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, 1998
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-16254
STEEL OF WEST VIRGINIA, INC.
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(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
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(Address of principal executive offices, Zip Code)
(304) 696-8200
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
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The number of shares outstanding of each of the issuer's classes of common
stock, as of June 30, 1998, is as follows:
6,010,795 shares of common stock, par value $.01 per share.
STEEL OF WEST VIRGINIA, INC.
AND SUBSIDIARIES
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of 3
June 30, 1998 and December 31, 1997
Condensed Consolidated Statements of Income for 4
the Three-Month and Six-Month Periods Ended
June 30, 1998 and 1997
Condensed Consolidated Statements of Cash Flows 5
for the Three-Month and Six-Month Periods Ended
June 30, 1998 and 1997
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 12
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
1998 1997
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ASSETS
CURRENT ASSETS
Cash $ 0 $ 0
Receivables, net of allowances of $609 15,435 11,181
Inventories 25,938 20,918
Deferred income taxes 1,555 1,555
Other current assets 519 660
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TOTAL CURRENT ASSETS 43,447 34,314
Property, plant, and equipment 66,624 61,002
Goodwill 17,428 17,770
Other assets 463 629
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TOTAL ASSETS $ 127,962 $ 113,715
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Overdraft $ 861 $ 968
Accounts payable 9,542 10,880
Accrued payroll and benefits payable 4,072 3,509
Income taxes payable 13 71
Other current liabilities 2,023 1,385
Current maturities of long-term debt 3,691 1,891
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TOTAL CURRENT LIABILITIES 20,202 18,704
Long-term debt 45,481 34,339
Deferred income taxes 5,494 6,194
Other long-term liabilities 179 176
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TOTAL LIABILITIES 71,356 59,413
STOCKHOLDERS' EQUITY
Common stock, $.01 par value: 12,000,000
voting shares authorized, 7,116,095 and
7,100,602 issued, including treasury stock 71 71
Paid-in capital 26,785 26,663
Treasury stock - 1,105,300 shares at cost (11,483) (11,483)
Retained earnings 41,233 39,051
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TOTAL STOCKHOLDERS' EQUITY 56,606 54,302
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 127,962 $ 113,715
============ ============
NOTE: The balance sheet at December 31, 1997, 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 share and per share data)
Three Months Ended Six Months Ended June 30
June 30
1998 1997 1998 1997
-------------------------------- -------------------------------
Net sales $ 34,510 $ 27,923 $ 66,670 $ 52,351
Cost of sales 30,430 23,675 59,224 44,042
--------------- ---------------- --------------- --------------
GROSS PROFIT 4,080 4,248 7,446 8,309
Selling and administrative expenses 1,451 1,646 2,930 3,055
Interest Expense 967 235 1,317 495
Loss (Gain) on disposal of assets 221 (230) (275) (453)
Other income (108) (276) (286) (343)
--------------- ---------------- --------------- --------------
INCOME BEFORE INCOME TAXES 1,549 2,873 3,760 5,555
Income Taxes 654 1,216 1,578 2,353
--------------- ---------------- --------------- --------------
NET INCOME $ 895 $ 1,657 $ 2,182 $ 3,202
=============== ================ =============== ==============
BASIC AND DILUTED EARNINGS PER
COMMON SHARE $.15 $.28 $.36 $.53
==== ==== ==== ====
Weighted average common shares outstanding:
Basic 6,011,103 5,994,114 6,010,949 5,992,987
Diluted 6,022,198 5,994,937 6,016,937 5,993,398
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
1998 1997 1998 1997
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CASH (USED IN) PROVIDED FROM OPERATIONS
Net income $ 895 $ 1,657 $ 2,182 $ 3,202
Adjustments for items not
affecting funds from
operations:
Depreciation and
amortization 2,125 1,326 3,897 2,650
Loss (Gain) on disposal of assets 220 (230) (275) (453)
Other 110 (53) 630 (211)
Working capital changes
related to operations (5,834) (2,011) (9,666) (4,089)
---------- ---------- ---------- ----------
CASH (USED IN) PROVIDED FROM OPERATIONS (2,484) 689 (3,232) 1,099
INVESTMENT ACTIVITIES
Additions to property, plant,
and equipment (1,506) (5,579) (9,603) (8,989)
FINANCING ACTIVITIES
Revolving credit and term loans 4,882 4,991 13,388 9,226
Long-term debt repayments (223) (201) (446) (1,970)
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4,659 4,790 12,942 7,256
INCREASE (DECREASE) IN CASH $ 669 $ (100) $ 107 $ (634)
========== ========== ========== ==========
See notes to condensed consolidated financial statements.
