FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 1996
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 0-16254
Steel of West Virginia, Inc.
(Exact name of registrant as specified in its charter)
Delaware 55-0684304
(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification No.
17th Street and 2nd Avenue, Huntington, West Virginia 25703
(Address of principal executive offices, Zip Code)
(304) 696-8200
(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___
The number of shares outstanding of each of the issuer's classes of common
stock, as of September 30, 1996, is as follows:
5,986,060 shares of common stock, par value $.01 per share.
STEEL OF WEST VIRGINIA, INC.
AND SUBSIDIARIES
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of 3
September 30, 1996 and December 31, 1995
Condensed Consolidated Statements of Income for 4
the Three-Month and Nine-Month Periods Ended
September 30, 1996 and September 30, 1995
Condensed Consolidated Statements of Cash Flows 5
for the Three-Month and Nine-Month Periods Ended
September 30, 1996 and September 30, 1995
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
2
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED BALANCE SHEETS
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)
September 30 December 31
1996 1995
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 0 $ 100
Receivables, net of allowances of $760
and $692 9,700 13,148
Inventories 15,541 17,095
Deferred income taxes 3,110 3,110
Other current assets 112 1,021
-------- --------
TOTAL CURRENT ASSETS 28,463 34,474
Property, plant, and equipment 38,811 40,807
Goodwill 18,623 19,134
Other assets 337 708
-------- --------
TOTAL ASSETS $ 86,234 $ 95,123
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Overdraft $ 419 $ 647
Accounts payable 4,930 5,045
Accrued payroll and benefits payable 3,670 5,240
Income taxes payable 225 117
Other current liabilities 1,182 2,026
Current maturities of long-term debt 3,684 5,885
-------- --------
TOTAL CURRENT LIABILITIES 14,110 18,960
Long-term debt 10,771 11,978
Deferred income taxes 8,005 8,005
Other long-term liabilities 793 765
-------- --------
TOTAL LIABILITIES 33,679 39,708
STOCKHOLDERS' EQUITY
Common stock, $.01 par value: 12,000,000
voting shares authorized, 7,091,360
issued and outstanding 71 71
Paid-in capital 26,597 26,597
Treasury stock (11,483) (7,983)
Retained earnings 37,370 36,730
-------- --------
TOTAL STOCKHOLDERS' EQUITY 52,555 55,415
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 86,234 $ 95,123
======== ========
NOTE: The balance sheet at December 31, 1995, has been derived from the
audited financial statements at that date.
See notes to condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
-------------------- --------------------
Net sales $ 22,229 $ 32,551 $ 72,673 $ 97,092
Cost of sales 20,225 26,789 64,894 80,391
-------- -------- -------- --------
GROSS PROFIT 2,004 5,762 7,779 16,701
Selling and administrative expenses 973 1,158 3,128 3,851
Other operating expense (income) 410 48 2,158 (185)
-------- -------- -------- --------
OPERATING INCOME 621 4,556 2,493 13,035
Interest expense 294 455 1,002 1,253
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 327 4,101 1,491 11,782
Income Taxes (318) (1,652) (851) (4,625)
-------- -------- -------- --------
NET INCOME $ 9 $ 2,449 $ 640 $ 7,157
======== ======== ======== ========
NET INCOME PER COMMON SHARE, based on
5,988,025 and 6,036,503 weighted average
shares of common stock outstanding during the
three months and nine months ended September
30, 1996 and 6,630,260 and 6,891,104 weighted
average shares of common stock outstanding
during the three months and nine months ended
September 30, 1995 $ .00 $ .37 $ .11 $ 1.04
======== ======== ======== ========
See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
(In thousands)
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
---------------------------- ----------------------------
CASH FROM OPERATIONS $ 5,522 $ 1,378 $ 11,970 $ 5,650
INVESTMENT ACTIVITIES
Additions to property, plant,
and equipment (3,490) (447) (4,934) (2,451)
FINANCING ACTIVITIES
Revolving credit loan (222) (273) 1,006 3,535
Long-term debt repayments (1,472) (1,215) (4,414) (3,645)
Purchase of treasury stock 0 0 (3,500) (5,235)
-------- -------- -------- --------
(1,694) (1,488) (6,908) (5,345)
-------- -------- -------- --------
INCREASE (DECREASE) IN CASH $ 338 $ (557) $ 128 $ (2,146)
======== ======== ======== ========
See notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
September 30, 1996
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Steel of West Virginia, Inc. (the Company) and its wholly-owned
subsidiaries SWVA, Inc. and Marshall Steel, Inc. Such condensed financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three-month and
nine-month periods ended September 30, 1996 are not necessarily indicative of
the results that may be expected for the year ended December 31, 1996. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1995.
