- --------------------------------------------------------------------------------
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 July 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 September 13, 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
July 31, 1999 and October 31, 1998. 3
Condensed Consolidated Statements of Income
for the three months and nine months ended
July 31, 1999 and 1998. 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended July 31, 1999 and 1998. 5
Notes to Condensed Consolidated Financial Statements. 6
FINANCIAL STATEMENTS OF WCI STEEL, INC.
Condensed Consolidated Balance Sheets as of
July 31, 1999 and October 31, 1998. 10
Condensed Consolidated Statements of Income
for the three months and nine months ended
July 31, 1999 and 1998. 11
Condensed Consolidated Statements of Cash Flows
for the nine months ended July 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 17
PART II OTHER INFORMATION
- -----------------------------------
Item 1. Legal Proceedings 25
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
Exhibit Index 28
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)
July 31, October 31,
1999 1998
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents...................... $ 7,199 $ 4,957
Restricted cash and cash equivalents........... 61,809 62,195
Other investments ............................. 10,333 15,774
Accounts receivable, less allowances........... 61,377 48,724
Inventories.................................... 87,190 88,138
Deferred income taxes.......................... - 8,462
Prepaid expenses............................... 363 1,144
--------- ---------
Total current assets.................... 228,271 229,394
Property, plant and equipment, net............... 256,906 266,625
Excess of cost over acquired net assets, net..... 12,033 12,439
Other assets, net................................ 28,043 34,342
--------- ---------
Total assets................... $ 525,253 $ 542,800
--------- ---------
--------- ---------
LIABILITIES and SHAREHOLDER'S DEFICIT
Current liabilities
Current portion of long-term debt.............. $ 120 $ 116
Accounts payable............................... 54,911 46,620
Accrued liabilities............................ 53,955 56,309
--------- ---------
Total current liabilities............... 108,986 103,045
Long-term debt, excluding current portion........ 421,070 421,114
Deferred income taxes............................ - 30,393
Postretirement health care benefits.............. 98,385 93,378
Pension benefits................................. 15,805 23,604
Other liabilities................................ 12,837 14,054
--------- ---------
Total liabilities.............. 657,083 685,588
--------- ---------
--------- ---------
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............................ (131,831) (142,789)
--------- ---------
Total shareholder's deficit.... (131,830) (142,788)
Commitments and contingencies.................... - -
--------- ---------
Total liabilities and
shareholder's deficit......... $ 525,253 $ 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 Nine months
ended July 31, ended July 31,
1999 1998 1999 1998
Net sales ......................... $ 143,086 $ 174,947 $ 392,478 $ 519,399
Operating costs and expenses
Cost of products sold ............ 119,329 144,880 342,912 435,800
Depreciation and amortization .... 6,756 7,336 20,192 21,955
Selling, general and
administrative expenses ......... 4,105 4,619 10,955 13,153
--------- --------- --------- ---------
130,190 156,835 374,059 470,908
--------- --------- --------- ---------
Operating income .................. 12,896 18,112 18,419 48,491
--------- --------- --------- ---------
Other income (expense)
Interest expense ................. (11,445) (11,429) (34,278) (30,799)
Interest, investment
and other income, net ........... 1,119 1,810 5,329 3,140
--------- --------- --------- ---------
(10,326) (9,619) (28,949) (27,659)
--------- --------- --------- ---------
Income (loss) before income taxes . 2,570 8,493 (10,530) 20,832
Income tax expense (benefit) ...... (12) 3,421 (21,489) 7,894
--------- --------- --------- ---------
Net income ...................... $ 2,582 $ 5,072 $ 10,959 $ 12,938
--------- --------- --------- ---------
--------- --------- --------- ---------
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)
Nine months
ended July 31,
1999 1998
Cash flows from operating activities
Net income ....................................................... $ 10,959 $ 12,938
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization ........................... 17,994 19,757
Amortization of deferred maintenance costs .............. 2,198 2,198
Amortization of financing costs ......................... 1,450 1,310
Postretirement health care benefits ..................... 5,007 4,944
Pension benefits ........................................ (2,732) 1,803
Deferred income taxes ................................... (21,689) 3,053
Gain on other investments ............................... (3,047) (1,499)
Other ................................................... 102 (382)
Cash provided (used) by changes in certain
assets and liabilities
Accounts receivable ..................................... (12,653) 2,636
Inventories ............................................. 949 15,996
Accounts payable ........................................ 8,291 765
Accrued liabilities ..................................... (5,058) (1,797)
Other assets and liabilities, net ....................... (346) (4,808)
--------- ---------
Net cash provided by operating activities ............... 1,425 66,530
--------- ---------
Cash flows from investing activities
Additions to property, plant and equipment ....................... (7,970) (12,955)
Proceeds from sale of other investments .......................... 13,488 --
Purchase of other investments .................................... (5,000) (15,500)
