PAGE 1
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2000.
-----------------
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: 333-48245
--------------------
RENCO STEEL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-1854775
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1040 Pine Ave., S.E., Warren, Ohio 44483-6528
(Address of principal executive offices) (Zip Code)
(330) 399-6884
(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
As of March 9, 2000, the registrant had 100 shares of its common stock,
no par value, $.01 stated value, outstanding.
- --------------------------------------------------------------------------------
PAGE 2
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
INDEX
--------------------------------
PAGE NO.
--------
PART I FINANCIAL INFORMATION
- ------ ----------------------
Item 1 FINANCIAL STATEMENTS OF RENCO STEEL HOLDINGS, INC.
Condensed Consolidated Balance Sheets as of
January 31, 2000 and October 31, 1999 3
Condensed Consolidated Statements of Income for the
three months ended January 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the
three months ended January 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
FINANCIAL STATEMENTS OF WCI STEEL, INC
Condensed Consolidated Balance Sheets as of
January 31, 2000 and October 31, 1999 10
Condensed Consolidated Statements of Operations for the
three months ended January 31, 2000 and 1999 11
Condensed Consolidated Statements of Cash Flows for the
three months ended January 31, 2000 and 1999 12
Notes to Condensed Consolidated Financial Statements 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II OTHER INFORMATION
- ------- -----------------
Item 1 Legal Proceedings 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6 Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit Index 22
PAGE 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
January 31, October 31,
2000 1999
------------- ------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents............................................... $ 12,304 $ 3,830
Restricted cash and cash equivalents.................................... 62,821 76,174
Other investments....................................................... 6,862 10,238
Accounts receivable, less allowances.................................... 62,207 57,846
Inventories............................................................. 96,105 84,174
Prepaid expenses........................................................ 6,654 6,236
--------- ---------
Total current assets................................................. 246,953 238,498
Property, plant and equipment, net........................................ 250,279 254,416
Excess of cost over acquired net assets, net.............................. 11,763 11,898
Intangible pension assets, net............................................ 26,769 28,192
Other assets, net......................................................... 17,584 18,749
--------- ---------
Total assets......................................................... $ 553,348 $ 551,753
========= =========
LIABILITIES and SHAREHOLDER'S DEFICIT
Current liabilities
Current portion of long-term debt....................................... $ 123 $ 122
Accounts payable........................................................ 56,913 59,730
Accrued liabilities..................................................... 47,936 51,916
--------- ---------
Total current liabilities............................................ 104,972 111,768
Long-term debt, excluding current portion................................. 421,039 421,054
Postretirement health care benefits....................................... 103,157 100,301
Pension benefits.......................................................... 38,917 38,709
Other liabilities......................................................... 14,286 13,738
--------- ---------
Total liabilities.................................................... 682,371 685,570
--------- ---------
Shareholder's deficit
Common stock, no par value, stated value
$.01 per share, 850 shares authorized,
100 shares issued and outstanding..................................... - -
Additional paid-in capital.............................................. 280 280
Accumulated deficit..................................................... (129,303) (134,097)
--------- ---------
Total shareholder's deficit.......................................... (129,023) (133,817)
Commitments and contingencies............................................. - -
--------- ---------
Total liabilities and
shareholder's deficit............................................. $ 553,348 $ 551,753
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
PAGE 4
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
Three months
ended January 31,
2000 1999
--------- ---------
Net sales....................................... $ 141,212 $ 110,277
Operating costs and expenses
Cost of products sold.......................... 119,108 101,796
Depreciation and amortization.................. 6,745 6,704
Selling, general and
administrative expenses....................... 4,348 3,301
--------- ---------
130,201 111,801
--------- ---------
Operating income (loss)......................... 11,011 (1,524)
--------- ---------
Other income (expense)
Interest expense............................... (11,409) (11,414)
Interest, investment
and other income, net......................... 5,192 1,967
--------- ---------
(6,217) (9,447)
--------- ---------
Income (loss) before income taxes............... 4,794 (10,971)
Income tax benefit.............................. - (21,477)
--------- ---------
Net income.................................... $ 4,794 $ 10,506
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
PAGE 5
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three months
