1
CORPORATE PROFILE CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
Chaparral Steel Company, located in Midlothian, Texas, owns and operates a
technologically advanced steel mill which produces bar and structural steel
products by recycling scrap steel. The plant commenced operations in 1975 and
more than doubled in capacity in 1982. In 1992, a large beam mill was completed
which further expanded Chaparral's capacity and product range. The Company now
has two electric arc furnaces with continuous casters, a bar mill, structural
mill and a large beam mill which enable it to produce a broader array of steel
products than traditional mini mills. Chaparral follows a market mill concept
which entails the production of a wide variety of products ranging from
reinforcing bar and specialty products to large-sized structural beams at low
cost and is able to change its product mix to recognize changing market
conditions or customer requirements. The Company's steel products include beams,
reinforcing bars, special bar quality rounds, channels and merchant quality
rounds. These products are sold principally to the construction industry and to
the railroad, defense, automotive, mobile home and energy industries.
Chaparral's principal customers are steel service centers, steel fabricators,
cold finishers, forgers and original equipment manufacturers. The Company
distributes its products primarily to markets in North America, and under
certain market conditions, to Europe and Asia. Chaparral is listed on the New
York Stock Exchange, under the ticker symbol CSM, and is 84 percent owned by
Texas Industries, Inc.
2
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
TO OUR STOCKHOLDERS
Fiscal year 1996 earnings were more than twice those reported for
1995. The increase was primarily driven by the Structural Products business
unit, which benefited from the sustained recovery of U.S. nonresidential
building. The improved results for the Company occurred despite weak markets for
major products supplied by the Bar Products business unit.
Net income for 1996 equaled $42 million or $1.43 per share, which compares to
$19.6 million or $.67 per share for the previous year. Revenues of $607.7
million were up 14% from last year on record shipments of 1.6 million tons and
9% higher realized prices.
With demand for structural steel beams having recovered, Chaparral looks forward
to pressing its advantages in lightweight beam sizes by developing new markets
and products. We also intend to increase and strengthen our Bar Products
business unit's position in special quality steels. Finally, we have intensified
our efforts to realize the full potential of our Recycled Products business
unit.
STRUCTURAL PRODUCTS BUSINESS UNIT
Shipments from the Structural Mills slightly exceeded 1.1 million tons, an
increase of 10% over the previous year. Average selling price increased 13%.
Sustained U.S. nonresidential building activity contributed to structural beam
demand. Sales in the manufactured housing industry have been strong as well,
resulting in good demand for Chaparral's Bantam BeamTM product.
With fewer domestic producers of beams in the market, supply and demand
conditions are favorable. Some imports are required to meet demand. However,
U.S. fabricators are exporting beams to overseas markets, indicating the strong
competitive position of U.S. beam producers relative to producers elsewhere in
the world.
Chaparral's strategy has been to focus on beams in the very lightweight ranges.
These sizes fit very well with the expected building of suburban offices,
shopping centers, warehouses and manufactured homes in the U.S. Going forward,
we intend to continue that focus and develop new applications and products, such
as our Castelite Beam(TM), which is designed to be used in roof and floor
support systems.
BAR PRODUCTS BUSINESS UNIT
Bar Mill shipments equaled 453,000 tons in 1996, down 5% compared to the prior
year. Average selling price declined slightly as well.
Demand for special quality steels, which accounted for half of the Bar Mill
shipments, weakened considerably during the year as general manufacturing
activity slipped. Demand for reinforcing bar was strong, but that market was
over supplied with product.
Chaparral's strategy has been to increase its mix of special quality steel
products in order to improve the long term profitability of the Bar Products
business unit. The over supply of the reinforcing bar market indicates that
this was, and continues to be, the correct course.
Early in 1995, the caster that supplies billets to the Bar Mill was
reconfigured in order to upgrade the special quality steel product line. Over
the next three years, we plan to increase the capacity and upgrade the
capability for making these products in order to further improve the
competitive position of the mill.
RECYCLED PRODUCTS BUSINESS UNIT
The goal of the Recycled Products business unit is to develop synergies in
recycling among all operations of Chaparral Steel. Specific responsibilities
include scrap processing, melt shop operations and the transformation of
by-products from manufacturing processes into value-added products.
Chaparral's shredder operation transformed over 700,000 tons of old cars and
other light scrap into raw material in 1996. This volume represents about 40%
of Chaparral's total scrap needs. The shredder operation, which is the largest
and most productive in the world, provides Chaparral with a competitive
advantage in the acquisition of raw material. We intend to increase the volume
of material processed through the shredder in order to expand on that
advantage.
