- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 1999.
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 333-48245
RENCO STEEL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-1854775
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1040 Pine Ave., S.E., Warren, Ohio 44483-6528
(Address of principal executive offices) (Zip Code)
(330) 399-6884
(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
As of March 17, 1999, the registrant had 100 shares of its common
stock, no par value, $.01 stated value, outstanding.
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PAGE 2
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES AND PREDECESSOR
INDEX
--------------------------------
Page No.
--------
PART I FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements of Renco Steel Holdings, Inc.
Condensed Consolidated Balance Sheets as of
January 31, 1999 and October 31, 1998. 3
Condensed Consolidated Statements of Income for the
three months ended January 31, 1999 and 1998. 4
Condensed Consolidated Statements of Cash Flows for the
three months ended January 31, 1999 and 1998. 5
Notes to Condensed Consolidated Financial Statements. 6
Financial Statements of WCI Steel, Inc.
Condensed Consolidated Balance Sheets as of
January 31, 1999 and October 31, 1998. 10
Condensed Consolidated Statements of Operations for the
three months ended January 31, 1999 and 1998. 11
Condensed Consolidated Statements of Cash Flows for the
three months ended January 31, 1999 and 1998. 12
Notes to Condensed Consolidated Financial Statements. 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
PART II OTHER INFORMATION
- -------------------------
Item 1. Legal Proceedings 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Exhibit Index 25
PAGE 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES AND PREDECESSOR
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
January 31, October 31,
1999 1998
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents ...................... $ 7,855 $ 4,957
Restricted cash and cash equivalents ........... 60,320 62,195
Other investments .............................. 14,515 15,774
Accounts receivable, less allowances ........... 42,434 48,724
Inventories .................................... 84,825 88,138
Deferred income taxes .......................... -- 8,462
Prepaid expenses ............................... 1,399 1,144
--------- ---------
Total current assets .................... 211,348 229,394
Property, plant and equipment, net ............... 263,109 266,625
Excess of cost over acquired net assets, net ..... 12,303 12,439
Other assets, net ................................ 32,195 34,342
--------- ---------
Total assets ................... $ 518,955 $ 542,800
========= =========
LIABILITIES and SHAREHOLDER'S DEFICIT
Current liabilities
Current portion of long-term debt .............. $ 117 $ 116
Accounts payable ............................... 48,316 46,620
Accrued liabilities ............................ 50,824 56,309
--------- ---------
Total current liabilities ............... 99,257 103,045
Long-term debt, excluding current portion ........ 421,100 421,114
Deferred income taxes ............................ -- 30,393
Postretirement health care benefits .............. 95,192 93,378
Pension benefits ................................. 22,153 23,604
Other liabilities ................................ 13,536 14,054
--------- ---------
Total liabilities .............. 651,238 685,588
--------- ---------
Shareholder's deficit
Common stock, no par value, stated value
$.01 per share, 850 shares authorized,
100 shares issued and outstanding ............ -- --
Additional paid-in capital ..................... 1 1
Accumulated deficit ............................ (132,284) (142,789)
--------- ---------
Total shareholder's deficit .... (132,283) (142,788)
Commitments and contingencies .................... -- --
Total liabilities and .......... -- --
shareholder's deficit ......... $ 518,955 $ 542,800
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
PAGE 4
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES AND PREDECESSORS
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
Three months
ended January 31,
1999 1998
Net sales .................................... $ 110,277 $ 166,592
Operating costs and expenses
Cost of products sold ....................... 101,796 141,848
Depreciation and amortization ............... 6,704 7,359
Selling, general and
administrative expenses .................... 3,301 4,049
--------- ---------
111,801 153,256
--------- ---------
Operating (loss) income ...................... (1,524) 13,336
--------- ---------
Other income (expense)
Interest expense ............................ (11,414) (8,014)
Interest, investment
and other income, net ...................... 1,967 299
--------- ---------
(9,447) (7,715)
--------- ---------
(Loss) income before income taxes ............ (10,971) 5,621
Income tax (benefit) expense ................. (21,477) 2,041
--------- ---------
Net income ................................. $ 10,506 $ 3,580
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
PAGE 5
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES AND PREDECESSOR
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three months
ended January 31,
1999 1998
Cash flows from operating activities
Net income .......................................... $ 10,506 $ 3,580
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization .............. 5,972 6,626
Amortization of deferred maintenance costs . 732 733
Amortization of financing costs ............ 450 337
Postretirement health care benefits ........ 1,814 1,514
Pension benefits ........................... (483) 1,361
Deferred income taxes ...................... (21,677) 203
Gain on other investments .................. (1,224) --
Other ...................................... 18 (35)
Cash provided (used) by changes in certain
assets and liabilities
Accounts receivable ........................ 6,290 (5,135)
Inventories ................................ 3,314 2,546
Prepaid expenses and other assets .......... (143) 911
Accounts payable ........................... 1,696 (2,397)
Accrued liabilities ........................ (5,839) (5,677)
Other liabilities .......................... (519) (1,543)
-------- --------
Net cash provided by operating activities .. 907 3,024
-------- --------
Cash flows from investing activities
Additions to property, plant and equipment .......... (2,337) (4,192)
Gross proceeds from the sale of assets .............. -- 110
Other investments, net .............................. 2,482 --
-------- --------
Net cash provided (used) by investing
activities ................................ 145 (4,082)
-------- --------
Cash flows from financing activities
Dividends paid ...................................... -- (5,300)
Principal payments on long-term debt ................ (29) (965)
Issuance of common stock of Company ................. -- 1
-------- --------
Net cash used by financing activities ...... (29) (6,264)
-------- --------
Net increase (decrease) in cash and cash equivalents ......... 1,023 (7,322)
Total cash and cash equivalents at
beginning of period ......................................... 67,152 18,989
-------- --------
Total cash and cash equivalents at end of period ............. $ 68,175 $ 11,667
======== ========
Supplemental disclosure of cash flow information
Cash paid for interest .............................. $ 15,145 $ 15,194
Cash paid for income taxes .......................... 220 40
The accompanying notes are an integral part of these condensed consolidated
financial statements.
