UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(x) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedApril 30, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-2389
ROANOKE ELECTRIC STEEL CORPORATION
(Exact name of Registrant as specified in its charter)
Virginia | 54-0585263 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
102 Westside Blvd., N.W., Roanoke, Virginia 24017
(Address of principal executive offices) (Zip Code)
(540) 342-1831
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if
changed since last report)
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, and (2) has been subject to such filing requirements for the past 90 days.
Yes x No
Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of April 30, 2001.
10,911,563 Shares outstanding
ROANOKE ELECTRIC STEEL CORPORATION
FORM 10-Q
CONTENTS
Page | |
1. Part I - Financial Information | 3 - 13 |
Item 1. Financial Statements | |
a. Consolidated Balance Sheets | 3 |
b. Consolidated Statements of Earnings | 4 |
c. Consolidated Statements of Cash Flows | 5 |
d. Notes to Consolidated Financial Statements | 6 - 8 |
e. Independent Accountants' Report | 9 |
Item 2. Management's Discussion and Analysis of Financial Condition | |
and Results of Operations | 10 - 12 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 13 |
2. Part II - Other Information | 14 |
Item 1. Legal Proceedings | 14 |
Item 4. Submission of Matters to a Vote of Security Holders | 14 |
Item 6. Exhibits and Reports on Form 8-K | 14 |
3. Signatures | 15 |
4. Exhibit Index pursuant to Regulation S-K | 16 |
ROANOKE ELECTRIC STEEL CORPORATION
Notes to Consolidated Financial Statements
April 30, 2001
Note 1. In the opinion of the Registrant, the accompanying unaudited consolidated financial statements contain
all adjustments necessary to present fairly the financial position as of April 30, 2001 and the results of
operations for the three months and six months ended April 30, 2001 and 2000 and cash flows for the
six months ended April 30, 2001 and 2000.
- Certain amounts included in this Form 10-Q filing for prior years have been reclassified from their
original presentation to conform with the current year presentation.
Note 2. Inventories include the following major classifications:
(Unaudited) | |||||
April 30, | October 31, | ||||
2001 | 2000 | ||||
Scrap steel | $ | 4,558,283 | $ | 5,721,583 | |
Melt supplies | 3,131,136 | 3,318,385 | |||
Billets | 11,273,045 | 17,266,805 | |||
Mill supplies | 4,443,400 | 3,485,332 | |||
Work-in-process | 6,205,404 | 6,877,954 | |||
Finished steel | 39,152,670 | 39,779,153 | |||
Total inventories | $ | 68,763,938 | $ | 76,449,212 | |
Note 3. In February 1997, the Financial Accounting Standards Board issued SFAS No. 128, "Earnings per
Share", which changed the method of calculating earnings per share. SFAS 128 requires the
presentation of "basic" earnings per share and "diluted" earnings per share on the face of the income
statement. Basic earnings per share is computed by dividing the net income available to common
shareholders by the weighted average shares of outstanding common stock. The calculation of diluted
earnings per share is similar to basic earnings per share except that the denominator includes dilutive
common stock equivalents such as stock options and warrants. Basic earnings per share and diluted
earnings per share calculated in accordance with SFAS 128 are presented in the consolidated statements
of earnings.
Note 4. The Registrant retired all of its treasury stock applicable to the shares recently acquired through its
common stock repurchase plan.
Note 5. In June 1997, the Financial Accounting Standards Board issued SFAS No. 130, "Comprehensive
Income", establishes standards for reporting and display of comprehensive income and its components
in a full set of general-purpose financial statements. The Company adopted SFAS 130 during the 1999
first quarter. The components of comprehensive income were as follows:
(Unaudited) Three Months Ended April 30, | (Unaudited) Six Months Ended April 30, | ||||||||||
2001 | 2000 | 2001 | 2000 | ||||||||
Net earnings | $ | 872,719 | $ | 4,825,359 | $ | 1,497,356 | $ | 8,779,742 | |||
Cumulative effect of change | |||||||||||
in accounting for derivative | |||||||||||
financial instruments | --- | --- | 1,663,516 | --- | |||||||
Change in derivative financial | |||||||||||
instruments | (273,380) | --- | (2,082,046) | --- | |||||||
Total comprehensive income | $ | 599,339 | $ | 4,825,359 | $ | 1,078,826 | $ | 8,779,742 | |||
Note 6. In June 1997, the Financial Accounting Standards Board issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information", establishing disclosure standards regarding
information about operating segments in interim and annual financial statements. The Company
adopted SFAS 131 at the close of fiscal year 1999. The Company's business consists of one industry
segment, which is the extracting of scrap metal from discarded automobiles and the manufacturing,
fabricating and marketing of merchant steel bar products and specialty steel sections, reinforcing bars,
open-web steel joists and billets. The industry segment consists of three classes of products - merchant
steel products and specialty steel sections, fabricated bar joists and reinforcing bars and billets.