5
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
June 30, 1998
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, 1998 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1998. 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, 1997.
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.
Basic earnings per share excludes any dilutive effects of stock options and is
computed by dividing net income by the weighted average shares of common stock
outstanding for the period. Diluted earnings per share is computed by dividing
net income by the weighted average shares of common stock outstanding for the
period plus the shares that would be outstanding assuming the exercise of
dilutive stock options.
NOTE B--INVENTORIES
Inventories consist of the following (in thousands):
June 30 December 31
1998 1997
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Raw materials $ 2,576 $ 2,354
Work-in-process 9,294 8,240
Finished goods 13,529 10,731
Manufacturing supplies 5,374 4,068
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30,773 25,393
Less LIFO reserve 4,835 4,475
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$25,938 $20,918
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At the end of each year, management determines inventory levels based on a
physical inventory. The amount of inventories at June 30, 1998, 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.
NOTE C--CREDIT ARRANGEMENTS
A summary of indebtedness under the Company's credit arrangements is as follows
(in thousands):
6
June 30 December 31
1998 1997
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Capital Expenditure Line Term Loan #1 $ 2,990 $ 3,420
Capital Expenditure Line Term Loan #2 28,000 20,000
Revolver 17,929 12,541
Other notes payable 253 269
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TOTAL 49,172 36,230
Less current maturities of long-term debt (3,691) (1,891)
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$45,481 $34,339
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The Company maintains a senior financing agreement that, as last amended
April 1998, provides for up to $21,000,000 of revolving credit borrowings and
capital expenditure line term loans. The interest rates on the Company's
existing revolving credit lines and term loans vary based on 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. As of June 30, 1998, the
revolving credit line loan balance, due January 1, 2001, was $17,929,000, and
the unused borrowing availability approximated $3,071,000.
Under the terms of its senior financing agreement, the Company is permitted to
convert its Capital Expenditure Line Term Loan #1 indebtedness to a fixed
interest rate. Effective with the April 1998 amendment, the Company's borrowing
availability under the Capital Expenditure Line Term Loan #2 was increased to
$28,000,000 to finance current machinery and equipment expenditures, as governed
by a percentage of such expenditures. The Company is permitted, at its election
through January 1, 1999, to convert such indebtedness to a fixed interest rate.
The Capital Expenditure Line Term Loan #1 portion of the loan agreement is
required to be repaid in quarterly installments of $215,000, with a final
principal payment of $195,000 on October 1, 2001. The Capital Expenditure Line
Term Loan #2 will be repaid in 40 equal quarterly installments of principal over
ten years commencing July 1, 1998.
The Company's senior lending agreement may be terminated by the Company or, on
or after January 1, 2001 and upon 90 days written notice, by the lender. The
agreement contains various restrictive covenants, including 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, 1998, the Company's retained earnings available
for dividends is $2,630,000. 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 1999). A liability
has been established for those illnesses and injuries occurring on or before
June 30, 1998, for which an amount of expected loss could be reasonably
estimated.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET SALES
Net sales increased 23.6% in the second quarter of 1998 to $34,510,000 up
$6,587,000 from the second quarter of 1997, primarily due to an increase in
tonnage of products shipped. Finished tonnage sales increased to 58,762 tons in
the second quarter of 1998 from 45,070 tons for the second quarter of 1997.
Billet sales decreased to 584 tons for the second quarter of 1998 from 1,370
tons in the second quarter of 1997. The average selling price per ton for
finished products decreased to $585 in the second quarter of 1998 compared to
$611 per ton in the second quarter of 1997. The average selling price per ton
for billets decreased to $261 in the second quarter of 1998 compared to $273 in
the second quarter of 1997.
Net sales for the six months ended June 30, 1998 increased 27.4% to $66,670,000
from $52,351,000 for the comparable period in 1997, primarily due to an increase
in tonnage of products shipped. Finished tonnage sales increased to 109,685 tons
for the six months ended June 30, 1998 from 82,526 tons for the comparable
period in 1997. Billet sales decreased to 1,281 tons for the same period in
1998, from 3,380 tons for the comparable period in 1997.