PAGE 6
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES AND PREDECESSOR
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended January 31, 1999 and 1998
( Unaudited )
NOTE 1 : BASIS OF PRESENTATION
Renco Steel Holdings, Inc. (Renco Steel) is a holding company incorporated in
the state of Ohio which was formed on January 20, 1998 and is a wholly owned
subsidiary of The Renco Group, Inc. (Renco). On January 29, 1998, Renco
contributed to Renco Steel its interest in its wholly owned subsidary WCI Steel,
Inc. (WCI or Precedessor). Accordingly the accompanying financial statements
include the accounts of Renco Steel and WCI (collectively, the Company).
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods. The results of operations for the
three months ended January 31, 1999 are not necessarily indicative of the
results to be expected for the full year.
These interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Form 10-K for the fiscal year ended October 31, 1998.
NOTE 2 : OTHER INVESTMENTS
At January 31, 1999, the Company's other investments consisted of investments in
limited partnerships which invest in a variety of financial assets, including
equity, debt, and derivative securities. Because of the nature of the underlying
investments, the Company's investments are subject to a high degree of risk,
including, but not limited to, credit risk, interest rate risk, foreign currency
exchange risk, and equity price risk. The Company does not have any off balance
sheet risk with respect to these investments, and thus its risk is limited to
the loss of its investment. The limited partnerships in which the Company has
invested each provide limited terms of withdrawal, the most restrictive being
annual withdrawal on December 31 of any year, upon 45 days notice, and
accordingly, these investments have been classified as current assets in the
accompanying balance sheets as of January 31, 1999 and October 31, 1998. These
investments are held for trading purposes and are recorded at fair value for
financial reporting purposes. The Company's condensed consolidated statements of
income include unrealized gains related to investments of $1.2 million and zero
for the three months ended January 31, 1999 and January 31, 1998, respectively.
PAGE 7
NOTE 3 : INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by the
last-in, first-out (LIFO) method. The composition of inventories at January 31,
1999 and October 31, 1998 was as follows:
January 31, October 31,
1999 1998
(Unaudited)
----------- -----------
(Dollars in thousands)
Raw materials .................................... $36,986 $36,259
Finished and semi-finished product ............... 54,328 58,332
Supplies ......................................... 67 86
------- -------
91,381 94,677
Less LIFO reserve ................................ 6,556 6,539
------- -------
$84,825 $88,138
======= =======
NOTE 4 : ENVIRONMENTAL MATTERS and OTHER CONTINGENCIES
In common with much of the steel industry, WCI's facilities are located on sites
that have been used for heavy industrial purposes for decades. WCI is and will
continue to be subject to numerous federal, state and local environmental laws
and regulations governing, among other things, air emissions, waste water
discharge and solid and hazardous waste disposal. WCI has made and intends to
continue to make the necessary expenditures for environmental remediation and
compliance with environmental laws and regulations. Environmental laws and
regulations have changed rapidly in recent years, and WCI may be subject to more
stringent environmental laws and regulations in the future. During 1998 the
Environmental Protection Agency (EPA) adopted new standards regulating
particulate matter and ozone emissions. Data relating to these standards is to
be collected and analyzed with implementation as early as 2004. Like much of the
steel, utilities and other industries, WCI's current operations are not expected
to comply with these standards if implemented as currently adopted. WCI cannot
currently assess the impact of these standards on its results of operations or
financial condition. Compliance with more stringent environmental laws and
regulations could have a material adverse effect on WCI's financial condition
and results of operations.
