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 ended July 31, 1998
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 July 31, 1998, reflecting a three-for-two stock split,
effective March 25, 1998.
11,120,288 Shares outstanding
ROANOKE ELECTRIC STEEL CORPORATION
FORM 10-Q
CONTENTS
Page
1. Part I - Financial Information 3 - 10
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
e. Independent Accountants' Report 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8 - 10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 11
2. Part II - Other Information 12
Item 1. Legal Proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
3. Signatures 13
4. Exhibit Index pursuant to Regulation S-K 14
5. Exhibits
a. Financial Data Schedule 15
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
ROANOKE ELECTRIC STEEL CORPORATION
Consolidated Balance Sheets
ASSETS
(Unaudited)
July 31, October 31,
1998 1997
CURRENT ASSETS
Cash and cash equivalents $ 11,916,660 $ 8,844,537
Investments 11,059,331 7,815,682
Accounts receivable 39,872,227 38,786,302
Inventories 33,814,044 36,814,417
Prepaid expenses 2,191,524 1,900,338
Deferred income taxes 1,211,881 1,211,881
Total current assets 100,065,667 95,373,157
PROPERTY, PLANT AND EQUIPMENT
Land 4,310,632 4,313,060
Buildings 19,028,231 18,874,555
Other property and equipment 122,412,891 119,266,483
Assets under construction 5,681,467 921,581
Total 151,433,221 143,375,679
Less--accumulated depreciation 68,846,434 62,077,810
Property, plant and equipment, net 82,586,787 81,297,869
OTHER ASSETS 172,389 189,193
TOTAL ASSETS $ 182,824,843 $ 176,860,219
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term debt $ 4,250,000 $ 4,250,000
Accounts payable 15,496,601 13,050,874
Dividends payable 1,056,427 971,639
Employees' taxes withheld 207,477 151,085
Accrued profit sharing contribution 4,054,087 4,910,443
Accrued wages and expenses 2,528,980 2,938,065
Accrued income taxes 733,805 1,072,258
Total current liabilities 28,327,377 27,344,364
LONG-TERM DEBT
Notes payable 29,604,167 32,791,667
Less--current portion 4,250,000 4,250,000
Total long-term debt 25,354,167 28,541,667
POSTRETIREMENT LIABILITIES 1,218,043 990,809
DEFERRED INCOME TAXES 13,784,110 13,547,110
STOCKHOLDERS' EQUITY
Common stock--no par value--authorized 20,000,000 shares,
issued 12,393,402 shares in 1998 and 13,544,977 in 1997 2,727,944 2,349,179
Capital in excess of stated value - 9,349,429
Retained earnings 112,231,070 105,241,256
Total 114,959,014 116,939,864
Less--treasury stock, 1,273,114 shares in 1998 and
2,333,914 in 1997 -- at cost 817,868 10,503,595
Total stockholders' equity 114,141,146 106,436,269
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 182,824,843 $ 176,860,219
The accompanying notes to consolidated financial statements are an integral part of this statement.
ROANOKE ELECTRIC STEEL CORPORATION
Consolidated Statements of Earnings
(Unaudited) (Unaudited)
Three Months Ended Nine Months Ended
July 31, July 31,
1998 1997 1998 1997
SALES $ 73,119,315 $ 68,768,769 $ 218,501,980 $ 188,420,399
COST OF SALES 58,937,231 55,187,551 178,017,296 153,657,173
GROSS EARNINGS 14,182,084 13,581,218 40,484,684 34,763,226
OTHER OPERATING EXPENSES
Administrative 4,817,725 4,586,175 14,133,889 12,945,279
Interest, net 220,246 396,639 772,274 1,286,335
Profit sharing 1,632,545 1,441,043 4,262,493 3,320,313
Total 6,670,516 6,423,857 19,168,656 17,551,927
EARNINGS BEFORE INCOME TAXES 7,511,568 7,157,361 21,316,028 17,211,299
INCOME TAX EXPENSE 3,002,119 2,857,809 8,516,592 6,868,003
NET EARNINGS $ 4,509,449 $ 4,299,552 $ 12,799,436 $ 10,343,296
Weighted average number of
common shares outstanding: *
Basic 11,107,558 11,229,526 11,147,781 11,242,186
Diluted 11,245,565 11,308,341 11,276,051 11,305,803
Net earnings per share of common stock:
Basic $ 0.41 $ 0.38 $ 1.15 $ 0.92
Diluted $ 0.40 $ 0.38 $ 1.14 $ 0.91
Cash dividends per share of common stock $ 0.095 $ 0.087 $ 0.277 $ 0.247
* Adjusted for three-for-two stock split effective March 25, 1998.
