PAGE 1
- --------------------------------------------------------------------------------
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 April 30, 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 June 11, 1999, the registrant had 100 shares of its common stock,
no par value, $.01 stated value, outstanding.
- --------------------------------------------------------------------------------
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
April 30, 1999 and October 31, 1998. 3
Condensed Consolidated Statements of Operations for the
three and six months ended April 30, 1999 and 1998. 4
Condensed Consolidated Statements of Cash Flows for the
six months ended April 30, 1999 and 1998. 5
Notes to Condensed Consolidated Financial Statements. 6
Financial Statements of WCI Steel, Inc.
Condensed Consolidated Balance Sheets as of
April 30, 1999 and October 31, 1998. 10
Condensed Consolidated Statements of Operations for the
three and six months ended April 30, 1999 and 1998. 11
Condensed Consolidated Statements of Cash Flows for the
six months ended April 30, 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 17
PART II OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 24
Item 6. Exhibits and Reports on Form 8-K 25
Signatures 26
Exhibit Index 27
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)
April 30, October 31,
1999 1998
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents...................... $ 1,127 $ 4,957
Restricted cash and cash equivalents........... 78,231 62,195
Other investments ............................. 16,015 15,774
Accounts receivable, less allowances........... 53,721 48,724
Inventories.................................... 72,895 88,138
Deferred income taxes.......................... - 8,462
Prepaid expenses............................... 277 1,144
--------- ---------
Total current assets.................... 222,266 229,394
Property, plant and equipment, net............... 260,511 266,625
Excess of cost over acquired net assets, net..... 12,168 12,439
Other assets, net................................ 30,130 34,342
--------- ---------
Total assets................... $ 525,075 $ 542,800
--------- ---------
--------- ---------
LIABILITIES and SHAREHOLDER'S DEFICIT
Current liabilities
Current portion of long-term debt.............. $ 119 $ 116
Accounts payable............................... 52,929 46,620
Accrued liabilities............................ 58,427 56,309
--------- ---------
Total current liabilities............... 111,475 103,045
Long-term debt, excluding current portion........ 421,085 421,114
Deferred income taxes............................ - 30,393
Postretirement health care benefits.............. 96,699 93,378
Pension benefits................................. 17,718 23,604
Other liabilities................................ 12,509 14,054
--------- ---------
Total liabilities.............. 659,486 685,588
--------- ---------
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............................ (134,412) (142,789)
--------- ---------
Total shareholder's deficit.... (134,411) (142,788)
Commitments and contingencies.................... - -
--------- ---------
Total liabilities and
shareholder's deficit......... $ 525,075 $ 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 OPERATIONS
(Dollars in thousands)
(Unaudited)
Three months Six months
ended April 30, ended April 30,
1999 1998 1999 1998
Net sales....................... $ 139,115 $177,860 $249,392 $344,452
Operating costs and expenses
Cost of products sold............. 121,787 149,072 223,583 290,920
Depreciation and amortization..... 6,732 7,259 13,436 14,618
Selling, general and
administrative expenses.......... 3,549 4,486 6,850 8,535
---------- --------- ----------- ---------
132,068 160,817 243,869 314,073
---------- --------- ----------- ---------
Operating income................... 7,047 17,043 5,523 30,379
---------- --------- ----------- ---------
Other income (expense)
Interest expense.................. (11,419) (11,356) (22,833) (19,370)
Interest, investment
and other income, net............ 2,243 1,031 4,210 1,330
---------- --------- ----------- ---------
(9,176) (10,325) (18,623) (18,040)
---------- --------- ----------- ---------
(Loss) income before income taxes.. (2,129) 6,718 (13,100) 12,339
Income tax expense (benefit)....... - 2,432 (21,477) 4,473
---------- --------- ----------- ---------
Net (loss) income ............... $ (2,129) $ 4,286 8,377 $ 7,866
---------- --------- ----------- ---------
---------- --------- ----------- ---------
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)
Six months
ended April 30,
1999 1998
Cash flows from operating activities
Net income .......................................... $ 8,377 $ 7,866
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization............... 11,971 13,153
Amortization of deferred maintenance costs.. 1,465 1,465
Amortization of financing costs............. 948 824
Postretirement health care benefits......... 3,321 3,153
Pension benefits............................ (1,788) 2,198
Deferred income taxes....................... (21,677) 1,044
Gain on other investments................... (2,724) (548)
Other....................................... 54 (447)
Cash provided (used) by changes in certain
assets and liabilities
Accounts receivable......................... (4,997) 2,752
Inventories................................. 15,243 20,746