COST OF SALES
Cost of sales increased to 88.2% of net sales or $30,430,000 for the second
quarter of 1998 from 84.8% of net sales or $23,675,000 for the second quarter of
1997. The percent increase in cost of goods sold was principally due to the
effect of electricity shortages and power interruptions, as well as higher alloy
and mill roll expense. It is likely the Company's operations will continue to be
affected by the electricity shortages and power interruptions during the summer
months. The increased costs were offset, in part, by a $520,000 favorable
settlement with one of the Company's vendors.
Cost of sales for the six months ended June 30, 1998 increased to 88.8% of net
sales or $59,224,000 from 84.1% of net sales or $44,042,000 for the comparable
period in 1997. This increase in cost of goods sold was principally due to the
effect of a shut down of approximately two weeks of the #2 Mill in the first
quarter for installation and start-up of new equipment, electricity shortages
and power interruptions in the second quarter, and higher alloy and mill roll
expense.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses for the second quarter of 1998
were $1,451,000 as compared to $1,646,000 for the second quarter of 1997. This
decrease was due primarily to lower legal and professional fees. As a percentage
of net sales, selling and administrative expense was 4.2% in the second quarter
of 1998 and 5.9% for the comparable period in 1997.
Selling, general, and administrative expenses for the six month period ended
June 30, 1998 were $2,930,000, compared to $3,055,000 for the comparable period
in 1997. This decrease was due primarily to lower legal fees. As a percentage of
net sales, selling and administrative expense was 4.4% in the six month period
ended June 30, 1998, compared to 5.8% for the comparable period in 1997.
INTEREST EXPENSE, GAIN ON DISPOSAL OF ASSETS AND OTHER OPERATING INCOME
Interest expense for the second quarter of 1998 was $967,000, compared to
$235,000 for the second quarter of 1997 due to increased borrowings associated
with the Company's recently completed Phase II expansion and modernization
program. The Company recognized a loss on the disposal of assets during the
second quarter of 1998 in the amount of $221,000 as compared to a $230,000 gain
in the second quarter of 1997. Other operating income for the second quarter of
1998 was $108,000 compared to $276,000 for the second quarter of 1997.
Interest expense for the six months ended June 30, 1998 was $1,317,000, compared
to $495,000 for the comparable period in 1997. Interest expense increased
primarily due to increased borrowings associated with the Company's recently
completed Phase
8
II expansion and modernization program. As a percentage of net sales,
interest expense was 2.0% in the six month period ended June 30, 1998,
compared to .9% for the comparable period in 1997. The Company recognized a
gain on disposal of assets of $275,000 for the six months ended June 30, 1998
compared to a gain on the disposal of assets of $453,000 for the six months
ended June 30, 1997. Other operating income for the six months ended June 30,
1998 was $286,000 of income compared to $343,000 of income for the comparable
period in 1997.
NET INCOME
Net income for the second quarter of 1998 decreased by $762,000 to $895,000 from
$1,657,000 for the second quarter of 1997. As a percentage of net sales, net
income was 2.6% for the second quarter of 1998, compared to 5.9% for the second
quarter of 1997. Net income for the six months ended June 30, 1998 was
$2,182,000, compared to $3,202,000 for the comparable period in 1997. As a
percentage of net sales, net income was 3.3% in the six month period ended June
30, 1998, compared to 6.1% for the comparable period in 1997. The decreases in
net income were caused by lower gross margins due to the reasons discussed
above, and an increase in interest expense.
LIQUIDITY AND SOURCES OF CAPITAL
The Company's primary ongoing cash needs are for working capital, debt service
and capital expenditures. The Company's three sources of liquidity 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 1998 was $23,245,000, compared to $15,610,000 at the end of the prior
fiscal year. This increase in working capital was funded by proceeds from the
Company's credit arrangements with its senior lender. The Company's expenditures
for required capital replacements are currently anticipated to average
approximately $1,000,000 to $2,000,000 annually over the next several years.
The Company completed Phase II of its expansion and modernization program for
the Huntington, West Virginia plant, in February 1998. The project, costing
approximately $36,000,000 (not including capitalized interest), was funded
with a combination of internally generated cash and bank debt.
From time to time, the Company evaluates discretionary capital expenditures and
acquisition opportunities. Any such expenditures would be subject to
availability of funds and approval by the Company's Board of Directors.