The accompanying notes to consolidated financial statements are an integral part of this statement.
ROANOKE ELECTRIC STEEL CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
July 31,
1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 12,799,436 $ 10,343,296
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Postretirement liabilities 227,234 185,978
Depreciation and amortization 6,890,501 7,099,106
(Gain) loss on sale of investments and property, plant and equipment (13,081) 4,207
Deferred income taxes 237,000 664,000
Changes in assets and liabilities which provided
(used) cash, exclusive of changes shown separately 2,521,487 1,957,353
Net cash provided by operating activities 22,662,577 20,253,940
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (8,141,975) (5,704,791)
Proceeds from sale of property, plant and equipment 300 100
Purchase of investments (3,251,508) (2,151,663)
Net cash used in investing activities (11,393,183) (7,856,354)
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends (3,085,621) (2,767,856)
Increase in dividends payable 84,788 64,088
Proceeds from exercise of common stock options 378,765 161,850
Payment of long-term debt (3,187,500) (5,687,500)
Repurchase of common stock (2,387,703) (1,572,778)
Net cash used in financing activities (8,197,271) (9,802,196)
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,072,123 2,595,390
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 8,844,537 1,038,689
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,916,660 $ 3,634,079
CHANGES IN ASSETS AND LIABILITIES WHICH PROVIDED
(USED) CASH, EXCLUSIVE OF CHANGES SHOWN SEPARATELY
(Increase) decrease in accounts receivable $ (1,085,925) $ 2,271,260
(Increase) decrease in inventories 3,000,373 (651,536)
(Increase) decrease in prepaid expenses (291,186) (1,379,538)
Increase (decrease) in accounts payable 2,445,727 3,119,693
Increase (decrease) in employees' taxes withheld 56,392 (181,088)
Increase (decrease) in accrued profit sharing contribution (856,356) (690,612)
Increase (decrease) in accrued wages and expenses (409,085) (543,753)
Increase (decrease) in accrued income taxes (338,453) 12,927
Total $ 2,521,487 $ 1,957,353
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 1,609,994 $ 1,805,026
Income taxes $ 8,618,045 $ 6,191,077
The accompanying notes to consolidated financial statements are an integral part of this statement.
ROANOKE ELECTRIC STEEL CORPORATION
Notes to Consolidated Financial Statements
July 31, 1998
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 July 31, 1998 and
the results of operations for the three months and nine months
ended July 31, 1998 and 1997 and cash flows for the nine months
ended July 31, 1998 and 1997.
Note 2. Inventories include the following major classifications:
(Unaudited)
July 31, October 31,
1998 1997
Scrap Steel $ 5,858,150 $ 7,579,552
Melt Supplies 2,508,782 2,212,939
Billets 2,421,416 5,960,432
Mill Supplies 3,237,228 3,484,688
Finished Steel 19,788,468 17,576,806
Total Inventories $ 33,814,044 $ 36,814,417
Note 3. In February 1997, the Financial Accounting Standards Board issued
SFAS No. 128, "Earnings per Share", which changes the method of
calculating earnings per share. SFAS No. 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. The statement is effective for financial statements for
periods ending after December 15, 1997. Basic earnings per share
and diluted earnings per share calculated in accordance with
SFAS No. 128 are presented in the consolidated statements of
earnings.
Note 4. Certain amounts included in the consolidated financial statements
for 1997 have been reclassified from their original presentation
to conform with the current year presentation.
Note 5. The Registrant declared a three-for-two common stock split payable
March 25, 1998, to shareholders of record March 6, 1998. All
references to the number of common shares (basic and diluted) and
per common share amounts (basic and diluted) have been restated to
retroactively reflect the stock split.
