<PAGE>
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 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 June 12, 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
--------------------------------
Page No.
--------
PART I FINANCIAL INFORMATION
---------------------------------
Item 1. FINANCIAL STATEMENTS OF RENCO STEEL HOLDINGS, INC.
Condensed Consolidated Balance Sheets as of
April 30, 2000 and October 31, 1999. 3
Condensed Consolidated Statements of Operations for the
three and six months ended April 30, 2000 and 1999. 4
Condensed Consolidated Statements of Cash Flows for the
six months ended April 30, 2000 and 1999. 5
Notes to Condensed Consolidated Financial Statements. 6
FINANCIAL STATEMENTS OF WCI STEEL, INC.
Condensed Consolidated Balance Sheets as of
April 30, 2000 and October 31, 1999. 10
Condensed Consolidated Statements of Operations for the
three and six months ended April 30, 2000 and 1999. 11
Condensed Consolidated Statements of Cash Flows for the
six months ended April 30, 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 15
PART II OTHER INFORMATION
-----------------------------
Item 1. Legal Proceedings 20
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Exhibit Index 22
<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>
April 30, Oct. 31,
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ...................... $ 9,570 $ 3,830
Restricted cash and cash equivalents ........... 90,406 76,174
Other investments .............................. 7,071 10,238
Accounts receivable, less allowances ........... 61,397 57,846
Inventories .................................... 87,876 84,174
Prepaid expenses ............................... 2,815 6,236
--------- ---------
Total current assets ....................... 259,135 238,498
Property, plant and equipment, net ............... 247,702 254,416
Excess of cost over acquired net assets, net ..... 11,627 11,898
Intangible pension assets, net ................... 25,159 28,192
Other assets, net ................................ 21,765 18,749
--------- ---------
Total assets ......................... $ 565,388 $ 551,753
========= =========
LIABILITIES and SHAREHOLDER'S DEFICIT
Current liabilities
Current portion of long-term debt .............. $ 125 $ 122
Accounts payable ............................... 53,371 59,730
Accrued liabilities ............................ 57,506 51,916
--------- ---------
Total current liabilities .................. 111,002 111,768
Long-term debt, excluding current portion ........ 421,022 421,054
Postretirement health care benefits .............. 105,562 100,301
Pension benefits ................................. 38,421 38,709
Other liabilities ................................ 14,386 13,738
--------- ---------
Total liabilities .................... 690,393 685,570
--------- ---------
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 ............................ (125,285) (134,097)
--------- ---------
Total shareholder's deficit .......... (125,005) (133,817)
Commitments and contingencies .................... -- --
--------- ---------
Total liabilities and
shareholder's deficit .............. $ 565,388 $ 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 Six months
ended April 30, ended April 30,
2000 1999 2000 1999
---------------------- ----------------------
<S> <C> <C> <C> <C>
Net sales ......................... $ 156,149 $ 139,115 $ 297,361 $ 249,392
Operating costs and expenses
Cost of products sold ............ 131,137 121,787 250,245 223,583
Depreciation and amortization .... 6,703 6,732 13,448 13,436
Selling, general and
administrative expenses ......... 4,261 3,549 8,609 6,850
--------- --------- --------- ---------
142,101 132,068 272,302 243,869
--------- --------- --------- ---------
Operating income .................. 14,048 7,047 25,059 5,523
--------- --------- --------- ---------
Other income (expense)
Interest expense ................. (11,395) (11,419) (22,804) (22,833)
Interest, investment
and other income, net ........... 1,365 2,243 6,557 4,210
--------- --------- --------- ---------
(10,030) (9,176) (16,247) (18,623)
--------- --------- --------- ---------
Income (loss) before income taxes . 4,018 (2,129) 8,812 (13,100)
Income tax benefit ................ -- -- -- (21,477)
--------- --------- --------- ---------
Net income (loss) ............... $ 4,018 $ (2,129) $ 8,812 $ 8,377
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
<PAGE>
PAGE 5
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months
ended April 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................... $ 8,812 $ 8,377
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization .............. 11,980 11,971
Amortization of deferred maintenance costs . 1,468 1,465
Amortization of financing costs ............ 948 948
Postretirement health care benefits ........ 5,261 3,321
Pension benefits ........................... 3,961 (1,788)
Deferred income taxes ...................... (243) (21,677)
Gain on other investments .................. (1,584) (2,724)