Gross proceeds from the sale of assets ........................... -- 110
--------- ---------
Net cash provided (used) by investing
activities ............................................. 518 (28,345)
--------- ---------
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 ............................. (87) (1,290)
Issuance of common stock of the Company .......................... -- 1
--------- ---------
Net cash (used) provided by financing
activities ............................................. (87) 8,977
--------- ---------
Net increase in cash and cash equivalents ................................. 1,856 47,162
Total cash and cash equivalents at
beginning of period ...................................................... 67,152 18,989
--------- ---------
Total cash and cash equivalents at end of period .......................... $ 69,008 $ 66,151
--------- ---------
--------- ---------
Supplemental disclosure of cash flow information
Cash paid for interest ........................................... $ 37,058 $ 30,555
Cash paid (refunds) for income taxes ............................. 519 (24)
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 nine months ended
July 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 and nine months ended July 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 July 31, 1999, the Company's other investments consisted of an investment in
a limited partnership which invests in a variety of financial assets, including
equity, debt, and derivative securities. Because of the nature of the underlying
investments, the Company's investment is 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 this investment, and thus its risk is limited to the
loss of its investment. The limited partnership in which the Company has
invested provides a right of withdrawal at the end of a calendar quarter, upon
30 days notice, and accordingly, this investment has been classified as a
current asset in the accompanying balance sheets as of July 31, 1999 and October
31, 1998. This investment is held for trading purposes and is recorded at fair
value for financial reporting purposes. The Company's condensed consolidated
statements of income include unrealized gains related to other investments of
$2.7 million and $1.5 million for the nine months ended July 31, 1999 and July
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 July 31,
1999 and October 31, 1998 was as follows:
July 31,
1999 October 31,
(Unaudited) 1998
----------- -------
(Dollars in thousands)
Raw materials .................... $24,426 $36,259
Finished and semi-finished product 67,410 58,332
Supplies ......................... 71 86
------- -------
91,907 94,677
Less LIFO reserve ................ 4,717 6,539
------- -------
$87,190 $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 was named a defendant in two 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 which were
recently resolved. The first action, instituted on June 29, 1995, under the
Clean Water Act, alleged 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, alleged
violations by WCI 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 WCI's facilities in Warren, Ohio. On June 4, 1999, the court
entered consent decrees in these two cases which provide for $1.74 million in
cash penalties which were paid in July 1999 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
PAGE 8
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.
WCI currently is the defendant in a pending action instituted by DOJ on May 11,
1998 under the Resource Conservation and Recovery Act (RCRA), which 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 was completed in June 1999. However, the court has not
yet rendered a decision. 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 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.
PAGE 9
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)
July 31,
1999 October 31,
(Unaudited) 1998
----------- ---------
ASSETS
Current assets
Cash and cash equivalents ............................ $ 61,809 $ 62,195
Accounts receivable, less allowances ................. 61,377 48,724
Inventories .......................................... 86,245 87,140
Deferred income taxes ................................ -- 8,610
Prepaid expenses ..................................... 363 1,144
--------- ---------
Total current assets ............................ 209,794 207,813
Property, plant and equipment, net ..................... 210,201 217,624
Other assets, net ...................................... 28,827 34,849
--------- ---------
Total assets ............................... $ 448,822 $ 460,286
--------- ---------
--------- ---------
LIABILITIES and SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt .................... $ 120 $ 116
Accounts payable ..................................... 54,911 46,620
Accrued liabilities .................................. 47,186 53,237
--------- ---------
Total current liabilities ................... 102,217 99,973
Long-term debt, excluding current portion .............. 301,411 301,502
Deferred income taxes .................................. -- 13,368
Postretirement health care benefits .................... 97,777 92,738
Pension benefits ....................................... 15,730 23,524
Other liabilities ...................................... 12,837 14,054
--------- ---------
Total liabilities .......................... 529,972 545,159
--------- ---------
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 .................................. (81,150) (84,873)
--------- ---------
Total shareholder's equity (deficit) (81,150) (84,873)
Commitments and contingencies .......................... -- --
--------- ---------
Total liabilities and
shareholder's equity (deficit) ............. $ 448,822 $ 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 INCOME
(Dollars in thousands)
(Unaudited)
Three months Nine months
