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, 2002
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, 2002.
10,942,813 Shares outstanding
ROANOKE ELECTRIC STEEL CORPORATION
FORM 10-Q
CONTENTS
Page | |
1. Part I - Financial Information | 3 - 14 |
Item 1. Financial Statements | |
a. Consolidated Balance Sheets | 3 |
b. Consolidated Statements of Earnings (Loss) | 4 |
c. Consolidated Statements of Cash Flows | 5 |
d. Notes to Consolidated Financial Statements | 6 - 9 |
e. Independent Accountants' Report | 10 |
Item 2. Management's Discussion and Analysis of Financial Condition | |
and Results of Operations | 11 - 13 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | 14 |
2. Part II - Other Information | 15 |
Item 1. Legal Proceedings | 15 |
Item 4. Submission of Matters to a Vote of Security Holders | 15 |
Item 6. Exhibits and Reports on Form 8-K | 15 |
3. Signatures | 16 |
4. Exhibit Index pursuant to Regulation S-K | 17 |
PART I - FINANCIAL INFORMATION | |||||
ITEM 1 - FINANCIAL STATEMENTS | |||||
ROANOKE ELECTRIC STEEL CORPORATION | |||||
Consolidated Balance Sheets | |||||
ASSETS | |||||
(Unaudited) | |||||
April 30, | October 31, | ||||
2002 | 2001 | ||||
CURRENT ASSETS | |||||
Cash and cash equivalents | $ | 18,090,798 | $ | 26,106,683 | |
Investments | 13,373,067 | 12,477,755 | |||
Accounts receivable, net of allowances of | |||||
$2,433,121 in 2002 and $2,551,000 in 2001 | 36,930,643 | 41,954,349 | |||
Refundable income taxes | 2,529,855 | 1,749,696 | |||
Inventories | 58,053,244 | 62,689,319 | |||
Prepaid expenses | 1,295,647 | 1,011,674 | |||
Deferred income taxes | 5,254,195 | 5,602,455 | |||
Total current assets | 135,527,449 | 151,591,931 | |||
PROPERTY, PLANT AND EQUIPMENT | |||||
Land | 7,977,521 | 8,010,036 | |||
Buildings | 44,092,184 | 43,563,921 | |||
Other property and equipment | 196,328,557 | 195,239,094 | |||
Assets under construction | 2,291,301 | 2,986,435 | |||
Total | 250,689,563 | 249,799,486 | |||
Less--accumulated depreciation | 108,091,431 | 99,849,499 | |||
Property, plant and equipment, net | 142,598,132 | 149,949,987 | |||
GOODWILL | 13,868,647 | 13,868,647 | |||
OTHER ASSETS | 1,708,682 | 1,476,213 | |||
TOTAL ASSETS | $ | 293,702,910 | $ | 316,886,778 | |
LIABILITIES AND STOCKHOLDERS' EQUITY | |||||
CURRENT LIABILITIES | |||||
Current portion of long-term debt | $ | 7,542,755 | $ | 15,039,488 | |
Accounts payable | 19,723,596 | 18,061,711 | |||
Dividends payable | 1,094,281 | 1,091,156 | |||
Employees' taxes withheld | 475,558 | 246,008 | |||
Accrued profit sharing contribution | 55,310 | 786,937 | |||
Accrued wages and expenses | 8,850,714 | 11,446,999 | |||
Total current liabilities | 37,742,214 | 46,672,299 | |||
LONG-TERM DEBT | |||||
Notes payable | 93,855,170 | 108,874,521 | |||
Less--current portion | 7,542,755 | 15,039,488 | |||
Total long-term debt | 86,312,415 | 93,835,033 | |||
DEFERRED INCOME TAXES | 30,228,072 | 29,833,680 | |||
OTHER LIABILITIES | 6,171,827 | 7,939,582 | |||
STOCKHOLDERS' EQUITY | |||||
Common stock--no par value--authorized 20,000,000 shares, | |||||
issued 12,215,927 shares in 2002 and 12,184,677 in 2001 | 4,394,889 | 4,066,765 | |||
Retained earnings | 131,270,976 | 138,555,379 | |||
Accumulated other comprehensive loss | (1,599,615) | (3,198,092) | |||
Total | 134,066,250 | 139,424,052 | |||
Less--treasury stock, 1,273,114 shares -- at cost | 817,868 | 817,868 | |||
Total stockholders' equity | 133,248,382 | 138,606,184 | |||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 293,702,910 | $ | 316,886,778 | |
The accompanying notes to consolidated financial statements are an integral part of these statements. |
ROANOKE ELECTRIC STEEL CORPORATION | ||||||||
Consolidated Statements of Earnings (Loss) | ||||||||
(Unaudited) | (Unaudited) | |||||||
Three Months Ended | Six Months Ended | |||||||
April 30, | April 30, | |||||||
2002 | 2001 | 2002 | 2001 | |||||
SALES | $ | 64,118,964 | $ | 77,925,125 | $ | 122,058,874 | $ | 152,696,660 |
COST OF SALES | 57,816,757 | 69,283,787 | 116,411,432 | 134,428,163 | ||||
