher depreciation expense partially offset by
higher customer pricing/mix. Engineered Wire Products-Europe operating
income was $3.5 million, or an increase of $0.2 million, from the 2006
period of $3.3 million due to increased sales volume to all major markets.
High Performance Conductors operating income was $10.2 million, or an
increase of $4.3 million, from the 2006 period of $5.9 million due to
increased sales levels and a lack of results for the three months ended
March 31, 2006, as HPC was acquired on March 31, 2006. Operating income in
the 2007 period also decreased by $1.2 million from increased charges for
stock-based compensation and professional fees.
Interest expense was $7.4 million for the nine months ended September 30,
2007 compared to $10.2 million for the nine months ended September 30,
2006. This decrease of $2.8 million was the result of the impact of lower
levels of borrowings from improved operating cashflows and a lower cost
debt structure.
21
Amortization of deferred financing costs was $0.5 million for the nine
months ended September 30, 2007 compared to $1.0 million for the nine
months ended September 30, 2006. This decrease of $0.5 million was the
result of the write-off of fees associated with the Term Credit Facility
that was terminated in August 2006.
Income tax provision was $5.2 million and $4.0 million for the nine months
ended September 30, 2007 and 2006, respectively. The Company's effective
tax rate for the nine months ended September 30, 2007 was 29.1% and 30.0%
for the nine months ended September 30, 2006. The lower effective tax rate
in 2007 was the result of efficient state tax strategies and certain
changes in state tax laws.
Income from continuing operations was $12.7 million and $9.3 million for
the nine months ended September 30, 2007 and 2006, respectively, or an
increase of $3.4 million primarily due to higher operating income, reduced
interest expense and a lower effective tax rate.
Income/(loss) from discontinued operations was $0.7 million and ($0.2)
million for the nine months ended September 30, 2007 and 2006,
respectively. The 2007 amount included a gain of $0.2 million from the
sale of property, plant and equipment of the former Insulated Wire
business and adjustments to the effective tax rate partially offset by
interest accrued under FIN 48. The 2006 amount included the results of the
Insulated Wire business that was sold in July 2006.
As a result of the aforementioned changes, net income was $13.4 million,
or $1.33 per basic share and $1.31 per diluted share, and $9.1 million, or
$0.91 per basic and diluted share, for the nine months ended September 30,
2007 and 2006, respectively.
FINANCIAL CONDITION
At the end of the third quarter, total cash and cash equivalents were $3.0
million, down $0.3 million from year-end 2006. During the first nine
months of 2007, cash levels were relatively constant throughout the period
as we used excess cash to reduce outstanding long-term debt borrowings.
Accounts receivable increased $16.8 million, or 17.2%, from year-end 2006.
This increase was primarily due to an increase in net sales of 11.2% in
the last two months of the third quarter of 2007 as compared to the last
two months of the fourth quarter of 2006. Accounts receivable also
increased due to an increase in the number of days sales outstanding as of
September 30, 2007. The number of days sales outstanding increased to 54
as of September 30, 2007 from 52 days as of December 31, 2006. The
allowance for doubtful accounts as a percentage of accounts receivable
decreased from 1.7% at December 31, 2006 to 1.1% as of September 30, 2007
reflecting primarily the write-off of remaining Insulated Wire accounts
deemed uncollectible against the allowance in the first quarter of 2007.
Inventories of $68.0 million as of September 30, 2007 increased by $9.2
million from December 31, 2006. This increase was the result of an
increase in pounds of copper and other inventory held in the Bare Wire
segment ($10.8 million) and increased inventory levels and metal costs at
HPC ($1.5 million), partially offset by an increase in the LIFO reserve
($2.7 million) and lower quantities in the Engineered Wire Products-Europe
segment of ($0.4 million). Inventory turns in the first nine months of
2007 were comparable to 2006 levels.