With the addition of a new ladle furnace and other improvements, annual
production capacity in the Melt Shop will be increased by approximately 100,000
tons. Shipments should be positively impacted as a result.
OUTLOOK
1996 was a good year, but not a great year. Our efforts will be focused on
improving results in the coming year by increasing shipments, continuing to
upgrade the Bar Mill product line and focusing on the beam market products that
play to our strengths. The strong cash flows and balance sheet of the Company
provide the flexibility to grow and expand. Our goal is to grow, but grow in a
way that generates above average returns for our stockholders.
Innovation has been and will continue to be a major key to Chaparral's success
and that innovation has been driven by the imagination and efforts of
Chaparral's employees. Opportunities for further innovation are only limited by
our imagination and I can assure you that your Company is well-stocked with
that resource!
/s/ GORDON E. FORWARD, PH.D.
Gordon E. Forward, Ph.D.
President and Chief Executive Officer
July 12, 1996
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CHAPARRAL
STEEL COMPANY AND SUBSIDIARIES
GENERAL
The Company's steel plant is a market mill with the flexibility to produce a
wide range of steel products. The ability to produce a variety of products at
low cost has enabled the Company to penetrate markets throughout the United
States and overseas. The principal components of the Company's cost of sales are
raw material and conversion costs. Scrap steel, the cost of which fluctuates
with market conditions, is the Company's primary raw material. Conversion costs
are comprised principally of energy, maintenance and labor.
RESULTS OF OPERATIONS
NET SALES
In 1996, net sales increased $75.8 million from the previous year due to a 9%
increase in average selling price and a 79,000 ton increase in shipments to a
record level of 1,590,000 tons. Export sales decreased to 4% of total shipments
in 1996 because of a strong domestic market. The demand for structural products
from service centers, fabricators and the mobile home industry has increased
substantially from the prior year. Prices for structural mill products increased
13% in 1996. Bar mill shipments were 5% below the previous year on somewhat
lower average selling prices. Chaparral uses its ability to adjust its product
mix to maximize profit margins.
Net sales in 1995 increased $69.5 million from the previous year as shipments
increased 149,000 to 1,511,000 tons. Export sales were 7% of total shipments in
1995. The demand for the Company's products improved due to a stronger United
States economy. Special Bar Quality shipments increased 26% during fiscal 1995
reflecting the Company's expanded penetration in this market. Average selling
price increased $13 per ton from the prior year also brought about by better
economic conditions.
COST OF SALES (EXCLUSIVE OF DEPRECIATION AND AMORTIZATION)
Cost of sales increased $40.6 million, in 1996, due to the 79,000 ton increase
in shipments and a 4% increase in average cost per ton. Higher scrap and melt
shop conversion costs in 1996 accounted for a significant portion of the
increase in average cost of sales. Combined rolling costs were slightly higher
than the prior year.
In 1995, cost of sales increased $56.6 million due primarily to the 149,000 ton
increase in shipments. Increases in scrap and melt shop conversion costs were
offset by decreases in combined rolling costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses generally fluctuate with the
provisions for employee incentive programs that are based on profitability which
amounted to $6.8 million, $2.8 million and $(.1) million for 1996, 1995 and
1994, respectively. 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 $1.6 million for severance pay is
included in selling, general and administrative in 1994.
INTEREST EXPENSE
Payment of scheduled maturities of long-term debt during the three years ended
May 31, 1996 served to reduce the amount of interest expense.
NET INCOME
In 1996, net income more than doubled to $42 million due primarily to the 9%
increase in average selling prices. Depreciation costs decreased slightly as
the Company did not incur any major capital improvements during 1996.
Amortization of commissioning costs, that are being expensed over a five year
period, totaled $3 million in the current year. Amortization of goodwill
totaled $2 million in 1996.
In 1995, net income improved $7.7 million to $19.6 million due primarily to the
149,000 ton increase in shipments. Depreciation costs were unchanged as the
Company did not incur any major capital improvements during 1995. Amortization
of commissioning costs and goodwill totaled $3 million and $2.3 million,
respectively, in fiscal 1995.
4
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Working capital increased $23 million to an all-time high of $136.7 million at
May 31, 1996. Cash provided by operations decreased by $20.1 million from the
prior year as the increase in net income of $22.4 million was offset by a
decrease in cash provided by inventories of $36.6 million. Finished goods was
higher at May 31, 1996 due to increased production in the structural mills. Raw
material levels were higher in anticipation of higher scrap costs in the fall of
1996. Cash provided by accounts payable decreased by $12.8 million as the
May 31, 1996 balance returned to more historical levels. As a result, at
May 31, 1996, cash and cash equivalents increased $.9 million to $20 million
after the Company acquired $20.6 million of capital additions, repaid $15.7
million of long-term debt, purchased $12.5 million of treasury stock and paid
cash dividends of $5.9 million.