ended January 31,
2000 1999
---------------------------
Cash flows from operating activities
Net income................................................ $ 4,794 $ 10,506
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization.......................... 6,011 5,972
Amortization of deferred maintenance costs............. 734 732
Amortization of financing costs........................ 473 450
Postretirement health care benefits.................... 2,856 1,814
Pension benefits....................................... 1,630 (483)
Deferred income taxes.................................. (243) (21,677)
Gain on other investments.............................. (1,375) (1,224)
Other.................................................. 1,030 18
Cash provided (used) by changes in certain
assets and liabilities
Accounts receivable.................................... (4,361) 6,290
Inventories............................................ (11,931) 3,314
Prepaid expenses and other assets...................... (447) (143)
Accounts payable....................................... (2,817) 1,696
Accrued liabilities.................................... (3,737) (5,839)
Other liabilities...................................... 550 (519)
-------- --------
Net cash (used) provided by operating
activities............................................ (6,833) 907
-------- --------
Cash flows from investing activities
Additions to property, plant and equipment................ (2,768) (2,337)
Other investments, net.................................... 4,752 2,482
-------- --------
Net cash provided by investing
activities............................................ 1,984 145
-------- --------
Cash flows from financing activities
Principal payments on long-term debt...................... (30) (29)
-------- --------
Net cash used by financing activities.................. (30) (29)
-------- --------
Net (decrease) increase in cash and cash
equivalents................................................ (4,879) 1,023
Total cash and cash equivalents at
beginning of period........................................ 80,004 67,152
-------- --------
Total cash and cash equivalents at
end of period.............................................. $ 75,125 $ 68,175
======== ========
Supplemental disclosure of cash flow information
Cash paid for interest.................................... $ 15,166 $ 15,145
Cash paid for income taxes................................ - 220
The accompanying notes are an integral part of these condensed consolidated
financial statements.
PAGE 6
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended January 31, 2000 and 1999
(Unaudited )
NOTE 1 : BASIS OF PRESENTATION
Renco Steel Holdings, Inc. (Renco Steel) is a holding company
incorporated in the state of Ohio which was formed on January 20, 1998
and is a wholly owned subsidiary of The Renco Group, Inc. (Renco). On
January 29, 1998, Renco contributed to Renco Steel its interest in its
wholly owned subsidary WCI Steel, Inc. (WCI). Accordingly the
accompanying financial statements include the accounts of Renco Steel
and WCI (collectively, the Company).
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods. The results of operations for the
three months ended January 31, 2000 are not necessarily indicative of the
results to be expected for the full year.
These interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Form 10-K for the fiscal year ended October 31, 1999.
NOTE 2 : OTHER INVESTMENTS
The Company has from time to time invested in various limited partnerships which
invest in a variety of financial assets, including equity, debt, and derivative
securities. The Company was invested in one such limited partership on January
31, 2000. Because of the nature of the underlying investments, the Company's
investment is subject to a high degree of risk, including, but not limited to,
credit risk, interest rate risk, foreign currency exchange risk, and equity
price risk. The Company does not have any off balance sheet risk with respect to
this investment, and thus its risk is limited to the amount of this investment.
The limited partnership permits annual withdrawal on December 31 of any year,
upon 45 days notice. Accordingly, this investment has been classified as a
current asset in the accompanying balance sheet as of January 31, 2000. This
investment is held for trading purposes and is recorded at fair value for
financial reporting purposes. The Company's condensed consolidated statements of
income include unrealized gains of $0.2 million and $1.2 million for the three
months ended January 31, 2000 and January 31, 1999, respectively.
PAGE 7
NOTE 3 : INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by the
last-in, first-out (LIFO) method. The composition of inventories at January 31,
2000 and October 31, 1999 was as follows:
January 31, October 31,
2000 1999
(Unaudited)
-------- --------
(Dollars in thousands)
Raw materials........................................ $ 31,617 $ 33,811
Finished and semi-finished product................... 63,756 49,386
Supplies............................................. 124 50
-------- --------
95,497 83,247
Less LIFO reserve.................................... (608) (927)
-------- --------
$ 96,105 $ 84,174
======== ========
NOTE 4 : ENVIRONMENTAL MATTERS and OTHER CONTINGENCIES
In common with much of the steel industry, WCI's facilities are located
on sites that have been used for heavy industrial purposes for decades. WCI is
and will continue to be subject to numerous federal, state and local
environmental laws and regulations governing, among other things, air emissions,
waste water discharge and solid and hazardous waste management. WCI has made and
intends to continue to make the necessary expenditures for environmental
remediation and compliance with environmental laws and regulations.