WCI is a defendant in three civil actions instituted by the Department of
Justice, on behalf of the EPA, in the United States District Court for the
Northern District of Ohio. The first action, instituted on June 29, 1995, under
the Clean Water Act, alleges numerous violations of WCI's National Pollution
Discharge Elimination System permit alleged to have occurred during the years
1989 through 1996. The second action, instituted on March 29, 1996, under the
Clean Air Act, alleges violations by WCI of
PAGE 8
the work practice, inspection and notice requirements for demolition and
renovation of the National Emission Standard for Hazardous Air Pollutants for
Asbestos and also violations of the particulate standard and the opacity limits
applicable to WCI's facilities in Warren, Ohio. The third action, instituted on
May 11, 1998, under the Resource Conservation and Recovery Act of 1976, as
amended (RCRA), alleges violations of RCRA, the Ohio Administrative Code (OAC)
and WCI's hazardous waste management permit issued pursuant to RCRA and OAC
related to WCI's management of hazardous waste in surface impoundments at the
Warren, Ohio facility. The action alleges that from September 1988 to the
present WCI operated hazardous waste management units at the Warren facility
without the proper permits pursuant to RCRA. Each action seeks a civil penalty
of not more than the statutory maximum of $25,000 per day per violation ($27,500
per day per violation for violations since January 30, 1997 in the case of the
RCRA action) and also an injunction against continuing violations. WCI believes
that imposition of the statutory maximum penalties for the alleged violations is
unlikely based upon past judicial penalties imposed under the Acts and that it
has defenses to liability. WCI has been attempting to negotiate consent decrees
with the EPA to settle the Clean Water Act and Clean Air Act actions. A trial
for the RCRA action has been scheduled for June 1999. If WCI is unable to reach
a negotiated settlement of these actions, and if a substantial penalty similar
to the statutory maximum penalty were imposed, it would have a material adverse
effect on the operating results and financial condition of WCI.
As a condition of a previous operating permit, WCI will be required to undertake
a corrective action program with respect to historical material handling
practices at the Warren facility. WCI is currently undertaking the first
investigation step of the corrective action program, the RCRA Facility
Investigation (RFI), the initial phase of which is expected to be completed in
1999. The RFI workplan identifies thirteen historical solid waste management
units which are the subject of the RFI, including areas of the facility which
are the subject of the RCRA civil action filed on May 11, 1998 described above.
The final scope of the corrective action required to remediate or reclaim any
contamination that may be present at or emanating from the Warren facility is
dependent upon the completion and findings of the RFI and the development and
approval of a corrective action program. Accordingly, WCI is unable at this time
to estimate the final cost of the corrective action program or the period over
which such costs may be incurred and there can be no assurance that any such
corrective action program would not have a material adverse effect on the
operating results or financial condition of WCI.
On January 23, 1996, two retired employees instituted an action against WCI and
the United Steelworkers of America (USWA) in the United States District Court
for the Northern District of Ohio alleging in substance that certain
distributions made by WCI to employees and benefit plans violated certain
agreements, the Employee Retirement Income Security Act, the National Labor
Relations Act and common law. On July 31, 1997, the court granted WCI's motion
to dismiss this action and entered judgement in favor of WCI and the USWA. The
plaintiffs have filed an
PAGE 9
appeal regarding the court's decision to dismiss, which was heard in June 1998.
No decision regarding the appeal has yet been rendered.
On April 5, 1996, an employee instituted an action for damages against WCI in
the Court of Common Pleas, Trumbull County, Ohio, alleging that, under Ohio
common law, her privacy rights were violated and that she had been subjected to
sexual harassment. The case went to trial on August 24, 1998 and the judge
directed a verdict in favor of WCI. The plaintiff has filed an appeal regarding
the directed verdict.
In addition to the above matters, WCI is contingently liable with respect to
lawsuits and other claims incidental to the ordinary course of its business. A
liability has been established for an amount, which WCI believes is adequate,
based on information currently available, to cover the costs to resolve the
above described matters, including remediation, if any, except for any costs of
corrective action that may result from the RFI for which no estimate can
currently be made. The outcome of the above described matters could have a
material adverse effect on the future operating results of WCI in a particular
quarterly or annual period; however, WCI believes that the effect of such
matters will not have a material adverse effect on WCI's consolidated financial
position.
NOTE 5 : INCOME TAXES
On January 15, 1999, Renco filed an election with the consent of its
shareholders with the Internal Revenue Service to change its taxable status from
that of a subchapter C corporation to that of a subchapter S corporation,
effective November 1, 1998. At the same time, Renco elected for the Company to
be treated as a qualified subchapter S subsidiary (QSSS). Most states in which
the Company operates will follow similar tax treatment. QSSS status requires the
ultimate shareholders to include their pro rata share of the Company's income or
loss in their individual tax returns. The Company will continue to provide for
state and local income taxes for the taxing jurisdictions which do not recognize
QSSS status, however, management believes this is not material to the Company.
As a result of this change in tax status, the Company recognized an income tax
benefit of $21.5 million during the three months ended January 31, 1999 which
represents the elimination of net deferred tax liabilities recorded as of
October 31, 1998.
