<PAGE>
1995
FIRST QUARTER
F O R M 1 0 - Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-983
NATIONAL STEEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 25-0687210
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4100 Edison Lakes Parkway, Mishawaka, IN 46545-3440
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code): 219-273-7000
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
The number of shares outstanding of the Registrant's Common Stock $ .01 par
value, as of April 30, 1995, was 43,276,156 shares.
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE
----
Statements of Consolidated Income -
Three Months Ended March 31, 1995 and 1994 3
Consolidated Balance Sheets -
March 31, 1995 and December 31, 1994 4
Statements of Consolidated Cash Flows -
Three Months Ended March 31, 1995 and 1994 5
Statements of Changes in Consolidated
Stockholders' Equity and Redeemable
Preferred Stock - Series B -
Three Months Ended March 31, 1995 and
Year Ended December 31, 1994 6
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II. OTHER INFORMATION
Legal Proceedings 14
Exhibits and Reports on Form 8-K 16
2
<PAGE>
PART I. - FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME
(In Thousands of Dollars, Except Per Share Amounts)
(Unaudited)
<S> <C> <C>
THREE MONTHS
ENDED MARCH 31,
1995 1994
-------- ---------
NET SALES $752,676 $ 622,738
Cost of products sold 618,716 571,659
Selling, general and administrative 34,315 36,426
Depreciation, depletion and amortization 36,833 34,101
Equity (income) loss of affiliates (1,381) 223
Restructuring charge 5,336 --
-------- ---------
INCOME (LOSS) FROM OPERATIONS 58,857 (19,671)
Other (Income) Expense
Interest and other financial income (2,748) (581)
Interest and other financial expense 14,076 16,196
Litigation judgment -- (110,972)
-------- ---------
11,328 (95,357)
-------- ---------
INCOME BEFORE INCOME TAXES 47,529 75,686
Income tax provision (credit) 2,835 (2,325)
-------- ---------
NET INCOME 44,694 78,011
Less preferred stock dividends 2,740 2,740
-------- ---------
Net income applicable to Common Stock $ 41,954 $ 75,271
======== =========
PER SHARE DATA APPLICABLE TO COMMON STOCK:
NET INCOME APPLICABLE TO COMMON STOCK $ 1.02 $ 2.07
======== =========
Weighted average shares outstanding (in thousands) 40,976 36,361
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands of Dollars, Except Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
MARCH 31, DECEMBER 31,
1995 1994
----------- -----------
<S> <C> <C>
Current assets
Cash and cash equivalents $ 237,663 $ 161,946
Receivables - net 315,758 292,869
Inventories:
Finished and semi-finished products 284,065 261,480
Raw materials and supplies 104,419 106,532
----------- -----------
388,484 368,012
----------- -----------
Total current assets 941,905 822,827
Investments in affiliated companies 58,157 57,676
Property, plant and equipment 3,382,230 3,360,467
Less: Allowance for depreciation,
depletion and amortization (2,002,673) (1,966,539)
----------- -----------
1,379,557 1,393,928
Other assets 232,428 224,954
----------- -----------
TOTAL ASSETS $ 2,612,047 $ 2,499,385
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $ 221,130 $ 272,586
Accrued liabilities 294,995 289,943
Long term obligations and related party indebtedness
due within one year 173,090 35,669
----------- -----------
Total current liabilities 689,215 598,198
Long term obligations 352,977 360,375
Long term indebtedness to related parties 169,496 310,409
Other long term liabilities 833,935 810,292
Redeemable Preferred Stock - Series B 66,155 66,530
Stockholders' equity
Common Stock - par value $.01:
Class A - authorized 30,000,000 shares;
issued and outstanding 22,100,000 shares 221 221
Class B - authorized 65,000,000 shares;
issued and outstanding 21,176,156 shares
in 1995 and 14,261,100 shares in 1994 212 143
Preferred Stock - Series A 36,650 36,650
Additional paid-in-capital 465,190 360,525
Retained deficit (2,004) (43,958)
----------- -----------
Total stockholders' equity 500,269 353,581
----------- -----------
TOTAL LIABILITIES, REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY $ 2,612,047 $ 2,499,385
=========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
1995 1994
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 44,694 $ 78,011
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization 36,833 34,101