Capital expenditures for fiscal 1997 are currently estimated to be approximately
$15 million; which represents normal replacement and technological upgrades of
existing equipment.
The Company's capitalization of $361.7 million at May 31, 1996, consisted of
$66.7 million in long-term debt and $295 million of stockholders' equity. The
Company's stockholders' equity includes paid-in capital which resulted from the
excess of cost over fair value of net assets acquired, net of amortization. In
1995, paid-in capital and goodwill were decreased by $9.4 million due to an
adjustment to the excess of cost over fair value of net assets acquired. During
1996, the Board of Directors approved the repurchase of a portion of the
Company's outstanding stock to satisfy outstanding stock option grants. The
long-term debt-to-capitalization ratio was 18% at May 31, 1996 versus 23% at May
31, 1995. The decrease was caused by the repayment of $15.7 million of long-term
debt and the increase in stockholders' equity which was due to the net income of
$42 million minus the payment of cash dividends of $5.9 million and the purchase
of treasury stock of $12.5 million.
The Company's earnings improved in 1996 due primarily to the 9% increase in
average selling price. Based on the current outlook for steel consumption
levels in 1997 and its impact on prices, the Company anticipates a slight
decrease in average selling price. Cost per ton levels should level off as an
expected slight increase in scrap costs should be offset by lower conversion
costs. Management anticipates a modest increase in shipment levels during
fiscal 1997 resulting from increased raw steel production. 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.
The Company expects the current financial resources and anticipated cash
provided from operations will be sufficient to provide funds for capital
expenditures, meet scheduled debt payments and satisfy other known working
capital needs for fiscal 1997. 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. Management determined that
the short-term credit facilities with two banks totaling $20 million were not
currently required to support the operations of the Company. No borrowings had
existed under these arrangements during the current fiscal year before they
expired January 31, 1996. 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.
INFLATION
Energy, scrap and labor, which are the principal components of the Company's
manufacturing cost, are generally susceptible to inflationary pressures, while
finished product prices are more readily influenced by competition within the
steel industry. Since May 31, 1993, inflation has not materially affected the
Company's results of operations or financial condition.
5
SELECTED FINANCIAL DATA CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
In thousands except per share 1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net sales $607,656 $531,811 $ 462,275 $ 420,210 $ 416,610
Gross profit (exclusive of depreciation and amortization) 130,050 94,761 81,777 58,624 66,678
Employee profit sharing 6,116 2,933 1,896 - 1,199
Interest expense 10,007 12,082 13,439 14,650 12,541
Net income (loss) 41,977 19,607 11,919 (2,051) 7,090
- -------------------------------------------------------------------------------------------------------------------------------
PER SHARE INFORMATION
Net income (loss) $ 1.43 $ .67 $ .41 $ (.06) $ .25
Dividends .20 .20 .20 .20 .20
- -------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR
Net cash provided by operating activities $ 52,618 $ 72,723 $ 10,603 $ 25,087 $ 28,841
Capital expenditures 20,630 16,234 7,805 7,424 12,616
- -------------------------------------------------------------------------------------------------------------------------------
YEAR END POSITION
Total assets $475,337 $469,827 $ 488,307 $ 480,811 $ 504,905
Net working capital 136,723 113,745 95,225 80,901 75,252
Long-term debt 66,697 81,065 96,219 113,997 126,714
Stockholders' equity 294,965 269,868 265,623 259,598 267,584
6
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - MAY 31
In thousands 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 20,014 $ 19,140
Trade accounts receivable, net of allowance of $2.8 million and $2.5 million, respectively 49,530 51,679
Inventories 121,791 101,377
Prepaid expenses 7,757 8,110
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Assets 199,092 180,306
Property, Plant And Equipment
Buildings and improvements 55,342 48,689
Machinery and equipment 436,886 447,982
Land 1,288 1,288
- -----------------------------------------------------------------------------------------------------------------------------
493,516 497,959
Less allowance for depreciation 279,447 275,476
- -----------------------------------------------------------------------------------------------------------------------------
214,069 222,483
Other Assets
Goodwill, commissioning costs and other assets, net of accumulated
amortization of $27.3 million and $22.3 million, respectively 62,176 67,038
- -----------------------------------------------------------------------------------------------------------------------------
$ 475,337 $ 469,827
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 34,131 $ 37,818
Accrued interest payable 1,402 1,862
Other accrued expenses 14,470 13,236
Current portion of long-term debt 12,366 13,645
- -----------------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 62,369 66,561
