<PAGE> 1
FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
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<CAPTION>
<S> <C>
For the three and six month periods ended June 30, 2000 Commission File Number: 333-90709-04
</TABLE>
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC
-------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 34-1902647
--------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
3770 EMBASSY PARKWAY
AKRON, OHIO 44333-8367 (330) 670-3000
---------------------------------------- -------------------------------
(Address of principal executive offices) (Registrant's telephone number)
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.
X Yes No
--- ---
Number of shares outstanding of common stock as of August 11, 2000: AS OF AUGUST
11, 2000, THERE WERE 1,100 CLASS A UNITS OF MEMBERS' INTEREST, 1,000 CLASS B
UNITS OF MEMBERS' INTEREST AND 30,000 CLASS C UNITS OF MEMBERS' INTEREST
OUTSTANDING.
<PAGE> 2
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND
SUBSIDIARIES
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
------------------------------
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Item 1. Unaudited Financial Statements
Consolidated/Combined Statements of Operations for the Three and
Six Months Ended June 30, 2000 and 1999 3
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 4
Consolidated/Combined Statements of Members'
Interest/Stockholders' Deficit for the Period from January 1,
1999 to August 12, 1999 and the Period from August 13, 1999 to
December 31, 1999 and the Six Months Ended June 30, 2000 5
Consolidated/Combined Statements of Cash Flows for the Six
Months Ended June 30, 2000 and 1999 6
Notes to Consolidated/Combined Financial Statements 7-13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14-19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 21
Item 6. Exhibits and Reports on Form 8-K 21-22
Signatures 23
</TABLE>
2
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PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1 - UNAUDITED FINANCIAL STATEMENTS
---------------------------------------
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED/COMBINED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2000 and 1999
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
The Company - The Predecessor - The Company -
Consolidated Combined Consolidated The Predecessor -
Three Months Three Months Six Months Combined
Ended June 30, Ended June 30, Ended June 30, Six Months
2000 1999 2000 Ended June 30, 1999
----------------- ------------------ ------------------ --------------------
<S> <C> <C> <C> <C>
Net sales $346,321 $234,184 $698,164 $ 454,592
Cost of goods sold 313,553 219,420 640,998 428,260
----------------- ------------------ ------------------ --------------------
Gross profit 32,768 14,764 57,166 26,332
Selling, general and administrative expense 13,814 16,256 29,388 29,648
Depreciation and amortization expense 15,403 10,359 31,098 18,819
Workforce reduction charges (Note 5) 2,437 20,493 5,220 41,947
Special charges (Note 8) 45,792 -- 45,792 --
Other (income) expense, net 252 204 1,196 (24)
----------------- ------------------ ------------------ --------------------
Operating loss (44,930) (32,548) (55,528) (64,058)
Interest expense, net 27,116 20,334 53,837 39,579
----------------- ------------------ ------------------ --------------------
Loss before income taxes (72,046) (52,882) (109,365) (103,637)
Provision for income taxes 76 283 251 376
----------------- ------------------ ------------------ --------------------
Loss from continuing operations (72,122) (53,165) (109,616) (104,013)
Loss from disposition of discontinued
operations (Note 7) 9,821 -- 9,821 --
----------------- ------------------ ------------------ --------------------
Net loss (81,943) (53,165) (119,437) (104,013)
Preferred stock dividends 96 192
------------------ --------------------
Net loss applicable to common shares $(53,261) $(104,205)
================== ====================
</TABLE>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
3
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REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and December 31, 1999
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------------- ---------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,410 $ 4,637
Accounts receivable, less allowances of $19,194 and $27,237,
respectively 191,450 157,166
Inventories (Note 4) 233,138 284,668
Assets held for sale (Note 7) 10,188 15,219
Prepaid expenses and other current assets 4,749 7,907
------------------- ---------------------
Total current assets 444,935 469,597
Property, plant and equipment:
Land and improvements 16,218 15,875
Buildings and improvements 36,579 43,032
Machinery and equipment 712,998 736,300
Construction-in-progress 7,711 25,361
------------------- ---------------------
Total property, plant and equipment 773,506 820,568
Accumulated depreciation (76,188) (56,802)
------------------- ---------------------
Net property, plant and equipment 697,318 763,766
Assets held for sale (Note 7) 8,130 9,009
Intangible assets, net of accumulated amortization of $15,806 and $11,203,
respectively 158,871 163,479
Other assets 9,931 9,567
------------------- ---------------------
Total assets $ 1,319,185 $1,415,418
=================== =====================
LIABILITIES AND MEMBERS' INTEREST
Current liabilities:
Accounts payable $ 206,359 $ 196,050
Accrued interest 30,707 26,494
Accrued compensation and benefits 50,137 50,162
Other postretirement benefits 15,365 15,365
Defined benefit pension obligations 53,000 42,000
Other accrued liabilities 51,611 57,599
Current maturities of long-term debt 2,332 2,391
Revolving credit facility 348,277 336,397
------------------- ---------------------
Total current liabilities 757,788 726,458
Long-term debt 481,630 481,062
Accrued environmental liabilities 17,865 17,373
Other postretirement benefits 214,455 204,268
Defined benefit pension obligations 37,556 56,480
Other liabilities 40,603 40,758
------------------- ---------------------
Total liabilities 1,549,897 1,526,399
Members' interest:
Class A Units 5,853 5,661
Class B Units (266,973) (146,594)
Class C Units 31,375 30,625
Accumulated other comprehensive loss (967) (673)
------------------- ---------------------
Total members' interest (230,712) (110,981)
------------------- ---------------------
Total liabilities and members' interest $ 1,319,185 $1,415,418
=================== =====================
</TABLE>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
4
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REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED/COMBINED STATEMENTS OF MEMBERS' INTEREST/STOCKHOLDERS' DEFICIT
For the Period From January 1, 1999 to August 12, 1999 and
the Period from August 13, 1999 to December 31, 1999 and the Six Months
Ended June 30, 2000
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
Bar Technologies Inc.