GROSS EARNINGS | 6,302,207 | 8,641,338 | 5,647,442 | 18,268,497 | ||||
OTHER OPERATING EXPENSES (INCOME) | ||||||||
Administrative | 5,612,912 | 6,513,273 | 11,228,952 | 12,934,026 | ||||
Interest, net | 1,159,418 | 1,472,244 | 2,867,367 | 3,257,518 | ||||
Profit sharing | (92,582) | (94,209) | 56,918 | 290,007 | ||||
Antitrust litigation settlement | --- | (700,991) | --- | (700,991) | ||||
Total | 6,679,748 | 7,190,317 | 14,153,237 | 15,780,560 | ||||
EARNINGS (LOSS) BEFORE INCOME TAXES | (377,541) | 1,451,021 | (8,505,795) | 2,487,937 | ||||
INCOME TAX EXPENSE (BENEFIT) | (153,180) | 578,302 | (3,406,892) | 990,581 | ||||
NET EARNINGS (LOSS) | $ | (224,361) | $ | 872,719 | $ | (5,098,903) | $ | 1,497,356 |
Net earnings (loss) per share of common stock: | ||||||||
Basic | $ | (0.02) | $ | 0.08 | $ | (0.47) | $ | 0.14 |
Diluted | $ | (0.02) | $ | 0.08 | $ | (0.47) | $ | 0.14 |
Cash dividends per share of common stock | $ | 0.10 | $ | 0.10 | $ | 0.20 | $ | 0.20 |
Weighted average number of common | ||||||||
shares outstanding : | ||||||||
Basic | 10,940,025 | 10,910,198 | 10,925,807 | 10,905,555 | ||||
Diluted | 10,975,991 | 10,951,559 | 10,965,713 | 10,931,467 | ||||
The accompanying notes to consolidated financial statements are an integral part of these statements. | ||||||||
ROANOKE ELECTRIC STEEL CORPORATION | |||||
Consolidated Statements of Cash Flows | |||||
(Unaudited) | |||||
Six Months Ended | |||||
April 30, | |||||
2002 | 2001 | ||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||
Net earnings (loss) | $ | (5,098,903) | $ | 1,497,356 | |
Adjustments to reconcile net earnings (loss) to net | |||||
cash provided by operating activities: | |||||
Deferred compensation liability | 42,213 | (15,571) | |||
Postretirement liabilities | 104,357 | 128,464 | |||
Depreciation and amortization | 8,508,452 | 8,639,491 | |||
Loss on sale of investments and property, plant and equipment | 1,392 | 21,692 | |||
Deferred income taxes | (323,000) | 301,000 | |||
Changes in assets and liabilities which provided | |||||
(used) cash, exclusive of changes shown seperately | 8,029,822 | 5,236,080 | |||
Net cash provided by operating activities | 11,264,333 | 15,808,512 | |||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||
Expenditures for property, plant and equipment | (930,874) | (2,665,250) | |||
Proceeds from sale of property, plant and equipment | 32,515 | 4,400 | |||
(Purchase) sale of investments | (917,438) | 1,820,182 | |||
Other | (19,345) | 37,571 | |||
Net cash used in investing activities | (1,835,142) | (803,097) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||
Cash dividends | (2,185,500) | (2,181,262) | |||
Increase in dividends payable | 3,125 | 1,050 | |||
Proceeeds from exercise of common stock options | 328,124 | 98,000 | |||
Payment of funded debt | (15,019,351) | (7,517,872) | |||
Loan costs | (316,474) | --- | |||
Interest rate swap termination fee | (255,000) | --- | |||
Net cash used in financing activities | (17,445,076) | (9,600,084) | |||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (8,015,885) | 5,405,331 | |||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 26,106,683 | 15,068,443 | |||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 18,090,798 | $ | 20,473,774 | |
CHANGES IN ASSETS AND LIABILITIES WHICH PROVIDED | |||||
(USED) CASH, EXCLUSIVE OF CHANGES SHOWN SEPARATELY | |||||
(Increase) decrease in accounts receivable | $ | 5,023,706 | $ | 2,244,866 | |
(Increase) decrease in refundable income taxes | (780,159) | 332,867 | |||
(Increase) decrease in inventories | 4,636,075 | 7,685,274 | |||
(Increase) decrease in prepaid expenses | (283,973) | 29,113 | |||
Increase (decrease) in accounts payable | 1,661,885 | (191,312) | |||
Increase (decrease) in employees' taxes withheld | 229,550 | 24,109 | |||
Increase (decrease) in accrued profit sharing contribution | (731,627) | (3,139,268) | |||
Increase (decrease) in accrued wages and expenses | (1,725,635) | (1,749,569) | |||
Total | $ | 8,029,822 | $ | 5,236,080 | |