Carrying charges related to facility
sales and plant closings 6,078 7,855
Equity (income) loss of affiliates (1,381) 223
Dividends from affiliates 900 900
Postretirement benefits 20,922 12,977
Deferred income taxes (7,100) (5,400)
Cash provided (used) by working capital items:
Receivables (22,889) (23,531)
Inventories (20,472) 38,993
Accounts payable (51,456) (60,083)
Accrued liabilities 4,986 (799)
Other (797) 7,458
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,318 90,705
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of plant and equipment (21,763) (71,245)
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (21,763) (71,245)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of Class B Common Stock 104,734 --
Debt repayments (10,890) (35,731)
Borrowings -- 87,950
Payment of released Weirton benefit liabilities (3,633) (5,414)
Dividend payments on Preferred Stock-Series A (1,016) (1,016)
Dividend payments on Preferred Stock-Series B (848) (87)
Payment of unreleased Weirton liabilities and
their release in lieu of cash dividends on
Preferred Stock-Series B (1,185) (1,946)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 87,162 43,756
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 75,717 63,216
Cash and Cash Equivalents, Beginning of the Period 161,946 5,322
-------- --------
CASH AND CASH EQUIVALENTS, END OF THE PERIOD $237,663 $ 68,538
======== ========
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CHANGES IN CONSOLIDATED STOCKHOLDERS' EQUITY
AND REDEEMABLE PREFERRED STOCK - SERIES B
(In Thousands of Dollars)
(Unaudited)
<TABLE>
<CAPTION>
REDEEMABLE
COMMON COMMON PREFERRED ADDITIONAL TOTAL PREFERRED
STOCK - STOCK - STOCK - PAID-IN- RETAINED STOCKHOLDERS' STOCK -
CLASS A CLASS B SERIES A CAPITAL DEFICIT EQUITY SERIES B
---------- ------- --------- ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1994 $221 $143 $36,650 $360,314 $(207,366) $189,962 $68,030
Net income 168,512 168,512
Amortization of excess of book
value over redemption value
of Redeemable Preferred Stock
- Series B 1,500 1,500 (1,500)
Cumulative dividends on Preferred
Stocks - Series A and B (12,538) (12,538)
Exercise of Stock Options 211 211
Minimum pension liability 5,934 5,934
---- ---- ------- -------- --------- -------- -------
BALANCE AT DECEMBER 31, 1994 221 143 36,650 360,525 (43,958) 353,581 66,530
Net income 44,694 44,694
Amortization of excess of book
value over redemption value
of Redeemable Preferred Stock
- Series B 375 375 (375)
Cumulative dividends on Preferred
Stocks - Series A and B (3,115) (3,115)
Issuance of Common Stock - Class B 69 104,665 104,734
---- ---- ------- -------- --------- -------- -------
BALANCE AT MARCH 31, 1995 $221 $212 $36,650 $465,190 $ (2,004) $500,269 $66,155
==== ==== ======= ======== ========= ======== =======
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
NATIONAL STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1995 (Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The consolidated financial statements of National Steel Corporation and its
majority owned subsidiaries (the "Company") presented herein are unaudited.
However, in the opinion of management, such statements include all adjustments
necessary for a fair presentation of the results for the periods indicated. All
such adjustments made were of a normal recurring nature, except for the unusual
items discussed in Note 2. The financial results presented for the three-month
period ended March 31, 1995 are not necessarily indicative of results of
operations for the full year. The Annual Report of the Company on Form 10-K for
the year ended December 31, 1994 (the "1994 Form 10-K") contains additional
information and should be read in conjunction with this report.
Certain items in prior years have been reclassified to conform with the current
year presentation.
NOTE 2 - RESTRUCTURING CHARGE
Reduction in Workforce - During the fourth quarter of 1994, the Company
finalized and implemented a plan that resulted in a workforce reduction of
approximately 400 salaried nonrepresented employees. Accordingly, a
restructuring charge of $34.2 million, $25.6 million net of tax, was recorded
during the fourth quarter of 1994. This charge and the amount reserved was
comprised of retiree medical benefits ("OPEB") of $22.0 million, severance of
$10.9 million, a pension credit of $1.8 million and other charges totaling $3.1
million.