Note 6. The Registrant retired all of its treasury stock applicable to the
shares acquired through its recent common stock repurchase plan.
DELOITTE & TOUCHE LLP
Suite 1401 Telephone: (336) 721-2300
500 West Fifth Street Facsimile: (336) 721-2301
Winston-Salem, North Carolina 27152
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors of
Roanoke Electric Steel Corporation:
We have reviewed the accompanying consolidated balance sheet of Roanoke
Electric Steel Corporation and subsidiaries as of July 31, 1998, the
related consolidated statements of earnings and cash flows for the
three-month and nine-month periods ended July 31, 1998 and 1997. 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 generally accepted auditing standards,
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 generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Roanoke Electric Steel
Corporation and subsidiaries as of October 31, 1997, 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 18, 1997, 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, 1997 is fairly
stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
Deloitte & Touche LLP
August 25, 1998
Deloitte Touche
Tohmatsu
International
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.
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 Nine Months Ended
July 31, July 31,
1998 and 1997 1998 and 1997
Amount Percent Amount Percent
Sales 4,350,546 6.3 30,081,581 16.0
Cost of Sales 3,749,680 6.8 24,360,123 15.9
Administrative Expenses 231,550 5.0 1,188,610 9.2
Interest Expense (176,393) (44.5) (514,061) (40.0)
Profit Sharing Expense 191,502 13.3 942,180 28.4
Earnings before Income Taxes 354,207 4.9 4,104,729 23.8
Income Tax Expense 144,310 5.0 1,648,589 24.0
Net Earnings 209,897 4.9 2,456,140 23.7
Sales increased for both the nine month and three month periods compared as
a result of significant increases in tons shipped of fabricated products
and billets, combined with improved selling prices for merchant bar
products and billets, even though bar product shipment levels declined.
Fabricated product selling prices favorably impacted the three month
period, but were flat for the nine months compared. Strong domestic demand
and lower excess billet availability in the market resulted in the
significant increase in billet shipments. Shipments of fabricated products
increased substantially, due both to increased activity and an easing of
competitive conditions within the commercial construction industry. The
improvement in bar product selling prices, during both periods compared,
was due to stronger market conditions which prompted a number of
industry-wide price increases during the year. Scrap price changes
normally trigger changes in billet pricing; therefore, rising scrap prices
during the nine month period brought about higher billet selling prices,
while scrap prices trended downward for the quarter, causing billet prices
to be nearly flat. During both periods compared, excess inventories or
inventory adjustments at steel services centers have caused temporary
reductions in tons shipped of bar products, as market conditions and
backlogs remained strong. Fabricated product selling prices increased for
the quarter, influenced mainly by higher raw material costs and improved
market conditions which, in turn, offset earlier price reductions caused by
business conditions resulting in flat selling prices for the nine months.
Cost of sales increased for both the nine month and three month periods
compared mainly as a result of the increased tons shipped of billets and
fabricated products, together with an increase in the cost of scrap steel,
our main raw material. Gross profit as a percentage of sales increased
from 18.4% to 18.5% for the nine months compared, primarily as a result of
the higher selling prices for both mill products and billets and increased
raw steel, bar and fabricated production levels which reduced unit costs
for fixed expenses, and more than offset the higher scrap costs. Gross
profit as a percentage of sales declined from 19.7% to 19.4% for the three
months compared due mainly to the higher scrap costs and growth in the
lower margin billet shipments, in spite of the positive effect of increased
raw steel production on fixed costs and improved prices for all product
classes. In addition, interruptions of power supply during June and July,
due to extreme temperatures, had a slight negative effect on production and
margins. For both periods compared, the increase in gross profit margins
for mill products, together with increased volume of fabricated product and
billet shipments caused the improvement in both gross profit and net
earnings. Administrative expenses increased in both periods compared
mainly as a result of increased executive and other compensation, in
accordance with various incentive arrangements based on earnings and
production, and higher professional fees. However, current year
administrative expenses, as a percentage of sales, dropped by .4% and .1%
from the nine month and three month 1997 periods, respectively. Interest
expense decreased in both periods compared primarily due to reduced average
borrowings and increased capitalized interest and interest income, as
interest rates were unchanged. Profit sharing expense, computed as a
percentage of pre-tax income, increased in both periods compared as a
result of the improvements in earnings. The effective income tax rate was
relatively constant for both periods compared.