Other ...................................... 1,105 54
Cash provided (used) by changes in certain
assets and liabilities
Accounts receivable ........................ (3,551) (4,997)
Inventories ................................ (3,702) 15,243
Accounts payable ........................... (6,359) 6,309
Accrued liabilities ........................ 4,617 (498)
Other assets and liabilities, net .......... (1,331) (584)
-------- --------
Net cash provided by operating activities .. 21,382 15,420
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment ....... (6,103) (5,639)
Other investments, net ........................... 4,753 2,482
-------- --------
Net cash used by investing
activities ................................ (1,350) (3,157)
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt ............. (60) (57)
-------- --------
Net cash used by financing activities ...... (60) (57)
-------- --------
Net increase in cash and cash equivalents .............. 19,972 12,206
Total cash and cash equivalents at
beginning of period ................................... 80,004 67,152
-------- --------
Total cash and cash equivalents at end of period ....... $ 99,976 $ 79,358
======== ========
Supplemental disclosure of cash flow information
Cash paid for interest ........................... $ 21,856 $ 21,885
Cash paid for income taxes ....................... 21 365
</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 six months ended April 30, 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
six months ended April 30, 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 April 30,
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 April 30, 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 $0.4 million and $2.3 million for the six
months ended April 30, 2000 and April 30, 1999, respectively, and $0.2 million
and $1.5 million for the three months ended April 30, 2000 and April 30, 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 April 30,
2000 and October 31, 1999 was as follows:
<TABLE>
<CAPTION>
April 30, October 31,
2000 1999
(Unaudited)
------- --------
(Dollars in thousands)
<S> <C> <C>
Raw materials .................................. $20,431 $ 33,811
Finished and semi-finished product ............. 67,443 49,386
Supplies ....................................... 114 50
------- --------
87,988 83,247
Less LIFO reserve .............................. 112 (927)
------- --------
$87,876 $ 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 report to the EPA. WCI believes that additional sampling will be
required to complete a
<PAGE>
PAGE 8
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
quarter 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 six months
ended April 30, 2000 and April 30, 1999, respectively.
<PAGE>
PAGE 9
All revenues are generated by WCI. Geographic revenues are based on the region
in which the customer invoice was generated and all revenue was 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>
Six months ended
April 30,
2000 1999
--------- ---------
<S> <C> <C>
WCI................................ $ 15,608 $ (2,768)
Other.............................. (6,796) 11,145
--------- ---------
Total Consolidated........... $ 8,812 $ 8,377
========= =========
</TABLE>
<PAGE>
PAGE 10
WCI STEEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
April 30, Oct. 31,
2000 1999
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents ........................ $ 93,084 $ 76,349
Accounts receivable, less allowances ............. 61,397 57,846
Inventories ...................................... 86,988 83,247
Prepaid expenses ................................. 2,815 6,236
--------- ---------
Total current assets .......................... 244,284 223,678
Property, plant and equipment, net ................. 203,295 208,477
Intangible pension assets, net ..................... 28,708 31,895
Other assets, net .................................. 18,830 15,894
--------- ---------
Total assets ........................... $ 495,117 $ 479,944
========= =========
LIABILITIES and SHAREHOLDER'S EQUITY (DEFICIT)
Current liabilities
Current portion of long-term debt ................ $ 125 $ 122
Accounts payable ................................. 53,371 59,730
Accrued liabilities .............................. 53,999 48,364
--------- ---------
Total current liabilities .................... 107,495 108,216
Long-term debt, excluding current portion .......... 301,317 301,380
Postretirement health care benefits ................ 104,992 99,706
Pension benefits ................................... 38,350 38,635
Other liabilities .................................. 14,386 13,738
--------- ---------
Total liabilities ...................... 566,540 561,675
--------- ---------
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 .............................. (71,702) (82,010)
--------- ---------
Total shareholder's equity (deficit) ... (71,423) (81,731)
Commitments and contingencies ...................... -- --
--------- ---------
Total liabilities and