Accounts payable............................ 6,309 381
Accrued liabilities......................... (498) 5,212
Other assets and liabilities, net........... (584) (380)
---------- ---------
Net cash provided by operating activities... 15,420 57,419
---------- ---------
Cash flows from investing activities
Additions to property, plant and equipment........... (5,639) (9,645)
Gross proceeds from the sale of assets...... - 110
Other investments, net............................... 2,482 (15,481)
---------- ---------
Net cash provided (used) by investing
activities................................. (3,157) (25,016)
---------- ---------
Cash flows from financing activities
Net proceeds from issuance of Senior
Secured Notes ...................................... - 115,566
Dividends paid....................................... - (105,300)
Principal payments on long-term debt................. (57) (1,263)
Issuance of common stock of the Company.............. - 1
---------- ---------
Net cash (used) provided by
financing activities....................... (57) 9,004
---------- ---------
Net increase in cash and cash equivalents..................... 12,206 41,407
Total cash and cash equivalents at
beginning of period.......................................... 67,152 18,989
---------- ---------
Total cash and cash equivalents at end of period.............. $ 79,358 $ 60,396
---------- ---------
---------- ---------
Supplemental disclosure of cash flow information..............
Cash paid for interest............................... $ 21,885 $ 15,384
Cash paid for income taxes........................... 365 (600)
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 and six months ended April 30, 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 and six months ended April 30, 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 April 30, 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 April 30, 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
operations include unrealized gains related to investments of $2.7 million and
$0.5 million for the six months ended April 30, 1999 and April 30, 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 April 30,
1999 and October 31, 1998 was as follows:
April 30, October 31,
1999 1998
(Unaudited)
----------- -----------
(Dollars in thousands)
Raw materials......................... $ 22,406 $ 36,259
Finished and semi-finished product.... 56,712 58,332
Supplies.............................. 101 86
--------- ---------
79,219 94,677
Less LIFO reserve..................... 6,324 6,539
--------- ---------
$ 72,895 $ 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. Compliance with more
stringent environmental laws and regulations could have a material adverse
effect on WCI's financial condition and results of operations.
WCI has been named a defendant in three civil actions instituted by the
Department of Justice (DOJ), on behalf of the Environmental Protection Agency
(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 Pollutant Discharge Elimination
System permit during the years 1989 through 1996. The second action, instituted
on March 29, 1996, under the Clean Air Act, alleges violations by WCI of the
work practice,
PAGE 8
inspection and notice requirements for demolition and renovation under the
National Emission Standard for Hazardous Air Pollutants for Asbestos and also
violations of the particulate standard and the opacity limits at WCI's
facilities in Warren, Ohio. Consent decrees embodying settlements reached
between WCI and the EPA in the civil actions, which have been approved and
entered by the court, provide for $1.74 million in cash penalties and for
injunctive relief and supplemental environmental projects estimated to cost
between $1.7 million and $2.2 million that will be expended over two years. The
largest of the projects to be undertaken as part of the settlement involves
sediment removal from the Mahoning River at an estimated cost of $750,000 but
not to exceed $1 million.
The third action, instituted on May 11, 1998, under the Resource Conservation
and Recovery Act (RCRA), alleges violations of RCRA, the Ohio Administrative
Code (OAC) and WCI's hazardous waste management permit related to WCI's
management of alleged 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 and in noncompliance with RCRA. This 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) and also an
injunction requiring closure of the surface impoundments under RCRA. WCI
believes that it has defenses to liability and that imposition of the statutory
maximum penalty for the alleged violations is unlikely, in any event, based upon
past judicial penalties imposed under RCRA. A trial in the RCRA action has been
scheduled for June 1999. 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 RCRA operating permit, WCI is 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 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
PAGE 9
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 (ERISA), the National
Labor Relations Act (NLRA) 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 filed an appeal regarding the court's decision to
dismiss which was heard in June 1998. In March 1999, the appellate court upheld
the dismissal of the claims under ERISA and common law, but reversed the
dismissal of the NLRA claim and remanded to the district court for further
proceedings.
