<PAGE>
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 July 31, 2000.
-----------------
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 14, 2000, the registrant had 100 shares of its common
stock, no par value, $.01 stated value, outstanding.
--------------------------------------------------------------------------------
<PAGE>
PAGE 2
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
INDEX
--------------------------------
<TABLE>
<CAPTION>
Page No.
--------
PART I FINANCIAL INFORMATION
---------------------------------
<S> <C>
Item 1. FINANCIAL STATEMENTS OF RENCO STEEL HOLDINGS, INC.
Condensed Consolidated Balance Sheets as of
July 31, 2000 and October 31, 1999. 3
Condensed Consolidated Statements of Operations for the
three and nine months ended July 31, 2000 and 1999. 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended July 31, 2000 and 1999. 5
Notes to Condensed Consolidated Financial Statements. 6
FINANCIAL STATEMENTS OF WCI STEEL, INC.
Condensed Consolidated Balance Sheets as of
July 31, 2000 and October 31, 1999. 10
Condensed Consolidated Statements of Income
for the three months and nine months ended
July 31, 2000 and 1999. 11
Condensed Consolidated Statements of Cash Flows for
the nine months ended July 31, 2000 and 1999. 12
Notes to Condensed Consolidated Financial Statements. 13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
PART II OTHER INFORMATION
-----------------------------
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibit Index 23
</TABLE>
<PAGE>
PAGE 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
July 31, Oct. 31,
2000 1999
------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ...................... $ 7,649 $ 3,830
Restricted cash and cash equivalents ........... 88,859 76,174
Other investments .............................. 7,293 10,238
Accounts receivable, less allowances ........... 52,926 57,846
Inventories .................................... 94,504 84,174
Prepaid expenses ............................... 306 6,236
--------- ---------
Total current assets ....................... 251,537 238,498
Property, plant and equipment, net ............... 248,097 254,416
Excess of cost over acquired net assets, net ..... 11,492 11,898
Intangible pension assets, net ................... 23,643 28,192
Other assets, net ................................ 20,678 18,749
--------- ---------
Total assets ......................... $ 555,447 $ 551,753
========= =========
LIABILITIES and SHAREHOLDER'S DEFICIT
Current liabilities
Current portion of long-term debt .............. $ 127 $ 122
Accounts payable ............................... 52,060 59,730
Accrued liabilities ............................ 51,516 51,916
--------- ---------
Total current liabilities .................. 103,703 111,768
Long-term debt, excluding current portion ........ 421,006 421,054
Postretirement health care benefits .............. 109,133 100,301
Pension benefits ................................. 36,808 38,709
Other liabilities ................................ 14,565 13,738
--------- ---------
Total liabilities .................... 685,215 685,570
--------- ---------
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 ..................... 280 280
Accumulated deficit ............................ (130,048) (134,097)
--------- ---------
Total shareholder's deficit .......... (129,768) (133,817)
Commitments and contingencies .................... -- --
--------- ---------
Total liabilities and
shareholder's deficit .............. $ 555,447 $ 551,753
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
PAGE 4
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months Nine months
ended July 31, ended July 31,
2000 1999 2000 1999
---------------------- ----------------------
<S> <C> <C> <C> <C>
Net sales ........................ $ 140,726 $ 143,086 $ 438,087 $ 392,478
Operating costs and expenses
Cost of products sold ........... 122,185 119,329 372,430 342,912
Depreciation and amortization ... 6,738 6,756 20,186 20,192
Selling, general and
administrative expenses ........ 4,074 4,105 12,684 10,955
--------- --------- --------- ---------
132,997 130,190 405,300 374,059
--------- --------- --------- ---------
Operating income ................. 7,729 12,896 32,787 18,419
--------- --------- --------- ---------
Other income (expense)
Interest expense ................ (11,395) (11,445) (34,200) (34,278)
Interest, investment
and other income, net .......... 2,154 1,119 8,712 5,329
--------- --------- --------- ---------
(9,241) (10,326) (25,488) (28,949)
--------- --------- --------- ---------
(Loss) income before income taxes (1,512) 2,570 7,299 (10,530)
Income tax benefit ............... -- (12) -- (21,489)
--------- --------- --------- ---------
Net (loss) income .............. $ (1,512) $ 2,582 $ 7,299 $ 10,959
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
PAGE 5
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES AND PREDECESSOR
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months
ended July 31,
2000 1999
----------------------------
<S> <C> <C>
Cash flows from operating activities
Net income ....................................... $ 7,299 $ 10,959
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization .............. 17,980 17,994
Amortization of deferred maintenance costs . 2,206 2,198
Amortization of financing costs ............ 1,421 1,450
Postretirement health care benefits ........ 8,832 5,007
Pension benefits ........................... 3,817 (2,732)