The accompanying notes to consolidated financial statements are an integral part of these statements. | |||||
ROANOKE ELECTRIC STEEL CORPORATION
Notes to Consolidated Financial Statements
April 30, 2002
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, 2002 and the results of operations for the three months and six months ended April 30, 2002 and 2001 and cash flows for the six months ended April 30, 2002 and 2001. |
Note 2. | Inventories include the following major classifications: |
(Unaudited) | |||||
April 30, | October 31, | ||||
2002 | 2001 | ||||
Scrap steel | $ | 4,568,643 | $ | 4,162,011 | |
Melt supplies | 2,570,024 | 2,908,676 | |||
Billets | 4,810,657 | 6,927,793 | |||
Mill supplies | 4,511,504 | 4,083,757 | |||
Work-in-process | 4,505,560 | 5,576,565 | |||
Finished steel | 37,086,856 | 39,030,517 | |||
Total inventories | $ | 58,053,244 | $ | 62,689,319 | |
Note 3. | 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 (loss) per share and diluted earnings (loss) per share calculated in accordance with SFAS No. 128 are presented in the consolidated statements of earnings (loss). |
Note 4. | The components of comprehensive income (loss) were as follows: |
(Unaudited) Three Months Ended April 30, | (Unaudited) Six Months Ended April 30, | ||||||||||
2002 | 2001 | 2002 | 2001 | ||||||||
Net earnings (loss) | $ | (224,361) | $ | 872,719 | $ | (5,098,903) | $ | 1,497,356 | |||
Cumulative effect of change | |||||||||||
in accounting for derivative | |||||||||||
financial instruments | --- | --- | --- | 1,663,516 | |||||||
Change in derivative financial | |||||||||||
instruments | 279,175 | (273,380) | 1,397,985 | (2,082,046) | |||||||
Amortization of past hedging | |||||||||||
relationships | 200,492 | --- | 200,492 | --- | |||||||
Total comprehensive income (loss) | $ | 255,306 | $ | 599,339 | $ | (3,500,426) | $ | 1,078,826 |
Note 5. | 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, | ||||||||||
2002 | 2001 | 2002 | 2001 | ||||||||
Sales to unaffiliated customers: | |||||||||||
Merchant steel and | |||||||||||
specialty steel sections | $ | 41,561,916 | $ | 49,411,257 | $ | 78,371,663 | $ | 94,353,806 | |||
Bar joists and rebar | 17,566,161 | 26,627,530 | 36,520,108 | 55,212,406 | |||||||
Billets | 4,990,887 | 1,886,338 | 7,167,103 | 3,130,448 | |||||||
Total consolidated sales | $ | 64,118,964 | $ | 77,925,125 | $ | 122,058,874 | $ | 152,696,660 |
Note 6. | Supplemental cash flow information: |
(Unaudited) | |||||
Six Months Ended | |||||
April 30, | |||||
2002 | 2001 | ||||
Cash paid (refunded) during the period for: | |||||
Interest | $ | 3,440,244 | $ | 4,121,004 | |
Income taxes (net of cash received) | $ | (2,303,733) | $ | 356,714 | |
Note 7. | Effective November 1, 2000, the Company adopted SFAS No. 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 $875,595 after-tax earnings adjustment and a $2,082,046 after-tax loss adjustment, for the six month periods ended April 30, 2002 and 2001, respectively, through other comprehensive income (loss), as a result of the change in the fair value of these swap instruments. For the quarters ended April 30, 2002 and 2001, these after-tax adjustments totaled losses of $100,427 and $273,380, respectively. As of April 1, 2002, the Company effected an early termination, or unwind, of its interest rate swap agreements, resulting in the conversion of fixed-rate debt into variable-rate borrowings. This swap unwind created a termination fee of $3,000,179 due the Lender, to be paid over the remaining term of the debt. For the quarter and six months ended April 30, 2002, the reclassification, and subsequent amortization, of these past hedging relationships resulted in the Company recording an after-tax earnings adjustment of $200,492 through other comprehensive income (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 (loss). Effective May 1, 2001, the Company entered into derivative financial instruments to minimize the exposure of price risk related to certain natural gas purchases