1 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 FEBRUARY 28, 1997 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: (972) 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 _____. 28,386,000 Shares of Common Stock, Par Value $.10 Outstanding at April 8, 1997. 1 of 13 2 INDEX CHAPARRAL STEEL COMPANY PART I. FINANCIAL INFORMATION Page Item 1. Financial Statements (Unaudited) Condensed consolidated balance sheets--February 28, 1997 and May 31, 1996 3 Condensed consolidated statements of income--three and nine months ended February 1997 and 1996 4 Condensed consolidated statements of cash flows --nine months ended February 1997 and 1996 5 Notes to condensed consolidated financial statements --February 28, 1997 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 3 CONDENSED CONSOLIDATED BALANCE SHEETS CHAPARRAL STEEL COMPANY AND SUBSIDIARIES (Unaudited) February 28, May 31, 1997 1996 --------- --------- (In thousands) ASSETS CURRENT ASSETS Cash and cash equivalents $ 586 $ 20,014 Trade accounts receivable, net of allowance of $2 million and $2.8 million, respectively 68,815 49,530 Inventories 135,864 121,791 Prepaid expenses 11,471 7,757 --------- --------- TOTAL CURRENT ASSETS 216,736 199,092 PROPERTY, PLANT AND EQUIPMENT Buildings and improvements 56,255 55,342 Machinery and equipment 460,459 436,886 Land 1,288 1,288 --------- --------- 518,002 493,516 Less allowance for depreciation (302,101) (279,447) --------- --------- 215,901 214,069 OTHER ASSETS Goodwill, commissioning costs and other assets, net of accumulated amortization of $30.8 million and $27.3 million, respectively 58,883 62,176 --------- --------- $ 491,520 $ 475,337 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Trade accounts payable $ 30,778 $ 34,131 Accrued interest payable 2,395 1,402 Other accrued expenses 20,580 14,470 Current portion of long-term debt 12,454 12,366 --------- --------- TOTAL CURRENT LIABILITIES 66,207 62,369 LONG-TERM DEBT 60,639 66,697 DEFERRED INCOME TAXES AND OTHER CREDITS 51,410 51,306 STOCKHOLDERS' EQUITY Preferred stock, $.01 par value, 500,000 authorized, none outstanding -- -- Common stock, $.10 par value, 28,386,100 and 28,707,400 shares outstanding, respectively 2,994 2,994 Paid-in capital 178,546 178,517 Retained earnings 148,698 126,885 Cost of common stock in treasury (16,974) (13,431) --------- --------- 313,264 294,965 --------- --------- $ 491,520 $ 475,337 ========= ========= See notes to condensed consolidated financial statements 3 4 (Unaudited) CONDENSED CONSOLIDATED STATEMENTS OF INCOME CHAPARRAL STEEL COMPANY AND SUBSIDIARIES Three months ended Nine months ended February February 1997 1996 1997 1996 --------- --------- --------- --------- (In thousands except per share) Net sales $ 147,715 $ 158,954 $ 440,879 $ 452,085 Costs and expenses: Cost of sales (exclusive of items stated separately below) 114,977 124,054 347,339 357,502 Depreciation and amortization 8,452 8,091 26,203 24,269 Selling, general and administrative 6,919 7,116 21,522 19,626 Interest 2,069 2,474 6,395 7,712 Other income (494) (1,480) (2,308) (3,723) --------- --------- --------- --------- 131,923 140,255 399,151 405,386 INCOME BEFORE INCOME TAXES 15,792 18,699 41,728 46,699 Provision for income taxes 6,086 6,804 15,660 17,891 --------- --------- --------- --------- NET INCOME $ 9,706 $ 11,895 $ 26,068 $ 28,808 ========= ========= ========= ========= Average shares outstanding 28,639 29,423 28,753 29,658 ========= ========= ========= ========= Per common share: NET INCOME $ .34 $ .41 $ .91 $ .98 ========= ========= ========= ========= CASH DIVIDENDS $ .05 $ .05 $ .15 $ .15 ========= ========= ========= ========= See notes to condensed consolidated financial statements. 4 5 (Unaudited) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS CHAPARRAL STEEL COMPANY AND SUBSIDIARIES Nine months ended February 1997 1996 -------- -------- (In thousands) OPERATING ACTIVITIES Net income $ 26,068 $ 28,808 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 26,203 24,269 Deferred income taxes (1,313) (1,471) Other deferred credits 1,417 985 Changes in operating assets and liabilities: Trade accounts receivable, net (19,285) (8,825) Inventories (14,073) (7,546) Prepaid expenses (3,714) (659) Trade accounts payable (3,353) (8,718) Accrued interest payable 993 948 Other accrued expenses 6,110 4,682 -------- -------- Net cash provided by operating activities 19,053 32,473 INVESTING ACTIVITIES Capital expenditures (25,590) (14,340) Other 1,105 1,575 -------- -------- Net cash used in investing activities (24,485) (12,765) FINANCING ACTIVITIES Long-term borrowings 456 52 Repayments on long-term debt (6,427) (7,619) Purchase of treasury stock (3,770) (6,402) Dividends paid (4,255) (4,424) -------- -------- Net cash used in financing activities (13,996) (18,393) -------- -------- Increase (decrease) in cash and cash equivalents (19,428) 1,315 Cash and cash equivalents at beginning of period 20,014 19,140 -------- -------- Cash and cash equivalents at end of period $ 586 $ 20,455 ======== ======== See notes to condensed consolidated financial statements. 