During the first quarter of 1995, the Company recorded, as expected, an
additional restructuring charge of $5.3 million, $3.6 million net of tax, as a
result of the various elections made by the terminated employees during the
first quarter of 1995. This charge was comprised of OPEB's of $4.5 million,
severance of $1.6 million, and a pension credit of $.8 million.
The following represents the components of the $34.2 million reserve recorded at
December 31, 1994, the cash utilizations during the first quarter of 1995, the
components of the additional $5.3 million restructuring charge recorded at March
31, 1995 and the balance of the reserve at March 31, 1995.
<TABLE>
<CAPTION>
BALANCE BALANCE
DECEMBER 31, CASH FIRST QUARTER MARCH 31,
1994 UTILIZATIONS ADJUSTMENTS 1995
------------- ------------- -------------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
OPEB $22.0 $ 0.0 $ 4.5 $26.5
Severance 10.9 (11.4) 1.6 1.1
Pensions (1.8) 0.0 (0.8) (2.6)
Other 3.1 (0.4) 0.0 2.7
----- ------ ----- -----
$34.2 $(11.8) $ 5.3 $27.7
===== ====== ===== =====
</TABLE>
The remaining OPEB and pension balances will require the utilization of cash
over the retirement lives of the affected employees. The aggregate balance of
$3.8 million related to severance and other will require the utilization of cash
within the 1995 fiscal year. The Company does not expect to record any
additional charges associated with this reduction in workforce.
7
<PAGE>
NOTE 3 - LITIGATION JUDGMENT
Bessemer & Lake Erie Railroad (the "B&LE") Litigation Judgment - On January 24,
1994, the United States Supreme Court denied the B&LE's petition for certiorari
in the Iron Ore Antitrust Litigation, thus sustaining the Company's judgment
against the B&LE. On February 11, 1994, the Company received $111.0 million,
including interest, in satisfaction of this judgment. This gain has been
reclassified from Income from Operations to Other Income to more properly
reflect the trend in operating income and had no effect on net income or
earnings per share as previously reported. The Company used $40.6 million of
the proceeds to repurchase a portion of its outstanding First Mortgage Bonds.
Pursuant to the terms of the 1993 labor agreement between the Company and the
United Steelworkers of America (the "USWA"), approximately $11 million of the
proceeds were deposited into a Voluntary Employee Benefits Association trust
established to fund the Company's OPEB obligation with respect to USWA
represented employees. The Company did not recognize any income taxes
associated with these proceeds, other than alternative minimum tax of $3.1
million, as regular federal income tax expense was offset by the utilization of
previously reserved tax assets.
NOTE 4 - PRIMARY OFFERING OF CLASS B COMMON STOCK AND USE OF PROCEEDS TO PREPAY
DEBT
On February 1, 1995, the Company completed a primary offering of 6,900,000
shares of Class B Common Stock, bringing the total number of shares of Class B
Common Stock issued and outstanding to 21,176,156. Subsequent to the offering,
NKK Corporation, through its ownership of all 22,100,000 issued and outstanding
shares of Class A Common Stock, holds 67.6% of the combined voting power of the
Company. The remaining 32.4% of the combined voting power is held by the
public. The issuance of the additional shares of Class B Common Stock generated
net proceeds of approximately $104.7 million. During the third quarter of 1995,
the Company intends to use all of the proceeds from this offering, along with an
additional amount which will be funded from the Company's available cash, to
prepay a portion of the related party debt associated with the rebuild of the
No. 5 Coke Oven Battery serving the Great Lakes Division.
NOTE 5 - ENVIRONMENTAL AND LEGAL PROCEEDINGS
The Company's operations are subject to numerous laws and regulations relating
to the protection of human health and the environment. Because these
environmental laws and regulations are quite stringent and are generally
becoming more stringent, the Company has expended, and can be expected to expend
in the future, substantial amounts for compliance with these laws and
regulations.
It is the Company's policy to expense or capitalize, as appropriate,
environmental expenditures that relate to current operating sites.
Environmental expenditures that relate to past operations and which do not
contribute to future or current revenue generation are expensed. With respect
to costs for environmental assessments or remediation activities, or penalties
or fines that may be imposed for noncompliance with such laws and regulations,
such costs are accrued when it is probable that liability for such costs will be
incurred and the amount of such costs can be reasonably estimated.