ended July 31, ended July 31,
1999 1998 1999 1998
Net sales ....................... $ 143,086 $ 174,947 $ 392,478 $ 519,399
Operating costs and expenses
Cost of products sold .......... 119,395 144,947 343,111 435,999
Depreciation and amortization .. 5,855 6,436 17,488 19,253
Selling, general and
administrative expenses ....... 4,076 4,614 10,817 13,146
--------- --------- --------- ---------
129,326 155,997 371,416 468,398
--------- --------- --------- ---------
Operating income ................ 13,760 18,950 21,062 51,001
--------- --------- --------- ---------
Other income (expense)
Interest expense ............... (8,031) (8,007) (24,047) (24,029)
Interest and other income, net . 762 775 2,150 1,491
--------- --------- --------- ---------
(7,269) (7,232) (21,897) (22,538)
--------- --------- --------- ---------
Income (loss) before income taxes 6,491 11,718 (835) 28,463
Income tax (benefit) expense .... -- 4,570 (4,558) 10,598
--------- --------- --------- ---------
Net income ...................... $ 6,491 $ 7,148 $ 3,723 $ 17,865
--------- --------- --------- ---------
--------- --------- --------- ---------
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)
Nine months
ended July 31,
1999 1998
Cash flows from operating activities
Net income ....................................................... $ 3,723 $ 17,865
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization ................................... 15,290 17,055
Amortization of deferred maintenance costs .................. 2,198 2,198
Amortization of financing costs ................................. 1,006 993
Postretirement health care benefits ......................... 5,039 4,979
Pension benefits ................................................ (2,514) 2,021
Deferred income taxes ........................................... (4,758) 3,353
Other ........................................................... 103 (382)
Cash provided (used) by changes in certain assets
and liabilities
Accounts receivable ................................... (12,653) 2,636
Inventories ................................................... 895 15,942
Accounts payable .............................................. 8,291 765
Accrued liabilities ............................................. (8,513) (2,949)
Other assets and liabilities, net ............................. (436) (48)
-------- --------
Net cash provided by operating activities .................... 7,671 64,428
-------- --------
Cash flows from investing activities
Additions to property, plant and equipment ....................... (7,970) (12,955)
Gross proceeds from the sale of assets ............................... -- 110
-------- --------
Net cash used by investing activities ........................ (7,970) (12,845)
-------- --------
Cash flows from financing activities
Dividends paid ....................................................... -- (11,950)
Principal payments on long-term debt ................................. (87) (1,290)
-------- --------
Net cash used by financing activities ........................ (87) (13,240)
-------- --------
Net increase (decrease) in cash and cash equivalents ...................... (386) 38,343
Cash and cash equivalents at beginning of period .......................... 62,195 18,989
-------- --------
Cash and cash equivalents at end of period ................................ $ 61,809 $ 57,332
-------- --------
-------- --------
Supplemental disclosure of cash flow information
Cash paid for interest ............................................... $ 30,533 $ 30,555
Cash paid for income taxes ....................................... 971 1,486
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 nine months ended July 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 and nine months ended July 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 July 31,
1999 and October 31, 1998 was as follows:
July 31, October 31,
1999 1998
(Unaudited)
------- -------
(Dollars in thousands)
Raw materials .................... $24,426 $36,259
Finished and semi-finished product 67,410 58,332
Supplies ......................... 71 86
------- -------
91,907 94,677
Less LIFO reserve ................ 5,662 7,537
------- -------
$86,245 $87,140
------- -------
------- -------
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,
PAGE 14
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 was named a defendant in two 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
which were recently resolved. The first action, instituted on June 29, 1995,
under the Clean Water Act, alleged 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,
alleged 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. On
June 4, 1999, the court entered consent decrees in these two cases which provide
for $1.74 million in cash penalties which were paid in July 1999 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 Company currently is the defendant in a pending action instituted by DOJ on
May 11, 1998 under the Resource Conservation and Recovery Act (RCRA), which
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 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 was completed
in June 1999. However,
PAGE 15
the court has not yet rendered a decision. 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
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
PAGE 16
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 July 31, 1999 Compared to
Three Months Ended July 31, 1998
Net sales for the three months ended July 31, 1999 were $143.1 million on
328,336 tons shipped, representing an 18.2% decrease in net sales and a 10.7%
decrease in tons shipped compared to the three months ended July 31, 1998.
During the 1998 period, 23,458 tons of lower value added semi-finished steel
were shipped. Excluding semi-finished steel, net sales per ton shipped decreased
11.0% to $436 in the 1999 quarter compared to $490 in the 1998 quarter.