Deferred income taxes ...................... (243) (21,689)
Gain on other investments .................. (1,807) (3,047)
Other ...................................... 1,150 102
Cash provided (used) by changes in certain
assets and liabilities
Accounts receivable ........................ 4,920 (12,653)
Inventories ................................ (10,330) 949
Accounts payable ........................... (7,670) 8,291
Accrued liabilities ........................ (1,326) (5,058)
Other assets and liabilities, net .......... 1,247 (346)
-------- --------
Net cash provided by operating activities .. 27,496 1,425
-------- --------
Cash flows from investing activities
Additions to property, plant and equipment ....... (12,404) (7,970)
Other investments, net ........................... 4,752 8,488
-------- --------
Net cash (used) provided by investing
activities ................................ (7,652) 518
-------- --------
Cash flows from financing activities
Principal payments on long-term debt ............. (90) (87)
Dividends paid ................................... (3,250) --
-------- --------
Net cash used by financing
activities ................................ (3,340) (87)
-------- --------
Net increase in cash and cash equivalents .............. 16,504 1,856
Total cash and cash equivalents at
beginning of period ................................... 80,004 67,152
-------- --------
Total cash and cash equivalents at end of period ....... $ 96,508 $ 69,008
======== ========
Supplemental disclosure of cash flow information
Cash paid for interest ........................... 37,008 $ 37,058
Cash paid (refunds) for income taxes ............. 21 519
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
PAGE 6
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and nine months ended July 31, 2000 and 1999
( Unaudited )
NOTE 1 : BASIS OF PRESENTATION
Renco Steel Holdings, Inc. (Renco Steel), a holding company incorporated in the
state of Ohio on January 20, 1998, 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). 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
nine months ended July 31, 2000 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, 1999.
NOTE 2 : OTHER INVESTMENTS
The Company has from time to time invested in various limited partnerships which
invest in a variety of financial assets, including equity, debt, and derivative
securities. The Company was invested in one such limited partership on July 31,
2000. 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 amount of this investment.
The limited partnership permits annual withdrawal on December 31 of any year,
upon 45 days notice. Accordingly, this investment has been classified as a
current asset in the accompanying balance sheet as of July 31, 2000. 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 of $0.6 million and $2.0 million for the nine
months ended July 31, 2000 and July 31, 1999, respectively, and $0.2 million and
$0.1 million for the three months ended July 31, 2000 and July 31, 1999
respectively.
<PAGE>
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,
2000 and October 31, 1999 was as follows:
<TABLE>
<CAPTION>
July 31, October 31,
2000 1999
(Unaudited)
----------- -----------
(Dollars in thousands)
<S> <C> <C>
Raw materials .................... $ 25,934 $ 33,811
Finished and semi-finished product 69,113 49,386
Supplies ......................... 89 50
-------- --------
95,136 83,247
Less LIFO reserve ................ 632 (927)
-------- --------
$ 94,504 $ 84,174
======== ========
</TABLE>
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 management.
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 continue to change and have
generally become more stringent, 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 is subject to consent decrees as a result of two civil actions instituted
by the Department of Justice (DOJ), on behalf of the Environmental Protection
Agency (EPA). These consent decrees require WCI to complete certain
supplemental environmental projects estimated to cost between $1.7 million
and $2.2 million that will be expended by late 2001. 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 consent decrees also provide for stipulated penalties in the
event of noncompliance which WCI does not believe will be material.
As a condition of a previous Resource Conservation and Recovery Act (RCRA)
operating permit, WCI is required to undertake a corrective action
program with respect to historical material handling practices at the Warren
facility. WCI has completed the initial phase of the first investigation
step of the corrective action program, the RCRA Facility Investigation (RFI),
and has submitted its
<PAGE>
PAGE 8
report to the EPA. WCI believes that additional sampling will be required to
complete a full RFI and will negotiate the extent of the second phase with
the EPA. The RFI workplan identifies thirteen historical solid waste
management units to be investigated. The final scope of 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. Discovery regarding the NLRA claim is
in process.
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: SEGMENT REPORTING
Effective for the year ended October 31, 1999, the Company adopted Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information," requiring that companies disclose segment
data based on how management makes resource allocation decisions and evaluates
segment operating performance.