used in the manufacturing process. The contracts used to mitigate the price risk related to natural gas purchases were designated as effective cash flow hedges for a portion of the natural gas usage over the next twelve months. Unrealized gains and losses associated with marking the contracts to market were recorded as a component of other comprehensive income (loss) and included in the stockholders' equity section of the balance sheet as part of accumulated comprehensive income (loss). These gains and losses were recognized in earnings in the month in which the related natural gas was used, or in the month a hedge was determined to be ineffective. For the quarter and six months ended April 30, 2002, the Company recorded after-tax earnings adjustments of $379,602 and $522,390, respectively, through other comprehensive income (loss), related to future transactions, which were expected to be recognized in earnings within the one-year contract term. The cash flow hedge became ineffective on April 30, 2002, with the maturity, and termination, of both the gas and commodity derivative contracts. |
Note 8. | In June 2001, SFAS No. 141, "Business Combinations", was issued, establishing accounting and reporting standards for all business combinations initiated after June 30, 2001 and establishing specific criteria for the recognition of intangible assets separately from goodwill. SFAS 141 eliminates the pooling-of-interest method of accounting and requires all acquisitions consummated subsequent to June 30, 2001 to be accounted for under the purchase method. The Company's previous acquisitions have been accounted for under the purchase method, and therefore, the November 1, 2001 Company adoption of SFAS 141 had no material impact on its results of operations and financial condition. |
Note 9. | In June 2001, SFAS No. 142, "Goodwill and Other Intangible Assets" was issued, addressing financial accounting and reporting for acquired goodwill and other intangible assets. SFAS 142 eliminates amortization of goodwill and other intangible assets that are determined to have an indefinite useful life and, instead, requires goodwill to be tested for impairment, at least annually, and more frequently if an event occurs which indicates the goodwill may be impaired. At fiscal year end October 31, 2001, the Company had net goodwill of $13,868,647 and had incurred $809,848 in goodwill amortization in the statement of operations for the year then ended. The Company early adopted SFAS 142 on November 1, 2001 and subsequently ceased goodwill amortization. The Company has completed the first step of the transitional goodwill impairment test and has determined that the fair value exceeded the recorded book value at October 31, 2001 and, thus, no goodwill impairment loss existed. Ongoing, the Company intends to perform its impairment testing during the third quarter of each year. Any subsequent impairment losses, if any, will be reflected in operating income in the statement of earnings. Had the Company been accounting for its goodwill and other intangible assets under SFAS 142 for the periods presented, the Company's net earnings (loss) and earnings (loss) per share would have been as follows: |
(Unaudited) Three Months Ended April 30, | (Unaudited) Six Months Ended April 30, | ||||||||||
2002 | 2001 | 2002 | 2001 | ||||||||
Reported net earnings (loss) | $ | (224,361) | $ | 872,719 | $ | (5,098,903) | $ | 1,497,356 | |||
Add: goodwill amortization, net of tax | --- | 202,462 | --- | 404,924 | |||||||
Adjusted net earnings (loss) | $ | (224,361) | $ | 1,075,181 | $ | (5,098,903) | $ | 1,902,280 | |||
Basic and diluted net earnings (loss) per share: | |||||||||||
Reported net earnings (loss) | $ | (0.02) | $ | 0.08 | $ | (0.47) | $ | 0.14 | |||
Goodwill amortization, net of tax | --- | 0.02 | --- | 0.03 | |||||||
Adjusted basic and diluted | |||||||||||
net earnings (loss) per share | $ | (0.02) | $ | 0.10 | $ | (0.47) | $ | 0.17 |
