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 March 31, 1995
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-16254
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Steel of West Virginia, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 55-0684304
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(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification No.
17th Street and 2nd Avenue, Huntington, West Virginia 25703
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(Address of principal executive offices, Zip Code)
(304) 696-8200
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(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
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The number of shares outstanding of each of the issuer's classes of common
stock, as of March 31, 1995, is as follows
7,091,360 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
March 31, 1995 and December 31, 1994
Condensed Consolidated Statements of Income for 4
the Three-Month Periods Ended March 31, 1995
and March 31, 1994
Condensed Consolidated Statements of Cash Flows 5
for the Three-Month Periods Ended
March 31, 1995 and March 31, 1994
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
None
2
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED BALANCE SHEETS
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)
March 31 December 31
1995 1994
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ASSETS
CURRENT ASSETS
Cash $ 100 $ 1,400
Receivables, net of allowances of $390
and $379 14,182 11,097
Inventories 16,595 15,846
Deferred income taxes 2,143 2,143
Other current assets 261 241
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TOTAL CURRENT ASSETS 33,281 30,727
Property, plant, and equipment 42,414 43,011
Goodwill 19,646 19,817
Other assets 607 619
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TOTAL ASSETS $95,948 $94,174
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Overdraft $ 653 $ 757
Accounts payable 7,019 7,894
Accrued payroll and benefits payable 5,379 5,029
Income taxes payable 1,335 41
Other current liabilities 1,711 1,630
Current maturities of long-term debt 5,110 4,860
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TOTAL CURRENT LIABILITIES 21,207 20,211
Long-term debt 10,125 11,542
Deferred income taxes 7,728 7,728
Other long-term liabilities 759 759
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TOTAL LIABILITIES 39,819 40,240
STOCKHOLDERS' EQUITY
Common stock, $.01 par value: 8,000,000
voting shares authorized, 7,091,360
issued and outstanding; 500,000
nonvoting shares authorized, 0
nonvoting shares issued and outstanding 71 71
Paid-in capital 26,597 26,597
Retained earnings 29,461 27,266
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TOTAL STOCKHOLDERS' EQUITY 56,129 53,934
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $95,948 $94,174
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NOTE: The balance sheet at December 31, 1994, 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
March 31
1995 1994
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Net sales $32,900 $28,362
Cost of sales 27,559 23,116
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GROSS PROFIT 5,341 5,246
Selling and administrative
expenses 1,398 1,295
Interest expense 386 210
Other expense (income) (42) 233
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INCOME BEFORE INCOME TAXES 3,599 3,508
Income Taxes 1,404 1,380
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NET INCOME $ 2,195 $ 2,128
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NET INCOME PER COMMON SHARE,
based on 7,091,360 shares
of common stock and equivalents
outstanding during 1995 and 1994. $.31 $.30
==== ====
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
March 31
1995 1994
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CASH FROM OPERATIONS $ 712 $ 4,660
INVESTMENT ACTIVITIES
Additions to property, plant,
and equipment (691) (5,822)
FINANCING ACTIVITIES
Revolving credit loan (2)
Long-term debt repayments (1,215) (1,000)
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(1,217) (1,000)
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DECREASE IN CASH $(1,196) $(2,162)
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See notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
March 31, 1995
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 period ended March 31, 1995 are
not necessarily indicative of the results that may be expected for the
year ended December 31, 1995. 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, 1994.
Net income per common share is calculated based on the 7,091,360
shares of common stock outstanding during the quarters ended March 31,
1995 and 1994, respectively.