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), and similar state superfund statutes generally
impose joint and several liability on present and former owners and operators,
regardless of fault. The Company and certain of its subsidiaries are involved
as a potentially responsible party ("PRP") at a number of off-site CERCLA or
state superfund site proceedings. At some of these sites, any remediation costs
incurred by the Company would constitute liabilities for which FoxMeyer Health
Corporation ("FOX") is required to indemnify the Company ("FOX Environmental
Liabilities"). In addition, at some of these sites, the Company does not have
sufficient information regarding the nature and extent of the contamination, the
wastes contributed by other PRPs, or the required remediation activity to
estimate its potential liability.
In connection with those sites involving FOX Environmental Liabilities, in
January 1994, the Company received $10.0 million from FOX as an unrestricted
prepayment for such liabilities for which the Company recorded $10.0 million as
a liability in its consolidated balance sheet. The Company is required to repay
FOX portions of the $10.0 million to
8
<PAGE>
the extent the Company's expenditures for such FOX Environmental Liabilities do
not meet specified levels by certain dates over a twenty year period. At both
March 31, 1995 and December 31, 1994, the balance recorded as prepaid FOX
Environmental Liabilities totaled $10.0 million.
The Company has also recorded the reclamation and other costs to restore its
coal and iron ore mines at its shutdown locations to their original and natural
state, as required by various federal and state mining statutes.
Since the Company has been conducting steel manufacturing and related operations
at numerous locations for over sixty years, the Company potentially may be
required to remediate or reclaim any contamination that may be present at these
sites. The Company does not have sufficient information to estimate its
potential liability in connection with any potential future remediation at such
sites. Accordingly, the Company has not accrued for such potential
liabilities.
As any of these environmental matters discussed above progress or the Company
becomes aware of additional matters, the Company may be required to accrue
charges in excess of those previously accrued. However, although the outcome of
any of the matters described, to the extent they exceed any applicable reserves,
could have a material adverse effect on the Company's results of operations and
liquidity for the applicable period, the Company has no reason to believe that
such outcomes, whether considered individually or in the aggregate, will have a
material adverse effect on the Company's financial condition. The Company
recorded an aggregate environmental liability of approximately $17.5 million and
$17.1 million at March 31, 1995 and December 31, 1994, respectively.
Since 1989, the United States Environmental Protection Agency (the "EPA") and
the eight Great Lakes states have been developing the Great Lakes initiative,
which will impose water quality standards that are even more stringent than the
best available technology standards currently being enforced. On March 23,
1995, the EPA published the final "Water Quality Guidance for the Great Lakes
System" (the "Guidance Document"). The Guidance Document establishes minimum
water quality standards and other pollution control policies and procedures for
waters within the Great Lakes System. Although all of the impacts of the
Guidance Document are not yet known, preliminary studies conducted by the
American Iron and Steel Institute prior to the original publication of the
Guidance Document in proposed form in April 1993 estimated that the potential
capital cost for a fully integrated steel mill to comply with draft standards
under the Great Lakes Initiative could range from approximately $50 million to
$175 million and the potential annual operating and maintenance cost would be
approximately 15% of the estimated capital cost. Until the impacts of the
Guidance Document can be fully analyzed, the Company is unable to determine
whether such estimates are accurate and whether the Company's actual costs for
compliance will be comparable. Although the Company believes only the Great
Lakes Division would be required to incur significant costs for compliance,
there can be no assurances that such compliance will not have a material adverse
effect on the Company's financial condition.
The Company is involved in various non-environmental legal proceedings most of
which occur in the normal course of its business. The Company does not believe
that the proceedings will have a material adverse effect, either individually or
in the aggregate, on the Company's financial condition. However, with respect
to certain of the proceedings, if reserves prove to be inadequate and the
Company incurs a charge to earnings, such charge could have a material adverse
effect on the Company's results of operations for the applicable period.
Certain other proceedings, if decided adversely to the Company, could have a
material adverse effect on cash flows.
NOTE 6 - INCOME TAXES
The Company's effective tax rate is lower than the federal statutory rate
primarily because of the continued utilization of available operating loss
carryforwards. As such, the Company anticipates paying alternative minimum tax
at an effective rate of 18.5%.