Note 10. | In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", was issued, establishing an accounting model for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadening the presentation of discontinued operations to include more disposal transactions. Adoption of this statement is required for fiscal years beginning after December 15, 2001. The Company is in the process of reviewing the impact this standard may have on its operations and financial position. |
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, 2002, and the related consolidated statements of earnings (loss) and cash flows for the three-month and six-month periods ended April 30, 2002 and 2001. 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 the Corporation and subsidiaries as of October 31, 2001, and the related consolidated statements of earnings, stockholders' equity and comprehensive earnings (loss), and cash flows for the year then ended (not presented herein); and in our report dated November 16, 2001, 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, 2001 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
- As discussed in Note 9 to the consolidated financial statements, effective November 1, 2001, the Corporation changed its method of accounting for goodwill and other intangible assets.
- Deloitte & Touche LLP
Raleigh, North Carolina
- May 24, 2002
PART I - ITEM 2
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 (loss).
A summary of the period to period changes in the principal items included in the consolidated statements of earnings (loss) is shown below:
Comparison of Increases (Decreases) | |||||||
Three Months Ended April 30, | Six Months Ended April 30, | ||||||
2002 | 2001 | 2002 | 2001 | ||||
Amount | Percent | Amount | Percent | ||||
Sales | (13,806,161) | (17.7) | (30,637,786) | (20.1) | |||
Cost of Sales | (11,467,030) | (16.6) | (18,016,731) | (13.4) | |||
Administrative Expenses | (900,361) | (13.8) | (1,705,074) | (13.2) | |||
Interest Expense | (312,826) | (21.2) | (390,151) | (12.0) | |||
Profit Sharing Expense | 1,627 | * | (233,089) | (80.4) | |||
Antitrust Settlement Income | (700,991) | * | (700,991) | * | |||
Earnings (Loss) Before Income Taxes | (1,828,562) | * | (10,993,732) | * | |||
Income Tax Expense (Benefit) | (731,482) | * | (4,397,473) | * | |||
Net Earnings (Loss) | (1,097,080) | * | (6,596,259) | * | |||
* Cannot be calculated |
RESULTS OF OPERATIONS
Sales decreased for both the six month and three month periods compared, due, mainly, to declines in selling prices for merchant bar products, specialty steel sections, billets and fabricated products, together with reductions in shipment levels for specialty steel and fabricated products. However, sales were favorably affected by increased tons shipped of bar products and billets. Continued pressure from foreign and domestic competition kept merchant bar selling prices depressed for both periods compared. Even though business conditions within the steel industry continued to deteriorate, merchant bar shipments increased, due to new product offerings and declining inventory levels at steel service centers. During both periods compared, average selling prices dropped for specialty steel sections, due, mainly, to heightened domestic competition, particularly, within a major market segment, and product mix. Both the three month and six month periods recorded reductions in tons shipped of specialty steel products as a result of softened demand, caused by poor economic conditions within certain niche markets. Billet selling prices were lower for the six months, primarily, due to reductions in scrap prices which normally trigger changes in billet pricing. Billet prices were lower for the quarter, even though scrap prices trended upward, only because price changes lagged market changes. Improved demand and lower excess billet availability in the market resulted in the increased billet shipments for both periods compared. The decline in fabricated product selling prices, for both periods compared, was caused by intense competition within the commercial construction