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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED AUGUST 31, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE
NO. 1-9944
CHAPARRAL STEEL COMPANY
Incorporated in
STATE OF DELAWARE
IRS Employer Identification
NO. 75-1424624
300 WARD ROAD
MIDLOTHIAN, TEXAS 76065
Telephone: (214) 775-8241
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 periods 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 .
--- ---
29,679,900 Shares of Common Stock, Par Value $.10 Outstanding at October 7,
1994.
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INDEX
CHAPARRAL STEEL COMPANY
PART I. FINANCIAL INFORMATION Page
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Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--August 31,
1994 and May 31, 1994 3
Condensed consolidated statements of income--three
months ended August 31, 1994 and 1993 4
Condensed consolidated statements of cash flows
--three months ended August 31, 1994 and 1993 5
Notes to condensed consolidated financial statements
--August 31, 1994 6
Independent accountants' review report 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II. OTHER INFORMATION
- - ---------------------------
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 11
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CONDENSED CONSOLIDATED BALANCE SHEETS
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
(Unaudited)
August 31, May 31,
1994 1994
----------- ----------
(In thousands)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 7,812 $ 3,203
Trade accounts receivable, net of allowance
of $4 million and $3.8 million, respectively 48,019 41,734
Inventories 100,141 117,583
Prepaid expenses 14,935 8,914
--------- ---------
TOTAL CURRENT ASSETS 170,907 171,434
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 47,544 47,217
Machinery and equipment 437,602 434,041
Land 1,288 1,288
--------- ---------
486,434 482,546
Less allowance for depreciation (254,735) (247,660)
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231,699 234,886
OTHER ASSETS
Goodwill, commissioning costs and other assets,
net of accumulated amortization of $18.3 million
and $16.9 million, respectively 80,651 81,987
--------- ---------
$ 483,257 $ 488,307
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 10,000 $ 15,000
Trade accounts payable 28,338 28,667
Accrued interest payable 3,429 2,435
Other accrued expenses 14,142 12,124
Current portion of long-term debt 16,720 17,983
--------- ---------
TOTAL CURRENT LIABILITIES 72,629 76,209
LONG-TERM DEBT 94,609 96,219
DEFERRED INCOME TAXES
AND OTHER CREDITS 50,127 50,256
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 29,679,900
shares outstanding 2,994 2,994
Paid-in capital 188,037 188,037
Retained earnings 77,365 77,096
Cost of common stock in treasury (2,504) (2,504)
--------- ---------
265,892 265,623
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$ 483,257 $ 488,307
========= =========
See notes to condensed consolidated financial statements.
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(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
Three months ended
August 31,
1994 1993
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(In thousands except per share)
Net sales $ 124,382 $ 101,896
Costs and expenses:
Cost of sales 105,919 85,347
Selling, general and administrative 3,935 4,579
Depreciation and amortization 8,408 8,406
Interest 3,280 3,408
Other income (129) (789)
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INCOME BEFORE INCOME TAXES 2,969 945
Provision for income taxes:
Current period provision 1,216 376
Change in statutory federal tax rate - 1,443
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1,216 1,819
NET INCOME (LOSS) $ 1,753 $ (874)
========== ==========
Per common share:
NET INCOME (LOSS) $ .06 $ (.03)
========== ==========
CASH DIVIDENDS $ .05 $ .05
========== ==========
Average shares outstanding - Note B 29,712 29,679
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See notes to condensed consolidated financial statements.
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(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
Three months ended
August 31,
1994 1993
---- ----
(In thousands)
OPERATING ACTIVITIES
Net income (loss) $ 1,753 $ (874)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 8,408 8,406
Deferred income taxes (24) 1,474
Other deferred credits (105) (350)
Changes in operating assets and liabilities:
Trade accounts receivable, net (6,285) (4,108)
Inventories 17,442 5,538
Prepaid expenses (6,021) (5,558)
Trade accounts payable (329) (1,943)
Accrued interest payable 994 546
Other accrued expenses 2,018 (753)
---------
Net cash provided by operating activities 17,851 2,378
INVESTING ACTIVITIES
Capital expenditures (3,887) (2,697)
Other 2 (402)
--------- ---------
Net cash used in investing activities (3,885) (3,099)
FINANCING ACTIVITIES
Short-term borrowings - 5,000
Repayments on short-term debt (5,000) -
Long-term borrowings - 196
Repayments on long-term debt (2,873) (4,285)
Dividends paid (1,484) (1,484)
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Net cash used in financing activities (9,357) (573)
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Increase (decrease) in cash and cash equivalents 4,609 (1,294)
Cash and cash equivalents at beginning of period 3,203 3,763
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Cash and cash equivalents at end of period $ 7,812 $ 2,469
========= =========
See notes to condensed consolidated financial statements.
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(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
August 31, 1994
NOTE A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Chaparral Steel Company and Subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. 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 August 31, 1994 are not necessarily
indicative of the results that may be expected for the year ending May 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 May 31, 1994.