PAGE 10
WCI STEEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
January 31, October 31,
1999 1998
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents .......................... $ 60,320 $ 62,195
Accounts receivable, less allowances ............... 42,434 48,724
Inventories ........................................ 83,844 87,140
Deferred income taxes .............................. -- 8,610
Prepaid expenses ................................... 1,399 1,144
--------- ---------
Total current assets ........................ 187,997 207,813
Property, plant and equipment, net ................... 214,873 217,624
Other assets, net .................................... 32,850 34,849
--------- ---------
Total assets ....................... $ 435,720 $ 460,286
========= =========
LIABILITIES and SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt .................. $ 117 $ 116
Accounts payable ................................... 48,316 46,620
Accrued liabilities ................................ 43,898 53,237
--------- ---------
Total current liabilities ................... 92,331 99,973
Long-term debt, excluding current portion ............ 301,472 301,502
Deferred income taxes ................................ -- 13,368
Postretirement health care benefits .................. 94,563 92,738
Pension benefits ..................................... 22,074 23,524
Other liabilities .................................... 13,536 14,054
--------- ---------
Total liabilities .................. 523,976 545,159
--------- ---------
Shareholder's equity (deficit)
Preferred stock, par value $1,000 per share,
5,000 shares authorized, none issued ............. -- --
Common stock, no par value, stated value $.01
per share, 40 million shares authorized,
100 shares issued and outstanding ................ -- --
Accumulated deficit ................................ (88,256) (84,873)
--------- ---------
Total shareholder's equity (deficit) (88,256) (84,873)
Commitments and contingencies ........................ -- --
Total liabilities and .............. -- --
shareholder's equity (deficit) .... $ 435,720 $ 460,286
========= =========
PAGE 11
The accompanying notes are an integral part of these condensed consolidated
financial statements.
WCI STEEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
Three months
ended January 31,
1999 1998
Net sales .................................... $ 110,277 $ 166,592
Operating costs and expenses
Cost of products sold ....................... 101,864 141,848
Depreciation and amortization ............... 5,802 6,413
Selling, general and
administrative expenses .................... 3,224 4,052
--------- ---------
110,890 152,313
--------- ---------
Operating income (loss) ...................... (613) 14,279
--------- ---------
Other income (expense)
Interest expense ............................ (8,010) (8,014)
Interest and other income, net .............. 682 299
--------- ---------
(7,328) (7,715)
--------- ---------
Income (loss) before income taxes ............ (7,941) 6,564
Income tax (benefit) expense ................. (4,558) 2,363
--------- ---------
Net income (loss) .......................... $ (3,383) $ 4,201
========= =========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
PAGE 12
WCI STEEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three months
ended January 31,
1999 1998
Cash flows from operating activities
Net income (loss) ................................... $ (3,383) $ 4,201
Adjustments to reconcile net income (loss)
to net cash provided by operating activities
Depreciation and amortization .............. 5,070 5,680
Amortization of deferred maintenance costs . 732 733
Amortization of financing costs ............ 328 337
Postretirement health care benefits ........ 1,825 1,514
Pension benefits ........................... (411) 1,361
Deferred income taxes ...................... (4,758) 203
Provision for losses on accounts
receivable ................................ -- (100)
Other ...................................... 18 (35)
Cash provided (used) by changes in certain assets
and liabilities
Accounts receivable ........................ 6,290 (5,035)
Inventories ................................ 3,296 2,546
Accounts payable ........................... 1,696 (2,397)
Accrued liabilities ........................ (9,439) (8,837)
Other assets and liabilities, net .......... (773) 2,853
-------- --------
Net cash provided by operating activities .. 491 3,024
-------- --------
Cash flows from investing activities
Additions to property, plant and equipment .......... (2,337) (4,192)
Gross proceeds from the sale of assets ..... -- 110
-------- --------
Net cash used by investing activities ...... (2,337) (4,082)
-------- --------
Cash flows from financing activities
Dividends paid .......................................... -- (5,300)
Principal payments on long-term debt .................... (29) (965)
-------- --------
Net cash used by financing activities ...... (29) (6,265)
-------- --------
Net decrease in cash and cash equivalents .................... (1,875) (7,323)
Cash and cash equivalents at beginning of period ............. 62,195 18,989
-------- --------
Cash and cash equivalents at end of period ................... $ 60,320 $ 11,666
======== ========
Supplemental disclosure of cash flow information
Cash paid for interest .............................. $ 15,145 $ 15,194
Cash paid for income taxes .......................... 583 40
The accompanying notes are an integral part of these condensed consolidated
financial statements.
PAGE 13
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended January 31, 1999 and 1998
( Unaudited )
NOTE 1 : BASIS OF PRESENTATION
WCI Steel, Inc. (Company or WCI) is a wholly-owned subsidiary of Renco Steel
Holdings, Inc. (Renco Steel) and an indirect wholly-owned subsidiary of The
Renco Group, Inc. (Renco). The financial information included herein is
unaudited; however, such information reflects all adjustments (consisting solely
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim periods. The results
of operations for the three months ended January 31, 1999 are not necessarily
indicative of the results to be expected for the full year.
These interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the
Company's Form 10-K for the fiscal year ended October 31, 1998.