-------------------------------
Members' Interest Series B Class A
---------------------------------------------
Class A Class B Class C Preferred Common
Units Units Units Stock Stock
-------------- ------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $ - $ -
Net loss
Other comprehensive income:
Foreign currency translation
adjustment
Minimum pension liability
adjustment
Preferred stock dividends
-------------- ------------- -------------- -------------- --------------
Balance, August 12, 1999 - -
Exchange of members' interest to
effect combination $ 5,500 $ 67,468 $ 30,000
Preferred return 161 (786) 625
Net loss (213,276)
Other comprehensive income:
Foreign currency translation
adjustment
-------------- ------------- -------------- -------------- --------------
Balance, December 31, 1999 5,661 (146,594) 30,625 $ - $ -
============== ==============
Preferred return 192 (942) 750
Net loss (119,437)
Other comprehensive income:
Foreign currency translation
adjustment
-------------- ------------- --------------
Balance, June 30, 2000 $ 5,853 $(266,973) $ 31,375
============== ============= ==============
</TABLE>
<TABLE>
<CAPTION>
Republic
----------------------------------------------- Engineered
Class B Class C Steels, Inc. Additional
Common Common Warrants Common Paid-In
Stock Stock Outstanding Stock Capital
--------------- --------------- -------------- ---------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $ 1 $ 1 $ 5,119 $ - $ 158,510
Net loss
Other comprehensive income:
Foreign currency translation
adjustment
Minimum pension liability
adjustment
Preferred stock dividends
--------------- --------------- -------------- ---------------- --------------
Balance, August 12, 1999 1 1 5,119 - 158,510
Exchange of members' interest to
effect combination (1) (1) (5,119) (158,510)
Preferred return
Net loss
Other comprehensive income:
Foreign currency translation
adjustment
--------------- --------------- -------------- ---------------- --------------
Balance, December 31, 1999 $ - $ - $ - $ - $ -
=============== =============== ============== ================ ==============
Preferred return
Net loss
Other comprehensive income:
Foreign currency translation
adjustment
Balance, June 30, 2000
</TABLE>
<TABLE>
<CAPTION>
Total
Accumulated Members'
Other Interest/
Accumulated Comprehensive Stockholders' Comprehensive
Deficit Income (Loss) Deficit Income (Loss)
--------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balance, January 1, 1999 $ (230,004) $ (3,682) $ (70,055) $ (116,746)
================
Net loss (114,913) (114,913) $ (114,913)
Other comprehensive income:
Foreign currency translation
adjustment 157 157 157
Minimum pension liability
adjustment 2,491 2,491 2,491
Preferred stock dividends (224) (224)
--------------- ---------------- ---------------- ----------------
Balance, August 12, 1999 (345,141) (1,034) (182,544) $ (112,265)
================
Exchange of members' interest to
effect combination 345,141 284,478
Preferred return
Net loss (213,276) $ (213,276)
Other comprehensive income:
Foreign currency translation
adjustment 361 361 361
--------------- ---------------- ---------------- ----------------
Balance, December 31, 1999 $ - (673) (110,981) $ (212,915)
=============== ================
Preferred return
Net loss (119,437) $ (119,437)
Other comprehensive income:
Foreign currency translation
adjustment (294) (294) (294)
---------------- ---------------- ----------------
Balance, June 30, 2000 $ (967) $ (230,712) $ (119,731)
================ ================ ================
</TABLE>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
5
<PAGE> 6
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
CONSOLIDATED/COMBINED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2000 and 1999
(In thousands of dollars)
(Unaudited)
<TABLE>
<CAPTION>
The Company - The Predecessor -
Consolidated Combined
Six Months Six Months
Ended June 30, 2000 Ended June 30, 1999
-------------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(119,437) $(104,013)
Adjustments to reconcile net cash used
in operating activities:
Gain on sale of fixed assets (1,156) --
Special charges 45,792 --
Depreciation and amortization 31,849 18,819
Accretion of original issue discount 1,339 5,571
Amortization of deferred financing cost 1,437 3,251
Changes in operating assets and liabilities:
Increase in accounts receivable (34,284) (32,213)
(Increase) decrease in inventory 51,530 (350)
Decrease in other current assets 3,158 6,274
Increase in accounts payable 10,309 55,586
(Decrease) increase in accrued compensation and
benefits (25) 11,291
(Decrease) increase in defined benefit pension
obligations (7,924) 16,860
Increase in other postretirement benefits 10,187 4,239
Decrease in accrued environmental liabilities (716) (449)
Decrease in other current liabilities (5,803) (7,505)
Other 4,522 (23,115)
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES (9,222) (45,754)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (5,243) (17,571)
Disposition of property, plant and equipment 4,482 --
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (761) (17,571)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt -- 75,676
Net proceeds (repayments) under revolving credit
facilities 11,881 (9,583)
Repayments of long-term debt (831) (3,708)
Preferred stock dividends -- (192)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,050 62,193
--------- ---------
Effect of exchange rate changes on cash (294) 455
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 773 (677)
Cash and cash equivalents - beginning of period 4,637 5,948
--------- ---------
Cash and cash equivalents - end of period $ 5,410 $ 5,271
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized $ 46,849 $ 28,669
========= =========
Cash paid for income taxes $ 845 $ 156
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated/combined
financial statements.
6
<PAGE> 7
REPUBLIC TECHNOLOGIES INTERNATIONAL HOLDINGS, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED/COMBINED FINANCIAL STATEMENTS
(In thousands of dollars, except as noted)
(Unaudited)
1. NATURE OF OPERATIONS, ORGANIZATION AND OTHER RELATED INFORMATION
Republic Technologies International Holdings, LLC and subsidiaries ("RTI" or the
"Company") manufactures and markets special bar quality ("SBQ") steel bar and
rod products. SBQ steel products are high quality hot-rolled and cold-finished
carbon and alloy steel bars and rods used primarily in critical applications in
automotive and industrial equipment industries. The Company produces a wide
range of SBQ steel products and supplies a diverse customer base that includes
leading automobile and industrial equipment manufacturers and their first tier
suppliers.
The Company was formed in a combination completed on August 13, 1999 (the
"Combination"). The Combination was completed through a series of mergers, asset
transfers and related steps as set forth in a Master Restructuring Agreement
among Bar Technologies Inc. ("BarTech"), Republic Engineered Steels, Inc.
("Republic"), USS/Kobe Steel Company and various of their affiliates. Following
the Combination, Republic Technologies International, LLC ("Republic
Technologies"), a newly formed legal entity and wholly owned subsidiary of the
Company, directly or indirectly owns and operates all of the assets of BarTech,
Republic and USS/Kobe Steel Company's SBQ steel products business ("USS/Kobe").
BarTech and Republic have been operated under common management and ownership
control since prior to the Combination. The consolidated financial statements of
RTI are being presented from the date of the Combination. Comparative combined
financial statements are being presented for BarTech and Republic for the
periods that they were under common control prior to the Combination (the
"Predecessor").
The Company and the individual companies included in the Combination: BarTech,
Republic and USS/Kobe have historically incurred substantial losses. As a result
of the Combination, the Company has substantial indebtedness and is highly
leveraged. The Company's future performance is subject to the success of its
consolidation plan pursuant to which is intended to create a more efficient,
higher quality network of production facilities operated by a smaller and more
flexible workforce. The success of the consolidation plan will depend on many
factors including the Company's ability to rationalize its production facilities
and headcount, enhance the productivity of its remaining facilities through
facility specialization and targeted capital investment, eliminate redundant
overhead costs and produce internally more raw materials currently purchased
from third parties. The Company's future success will also depend on general
economic conditions and financial competitive, regulatory, labor and other
factors, many of which cannot be predicted and are beyond the Company's control.
The Company's lower than expected sales in the first half of 2000 and it's lower
than expected performance during the third and fourth quarters of 1999 caused
the Company's liquidity to be negatively affected. The Company's liquidity
position has also been negatively impacted by the implementation of the
Company's consolidation plan as a result of the time lag between the incurrence
of certain costs and the receipt of the expected cash flow benefits, such as in
the case of headcount reductions requiring lump sum payouts. The Company's net
availability on its revolving credit facility at July 31, 2000 was approximately
$38,500.
Management has sought to improve the Company's liquidity position by taking a
number of actions including, increasing spot prices, reducing administrative
staff, implementing cost cutting programs, closing operations at its Johnstown
melt facility and its Canton 12" rolling facility, which is anticipated to be
completed during the third quarter (see Note 8), and reducing inventories. The
Company has also reduced its planned capital expenditures from $48,000 to
$19,000 for the year 2000, has obtained deferrals of approximately $46,000 of
certain quarterly 2000 and 2001 Pension Benefit Guaranty Corporation ("PBGC")
funding requirements until 2002 and 2003, obtained a deferral from the Ohio
Environmental Protection Agency (the "Ohio EPA") of $1.2 million of committed
environmental expenditures until 2001 and restructured Republic Technologies'
revolving credit facility. Additionally, on July 17, 2000, Republic Technologies
received approximately $30,000 aggregate principal amount of loans made from
certain of its direct and indirect equity partners in exchange for warrants to
purchase Class D common stock of Republic Technologies International, Inc.
("RTI, Inc.") and notes of Republic Technologies (see Note 9).
The Company is in the process of disposing of its Specialty Steels Division and
expects to complete this in 2001 (see Note 7). The Company is also in the
process of selling certain real estate from facilities closed as part of the
consolidation plan.
Notwithstanding these efforts, the Company may need to obtain additional
financing to meet its cash flow requirements, including financing through the
sale of additional debt or equity securities. Restrictive covenants included in
the indenture
7
<PAGE> 8
relating to the senior secured notes and other debt obligations limit the
Company's ability to incur additional indebtedness, or sell assets (most of
which are pledged), and may otherwise limit the operational and financial
flexibility of the Company. The ability to sell its assets may also be
constrained by the provisions of the Company's new labor agreement.
2. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated/combined financial statements contain results for
BarTech and Republic for the three and six months ended June 30, 2000 and 1999,
and the results for USS/Kobe for the three and six months ended June 30, 2000.
Prior period results are not comparable with the current periods due to the
acquisition USS/Kobe on August 13, 1999.