Accounts payable were $51.4 million as of September 30, 2007, or an
increase of $17.8 million from December 31, 2006 levels, as trade vendor
terms from a major copper vendor were extended, more pounds were purchased
and the timing of payments differed.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, - an interpretation of FASB Statement No. 109
("FIN 48") to be effective for fiscal years beginning after December 31,
2006. This Interpretation adopts a two-step approach for recognizing and
measuring tax benefits and requires certain disclosures about
uncertainties surrounding income tax positions. It also adopts the
recognition threshold of "more-likely-than-not." On January 1, 2007, the
Company adopted the provisions of FIN 48. As a result of the
implementation of FIN 48, the Company recognized an increase of $3.3
22
million to the opening balance of accumulated deficit. See Note 1 to the
unaudited condensed consolidated financial statements in this Form 10-Q.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
("SFAS No. 157"). This statement defines fair value, establishes a
framework for using fair value to measure assets and liabilities and
expands disclosures about fair value measurements. The statement applies
whenever other pronouncements require or permit assets or liabilities to
be measured at fair value. SFAS No. 157 is effective for the Company's
fiscal year beginning January 1, 2008. The Company is evaluating the
impact the adoption of SFAS No. 157 will have on the Company's financial
statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Liabilities -- including an amendment to FASB
Statement No. 115 ("SFAS No. 159"). This statement permits entities to
choose to measure many financial instruments and certain other items at
fair value in order to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently. SFAS No. 159 is
effective for the Company's fiscal year beginning January 1, 2008. The
Company is evaluating the impact the adoption of SFAS No. 159 will have on
the Company's financial statements.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL AND CASH FLOWS
Net cash provided by operating activities was $26.2 million for the nine
months ended September 30, 2007, compared to net cash provided by
operating activities of $19.2 million for the nine months ended September
30, 2006. This improvement of $7.0 million was the result of increased net
income ($4.3 million), non-cash stock-based compensation expense ($0.8
million), accounts receivable changes ($3.3 million), inventory changes
($3.3 million), increased accounts payable ($0.3 million), and other, net
($1.7 million) partially offset by lower accrued payroll and payroll
related items ($2.3 million) deferred income taxes ($2.6 million), and
lower accrued and other liabilities ($1.8 million).
Net cash used in investing activities was $14.6 million for the nine
months ended September 30, 2007, compared to $22.1 million for the nine
months ended September 30, 2006. This decrease in net cash used of $7.5
million resulted primarily from the acquisition of HPC for $52.1 million
in the 2006 period and $3.0 million in 2007. In addition, capital
expenditures were $14.6 million for the nine months ended September 30,
2007 compared to $7.6 million for the nine months ended September 30,
2006, primarily due to spending for the new plant in Sherrill, New York of
$7.6 million, including purchase of equipment and installation costs.
Total capital expenditures related to the acquisition of the Sherrill, New
York facility are expected to be approximately $3.2 million over the
remaining life of the project. Proceeds from the sale of property, plant
and equipment in the 2007 period were $1.7 million greater than in the
2006 period. Proceeds from sale of businesses was zero for the nine months
ended September 30, 2007 compared to $36.1 million for the nine months
ended September 30, 2006. The collection of restricted cash contributed
$0.3 million less in 2007 than in 2006.
Net cash used in financing activities was $12.1 million for the nine
months ended September 30, 2007, compared to net cash used in financing
activities of $0.9 million for the nine months ended September 30, 2006,
for a increase of $11.2 million. There were net repayments of borrowings
of $10.7 million for the nine months ended September 30, 2007, and net
borrowings of $0.5 million for the nine months ended September 30, 2006.
During the third quarter of 2007, $1.7 million was used to repurchase the
Company's stock under its stock repurchase program and the Company
received $0.3 million in proceeds from the issuance of common stock.
Financing fees were $1.4 million lower in 2007 compared to 2006 due to
amendments to the Revolver Credit Facility that occurred in 2006.
FINANCING ARRANGEMENTS
The Company and its subsidiaries are party to a revolving credit facility
with Wachovia Capital Finance Corporation (Central) (the "Revolver Credit
Facility"). The Revolver Credit Facility provides for a $200 million
revolver credit facility subject to borrowing availability (including a
$25 million letter of credit facility) and matures August 22, 2011.
23
The Company and its subsidiaries are party to an indenture governing the
Notes we issued in October 2004. For a description of the terms of the
Revolver Credit Facility and the Notes, see Note 11 to the unaudited
condensed consolidated financial statements.
LIQUIDITY
We require cash to fund 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,
silver, nickel, tin and alloy costs increase significantly or rapidly.
Currently, a $0.10 per pound fluctuation in the price of copper will have
an approximate $2.7 million impact on our working capital. The average
price of copper based upon COMEX decreased to $3.48 per pound for the
three months ended September 30, 2007 from $3.54 per pound for the three
months ended September 30, 2006. Copper prices continue to fluctuate, and
the price of copper on the COMEX was $3.11 per pound as of November 12,
2007.