The preparation of the condensed consolidated financial statements in conformity
with generally accepted accounting principles requires that management make
certain estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
NOTE B--INVENTORIES
Inventories consist of the following (in thousands):
September 30 December 31
1996 1995
------------ -----------
Raw materials $ 1,851 $ 2,013
Work-in-process 5,372 6,089
Finished goods 9,135 10,633
Manufacturing supplies 3,358 3,288
------- -------
19,716 22,023
Less LIFO reserve 4,175 4,928
------- -------
$15,541 $17,095
======= =======
Annually, at the end of each year, management determines inventory levels
based on the taking of a physical inventory. The amount of inventories at
September 30, 1996, has been determined based upon inventory levels indicated by
perpetual inventory accounting records. In addition, an actual valuation of
inventory under the LIFO method can be made only at the end of each year based
on the inventory levels and costs at that time. Accordingly, interim LIFO
calculations must necessarily be based on management's estimates of expected
year-end inventory levels and costs. Since these are subject to many forces
beyond management's control, interim results are subject to the final year-end
LIFO inventory valuation.
6
NOTE C--CREDIT ARRANGEMENTS
The Company entered into a senior financing agreement on December 30, 1986, as
subsequently amended, that provides for revolving credit borrowings and term
loans. The interest rates on its existing revolving credit line and term loans
outstanding vary from the Chemical Bank prime rate or LIBOR plus 1-3/4%; and the
annual revolving credit line commitment fee is 1/8% of the unused balance. The
Company is permitted to convert up to $7 million of its indebtedness to a fixed
interest rate. On February 28, 1996, the Company amended its senior credit
agreement to increase the revolver availability to a maximum of $15,000,000. The
senior credit agreement may be terminated by the Company or, on or after January
1, 1998 and upon 90 days written notice, by the lender.
Amounts outstanding under the term loan portion of the senior financing
agreement are scheduled to be repaid in remaining quarterly principal
installments totaling as follows: 1996--$1,250,000; 1997--$1,547,050. The
"Capital Expenditure Line" term loan portion of the loan agreement is required
to be repaid in quarterly principal installments of $215,000, with a final
principal payment of $195,000 on October 1, 2001. As of September 30, 1996, the
revolving credit line loan balance was $6,880,000 and the unused borrowing
availability approximated $6,241,000.
The Company's senior lending agreement contains various restrictive covenants,
including that the Company must maintain specified levels of working capital and
net worth (as defined in the agreement). In addition, capital expenditures and
dividends are limited to the annual amounts set forth in the agreement. At
September 30, 1996, the Company's retained earnings available for dividends in
1996 was $4,710,000. As a result of the lending agreement, substantially all of
the Company's property, plant, and equipment, inventory and accounts receivable
are subject to a third party's security interests.
NOTE D--COMMITMENTS AND CONTINGENCIES
The Company is principally self-insured for employees' medical care costs and
workers' compensation claims up to certain specified dollar limits. Under the
medical care program, the Company is insured by a private carrier for individual
claims in excess of specified dollar limits. The Company also has excess
coverage provided by the West Virginia Workers' Compensation Fund (a state
agency) for certain work related injuries. In connection with the self-insured
workers' compensation program, the Company has obtained an irrevocable standby
letter of credit in the amount of $1,000,000 (through July 1997). A liability
has been established for those illnesses and injuries occurring on or before
September 30, 1996, for which an amount of expected loss could be reasonably
estimated.