These consolidated/combined statements are unaudited. Certain information and
footnote disclosures normally prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Although management
believes that all adjustments, including normal recurring adjustments necessary
for a fair presentation, have been made, interim periods are not necessarily
indicative of the results of operations for a full year. As such, these
financial statements should be read in conjunction with the audited financial
statements and notes thereto for the year ended December 31, 1999 included in
the Company's Form 10-K, filed with the Securities and Exchange Commission.
The consolidated financial statements include the accounts of RTI and its wholly
owned subsidiaries. The combined financial statements include the accounts of
BarTech and its wholly owned subsidiaries and Republic and its wholly owned
subsidiaries for the periods that they were under common control prior to the
Combination. All significant intercompany balances have been eliminated in
consolidation. Certain reclassifications have been made to prior period
financial statements to conform to current period presentation.
Republic has been under common management and control with BarTech since
September 8, 1998, the date BarTech's controlling shareholders acquired control
of Republic. The acquisition of Republic has been accounted for as a purchase.
The combining of BarTech and Republic in the Combination has been accounted for
as a common control merger like a pooling of interests. The acquisition of
USS/Kobe as part of the Combination has been accounted for as a purchase. See
Note 3 for additional information related to the common control combination of
BarTech and Republic and information related to the acquisition of USS/Kobe.
The Company operates in three separate segments: hot-rolled, cold-finished and
specialty steels. In connection with the acquisition of Republic, the
Predecessor determined its intent to sell the Specialty Steels segment of the
business. The Company manages the reportable segments as separate strategic
business units. Differences between the segments include manufacturing
techniques and equipment, competition and end-users. The Company is in the
process of disposing of its Specialty Steels Division. The accompanying
consolidated/combined financial statements reflect the specialty division as a
discontinued business in accordance with Accounting Principles Board Opinion No.
30. See Note 7 for further information related to discontinued operations.
3. BUSINESS COMBINATIONS
On August 13, 1999, the Combination of BarTech, Republic and USS/Kobe was
completed. The Combination occurred through a series of mergers, asset transfers
and related steps that resulted in the formation of the Company. Assuming
exercise of outstanding warrants and conversion of outstanding convertible
preferred stock of the Company's parent and exchange of Members' Interests by
USX Corporation ("USX") and Kobe Steel, Ltd. ("Kobe"), Blackstone Capital
Partners II Merchant Banking Fund L.P. and its affiliates (together,
"Blackstone") and Veritas Capital Fund, L.P. and its affiliates (together,
"Veritas") indirectly own approximately 51.5 percent of the combined operations,
while USX and Kobe each indirectly own approximately 15 percent of the combined
operations. In conjunction with the Combination, the Company entered into a new
credit facility and applied proceeds from borrowings under this new credit
facility, together with proceeds of an offering of the senior secured notes and
warrants, including warrants sold separately from the senior secured notes
concurrent with the Combination, and new equity contributions, to refinance a
substantial portion of the indebtedness of Republic, RES Holding (Republic's
parent), BarTech and USS/Kobe.
8
<PAGE> 9
Combined and separate results of BarTech and Republic during the periods
preceding the Combination, while under common control, were as follows:
<TABLE>
<CAPTION>
BarTech Republic Adjustment Combined
-------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Three months ended June 30, 1999
Net sales $ 76,592 $157,592 -- $234,184
Net loss (10,949) (42,216) -- (53,165)
Six months ended June 30, 1999
Net sales $136,369 $318,223 -- $454,592
Net loss (18,211) (85,802) -- (104,013)
</TABLE>
The adjustments made to conform accounting policies of the two companies had no
impact on the combined financial results presented above. The amount of
intercompany profit in inventory at the end of each period is not significant.
The acquisition of USS/Kobe has been accounted for using the purchase method of
accounting. The purchase price for USS/Kobe totaled approximately $102,743,
including transaction costs and net of cash acquired of $14,621. Consideration
in the transaction included equity to the sellers valued at approximately
$83,756 and seller debt assumed of $23,844. Under purchase accounting, the total
purchase cost is allocated to the assets acquired and liabilities assumed of
USS/Kobe based on their respective fair values as of August 12, 1999, based on
valuations and other studies that are not yet finalized. The actual allocation
of purchase price and the resulting effect on income from operations may differ
significantly from these preliminary estimates. The excess of the fair value of
the net assets of USS/Kobe over the purchase price (i.e., purchase discount) of
$5,445 has been recorded as a reduction of property, plant and equipment.
The purchase price has been allocated to the assets purchased and liabilities
assumed based upon the fair values on the date of the acquisition as follows:
<TABLE>
<CAPTION>
USS/Kobe
---------------------
<S> <C>
Purchase price:
Fair value of equity consideration $ 83,756
Additional seller debt assumed 23,844
Acquisition fees and expenses 9,764
---------------------
Total purchase price 117,364
Book value of net assets acquired 206,859
---------------------
Excess purchase discount from book value
of net assets acquired (89,495)
Allocation of purchase price:
Increase in inventory (3,290)
Decrease in prepaids and other current assets 1,077
Decrease in property, plant and equipment 6,838
Decrease in intangible and other assets 2,475
Decrease in accounts payable (217)
Increase in accrued expenses 3,888
Increase in other postretirement benefits 47,032
Increase in defined benefit pension obligation 26,247
---------------------
Purchase discount $ (5,445)
=====================
</TABLE>
9
<PAGE> 10
The following pro forma information presents the consolidated results of
operations assuming the Combination was completed as of the beginning of January
1999:
Six Months Ended
(in millions) June 30, 1999
----------------
Net sales $ 723.4
Net loss from continuing operations $ (137.4)
The pro forma results have been prepared for comparative purposes only and
include certain adjustments, such as reduced depreciation expense as a result of
fair value adjustments to the basis of property, plant and equipment, net of the
purchase discount, and increased interest expense resulting from borrowing under
the revolving credit facility and senior secured notes. They do not purport to
be indicative of the results of operations which actually would have resulted
had the Combination been in effect on January 1, 1999.
4. INVENTORIES
The components of inventories are as follows:
June 30, 2000 December 31, 1999
-------------------- ---------------------
Raw materials $ 31,677 $ 52,833
Semi-finished and finished goods 201,461 231,835
-------------------- ---------------------
Total $ 233,138 $ 284,668
==================== =====================
At June 30, 2000 and December 31, 1999, inventories are net of market reserves
and obsolescence reserves aggregating $5,432 and $13,585, respectively.
5. WORKFORCE REDUCTION CHARGES
The new Master Collective Bargaining Agreement and settlement agreement entered
into in 1998 (collectively, the "Master CBA") requires Republic Technologies to
offer Early Retirement Buyouts ("ERB's") to at least 1,000 employees and permits
Republic Technologies to offer a Voluntary Severance Plan ("VSP"). The purpose
of these programs is to reduce the hourly workforce by a net reduction of over
1,900 hourly employees over four years. These programs are substantially
voluntary in nature. Accordingly, the costs associated with these workforce
reductions are being recognized as charges to operations as the offers for ERB's
and VSP's are accepted by the employees and intended to be awarded by Republic
Technologies. Through June 30, 2000, 758 voluntary ERB packages were accepted.
As such, Republic Technologies has recorded $100,422 of workforce reduction
charges to date for early retirement benefits, including pension and other
postretirement obligations and special termination payments. During the six
months ended June 30, 2000 and 1999, 9 and 313, respectively, voluntary ERB
packages were accepted and corresponding workforce charges of $1,642 and
$41,947, respectively, were recorded.
Under the terms of Master CBA, if the ERB's and VSP's do not achieve targeted
headcount reductions, Republic Technologies will have the flexibility to reduce
the hourly workforce by approximately 300 employees in addition to the number of
accepted ERB's and VSP's. Pursuant to the Master CBA, United Steelworkers of
America (the "USWA") represented employees will be eligible for Supplemental
Unemployment Benefits (SUB) and the continuation of certain health insurance
benefits.
During the six months ended June 30, 2000, workforce reduction charges included
$3,578 of severance related costs for administrative staff reductions.