Long-Term Debt 66,697 81,065
Deferred Income Taxes And Other Credits 51,306 52,333
Stockholders' Equity
Preferred stock, $.01 par value, 500,000 authorized, none outstanding - -
Common stock, $.10 par value, 50,000,000 authorized, 28,707,400
and 29,679,900 outstanding, respectively 2,994 2,994
- -----------------------------------------------------------------------------------------------------------------------------
Paid-in capital 178,517 178,611
Retained earnings 126,885 90,767
Cost of common shares in treasury (13,431) (2,504)
- -----------------------------------------------------------------------------------------------------------------------------
294,965 269,868
- -----------------------------------------------------------------------------------------------------------------------------
$ 475,337 $ 469,827
- -----------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
7
CONSOLIDATED STATEMENTS OF INCOME - YEAR ENDED MAY 31
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
In thousands except per share 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
Net sales $ 607,656 $ 531,811 $ 462,275
Costs and expenses:
Cost of sales (exclusive of items stated separately below) 477,606 437,050 380,498
Depreciation and amortization 32,493 33,887 33,756
Selling, general and administrative 26,099 20,362 15,937
Interest 10,007 12,082 13,439
Other income (4,318) (3,116) (3,372)
- -------------------------------------------------------------------------------------------------------------------------------
541,887 500,265 440,258
Income Before Income Taxes 65,769 31,546 22,017
Provision for income taxes 23,792 11,939 10,098
- -------------------------------------------------------------------------------------------------------------------------------
Net Income $ 41,977 $ 19,607 $ 11,919
- -------------------------------------------------------------------------------------------------------------------------------
Net Income Per Common Share $ 1.43 $ .67 $ .41
- -------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Per Common Share $ .20 $ .20 $ .20
- -------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
8
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - YEAR ENDED MAY 31
In thousands 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 41,977 $ 19,607 $ 11,919
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 32,493 33,887 33,756
Provision for deferred income taxes (1,894) 1,994 3,101
Other deferred credits 867 83 (2,193)
Changes in operating assets and liabilities:
Trade accounts receivable, net 2,149 (9,548) (8,380)
Inventories (20,414) 16,206 (24,911)
Prepaid expenses 353 804 (767)
Trade accounts payable (3,687) 9,151 1,465
Accrued interest payable (460) (573) (609)
Other accrued expenses 1,234 1,112 (2,778)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 52,618 72,723 10,603
INVESTING ACTIVITIES
Capital expenditures (20,630) (16,234) (7,805)
Other 1,429 (124) 93
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (19,201) (16,358) (7,712)
FINANCING ACTIVITIES
Short-term borrowings - -- 30,000
Repayments on short-term debt - (15,000) (15,000)
Long-term borrowings 52 985 260
Repayments on long-term debt (15,700) (20,477) (12,775)
Dividends paid (5,859) (5,936) (5,936)
Proceeds from issuance of treasury stock 1,470 -- --
Purchase of treasury stock (12,506) -- --
- -------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (32,543) (40,428) (3,451)
- -------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 874 15,937 (560)
Cash and cash equivalents at beginning of year 19,140 3,203 3,763
- -------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 20,014 $ 19,140 $ 3,203
- -------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
9
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
Preferred Common Stock Paid-in Retained Treasury Stock
In thousands Stock Shares Amount Capital Earnings Shares Amount
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1993 $ - 29,940 $2,994 $188,050 $ 71,113 (265) $ (2,559)
Net income for the year ended May 31, 1994 - - - - 11,919 - -
Dividends paid to stockholders ($.20 per share) - - - - (5,936) - -
Treasury stock issued for options - 4,500 shares - - - (13) - 5 55
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1994 - 29,940 2,994 188,037 77,096 (260) (2,504)
Net income for the year ended May 31, 1995 - - - - 19,607 - -
Dividends paid to stockholders ($.20 per share) - - - - (5,936) - -
Adjustment to the excess of cost over fair value
of net assets acquired - - - (9,426) - - -
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1995 - 29,940 2,994 178,611 90,767 (260) (2,504)
Net income for the year ended May 31, 1996 - - - - 41,977 - -
Dividends paid to stockholders ($.20 per share) - - - - (5,859) - -
Treasury stock purchased - - - - - (1,107) (12,506)
Treasury stock issued for options - 134,000 shares - - - (94) - 134 1,579
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at May 31, 1996 $ - 29,940 $2,994 $178,517 $ 126,885 (1,233) $ (13,431)
- ---------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
10
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - MAY 31, 1996
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND RELATED MATTERS:
The consolidated financial statements include the operations of Chaparral Steel
Company (the "Company") and its majority owned subsidiaries. The Company is 84%
owned by Texas Industries, Inc. ("TXI").