Environmental laws and regulations continue to change and have generally become
more stringent, and WCI may be subject to more stringent environmental laws and
regulations in the future. Compliance with more stringent environmental laws and
regulations could have a material adverse effect on WCI's financial condition
and results of operations.
WCI is subject to consent decrees as a result of two civil actions
instituted by the Department of Justice (DOJ), on behalf of the Environmental
Protection Agency (EPA). These consent decrees require WCI to complete certain
supplemental environmental projects estimated to cost between $1.7 million and
$2.2 million that will be expended by late 2001. The largest of the projects to
be undertaken as part of the settlement involves sediment removal from the
Mahoning River at an estimated cost of $750,000 but not to exceed $1 million.
The consent decrees also provide for stipulated penalties in the event of
noncompliance which WCI does not believe will be material.
WCI was the defendant in an action instituted by DOJ on May 11, 1998
under the Resource Conservation and Recovery Act (RCRA), which alleged
violations of RCRA, the Ohio Administrative Code and WCI's hazardous waste
management permit related to WCI's management of alleged hazardous waste in
surface impoundments at the Warren, Ohio facility. The action alleged that from
September 1988 to the present, WCI operated hazardous waste management units at
the Warren facility
PAGE 8
without the proper permits and in noncompliance with RCRA. This action sought a
civil penalty of not more than the statutory maximum of $25,000 per day per
violation ($27,500 per day per violation for violations since January 30, 1997)
and also an injunction requiring closure of the surface impoundments and other
compliance measures under RCRA. A trial in the RCRA action was completed in June
1999 and the court rendered its decision in October 1999. The court's decision
required WCI to pay a $1 million cash penalty which was paid during the first
quarter of 2000 and denied the United States' request for injunctive relief. The
court's decision is no longer subject to appeal.
As a condition of a previous RCRA operating permit, WCI is required to
undertake a corrective action program with respect to historical material
handling practices at the Warren facility. WCI is currently undertaking the
first investigation step of the corrective action program, the RCRA Facility
Investigation (RFI), the initial phase of which is expected to be completed in
2000. The RFI workplan identifies thirteen historical solid waste management
units to be investigated. The final scope of corrective action required to
remediate any contamination that may be present at or emanating from the Warren
facility is dependent upon the completion and findings of the RFI and the
development and approval of a corrective action program. Accordingly, WCI is
unable at this time to estimate the final cost of the corrective action program
or the period over which such costs may be incurred and there can be no
assurance that any such corrective action program would not have a material
adverse effect on the operating results or financial condition of WCI.
On January 23, 1996, two retired employees instituted an action against
WCI and the United Steelworkers of America (USWA) in the United States District
Court for the Northern District of Ohio alleging in substance that certain
distributions made by WCI to employees and benefit plans violated certain
agreements, the Employee Retirement Income Security Act (ERISA), the National
Labor Relations Act (NLRA) and common law. On July 31, 1997, the court granted
WCI's motion to dismiss this action and entered judgement in favor of WCI and
the USWA. The Plaintiffs filed an appeal regarding the court's decision to
dismiss which was heard in June 1998. In March 1999, the appellate court upheld
the dismissal of the claims under ERISA and common law, but reversed the
dismissal of the NLRA claim and remanded to the district court for further
proceedings. Discovery regarding the NLRA claim is in process.
In addition to the above matters, WCI is contingently liable with
respect to lawsuits and other claims incidental to the ordinary course of its
business. A liability has been established for an amount, which WCI believes is
adequate, based on information currently available, to cover the costs to
resolve the above described matters, including remediation, if any, except for
any costs of corrective action that may result from the RFI for which no
estimate can currently be made. The outcome of the above described matters could
have a material adverse effect on the future operating results of WCI in a
particular quarterly or annual period; however, WCI believes that the effect of
such matters will not have a material adverse effect on WCI's consolidated
financial position.
PAGE 9
NOTE 5: SEGMENT REPORTING
Effective for the year ended October 31, 1999, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information," requiring that companies disclose segment
data based on how management makes resource allocation decisions and evaluates
segment operating performance.
