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 June 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 June 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
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of 3
June 30, 1996 and December 31, 1995
Condensed Consolidated Statements of Income for 4
the Three-Month and Six-Month Periods Ended June 30, 1996
and June 30, 1995
Condensed Consolidated Statements of Cash Flows 5
for the Three-Month and Six-Month Periods Ended
June 30, 1996 and June 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 4. Submission of Matters to a Vote of Security Holders 11
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)
June 30 December 31
1996 1995
--------- ---------
ASSETS
CURRENT ASSETS
Cash $ 100 $ 100
Receivables, net of allowances of $661
and $692 10,379 13,148
Inventories 17,309 17,095
Deferred income taxes 3,110 3,110
Other current assets 176 1,021
--------- ---------
TOTAL CURRENT ASSETS 31,074 34,474
Property, plant, and equipment 36,891 40,807
Goodwill 18,793 19,134
Other assets 624 708
--------- ---------
TOTAL ASSETS $87,382 $95,123
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Overdraft $ 857 $ 647
Accounts payable 3,086 5,045
Accrued payroll and benefits payable 4,368 5,240
Income taxes payable (refundable) (93) 117
Other current liabilities 1,672 2,026
Current maturities of long-term debt 4,934 5,885
--------- ---------
TOTAL CURRENT LIABILITIES 14,824 18,960
Long-term debt 11,215 11,978
Deferred income taxes 8,005 8,005
Other long-term liabilities 791 765
--------- ---------
TOTAL LIABILITIES 34,835 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 37,362 36,730
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 52,547 55,415
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $87,382 $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 Six Months Ended
June 30 June 30
1996 1995 1996 1995
-------------------- --------------------
Net sales $23,797 $31,641 $50,444 $64,541
Cost of sales 21,429 26,043 44,669 53,601
------- ------- ------- -------
GROSS PROFIT 2,368 5,598 5,775 10,940
Selling and administrative expenses 987 1,295 2,155 2,693
Other operating expense (income) (103) (192) 1,749 (233)
------- ------- ------- -------
OPERATING INCOME 1,484 4,495 1,871 8,480
Interest expense 343 412 708 798
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 1,141 4,083 1,163 7,682
Income Taxes (523) (1,570) (532) (2,974)
------- ------- ------- -------
NET INCOME $ 618 $ 2,513 $ 631 $ 4,708
======= ======= ======= =======
NET INCOME PER COMMON SHARE, based
on 5,986,923 and 6,060,658
weighted average shares of
common stock outstanding
during the three months and
six months ended June 30, 1996
and 6,951,693 and 7,021,527
weighted average shares of
common stock outstanding
during the three months and
six months ended June
30, 1995. $.10 $.36 $.10 $.67
==== ==== ==== ====
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 Six Months Ended
June 30 June 30
1996 1995 1996 1995
-------------------- -------------------
CASH FROM OPERATIONS $ 3,939 $ 915 $ 6,448 $ 1,627
INVESTMENT ACTIVITIES
Additions to property, plant,
and equipment (798) (1,313) (1,444) (2,004)
FINANCING ACTIVITIES
Revolving credit loan (2,598) 3,810 1,228 3,808
Long-term debt repayments (1,471) (1,215) (2,942) (2,430)
Purchase of treasury stock 0 (2,590) (3,500) (2,590)
------- ------- ------- -------
(4,069) 5 (5,214) (1,212)
------- ------- ------- -------
INCREASE (DECREASE) IN CASH $ (928) $ (393) $ (210) $(1,589)
======= ======= ======= =======
See notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
June 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
six-month periods ended June 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):
June 30 December 31
1996 1995
---- ----
Raw materials $ 2,465 $ 2,013
Work-in-process 5,883 6,089
Finished goods 9,894 10,633
Manufacturing supplies 3,242 3,288
------- -------
21,484 22,023
Less LIFO reserve 4,175 4,928
------- -------
$17,309 $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 June 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 $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--$2,500,000; 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 June 30, 1996, the
revolving credit line loan balance was $7,102,000 and the unused borrowing
availability approximated $7,898,000.
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 June
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 1996). A liability
has been established for those illnesses and injuries occurring on or before
June 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 June 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 5,986,923 and 6,060,658
weighted average shares of common stock outstanding during the three months and
six months ended June 30, 1996 and 6,951,693 and 7,021,527 weighted average
shares of common stock outstanding during the three months and six months ended
June 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.
As of June 30, 1996 the Company has repurchased 1,105,000 shares at a total cost
of $11,483,000.