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS:
The Company operates in the steel industry only; therefore, no industry segment
information is presented.
CASH EQUIVALENTS:
Cash equivalents consist of highly liquid investments with original maturities
of three months or less.
CREDIT RISK:
The Company extends credit to various companies in steel distribution,
fabrication and related industries. Such credit risk is considered by management
to be limited due to the Company's sizable customer base and the geographical
dispersion of the customer base. The Company performs ongoing credit evaluations
of its customers and generally does not require collateral.
INVENTORIES:
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.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the property.
EXCESS OF COST OVER FAIR VALUE OF NET ASSETS ACQUIRED:
The amount of goodwill, net of amortization, arising from the purchase of 50% of
the outstanding securities of the Company by TXI, was recorded using the
purchase method of accounting and totaled $59.2 million and $61.2 million at May
31, 1996 and 1995, respectively. Due to an adjustment of the original amount,
goodwill and paid-in capital were decreased $9.4 million in 1995. This goodwill
is being amortized over 40 years using the straight-line method and reduced
earnings by $2 million, $2.3 million and $2.3 million in 1996, 1995 and 1994,
respectively.
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.
INCOME TAXES:
The Company and TXI have a tax sharing agreement (the "Agreement") whereby the
Company is included in the consolidated income tax return of TXI. The agreement
provides that the Company will account for income taxes on a stand-alone basis.
Accordingly, the Company makes payments to or receives payments from TXI in
amounts equal to the income taxes it would have otherwise paid or received.
Deferred income taxes are determined using the liability method.
COMPUTATION OF NET INCOME PER COMMON SHARE:
Net income per common share is calculated based upon a weighted average of
29,543,000, 29,722,000 and 29,721,000 shares outstanding (including common stock
equivalents) during 1996, 1995 and 1994, respectively.
The calculations of net income per common share for periods after August 31,
1990, contain an adjustment for the previous amortization of an estimated amount
of goodwill.
USE OF ESTIMATES:
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
RECENT ACCOUNTING PRONOUNCEMENT:
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121 ("Statement No. 121"), "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed
Of", that requires recognition of impairment losses on long-lived assets.
Statement No. 121 also addresses the accounting for long-lived assets that are
expected to be disposed of in future periods. The Company will adopt Statement
No. 121 in the first quarter of 1997 and, based on estimates as of May 31, 1996,
believes the effect of adoption, if any, will not have material effect on the
financial statements of the Company.
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
NOTE B - INVENTORIES
Inventories consist of the following:
May 31
In thousands 1996 1995
- ------------------------------------------------------------------
Finished goods $ 64,962 $ 54,323
Work in process 11,851 9,856
Raw materials 21,082 14,052
Rolls and molds 20,693 18,148
Supplies 16,377 15,487
LIFO adjustment (13,174) (10,489)
- ------------------------------------------------------------------
$ 121,791 $101,377
- ------------------------------------------------------------------
NOTE C - COMMISSIONING COSTS
In fiscal 1990, the Company began construction of the large beam mill and
commissioning commenced in February 1991. The mill was substantially complete
and ready for its intended use in the third quarter of fiscal 1992 with a total
of $15.1 million of costs deferred. The amounts of commissioning costs (net of
amortization) were $2 million and $5 million at May 31, 1996 and 1995,
respectively. The amounts of amortization charged to income were $3 million in
1996, 1995 and 1994, based on a five year period.
NOTE D - CONTINGENCIES
The Company and subsidiaries are defendants in lawsuits which arose in the
normal course of business. In management's judgement (based on the opinion of
counsel) the ultimate liability, if any, from such legal proceedings will not
have a material effect on the Company's financial position.
The Company is subject to federal, state and local environmental laws and
regulations concerning, among other matters, air emissions, furnace dust
disposal and wastewater discharge. The Company believes it is in substantial
compliance with applicable environmental laws and regulations. Notwithstanding
such compliance, if damage to persons or property or contamination of the
environment has been or is caused by the conduct of the Company's business or by
hazardous substances or wastes used in, generated or disposed of by the Company,
the Company could be held liable for such damages and be required to pay the
cost of investigation and remediation of such contamination. The amount of such
liability could be material. Changes in federal or state laws, regulations or
requirements or discovery of unknown conditions could require additional
expenditures by the Company. At May 31, 1996, the Company had $1.6 million
accrued for closure and post closure costs as prescribed by the Texas Natural
Resource Conservation Commission.