industry. Poor business conditions, which caused a dramatic slowdown in construction activity, resulted in the reduced fabricated product shipments during both periods. Cost of sales declined for both the six month and three month periods compared, mainly, as a result of the decreased tons shipped for specialty steel products and fabricated pro ducts, in spite of increased bar and billet shipments. The cost of scrap steel, our main raw material, was lower during the six month period, but higher during the quarter, and affected cost of sales accordingly. Gross profit as a percentage of sales declined from 12.0% to 4.6% and from 11.1% to 9.8% 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. Margins for the six months were improved by the lower scrap costs, while the higher scrap costs for the quarter reduced margins. The decline in gross profit margins and the reduced shipment levels for specialty and fabricated products 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 management compensation, and lower expenses for professional fees, travel and charitable contributions, whic h more than offset higher insurance expenses. In addition, the November 1, 2001 adoption of the new accounting standard for intangibles eliminated goodwill amortization during the current year, while 2001 included amortization for the six months and three months of $404,924 and $202,462, respectively. Administrative expenses, as a percentage of sales, rose from 8.5% to 9.2% for the six month period and from 8.4% to 8.8% 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 and lower average interest rates, which more than offset lower interest income. Profit sharing expense is based on earnings before income taxes in accordance with the provisions of various plans. For the current six month period, one plan provided no benefits due to losses, while the other plans accrued benefits, as a result of incurred earnings. For the current quarter, one plan provided no benefits due to losses, wh ile a second plan accrued benefits resulting from incurred earnings, and a third plan adjusted for over-accruals made in prior periods which exceeded the amount to be funded. 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 the Company's graphite electrode suppliers for antitrust violations. The effective income tax rate was relatively constant for both periods compared.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased $7,134,397 during the period to $97,785,235 as capital expenditures, dividends and changes to long-term debt amounting to $930,874, $2,185,500 and $7,522,618, respectively, exceeded working capital provided from operations. The current ratio of 3.6 to 1 and the quick ratio of 1.9 to 1 both indicate very strong liquidity and a healthy financial condition. In addition, cash, cash equivalents and investments total $31,463,865, and combined with cash flows from operations, should provide the liquidity and capital resources necessary to remain competitive, fund operations and meet required debt retirement. However, the Company modified certain provisions of its credit agreement in January, 2002. The modification resulted in the elimination of the Company's unused $30,000,000 revolving credit facility, the prepayment of $7,500,000 of debt and higher interest rate spreads, which will negatively affect future liquidity, capital resources and earnings. Also, the modification made cer tain financial covenants less restrictive and lowered total funded debt to $93,855,170.
At April 30, 2002, there were commitments for the purchase of property, plant and equipment of approximately $185,000. In addition, during the quarter, the Company unwound the balance of its interest rate swap and is obligated to pay over the remaining term of the debt a termination fee of $2,745,179, as of April 30, 2002. These commitments, together with current debt maturities, will affect future earnings, working capital and liquidity, and will be financed from internally generated funds and existing cash reserves.