In applying the Statement, the Company considered its operating and management
structure and the types of information subject to regular review by its "chief
operating decision maker." On this basis, the Company's only reportable segment
is WCI. The segment disclosure is presented on this new basis for the three
months ended January 31, 2000 and January 31, 1999, respectively.
All revenues are generated by WCI. Geographic revenues are based on the region
in which the customer invoice was generated and all revenue was generated within
the United States. The Company measures segment profit for internal reporting
purposes as net income (loss). A reconciliation of segment income to
consolidated net income is presented below:
Three months ended
January 31,
2000 1999
------- --------
WCI ............................................................... $ 7,586 $ (3,383)
Other ............................................................. (2,792) 13,889
------- --------
Total Consolidated .......................................... $ 4,794 $ 10,506
======= ========
PAGE 10
WCI STEEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
Jan. 31, Oct. 31,
2000 1999
--------- ---------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents ................................................... $ 66,789 $ 76,349
Accounts receivable, less allowances ........................................ 62,207 57,846
Inventories ................................................................. 95,197 83,247
Prepaid expenses ............................................................ 6,540 6,236
--------- ---------
Total current assets ..................................................... 230,733 223,678
Property, plant and equipment, net ............................................ 205,105 208,477
Intangible pension assets, net ................................................ 30,395 31,895
Other assets, net ............................................................. 14,866 15,894
--------- ---------
Total assets ...................................................... $ 481,099 $ 479,944
========= =========
LIABILITIES and SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt ........................................... $ 123 $ 122
Accounts payable ............................................................ 56,913 59,730
Accrued liabilities ......................................................... 41,152 48,364
--------- ---------
Total current liabilities ......................................... 98,188 108,216
Long-term debt, excluding current portion ..................................... 301,349 301,380
Postretirement health care benefits ........................................... 102,575 99,706
Pension benefits .............................................................. 38,844 38,635
Other liabilities ............................................................. 14,288 13,738
--------- ---------
Total liabilities ................................................. 555,244 561,675
--------- ---------
Shareholder's equity (deficit)
Preferred stock, par value $1,000 per share,
5,000 shares authorized, none issued ...................................... - -
Common stock, no par value, stated value $.01
per share, 40 million shares authorized,
100 shares issued and outstanding ......................................... - -
Additional paid-in capital .................................................. 279 279
Accumulated deficit ......................................................... (74,424) (82,010)
--------- ---------
Total shareholder's equity (deficit) .............................. (74,145) (81,731)
Commitments and contingencies ................................................. - -
--------- ---------
Total liabilities and
shareholder's equity (deficit) .................................. $ 481,099 $ 479,944
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
PAGE 11
WCI STEEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
Three months
ended January 31,
2000 1999
--------- ---------
Net sales ................................................................ $ 141,212 $ 110,277
Operating costs and expenses
Cost of products sold ................................................... 119,180 101,864
Depreciation and amortization ........................................... 5,844 5,802
Selling, general and
administrative expenses ................................................ 4,345 3,224
--------- ---------
129,369 110,890
--------- ---------
Operating income (loss) .................................................. 11,843 (613)
--------- ---------
Other income (expense)
Interest expense ........................................................ (7,995) (8,010)
Interest and other income, net .......................................... 3,738 682
--------- ---------
(4,257) (7,328)
--------- ---------
Income (loss) before income taxes ........................................ 7,586 (7,941)
Income tax benefit ....................................................... - (4,558)
--------- ---------
Net income (loss) ...................................................... $ 7,586 $ (3,383)
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
PAGE 12
WCI STEEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three months ended
January 31,
2000 1999
-------- --------
Cash flows from operating activities
Net income (loss) .............................. $ 7,586 $ (3,383)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities
Depreciation and amortization .............. 5,110 5,070
Amortization of deferred maintenance costs . 734 732
Amortization of financing costs ............ 322 328
Postretirement health care benefits ........ 2,869 1,825
Pension benefits ........................... 1,709 (411)
Deferred income taxes ...................... - (4,758)
Other ...................................... 1,030 18
Cash provided (used) by changes in certain
assets and liabilities
Accounts receivable ........................ (4,361) 6,290
Inventories ................................ (11,950) 3,296
Accounts payable ........................... (2,817) 1,696
Accrued liabilities ........................ (7,212) (9,439)
Other assets and liabilities, net .......... 218 (773)
-------- --------
Net cash (used) provided by operating
activities ................................ (6,762) 491
-------- --------
Cash flows from investing activities
Additions to property, plant and equipment ..... (2,768) (2,337)
-------- --------
Net cash used by investing activities ...... (2,768) (2,337)
-------- --------
Cash flows from financing activities
Principal payments on long-term debt ........... (30) (29)
-------- --------
Net cash used by financing
activities ............................... (30) (29)
-------- --------
Net decrease in cash and cash equivalents ........ (9,560) (1,875)
Cash and cash equivalents at beginning
of period ....................................... 76,349 62,195
-------- --------
Cash and cash equivalents at end of period ....... $ 66,789 $ 60,320
======== ========
Supplemental disclosure of cash flow information
Cash paid for interest ......................... $ 15,166 $ 15,145
Cash paid for income taxes ..................... - 583
The accompanying notes are an integral part of these condensed consolidated
financial statements.