NOTE E - LONG-TERM DEBT
Outstanding long-term debt is as follows:
May 31
In thousands Interest Rate 1996 1995
- -------------------------------------------------------------------------------
First mortgage notes payable:
$61.4 million note, due in
annual installments
through January 2000 14.2% $ 14,320 $ 20,458
$70.9 million note, due in 1.5% to
semiannual installments 2% over
through June 1995 Libor -- 1,248
- -------------------------------------------------------------------------------
14,320 21,706
$80 million senior unsecured
notes due in annual
installments from April
1995 through 2004 10.2% 64,000 72,000
Other notes payable,
due through 2000 Various 743 1,004
- -------------------------------------------------------------------------------
79,063 94,710
Less current portion 12,366 13,645
- -------------------------------------------------------------------------------
$ 66,697 $ 81,065
- -------------------------------------------------------------------------------
12
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Scheduled maturities of long-term debt at May 31, 1996 for each of the five
succeeding fiscal years are as follows:
In thousands
- -------------------------------------------------------------------------------
1997 $ 12,366
1998 12,339
1999 12,309
2000 10,049
2001 8,000
Substantially all of the assets of the Company except accounts receivable,
inventories and certain equipment not forming an integral part of the mill have
been pledged as collateral on the first mortgage notes.
The terms of the loan agreements impose certain restrictions on the Company, the
most significant of which require the Company to maintain minimum amounts of
working capital, limit the incurrence of certain indebtedness and restrict
payments of cash dividends and purchases of treasury stock. The amounts of
earnings available for restricted payments were approximately $41 million and
$37 million at May 31, 1996 and 1995, respectively.
Interest payments were $10.5 million, $12.7 million and $14 million in 1996,
1995 and 1994, respectively.
NOTE F - INCOME TAXES
The provisions for income taxes are comprised of:
Year Ended May 31
In thousands 1996 1995 1994
- -------------------------------------------------------------------
Current $26,176 $ 9,451 $ 6,982
Deferred (2,384) 2,488 3,116
- -------------------------------------------------------------------
$ 23,792 $ 11,939 $ 10,098
- -------------------------------------------------------------------
The reasons for the differences between the provisions for income taxes and the
amounts computed by applying the statutory federal income tax rates to income
before income taxes are:
Year Ended May 31
In thousands 1996 1995 1994
- ------------------------------------------------------------------
Statutory rate applied
to income before
income taxes $ 23,019 $ 11,041 $ 7,706
Increase in taxes
resulting from:
Change in statutory
federal tax rate - -- 1,443
Goodwill amortization 702 811 811
Other - net 71 87 138
- ------------------------------------------------------------------
$ 23,792 $ 11,939 $ 10,098
- ------------------------------------------------------------------
13
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
The components of the net deferred tax liability as of May 31, 1996 and 1995 are
summarized below:
Year Ended May 31
In thousands 1996 1995
- ------------------------------------------------------------------
Deferred tax assets:
Deferred compensation $ 458 $ 242
Accounts receivable 997 864
Uniform capitalization expense 1,165 1,117
Net operating loss carryforwards -- 15
Alternative minimum tax credit
carryforwards -- 1,391
Expenses not currently tax deductible 1,872 1,563
- ------------------------------------------------------------------
Total deferred tax assets 4,492 5,192
Deferred tax liabilities:
Accelerated tax depreciation (49,229) (51,010)
Commissioning costs (704) (1,760)
Other - net -- (247)
- ------------------------------------------------------------------
Total deferred tax liabilities (49,933) (53,017)
Net deferred tax liability (45,441) (47,825)
Current portion 4,034 3,544
- ------------------------------------------------------------------
Non-current portion of deferred
tax liability $ (49,475) $(51,369)
- ------------------------------------------------------------------
The Company made income tax payments of $25.6 million, $9.6 million and $7.2
million in 1996, 1995 and 1994, respectively.
NOTE G - RETIREMENT PLAN
A non-contributory defined contribution plan provides retirement benefits for
substantially all employees. The Company makes a regular contribution of 1% of
annual compensation for each participant and a variable contribution equal to
1/2 of 1% of pre-tax income, as defined, to this plan. The amounts of expense
charged to income for this plan were $.8 million, $.6 million and $.5 million in
1996, 1995 and 1994, respectively. The plan is funded to the extent of charges
to income.