shareholder's equity (deficit) ........ $ 495,117 $ 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 OPERATIONS
(Dollars in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months Six months
ended April 30, ended April 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales .......................... $ 156,149 $ 139,115 $ 297,361 $ 249,392
Operating costs and expenses
Cost of products sold ........... 131,208 121,852 250,388 223,716
Depreciation and amortization ... 5,801 5,831 11,645 11,633
Selling, general and
administrative expenses ........ 4,232 3,517 8,577 6,741
--------- --------- --------- ---------
141,241 131,200 270,610 242,090
--------- --------- --------- ---------
Operating income ................. 14,908 7,915 26,751 7,302
--------- --------- --------- ---------
Other income (expense)
Interest expense ................ (7,981) (8,006) (15,976) (16,016)
Interest and other income, net .. 1,095 706 4,833 1,388
--------- --------- --------- ---------
(6,886) (7,300) (11,143) (14,628)
--------- --------- --------- ---------
Income (loss) before income taxes 8,022 615 15,608 (7,326)
Income tax benefit ............... -- -- -- (4,558)
--------- --------- --------- ---------
Net income (loss) ................ $ 8,022 $ 615 $ 15,608 $ (2,768)
========= ========= ========= =========
</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>
Six months
ended April 30,
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................ $ 15,608 $ (2,768)
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Depreciation and amortization .............. 10,177 10,168
Amortization of deferred maintenance costs . 1,468 1,465
Amortization of financing costs ............ 645 656
Postretirement health care benefits ........ 5,286 3,343
Pension benefits ........................... 4,118 (1,643)
Deferred income taxes ...................... -- (4,758)
Other ...................................... 1,108 54
Cash provided (used) by changes in certain assets
and liabilities
Accounts receivable ........................ (3,551) (4,997)
Inventories ................................ (3,741) 15,208
Accounts payable ........................... (6,359) 6,309
Accrued liabilities ........................ 4,419 (628)
Other assets and liabilities, net .......... (980) (677)
-------- --------
Net cash provided by operating activities .. 28,198 21,732
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment ....... (6,103) (5,639)
-------- --------
Cash flows from financing activities:
Principal payments on long-term debt ............. (60) (57)
Dividends paid ................................... (5,300) --
-------- --------
Net cash used by financing activities ...... (5,360) (57)
-------- --------
Net increase in cash and cash equivalents .............. 16,735 16,036
Cash and cash equivalents at beginning of period ....... 76,349 62,195
-------- --------
Cash and cash equivalents at end of period ............. $ 93,084 $ 78,231
======== ========
Supplemental disclosure of cash flow information
Cash paid for interest ........................... $ 15,331 $ 15,360
Cash paid for income taxes ....................... 21 769
</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 six months ended April 30, 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 six months ended April 30, 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 April
30, 2000 and October 31, 1999 was as follows:
<TABLE>
<CAPTION>
April 30, October 31,
2000 1999
-------- -------
(Unaudited)
(Dollars in thousands)
<S> <C> <C>
Raw materials .................................. $ 20,431 $33,811
Finished and semi-finished product ............. 67,443 49,386
Supplies ....................................... 114 50
-------- -------
87,988 83,247
Less LIFO reserve .............................. (1,000) --
-------- -------
$ 86,988 $83,247
======== =======
</TABLE>
NOTE 3 : ENVIRONMENTAL MATTERS and OTHER CONTINGENCIES
In common with much of the steel industry, the Company's facilities are
located on sites that have been used for heavy industrial purposes for decades.
The Company is and will continue to be subject to numerous federal, state and
local environmental laws and regulations governing, among other things, air
emissions, waste water discharge and solid and hazardous waste management. 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 continue to change and have
generally become more stringent, and the Company may be subject to
<PAGE>
PAGE 14
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 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 the Company 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 the Company does not believe will be material.
As a condition of a previous Resource Conservation and Recovery Act (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 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. The Company 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, 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. Discovery regarding the NLRA claim is in
process.