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS - COMPARISON OF THE THREE-MONTH PERIODS ENDED MARCH 31,
- -----------------------------------------------------------------------------
1995 AND 1994
- -------------
Net Sales
- ---------
Net sales for the first quarter of 1995 totalled $752.7 million, an improvement
of $130.0 million, or 20.9%, compared to the corresponding period in 1994. This
increase in sales is primarily attributable to a 15.3% increase in shipments and
an increase in realized selling prices and was somewhat offset by an unfavorable
shift in product mix as certain customers accelerated orders in the fourth
quarter of 1994 in anticipation of a 1995 price increase, along with an increase
in the percentage of the Company's hot rolled shipments.
Steel shipments for the first quarter of 1995 were a record 1,422,000 tons
compared to the 1,233,000 tons shipped during the same period in 1994. This
15.3% improvement is attributable to a number of factors, including an overall
increase in demand for the Company's products as well as improved operating
practices. Steel shipments during the first quarter of 1994 were adversely
impacted by severe winter weather which hindered operations and disrupted
shipments.
Cost of Products Sold
- ---------------------
The Company's cost of products sold as a percentage of net sales declined from
91.8% during the first quarter of 1994, to 82.2% during the corresponding 1995
period. This decrease is reflective of improvements in productivity and quality
as well as an increase in volume.
Raw steel production was 1,586,000 net tons during the first quarter of 1995, a
16.5% increase compared to the 1,361,000 net tons produced during the same 1994
period. Improved productivity at both of the Company's steelmaking facilities
together with an increase in blast furnace production limits at the Granite City
Division contributed to this increase. State authorities temporarily increased
caster production limits at the Granite City Division in order to compensate for
production which will be lost as a result of a planned blast furnace outage
which will occur during the second quarter of 1995. Severe winter weather
adversely impacted raw steel production during the first quarter of 1994.
Restructuring Charge
- --------------------
During the fourth quarter of 1994, the Company finalized and implemented a plan
that resulted in a workforce reduction of approximately 400 salaried
nonrepresented employees. Accordingly, a restructuring charge of $34.2 million,
$25.6 million net of tax, was recorded during the fourth quarter of 1994. This
charge and the amount reserved was comprised of retiree medical benefits
("OPEB") of $22.0 million, severance of $10.9 million, a pension credit of $1.8
million and other charges totaling $3.1 million.
During the first quarter of 1995, the Company recorded, as expected, an
additional restructuring charge of $5.3 million, $3.6 million net of tax, as a
result of the various elections made by the terminated employees during the
first quarter of 1995. This charge was comprised of OPEB's of $4.5 million,
severance of $1.6 million, and a pension credit of $.8 million.
10
<PAGE>
The following represents the components of the $34.2 million reserve recorded at
December 31, 1994, the cash utilizations during the first quarter of 1995, the
components of the additional $5.3 million restructuring charge recorded at March
31, 1995 and the balance of the reserve at March 31, 1995.
<TABLE>
<CAPTION>
BALANCE BALANCE
DECEMBER 31, CASH FIRST QUARTER MARCH 31,
1994 UTILIZATIONS ADJUSTMENTS 1995
------------- ------------- -------------- ----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
OPEB $22.0 $ 0.0 $ 4.5 $26.5
Severance 10.9 (11.4) 1.6 1.1
Pensions (1.8) 0.0 (0.8) (2.6)
Other 3.1 (0.4) 0.0 2.7
----- ------ ----- -----
$34.2 $(11.8) $ 5.3 $27.7
===== ====== ===== =====
</TABLE>
The remaining OPEB and pension balances will require the utilization of cash
over the retirement lives of the affected employees. The aggregate balance of
$3.8 million related to severance and other will require the utilization of cash
within the 1995 fiscal year. The Company does not expect to record any
additional charges associated with this reduction in workforce.
Other (Income) Expense
- ----------------------
Financing Costs - Net financing costs of $11.3 million during the first quarter
of 1995 represents a 27.5% decrease compared to net financing costs of $15.6
million during the corresponding 1994 period. This decrease is primarily
attributable to higher short term investment earnings resulting from the receipt
of cash from the B&LE judgment along with cash generated by the issuance of 6.9
million shares of Class B Common Stock, coupled with a decrease in interest
expense as a result of the reduction of debt.