7
NOTE E--STOCKHOLDERS' EQUITY
In June 1995, the Company's shareholders approved the Steel of West Virginia,
Inc. 1995 Employee Stock Option Plan and the 1995 Non-Employee Director Stock
Option Plan. Under these Plans, as of September 30, 1996, options to acquire
79,500 shares, exercisable at an option price of $11 5/8, have been granted and
are outstanding. In addition, options to acquire 8,000 shares, at an option
price of $9 a share, have been granted and can be exercised commencing April 1,
1997.
In May 1996, the Company's shareholders voted to approve an amendment to the
Steel of West Virginia, Inc. 1995 Non-Employee Director Stock Option Plan, to
provide for the awarding of shares of the Company's Common Stock in payment of a
portion of the compensation payable to certain outside directors for their
services as directors.
Net income per common share is calculated based on 5,988,025 and 6,036,503
weighted average shares of common stock outstanding during the three months and
nine months ended September 30, 1996 and 6,630,260 and 6,891,104 weighted
average shares of common stock outstanding during the three months and nine
months ended September 30, 1995. The effect of the Company's stock option plans
was anti-dilutive for all periods presented.
In October 1995, the Financial Accounting Standards Board issued Statement No.
123 "Accounting for Stock-Based Compensation," effective in 1996. As permitted
by this statement, the Company intends to continue its present accounting
practice of recognizing compensation expense related to stock options using the
"intrinsic method." Under this method, compensation expense, if any, is
recognized on the measurement date that both the number of shares the employee
is entitled to receive and the exercise price are known, in an amount equivalent
to the excess of the market value over the exercise price. The Company is
required to provide additional disclosures regarding the stock-based
compensation plans, including pro-forma disclosures of net income and earnings
per share as if the "fair value" method of accounting for stock-based
compensation and been applied, and the Company plans to include these required
disclosures in its 1996 Annual Report.
Commencing in April 1995 through September 30, 1996 the Company has repurchased
1,105,000 shares at a total cost of $11,483,000.
NOTE F--FIXED ASSET IMPAIRMENT
In the three-month and nine-month periods ended September 30, 1996, the Company
has recorded charges of $464,000 and $2,467,000, respectively, as a result of
ongoing review and analysis of equipment performance. Such charges are included
in other operating expenses.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Sales
Net sales decreased 31.7% in the third quarter of 1996 to $22,229,000 down
$10,322,000 from the third quarter of 1995, primarily as a result of weakness in
certain of the industries that the Company serves, the most significant of which
being the truck trailer industry. The Company does not see any significant
improvement in its market demand in the near term. Finished tonnage sales
decreased to 35,501 tons in the third quarter of 1996 from 44,564 tons for the
third quarter of 1995. Billet sales decreased to 1,728 tons for the third
quarter of 1996 from 10,967 tons in the third quarter of 1995.
Net sales for the nine months ended September 30, 1996 decreased 25.2% to
$72,673,000 from $97,092,000 for the comparable period in 1995, primarily as a
result of weakness in certain of the industries that the Company serves, the
most significant of which being the truck trailer industry. Finished tonnage
sales decreased to 111,308 tons for the nine months ended September 30, 1996
from 135,034 tons for the comparable period in 1995. Billet sales decreased to
4,063 tons for the same period in 1996, from 23,980 tons for the comparable
period in 1995.
Cost of Sales
Cost of sales increased to 91.0% of net sales or $20,225,000 for the third
quarter of 1996 from 82.3% of net sales or $26,789,000 for the third quarter of
1995. The percent increase in cost of goods sold is principally due to higher
costs for maintenance, natural gas and depreciation expense, in addition to
fixed costs being a higher component of costs of goods sold due to lower sales
and production levels. The Huntington, West Virginia facility was shut down for
two weeks during the quarter due to reduced orders and also to perform required
maintenance.
Cost of sales for the nine months ended September 30, 1996 increased to 89.3% of
net sales or $64,894,000 from 82.8% of net sales or $80,391,000 for the
comparable period in 1995. This increase in costs of goods sold was principally
due to higher costs for utilities, medical care, warehousing, maintenance,
depreciation expense and labor, lower production efficiencies and yields, in
addition to fixed costs being a higher component of costs of goods sold due to
lower sales and production levels.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses for the third quarter of 1996 were
$973,000, as compared to $1,158,000 for the third quarter of 1995. This decrease
was due primarily to lower salaries and legal expense. As a percentage of net
sales, selling and administrative expense was 4.4% in the third quarter of 1996
and 3.6% for the comparable period in 1995 principally due to lower sales.