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
<PAGE>
PAGE 15
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 quarter or annual period; however, the Company believes that the
effect of such matters will not have a material adverse effect on the Company's
consolidated financial position.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
Three Months Ended April 30, 2000 Compared to Three Months Ended April 30,
1999.
Net sales for the three months ended April 30, 2000 were $156.1 million on
349,745 tons shipped, representing a 12% increase in net sales and a 9% increase
in tons shipped compared to the three months ended April 30, 1999. Shipping
volume for the 2000 period returned to more historical levels when compared to
the 1999 period. The 1999 period was adversely affected by the surge of
illegally dumped 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 2.5% to $446 in the 2000 period compared to $435 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 offset somewhat by changes in product mix. Shipments of custom carbon,
alloy and electrical steels accounted for 58.3% of total shipments for the three
months ended April 30, 2000 compared to 66.9% in the comparable period of 1999.
Due to the growth in customer inventory levels and the levels of imports and the
uncertainty created by the imports, no assurance can be given that the current
volume and price levels will be sustained. The Company's order backlog was
234,000 tons at April 30, 2000 compared to 283,000 tons at October 31, 1999 and
252,000 tons at April 30, 1999.
Gross margin (sales less cost of goods sold) was $25.0 million for the
three months ended April 30, 2000 compared to $17.3 million for the three months
ended April 30, 1999. The increase in gross margin reflects the higher shipping
volume and prices discussed above offset somewhat by higher variable
compensation expense.
Operating income was $14.0 million, or $40 per ton, for the three months
ended April 30, 2000 compared to operating income of $7.0 million, or $22 per
ton, for the three months ended April 30, 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 $1.4 million for the three
months ended April 30, 2000 compared to $2.2 million for the three months ended
April 30, 1999. Interest and investment income decreased by $0.8 million in the
second quarter of 2000 compared to the second quarter of 1999 due to a reduction
of $1.2 million in investment income at Renco Steel offset by an increase of
$0.4 million in interest income at WCI.
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PAGE 16
As a result of the items discussed above, the Company had income before
taxes of $4.0 million for the three months ended April 30, 2000 compared to a
loss of $2.1 million for the three months ended April 30, 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.
Six Months Ended April 30, 2000 Compared to
Six Months Ended April 30, 1999
Net sales for the six months ended April 30, 2000 were $297.4 million on
675,788 tons shipped, representing a 19% increase in net sales and a 21%
increase in tons shipped compared to the six months ended April 30, 1999.
Shipping volume for the 2000 period returned to more historical levels when
compared to the 1999 period. The 1999 period was adversely affected by the surge
of illegally dumped 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 decreased 1.1% to $440 in the 2000 period compared to $445 for the 1999
period, primarily as a result of a lower custom product mix offset somewhat by
price increases which became effective January 1, 2000 and, to a lesser extent,
April 1, 2000. Shipments of custom carbon, alloy and electrical steels accounted
for 59.1% of total shipments for the six months ended April 30, 2000 compared to
66.9% in the comparable period of 1999.
Gross margin (sales less cost of goods sold) was $47.1 million for the six
months ended April 30, 2000 compared to $25.8 million for the six months ended
April 30, 1999. Gross margin was adversely impacted during the 1999 period by
higher costs caused by production being significantly below capacity. The
increase in gross margin reflects the higher shipping volume and prices
discussed above and lower production costs resulting from higher operating
levels during the 2000 period.
Operating income was $25.1 million, or $37 per ton, for the six months
ended April 30, 2000 compared to operating income of $5.5 million, or $10 per
ton, for the six months ended April 30, 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 $6.6 million for the six
months ended April 30, 2000 compared to $4.2 million for the six months ended
April 30, 1999. Interest and investment income decreased by $0.4 million to $3.8
million in the current six month period. 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 permits WCI to pay certain medical benefits from
assets in a trust previously restricted for other benefits.
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PAGE 17
As a result of the items discussed above, the Company had income before
taxes of $8.8 million for the six months ended April 30, 2000 compared to a loss
of $13.1 million for the six months ended April 30, 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. During the three months ended January 31, 1999 the
Company recognized an income tax benefit of $21.5 million 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). Interest on the Senior Secured
Notes is payable semi-annually in arrears on February 1, and August 1 of each
year.