PAGE 13
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended January 31, 2000 and 1999
( Unaudited )
NOTE 1 : BASIS OF PRESENTATION
WCI Steel, Inc. (Company or WCI) is a wholly-owned subsidiary of Renco
Steel Holdings, Inc. (Renco Steel) and an indirect wholly-owned subsidiary of
The Renco Group, Inc. (Renco). The financial information included herein is
unaudited; however, such information reflects all adjustments (consisting solely
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim periods. The results
of operations for the three months ended January 31, 2000 are not necessarily
indicative of the results to be expected for the full year.
These interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the fiscal year ended October 31, 1999.
NOTE 2 : INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined by the last-in, first-out (LIFO) method. The composition of
inventories at January 31, 2000 and October 31, 1999 was as follows:
January 31, October 31,
2000 1999
(Unaudited)
------------ ------------
(Dollars in thousands)
Raw materials ......................................................... $31,617 $33,811
Finished and semi-finished product .................................... 63,756 49,386
Supplies .............................................................. 124 50
------- -------
95,497 83,247
Less LIFO reserve ..................................................... 300 -
------- -------
$95,197 $83,247
======= =======
NOTE 3 : ENVIRONMENTAL MATTERS AND OTHER CONTINGENCIES
In common with much of the steel industry, the Company's facilities are
located on sites that have been used for heavy industrial purposes for decades.
The Company is and will continue to be subject to numerous federal, state and
local environmental laws and regulations governing, among other things, air
emissions, waste water discharge and solid and hazardous waste management. The
Company has made and intends to continue to make the necessary expenditures for
environmental remediation and compliance with environmental laws and
regulations. Environmental laws and
PAGE 14
regulations continue to change and have generally become more stringent, and the
Company may be subject to more stringent environmental laws and regulations in
the future. Compliance with more stringent environmental laws and regulations
could have a material adverse effect on the Company's financial condition and
results of operations.
The Company is subject to consent decrees as a result of two civil
actions instituted by the Department of Justice (DOJ), on behalf of the
Environmental Protection Agency (EPA). These consent decrees require the Company
to complete certain supplemental environmental projects estimated to cost
between $1.7 million and $2.2 million that will be expended by late 2001. The
largest of the projects to be undertaken as part of the settlement involves
sediment removal from the Mahoning River at an estimated cost of $750,000 but
not to exceed $1 million. The consent decrees also provide for stipulated
penalties in the event of noncompliance which the Company does not believe will
be material.
The Company was the defendant in an action instituted by DOJ on May 11,
1998 under the Resource Conservation and Recovery Act (RCRA), which alleged
violations of RCRA, the Ohio Administrative Code and the Company's hazardous
waste management permit related to the Company's management of alleged hazardous
waste in surface impoundments at the Warren, Ohio facility. The action alleged
that from September 1988 to the present, the Company operated hazardous waste
management units at the Warren facility without the proper permits and in
noncompliance with RCRA. This action sought a civil penalty of not more than the
statutory maximum of $25,000 per day per violation ($27,500 per day per
violation for violations since January 30, 1997) and also an injunction
requiring closure of the surface impoundments and other compliance measures
under RCRA. A trial in the RCRA action was completed in June 1999 and the court
rendered its decision in October 1999. The court's decision required the Company
to pay a $1 million cash penalty which was paid during the first quarter of 2000
and denied the United States' request for injunctive relief. The court's
decision is no longer subject to appeal.