Working capital increased $3,709,497 during the period to $71,738,290
mainly as a result of working capital provided from operations exceeding
capital expenditures, dividends, debt maturities and repurchases of common
stock amounting to $8,141,975, $3,085,621, $3,187,500 and $2,387,703,
respectively. The current ratio of 3.5 to 1 and the quick ratio of 2.2 to
1 both indicate very sound liquidity and a healthy financial condition. In
addition, cash, cash equivalents and investments increased $6,315,772
during the period to $22,975,991. Our $30,000,000 revolver, unused at July
31, 1998, provides the liquidity and capital resources necessary to
maintain our competitive position and ensure future growth.
In July, the Company approved additional repurchases of up to 750,000
shares of the Company's common stock. The previous repurchase program,
completed earlier this year, returned $11,696,430 to shareholders with the
repurchase of 749,200 shares. At July 31, 1998, there were commitments for
the purchase of property, plant and equipment amounting to $8,164,331,
including $5 million for new state-of-the-art stacking and bundling
equipment, expected to be in operation by mid-1999 with anticipated
improvements in rolling mill productivity and efficiency. These commitments
and the stock repurchase program will affect future liquidity and will be
financed from internally generated funds and the use of the revolver
mentioned above.
During the period, the ratio of debt to equity improved to .60 to 1, and
the percentage of long-term debt to total capital decreased from 21.1% to
18.2%, due to current maturities reducing long-term debt by $3,187,500,
while stockholders' equity increased as net earnings of $12,799,436
exceeded dividends of $3,085,621 and common stock repurchases of $2,387,703.
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, the ability of the Company and its customers and vendors to
address effectively Year 2000 issues, and others.
Since 1997, the Company has been diligently involved in converting our
computer hardware and software to be Year 2000 compliant. It has been
assigned the highest priority within our information systems area utilizing
all internal personnel available. External resources have been added to
assist in the task and continue ongoing projects. We have identified the
systems in our manufacturing facilities and offices that may be affected
and established a completion goal of December 31, 1998. Conversion of a
number of systems has been completed on schedule. To ensure compliance by
third-party software vendors, we are requesting in writing from our vendors
confirmation of their Year 2000 compliance. We have also purchased
analytical tools to check not only our computers for compliance, but also
loaded software. The Company has sent compliance questionnaires to its
major suppliers to assess their readiness and our needs to seek alternate
suppliers. We have not totally assessed the risks of Year 2000 issues, nor
have we developed any contingency plans. We plan to utilize all of 1999
for such matters and testing our conversions. The estimated costs of Year
2000 issues are approximately $300,000 and are not expected to have a
material effect on results of operations, liquidity or capital resources.
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 31,1997, as previously filed with
the commission. There has been no material changes to that information
required to be disclosed in this 3rd quarter 10-Q filing.
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 Registrant on Form 10-K for
fiscal year ended October 31, 1997 and Forms 10-Q for the quarters
ended January 31, 1998 and April 30, 1998, as previously filed
with the commission.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a. Exhibits.
(27) Financial Data Schedule
b. Reports on Form 8-K.
A report on Form 8-K was filed July 22, 1998, during the quarter
for which this report is filed, stating that the Registrant had
approved the repurchase of up to 750,000 shares of the Company's
common stock, both in the open market and in privately negotiated
transactions, as the Company deems appropriate. The repurchased
shares, to be held as authorized and unissued shares, will be
available for general corporate purposes.
Items 2, 3, 4 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 08/25/98 Donald G. Smith
Donald G. Smith, Chairman, President,
Treasurer and Chief Executive Officer
(Principal Financial Officer)
Date 08/25/98 John E. Morris
John E. Morris, Vice President-Finance
and Assistant Treasurer
(Chief Accounting Officer)
EXHIBIT INDEX
Exhibit No. Exhibit Page
(27) Financial Data Schedule 15
EXHIBIT NO. 27
FINANCIAL DATA SCHEDULE