Renco Steel's liquidity requirements result from its debt service
obligations related to the Senior Secured Notes, as well as to a nominal extent,
general corporate overhead. Renco Steel has met these requirements from existing
cash balances and through distributions from WCI, as permitted under the terms
of WCI's outstanding indebtedness. At April 30, 2000, Renco Steel had available
cash and investment balances of $14.0 million plus unrestricted cash at WCI of
$2.7 million was available for dividends to Renco Steel under the terms of the
indenture governing WCI's 10% Senior Secured Notes due 2004 (Senior Secured
Notes of WCI). Such dividends are generally limited to 50% of WCI's cumulative
earnings since October 31, 1996. 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 $15.6 million in the six
months of 2000.
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 $21.4 million and $15.4 million
for the six months ended April 30, 2000 and April 30, 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.
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PAGE 18
Cash used by investing activities was $1.4 million during the first six
months of 2000, compared with $3.2 million in the first six months of 1999.
WCI's capital expenditures in the current period were $6.1 million compared to
$5.6 million in the first six months of 1999. Renco Steel's proceeds from the
sale of Other Investments, net of purchases, increased $2.3 million. WCI's
capital expenditures in fiscal 2000 are expected to be $20.0 million. Capital
expenditures in 2000 and 1999 have been funded from existing cash balances and
cash provided by operations. At April 30, 2000, WCI had commitments for capital
expenditures of approximately $5.1 million.
During the first six months of 2000, Renco Steel did not declare or pay
any dividends. At April 30, 2000, Renco Steel was permitted to pay $2.6 million
in dividends under the terms of the Senior Secured Notes indenture.
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 April 30, 2000 consisted of cash and cash equivalents
of $93.1 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 receivables
and inventories, as defined therein, and expires on December 29, 2003. As of
April 30, 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 $28.2 million for the six months
ended April 30, 2000 compared to $21.7 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 $6.1 million and $5.6 million during the six
months ended April 30, 2000 and 1999 respectively, and are expected to be
approximately $20 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 April 30, 2000, WCI had commitments for capital
expenditures of approximately $5.1 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.
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PAGE 19
WCI paid dividends of $5.3 million during the six months ended April 30,
2000 and, under the terms of the Senior Secured Notes of WCI indenture, $2.7
million was available for dividends at April 30, 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; the outcome of pending environmental and other legal matters and
the performance of the Other Investments. These forward-looking statements speak
only as of the date of this report. The Company expressly disclaims any
obligation or undertaking to disseminate any updates or revisions to any
forward-looking statement contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based.
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PAGE 20
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 April
30, 2000.
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PAGE 21
RENCO STEEL HOLDINGS, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RENCO STEEL HOLDINGS, INC.
(registrant)
Date: June 12, 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
(principrial financial and
accounting officer)
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PAGE 22
RENCO STEEL HOLDINGS, INC.
EXHIBIT INDEX
Exhibit Number Description
-------------- -----------
10.2.10(1) Amended and Restated Net Worth Appreciation
Participation Agreement, as of January 15,
1999, Between WCI Steel, Inc. and Edward R.
Caine.
10.2.11(1) Amended and Restated Net Worth Appreciation
Participation Agreement, as of January 15,
1999, Between WCI Steel, Inc. and Patrick G.
Tatom.
10.2.12(1) Amended and Restated Net Worth Appreciation
Participation Agreement, as of January 15,
1999, Between WCI Steel, Inc. and Patrick T.
Kenney.
10.2.13(1) Amended and Restated Net Worth Appreciation
Participation Agreement, as of January 15,
1999, Between WCI Steel, Inc. and Brian J.
Mitchell.
10.2.14(1) Amended and Restated Net Worth Appreciation
Participation Agreement, as of January 15,
1999, Between WCI Steel, Inc. and David A.
Howard.
27. Financial Data Schedule
(1) Incorporated by reference to the WCI Steel, Inc. Form 10-Q report for the
quarterly period ended April 30, 2000.