6. SEGMENT INFORMATION
The Company operates in three reportable segments: hot-rolled, cold-finished
and specialty steels. As discussed previously in Note 1, the Company intends to
dispose of its Specialty Steel Division and accordingly, the accompanying
consolidated/combined financial statements reflect that division as a
discontinued operation in accordance with Accounting Principles Board Opinion
No. 30. As such the following tables do not reflect specialty steels as a
reportable segment. The Company manages the reportable segments as separate
strategic business units. Differences between the segments include
manufacturing techniques and equipment, competition, and end-users. The Company
measures segment performance based on earnings before net interest
10
<PAGE> 11
expense, income taxes, depreciation and amortization expense, other
postretirement benefit charges, workforce reduction charges and other (income)
loss, net ("EBITDA, as defined").
HOT-ROLLED
Hot-rolled bars and rods are processed from blooms and billets on rolling mills
to change the internal physical properties, size or shape of the steel.
Desirable characteristics of hot-rolled products include internal soundness,
uniformity of chemical composition and freedom from surface imperfection. The
Company's hot-rolled products include rounds, squares and hexagons, in both
cut-lengths and coils. Customers for hot-rolled products include manufacturers
of automotive parts, industrial equipment, independent forgers, steel service
centers and converters. The Company's hot-rolled products are used in the
manufacture of end-use products such as automotive drive trains, engine and
transmission parts, bearings and tractor components.
COLD-FINISHED
Cold-finishing is a value-added process which improves the physical properties
of hot-rolled bars and rods. Cold-finished products are produced from hot-rolled
bars by cold-drawing, turning, grinding, thermal treating or a combination of
these processes. The manufacturing process allows for production of products
with more precise size and straightness tolerances, as well as improved strength
and surface finish, that provides customers with a more efficient means of
producing a number of end products by often eliminating processing steps in the
customers' use of the products. The Company's cold-finished products include
rounds, squares, hexagons, and flats, all of which can be further processed by
turning, grinding or polishing, or a combination thereof. Customers for
cold-finished products include manufacturers of automotive parts, industrial
equipment, steel service centers and distributors. The Company's cold-finished
products are used in the manufacture of end-use products such as automotive
steering assemblies, electrical motor shafts, ball and roller bearings, valves
and hand tools.
Intersegment sales are made at an agreed upon transfer cost which is adjusted
quarterly and are eliminated in consolidation. Selling, general and
administrative and other costs are allocated 80% to hot-rolled and 20% to
cold-finished. Pension costs are allocated based on the amount of payroll
incurred by each segment.
<TABLE>
<CAPTION>
For the Three Months Ended June 30, 2000
--------------------------------------------------------
Inter Segment
Cold- Total Elimination/
Hot-Rolled Finished Segments Other Consolidated
<S> <C> <C> <C> <C> <C>
Net sales $323,260 $ 76,551 $399,811 $(53,490) $346,321
Depreciation and amortization 14,208 1,195 15,403 -- 15,403
Segment profit (EBITDA,
as defined) 18,428 3,487 21,915 -- 21,915
Capital expenditures 1,759 73 1,832 (87) 1,745
</TABLE>
<TABLE>
<CAPTION>
For the Three Months Ended June 30, 1999
--------------------------------------------------------
Inter Segment
Cold- Total Elimination/
Hot-Rolled Finished Segments Other Consolidated
<S> <C> <C> <C> <C> <C>
Net sales $ 151,865 $ 87,582 $ 239,447 $ (5,263) $ 234,184
Depreciation and amortization 6,979 3,380 10,359 -- 10,359
Segment profit (EBITDA,
as defined) (1,139) 1,131 (8) -- (8)
Capital expenditures 8,666 638 9,304 -- 9,304
</TABLE>
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 2000
--------------------------------------------------------
Inter Segment
Cold- Total Elimination/
Hot-Rolled Finished Segments Other Consolidated
<S> <C> <C> <C> <C> <C>
Net sales $ 632,339 $ 157,872 $ 790,211 $ (92,047) $698,164
Depreciation and amortization 28,687 2,411 31,098 -- 31,098
Segment profit (EBITDA,
as defined) 29,305 6,974 36,279 -- 36,279
Capital expenditures 5,017 313 5,330 (87) 5,243
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1999
--------------------------------------------------------------------------------------
Inter Segment
Cold- Total Elimination/
Hot-Rolled Finished Segments Other Consolidated
<S> <C> <C> <C> <C> <C>
Net sales $292,142 $176,745 468,887 $(14,295) 454,592
Depreciation and amortization 14,226 4,593 18,819 -- 18,819
Segment profit (EBITDA,
as defined) (1,472) 1,794 322 -- 322
Capital expenditures 16,266 1,305 17,571 -- 17,571
</TABLE>
7. DISCONTINUED OPERATIONS
In connection with its acquisition of Republic, the Company determined its
intent to sell its Specialty Steels Division and accordingly, the accompanying
consolidated financial statements reflect that division as a discontinued
operation in accordance with Accounting Principles Board Opinion No. 30. An
estimate of the operating results of the Specialty Steels Division during the
phase-out period from the acquisition date to the estimated ultimate disposition
date was made and included as a fair value adjustment as part of the allocation
of the Republic purchase price. Adjustments to this estimate have been made from
time to time and are reflected in the Company's results of operations.
From April 1999 to June 13, 2000, Haynes International ("Haynes"), an affiliate
company controlled by Blackstone, managed the Company's Specialty Steels
Division. Management responsibilities are currently being handled internally.
During the second quarter of 2000, the Company and a potential acquiror broke
off negotiations for the sale of the division. The Company is continuing the
process of disposing of its Specialty Steels Division and anticipates this to
be completed by June 2001. The Company recorded a charge of $9,821 for an
additional loss on the disposition of discontinued operations during June 2000.
Sales and related losses for the discontinued operations were as follows (net
loss on discontinued operations has been reflected in the Company's financial
statements as a reduction in the accrual for losses on the discontinued
operations that was provided as part of the estimated loss on disposition):
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
---------------------------------------------- -----------------------------------------------
2000 1999 2000 1999
---------------------------------------------- -----------------------------------------------
<S> <C> <C> <C> <C>
Net sales $13,285 $12,848 $25,947 $25,876
Gross loss (1,193) (155) (3,845) (1,024)
Loss before income taxes (2,365) (1,171) (6,209) (3,242)
Provision for income taxes -- -- -- --
---------------------------------------------- -----------------------------------------------
Net loss $(2,365) $ (1,171) $(6,209) $(3,242)
============================================== ===============================================
</TABLE>
The components of net assets of discontinued operations included in the
Company's consolidated balance sheets as assets held for sale were as follows:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
----------------------- -----------------------
<S> <C> <C>
Assets held for sale, current- Inventories $10,188 $15,219
======================= =======================
Assets held for sale, non-current - Property, plant
and equipment $ 8,130 $ 9,009
======================= =======================
</TABLE>
8. SPECIAL CHARGES
The Company announced during the second quarter of 2000 its plans to shutdown
two of its production facilities; the Johnstown, Pennsylvania melt shop facility
and the Canton, Ohio 12" rolling mill facility. Both facilities are expected to
close during the third quarter of 2000. These actions are being undertaken in an
attempt to reduce costs and increase productivity and efficiency.
12
<PAGE> 13
As a result, the Company recorded special charges of $45,792 in the second
quarter of 2000 related to the Johnstown facility. The charges consisted of a
$40,557 write-down of fixed assets, $3,235 in additional environmental
remediation required as a result of the closure and $2,000 in other shutdown
costs. The special charges did not include any amount for employee separation
costs as these costs are not fully defined under the current labor agreement
with the USWA and cannot be reasonably estimated at this time. The Company and
the USWA have been directed by an arbitrator to begin negotiating in order to
resolve this issue. Employee termination charges will be recorded in the future
and are likely to be material to results of operations, financial position and
liquidity of the Company.