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 first fiscal quarter 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)
April 30, Oct. 31,
1999 1998
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents .......................... $ 78,231 $ 62,195
Accounts receivable, less allowances ............... 53,721 48,724
Inventories ........................................ 71,932 87,140
Deferred income taxes .............................. -- 8,610
Prepaid expenses ................................... 277 1,144
--------- ---------
Total current assets ........................ 204,161 207,813
Property, plant and equipment, net ................... 213,041 217,624
Other assets, net .................................... 30,849 34,849
--------- ---------
Total assets ....................... $ 448,051 $ 460,286
--------- ---------
--------- ---------
LIABILITIES and SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt .................. $ 119 $ 116
Accounts payable ................................... 52,929 46,620
Accrued liabilities ................................ 54,971 53,237
--------- ---------
Total current liabilities ................... 108,019 99,973
Long-term debt, excluding current portion ............ 301,442 301,502
Deferred income taxes ................................ -- 13,368
Postretirement health care benefits .................. 96,081 92,738
Pension benefits ..................................... 17,641 23,524
Other liabilities .................................... 12,509 14,054
--------- ---------
Total liabilities .................. 535,692 545,159
--------- ---------
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 ................................ (87,641) (84,873)
--------- ---------
Total shareholder's equity (deficit) (87,641) (84,873)
Commitments and contingencies ........................ -- --
--------- ---------
Total liabilities and
shareholder's equity (deficit) ... $ 448,051 $ 460,286
--------- ---------
--------- ---------
The accompanying notes are an integral part of these condensed consolidated
financial statements.
PAGE 11
WCI STEEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
Three months Six months
ended April 30, ended April 30,
1999 1998 1999 1998
Net sales .......................... $ 139,115 $ 177,860 $ 249,392 $ 344,452
Operating costs and expenses
Cost of products sold ........... 121,852 149,204 223,716 291,052
Depreciation and amortization ... 5,831 6,404 11,633 12,817
Selling, general and
administrative expenses ........ 3,517 4,480 6,741 8,532
--------- --------- --------- ---------
131,200 160,088 242,090 312,401
--------- --------- --------- ---------
Operating income ................. 7,915 17,772 7,302 32,051
--------- --------- --------- ---------
Other income (expense)
Interest expense ................ (8,006) (8,008) (16,016) (16,022)
Interest and other income, net .. 706 417 1,388 716
--------- --------- --------- ---------
(7,300) (7,591) (14,628) (15,306)
--------- --------- --------- ---------
Income (loss) before income taxes 615 10,181 (7,326) 16,745
Income tax (benefit) expense ..... -- 3,665 (4,558) 6,028
--------- --------- --------- ---------
Net income (loss) ................ $ 615 $ 6,516 $ (2,768) $ 10,717
--------- --------- --------- ---------
--------- --------- --------- ---------
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)
Six months
ended April 30,
1999 1998
Cash flows from operating activities
Net income (loss) ................................. $ (2,768) $ 10,717
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Depreciation and amortization ............ 10,168 11,352
Amortization of deferred maintenance costs 1,465 1,465
Amortization of financing costs .......... 656 665
Postretirement health care benefits ...... 3,343 3,176
Pension benefits ......................... (1,643) 2,344
Deferred income taxes .................... (4,758) 1,413
Other .................................... 54 (447)
Cash provided (used) by changes in certain assets
and liabilities
Accounts receivable ...................... (4,997) 2,753
Inventories .............................. 15,208 20,711
Accounts payable ......................... 6,309 381
Accrued liabilities ...................... (628) 1,106
Other assets and liabilities, net ........ (677) (371)
-------- --------
Net cash provided by operating activities 21,732 55,265
-------- --------
Cash flows from investing activities
Additions to property, plant and equipment ........ (5,639) (9,645)
Gross proceeds from the sale of assets ............ -- 110
-------- --------
Net cash used by investing activities .... (5,639) (9,535)
-------- --------
Cash flows from financing activities
Dividends paid .................................... -- (5,300)
Principal payments on long-term debt .............. (57) (1,263)
-------- --------
Net cash used by financing activities .... (57) (6,563)
-------- --------
Net increase in cash and cash equivalents .................. 16,036 39,167
Cash and cash equivalents at beginning of period ........... 62,195 18,989
-------- --------
Cash and cash equivalents at end of period ................. $ 78,231 $ 58,156
-------- --------
-------- --------
Supplemental disclosure of cash flow information
Cash paid for interest ............................ $ 15,360 $ 15,384
Cash paid for income taxes ........................ 769 715