NOTE B--INVENTORIES
Inventories consist of the following (in thousands):
March 31 December 31
1995 1994
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Raw materials $ 2,230 $ 1,908
Work-in-process 6,553 4,846
Finished goods 8,775 10,372
Manufacturing supplies 3,314 2,750
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20,872 19,876
Less LIFO reserve 4,277 4,030
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$16,595 $15,846
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Annually, at the end of each year, management determines inventory
levels based on the taking of a physical inventory. The amount of
inventories at March 31, 1995, 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. During 1994, the Company amended its senior
credit agreement to permit the Company to borrow $6 million in 1994
and provide for equivalent term borrowing availability in 1995 under a
new "Capital Expenditure Line" of credit. The terms of the loan
amendment also enabled the Company to reduce the interest rates on its
existing revolving credit line and term loans outstanding from the
greater of 7% or 3/4% over prime and the greater of 7% or 1% over
prime, respectively, to the Chemical Bank prime rate or LIBOR plus 1-
3/4%; reduce the annual revolving credit line commitment fee from 1/2%
to 1/8% of the unused balance; and extend the term of the revolving
credit line to January 1, 1998. In addition, the amendment permits
the Company to convert up to $7 million of its indebtedness to a fixed
interest rate. 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. In the event the Company makes certain
prepayments prior to October 1, 1995, prepayment fees of 1-3/4% of the
amount prepaid could result.
Amounts outstanding under the term loan portion of the senior
financing agreement are scheduled to be repaid in quarterly principal
installments totaling as follows: 1995--$4,000,000; 1996--$5,000,000;
1997--$1,547,050. The Capital Expenditure Line portion of the loan
agreement is required to be repaid in 27 quarterly principal
installments of $215,000, beginning January 1, 1995, with a final
principal payment of $195,000. As of March 31, 1995, the revolving
credit line loan balance was $0, and the unused borrowing availability
approximated $10,000,000. In addition, the unused borrowing
availability on the Capital Expenditure Line approximated $6,000,000.
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 March 31, 1995, the Company's
retained earnings available for dividends in 1995 is $4,074,000. 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 1995). A
liability has been established for those illnesses and injuries
occurring on or before March 31, 1995, for which an amount of expected
loss could be reasonably estimated.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Sales
Net sales increased 16.0% in the first quarter of 1995 to $32,900,000
up $4,538,000 from $28,362,000 for the first quarter of 1994 primarily
due to an increase in tonnage of products shipped. Finished tonnage
sales increased from 43,894 tons in the first quarter 1994 to 44,986
tons in 1995. Billet sales increased from 2,319 tons in the first
quarter 1994 to 10,407 tons in 1995.
Cost of Sales
Cost of sales increased from 81.5% of net sales in 1994 to 83.8% of
net sales or $27,559,000 for the first quarter of 1995. The increase
in cost of goods sold was principally due to inefficiencies
experienced in January and February as a result of the break-in of our
new equipment that was installed in late 1994. In addition, cost of
goods sold were affected by increased low margin billet sales and
higher mill roll and maintenance expense.
Selling and Administrative Expenses
Selling and administrative expenses for the first quarter of 1995 were
$1,400,000 compared to $1,300,000 in 1994, principally due to
recognition of $200,000 in cost in 1995 upon discontinuing efforts to
acquire another steel company. As a percentage of net sales, selling
and administrative expense decreased from 4.6% in 1994 to 4.2% in
1995.
Interest Expense and Other Expense (Income)
Interest expense for the first quarter was 1.2% of net sales or
$386,000 as compared to .7% of net sales or $210,000 for the previous
year. Interest expense increased as a result of higher average debt
outstanding due to the modernization and expansion program. Other
expense (income) changed $275,000 from $233,000 of expense in the
first quarter of 1994 to $42,000 of income in 1995. This was
principally due to a reduction in losses from the disposal of fixed
assets.
Net Income
As a result of the above, net income for the first quarter of 1995
increased by $67,000 (3.1%) from $2,128,000 in 1994 to $2,195,000 in
1995. As a percentage of net sales, net income decreased from 7.5% in
1994 to 6.7% 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 first quarter was $12,074,000 compared to $10,516,000 at
the end of the prior fiscal year. This increase in working capital
was due primarily to working capital provided by operations. 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
acquisition opportunities. Any such acquisition would be subject to
availability of funds and approval by the Company's Board of
Directors.
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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: May 11, 1995 STEEL OF WEST VIRGINIA, INC.
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(Registrant)
/s/ Timothy R. Duke
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Timothy R. Duke, Vice President,
Treasurer and Chief Financial
Officer
9