Unlike the closure of the Johnstown facility, the closure of the Canton facility
was part of the Company's original consolidation plan contemplated at the time
of the Combination. Fair value adjustments to the fixed assets and shutdown
reserves related to the Canton facility were recorded at the date of the
Republic acquisition as adjustments to the purchase price. No charges have been
recorded for employee separation costs. It is currently anticipated that most
affected employees will be offered suitable alternative employment at other
nearby facilities or a combination of ERB's and VSPs.
The Company has previously recorded a reserve for the reduction of non-union
labor amounting to $7,776. The balance of this reserve at June 30, 2000 was
$1,964. The Company also recorded, as discussed above, a fair value adjustment
and shutdown reserves at the date of the Republic acquisition related to the
manufacturing locations selected for closure amounting to $12,705 and $1,917,
respectively. No activity has been recorded in the shutdown reserve.
9. SUBSEQUENT EVENTS
On July 17, 2000, the Company underwent a financial restructuring
("restructuring") to improve its liquidity position and to assist in making the
semiannual interest payment on its senior secured notes. The restructuring
consists of the following four components.
- Several of the Company's direct and indirect equity partners made
loans of $30,000 aggregate principal amount to Republic
Technologies. In exchange for these loans, the lenders received
notes of $30,000 aggregate principal amount and warrants to
purchase an aggregate of 15,000 shares of Class D common stock,
par value $0.001 per share of RTI, Inc.
- The PBGC agreed to defer approximately $46,000 of payments due
under the original memorandum of understanding between the Company
and the PBGC in 2000 and 2001, to the years 2002 and 2003. The
deferred amount is due in eight equal quarterly installments
starting on January 1, 2002.
- USX agreed to further defer $30,000 in payables deferred at the
time of the Combination. These payables, which were originally due
in July 2001, have been deferred to July 2003.
- The Company restructured Republic Technologies' revolving credit
facility with Fleet National Bank (formerly known as BankBoston,
N.A), which permitted the new subordinated debt mentioned above,
as follows:
a) the cap on the amount to be borrowed against the Canton
CAST-ROLL facility is reduced from $125,000 to $92,000, with
the reduction in the eligible fixed asset cap being deferred
until the quarter after December 31, 2001, with subsequent
decreases of $7,500 per quarter until July 2004;
b) the commitment cap was reduced from $425,000 to $395,000, with
subsequent reductions through January 1, 2002;
c) the reserve of $50,000 was eliminated;
d) a minimum liquidity requirement of $3,000 was established;
e) minimum EBITDA requirements were established through
June, 2004;
f) the acquisition of off-balance sheet financing for the new
four stand mill and large bar finishing/inspection equipment
and certain other projects is now permitted; and
g) capital expenditure caps were implemented for fiscal years
2000 through 2004.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company is the largest producer of special bar quality steel products in the
United States with a market share of approximately 22%, based on 1999 calendar
year pro-forma shipments. SBQ steel products are high quality hot-rolled and
cold-finished carbon and alloy steel bar and rod used primarily in critical
applications in automotive and industrial equipment. SBQ steel products are sold
to customers who require precise metallurgical content and quality
characteristics. SBQ steel products generally contain more alloys and sell for
substantially higher prices than merchant and commodity steel bar and rod
products. The Company produces the widest range of SBQ steel products in the
United States and supplies a diverse customer base that includes leading
automobile and industrial equipment manufacturers and their first tier
suppliers.
RESULTS OF OPERATIONS
The consolidated/combined results of operations include BarTech and Republic for
the three and six months ended June 30, 2000 and 1999, and for USS/Kobe for the
three and six months ended June 30, 2000. The results for USS/Kobe are included
in the Company's consolidated results of operations from USS/Kobe's acquisition
date, August 13, 1999. Accordingly, prior period results are not comparable with
the current period. The results for the three and six months ended June 30,
2000, are not necessarily indicative of the results to be expected for the full
year ended December 31, 2000.
The Company announced during the second quarter of 2000 its plans to shutdown
two of its production facilities; the Johnstown, Pennsylvania melt shop facility
and the Canton, Ohio 12" rolling mill facility. Both facilities are expected to
close during the third quarter of 2000. These actions are being undertaken in an
attempt to reduce costs and increase productivity and efficiency
As a result, the Company recorded special charges of $45.8 million in the
second quarter of 2000 related to the Johnstown facility. The special charges
consisted of a write-down of fixed assets, additional environmental remediation
required as a result of the closure and other shutdown costs. The
rationalization charge did not include any amount for employee separation costs
as these costs are not fully defined under the current labor agreement with the
USWA and cannot be reasonably estimated at this time. The Company and the USWA
have been directed by an arbitrator to begin negotiating in order to resolve
this issue. Employee termination charges will be recorded in the future and are
likely to be material to results of operations, financial position and
liquidity of the Company.
Unlike the closure of the Johnstown facility, the closure of the Canton facility
was part of the Company's original consolidation plan contemplated at the time
of the Combination. Fair value adjustments to the fixed assets and shutdown
reserves related to the Canton facility were recorded at the date of the
Republic acquisition as adjustments to the purchase price.
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1999
Net sales for the three months ended June 30, 2000 totaled $346.3 million on
shipments of approximately 719,700 net tons compared with net sales of $234.2
million for the three months ended June 30, 1999 on shipments of approximately
368,400 net tons. The increase in net sales and tons shipped reflects the
inclusion of the results of USS/Kobe in the results for the three months ended
June 30, 2000. Net sales for the three months ended June 30, 2000 were comprised
of $269.8 million of hot-rolled net sales and $76.5 million of cold-finished net
sales, compared with hot-rolled net sales of $146.5 million and cold-finished
net sales of $87.7 million for the three months ended June 30, 1999.
There was an overall decrease in net selling value per ton shipped of $154.48
from the three months ended June 30, 1999 to the three months ended June 30,
2000. The Company's hot-rolled net selling value per ton shipped decreased
because of a shift in the product mix following the Combination which includes
seamless rounds and other lower priced semi-finished products from the Company's
Lorain plant that was not produced prior to the Combination. This was partially
offset with an increase in net selling value per ton shipped for the Company's
cold-finished products. The reason for this increase is due to decreases in
shipments of a lower value cold-finished product.
Cost of sales totaled $313.6 million, or 90.5% of net sales, for the three
months ended June 30, 2000 compared with cost of sales of $219.4 million, or
93.7% of net sales, for the similar period ended June 30, 1999. Cost of sales
for the three months ended June 30, 2000 consisted of $243.7 million on
hot-rolled products and $69.9 million on cold-finished products compared with
$136.1 million on hot-rolled products and $83.3 million on cold-finished
products for the three months ended June 30, 1999. The overall decrease in cost
of sales as a percentage of net sales from the three months ended June 30, 1999
to the three months ended June 30, 2000 was primarily due to the decrease in
sales of a specific cold-finished product that sold at a negative margin. In
addition, the Company's cold-finished segment sourced significantly more
hot-rolled bar internally at lower costs than purchased materials.
14
<PAGE> 15
Selling, general and administrative expenses were $13.8 million, or 4.0% of net
sales, for the three months ended June 30, 2000 compared with $16.3 million, or
6.9% of net sales, for the three months ended June 30, 1999. The overall
decrease in selling, general and administrative expenses as a percentage of net
sales is due in part to the continuing benefits derived from combining selling,
general and administrative functions following the Combination. Additionally
there was a further reduction in selling, general and administrative headcount
during the quarter that was not initially contemplated as part of the Company's
original consolidation plan.
Depreciation and amortization expense was $15.4 million for the three months
ended June 30, 2000, compared with $10.4 million for the three months ended June
30, 1999. Nearly all of the increase was due to the increase in property, plant
and equipment associated with the acquisition of USS/Kobe.
Workforce reduction charges were $2.4 million for the three months ended June
30, 2000, compared with $20.5 million for the three months ended June 30, 1999.
The reason for the decrease was due to only 3 voluntary early retirement buyouts
("ERBs") being accepted during the second quarter of 2000 as compared to 123
ERBs accepted during the second quarter of 1999. The workforce reduction charges
for the three months ended June 30, 2000 also included $2.1 million of severance
related costs for administrative staff reductions.