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 and six months ended April 30, 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 and six months ended April 30, 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 April 30,
1999 and October 31, 1998 was as follows:
April 30, October 31,
1999 1998
(Unaudited)
------- -------
(Dollars in thousands)
Raw materials ..................................... $22,406 $36,259
Finished and semi-finished product ................ 56,712 58,332
Supplies .......................................... 101 86
------- -------
79,219 94,677
Less LIFO reserve ................................. 7,287 7,537
------- -------
$71,932 $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. 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 has been named a defendant in three civil actions instituted by the
Department of Justice (DOJ), on behalf of the Environmental Protection Agency
(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 Pollutant Discharge
Elimination System permit 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 under the National Emission Standard for Hazardous Air Pollutants
for Asbestos and also violations of the particulate standard and the opacity
limits at the Company's facilities in Warren, Ohio. Consent decrees embodying
settlements reached between the Company and the EPA in the civil actions, which
have been approved and entered by the court, provide for $1.74 million in cash
penalties and for injunctive relief and supplemental environmental projects
estimated to cost between $1.7 million and $2.2 million that will be expended
over two years. The largest of the projects to be undertaken as part of the
settlement involves sediment removal from the Mahoning River at an estimated
cost of $750,000 but not to exceed $1 million.
The third action, instituted on May 11, 1998, under the Resource Conservation
and Recovery Act (RCRA), alleges violations of RCRA, the Ohio Administrative
Code (OAC) and the Company's hazardous waste management permit related to the
Company's management of alleged 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 and in noncompliance with RCRA. This action
seeks a civil penalty of not more than the statutory maximum of $25,000 per day
per
PAGE 15
violation ($27,500 per day per violation for violations since January 30, 1997)
and also an injunction requiring closure of the surface impoundments under RCRA.
The Company believes that it has defenses to liability and that imposition of
the statutory maximum penalty for the alleged violations is unlikely, in any
event, based upon past judicial penalties imposed under RCRA. A trial in the
RCRA action has been scheduled for June 1999. 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 RCRA operating permit, the Company is 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 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
(ERISA), the National Labor Relations Act (NLRA) 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 filed an appeal
regarding the court's decision to dismiss which was heard in June 1998. In March
1999, the appellate court upheld the dismissal of the claims under ERISA and
common law, but reversed the dismissal of the NLRA claim and remanded to the
district court for further proceedings.
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 established for an amount, which the Company
believes is adequate, based on information currently available, to cover the
PAGE 16
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.
PAGE 17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Three Months Ended April 30, 1999 Compared to
Three Months Ended April 30, 1998
Net sales for the three months ended April 30, 1999 were $139.1 million on
319,560 tons shipped, representing a 21.8% decrease in net sales and a 17.7%
decrease in tons shipped compared to the three months ended April 30, 1998.
During the 1998 period, 36,862 tons of lower value added semi-finished steel
were shipped. Excluding semi-finished steel, net sales per ton shipped decreased
8.8% to $435 in the 1999 quarter compared to $477 in 1998. Excluding
semi-finished steel, shipments of custom carbon, alloy and electrical steels
accounted for 66.9% of total shipments during the 1999 quarter compared to 64.8%
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 that
occurred during the second half of 1998. WCI's shipments returned to more normal
levels late in the second fiscal quarter as import levels fell beginning in
early 1999. WCI's order backlog increased to 252,000 tons at April 30, 1999
compared to 155,000 tons at October 31, 1998 and 199,000 tons at January 31,
1999.
Gross margin (net sales less cost of products sold) was $17.3 million for the
three months ended April 30, 1999 compared to $28.8 million for the three months
ended April 30, 1998. The decrease in gross margin in 1999 is primarily
attributable to the lower selling prices and volume discussed above partially
offset by lower raw material costs, operating costs and variable compensation
expense.
Operating income was $7.0 million, $22 per ton, for the three months ended April
30, 1999 compared to $17.0 million, $44 per ton, for the three months ended
April 30, 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 second quarter of 1999 and 1998.