Our principal sources of cash are generated from operations and
availability under our Revolver Credit Facility.
As of September 30, 2007, we had $3.0 million of unrestricted cash and
cash equivalents. Actual borrowing 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 September 30, 2007, our borrowing base was
$155.7 million and our outstanding indebtedness under the Revolver Credit
Facility (including outstanding letters of credit) was $43.3 million,
resulting in a remaining availability of $112.4 million.
As part of the Company's approved $3.7 million stock repurchase program
discussed above, during the third quarter of 2007, the Company repurchased
84,000 shares for an aggregate cost, including broker commissions, of $1.7
million, resulting in an average price of $20.53 per share. The Company
utilized funds available from its operating cashflow and/or borrowings
under its Revolver Credit Facility.
We expect our cash on hand, operating cash flow, and available borrowings
under the Revolver Credit Facility, will be sufficient to meet our
anticipated future operating expenses, stock repurchases, capital
expenditures and debt service requirements for the next twelve months and
the foreseeable future. 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, tin and alloy, 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 September 30, 2007. However, we do
finance the use of certain facilities and equipment under lease agreements
provided by various institutions. Since the terms of these agreements meet
the definition of operating lease agreements, the sum of future lease
payments is not reflected on our consolidated balance sheets. As of
September 30, 2007, the future minimum lease payments under these
arrangements totaled $6.3 million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not ordinarily hold market risk sensitive instruments for trading
purposes.
INTEREST RATE RISK
At September 30, 2007, approximately $27.9 million of the total $102.9
million of long-term debt, specifically, $27.9 million of borrowings under
our Revolver Credit Facility, bear interest at variable rates. A
hypothetical 1% increase in variable interest rates would increase our
interest rate expense by $0.3 million based on the debt outstanding as of
September 30, 2007. We are not currently engaged in any hedging
activities.
24
FOREIGN CURRENCY RISK
As of September 30, 2007, we had operations in Belgium, France and Italy.
Our operations may, therefore, be subject to volatility because of
currency fluctuations. Sales and expenses are denominated in the euro for
the Belgium, French and Italian operations. As a result, these operations
are subject to fluctuations in the relative value of the euro versus other
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. Our net foreign currency investment in foreign subsidiaries and
affiliates translated into U.S. dollars using month-end exchange rates at
September 30, 2007 and year-end exchange rates at December 31, 2006, was
$26.7 million and $22.0 million, respectively.
At September 30, 2007, we had no financial instruments outstanding that
were sensitive to changes in foreign currency exchange rates.
COMMODITY PRICE RISK
The principal raw material we use is copper, which is purchased in the
form of 5/16-inch rod primarily from the major copper producers in North
America, Europe and South America. 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 decreased to $3.48 per pound for the three
months ended September 30, 2007 from $3.54 per pound for the three months
ended September 30, 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 copper raw material 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 an approximate $2.7 million impact on our
working capital.
Tin is also a component of our products in the Bare Wire and HPC segments.
For the three months ended September 30, 2007, the average price of tin
increased by 70% compared to the three months ended September 30, 2006.
The HPC segment also uses silver and nickel. For the three months ended
September 30, 2007, the average price of silver increased by 9% and the
average price of nickel increased by 4% compared to the three months ended
September 30, 2006. The cost of silver, nickel and tin is generally
passed-through to our customers through a variety of pricing mechanisms.
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. Based upon the evaluation and because
of the material weaknesses described below, 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
weaknesses discussed below, the Company's management has concluded that
the financial statements included in this Form 10-Q fairly present in all
material respects the Company's financial position and its results of
operations for the periods presented in conformity with generally accepted
accounting principles.
25
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 discontinued
operations. Specifically, we did not have effective controls in place to
identify net operating loss carryforwards and the differences between book
and tax accounting for fixed assets, certain inventory reserves and LIFO
inventories and certain intangibles. This material weakness resulted in a
restatement of the Company's 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 the
Company's 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. This material
weakness existed throughout 2006 and 2007, and at September 30, 2007.
As of December 31, 2006 and September 30, 2007, we did not maintain a
sufficient number of personnel with an appropriate level of knowledge to
adequately prepare the financial statements, which contributed to the
following control deficiencies:
1. We did not have an adequate process in place to perform analysis and
independent secondary review of complex or non-routine accounting matters,
such as accounting for discontinued operations, certain aspects of a debt
modification, purchase accounting transactions and stock-based
compensation.