Special charges of $45.8 million were recorded in connection with the shutdown
of the Johnstown facility. $40.6 million is related to a write down of the
property, plant and equipment for the Johnstown facility, $3.2 million is
related to additional environmental remediation required as a result of the
closure and $2.0 million is for other shutdown costs related to the Johnstown
facility. Closing the Johnstown facility was not part of the Company's original
consolidation plan as contemplated.
Net interest expense was $27.1 million for the three months ended June 30, 2000
compared with $20.3 million for the three months ended June 30, 1999. The $6.8
million increase in net interest expense was attributable to the higher average
borrowings outstanding following the completion of the Combination and higher
average interest rates of the new borrowings compared to the borrowings repaid
in connection with the Combination.
The provision for income taxes for the three month periods ended June 30, 2000
and 1999, consisted of currently payable income taxes, primarily foreign income
taxes, owed by Canadian Drawn Steel Company ("CDSC").
The Company recorded charges of $9.8 million related to the disposition of its
Specialty Steels Division.
As a result of the above, the Company reported a net loss of $81.9 million for
the three months ended June 30, 2000 compared with a net loss of $53.2 million
for the three months ended June 30, 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999
Net sales for the six months ended June 30, 2000 totaled $698.2 million on
shipments of approximately 1,428,500 net tons compared with net sales of $454.6
million for the six months ended June 30, 1999 on shipments of approximately
694,200 net tons. The increase in net sales and tons shipped reflects the
inclusion of the results of USS/Kobe in the results for the six months ended
June 30, 2000. Net sales for the six months ended June 30, 2000 were comprised
of $540.3 million of hot-rolled net sales and $157.9 million of cold-finished
net sales, compared with hot-rolled net sales of $277.7 million and
cold-finished net sales of $176.9 million for the six months ended June 30,
1999.
There was an overall decrease in net selling value per ton shipped of $166.09
from the six months ended June 30, 1999 to the six months ended June 30, 2000.
The Company's hot-rolled net selling value per ton shipped decreased because of
a shift in the product mix following the Combination which includes seamless
rounds and other lower priced semi-finished products from the Company's Lorain
plant that was not produced prior to the Combination. This was partially offset
with an increase in net selling value per ton shipped for the Company's
cold-finished products. The reason for this increase is due to decreases in
shipments of a lower value cold-finished product. Additionally, there were two
spot price increases in both cold-finished and hot-rolled products during the
six months ended June 30, 2000, due to strengthening demand in the domestic
steel market.
Cost of sales totaled $641.0 million, or 91.8% of net sales, for the six months
ended June 30, 2000 compared with cost of sales of $428.2 million, or 94.2% of
net sales, for the similar period ended June 30, 1999. Cost of sales for the six
months ended June 30, 2000 consisted of $496.4 million on hot-rolled products
and $144.6 million on cold-finished products compared with $268.9 million on
hot-rolled products and $159.3 million on cold-finished products for the six
months ended June 30, 1999. The overall decrease in cost of sales as a
percentage of net sales from the six months ended June 30, 1999 to the six
months ended June 30, 2000 was primarily due to the decrease in sales of a
specific cold-finished product that sold at a negative margin. In addition, the
Company's cold-finished segment sourced significantly more hot-rolled bar
internally at lower costs than purchased materials.
15
<PAGE> 16
Selling, general and administrative expenses were $29.4 million, or 4.2% of net
sales, for the six months ended June 30, 2000 compared with $29.7 million, or
6.5% of net sales, for the six months ended June 30, 1999. The overall decrease
in selling, general and administrative expenses as a percentage of net sales is
due in part to the continuing benefits derived from combining selling, general
and administrative functions following the Combination. Additionally there was a
further reduction in selling, general and administrative headcount during the
quarter that was not initially contemplated as part of the Company's original
consolidation plan.
Depreciation and amortization expense was $31.1 million for the six months ended
June 30, 2000, compared with $18.8 million for the six months ended June 30,
1999. Nearly all of the increase was due to the increase in property, plant and
equipment associated with the acquisition of USS/Kobe.
Workforce reduction charges were $5.2 million for the six months ended June 30,
2000, compared with $41.9 million for the six months ended June 30, 1999. The
reason for the decrease was due to only 9 voluntary early retirement buyouts
("ERBs") being accepted during the first six months of 2000 as compared to 313
ERBs accepted during the first six months of 1999. The workforce reduction
charges for the six months ended June 30, 2000 also included $3.6 million of
severance related costs for administrative staff reductions.
Special charges of $45.8 million were recorded in connection with the shutdown
of the Johnstown facility. $40.6 million is related to a write down of the
property, plant and equipment for the Johnstown facility, $3.2 million is
related to additional environmental remediation required as a result of the
closure and $2.0 million is for other shutdown costs related to the Johnstown
facility. Closing the Johnstown facility was not part of the Company's original
consolidation plan as contemplated.
Net interest expense was $53.8 million for the six months ended June 30, 2000
compared with $39.6 million for the six months ended June 30, 1999. The $14.2
million increase in net interest expense was attributable to the higher average
borrowings outstanding following the completion of the Combination and higher
average interest rates of the new borrowings compared to the borrowings repaid
in connection with the Combination.
The provision for income taxes for the six month periods ended June 30, 2000 and
1999, consisted of currently payable income taxes, primarily foreign income
taxes, owed by CDSC.
The Company recorded charges of $9.8 million related to the disposition of its
Specialty Steels Division.
As a result of the above, the Company reported a net loss of $119.4 million for
the six months ended June 30, 2000 compared with a net loss of $104.0 million
for the six months ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary liquidity needs relate to working capital needs, funding
requirements relating to its agreement with the PBGC, capital expenditures and
other costs relating to the Company's consolidation plan, debt service
requirements and tax distributions to the Company's members. On July 17, 2000,
the Company underwent a financial restructuring to improve its liquidity
position. The restructuring was comprised of several components, each briefly
discussed throughout the following sections.
PBGC Obligations
----------------
In connection with the Combination, Republic Technologies agreed with the PBGC
to fund $178 million into the Republic Engineered Steels, Inc. USWA Defined
Benefit Plan, a defined benefit pension plan for employees represented by the
USWA in connection with the headcount reduction and related early retirement
benefits contemplated by the Company's consolidation plan. Of the $178 million,
$60.5 million has been funded through July 14, 2000. One component of the
restructuring was the agreement by the PBGC to defer approximately $46 million
of the remainder due. The new payment schedule for Republic Technologies is as
follows: $2.0 million per quarter for the next five payments, $14.9 million per
quarter for the next three payments, $14.3 million per quarter for the next four
payments and a final payment of $5.6 million. In addition, pursuant to the
Company's consolidation plan, Republic Technologies will offer a combination of
ERB packages and voluntary severance plans to its employees, which the Company
currently expects will include expenditures outside its defined benefit plan of
up to approximately $36 million over the next 4 years. The actual cost of the
ERB packages and voluntary severance plans will depend on the mix of such
arrangements offered to and accepted by the hourly employees represented by the
USWA.
Additionally, with respect to the USS/Kobe Union Eligible Pension Plan, a
defined benefit plan for union employees, Republic Technologies has agreed with
the PBGC to maintain a specified level of funding based on statutory funding
requirements. The
16
<PAGE> 17
contributions shall be made as follows: for the year 2000, an amount necessary
to avoid an accumulated funding deficiency plus $4 million ($6 million); for
2001, an amount so that the December 31, 2001 credit balance equals that of
December 31, 2000 with interest plus $2 million; for 2002, an amount so that the
December 31, 2002 credit balance equals that of December 2001 with interest plus
$2 million; for 2003, an amount so that the December 31, 2003 credit balance
equals that of December 31, 2002 with interest plus $2 million. Beginning with
2004, Republic Technologies shall make contributions to maintain the December
31, 2003 credit balance with interest. As security for such obligation, Republic
Technologies has provided the PBGC with a $5 million letter of credit. The
Company currently estimates that approximately $53.6 million of fundings will be
required in connection with these obligations.