Interest, investment and other income, net, was $2.2 million in the second
quarter of 1999 compared to $1.0 million in the second 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 $2.1 million in 1999 compared to income before taxes of $6.7 million in
1998. Effective November 1, 1998, the Company was designated as a qualified
subchapter S
PAGE 18
subsidiary by Renco. Accordingly, the Company is generally not
subject to income taxes.
Six Months Ended April 30, 1999 Compared to
Six Months Ended April 30, 1998
Net sales for the six months ended April 30, 1999 were $249.4 million on 560,642
tons shipped, representing a 27.6% decrease in net sales and a 23.9% decrease in
tons shipped compared to the six months ended April 30, 1998. The Company
shipped 46,256 tons of lower value added semi-finished steel during the 1998
period. Excluding semi-finished steel, net sales per ton shipped decreased 7.5%
to $445 compared to $481 for the 1998 period. This decrease is the result of an
unprecedented surge in imports during the second half of 1998. Excluding
semi-finished steel, shipments of custom carbon, alloy and electrical steels
accounted for 66.9% in 1999 and 64.4% in 1998.
Gross margin (net sales less cost of goods sold) was $25.8 million for the six
months ended April 30, 1999 compared to $53.5 million for the six months ended
April 30, 1998. The decrease in gross margin reflects the lower selling prices
and volume discussed above and the effect of higher costs in the first quarter
of 1999 caused by production levels being significantly below capacity.
Production returned to more normal levels late in the first quarter of 1999 and
WCI enjoyed lower raw material and production costs throughout the second
quarter of 1999 compared to the second quarter of 1998. In addition, the
decrease in gross margin resulted in lower variable compensation expense in 1999
compared to 1998.
Operating income was $5.5 million, $10 per ton shipped, for the six months ended
April 30, 1999 compared to $30.4 million, $41 per ton shipped, for the six
months ended April 30, 1998. The decrease in operating income in 1999 reflects
the lower gross margin discussed above offset by lower depreciation expense and
a decrease in selling, general and administrative expenses in 1999 as a result
of lower variable compensation expense.
Interest expense was $22.8 million in the six months ended April 30, 1999
compared to $19.4 million in the 1998 period. The increase is primarily
attributable to interest incurred on Renco Steel's $120.0 million principal
amount 10 7/8% Senior Secured Notes due 2005 (Senior Secured Notes) which were
issued on February 3, 1998. Interest, investment and other income, net, was $4.2
million in the first six months of 1999 compared to $1.3 million in the first
six months 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
PAGE 19
loss before taxes of $13.1 million in 1999 compared to income before taxes of
$12.3 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 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.
LIQUIDITY AND CAPITAL RESOURCES
Renco Steel
In February 1998, Renco Steel issued the Senior Secured Notes which are secured
by the stock of WCI. 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 April 30, 1999, Renco Steel had available
cash and investment balances of $17.1 million. 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
PAGE 20
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 $2.8 million in
the first six months of 1999 after generating a profit of $0.6 million in the
current quarter. Production and sales at WCI returned to more normal levels late
in the second quarter of 1999. If recent conditions at WCI continue, a dividend
distribution to Renco Steel in late 1999 or soon thereafter could be
anticipated. Such dividends are generally limited to 50% of WCI's cumulative
earnings since October 31, 1996.
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 $15.4 million for the six months ended
April 30, 1999 compared to $57.4 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, and from changes in working capital at WCI.
Cash used in investing activities was $3.2 million during the first six months
of 1999, compared with a use of cash of $25.0 million in the 1998 period. WCI's
capital expenditures in the current six month period were $4.0 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. In the 1998 period, $15.5
million was expended to purchase Renco Steel's Other Investments. Capital
expenditures for fiscal 1999 are expected to be $15.0 million. Management has
funded such expenditures in 1999 and 1998 from existing cash balances and cash
provided by operations. At April 30, 1999, WCI had commitments for capital
expenditures of approximately $2.0 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 April 30, 1999 consisted of cash and cash equivalents of $78.2
million and available borrowing under its $100 million revolving credit facility
(Revolving Credit Facility
PAGE 21
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 April 30, 1999, WCI had no
borrowings outstanding under the Revolving Credit Facility of WCI, with a
borrowing limit of $84.9 million based on eligible inventories and receivables,
net of $6.5 million in outstanding letters of credit. Management believes that
it has sufficient liquidity to support its operations for the foreseeable
future.