Financial Information Relating to Classes of Products | |||||||||||
(Unaudited) Three Months Ended April 30, | (Unaudited) Six Months Ended April 30, | ||||||||||
2001 | 2000 | 2001 | 2000 | ||||||||
Sales to unaffiliated customers: | |||||||||||
Merchant steel and | |||||||||||
specialty steel sections | $ | 49,411,257 | $ | 61,050,945 | $ | 94,353,806 | $ | 117,167,016 | |||
Bar joists and rebar | 26,627,530 | 31,043,992 | 55,212,406 | 61,185,605 | |||||||
Billets | 1,886,338 | 7,617,800 | 3,130,448 | 12,765,248 | |||||||
Total consolidated sales | $ | 77,925,125 | $ | 99,712,737 | $ | 152,696,660 | $ | 191,117,869 | |||
Note 7. Supplemental cash flow information:
(Unaudited) | |||||
Six Months Ended | |||||
April 30, | |||||
2001 | 2000 | ||||
Cash paid during the period for: | |||||
Interest | $ | 4,121,004 | $ | 4,571,726 | |
Income taxes | $ | 356,714 | $ | 3,067,853 | |
Note 8. In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", was
issued, establishing standards for accounting and reporting derivative instruments, including
certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. Effective November 1, 2000, the Company adopted SFAS 133. In the 2001 first
quarter, in accordance with the transition provisions of SFAS 133, the Company recorded a cumulative
effect earnings adjustment, after applicable taxes, of $1,663,516 in other comprehensive income to
recognize the fair value of all derivatives designated as cash-flow hedging instruments.
For certain hedging relationships, SFAS 133 eliminates special accounting formerly provided by U.S.
GAAP. The Company has traditionally entered into interest rate swap and similar instruments to
manage its exposure to movements in interest rates paid on corporate debt. Such instruments are
matched with underlying borrowings. SFAS 133 eliminates special hedge accounting if the swap
agreements do not meet certain criteria, thus requiring the Company to reflect all changes in their fair
value in its current earnings. Since the Company's current swap agreements meet the required criteria
necessary to use special hedge accounting, the Company recorded a $273,380 after-tax loss adjustment,
for the quarter ended April 30, 2001, through other comprehensive income, as a result of the change in
the fair value of these swap instruments. For the six month period ended April 30, 2001, these after-tax
adjustments totaled a $2,082,046 loss. Due to fluctuations in interest rates and volatility in market
expectations, the fair market value of interest rate swap instruments can be expected to appreciate or
depreciate over time. The Company plans to continue its practice of economically hedging various
components of its debt. However, as a result of SFAS 133, such swap instruments may now create
volatility in future reported earnings or other comprehensive income.
INDEPENDENT ACCOUNTANTS' REPORT
- Board of Directors
Roanoke Electric Steel Corporation:
- We have reviewed the accompanying consolidated balance sheet of Roanoke Electric Steel Corporation (the "Corporation") and subsidiaries as of April 30, 2001, and the related consolidated statements of earnings and cash flows for the three-month and six-month periods ended April 30, 2001 and 2000. These financial statements are the responsibility of the Corporation's management.
- We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
- Based on our review, we are not aware of any material modifications that should be made to such consolidated financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
- We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet of Roanoke Electric Steel Corporation and subsidiaries as of October 31, 2000, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated November 17, 2000, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet as of October 31, 2000 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
- As discussed in Note 8 to the consolidated financial statements, effective November 1, 2000, the Corporation changed its method for accounting and reporting derivative instruments.
- Deloitte & Touche LLP
Raleigh, North Carolina
May 30, 2001
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant factors which have affected the Company's earnings during the periods included in the accompanying consolidated statements of earnings.