As a condition of a previous RCRA operating permit, the Company is
required to undertake a corrective action program with respect to historical
material handling practices at the Warren facility. The Company is currently
undertaking the first investigation step of the corrective action program, the
RCRA Facility Investigation (RFI), the initial phase of which is expected to be
completed in 2000. The RFI workplan identifies thirteen historical solid waste
management units to be investigated. The final scope of corrective action
required to remediate any contamination that may be present at or emanating from
the Warren facility is dependent upon the completion and findings of the RFI and
the development and approval of a corrective action program. Accordingly, the
Company is unable at this time to estimate the final cost of the corrective
action program or the period over which such costs may be incurred and there can
be no assurance that any such corrective action program would not have a
material adverse effect on the operating results or financial condition of the
Company.
On January 23, 1996, two retired employees instituted an action against
the Company and the United Steelworkers of America (USWA) in the United States
District Court for the Northern District of Ohio alleging in substance that
certain distributions made by the Company to employees and benefit plans
violated certain agreements, the Employee Retirement Income Security Act
(ERISA), the National Labor Relations Act (NLRA) and common
PAGE 15
law. On July 31, 1997, the court granted the Company's motion to dismiss this
action and entered judgement in favor of the Company and the USWA. The
Plaintiffs filed an appeal regarding the court's decision to dismiss which was
heard in June 1998. In March 1999, the appellate court upheld the dismissal of
the claims under ERISA and common law, but reversed the dismissal of the NLRA
claim and remanded to the district court for further proceedings. Discovery
regarding the NLRA claim is in process.
In addition to the above matters, the Company is contingently
liable with respect to lawsuits and other claims incidental to the ordinary
course of its business. A liability has been established for an amount, which
the Company believes is adequate, based on information currently available, to
cover the costs to resolve the above described matters, including remediation,
if any, except for any costs of corrective action that may result from the RFI
for which no estimate can currently be made. The outcome of the above described
matters could have a material adverse effect on the future operating results of
the Company in a particular quarterly or annual period; however, the Company
believes that the effect of such matters will not have a material adverse effect
on the Company's consolidated financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended January 31, 2000 Compared to
Three Months Ended January 31, 1999
Net sales for the three months ended January 31, 2000 were $141.2
million on 326,043 tons shipped, representing a 28% increase in net sales and a
35% increase in tons shipped compared to the three months ended January 31,
1999. Shipping volume for the 2000 period returned to more historical levels
when compared to the 1999 period which was adversely affected by the surge of
illegally dumped imports in late 1998. Net sales per ton shipped decreased 5.3%
to $433 in the 2000 period compared to $457 for the 1999 period, primarily as a
result of changes in product mix. Shipments of custom carbon, alloy and
electrical steels accounted for 59.9% of total shipments for the three months
ended January 31, 2000 compared to 66.8% in the comparable period of 1999. WCI
expects price improvements during the second quarter as a result of price
increases effective January 1, 2000. In addition, the industry, including WCI,
has announced price increases for April 1, 2000. However, due to the levels of
imports and the uncertainty created by the imports, no assurance can be given
that such price increases will be realized or sustained. WCI's order backlog was
276,000 tons at January 31, 2000 compared to 283,000 tons at October 31, 1999
and 199,000 tons at January 31, 1999.
Gross margin (sales less cost of goods sold) was $22.1 million for the
three months ended January 31, 2000 compared to $8.5 million for the three
months ended January 31, 1999. Gross margin was adversely impacted during the
1999 period by higher costs caused by production being significantly below
capacity. The increase in gross margin reflects the higher shipping volume
discussed above and lower production costs resulting from higher operating
levels during the first quarter of 2000 which were offset somewhat by changes in
product mix.
PAGE 16
Operating income was $11.0 million, or $34 per ton, for the three
months ended January 31, 2000 compared to an operating loss of $1.5 million, or
($6) per ton, for the three months ended January 31, 1999. The increased
operating income for the 2000 period reflects the higher gross margin discussed
above partially offset by increased selling, general and administrative expenses
primarily due to higher variable compensation costs.