In applying the Statement, the Company considered its operating and management
structure and the types of information subject to regular review by its "chief
operating decision maker." On this basis, the Company's only reportable segment
is WCI. The segment disclosure is presented on this new basis for the nine
months ended July 31, 2000 and July 31, 1999, respectively.
<PAGE>
PAGE 9
All sales are generated by WCI. Geographic sales are based on the region in
which the customer invoice was generated and all sales were generated within the
United States. The Company measures segment profit for internal reporting
purposes as net income (loss). A reconciliation of segment income to
consolidated net income is presented below:
<TABLE>
<CAPTION>
Nine months ended
July 31,
2000 1999
-------- --------
<S> <C> <C>
WCI .................... $ 18,008 $ 3,723
Other .................. (10,709) 7,236
-------- --------
Total Consolidated $ 7,299 10,959
======== ========
</TABLE>
NOTE 6: SUBSEQUENT EVENT
On September 8, 2000 Acme Metals Incorporated filed a motion in U.S. Bankruptcy
Court, Delaware District, seeking approval of expense reimbursement and bidding
procedures including provisions for a break-up fee and minimum overbid in
certain circumstances relating to a potential sale of certain assets of its
wholly-owned subsidiary, Acme Steel Co., to WCI. Acme Metals Incorporated filed
for bankruptcy court protection on September 28, 1998.
The motion seeks approval for the reimbursement of expenses related to the
completion of due diligence by WCI. This will permit WCI to continue with its
due diligence related to the evaluation of environmental, operational and
information systems as well as other matters.
Included with the motion is a non-binding term sheet, which includes the
significant terms of a potential purchase agreement by WCI. Acme and WCI intend
to negotiate toward a definitive purchase agreement subject to the completion of
due diligence.
Acme Steel is an integrated steelmaker producing hot-rolled sheet and strip
steel to customers in the tube, agricultural equipment, industrial equipment,
industrial fastener, processor, service center and tool manufacturing
industries. Acme's facilities are located in Chicago and Riverdale, Ill.
<PAGE>
PAGE 10
WCI STEEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
July 31, Oct. 31,
2000 1999
---------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents .................... $ 88,859 $ 76,349
Accounts receivable, less allowances ......... 52,926 57,846
Inventories .................................. 93,635 83,247
Prepaid expenses ............................. 306 6,236
--------- ---------
Total current assets ...................... 235,726 223,678
Property, plant and equipment, net ............. 204,455 208,477
Intangible pension asset, net .................. 27,115 31,895
Other assets, net .............................. 17,880 15,894
--------- ---------
Total assets ....................... $ 485,176 $ 479,944
========= =========
LIABILITIES and SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt ............ $ 127 $ 122
Accounts payable ............................. 52,060 59,730
Accrued liabilities .......................... 44,747 48,364
--------- ---------
Total current liabilities ................ 96,934 108,216
Long-term debt, excluding current portion ...... 301,285 301,380
Postretirement health care benefits ............ 108,575 99,706
Pension benefits ............................... 36,739 38,635
Other liabilities .............................. 14,566 13,738
--------- ---------
Total liabilities .................. 558,099 561,675
--------- ---------
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 .......... -- --
Additional paid-in capital ................... 279 279
Accumulated deficit .......................... (73,202) (82,010)
--------- ---------
Total shareholder's equity (deficit) (72,923) (81,731)
Commitments and contingencies .................. -- --
--------- ---------
Total liabilities and
shareholder's equity (deficit) .... $ 485,176 $ 479,944
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
PAGE 11
WCI STEEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months Nine months
ended July 31, ended July 31,
2000 1999 2000 1999
---------------------- ----------------------
<S> <C> <C> <C> <C>
Net sales .......................... $ 140,726 $ 143,086 $ 438,087 $ 392,478
Operating costs and expenses
Cost of products sold ........... 122,258 119,395 372,646 343,111
Depreciation and amortization ... 5,837 5,855 17,482 17,488
Selling, general and
administrative expenses ........ 4,060 4,076 12,637 10,817
--------- --------- --------- ---------
132,155 129,326 402,765 371,416
--------- --------- --------- ---------
Operating income ................. 8,571 13,760 35,322 21,062
--------- --------- --------- ---------
Other income (expense)
Interest expense ................ (7,983) (8,031) (23,959) (24,047)
Interest and other income, net .. 1,812 762 6,645 2,150
--------- --------- --------- ---------
(6,171) (7,269) (17,314) (21,897)
--------- --------- --------- ---------
Income (loss) before income taxes 2,400 6,491 18,008 (835)
Income tax (benefit) ............. -- -- -- (4,558)
--------- --------- --------- ---------
Net income ....................... $ 2,400 $ 6,491 $ 18,008 $ 3,723
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