A summary of the period to period changes in the principal items included in the consolidated statements of earnings is shown below:
Comparison of Increases (Decreases) | |||||||
Three Months Ended April 30, | Six Months Ended April 30, | ||||||
2001 | 2000 | 2001 | 2000 | ||||
Amount | Percent | Amount | Percent | ||||
Sales | (21,787,612) | (21.9) | (38,421,209) | (20.1) | |||
Cost of sales | (12,074,449) | (14.8) | (21,884,402) | (14.0) | |||
Administrative expenses | (179,582) | (2.7) | (205,126) | (1.6) | |||
Interest expense | (37,679) | (2.5) | (28,246) | (0.9) | |||
Profit sharing expense | (2,111,056) | (104.7) | (3,255,817) | (91.8) | |||
Antitrust settlement income | 700,991 | ** | 700,991 | ** | |||
Earnings before income taxes | (6,683,855) | (82.2) | (12,346,627) | (83.2) | |||
Income tax expense | (2,731,215) | (82.5) | (5,064,241) | (83.6) | |||
Net earnings | (3,952,640) | (81.9) | (7,282,386) | (82.9) | |||
** Cannot be calculated
Sales for the six months decreased, due mainly to declines in selling prices for merchant bar products and specialty steel sections, together with reductions in shipment levels for bar and specialty steel products, fabricated products and billets. Sales were, also, negatively impacted by a drop in selling prices for fabricated products, while billet prices were unchanged. The decline in sales for the quarter was, primarily, the result of a drop in selling prices for merchant bar and specialty steel products, along with a decrease in tons shipped of billets, merchant bar and fabricated products. Also, adversely affecting sales, was a decline in selling prices for both fabricated products and billets, while tons shipped of specialty steel products were flat. Continued increased foreign competition, which prompted industry-wide price reductions and excess inventory levels, resulted in the depressed selling prices and reduced shipment levels of merchant bar products for both periods compared. Average selling prices dropped for specialty steel sections, during both periods compared, mainly, due to increased domestic competition, particularly within a major market segment, and product mix. For the six month period, decreased demand, caused by poor economic conditions within certain niche markets, resulted in the reduction in tons shipped of specialty steel products. For the quarter, however, specialty steel shipments were flat, as increased demand in other markets offset the softened demand within the major market segment. A dramatic change in market conditions for billets, coupled with the bankruptcy of a major customer, brought diminished demand and declines of 75% in tons shipped for both periods compared. Billet selling prices were slightly lower for the quarter with reductions in scrap prices which normally trigger changes in billet pricing. However, the effects of lower scrap prices on billet prices were offset by improved product mix, resulting in flat billet prices for the six month period. Fabricated product shipments decreased for both periods compared as a result of market conditions and longer delivery schedules for various custom-made product lines. Selling prices for fabricated products declined for both periods compared, caused by increased competition within the commercial construction industry. Cost of sales declined for both the six month and three month periods compared mainly as a result of the decreased tons shipped for all product classes, with the exception of the flat levels of specialty steel shipments for the quarter, together with a reduction in the cost of scrap steel, our main raw material. Gross profit as a percentage of sales declined from 18.2% to 12.0% and from 18.4% to 11.1% for the six month and three month periods, respectively. These lower margins, for both periods compared, primarily, resulted from the lower selling prices for all product classes, with the exception of the flat billet pricing for the six month period, coupled with the effects of decreased production levels on costs, which more than offset the lower scrap costs. The decline in gross profit margins at the reduced shipment levels caused the reductions in gross profit and net earnings for both periods compared. Administrative expenses decreased in both periods compared mainly as a result of reduced executive and other compensation, which more than offset higher insurance expenses, professional fees and utilities. Administrative expenses, as a percentage of sales, rose from 6.9% to 8.5% for the six month period and from 6.7% to 8.4% for the three month period, resulting from the significant drop in sales. Interest expense decreased in both periods compared, primarily, due to reduced average borrowings, which more than offset lower interest income and higher average interest rates. Profit sharing expense is based on earnings before income taxes in accordance with the provisions of various plans. For both periods compared, profit sharing expense declined as a result of lower earnings. During the current quarter, profit sharing expense was adjusted for accruals made in prior periods which could not be funded due to changes in profit levels. During the 2001 quarter and six month periods, other operating expenses were reduced by $700,991 as a result of a partial settlement from a number of our graphite electrode suppliers for antitrust violations. The effective income tax rate is slightly lower for both periods compared due to the effects of nondeductible amortization.