NOTE 2 : INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined by the
last-in, first-out (LIFO) method. The composition of inventories at January 31,
1999 and October 31, 1998 was as follows:
January 31, October 31,
1999 1998
(Unaudited)
----------- -----------
(Dollars in thousands)
Raw materials .................................... $36,986 $36,259
Finished and semi-finished product ............... 54,328 58,332
Supplies ......................................... 67 86
------- -------
91,381 94,677
Less LIFO reserve ................................ 7,537 7,537
------- -------
$83,844 $87,140
======= =======
PAGE 14
NOTE 3 : ENVIRONMENTAL MATTERS and OTHER CONTINGENCIES
In common with much of the steel industry, the Company's facilities are located
on sites that have been used for heavy industrial purposes for decades. The
Company is and will continue to be subject to numerous federal, state and local
environmental laws and regulations governing, among other things, air emissions,
waste water discharge and solid and hazardous waste disposal. The Company has
made and intends to continue to make the necessary expenditures for
environmental remediation and compliance with environmental laws and
regulations. Environmental laws and regulations have changed rapidly in recent
years, and the Company may be subject to more stringent environmental laws and
regulations in the future. During 1998 the Environmental Protection Agency (EPA)
adopted new standards regulating particulate matter and ozone emissions. Data
relating to these standards is to be collected and analyzed with implementation
as early as 2004. Like much of the steel, utilities and other industries, the
Company's current operations are not expected to comply with these standards if
implemented as currently adopted. The Company cannot currently assess the impact
of these standards on its results of operations or financial condition.
Compliance with more stringent environmental laws and regulations could have a
material adverse effect on the Company's financial condition and results of
operations.
The Company is a defendant in three civil actions instituted by the Department
of Justice, on behalf of the EPA, in the United States District Court for the
Northern District of Ohio. The first action, instituted on June 29, 1995, under
the Clean Water Act, alleges numerous violations of the Company's National
Pollution Discharge Elimination System permit alleged to have occurred during
the years 1989 through 1996. The second action, instituted on March 29, 1996,
under the Clean Air Act, alleges violations by the Company of the work practice,
inspection and notice requirements for demolition and renovation of the National
Emission Standard for Hazardous Air Pollutants for Asbestos and also violations
of the particulate standard and the opacity limits applicable to the Company's
facilities in Warren, Ohio. The third action, instituted on May 11, 1998, under
the Resource Conservation and Recovery Act of 1976, as amended (RCRA), alleges
violations of RCRA, the Ohio Administrative Code (OAC) and the Company's
hazardous waste management permit issued pursuant to RCRA and OAC related to the
Company's management of hazardous waste in surface impoundments at the Warren,
Ohio facility. The action alleges that from September 1988 to the present the
Company operated hazardous waste management units at the Warren facility without
the proper permits pursuant to RCRA. Each action seeks a civil penalty of not
more than the statutory maximum of $25,000 per day per violation ($27,500 per
day per violation for violations since January 30, 1997 in the case of the RCRA
action) and also an injunction against continuing violations. The Company
believes that imposition of the statutory maximum penalties for the alleged
violations is
PAGE 15
unlikely based upon past judicial penalties imposed under the Acts and that it
has defenses to liability. The Company has been attempting to negotiate consent
decrees with the EPA to settle the Clean Water Act and Clean Air Act actions. A
trial for the RCRA action has been scheduled for June 1999. If the Company is
unable to reach a negotiated settlement of these actions, and if a substantial
penalty similar to the statutory maximum penalty were imposed, it would have a
material adverse effect on the operating results and financial condition of the
Company.
As a condition of a previous operating permit, the Company will be required to
undertake a corrective action program with respect to historical material
handling practices at the Warren facility. The Company is currently undertaking
the first investigation step of the corrective action program, the RCRA Facility
Investigation (RFI), the initial phase of which is expected to be completed in
1999. The RFI workplan identifies thirteen historical solid waste management
units which are the subject of the RFI, including areas of the facility which
are the subject of the RCRA civil action filed on May 11, 1998 described above.
The final scope of the corrective action required to remediate or reclaim any
contamination that may be present at or emanating from the Warren facility is
dependent upon the completion and findings of the RFI and the development and
approval of a corrective action program. Accordingly, the Company is unable at
this time to estimate the final cost of the corrective action program or the
period over which such costs may be incurred and there can be no assurance that
any such corrective action program would not have a material adverse effect on
the operating results or financial condition of the Company.
On January 23, 1996, two retired employees instituted an action against the
Company and the United Steelworkers of America (USWA) in the United States
District Court for the Northern District of Ohio alleging in substance that
certain distributions made by the Company to employees and benefit plans
violated certain agreements, the Employee Retirement Income Security Act, the
National Labor Relations Act and common law. On July 31, 1997, the court granted
the Company's motion to dismiss this action and entered judgement in favor of
the Company and the USWA. The plaintiffs have filed an appeal regarding the
court's decision to dismiss, which was heard in June 1998. No decision regarding
the appeal has yet been rendered.
On April 5, 1996, an employee instituted an action for damages against WCI in
the Court of Common Pleas, Trumbull County, Ohio, alleging that, under Ohio
common law, her privacy rights were violated and that she had been subjected to
sexual harassment. The case went to trial on August 24, 1998 and the judge
directed a verdict in favor of the Company. The plaintiff has filed an appeal
regarding the directed verdict.