Excluding semi-finished steel, shipments of custom carbon, alloy and electrical
steels accounted for 66.6% of total shipments during the 1999 quarter compared
to 66.5% in the comparable period of 1998. While steel imports have receded from
record levels, they remain above historical levels, and net sales per ton
shipped remain well below the comparable period in 1998 as a result of the
unprecedented surge in steel imports that occurred during the second half of
1998. WCI realized slightly higher selling prices in the third quarter compared
to the second quarter of 1999; however, this increase was offset by changes in
product mix. Many steel producers, including WCI, have announced price increases
of $10 to $30 per ton effective October 1999. However, no assurance can be given
that such price increases will be realized. WCI's order backlog increased to
255,000 tons at July 31, 1999 compared to 155,000 tons at October 31, 1998 and
236,000 tons at July 31, 1998.
Gross margin (net sales less cost of products sold) was $23.8 million for the
three months ended July 31, 1999 compared to $30.1 million for the three months
ended July 31, 1998. The decrease in gross margin in the 1999 quarter 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. During the fourth quarter of 1999, WCI will perform
certain scheduled annual maintenance at its blast furnace designed to extend the
life of the furnace lining. As a result of this, and other scheduled
maintenance, operating costs are expected to rise slightly in the fourth quarter
compared to the third quarter.
Operating income was $12.9 million, $39 per ton, for the three months ended July
31, 1999 compared to $18.1 million, $49 per ton, for the three months ended July
31, 1998. The operating results for the 1999 quarter 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.
PAGE 18
Interest expense was $11.4 million in the third quarter of 1999 and 1998.
Interest, investment and other income, net, was $1.1 million in the third
quarter of 1999 compared to $1.8 million in the third quarter of 1998. The
decrease was a result of lower investment income at Renco Steel.
As a result of the items discussed above, income before taxes was $2.6 million
in 1999 compared to $8.5 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.
Nine Months Ended July 31, 1999 Compared to
Nine Months Ended July 31, 1998
Net sales for the nine months ended July 31, 1999 were $392.5 million on 888,978
tons shipped, representing a 24.4% decrease in net sales and a 19.5% decrease in
tons shipped compared to the nine months ended July 31, 1998. In the comparable
1998 period, 69,714 tons of lower value added semi-finished steel were shipped.
Excluding semi-finished steel, net sales per ton shipped decreased 8.9% to $441
compared to $484 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 66.7% in the 1999 period and 65.1% in the 1998 period.
Gross margin (net sales less cost of goods sold) was $49.6 million for the nine
months ended July 31, 1999 compared to $83.6 million for the nine months ended
July 31, 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 and
third quarters of 1999 compared to the same periods in 1998. In addition, the
decrease in gross margin resulted in lower variable compensation expense in 1999
compared to 1998.
Operating income was $18.4 million, $21 per ton shipped, for the nine months
ended July 31, 1999 compared to $48.5 million, $44 per ton shipped, for the nine
months ended July 31, 1998. The decrease in operating income in the 1999 period
reflects the lower gross margin discussed above offset by lower depreciation
expense and a decrease in selling, general and administrative expenses in the
1999 period as a result of lower variable compensation expense.
Interest expense was $34.3 million in the nine months ended July
PAGE 19
31, 1999 compared to $30.8 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 $5.3
million in the first nine months of 1999 compared to $3.1 million in the first
nine 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 loss before
taxes of $10.5 million in the 1999 period compared to income before taxes of
$20.8 million in the 1998 period. 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 July 31, 1999, Renco Steel had available cash
and investment balances of $11.0 million, net of cash appropriated for the
August 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.
In the preceding year, a source of liquidity for Renco Steel to meet its debt
service obligations was available payments from WCI under a 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).
PAGE 20
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 generated a profit of $3.7 million in the first nine months
of 1999 after recording a $6.5 million profit in the current quarter. In the
fourth quarter, WCI's operating costs are expected to rise as a result of
scheduled maintenance. WCI's ability to pay dividends to Renco Steel is
restricted by the terms of the indenture governing WCI's 10% Senior Securied
Notes due 2004 (Senior Secured Notes of WCI). At July 31, 1999, WCI had $2.1
million available for dividends under the terms of the Senior Secured Notes of
WCI. 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 $1.4 million for the nine months ended
July 31, 1999 compared to $66.5 million for the 1998 period. The lower operating
cash flow in 1999 compared to 1998 resulted primarily from a decrease in income
before taxes as described above, and from changes in working capital at WCI.