The termination of the interest rate swap, that was accounted for as a hedge, effectively converted $75,000,000 of fixed-rate debt into variable-rate borrowings, placing the Company at risk for future increases in market interest rates. However, the conversion to currently lower variable rates has already incurred interest savings of $825,367 for the period ending July 1, 2002.
The Company has no material off-balance sheet financing arrangements nor does it have any transactions, arrangements or other relationships with any unconsolidated structured finance or special purpose entities.
During the first half of the year, the ratio of debt to equity decreased to 1.2 to 1, and the percentage of long-term debt to total capitalization declined to 39.3%, due to current changes of $7,522,618 reducing long-term debt to $86,312,415, even though stockholders' equity declined to $133,248,382 as the net loss of $5,098,903 and dividends of $2,185,500 exceeded the recognition of unrealized net gains on current and past hedging relationships of $1,598,477.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Registrant's discussion and analysis of its financial condition and results of operations are based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. Estimates and assumptions are made, during the preparation of these financial statements, that affect the amounts reported. Periodically, the Company evaluates its estimates, including those related to contracts, warranties, taxes, insurance and environment. Under different assumptions and conditions, actual costs may vary from these estimates.
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. Allowances for doubtful accounts are maintained to provide for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of these customers became worse, resulting in there inability to make payments, additional allowances may be required. The Company periodically reviews for impairment of its long-lived assets, and whenever changes in circumstances indicate that the carrying amount of the assets may not be recoverable, records an impairment charge if necessary. Compliance issues, associated with environmental laws and regulations established by federal, state and local authorities, could subject the Company to various related costs. The Company makes provision for these costs, but if the environmental laws and regulations or the varying underlying assumptions cha nge, adjustments to the reserves may be necessary. Provision is also made for estimated costs associated with coverages for workers' compensation insurance and self-insured health plans. These estimates and related reserves could require revision if circumstances and conditions warrant.
FORWARD-LOOKING STATEMENTS
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, foreign and domestic competition, governmental regulations, interest rates, inflation, labor relations, environmental concerns, and others.
PART I - ITEM 3
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, 2001, 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 No. 133, as reported in Note 7, and as follows:
- The Company uses interest rate swaps, a form of derivative, to manage interest costs. During the quarter, the Company did a reverse swap, converting $75,000,000 of term debt to a variable interest rate from a fixed rate. A termination fee of $3,000,179 will be expensed ratably over the remaining maturity of the term loan. The $75,000,000 of variable rate term debt is subject to the risk of fluctuations in short-term interest rates. However, the cash and investments of $31,463,865 provides a partial hedge against rising interest rates.
PART II - OTHER INFORMATION
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, 2001 and Form 10-Q for the quarter ended January 31, 2002, as previously filed with the Commission.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
- On February 19, 2002, the Annual Meeting of Shareholders was held and the following persons were elected as Class C directors of the Registrant, with terms expiring in 2005:
Authority | Not | |||
Director | For | Withheld | Voted | |
Charles I. Lunsford, II | 9,756,475 | 74,577 | 1,081,136 | |
Charles W. Steger | 9,752,350 | 78,702 | 1,081,136 | |
- The following persons continued to serve as Class A and Class B directors of the Registrant after the annual meeting:
Class A directors, with terms expiring in 2003 | |
George B. Cartledge, Jr. | |
Thomas L. Robertson | |
Donald G. Smith | |
Class B directors, with terms expiring in 2004 | |
Frank A. Boxley | |
Timothy R. Duke | |
George W. Logan |
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 24, 2002 | Donald G. Smith | ||
Donald G. Smith, Chairman, President, | ||||
Treasurer and Chief Executive Officer | ||||
(Principal Financial Officer) | ||||
Date | May 24, 2002 | John E. Morris | ||
John E. Morris, Vice President-Finance | ||||
and Assistant Treasurer | ||||
(Chief Accounting Officer) | ||||
EXHIBIT INDEX
Exhibit No. | Exhibit | Page |
NONE | ||