Selling, general, and administrative expenses for the nine month period ended
September 30, 1996 were $3,128,000, compared to $3,851,000 for the comparable
period in 1995. The expense for the first quarter of 1995 included a $200,000
charge for costs associated with a discontinued acquisition of another steel
company. As a percentage of net sales, selling and administrative expense was
4.3% in the nine month period ended September 30, 1996, compared to 4.0% for the
comparable period in 1995.
9
Other Operating Expense (Income)
Other operating expense for the third quarter of 1996 was $410,000 of expense,
compared to $48,000 of expense for the third quarter of 1995. Other operating
expense increased primarily due to the recognition of the estimated loss on the
disposal of certain equipment.
Other operating expense for the nine months ended September 30, 1996 was
$2,158,000 of expense, compared to $185,000 of income for the comparable period
in 1995. Other operating expense increased primarily due to the recognition of
the estimated loss on the disposal of certain equipment that is being replaced
by new equipment.
Interest Expense
Interest expense for the third quarter of 1996 was $294,000, compared to
$455,000 for the third quarter of 1995. As a percentage of net sales, interest
expense was 1.3% in the third quarter of 1996, compared to 1.4% for the third
quarter of 1995.
Interest expense for the nine months ended September 30, 1996 was $1,002,000,
compared to $1,253,000 for the comparable period in 1995. As a percentage of net
sales, interest expense was 1.4% in the nine month period ended September 30,
1996, compared to 1.3% for the comparable period in 1995.
Net Income
Net income for the third quarter of 1996 decreased by $2,440,000 to $9,000 from
$2,449,000 for the third quarter of 1995. This decrease was principally due to
the reduction in operating income, including higher charges for disposal of
fixed assets, in addition to a higher effective income tax rate. As a percentage
of net sales, net income was 0.0% for the third quarter of 1996, compared to
7.5% for the third quarter of 1995.
Net income for the nine months ended September 30, 1996 was $640,000, compared
to $7,157,000 for the comparable period in 1995. This decrease was due to the
reduction in operating income, including higher charges for the disposal of
fixed assets, higher operating costs and lower sales. As a percentage of net
sales, net income was 0.1% in the nine month period ended September 30, 1996,
compared to 7.4% for the comparable period in 1995.
Liquidity and Sources of Capital
The Company's primary ongoing cash needs are for working capital requirements,
debt service and capital expenditures. The three present sources for the
Company's liquidity needs are internally generated funds, a capital expenditure
term loan line, and the Company's revolving credit facility, which the Company
anticipates will be sufficient for its ongoing cash needs. Working capital at
the end of the third quarter of 1996 was $14,353,000, compared to $15,514,000 at
the end of the prior fiscal year. This decrease in working capital was due
primarily to the Company funding capital expenditures, purchasing treasury stock
and meeting its long-term debt amortization requirements with internally
generated funds. The Company's expenditures for required capital replacements
are currently anticipated to average approximately $1,000,000 annually over the
next several years.
In addition, from time to time, the Company evaluates discretionary capital
expenditures and acquisition opportunities. Engineering studies are underway in
10
connection with the Company moving forward with phase II of the modernization
and expansion program that was started in late 1993. The phase II project is
expected to include new rolling stands, a reheat furnace, and miscellaneous
equipment enhancements. Any such expenditure would be subject to availability of
funds and approval by the Company's Board of Directors.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
11.1 Computation of Earnings Per Share Data.
(b) Reports on Form 8-K
None
11
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.
DATED: November 12, 1996 STEEL OF WEST VIRGINIA, INC.
----------------------------
(Registrant)
/s/ Timothy R. Duke
----------------------------
Timothy R. Duke, President and
Chief Operating Officer
/s/ Mark G. Meikle
----------------------------
Mark G. Meikle, Vice President,
Treasurer and Chief Financial
Officer
12