NOTE H - INCENTIVE PLANS
The Company has a profit-sharing plan which provides that all personnel employed
as of May 31 share currently in the pre-tax income, as defined, of the Company
for the year then ended based on a predetermined formula. The duration of the
plan is one year and is subject to annual renewal by the Board of Directors. The
provisions for this plan were $6.1 million, $2.9 million and $1.9 million for
1996, 1995 and 1994, respectively.
In 1987, the Board of Directors approved a deferred compensation plan for
certain executives of the Company. The plan is based on a five-year average of
earnings. Amounts recorded as expense (income) under this plan were $.7 million,
($.1) million and ($2) million for 1996, 1995 and 1994, respectively. The amount
of deferred compensation currently payable was $.1 million at May 31, 1996 and
1995.
14
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE I - STOCK OPTION PLAN
In 1989, the stockholders approved a stock option plan whereby options to
purchase Common Stock may be granted to officers and key employees at prices not
less than the market value at the date of grant. Generally, options become
exercisable beginning two years after date of grant and expire ten years after
the date of grant. The Company accounts for its options to purchase shares of
common stock in accordance with APB No. 25.
A summary of option transactions for the two years ended May 31, 1996, follows:
Shares Under Option Aggregate
In thousands except option price Option Price Option Price
- -------------------------------------------------------------------------------
Outstanding at
May 31, 1994 1,110 $8.88 - 12.13 $ 12,046
Granted 395 8.34 - 8.38 3,307
Terminated (10) 10.625 - 12.13 (114)
- -------------------------------------------------------------------------------
Outstanding at
May 31, 1995 1,495 8.34 - 12.13 15,239
Terminated (66) 8.34 - 12.13 (647)
Exercised (134) 8.88 - 12.13 (1,470)
- ---------------------------------------------------------------------------
Outstanding at
May 31, 1996 1,295 $8.34 - 12.13 $ 13,122
- ---------------------------------------------------------------------------
May 31
In thousands 1996 1995
- ---------------------------------------------------------------------------
Shares at end of year:
Exercisable 787 796
Available for future grants 66 -0-
The options outstanding at May 31, 1996, expire on various dates to January 18,
2005.
Note J - Fair Value Of Financial Instruments
The estimated fair value amounts of financial instruments at May 31, 1996 and
1995 have been determined using available market information and the following
methodologies:
Cash and cash equivalents, accounts receivable, accounts payable: The carrying
amounts of these items are a reasonable estimate of their fair values at May
31, 1996 and 1995.
Long-term debt: Interest rates that are currently available to the Company for
issuance of the debt with similar terms and remaining maturities are used to
estimate fair value for debt issues using a discounted cash flow analysis.
MAY 31
IN MILLIONS 1996 1995
- -------------------------------------------------------------------------------
Long-term debt:
Carrying amount $ 79.1 $ 94.7
Estimated fair value 86.0 110.0
15
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table is a summary of quarterly financial information for the two
years ended May 31, 1996:
Three Months Ended
In thousands except per share Aug.(2) Nov. Feb. May
- -------------------------------------------------------------------------
1996
Net sales $138,141 $154,990 $158,954 $ 155,571
Gross profit(1) 26,060 33,623 34,900 35,467
Net income 6,428 10,485 11,895 13,169
- -------------------------------------------------------------------------
Net income per
common share .22 .35 .41 .45
1995
Net sales $124,382 $126,273 $132,388 $ 148,768
Gross profit(1) 18,463 23,200 23,382 29,716
Net income 1,753 4,969 5,070 7,815(3)
- -------------------------------------------------------------------------
Net income per
common share .06 .17 .17 .27
(1) Gross profit exclusive of depreciation and amortization.
(2) Results are effected by annual maintenance performed during the summer
months.
(3) Reflects higher selling prices and shipments.
QUARTERLY STOCK PRICES AND DIVIDENDS (UNAUDITED)
The Company's common stock is listed on the New York Stock Exchange (ticker
symbol CSM). The number of record holders of the Company's common stock at May
31, 1996 was 913.