In addition to the above matters, the Company is contingently liable with
respect to lawsuits and other claims incidental to the ordinary course of its
business. A liability has been
PAGE 16
established for an amount, which the Company believes is adequate, based on
information currently available, to cover the costs to resolve the above
described matters, including remediation, if any, except for any costs of
corrective action that may result from the RFI for which no estimate can
currently be made. The outcome of the above described matters could have a
material adverse effect on the future operating results of the Company in a
particular quarterly or annual period; however, the Company believes that the
effect of such matters will not have a material adverse effect on the Company's
consolidated financial position.
NOTE 4 : INCOME TAXES
On January 15, 1999, Renco filed an election with the consent of its
shareholders with the Internal Revenue Service to change its taxable status from
that of a subchapter C corporation to that of a subchapter S corporation,
effective November 1, 1998. At the same time, Renco elected for the Company to
be treated as a qualified subchapter S subsidiary (QSSS). Most states in which
the Company operates will follow similar tax treatment. QSSS status requires the
ultimate shareholders to include their pro rata share of the Company's income or
loss in their individual tax returns. The Company will continue to provide for
state and local income taxes for the taxing jurisdictions which do not recognize
QSSS status, however, management believes this is not material to the Company.
As a result of this change in tax status, the Company recognized an income tax
benefit of $4,558,000 during the three months ended January 31, 1999 which
includes the elimination of net deferred tax liabilities recorded as of October
31, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Three Months Ended January 31, 1999 Compared to
Three Months Ended January 31, 1998
Net sales for the three months ended January 31, 1999 were $110.3 million on
241,082 tons shipped, representing a 33.8% decrease in net sales and a 30.7%
decrease in tons shipped compared to the three months ended January 31, 1998.
Net sales per ton shipped decreased 5.8% to $457 in the 1999 quarter compared to
$485 in 1998, excluding semi-finished steel. Shipments of custom carbon, alloy
and electrical steels accounted for 66.8% of total shipments during the 1999
quarter compared to 63.9%, excluding semi-finished steel, in the comparable
period of 1998. The decreases in net sales per ton shipped and the lower
shipping volume reflect an unprecedented surge in steel imports during the
second half of 1998, which began to slow in December 1998. WCI has experienced
an improving order entry rate since the low point experienced in October 1998
and booked at near capacity levels during January and the first half of February
1999. WCI's order
PAGE 17
backlog increased to 199,000 tons at January 31, 1999 compared to 155,000 tons
at October 31, 1998. As a result, WCI increased production in late January 1999
and expects that shipments will return to more normal levels by late in the
second fiscal quarter. In addition, several domestic producers, including WCI,
have announced price increases of $10 to $40 per ton effective April 1999. There
can be no assurance that the announced price increases will be realized.
Gross margin (net sales less cost of products sold) was $8.5 million for the
three months ended January 31, 1999 compared to $24.7 million for the three
months ended January 31, 1998. The decrease in gross margin in 1999 is primarily
attributable to the lower selling prices and volume discussed above and the
effect of higher costs caused by production being significantly below capacity
throughout most of the first quarter. In addition, during the first quarter of
1999, WCI incurred approximately $0.9 million of costs to address year 2000
computer issues and to repair a vessel breakout that occurred at its basic
oxygen furnace.
The Company incurred an operating loss of $1.5 million for the three months
ended January 31, 1999 compared to operating income of $13.3 million for the
three months ended January 31, 1998. The operating results for 1999 reflect the
lower gross margin discussed above partially offset by decreases in depreciation
expense and selling, general and administrative expenses primarily as a result
of lower variable compensation expense.
Interest expense was $11.4 million in the first quarter of 1999 compared to $8.0
million in the first quarter of 1998. The increase was primarily due to Renco
Steel's issuance of the $120.0 million principal amount 10 7/8% Senior Secured
Notes due 2005 (Senior Secured Notes) on February 3, 1998. Interest, investment
and other income, net, was $2.0 million in the first quarter of 1999 compared to
$0.3 million in the first quarter of 1998 due to interest earned on
significantly higher cash and cash equivalent balances at WCI, and investment
income at Renco Steel.
As a result of the items discussed above, the Company incurred a loss before
taxes of $11.0 million in 1999 compared to income before taxes of $5.6 million
in 1998. Effective November 1, 1998, the Company was designated as a qualified
subchapter S subsidiary by Renco. Accordingly, the Company is generally not
subject to income taxes and has recognized an income tax benefit of $21.5
million during the three months ended January 31, 1999 representing the
elimination of net deferred tax liabilities recorded as of October 31, 1998.
PAGE 18
LIQUIDITY AND CAPITAL RESOURCES
Renco Steel
In February 1998, Renco Steel issued the Senior Senior Secured Notes. Interest
on the Senior Secured Notes is payable semi-annually in arrears on February 1,
and August 1 of each year.
Renco Steel's liquidity requirements result from its debt service obligations
related to the Senior Secured Notes, as well as to a nominal extent, general
corporate overhead. Renco Steel has met these requirements from existing cash
balances and through distributions from WCI, as permitted under the terms of
WCI's outstanding indebtedness. At January 31, 1999, Renco Steel had available
cash and investment balances of $15.9 million, net of cash appropriated for the
February 1st interest payment. Renco may also make contributions or advances to
Renco Steel to meet its debt service obligations, however, Renco has no
obligation to do so.