Interest, investment and other income, net was $5.2 million for the
three months ended January 31, 2000 compared to $2.0 million for the three
months ended January 31, 1999. Interest and investment income increased by $0.4
million to $2.4 million in the current period. During the first quarter of 2000,
a gain of $2.8 million was recorded as a result of an agreement with the United
Steelworkers of America which permits WCI to pay certain medical benefits from
assets in a trust previously restricted for other benefits. A like gain of $5.0
million was recorded in the fourth fiscal quarter of 1999. However, no further
gains are expected to be recorded.
As a result of the items discussed above, the Company had income before
taxes of $4.8 million for the three months ended January 31, 2000 compared to a
loss of $11.0 million for the three months ended January 31, 1999.
Effective November 1, 1998, the Company was designated as a qualified
subchapter S subsidiary by Renco. Accordingly, the Company is generally not
subject to income taxes. During the three months ended January 31, 1999 the
Company recognized an income tax benefit of $21.5 million which included the
elimination of net deferred tax liabilities recorded as of October 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Renco Steel
In February 1998, Renco Steel issued the Senior Senior Secured Notes.
Interest on the Senior Secured Notes is payable semi-annually in arrears on
February 1, and August 1 of each year.
Renco Steel's liquidity requirements result from its debt service
obligations related to the Senior Secured Notes, as well as to a nominal extent,
general corporate overhead. Renco Steel has met these requirements from existing
cash balances and through distributions from WCI, as permitted under the terms
of WCI's outstanding indebtedness. At January 31, 2000, Renco Steel had
available cash and investment balances of $8.7 million, net of cash appropriated
for the February 1st interest payment plus unrestricted cash at WCI of $4.0
million was available for dividends to Renco Steel under the terms of the
indenture governing WCI's 10% Senior Secured Notes due 2004 (Senior Secured
Notes of WCI). Such dividends are generally limited to 50% of WCI's cumulative
earnings since October 31, 1996. Renco may also make contributions or advances
to Renco Steel to meet its debt service obligations, however, Renco has no
obligation to do so.
The ability of Renco Steel to meet its debt service obligations is
dependent upon WCI's operating performance and financial results and the
performance of Renco Steel's investments, other than in WCI (Other
PAGE 17
Investments). WCI's operating performance and financial results will be subject
to financial, economic, political, competitive and other factors affecting WCI,
many of which are beyond WCI's control. WCI generated a profit of $7.6 million
in the first fiscal quarter of 2000.
The indenture governing the Senior Secured Notes contains numerous
covenants and prohibitions that limit the financial activities of Renco Steel,
including, among others, limitations on the incurrence of additional
indebtedness and additional liens and the ability to pay dividends. The ability
of Renco Steel to comply with such covenants will be dependent upon WCI's future
performance.
Cash used by operating activities was $6.8 million for the three months
ended January 31, 2000 compared to cash provided from operating activities of
$0.9 million for the 1999 period. The lower operating cash flow in the first
quarter of 2000 as compared to 1999 resulted primarily from changes in working
capital due to the low level of operations during the first quarter of 1999 and
partially offset by an increase in income before taxes as described above.
Cash provided by investing activities was $2.0 million during the first
quarter of 2000, compared with $0.1 million in the 1999 first quarter. WCI's
capital expenditures in the current period were $2.8 million compared to $2.3
million in the first quarter of 1999. Renco Steel's proceeds from the sale of
Other Investments, net of purchases, increased $2.3 million. WCI's capital
expenditures in fiscal 2000 are estimated to be between $20.0 and $25.0 million.
Capital expenditures in 2000 and 1999 have been funded from existing cash
balances and cash provided by operations. At January 31, 2000, WCI had
commitments for capital expenditures of approximately $6.0 million.
During the first quarter of 2000, Renco Steel did not declare or pay
any dividends. At January 31, 2000, Renco Steel was permitted to pay $2.0
million in dividends under the terms of the Senior Secured Notes indenture.
WCI
WCI's liquidity requirements result from capital investments, working
capital requirements, postretirement healthcare and pension funding, and
interest expense.
WCI has met these requirements in each fiscal year since 1992 from cash
balances and cash provided by operating activities. WCI's primary sources of
liquidity as of January 31, 2000 consisted of cash and cash equivalents of $66.8
million and available borrowing under its $100 million revolving credit facility
(Revolving Credit Facility of WCI). The Revolving Credit Facility of WCI has a
maximum borrowing limit of $100 million, and is secured by eligible receivables
and inventories, as defined therein, and expires on December 29, 2003. As of
January 31, 2000, WCI had no borrowings outstanding under the Revolving Credit
Facility of WCI, with a borrowing limit of $93.9 million based on eligible
receivables and inventories, net of $6.1 million in outstanding letters of
credit.