Capital Expenditures
--------------------
The Company has incurred approximately $5.2 million in capital expenditures
during the first six months of 2000. The restructuring of Republic Technologies'
revolving credit facility, another component of the restructuring, limits
capital expenditures to $19.0 million in 2000, $24 million in 2001, $27 million
in 2002, $33.5 million in 2003 and $23.0 million in 2004. The Company's four
year consolidation plan originally contemplated construction of new large bar
mill which management estimates would cost approximately $90 million. As part of
the restructuring of the revolving credit facility, the Company may obtain
off-balance sheet financing to fund this construction. The plan to construct
this facility is currently under review. Additionally, under the terms of the
restructured revolving credit facility the Company may obtain off-balance sheet
financing of up to $66 million for three other capital projects.
Debt Service Requirements
-------------------------
In connection with the financial restructuring mentioned above, on July 17,
2000, several equity partners made loans of $30 million in aggregate principal
amount to Republic Technologies. In exchange for these loans, the lenders
received notes of $30 million aggregate principal amount and warrants to
purchase an aggregate of 15 million shares of Class D common stock, par value
$0.001 per share, of RTI, Inc. These notes mature on August 1, 2010, and may be
prepaid in certain instances and must be prepaid upon a change of control of the
Company. The interest rate on the notes is 9.5% and is payable in arrears on
each February 1 and August 1 commencing on August 1, 2006 or earlier if the
lenders consent. The notes are secured by a second mortgage on the Canton
CAST-ROLL facility.
In conjunction with the Combination, Republic Technologies completed a private
offering of $425 million of senior secured notes and warrants and entered into
the $425 million revolving credit facility. The proceeds of this private
offering, together with approximately $239 million of borrowings under the
revolving credit facility and the proceeds from new equity contributions, were
applied to refinance a substantial portion of the indebtedness of Republic, RES
Holding, BarTech and USS/Kobe at the time of the Combination. As part of the
financial restructuring referred to above, commitments under the revolving
credit facility were reduced from $425 million to $395 million.
As a result of the Combination and the other transactions, the Company and
Republic Technologies have significant amounts of debt, with the interest
payments on the senior secured notes and interest and principal repayments under
the new credit facility representing significant obligations. The senior secured
notes require semi-annual interest payments on January 15 and July 15 every year
until they mature on July 15, 2009. The senior secured notes require that tender
offers be made for such securities with certain proceeds from asset sales in the
event that such proceeds are not applied to specified purposes within certain
time periods. The loans under the revolving credit facility require periodic
payments of interest and mature on August 13, 2004. The revolving credit
facility requires prepayment of loans and reductions of commitments with net
proceeds of specified asset dispositions, casualty and condemnation recovery
events, issues of equity and incurrences of permitted indebtedness.
Additionally, the restructuring of the revolving credit facility, as discussed
in Note 8, establishes minimum requirements for EBITDA and liquidity. The 1984
environmental improvement revenue bonds, of which $9.0 million was outstanding
as of December 31, 1999, mature on December 1, 2001. In addition, the $5.5
million Series A Preferred Stock of Republic Technologies International, Inc.
("RTI, Inc.") is redeemable on September 26, 2000. Payment of the redemption
price would require distributions or loans from Republic Technologies to RTI
followed by distributions or loans from RTI to RTI, Inc.
The senior secured notes and the revolving credit facility each contain
significant affirmative and negative covenants including separate provisions
imposing restrictions on additional borrowings, certain investments, certain
payments, sale or disposal of assets, payment of dividends and change of control
provisions, in each case, subject to certain exceptions. The ability of RTI to
receive distributions from Republic Technologies and its subsidiaries is
significantly restricted by the terms of the senior secured notes and the
revolving credit agreement. Under the terms of the senior secured notes, subject
to certain exceptions, generally neither Republic Technologies nor its
subsidiaries may declare or pay any dividend or make any other distribution or
payment on or in respect of capital stock, unless, at the time of and after
giving effect to the proposed payment, (1) no Default (as defined
17
<PAGE> 18
in the senior secured note indenture) shall have occurred and be continuing, (2)
immediately after giving effect to such payment, the Consolidated Fixed Charge
Coverage Ratio (as defined in the senior secured note indenture) of Republic
Technologies would be equal to or greater than 2.5 to 1, and (3) the aggregate
amount of all restricted payments declared or made from and after the issue date
would not exceed the 50% of the Consolidated Net Income (as defined in the
senior secured note indenture) of Republic Technologies accrued on a cumulative
basis during the period, taken as one accounting period, beginning on October 1,
1999 and ending on the last day of the fiscal quarter of Republic Technologies
immediately preceding the date of such proposed restricted payment or, if such
aggregate cumulative Consolidated Net Income of Republic Technologies for such
period shall be a deficit, minus 100% of such deficit, plus the cash proceeds
from certain equity offerings and value of certain investments. Under the terms
of the revolving credit facility, neither Republic Technologies nor its
subsidiaries may declare or pay any dividend to RTI or make any other
distribution or payment to RTI on or in respect of capital stock other than
distributions or payments for certain limited purposes and in limited amounts.
The senior secured notes are secured, subject to exceptions and limitations, by
(1) a first priority lien on, and security interest in, substantially all of the
existing assets of the issuers and the restricted subsidiaries, other than (a)
the CAST-ROLL and Cartersville, Georgia facilities, (b) inventory, (c) accounts
receivable and (d) intellectual property and related assets, and (2) a first
priority lien, shared on an equal and ratable basis with the lenders under the
revolving credit facility, on the equity interests of Republic Technologies and
its restricted subsidiaries. This collateral is subject to release without
substitution under a limited number of circumstances. Borrowings under the
revolving credit facility are secured by a first priority perfected security
interest in (1) the equity interests of Republic Technologies and its restricted
subsidiaries, shared on an equal and ratable basis with the senior secured notes
and (2) all presently owned and subsequently acquired accounts, inventory,
intellectual property and related assets of Republic Technologies and guarantors
and the real estate and fixed assets comprising, and the intellectual property
relating to, the CAST-ROLL facility, including the related melt shop.
The obligations under the senior secured notes are unconditionally and
irrevocably guaranteed jointly and severally by RTI and each of its subsidiaries
other than Republic Technologies, RTI Capital Corp. (the co-issuer of the senior
secured notes) and Oberlin Insurance Company. The obligations under the
revolving credit facility are unconditionally and irrevocably guaranteed jointly
and severally by RTI and each of its subsidiaries other than Republic
Technologies and Oberlin Insurance Company.
The high level of long-term debt relative to total capitalization could have
important consequences, including, among others, the following:
- RTI and Republic Technologies, may be unable to obtain additional
financing for working capital, capital expenditures, debt service
requirements and general corporate purposes;
- a substantial portion of cash flow from operations will need to be
used to pay principal and interest on indebtedness, which will
reduce the funds available for other purposes, including
operations and future business opportunities;
- RTI and Republic Technologies may need to make payments in
connection with environmental improvement revenue bonds related to
USS/Kobe facilities earlier than scheduled if USX makes early
payment on these bonds, and any such early payment may adversely
affect liquidity;
- borrowings under the revolving credit facility as well as other
future borrowings, may be at variable interest rates of interest,
which create the risk of increased interest rates; and
- this leverage may make RTI and Republic Technologies more
vulnerable to economic downturns and competitive pressures.
Tax Distributions
-----------------
The Company and Republic Technologies are limited liability companies that are
expected to be treated as a partnership for income tax purposes and accordingly
are not an income taxpaying entity. However, pursuant to the limited liability
company agreement of the Company's parent, the Company's parent will be required
to make cash distributions to its members to the extent necessary to satisfy tax
obligations regarding members' investment in RTI, Inc. To the extent the
Company's parent is required to make these tax distributions, Republic
Technologies will be required to make equivalent cash distributions to the
Company. However, the Company believes that certain of its parent's members have
net operating loss carryforwards which may be available to offset a significant
portion of their taxable income attributable to their investment in the
Company's parent
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and reduce but not eliminate, the need for tax distributions. Use of these net
operating losses is subject to various limitations and uncertainties and
accordingly, the Company cannot make any assurances that these net operating
loss carryforwards will reduce the need for tax distributions or that they will
not be otherwise utilized.