PAGE 12
WCI STEEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine months
ended July 31,
2000 1999
---------------------
<S> <C> <C>
Cash flows from operating activities
Net income ....................................... $ 18,008 $ 3,723
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .............. 15,276 15,290
Amortization of deferred maintenance costs . 2,206 2,198
Amortization of financing costs ............ 968 1,006
Postretirement health care benefits ........ 8,869 5,039
Pension benefits ............................. 4,053 (2,514)
Deferred income taxes ........................ -- (4,758)
Other ...................................... 1,150 103
Cash provided (used) by changes in certain
assets and liabilities
Accounts receivable ........................ 4,920 (12,653)
Inventories ................................ (10,388) 895
Accounts payable ........................... (7,670) 8,291
Accrued liabilities .................................... (4,786) (8,513)
Other assets and liabilities, net .......... 1,598 (436)
-------- --------
Net cash provided by operating activities .. 34,204 7,671
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment ....... (12,404) (7,970)
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt ............. (90) (87)
Dividends paid ................................... (9,200) --
-------- --------
Net cash used by financing activities .... (9,290) (87)
-------- --------
Net increase (decrease) in cash and cash
equivalents ..................................... 12,510 (386)
Cash and cash equivalents at beginning of period . 76,349 62,195
-------- --------
Cash and cash equivalents at end of period ............. $ 88,859 $ 61,809
======== ========
Supplemental disclosure of cash flow information
Cash paid for interest ........................... $ 30,483 $ 30,533
Cash paid for income taxes ....................... 21 971
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
PAGE 13
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three months and nine months ended July 31, 2000 and 1999
( 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, 2000 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, 1999.
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, 2000 and October 31, 1999 was as follows:
<TABLE>
<CAPTION>
July 31, October 31,
2000 1999
----------- -----------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Raw materials .................... $ 25,934 $ 33,811
Finished and semi-finished product 69,113 49,386
Supplies ......................... 89 50
-------- --------
95,136 83,247
Less LIFO reserve ................ (1,501) --
-------- --------
$ 93,635 $ 83,247
======== ========
</TABLE>
<PAGE>
PAGE 14
NOTE 3 : 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 management. 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 continue to change and have generally become more stringent, 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 is subject to consent decrees as a result of two civil actions instituted by
the Department of Justice (DOJ), on behalf of the Environmental Protection
Agency (EPA). These consent decrees require WCI to complete certain supplemental
environmental projects estimated to cost between $1.7 million and $2.2 million
that will be expended by late 2001. 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 consent decrees
also provide for stipulated penalties in the event of noncompliance which WCI
does not believe will be material.
As a condition of a previous Resource Conservation and Recovery Act (RCRA)
operating permit, WCI is required to undertake a corrective action program with
respect to historical material handling practices at the Warren facility. WCI
has completed the initial phase of the first investigation step of the
corrective action program, the RCRA Facility Investigation (RFI), and has
submitted its report to the EPA. WCI believes that additional sampling will be
required to complete a full RFI and will negotiate the extent of the second
phase with the EPA. The RFI workplan identifies thirteen historical solid waste
management units to be investigated. The final scope of 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.
<PAGE>
PAGE 15
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. Discovery regarding the NLRA claim is in
process.
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.
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PAGE 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Three Months Ended July 31, 2000 Compared to
Three Months Ended July 31, 1999.
Net sales for the three months ended July 31, 2000 were $140.7 million on
308,912 tons shipped, representing a 1.6% decrease in net sales and a 5.9%
decrease in tons shipped compared to the three months ended July 31, 1999.
Shipping volume for the 2000 period was lower due primarily to customers
reducing the level of their inventories. Net sales per ton shipped increased
4.6% to $456 in the 2000 period compared to $436 for the 1999 period, primarily
as a result of price increases which became effective January 1, 2000 and to a
lesser extent price increases which became effective April 1, 2000. Shipments of
custom carbon, alloy and electrical steels accounted for 62.3% of total
shipments for the three months ended July 31, 2000 compared to 66.6% in the
comparable period of 1999.