Working capital decreased $1,674,314 during the period to $109,769,765 mainly as a result of capital expenditures, dividends and debt maturities amounting to $2,665,250, $2,181,262 and $7,517,872, respectively, which exceeded working capital provided from operations. The current ratio of 3.4 to 1 and the quick ratio of 1.7 to 1 both indicate very strong liquidity and a healthy financial condition. In addition, cash, cash equivalents and investments total $31,373,901. Our unused $30,000,000 revolving credit facility, combined with the cash and investments mentioned above and funds provided from operations, should provide the liquidity and capital resources necessary to fund operations and remain competitive, while meeting approximately $15,000,000 of annual required debt retirement.
At April 30, 2001, there were commitments for the purchase of property, plant and equipment of approximately $1,700,000. These commitments, together with current debt maturities, will affect working capital and future liquidity and will be financed from internally generated funds, the revolving credit facility and existing cash reserves. Borrowings under our revolving credit facility could be limited due to restrictive financial covenants contained in the loan agreement. Near the end of the current quarter, amendments were made to the financial covenants and other provisions of our loan agreement. While these amendments made certain financial covenants less restrictive, they unfortunately caused an increase in interest rate spreads, which will negatively affect future earnings, liquidity and capital resources.
During the first half of the year, the ratio of debt to equity remained at 1.3 to 1, while the percentage of long-term debt to total capitalization declined to 41.4%, due to current maturities of $7,517,872 reducing long-term debt to $101,353,630. Stockholders' equity declined to $143,717,393 as dividends of $2,181,262 and derivative fair value recognition (loss) of $418,530 exceeded net earnings.
From time to time, the Company may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company's business include economic and industry conditions, availability and prices of supplies, prices of steel products, competition, governmental regulations, interest rates, inflation, labor relations, environmental concerns, and others.
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
Quantitative and qualitative information about market risk was addressed in Form 10-K for fiscal year ended
October 31, 2000, as previously filed with the commission. There has been no material changes to that information required to be disclosed in this 2nd quarter 10-Q filing, except the required disclosure for SFAS 133, as reported
in Note 8.
ITEM 1.LEGAL PROCEEDINGS.
To the best of Registrant's information and belief no new legal proceedings were instituted against Registrant or any of its wholly-owned subsidiaries during the period covered by this report and there was no material development in or termination of the legal proceedings reported earlier by the Registrant on Form 10-K for fiscal year ended October 31, 2000 and Form 10-Q for the quarter ended January 31, 2001, as previously filed with the Commission.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On February 20, 2001, the Annual Meeting of Shareholders was held and the following persons were elected as Class B directors of the Registrant, with terms expiring in 2004:
Authority | Not | ||
Director | For | Withheld | Voted |
Frank A. Boxley | 10,164,646 | 40,061 | 696,356 |
Timothy R. Duke | 10,164,646 | 40,061 | 696,356 |
George W. Logan | 10,164,646 | 40,061 | 696,356 |
the annual meeting:
Class C directors, with terms expiring in 2002
Charles I. Lunsford, II
Paul E. Torgersen
John D. Wilson
Class A directors, with terms expiring in 2003
George B. Cartledge, Jr.
Thomas L. Robertson
Donald G. Smith
ITEM 6.EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits.
None
b. Reports on Form 8-K.
No reports on Form 8-K have been filed during the quarter for which this report is filed.
Items 2, 3 and 5 are omitted because the information required by these items is not applicable.
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 thereunto duly authorized.
ROANOKE ELECTRIC STEEL CORPORATION | ||
Registrant | ||
Date | May 30, 2001 | Donald G. Smith |
Donald G. Smith, Chairman, President, | ||
Treasurer and Chief Executive Officer | ||
(Principal Financial Officer) | ||
Date | May 30, 2001 | John E. Morris |
John E. Morris, Vice President-Finance | ||
and Assistant Treasurer | ||
(Chief Accounting Officer) | ||
EXHIBIT INDEX
Exhibit No. | Exhibit | Page |
NONE | ||