NOTE B - Earnings Per Share
Texas Industries, Inc. ("TXI") owned 100% of the Company from November 1985,
when it acquired the remaining 50% of the outstanding securities of the Company
from Co-Steel Inc. ("Co-Steel"), until July 1988, when approximately 19.8% of
the outstanding securities were sold in an initial public offering of common
stock by the Company. Under terms of the purchase agreement between TXI and
Co- Steel, TXI made a $42 million initial cash payment and made a $73 million
final payment in August 1990.
The acquisition by TXI has been accounted for using the purchase method of
accounting. The $115 million total purchase price exceeded the value of
acquired assets by $83 million and the excess has been recorded as goodwill and
additional paid-in-capital. This goodwill is being amortized over 40 years
using the straight-line method and reduced earnings by $.6 million in the three
months ended August 31, 1994 and 1993, respectively. The amount of goodwill,
net of accumulated amortization included in other assets was $72.4 million and
$73 million at August 31, 1994 and May 31, 1994, respectively.
Net income (loss) per common share is calculated based upon a weighted average
of 29,712,000 and 29,679,000 shares outstanding at August 31, 1994 and 1993,
respectively.
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NOTE C - Inventories
Inventories consist of the following:
August 31, May 31,
1994 1994
---- ----
(In thousands)
Finished goods $ 58,499 $ 72,946
Work in process 9,658 14,477
Raw materials:
Scrap 12,087 10,407
Crushed cars 19 -
Rolls 15,990 15,602
Supplies 14,615 14,878
LIFO adjustment (10,727) (10,727)
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$100,141 $117,583
======== ========
Inventories are stated at the lower of cost (last-in, first-out) or market,
except rolls which are stated at cost (specific identification) and supplies
which are stated at average cost.
NOTE D - Income Tax Provision
The provision for income taxes has been included in the accompanying financial
statements on the basis of an estimated annual rate. In August 1993, President
Clinton signed into law the Omnibus Budget Reconciliation Act of 1993 that
contained a provision raising the top effective rate for corporations to 35%.
This rate increase, when applied to the Company's temporary differences,
resulted in a charge of $1.4 million which is included in the income tax
provision for the three months ended August 31, 1993. Goodwill amortization
also contributed to the difference between provision amounts and amounts
computed by applying the statutory federal income tax rates.
NOTE E - Commissioning Costs
The Company's policy for new facilities is to capitalize certain costs until
the facility is substantially complete and ready for its intended use. The
Large Beam Mill was substantially complete and ready for its intended use in
the third quarter of 1992 with a total of $15.1 million of costs deferred,
including $4.4 million of interest and $3.4 million of depreciation.
Amortization of $.8 million was recorded in the first quarter of fiscal 1995
and 1994, respectively, based on a five year period.
NOTE F - Severance Pay
In an effort to stay competitive and reduce costs, the Company decreased its
number of employees in the first quarter of fiscal 1994. As a result, a
non-recurring charge of $1.5 million for severance pay is included in selling,
general and administrative.
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EXHIBIT A
Independent Accountants' Review Report
Board of Directors
Chaparral Steel Company
We have reviewed the accompanying condensed consolidated balance sheet of
Chaparral Steel Company and subsidiaries as of August 31, 1994, and the related
condensed consolidated statements of income and cash flows for the three month
periods ended August 31, 1994 and 1993. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Chaparral Steel Company as of May
31, 1994, and the related consolidated statements of income, stockholders'
equity and cash flows for the year then ended (not presented herein), and in
our report dated July 14, 1994, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet as of May 31, 1994, is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
Ernst & Young LLP
Dallas, Texas
September 16, 1994
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Comparison of operations and financial condition for the quarter ended August
31, 1994 to the quarter ended August 31, 1993
RESULTS OF OPERATIONS
An increase in average selling price of 5% coupled with an increase in
shipments of 51,000 tons resulted in a $22.5 million increase in net sales in
the three month period ended August 31, 1994 compared to the same quarter in
the prior year. Shipments of 365,000 tons during the August 1994 quarter were
the highest quarterly total in four years. It is anticipated that the strong
demand for SBQ rounds and rebar will continue in the near-term. The market for
structural products has improved slightly, but has not exhibited any
encouraging long-term strength. The 5% improvement in average selling price
reflects the general price increases put in place to offset the escalation in
scrap costs in the prior year.
Cost of sales increased $20.6 million to $105.9 million for the three month
period ended August 31, 1994 compared to the same period in the prior year.
The increase was caused by the 16% increase in shipments and an $18 increase in
cost of sales per ton. Scrap prices stabilized during the summer of 1994, but
were up 10% from the prior year quarter. Melt shop variable and conversion per
ton costs increased slightly while combined rolling mill conversion costs were
unchanged from the prior year quarter.
Selling, general and administrative expense decreased $.6 million from the
prior year quarter principally due to a one time $1.5 million charge for
severance pay in the August 1993 quarter. The provisions for employee
incentives increased $.4 million from the prior year due to increased profits.
Other areas of administrative expense were slightly higher.