2. We did not maintain an adequate process to analyze and review certain
accrued liabilities and related expense accounts involving management's
judgments and estimates.
3. We did not maintain effective policies and procedures related to our
financial close process to ensure that the presentation and disclosures in
the financial statements were prepared and reviewed in a timely and
accurate manner.
A material weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the company's annual or
interim financial statements will not be prevented or detected on a timely
basis. These control deficiencies, either individually or in the
aggregate, could result in material misstatements to annual or interim
financial statements that would not be prevented or detected. Accordingly,
management determined that these control deficiencies combined constituted
a material weakness.
REMEDIATION PLAN
Our remediation plan for the deferred tax accounting weakness included a
special project in which we staffed qualified outside tax and accounting
consultants, beginning in the second quarter of 2006, to fully assess the
material weakness. Management also obtained internal and external
resources for the preparation of the 2006 and 2007 quarter-end and
year-end closings. The initial phase of the remediation plans has resulted
in the restatement of the 2005 annual consolidated financial statements as
more fully described in Amendment No. 1 to the Form 10-K for December 31,
2005 in Note 1A. We continue to strengthen our controls over income tax
accounting with additional internal accounting and external resources
through and including the preparation of the 2006 and 2007 income tax
provision and related footnote disclosures. To remediate the control
weakness related to personnel, management has hired a Manager of Financial
Reporting (recently promoted to Corporate Controller) who possesses the
technical qualifications to properly account for both non-routine and
routine transactions. In 2007, management has also hired a Manager of
Income Taxes and a Senior Accountant to assist the Corporate Controller in
income tax accounting and financial reporting. Management has additionally
hired a Manager of Internal Audit/SOX to assist management in the proper
implementation of adequate disclosure controls. Management, with the
assistance of the Manager of Internal Audit/SOX, has developed, and will
continue to develop, detailed control remediation steps for each of the
deficiencies noted above and has begun implementation of those steps.
Management had previously conducted an analysis of the current financial
reporting staff and validated that the roles and responsibilities have
been properly allocated and assessed the potential need for additional
resources. Management is in the process of assessing if additional
resources are deemed necessary and is transitioning various functions to
the Camden, NY offices.
26
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the three months ended September 30, 2007, there have been no
material developments in the Company's legal proceedings. For more
detailed information, see the disclosures provided in Note 15 to the
unaudited condensed consolidated financial statements in this Form 10-Q
and Note 18 to our Consolidated Financial Statements and in "Item 3-Legal
Proceedings" set forth in our 2006 Form 10-K.
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 2006 Form 10-K for the year ended December 31, 2006, which
could materially affect our business, financial condition or future
results. The Risk Factors included in our 2006 Form 10-K have not
materially changed. The risks described in our 2006 Form 10-K 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.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(c) Issuer Purchases of Equity Securities
The following is a summary of the Company's share repurchase activity for
the three months ended September 30, 2007:
(A) (B) (C) (D)
------------- ------------ --------------- ----------------
TOTAL NUMBER OF DOLLAR VALUE OF
TOTAL NUMBER AVERAGE PRICE SHARES PURCHASED SHARES THAT MAY
OF SHARES PAID PER PART OF PUBLICLY YET BE PURCHASED
PERIOD PURCHASED(1) SHARE ANNOUNCED PLAN UNDER THE PLAN(2)
------------------------------------ ---------- --------- ---------- ----------
July 1, 2007 - July 31, 2007 -- $ -- -- $ --
August 1, 2007 - August 31, 2007 -- $ -- -- $ --
September 1, 2007 - September 30, 2007 84,000 $ 20.53 84,000 $1,975,000
---------- --------- ---------- ----------
Total 84,000 $ 20.53 84,000 $1,975,000
(1) Share repurchases under the program were made pursuant to open-market
purchases.
(2) On September 4, 2007, the Company publicly announced a $3.7 million stock
repurchase program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
27
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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.
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
INTERNATIONAL WIRE GROUP, INC.
Dated: November 14, 2007 By: /s/ GLENN J. HOLLER
-----------------------------
Name: Glenn J. Holler
Title: Senior Vice President, Chief
Financial Officer (Principal
Financial and Accounting
Officer) and Secretary
29
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.
30