YEAR 2000 ISSUES
The "Year 2000 problem", as it has come to be known, refers to the fact
that many computer programs use only the last two digits to refer to a year, and
therefore recognize a year that begins with "20" as instead beginning with "19".
For example, the year 2000 would be read as being the year 1900. If not
corrected, this problem could cause many computer applications to fail or create
erroneous results.
The Company has modified and tested all of the critical applications of
its information technology ("IT"), the result of which is that all such critical
applications are now Year 2000 compliant. The Company believes that virtually
all of the non-critical applications of its IT will be made Year 2000 compliant
prior to January 1, 1999. The Company has retained the services of an
independent consultant to direct and, together with the Company's internal IT
personnel, implement its compliance program. The total amount of the payments
made to date and to be made hereafter to such independent consultant are not
expected to be material. Based on the Company's analysis to date, the Company
believes that its material non-IT systems are either Year 2000 compliant, or do
not need to be made Year 2000 compliant in order to continue to function in
substantially the same manner in the year 2000. The Company intends to continue
its analysis of whether its non-IT systems require any Year 2000 remediation.
The Company's Year 2000 compliance work has not caused, nor does the Company
expect that it will cause, a deferral on the part of the Company of any material
IT or non-IT projects.
In response to the Company's inquiries, the Company has received
questionnaires from approximately 50% of its significant vendors, and customers
representing approximately 33 1/3% of the Company's 1997 net sales, with regard
to their Year 2000 compliance efforts. Virtually all of these companies have
indicated
9
that they are endeavoring to become Year 2000 compliant prior to January 1,
2000. However, there can be no assurance that any of the Company's vendors or
customers, including those that responded to the Company's questionnaire,
will be Year 2000 compliant prior to such date. The Company is unable to
predict the ultimate affect that the Year 2000 problem may have upon the
Company, in that there is no way to predict the impact that the problem will
have nation-wide or world-wide and how the Company will in turn be affected,
and, in addition, the Company cannot predict the number and nature of its
vendors and customers who will fail to become Year 2000 compliant prior to
January 1, 2000. Significant Year 2000 difficulties on the part of vendors or
customers could have a material adverse impact upon the Company. The Company
intends to monitor the progress of its vendors and customers in becoming Year
2000 compliant. The Company has not to date formulated a contingency plan to
deal with the potential non-compliance of vendors and customers, but will be
considering whether such a plan would be feasible.
FORWARD LOOKING STATEMENTS
Any Forward Looking Statements contained herein are subject to the section on
Forward Looking Statements contained in the Company's Annual Report on Form 10-K
for the year ended December 31, 1997, including the following risk factors set
forth therein: the cyclical and capital intensive nature of the industry;
pressure resulting from foreign and domestic competition; reduction in demand
for the Company's products and industry pricing; volatility of electricity
prices and raw material costs, especially steel scrap, resulting in reduced
profit margins; excess industry capacity resulting in reduced profit margins;
and the cost of compliance with environmental regulations. In addition, the
Forward Looking Statements contained herein are also subject to the Company's
ability to effectively integrate new equipment.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of the Stockholders held on May 28, 1998, 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 5,167,993
Timothy R. Duke 5,170,593
Albert W. Eastburn 5,170,593
Daniel N. Pickens 5,170,593
Paul E. Thompson 5,169,793
At the Annual Meeting of Stockholders, the stockholders also approved the
following:
(1) an Amendment to the Company's Certificate of Incorporation to authorize
5,000,000 additional shares of common stock, by a vote of 4,908,824 shares
in favor, 638,169 shares against and 17,700 shares abstained;
(2) the appointment of Ernst & Young as independent auditors, by a vote of
5,559,834 shares in favor, 1,624 shares against and 3,235 shares abstained.
10
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
3.1 Certificate of Incorporation of Steel of West Virginia,
Inc. (the "Company"), as amended.
10 Amendment, dated April 3, 1998, to the Financing Agreement,
dated December 30, 1986, between The CIT Group/Business
Credit, Inc., SWVA, Inc., and Charter Acquisition Corporation.
27 Financial Data Schedule
(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 10, 1998 STEEL OF WEST VIRGINIA, INC.
------------------------------
(Registrant)
/s/ Timothy R. Duke
-------------------------------------
Timothy R. Duke, President and
Chief Executive Officer
/s/ Mark G. Meikle
-------------------------------------
Mark G. Meikle, Vice President,
Treasurer and Chief Financial Officer
12