Cash provided by operating activities was $21.7 million for the six months ended
April 30, 1999 compared to $55.3 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 and from changes in working capital.
Capital expenditures were $5.6 million and $9.6 million during the six months
ended April 30, 1999 and 1998, respectively, and are estimated to be
approximately $15 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 April 30, 1999, WCI had commitments for capital
expenditures of approximately $2.0 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 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 six months ended April 30, 1999 and, under the
terms of the Senior Secured Notes of WCI indenture, was not permitted to pay
dividends at April 30, 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 the replacement/upgrading of
purchased systems. WCI has completed testing of approximately 95% of the
applications and, after completing additional remediation on approximately 5% of
the programs tested, has found them to be year 2000 ready. WCI completed a
comprehensive enterprise-wide test for its business
PAGE 22
systems in March 1999. Based on the results of this test, WCI believes that its
critical business systems are year 2000 ready. 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, including
integration tests, by June 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 $0.3 million of incremental costs to
address year 2000 issues during the six months ended April 30, 1999 and, based
on information available at this time, estimates that it will incur additional
incremental costs of approximately $0.5 million during the remainder of 1999.
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 has made and intends to make
additional inquiries of critical suppliers during 1999 to monitor the status of
their year 2000 readiness efforts. WCI is using information learned from this
process to develop 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
PAGE 23
the six months ended April 30, 1999.
Labor Matters
Most of WCI's hourly employees are represented by the USWA, with which WCI has a
four-year collective bargaining agreement that expires September 1, 1999. While
WCI does not expect any disruption to its operations as a result of the
expiration of the current agreement, WCI has experienced such disruptions in the
past and no assurance can be given that there will not be a disruption to
operations at the expiration of this agreement. WCI is unable to estimate the
effect on its results of operations that a new labor agreement may have.
Several large integrated steel producers contracts with the USWA expire on July
31, 1999. Customers may require these integrated producers to increase steel
inventories prior to the expiration of the labor agreements as a hedge against
any potential work stoppage. If there are no work stoppages, the excess
inventories produced prior to the contract expiration could result in a
supply-demand imbalance which could adversely effect WCI's shipments in the
fourth fiscal quarter.
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;
effects of future collective bargaining agreements; major equipment failures;
changes in, or the failure or inability to comply with, government regulation,
including, without 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 24
PART II - OTHER INFORMATION
RENCO STEEL HOLDINGS, INC.
ITEM 1. LEGAL PROCEEDINGS
For information as to the 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.
Leonard v. WCI Steel, Inc.
--------------------------
Reference is made to the description of this action in the
Company's Form 10-K for the year ended October 31, 1998, see
Part I, Item 3. Legal Proceedings.
In March 1999, the court dismissed the plaintiff's appeal of
the directed verdict in favor of WCI.
Thomas C. Williams, etc. v. WCI Steel, Inc.
-------------------------------------------
Reference is made to the description of this action contained
in the Company's annual report on Form 10-K for the year ended
October 31, 1998.
In March 1999, the appellate court upheld the dismissal of the
claims under ERISA and common law, but reversed the dismissal
of the NLRA claim and remanded to the district court for
further proceedings.
United States v. WCI Steel, Inc.
--------------------------------
Reference is made to the description of these actions in the
Company's Form 10-K for the year ended October 31, 1998, see
Part I, Item 1. Business.
Consent decrees embodying settlements reached between WCI and
the EPA in the Clean Water Act and Clean Air Act civil
actions, which have been approved and entered by the court,
provide for $1.74 million in cash penalties and for injunctive
relief and supplemental environmental projects estimated to
cost between $1.7 million and $2.2 million that will be
expended over two years. The largest of the projects to be
undertaken as part of the settlement involves sediment removal
from the Mahoning River at an estimated cost of $750,000 but
PAGE 25
not to exceed $1 million. WCI had previously established
reserves to provide for the estimated settlement and related
costs and does not expect the settlement to result in any
charge to earnings.
The action against WCI under the Resource Conservation
and Recovery Act remains pending and is not affected by
these settlements. See 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:
No report on Form 8-K was filed during the quarter ended April
30, 1999.
PAGE 26
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: June 11, 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 27
RENCO STEEL HOLDINGS, INC.
EXHIBIT INDEX
Exhibit Number Description
27. Financial Data Schedule