Bessemer & Lake Erie Railroad (the "B&LE") Litigation Judgment - On January 24,
1994, the United States Supreme Court denied the B&LE petition to hear the
appeal in the Iron Ore Antitrust Litigation, thus sustaining a judgment in favor
of the Company against the B&LE. On February 11, 1994, the Company received
$111.0 million, including interest, in satisfaction of this judgment. This gain
has been reclassified from Income from Operations to Other Income to more
properly reflect the trend in operating income and had no effect on net income
or earnings per share as previously reported.
Income Taxes
- ------------
The Company's effective tax rate is lower than the federal statutory rate
primarily because of the continued utilization of available operating loss
carryforwards. As such, the Company anticipates paying alternative minimum tax
at an effective rate of 18.5%.
Net Income
- ----------
The Company recorded net income of $44.7 million and $78.0 million for the first
quarter of 1995 and 1994, respectively. However, exclusive of the restructuring
charge and litigation judgment, the Company would have reported net income of
$48.3 million and a net loss of $29.9 million for the first quarter of 1995 and
1994, respectively. The Company attributes this $78.2 million improvement in
net income to refinements in operating practices which stabilized operations and
increased productivity, along with favorable market conditions.
11
<PAGE>
Other
- -----
Primary Offering of Class B Common Stock and Use of Proceeds - On February 1,
1995, the Company completed a primary offering of 6,900,000 shares of Class B
Common Stock, bringing the total number of shares of Class B Common Stock issued
and outstanding to 21,176,156. Subsequent to the offering, NKK Corporation,
through its ownership of all 22,100,000 issued and outstanding shares of Class A
Common Stock, holds 67.6% of the combined voting power of the Company. The
remaining 32.4% of the combined voting power is held by the public. The
issuance of the additional shares of Class B Common Stock generated net proceeds
of approximately $104.7 million. During the third quarter of 1995, the Company
intends to use all of the proceeds from this offering, along with an additional
amount which will be funded from the Company's available cash, to prepay a
portion of the related party debt associated with the rebuild of the No. 5 Coke
Oven Battery serving the Great Lakes Division.
Construction of Coating Line - The Company is in the process of constructing a
$67 million coating line which will be located at the Company's Granite City
Division. The line, which is rated at 270,000 annual net tons, is expected to
be completed in twelve to fifteen months and will increase the Company's coated
product capacity to more than two million tons annually. The Company will
market products from this new coating line to the metal buildings market for use
in pre-engineered buildings and in the emerging market for residential roofing,
siding and framing.
Blast Furnace Reline - The B Blast Furnace at the Company's Granite City
Division temporarily ceased production on April 7, 1995, to undergo a planned
reline scheduled for July completion. During the first quarter of 1995, the
Company stockpiled inventories of finished and semi-finished products in
anticipation of this outage. Therefore, shipments during the second quarter are
not expected to be unfavorably impacted. The Company anticipates that this
outage will unfavorably impact second quarter results of operations by $20 to
$25 million.
12
<PAGE>
LIQUIDITY AND SOURCES OF CAPITAL
- --------------------------------
The Company's liquidity needs arise primarily from capital investments, working
capital requirements and principal and interest payments on its indebtedness.
In addition to the Company's 1995 and 1993 public offerings of Class B Common
Stock and the receipt of approximately $111.0 million in February 1994 from the
satisfaction of a judgment in favor of the Company against the B&LE, the Company
has satisfied these liquidity needs with funds provided by long term borrowings
and cash provided by operations.
Cash and cash equivalents totaled $237.7 million at March 31, 1995 as compared
to $161.9 million at December 31, 1994. This increase is primarily a result of
the proceeds realized in connection with the primary offering of 6,900,000
shares of Class B Common Stock completed on February 1, 1995. During the third
quarter of 1995, the Company intends to use all of the proceeds from this
offering, along with an additional amount which will be funded from the
Company's available cash, to prepay a portion of the related party debt
associated with the rebuild of the No. 5 Coke Oven Battery serving the Great
Lakes Division.
Cash Flows from Operating Activities
For the quarter ended March 31, 1995, cash provided by operating activities
decreased by $80.4 million compared to the same 1994 period, due primarily to
the February 11, 1994 receipt of $111.0 million in proceeds related to the B&LE
litigation judgment. Cash provided by operating activities, excluding the
effects of the restructuring charge and the litigation judgment recorded during
the first quarter of 1995 and 1994, respectively, increased by $31.2 million.