A source of liquidity for Renco Steel to meet its debt service obligations has
been available payments from WCI under the tax sharing agreement. On January 15,
1999, Renco filed an election, with the consent of its shareholders, with the
Internal Revenue Service to change its taxable status from that of a subchapter
C corporation to that of a subchapter S corporation, effective November 1, 1998.
At the same time, Renco designated Renco Steel and WCI as qualified subchapter S
subsidiaries. (See Note 5 to Part I Financial Statements of Renco Steel Holdings
Inc., Item 1).
As a result of such election, Renco Steel generally will not be receiving income
tax payments from WCI pursuant to the tax sharing agreement. The effect of this
is the loss of cash generated from the tax benefit, if any, derived from Renco
Steel's interest expense. This may be partially offset by an increase in
allowable dividends payable by WCI under the terms of WCI's indenture.
Management believes that this change in tax status will not have a material
adverse effect on Renco Steel and its ability to meet its debt service
obligations.
The ability of Renco Steel to meet its debt service obligations is dependent
upon WCI's operating performance and financial results and the performance of
its investments, other than in WCI (Other Investments). WCI's operating
performance and financial results will be subject to financial, economic,
political, competitive and other factors affecting WCI, many of which are beyond
WCI's control. WCI incurred a loss of $3.4 million in the first fiscal quarter
of 1999 and expects production and sales to return to normal levels by the end
of the second fiscal quarter of 1999. As a result, Renco Steel does not expect
to receive a dividend distribution from WCI until late 1999 or later. Such
dividends are generally limited to 50% of WCI's cumulative earnings since
October 31, 1996.
PAGE 19
The indenture governing the Senior Secured Notes contains numerous covenants and
prohibitions that limit the financial activities of Renco Steel, including,
among others, limitations on the incurrence of additional indebtedness and
additional liens and the ability to pay dividends. The ability of Renco Steel to
comply with such covenants will be dependent upon WCI's future performance.
Cash provided by operating activities was $0.9 million for the three months
ended January 31, 1999 compared to $3.0 million for the 1998 period. The lower
operating cash flow in 1999 compared to 1998 resulted from a decrease in income
before taxes as described above, partially offset by changes in working capital.
Cash provided by investing activities was $0.1 million during the first quarter
of 1999, compared with a cash outflow of $4.1 million in the 1998 first quarter.
WCI's capital expenditures in the current period were $1.9 million less than in
the prior period and Renco Steel's proceeds from the sale of Other Investments
provided $2.5 million, net of purchases. Capital expenditures in fiscal 1999 are
estimated to be $15.0 million to $20.0 million. Management has funded such
expenditures in 1999 and 1998 from existing cash balances and cash provided by
operations. At January 31, 1999, WCI had commitments for capital expenditures of
approximately $3.0 million.
WCI
WCI's liquidity requirements result from capital investments, working capital
requirements, postretirement health care and pension funding, and interest
expense. WCI has met these requirements in each fiscal year since 1992 from cash
balances and cash provided by operating activities. WCI's primary sources of
liquidity as of January 31, 1999 consisted of cash and cash equivalents of $60.3
million and available borrowing under its $100 million revolving credit facility
(Revolving Credit Facility of WCI). The Revolving Credit Facility of WCI has a
maximum borrowing limit of $100 million, is secured by eligible inventories and
receivables, as defined therein, and expires on December 29, 1999. As of January
31, 1999, WCI had no borrowings outstanding under the Revolving Credit Facility
of WCI, with a borrowing limit of $82.1 million based on eligible inventories
and receivables, net of $6.6 million in outstanding letters of credit.
Management believes that it has sufficient liquidity to support its operations
for the foreseeable future.
WCI's cash provided by operating activities was $0.5 million for the three
months ended January 31, 1999 compared to $3.0 million for the 1998 period. The
lower operating cash flow in 1999 compared to 1998 resulted from a decrease in
income before taxes as described above, partially offset by changes in working
capital.
PAGE 20
Capital expenditures were $2.3 million and $4.2 million during the first quarter
of fiscal 1999 and 1998, respectively, and are estimated to be $15 million to
$20 million for all of fiscal 1999. Management has funded capital expenditures
in 1999 and 1998 through cash balances and cash provided by operating
activities. At January 31, 1999, WCI had commitments for capital expenditures of
approximately $3.0 million.
The Revolving Credit Facility of WCI and WCI's 10% Senior Secured Notes due 2004
(Senior Secured Notes of WCI) contain numerous covenants and prohibitions that
limit the financial activities of WCI, including requirements that WCI satisfy
certain financial ratios which limit the incurrence of additional indebtedness.
The ability of WCI to meet its debt service requirements and to comply with such
covenants will be dependent upon its future operating performance and financial
results of WCI, which will be subject to financial, economic, political,
competitive and other factors affecting WCI, many of which are beyond its
control.