Cash used by operating activities was $6.8 million for the three
PAGE 18
months ended January 31, 2000 compared to cash provided by operating activities
of $0.5 million for the 1999 period. The lower operating cash flow in 2000
compared to 1999 resulted primarily from changes in working capital because of
the low level of operations during the first quarter of 1999 offset somewhat by
an increase in income before taxes as described above.
Capital expenditures were $2.8 million and $2.3 million during the
three months ended January 31, 2000 and 1999 respectively, and are expected to
range between $20 million and $25 million for all of fiscal 2000. WCI has funded
capital expenditures in 2000 and 1999 through cash balances and cash provided by
operating activities. At January 31, 2000, WCI had commitments for capital
expenditures of approximately $6.0 million.
The Revolving Credit Facility of WCI and the indenture governing the
Senior Secured Notes of WCI contain numerous covenants and prohibitions that
limit the financial activities of WCI, including requirements that WCI satisfy
certain financial ratios which limit the incurrence of additional indebtedness.
The ability of WCI to meet its debt service requirements and to comply with such
covenants will be dependent upon future operating performance and financial
results of WCI, which will be subject to financial, economic, political,
competitive and other factors affecting, many of which are beyond its control.
WCI paid no dividends during the three months ended January 31, 2000
and, under the terms of the indenture governing the Senior Secured Notes of WCI,
$4.0 million was available for dividends at January 31, 2000.
Year 2000 Business Matters
WCI had no significant disruption to operations or business systems as
a result of the transition from 1999 to 2000. WCI does not expect any material
subsequent disruption to its operations or business systems from this
transition.
Forward-Looking Statements
This report includes "forward-looking statements" which involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company to differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such risks, uncertainties and other important
factors include, among others: general economic and business conditions;
increasing industry capacity and levels of imports of steel or steel products;
industry trends, including product pricing; competition; currency fluctuations;
the loss of any significant customers; availability of qualified personnel;
major equipment failures; changes in, or the failure or inability to comply
with, government regulation, including, without limitation, environmental
regulations; the outcome of pending environmental and other legal matters and
the performance of the Other Investments. These forward-looking statements speak
only as of the date of this report. The Company expressly disclaims any
obligation or undertaking
PAGE 19
to disseminate any updates or revisions to any forward-looking statement
contained herein to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.
PAGE 20
PART II - OTHER INFORMATION
RENCO STEEL HOLDINGS, INC.
ITEM 1. LEGAL PROCEEDINGS
UNITED STATES DEPT. OF JUSTICE V. WCI STEEL, INC.
Reference is made to the description of this action contained in the
Company's annual report on Form 10-K for the year ended October 31, 1999 and as
described in Note 4 to the condensed consolidated financial statements herein.
With respect to this action instituted by the DOJ on May 11, 1998 under RCRA,
the period for appealing the court's ruling expired with no appeal being filed.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 5, 2000, The Renco Group, Inc. as sole shareholder of Renco
Steel Holdings, Inc., executed a written consent, in lieu of an annual meeting
of shareholders, for the re-election of Ira Leon Rennert as chairman and sole
director of Renco Steel Holdings, Inc.
ITEM 6. EXHIBITS and REPORTS ON FORM 8-K
(a) Exhibits:
A list of the exhibits required to be filed as part of this Report on
Form 10-Q is set forth in the "Exhibit Index" which immediately
precedes such exhibits, and is incorporated herein by reference.
(b) Reports on Form 8-K:
No report on Form 8-K was filed during the quarter ended January 31,
2000.
PAGE 21
RENCO STEEL HOLDINGS, INC.
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.
RENCO STEEL HOLDINGS, INC.
(registrant)
Date: March 9, 2000 /s/ James N. Chapman
------------------------------
James N. Chapman
President
(principal executive officer)
/s/ Roger L. Fay
------------------------------
Roger L. Fay
Vice President and
Chief Financial Officer
(principrial financial and
accounting officer)
PAGE 22
RENCO STEEL HOLDINGS, INC.
EXHIBIT INDEX
Exhibit Number Description
27. Financial Data Schedule