This increase is primarily due to an improvement in net income and was offset by
the impact of working capital items which reduced cash flows by $89.8 million
for the three month period. A decrease in accounts payable had the most
significant negative effect, due primarily to the timing of cash disbursement
clearings. Additionally, an increase in accounts receivable had a negative cash
flow impact due to higher shipments during the first quarter of 1995 when
compared to the previous fourth quarter of 1994. An increase in the Company's
inventories in anticipation of a second quarter blast furnace reline also had a
negative impact on cash from operating activities.
Cash Flows from Investing Activities
Capital investments for the quarters ended March 31, 1995 and 1994 amounted to
$21.8 and $71.2 million, respectively. The 1994 spending was largely
attributable to the completion of a pickle line servicing the Great Lakes
Division. The Company plans to invest an additional $205.3 million during the
remainder of 1995 for capital expenditures to improve its plant and equipment as
well as increase its steel coating capacity at the Granite City Division.
Cash Flows from Financing Activities
Financing activities for the first quarter of 1995 included the issuance of
6,900,000 shares of Class B Common Stock which generated net proceeds of $104.7
million, offset by debt repayments of $10.9 million and other payments totaling
$6.7 million. Financing activities for the first quarter of 1994 included
borrowings of $88.0 million related to the completion of a pickle line servicing
the Great Lakes Division.
Sources of Financing
The Company's available sources of liquidity consist of a Receivables Purchase
Agreement with commitments of up to $180 million and $15 million in an
uncommitted, unsecured line of credit (the "Uncommitted Line of Credit"). On
March 31, 1995, there were no cash borrowings outstanding under the Receivables
Purchase Agreement, and outstanding letters of credit under the Receivables
Purchase Agreement totaled $89.7 million.
Total debt and redeemable preferred stock as a percentage of total
capitalization improved to 60.4% at March 31, 1995, as compared to 68.6% at
December 31, 1994, primarily as a result of the Company's improved net income
and the proceeds received in connection with the aforementioned stock offering.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Baker's Port, Inc. v. National Steel Corporation. With respect to the matter
involving claims arising out of the sale of land in Texas to Baker's Port, Inc.
("BPI"), previously reported in the Annual Report of the Company on Form 10-K
for the year ended December 31, 1994 (the "1994 Form 10-K"), the Court entered
an Order on April 21, 1995 that the new trial would be limited to the specific
issue that was remanded by the Court of Appeals, that being the breach of title
cause of action concerning the submerged lands owned by the State of Texas, if
any, and related attorney's fees, if any. The Court further ordered that
evidence of the alleged title defects on the other tracts of land and evidence
of BPI's claims for breach of warranty against encumbrances, fraud, and under
the Deceptive Trade Practices Act, as well as evidence relating to BPI's claims
relating to rescission, would not be admitted at the new trial except as they
may apply to the breach of title cause of action concerning the submerged lands
owned by the State of Texas, if any, and related attorney's fees. A trial date
has been set for November 13, 1995.
Management believes that the final disposition of the Baker's Port matter will
not have a material adverse effect on the Company's financial condition, results
of operations or cash flows.
ENVIRONMENTAL MATTERS
The Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended ("CERCLA"), and similar state superfund statutes generally
impose joint and several liability on present and former owners and operators,
transporters and generators for remediation of contaminated properties,
regardless of fault. The Company and certain of its subsidiaries are involved as
a potentially responsible party ("PRP") at a number of off-site CERCLA or state
superfund site proceedings.
Iron River (Dober Mine) Site. With reference to the matter involving the Iron
River (Dober Mine) Site located in Iron County Michigan, previously reported in
the 1994 Form 10-K, a hearing on the various parties' summary judgment motions
on liability issues was held. The court refused to grant any of the parties'
requested relief, and the case will now proceed through the discovery phase.
Berlin & Farro Liquid Incineration Site. With reference to the matter involving
the Berlin & Farro Site located in Swartz Creek, Michigan, previously reported
in the 1994 Form 10-K, both the federal and state consent decrees have been
entered of record. Additionally, by order of the court, the third party
plaintiffs' claims against the Company have been dismissed.
FOX Sites.