Gross margin (sales less cost of goods sold) was $18.5 million for the
three months ended July 31, 2000 compared to $23.8 million for the three months
ended July 31, 1999. The decrease in gross margin reflects the lower shipping
volume discussed above and increased production costs as a result of planned
maintenance at the company's hot strip mill and other operating units and the
effect of lower production volume offset somewhat by increased selling prices.
Operating income was $7.7 million, or $25 per ton, for the three months
ended July 31, 2000 compared to operating income of $12.9 million, or $39 per
ton, for the three months ended July 31, 1999. The decreased operating income
for the 2000 period reflects the lower gross margin discussed above.
Interest, investment and other income, net was $2.1 million for the three
months ended July 31, 2000 compared to $1.1 million for the three months ended
July 31, 1999. This increase is due primarily to higher cash balances at WCI
generating increased interest income in the 2000 quarter compared to 1999.
As a result of the items discussed above, the Company had a loss before
taxes of $1.5 million for the three months ended July 31, 2000 compared to
income of $2.6 million for the three months ended July 31, 1999.
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, 2000 Compared to
Nine Months Ended July 31, 1999
Net sales for the nine months ended July 31, 2000 were $438.1 million on
984,700 tons shipped, representing a 11.6% increase in net sales and a 10.8%
increase in tons shipped compared to the nine months ended July 31, 1999. The
1999 period was adversely affected by a surge of imports that began in late 1998
and continued to affect the market until late in the second fiscal quarter of
1999. Net sales per ton shipped increased 1.0% to $445 in the 2000 period
compared to $441 for
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PAGE 17
the 1999 period, primarily as a result of price increases which became effective
January 1, 2000 and, to a lesser extent, April 1, 2000, offset somewhat by a
lower custom product mix. Shipments of custom carbon, alloy and electrical
steels accounted for 60.1% of total shipments for the nine months ended July 31,
2000 compared to 66.7% in the comparable period of 1999.
Gross margin (sales less cost of goods sold) was $65.7 million for the
nine months ended July 31, 2000 compared to $49.6 million for the nine months
ended July 31, 1999. The increase in gross margin reflects the higher shipping
volume and prices discussed above.
Operating income was $32.8 million, or $33 per ton, for the nine months
ended July 31, 2000 compared to operating income of $18.4 million, or $21 per
ton, for the nine months ended July 31, 1999. The increased operating income for
the 2000 period reflects the higher gross margin discussed above partially
offset by increased selling, general and administrative expenses primarily due
to higher variable compensation costs.
Interest, investment and other income, net was $8.7 million for the nine
months ended July 31, 2000 compared to $5.3 million for the nine months ended
July 31, 1999. Interest and investment income increased by $0.2 million to $5.5
million in the nine months ended July 31, 2000 compared to the nine months ended
July 31, 1999 due to higher interest income at WCI of $1.3 million, partially
offset by lower investment income at Renco Steel of $1.1 million. During the
first quarter of 2000, a gain of $2.8 million was recorded as a result of an
agreement with the United Steelworkers of America which permitted WCI to pay
certain medical benefits from assets in a trust previously restricted to other
benefits.
As a result of the items discussed above, the Company had income before
taxes of $7.3 million for the nine months ended July 31, 2000 compared to a loss
of $10.5 million for the nine months ended July 31, 1999.
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. For the 1999 period, the Company recognized an income
tax benefit of $21.5 million during the three months ended January 31, 1999
which included 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 $120.0 million 10 7/8% Senior
Secured Notes due 2005 (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
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PAGE 18
WCI, as permitted under the terms of WCI's outstanding indebtedness. At July
31, 2000, Renco Steel had available cash and investment balances of $8.4
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.
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 Renco Steel's 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 $18.0 million in the nine
months of 2000 but it is not expected that such results will be indicative of
results in the coming three to six months (see "Outlook"). Under the terms of
the indenture governing WCI's 10% Senior Secured Notes due 2004 (Senior Secured
Notes of WCI) dividends of $9.2 million were paid to Renco Steel during 2000. At
July 31, 2000, WCI had no remaining availability for dividends. 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 $27.5 million and $1.4 million
for the nine months ended July 31, 2000 and July 31, 1999, respectively. The
higher operating cash flow in 2000 compared to 1999 resulted primarily from an
increase in income before taxes and non-cash post-retirement benefits offset
somewhat by changes in working capital.