Interest expense decreased slightly in the three month period ended August 31,
1994 compared to the same period in the prior year. Interest expense in the
current period was reduced by repayments of long-term debt which is principally
at fixed rates.
The provision for income taxes has been calculated on the basis of an estimated
annual rate. In August 1993, the Omnibus Budget Reconciliation Act of 1993 was
signed into law and contained a provision raising the top effective rate for
corporations to 35%. This rate increase, when applied to the Company's
temporary differences, resulted in a charge of $1.4 million which was included
in the income tax provision in the August 1993 quarter. Goodwill amortization
also contributed to the difference between provision amounts and income tax
amounts computed by applying the statutory federal income tax rates.
The positive movement in net income (loss) of $2.6 million was due principally
to the increase in shipments and average selling price. The aforementioned
$1.5 million adjustment for severance pay and the additional $1.4 million
income tax provision in the prior year quarter, also contributed to the
improvement in net income (loss).
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CAPITAL RESOURCES AND LIQUIDITY
Working capital increased $3.1 million to $98.3 million at August 31, 1994 from
the previous fiscal year-end. Accounts receivable increased $6.3 million as
August 1994 sales were improved over May 1994 levels. Inventories decreased
$17.4 million as the Company's planned reduction resulted in finished goods
inventory decreasing by 20%. Prepaid expenses increased $6 million from May
31, 1994 as a result of summer shutdown spending that will be amortized over
the remainder of the fiscal year. During the first quarter of fiscal 1995, the
Company reduced the outstanding amount of its short-term credit facilities by
$5 million to a level of $10 million at August 31, 1994. The other components
of current liabilities were virtually unchanged from the previous fiscal year-
end. Cash provided by operations in the first quarter of fiscal 1995 increased
by $15.5 million primarily due to the increase in net income (loss) of $2.6
million and the change in net cash provided by inventory of $11.9 million. As a
result, cash and cash equivalents increased $4.6 million after the Company
acquired $3.9 million of capital additions, repaid $2.9 million of long-term
debt and paid cash dividends of $1.5 million.
Capital expenditures for the quarter ended August 31, 1994 totaled $3.9 million
and are estimated to be approximately $17 million in fiscal 1995; which
represents normal replacement and technological upgrades of existing equipment.
The Company currently does not plan any major capital expenditures requiring
significant capital resources within the next two years.
The Company's capitalization of $360.5 million at August 31, 1994, consisted of
$94.6 million of long-term debt and $265.9 million of stockholders' equity.
The current portion of long-term debt totaled $16.7 million at August 31, 1994.
The Company's average interest rate on long-term debt is 11%. The Company's
total debt service is expected to be $28.6 million during the next twelve
months.
The Company is subject to federal, state and local environmental laws and
regulations concerning, among other matters, waste water effluent, air
emissions and electric arc furnace ("EAF") dust disposal. From time to time,
the Company is involved in litigation relating to claims arising in the
ordinary course of business operations. No litigation (based on the opinion
of counsel) is pending against or currently affects the Company, the ultimate
liability of which, if any, would have a material effect on the Company's
financial position or results of operations. The Company maintains a hazardous
waste liability policy against certain third party claims, which insurance the
Company believes to be adequate in relation to the Company's business.
The Company has short-term credit facilities with two banks totaling $20
million which will expire January 31, 1995 if not renewed by the banks or the
Company. The Company had maximum borrowings of $15 million at any one time
under these arrangements during the first quarter of fiscal 1995. At August
31, 1994, the Company had $10 million of outstanding borrowings under these
facilities. The Company anticipates that it will repay the outstanding amount
of the short-term credit facility during the November 1994 quarter. The
Company believes that it will be able to renew these credit facilities or
negotiate similar arrangements with other financial institutions if they are
deemed necessary. The Company expects that current financial resources and
anticipated cash provided from operations in fiscal 1995 will be sufficient to
provide funds for capital expenditures, meet scheduled debt payments and
satisfy other known working capital needs for fiscal 1995. If additional funds
are required to accomplish long-term expansion of its productive capabilities,
the Company believes that funding can be obtained to meet such requirements.
Based on the current outlook for steel consumption levels and its impact on
prices, in fiscal 1995, the Company expects its average selling price and cost
per ton levels to remain virtually unchanged from fiscal 1994. Significant
changes in average selling price without a corresponding change in the scrap
raw material costs could have a substantial effect on the Company's operating
results and liquidity.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
The following exhibits are included herein:
(11) Statement re: Computation of earnings per share
(15) Letter re: Unaudited interim financial information
The Registrant did not file any reports on Form 8-K during the three
months ended August 31, 1994
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CHAPARRAL STEEL COMPANY
October 7, 1994 /s/ Richard M. Fowler
Richard M. Fowler
Senior Vice-President &
Chief Financial Officer
October 7, 1994 /s/ Larry L. Clark
Larry L. Clark
Vice President - Controller
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EXHIBIT INDEX
EXHIBIT 11 -- Statement re: Computation of earnings per share
EXHIBIT 15 -- Letter re: Unaudited interim financial information
EXHIBIT 27 -- Financial Data Schedule