Lowry Landfill Site. With reference to the matter involving the Lowry Landfill
Site in Aurora, Colorado, previously reported in the 1994 Form 10-K, the Alumet
Partnership ("Alumet") has had numerous and frequent communications with the
Environmental Protection Agency (the "EPA") and the Department of Justice
concerning settlement of any liability Alumet may have with respect to this
Site. Alumet has reached a settlement in principle with the EPA and the
Department of Justice and has made substantial progress towards finalizing a
consent decree which embodies the settlement agreement. The consent decree, if
executed by the parties, will be published in the Federal Register for public
comment. If ultimately approved and entered by the United States District Court
for the District of Colorado, the consent decree will settle the liabilities of
Alumet at this Site. The Company believes that its share of the Alumet
liability at this Site will be covered by the $10.0 million payment made by FOX
to the Company as an unrestricted prepayment for environmental obligations for
which FOX has previously agreed to indemnify the Company, as more particularly
described in "Part I - Note 5 - Environmental and Legal Proceedings."
14
<PAGE>
Other
Great Lakes Division Outfalls Proceeding. With reference to this matter
involving certain outfalls located at the Great Lakes Division facility,
including the outfall at the 80-inch hot strip mill, previously reported in the
1994 Form 10-K, the five penalty assessments issued by the United States Coast
Guard (the "USCG") in 1994 were settled for an aggregate amount of $32,000. The
USCG issued one new penalty assessment in 1995, which was in the amount of
$10,000. By letter dated March 31, 1995, the Company challenged the assessment
on both factual and legal grounds. The USCG has not yet responded to the
Company's letter.
Granite City Division Alleged Air Emission Violations. On or about March 2,
1995, the Company received Notices of Violation ("NOVs") and Findings of
Violation ("FOVs") issued by the United States EPA covering alleged violations
of various air emission requirements at the Granite City basic oxygen furnace
shop, coke oven batteries and by-products plant. The Company met with EPA on
March 23, 1995 to discuss and respond to the allegations contained in the NOVs
and FOVs. No demand or proposal for penalties was set forth in the NOVs or
FOVs.
In connection with certain of these proceedings, the Company has only commenced
investigation or otherwise does not have sufficient information to estimate its
potential liability, if any. Although the outcomes of the proceedings described
above or any fines or penalties that may be assessed in any such proceedings, to
the extent that they exceed any applicable reserves, could have a material
adverse effect on the Company's results of operations for the applicable period,
the Company has no reason to believe that any such outcomes, fines or
penalties, whether considered individually or in the aggregate, will have a
material adverse effect on the Company's financial condition, results of
operations or cash flows. See "Part I - Financial Information - Note 5 -
Environmental and Legal Proceedings."
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following is an index of the exhibits included in this report on
Form 10-Q:
27A Financial Data Schedule
(b) The Company did not file any reports on Form 8-K during the first quarter
of 1995.
16
<PAGE>
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.
NATIONAL STEEL CORPORATION
BY /s/Robert M. Greer
---------------------------------------------------
Robert M. Greer, Senior Vice President and
Chief Financial Officer
BY /s/Carl M. Apel
---------------------------------------------------
Carl M. Apel, Corporate Controller, Accounting
and Assistant Secretary
Date: May 8, 1995
17
<PAGE>
NATIONAL STEEL CORPORATION
QUARTERLY REPORT ON FORM 10-Q
EXHIBIT INDEX
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1995
27-A Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 237,663
<SECURITIES> 0
<RECEIVABLES> 330,909
<ALLOWANCES> 15,151
<INVENTORY> 388,484
<CURRENT-ASSETS> 941,905
<PP&E> 3,382,230
<DEPRECIATION> 2,002,673
<TOTAL-ASSETS> 2,612,047
<CURRENT-LIABILITIES> 689,215
<BONDS> 522,473
<COMMON> 433
66,155
36,650
<OTHER-SE> 463,186
<TOTAL-LIABILITY-AND-EQUITY> 2,612,047
<SALES> 752,676
<TOTAL-REVENUES> 752,676
<CGS> 618,716
<TOTAL-COSTS> 618,716
<OTHER-EXPENSES> 75,137
<LOSS-PROVISION> (34)
<INTEREST-EXPENSE> 11,328
<INCOME-PRETAX> 47,529
<INCOME-TAX> 2,835
<INCOME-CONTINUING> 44,694
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 44,694
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.02
</TABLE>