Cash used by investing activities was $7.7 million during the first nine
months of 2000, compared with cash provided by investing activities of $0.5
million in the first nine months of 1999. WCI's capital expenditures in the nine
months ended July 31, 2000 were $12.4 million compared to $8.0 million in the
nine months ended July 31, 1999. Renco Steel's proceeds from the sale of Other
Investments, net of purchases, decreased by $3.7 million from the comparable
1999 period. WCI's capital expenditures in fiscal 2000 are expected to be $16.0
million. Capital expenditures in 2000 and 1999 have been funded from existing
cash balances and cash provided by operations. At July 31, 2000, WCI had
commitments for capital expenditures of approximately $3.6 million.
During the first nine months of 2000, Renco Steel paid dividends of $3.3
million. At July 31, 2000, Renco Steel was not permitted to pay dividends under
the terms of the Senior Secured Notes indenture.
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PAGE 19
WCI
WCI's liquidity requirements result from capital investments, working
capital requirements, postretirement healthcare 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, 2000 consisted of cash and cash equivalents
of $88.9 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
receivables and inventories, as defined therein, and expires on December 29,
2003. As of July 31, 2000, WCI had no borrowings outstanding under the Revolving
Credit Facility of WCI, with a borrowing limit of $93.9 million based on
eligible receivables and inventories, net of $6.1 million in outstanding letters
of credit.
Cash provided by operating activities was $34.2 million for the nine
months ended July 31, 2000 compared to $7.7 million for the 1999 period. The
higher operating cash flow in 2000 compared to 1999 resulted primarily from an
increase in income before taxes and non-cash postretirement benefits offset
somewhat by changes in working capital.
Capital expenditures were $12.4 million and $8.0 million during the nine
months ended July 31, 2000 and 1999 respectively, and are expected to be
approximately $16 million for all of fiscal 2000. Management has funded capital
expenditures in 2000 and 1999 through cash balances and cash provided by
operating activities. At July 31, 2000, WCI had commitments for capital
expenditures of approximately $3.6 million.
The Revolving Credit Facility of WCI and the indenture governing the
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 dividends of $9.2 million during the nine months ended July 31,
2000 and, under the terms of the indenture governing the Senior Secured Notes of
WCI, there was no remaining availability for dividends at July 31, 2000.
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PAGE 20
Outlook
While the U.S. economy remains strong, some evidence of slowing growth is
appearing. The slowing growth is expected to reduce steel consumption in the
second half of calendar year 2000. This, in conjunction with customers reduction
in inventory levels and continued high levels of steel imports, has resulted in
significant declines in market prices for the third calendar quarter of 2000.
Imports are entering the domestic market at near record levels, approaching the
levels during the 1998 crisis, on an annualized basis. WCI expects shipments in
the fourth quarter to be slightly lower compared to the third quarter of 2000 at
reduced transaction prices. WCI's order backlog declined to 187,467 tons at July
31, 2000 compared to 283,306 tons at October 31, 1999 and 254,903 tons at July
31, 1999 reflecting the weakening demand, customer inventory reductions and
continued high levels of imports. As a result of these conditions, the Company
expects to incur a loss in the fourth quarter of fiscal 2000.
Forward-Looking Statements
This report includes "forward-looking statements" which involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company to differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such risks, uncertainties and other important
factors include, among others: general economic and business conditions;
increasing industry capacity and levels of imports of steel or steel products;
industry trends, including product pricing; competition; currency fluctuations;
the loss of any significant customers; availability of qualified personnel;
major equipment failures; changes in, or the failure or inability to comply
with, government regulation, including, without limitation, environmental
regulations; and the outcome of 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.
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PAGE 21
PART II - OTHER INFORMATION
RENCO STEEL HOLDINGS, INC.
ITEM 1. LEGAL PROCEEDINGS
For information as to the environmental matters and as to the employee
litigation described in the Company's Form 10-K for the year ended October 31,
1999, see Part I, Note 4 to Item 1, Financial Statements.
UNITED STATES DEPARTMENT OF JUSTICE 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, 1999. As
reported in the Company's quarterly report on Form 10-Q for the quarter ended
January 31, 2000, with respect to the action instituted by DOJ May 11, 1998
under RCRA, the period for appealing the court's ruling expired with no appeal
being filed.
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, 2000.
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PAGE 22
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 14, 2000 /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)
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PAGE 23
RENCO STEEL HOLDINGS, INC.
EXHIBIT INDEX
Exhibit Number Description
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27. Financial Data Schedule