Liquidity Sources and Other Factors Affecting Liquidity
-------------------------------------------------------
The Company intends to fund its working capital, pension contribution
requirements, employee termination costs, capital expenditure, debt service
requirements and tax distributions to its parent company's members through cash
flows generated from operations and borrowings under its $395.0 million
revolving credit facility. Under the above mentioned restructuring, availability
under the revolving credit facility has been amended and is now limited to a
borrowing base equal to the lesser of $395.0 million or (1) 60% of eligible
inventory, plus (2) 85% of eligible accounts receivable, plus (3) the lesser of
67% of the appraised value of the CAST-ROLL facility and $92 million, which will
decrease by $7.5 million per quarter beginning the quarter ended December 31,
2001, with the reserve being eliminated. The CAST-ROLL facility is subject to
reappraisal after March 31, 2001 or upon a default under the revolving credit
facility. The Company's net availability on its revolving credit facility as of
July 31, 2000 was approximately $38.5 million.
In connection with the Combination, RTI, Inc. issued 30,000 shares of its Series
C convertible preferred stock. The Series C convertible preferred stock accrues
dividends at a rate of 5% per year, which can be paid in cash or by the issuance
of additional shares of Series C convertible preferred stock at the election of
RTI, Inc.
The Company's lower than expected sales in the first half of 2000 and it's lower
than expected performance during the third and fourth quarters of 1999 caused
the Company's liquidity to be negatively affected. The Company's liquidity
position has also been negatively impacted by the implementation of the
Company's consolidation plan as a result of the time lag between the incurrence
of certain costs and the receipt of the expected cash flow benefits, such as in
the case of headcount reductions requiring lump sum payouts.
Management has sought to improve the Company's liquidity position by taking a
number of actions including, increasing spot prices, reducing administrative
staff, implementing cost cutting programs, closing operations at its Johnstown
melt facility and the Canton 12" rolling facility, which is anticipated to be
complete during the third quarter of 2000, and reducing inventories. The Company
has also obtained a deferral from the Ohio Environmental Protection Agency (the
"Ohio EPA") of $1.2 million of committed environmental expenditures until 2001
in addition to the financial restructuring package discussed in Note 8.
As previously discussed, the expected closure of the Johnstown facility caused
the Company to take a rationalization charge of $45.8 million in the second
quarter of 2000. This amount does not include any amounts for employee
separation costs related to the shutdown of the Johnstown facility as these
amounts cannot be reasonably estimated at this time. Employee termination
charges will be recorded in the future and are likely to be material to the
results of operations, financial position and liquidity of the Company.
The Company is in the process of disposing of its Specialty Steels Division and
expects to complete this in 2001. The Company is also in the process of selling
certain real estate from facilities closed as part of the consolidation plan.
Notwithstanding these efforts, the Company may need to obtain additional
financing to meet its cash flow requirements, including financing through the
sale of additional debt or equity securities. Restrictive covenants included in
the indenture relating to the senior secured notes and other debt obligations
limit the Company's ability to incur additional indebtedness, or sell assets
(most of which are pledged), and may otherwise limit the operational and
financial flexibility of the Company. The ability to sell its assets may also be
constrained by the provisions of the Company's new labor agreement.
As a result of the factors mentioned above, the Company is highly leveraged and
could be considered a risky investment. Further information regarding the risk
factors of the Company can be found in the Company's Registration Statement on
Form S-4.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, was
recently enacted by the FASB. SFAS No. 133, as amended by SFAS No. 137,
establishes accounting and reporting standards for derivative instruments and
hedging activities and is effective for fiscal years beginning after June 15,
2000. We have not yet determined the impact that the adoption of this standard
will have on our financial statements.
SEC Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, issued to address significant revenue recognition issues encountered
by companies that file with the SEC, has been delayed until no later than the
fourth fiscal quarter of fiscal years beginning after December 15, 1999. We have
not yet completed our evaluation of SAB No. 101 and have not determined the
impact that the adoption of this standard will have on our financial statements.
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<PAGE> 20
FORWARD LOOKING STATEMENTS
Statements included in this filing with the Securities and Exchange Commission
(including those portions of Management's Discussion and Analysis that refer to
the future) may contain forward-looking statements that are not historical facts
but refer to management's intentions, beliefs, or expectations for the future.
It is important to note that the Company's actual results could differ
materially from those projected in such forward-looking statements. Certain
factors that could cause actual results to differ from those in such
forward-looking statements include, but are not limited to, the following:
- the Company's ability to increase sales to existing and new customers,
particularly sales to automotive and industrial equipment
manufacturers;
- the Company's ability to implement its consolidation plan and to
realize the expected benefits of the Combination in the time frame and
at the costs currently contemplated;
- charges, including employee termination charges, related to the closure
of Johnstown, and other facilities;
- market conditions and general risks associated with the steel industry;
and
- the matters discussed under the caption "Risk Factors" in the Company's
Registration Statement on Form S-4.
The reader should not place undue reliance on the forward-looking statements
contained in this report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risks due to changes in interest rates with
respect to its debt. The fair value of the Company's senior secured notes was
determined using quoted market prices. At June 30, 2000, the fair value of the
Company's senior secured notes was $77.0 million based on the quoted price of
$18.13 per $100 of par value. There was no significant change in the fair value
of the remainder of the Company's debt from December 31, 1999.
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PART II - OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various legal proceedings
occurring in the ordinary course of business. It is the opinion of management,
after consultation with legal counsel, that except for certain environmental
proceedings (which is discussed in detail in the Company's Annual Report filed
on Form 10-K), these matters will not materially affect the Company's
consolidated financial position, results of operations or cash flows.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(10.41) Amendment No. 3 to the Revolving Credit Agreement among
Republic Technologies, RTI, RTI Capital Corp., Bliss &
Laughlin, LLC, CDSC, Nimishillen & Tuscarawas, LLC and Fleet
National Bank (f/k/a BankBoston, N.A.) dated July 17, 2000.
(10.42) Amendment to the Memorandum of Understanding dated November 2,
1998 between Republic Technologies and the PBGC, dated
December 29, 1999.
(10.43) Second Amendment to the Memorandum of Understanding dated
November 2, 1998 between Republic Technologies and the PBGC,
dated March 15, 2000.
(10.44) Third Amendment to the Memorandum of Understanding dated
November 2, 1998 between Republic Technologies and the PBGC,
dated March 22, 2000.
(10.45) Fourth Amendment to the Memorandum of Understanding dated
November 2, 1998 between Republic Technologies and the PBGC,
dated March 29, 2000.
(10.46) Fifth Amendment to the Memorandum of Understanding dated
November 2, 1998 between Republic Technologies and the PBGC,
dated March 31, 2000.
(10.47) Sixth Amendment to the Memorandum of Understanding dated
November 2, 1998 between Republic Technologies and the PBGC,
dated April 12, 2000.
(10.48) Seventh Amendment to the Memorandum of Understanding dated
November 2, 1998 between Republic Technologies and the PBGC,
dated June 28, 2000.
(10.49) Eighth Amendment to the Memorandum of Understanding dated
November 2, 1998 between Republic Technologies and the PBGC,
dated July 14, 2000.
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(10.50) Subordinated Credit Agreement among Republic Technologies (as
Borrower), Blackstone, USX RTI Holdings, Inc., Sumitomo
Corporation of America, Triumph Capital Investors II, L.P. and
First Dominion Capital, LLC (as Lenders) dated July 17, 2000.
(27) Financial Data Schedule
a.) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
REPUBLIC TECHNOLOGIES INTERNATIONAL
HOLDINGS, LLC
Date: August 14, 2000 By: /s/JOSEPH F. LAPINSKY
---------------------
Joseph F. Lapinsky
Chief Executive Officer,
President and Chief
Operating Officer
Date: August 14, 2000 By: /s/STEPHEN GRAHAM
-----------------
Stephen Graham
Executive Vice President and
Chief Financial Officer
Date: August 14, 2000 By: /s/ JOSEPH A. KACZKA
--------------------
Joseph A. Kaczka
Vice President of Finance, Controller
and Chief Accounting Officer
23