5 6 (Unaudited) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CHAPARRAL STEEL COMPANY AND SUBSIDIARIES February 28, 1997 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 nine month period ended February 28, 1997 are not necessarily indicative of the results that may be expected for the year ending May 31, 1997. 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, 1996. 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 was recorded as goodwill and additional paid-in-capital. During May 1995, the Company recorded a $9.4 million adjustment to the original amount of goodwill. The amount of goodwill, net of accumulated amortization included in other assets was $57.7 million, $59.2 million and $61.2 million at February 28, 1997, May 31, 1996 and 1995, respectively. This goodwill is being amortized over 40 years using the straight-line method and reduced earnings by $.5 million and $1.5 million in the three and nine months ended February 1997 and 1996, respectively. Management reviews the remaining goodwill with consideration toward recovery through future operating results (undiscounted) at the current rate of amortization. Net income per common share is calculated based upon a weighted average shares outstanding. NOTE C - Income Tax Provision The provision for income taxes has been calculated on the basis of an estimated annual rate. The current year effective tax rates declined from the prior year due to a decrease in the state tax provision. Goodwill amortization contributed to the difference between provision amounts and income tax amounts computed by applying the statutory federal income tax rates. 6 7 NOTE D - Inventories Inventories consist of the following: February 28, May 31, 1997 1996 --------- --------- (In thousands) Finished goods $ 82,555 $ 64,962 Work in process 10,470 11,851 Raw materials 13,587 21,082 Rolls and molds 22,535 20,693 Supplies 18,854 16,377 LIFO adjustment (12,137) (13,174) --------- --------- $ 135,864 $ 121,791 ========= ========= 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 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 fiscal 1992 with a total of $15.1 million of costs deferred, including $4.4 million of interest and $3.4 million of depreciation. The amounts of commissioning costs (net of amortization) were $-0- and $2 million at February 28, 1997 and May 31, 1996, respectively. Amortization of $2 million and $2.3 million was recorded in the first nine months of fiscal 1997 and 1996, respectively, based on a five year period. NOTE F - Contingencies The Company and subsidiaries are defendants in lawsuits which arose in the normal course of business. In management's judgment (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 emission, 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, state or local laws, regulations or requirements or discovery of unknown conditions could require additional expenditures by the Company. NOTE G - New Accounting Pronouncements The adoption of Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of", effective June 1, 1996, had no effect on the financial statements of the Company. The Company has elected to continue utilizing the accounting for stock issued to directors and employees prescribed by APB No. 25, and therefore, the required adoption of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", is expected to have no effect on the financial position or results of operations of the Company. 7 8 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 February 28, 1997, and the related condensed consolidated statements of income for the three month and nine month periods ended February 28, 1997 and February 29, 1996, and the condensed consolidated statements of cash flows for the nine month periods ended February 28, 1997 and February 29, 1996. 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, 1996, 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 12, 1996, 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, 1996, 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 March 20, 1997 8 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Unaudited) Comparison of operations and financial condition for the three and nine months ended February 28, 1997 to the three and nine months ended February 29, 1996. RESULTS OF OPERATIONS A 22,000 ton decrease in shipments coupled with a $7 decrease in selling prices resulted in an $11.2 million decrease in net sales in the three month period ended February 28, 1997 compared to the same quarter in the prior year. Net sales decreased $11.2 million to $440.9 million in the nine month period ended February 28, 1997 as shipments decreased 25,000 tons compared to those in the prior year. Shipments of bar products improved in the February 1997 quarter due to steady demand from fabricators. Although structural shipments declined by 12% from the February 1996 quarter, U.S. nonresidential construction activity remains consistent with a relatively stable and satisfactory level of demand. However, construction volume is generally dependent on the health of the economy and changes in interest