WCI paid no dividends during the first quarter of 1999 and, under the terms of
the Senior Secured Notes of WCI indenture, WCI was not permitted to pay
dividends at January 31, 1999.
Year 2000 Business Matters
Many information and process control systems used in the current business
environment were designed to use only two digits in the date field and thus may
not function properly in or after the year 2000. Over the past several years,
WCI has been assessing and modifying its business systems to be year 2000 ready
and has completed the required program changes and has completed, or has
substantially completed, the replacement/ upgrading of purchased systems. WCI is
testing each individual application for year 2000 readiness and has completed
testing of approximately 70% of the applications and, after completing
additional remediation on approximately 5% of the programs tested, has found
them to be year 2000 ready. WCI has developed a comprehensive enterprise-wide
testing plan for its business systems. The initial test is scheduled for March
1999 and further remediation may be required after this test. WCI has a second
enterprise-wide test scheduled for July 1999, if necessary. WCI has completed an
inventory and assessment of its process control environment including
automation, instrumentation and components with embedded chips, with
approximately 90% of the assessed inventory being year 2000 ready. WCI expects
to complete remediation and testing of the process control systems and
components by September 1999. WCI is planning an enterprise-wide test for
process control in mid-1999. WCI does not expect year 2000 issues related to its
business systems or process control environment to cause any significant
disruption to operations. WCI incurred $0.2 million of incremental costs to
address year 2000 issues during the three months ended January 31, 1999 and,
based on information available at this time, estimates that it will incur
incremental costs of approximately $1.5 million during the remainder of 1999.
PAGE 21
In conjunction with its efforts to achieve year 2000 readiness, WCI is also
monitoring the status of the year 2000 readiness programs at its significant
suppliers and business partners through questionnaires which were sent to each
such entity. WCI has received responses from approximately 87% of these
entities. WCI is evaluating these responses and intends to make additional
inquiries of critical suppliers during 1999 to monitor the status of their year
2000 readiness efforts. WCI will use information learned from this process in
developing its contingency plans to mitigate the impact that may occur if its
critical suppliers are not year 2000 ready on a timely basis.
While WCI is developing contingency plans for the sourcing and transportation of
raw material components critical to its operations, WCI is presently dependent
on a single source for certain of its energy, raw materials and transportation
needs. If certain vendors are unable to supply the raw materials, energy or
transportation services on a timely basis in the year 2000, it could result in
WCI being unable to operate or require WCI to operate at a reduced level. In
addition, the lack of accurate and timely year 2000 information from suppliers
of automation and process control systems and components or suppliers' inability
to provide year 2000 ready replacement components could result in WCI being
unable to operate, or require WCI to operate at a reduced level, in the year
2000.
Accounting Standards
In March 1998, the American Institute of Certified Public Accounts issued its
Statement of Position No. 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides
guidelines for companies to capitalize or expense as incurred costs to develop
or obtain internal-use software. The Company adopted SOP 98-1 effective November
1, 1998. The adoption of SOP 98-1 did not have a material impact on the
Company's results of operations for the three months ended January 31, 1999.
Forward-Looking Statements
This report includes "forward-looking statements" which involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company to differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such risks, uncertainties and other important
factors include, among others: general economic and business conditions;
increasing industry capacity and levels of imports of steel or steel products;
industry trends, including product pricing; competition; currency fluctuations;
the loss of any significant customers; availability of qualified personnel;
major equipment failures; changes in, or the failure or inability to comply
with, government regulation, including, without
PAGE 22
limitation, environmental regulations; the outcome of pending environmental and
other legal matters and the performance of the Other Investments. These
forward-looking statements speak only as of the date of this report. The Company
expressly disclaims any obligation or undertaking to disseminate any updates or
revisions to any forward-looking statement contained herein to reflect any
change in the Company's expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based.
PAGE 23
PART II - OTHER INFORMATION
RENCO STEEL HOLDINGS, INC.
ITEM 1. LEGAL PROCEEDINGS
For information relating to WCI's environmental matters and
employee litigation described in the Company's Form 10-K for
the year ended October 31, 1998, see Part I, Note 4 to Item 1,
Financial Statements.
ITEM 6. EXHIBITS and REPORTS ON FORM 8-K
(a) Exhibits:
A list of the exhibits required to be filed as part of this
Report on Form 10-Q is set forth in the "Exhibit Index" which
immediately precedes such exhibits, and is incorporated herein
by reference.
(b) Reports on Form 8-K:
On January 29, 1999, WCI filed Form 8-K to report a change in
tax status. This matter is described in Note 5 to the
condensed consolidated financial statements.
PAGE 24
RENCO STEEL HOLDINGS, INC.
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.
RENCO STEEL HOLDINGS, INC.
(registrant)
Date: March 17, 1999 /s/ JAMES N. CHAPMAN
------------------------------
James N. Chapman
President
(principal executive officer)
/s/ ROGER L. FAY
------------------------------
Roger L. Fay
Vice President and
Chief Financial Officer
(principal financial and
accounting officer)
PAGE 25
RENCO STEEL HOLDINGS, INC.
EXHIBIT INDEX
Exhibit Number Description
27. Financial Data Schedule