High and low stock prices and dividends for the last two years were:
Stock Prices Dividends
High Low
- -----------------------------------------------------------------------
1996
First quarter 11 3/4 9 1/8 $ .05
Second quarter 11 7/8 9 1/8 .05
Third quarter 16 3/4 10 1/2 .05
Fourth quarter 15 7/8 13 .05
1995
First quarter 9 1/2 8 3/8 $ .05
Second quarter 10 1/8 6 7/8 .05
Third quarter 9 6 1/2 .05
Fourth quarter 10 8 3/8 .05
16
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
REPORT OF INDEPENDENT AUDITORS
BOARD OF DIRECTORS
CHAPARRAL STEEL COMPANY
We have audited the accompanying consolidated balance sheets of Chaparral Steel
Company and subsidiaries as of May 31, 1996 and 1995, and the related
consolidated statements of income, cash flows and stockholders' equity for each
of the three years in the period ended May 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Chaparral Steel
Company and subsidiaries at May 31, 1996 and 1995, and the consolidated results
of their operations and their cash flows for each of the three years in the
period ended May 31, 1996, in conformity with generally accepted accounting
principles.
/s/ ERNST AND YOUNG LLP
Dallas, Texas
July 12, 1996
17
FINANCIAL HIGHLIGHTS
In thousands except per share 1996 1995 1994
=========================================================================================
RESULTS OF OPERATIONS
Tons shipped:
Bar mill 453 475 424
Structural mills 1,137 1,036 938
- -----------------------------------------------------------------------------------------
Total 1,590 1,511 1,362
Net sales:
Bar mill $157,130 $167,962 $138,353
Structural mills 447,115 359,845 320,210
Transportation service 3,411 4,004 3,712
- -----------------------------------------------------------------------------------------
Total 607,656 531,811 462,275
Net income 41,977 19,607 11,919
- -----------------------------------------------------------------------------------------
PER SHARE INFORMATION
Net income 1.43 .67 .41
Dividends .20 .20 .20
- -----------------------------------------------------------------------------------------
FOR THE YEAR
Net cash provided by operating activities 52,618 72,723 10,603
Capital expenditures 20,630 16,234 7,805
- -----------------------------------------------------------------------------------------
YEAR END POSITION
Total assets 475,337 469,827 488,307
Net working capital 136,723 113,745 95,225
Stockholders' equity $294,965 $269,868 $265,623
- -----------------------------------------------------------------------------------------
MISSION STATEMENT
To be No. 1 in costs, quality and service in the markets we serve and to achieve
a return on equity at least 50% higher than the industry average.
18
CHAPARRAL STEEL COMPANY
DIRECTORS
Robert D. Rogers
Chairman of the Board
Gordon E. Forward
President and Chief Executive Officer
Robert Alpert
Chairman of the Board
Alpert Companies
Dallas, Texas
John M. Belk
Chairman of the Board
Belk Stores Services, Inc.
Charlotte, North Carolina
Lic. Eugenio Clariond Reyes
Director General and Chief Executive Officer
Grupo IMSA, S.A.
Monterrey
Gerald R. Heffernan
President
G.R. Heffernan & Associates, Ltd.
Toronto, Ontario
OFFICERS
Gordon E. Forward
President and Chief Executive Officer
Kenneth R. Allen
Director-Investor Relations
Dennis E. Beach
Vice President-Administration
Larry L. Clark
Vice President-Controller and Assistant Treasurer
David A. Fournie
Vice President-Structural Products
Business Unit
Richard M. Fowler
Vice President-Finance and Treasurer
H. Duff Hunt
Vice President-Recycled Products
Richard T. Jaffre
Vice President-Raw Materials/Transportation
Robert C. Moore
Vice President-General Counsel and Secretary
Libor F. Rostik
Vice President-Engineering
Peter H. Wright
Vice President-Bar Products Business Unit
STOCKHOLDER INFORMATION
TRANSFER AGENT AND REGISTRAR OF STOCK
Chase Mellon Shareholder Services
Common Stock
Stockholder Inquiries
1-800-635-9270
STOCK EXCHANGE LISTING
New York Stock Exchange
WEB ADDRESS
http://www.chaparralsteel.com
FORM 10-K AND 10-Q REQUESTS
Stockholders may obtain, without charge, a copy of the Company's Form 10-K for
the year ended May 31, 1996, and Form 10-Q for the quarters ended August 31,
1995, November 30, 1995 and February 29, 1996, as filed with the Securities and
Exchange Commission. Written requests should be addressed to the
Director-Investor Relations. The information contained herein is not given in
connection with any sale or offer of, or solicitation of any offer to buy, any
securities.
ANNUAL MEETING
The Annual Meeting of Stockholders of Chaparral Steel Company will be held
Wednesday, October 16, 1996, at 9:30 a.m., CDT, at Environmental Education
Center, 1600 Bowers Road, Seagoville, Texas.
SAFE HARBOR STATEMENT
With the exception of historical information, the matters discussed in this
annual report to stockholders are forward- looking statements that involve risks
and uncertainties.