rates. Cost of sales (exclusive of depreciation and amortization) decreased $9.1 million to $115 million for the three month period ended February 28, 1997 compared to the same period in the prior year. The decrease was predominately caused by the decrease in shipments of 22,000 tons and a $7 per ton decrease in cost of sales. Cost of sales decreased $10.2 million to $347.3 million for the nine month period ended February 28, 1997 compared to the same period in the prior year due primarily to the 25,000 ton decrease in shipments as per ton costs were unchanged from the prior year. Scrap prices stabilized in the winter months but are expected to move slightly upward during the spring. Depreciation expense increased from the prior year periods due to increased levels of capital spending. Depreciation is computed using the straight-line method over the estimated useful lives of the property. Amortization of goodwill and commissioning costs decreased from the levels in the prior year due to the completed amortization of commissioning costs for the large beam mill. Selling, general and administrative expense increased $1.9 million in the nine month period ended February 28, 1997 compared to the prior year periods primarily due to increases in long-term employee incentive programs which are based on profitability. Interest expense decreased $.4 million and $1.3 million in the three and nine month periods ended February 28, 1997 compared to the same periods in the prior year. Interest expense in the current periods 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. The current year effective tax rates declined from the prior year due to a decrease in the state tax provision. Goodwill amortization contributed to the difference between provision amounts and income tax amounts computed by applying the statutory federal income tax rates. 9 10 CAPITAL RESOURCES AND LIQUIDITY Working capital increased $13.8 million to an all-time high of $150.5 million at February 28, 1997. Net income of $26.1 million provided additional working capital in the first nine months of fiscal 1997. Accounts receivable increased $19.3 million from the prior fiscal year-end due to changes in the Company's discount policy. Inventories increased $14.1 million due to record production in the melt shop and shipments in the February 1997 quarter below the record levels of the previous year. Other accrued expenses increased $6.1 million to $20.6 million due to increases in accruals for income taxes and employee incentives. The other components of working capital were virtually unchanged from the previous fiscal year-end. Net cash provided by operating activities in the nine months ended February 28, 1997 decreased by $13.4 million due primarily to the change in net cash used by accounts receivable and inventories described above. As a result, cash and cash equivalents decreased $19.4 million from the previous fiscal year-end after the Company bought $25.6 million of capital additions, repaid $6.4 million of long-term debt, purchased $3.8 million of treasury stock and paid cash dividends of $4.3 million. Capital expenditures for the nine months ended February 28, 1997 totaled $25.6 million and are estimated to be approximately $40 million in fiscal 1997. The anticipated spending includes upgrades for the Recycled Products and Bar Products business units of approximately $20 million. The Company's capitalization of $373.9 million at February 28, 1997, consisted of $60.6 million of long-term debt and $313.3 million of stockholders' equity. The current portion of long-term debt totaled $12.5 million at February 28, 1997. The Company's average interest rate on long-term debt is 11%. The Company's payments of principal and interest are expected to be approximately $22 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. Effective January 1, 1997, the Company has a short-term credit facility with a bank totaling $10 million which will expire December 31, 1997 if not renewed by the bank or the Company. The Company believes that it will be able to renew this credit facility or negotiate similar arrangements with other financial institutions if they are deemed necessary. The Company expects that current financial resources and anticipated cash provided by operations in fiscal 1997 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. 10 11 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 (27) Financial Data Schedule The Registrant did not file any reports on Form 8-K during the three months ended February 28, 1997. 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 April 10, 1997 /s/ Richard M. Fowler - -------------- ------------------------------- Richard M. Fowler Vice President - Finance and Treasurer April 10, 1997 /s/ Larry L. Clark - -------------- ------------------------------- Larry L. Clark Vice President - Controller and Assistant Treasurer 11 12 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION - ------ ----------- 11 Statement re: Computation of Earnings per share. 15 Letter re: Unaudited interim financial information 27 Financial Data Schedule