Cash provided by investing activities was $0.5 million during the first nine
months of 1999, compared with a use of cash of $28.3 million in the 1998 period.
Renco Steel's proceeds from the sale of Other Investments, net of purchases,
provided $8.5 million, of which $6.0 million was used to fund the August 1st
interest payment. In the 1998 period, $15.5 million was expended to purchase
Renco Steel's Other Investments. WCI's capital expenditures in the current nine
month period was $8.0 million and $13.0 in the corresponding prior period.
Capital expenditures for fiscal 1999 are expected to be $11.0 million.
PAGE 21
Management has funded such expenditures in 1999 and 1998 from existing cash
balances and cash provided by operations. At July 31, 1999, WCI had commitments
for capital expenditures of approximately $7.7 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 July 31, 1999 consisted of cash and cash equivalents of $61.8 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, and is secured by eligible inventories and
receivables, as defined therein. During the third quarter of 1999, WCI extended
the term of the Revolving Credit Facility of WCI to December 29, 2003. As of
July 31, 1999, WCI had no borrowings outstanding under the Revolving Credit
Facility of WCI, with a borrowing limit of $93.5 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 $7.7 million for the nine months ended
July 31, 1999 compared to $64.4 million for the 1998 period. The lower operating
cash flow in 1999 compared to 1998 resulted primarily from a decrease in income
before taxes as described above and from changes in working capital.
Capital expenditures were $8.0 million and $13.0 million during the nine months
ended July 31, 1999 and 1998, respectively, and are estimated to be
approximately $11.0 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 July 31, 1999, WCI had commitments for capital
expenditures of approximately $7.7 million.
The Revolving Credit Facility of WCI and the indenture governing of 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.
PAGE 22
WCI paid no dividends during the nine months ended July 31, 1999 and, under the
terms of the indenture governing the Senior Secured Notes of WCI, $2.1 million
was available for dividends at July 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 the replacement/upgrading of
purchased systems. WCI has completed testing 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 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 completed testing of the process control systems and components, including
integration tests, during June 1999 and has identified additional remediation
which is expected to be completed by September 30, 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 nine months ended July
31, 1999 and, based on information available at this time, estimates that it
will incur additional incremental costs of approximately $0.2 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 each 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 single sources for certain of its energy, raw materials and transportation
needs. If certain vendors are unable to supply the raw materials, energy
PAGE 23
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 Accountants 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 nine months ended July 31, 1999.
Labor Matters
WCI and the United Steelworkers of America (USWA) have reached a tentative
agreement on a new five-year labor contract. More than 1,600 WCI employees are
represented by the USWA. The former labor contract expired September 1, 1999 and
there was no interruption in operations. A ratification vote on the tentative
contract has yet to be scheduled. Details of the agreement are not being
released, pending ratification.
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 negotiations and 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
PAGE 24
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 25
PART II - OTHER INFORMATION
RENCO STEEL HOLDING, INC.
ITEM 1. LEGAL PROCEEDINGS
Leonard v. WCI Steel, Inc.
--------------------------
Reference is made to the description of this action in the
Company's quarterly report on Form 10-Q for the quarter ended
April 30, 1999.
Thomas C. Williams, etc. v. WCI Steel, Inc.
-------------------------------------------
Reference is made to the description of this action in the
Company's quarterly report on Form 10-Q for the quarter ended
April 30, 1999 and as described in Note 4 to the condensed
consolidated financial statements.
United States v. WCI Steel, Inc.
--------------------------------
Reference is made to the description of these actions in the
Company's Form 10-Q for the quarter ended April 30, 1999, and
as described in Note 4 to the condensed consolidated financial
statements.
On June 4, 1999 the court entered consent decrees embodying
settlements reached between WCI and the EPA regarding the
Clean Water Act and Clean Air Act civil actions. The
agreements provide for $1.74 million in cash penalties which
were paid in July 1999 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. 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 actions against WCI under the Resource Conservation and
Recovery Act remains pending and is not affected by these
settlements. A trial at this action was completed in June
1999. However, the court has not yet rendered a decision. See
Note 4 to Item 1. Financial Statements.
PAGE 26
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 July
31, 1999.
PAGE 27
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: September 13, 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 28
RENCO STEEL HOLDINGS, INC.
EXHIBIT INDEX
Exhibit Number Description
10.4.12 Second Amended and Restated
Loan and Security Agreement of WCI
dated July 30, 1999.*
27. Financial Data Schedule
* Incorporated by reference to WCI's Form 10-Q for the quarterly period ended
July 31, 1999.