NOTE F--FIXED ASSET IMPAIRMENT
During the first quarter of 1996, the Company determined that certain
cut-to-length equipment utilized in one of the Company's production lines was
not performing up to expectations and the decision to replace the equipment was
made. Based upon this indication of impairment, the Company recorded a
$1,862,000 charge against operations, included in other operating expense,
equivalent to the net book value of the equipment less its estimated salvage
value. The replacement equipment is expected to reduce the cost of cutting steel
and improve product quality.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Sales
Net sales decreased 24.8% in the second quarter of 1996 to $23,797,000 down
$7,844,000 from the second 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 35,421 tons in the second quarter of 1996 from 45,485 tons for the
second quarter of 1995. Billet sales decreased to 1,189 tons for the second
quarter of 1996 from 2,607 tons in the second quarter of 1995.
Net sales for the six months ended June 30, 1996 decreased 21.8% to $50,444,000
from $64,541,000 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 75,808 tons for the six months ended June 30, 1996 from 90,472 tons
for the comparable period in 1995. Billet sales decreased to 2,334 tons for the
same period in 1996, from 13,014 tons for the comparable period in 1995.
Cost of Sales
Cost of sales increased to 90.0% of net sales or $21,429,000 for the second
quarter of 1996 from 82.3% of net sales or $26,043,000 for the second quarter of
1995. The percent increase in cost of goods sold is principally due to 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.
Cost of sales for the six months ended June 30, 1996 increased to 88.6% of net
sales or $44,669,000 from 83.0% of net sales or $53,601,000 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 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 second quarter of 1996
were $987,000, as compared to $1,295,000 for the second quarter of 1995. This
decrease was due primarily to lower salaries. As a percentage of net sales,
selling and administrative expense was 4.1% in the second quarter of 1996 and
1995.
Selling, general, and administrative expenses for the six month period ended
June 30, 1996 were $2,155,000, compared to $2,693,000 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
six month period ended June 30, 1996, compared to 4.2% for the comparable period
in 1995.
9
Other Operating Expense (Income)
Other operating expense (income) for the second quarter of 1996 was $103,000 of
income, compared to $192,000 of income for the second quarter of 1995.
Other operating expense (income) for the six months ended June 30, 1996 was
$1,749,000 of expense, compared to $233,000 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 second quarter of 1996 was $343,000, compared to
$412,000 for the second quarter of 1995. As a percentage of net sales, interest
expense was 1.4% in the second quarter of 1996, compared to 1.3% for the second
quarter of 1995.
Interest expense for the six months ended June 30, 1996 was $708,000, compared
to $798,000 for the comparable period in 1995. As a percentage of net sales,
interest expense was 1.4% in the six month period ended June 30, 1996, compared
to 1.2% for the comparable period in 1995.
Net Income
Net income for the second quarter of 1996 decreased by $1,895,000 to $618,000
from $2,513,000 for the second quarter of 1995. This decrease was principally
due to the reduction in operating income. As a percentage of net sales, net
income was 2.6% for the first quarter of 1996, compared to 7.9% for the second
quarter of 1995.
Net income for the six months ended June 30, 1996 was $631,000, compared to
$4,708,000 for the comparable period in 1995. This decrease was due to the
significant charge to recognize the impairment of certain equipment, higher
operating costs and lower sales. As a percentage of net sales, net income was
1.3% in the six month period ended June 30, 1996, compared to 7.3% 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 second quarter of 1996 was $16,250,000, compared to $15,514,000
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 discretionary capital expenditures and
acquisition opportunities. Engineering studies are underway in 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.
10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on May 23, 1996, for which proxies
for the meeting were solicited pursuant to Regulation 14A of the Securities
Exchange Act of 1934, the stockholders elected five directors, each for a term
of one year. The tabulation of the votes cast for each nominee for director was
as follows:
Name of Nominee Voted For
- --------------- ---------
Stephen A. Albert 5,197,229
Robert L. Bunting, Jr. 5,199,529
Albert W. Eastburn 5,196,429
Daniel N. Pickens 5,198,879
Paul E. Thompson 5,194,329
At the Annual Meeting of Stockholders, the stockholders also approved the
following:
(i) 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, by a vote of 4,834,751
shares in favor, 60,157 shares against and 315,171 shares abstained; and
(ii) the appointment of Ernst & Young as independent auditors, by a vote of
5,208,705 shares in favor, 824 shares against and 550 shares abstained.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.25 Collective Bargaining Agreement, dated June 10, 1996,
between SWVA and the United Steelworkers of America,
AFL-CIO.
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: August 6, 1996 STEEL OF WEST VIRGINIA, INC.
------------------------------
(Registrant)
/s/ Timothy R. Duke
------------------------------
Timothy R. Duke, Vice President,
Treasurer and Chief Financial
Officer
12