<PAGE> 1
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 October 31, 1998
or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to ___________
Commission file number 0-21556
NORTHWESTERN STEEL AND WIRE COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Illinois 36-1562920
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
121 Wallace Street, Sterling, Illinois 61081
- --------------------------------------------------------------------------------
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code 815/625-2500
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Number of shares of common stock outstanding as of December 8, 1998:
Common Stock 24,905,424 shares
(includes 420,601 treasury shares)
Page 1 of 12
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NORTHWESTERN STEEL AND WIRE COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
October 31,
-----------------------------------------
1998 1997
(Unaudited)
(in thousands of dollars except per
share data and tonnage data)
<S> <C> <C>
Net sales $ 113,516 $ 138,925
------------- ------------
Cost and operating expenses:
Cost of goods sold (excluding depreciation) 100,448 119,050
Depreciation 3,744 4,543
Selling and administrative 2,466 3,142
Non-recurring item 41,597 -
------------- ------------
Total cost and operating expenses 148,255 126,735
------------- ------------
Operating (loss) profit (34,739) 12,190
------------- ------------
Other income and expenses:
Interest expense 3,226 4,380
Interest and other income (417) (5,161)
------------- ------------
Total other income and expenses 2,809 (781)
------------- ------------
(Loss) income before income taxes (37,548) 12,971
(Benefit) provision for income taxes (12,980) 5,201
------------- ------------
Net (loss) income $ (24,568) $ 7,770
============= ============
Basic net (loss) income per share $ (1.00) $ 0.32
============= ============
Net tons shipped 295,059 366,639
============= ============
</TABLE>
The accompanying notes are an integral part
of the unaudited consolidated financial statements
-2-
<PAGE> 3
NORTHWESTERN STEEL AND WIRE COMPANY
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars except share data)
<TABLE>
<CAPTION>
October 31, July 31,
1998 1998
-------------- -------------
ASSETS
CURRENT ASSETS (Unaudited)
<S> <C> <C>
Cash and cash equivalents $ 11,152 $ 36,930
Receivables, less allowance of $1,175 45,322 52,057
Income tax receivable 13 13
Deferred income taxes 14,847 14,147
Other assets 25,429 14,085
------------ ------------
96,763 117,232
------------ ------------
Inventories, at lower of cost or market:
Finished products 40,501 36,867
Semi-finished products 28,761 26,937
Raw materials and supplies 18,120 20,218
------------ ------------
87,382 84,022
------------ ------------
Total current assets 184,145 201,254
------------ ------------
PLANT AND EQUIPMENT, at cost 317,755 318,656
Accumulated depreciation 169,941 166,196
------------ ------------
Net plant and equipment 147,814 152,460
------------ ------------
DEFERRED INCOME TAXES 25,267 12,287
DEFERRED FINANCING COST 1,684 1,990
OTHER ASSETS 15,208 15,208
------------ ------------
Total assets $ 374,118 $ 383,199
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 26,786 $ 42,953
Accrued expenses 66,102 34,897
Current portion of long term debt 609 609
------------ ------------
Total current liabilities 93,497 78,459
LONG TERM DEBT 116,141 116,141
OTHER LONG TERM LIABILITIES 102,348 101,899
------------ ------------
Total liabilities 311,986 296,499
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Preferred stock, par value $1 per share:
- Authorized - 1,000,000 shares
- Issued - none - -
Common stock, par value $.01 per share:
- Authorized - 75,000,000 shares
- Issued - 24,905,424 shares 123,973 123,973
Retained (deficit) earnings (51,043) (26,475)
Minimum pension liability (5,473) (5,473)
Treasury shares, at cost; 420,601 shares (5,325) (5,325)
------------ ------------
Total shareholders' equity 62,132 86,700
------------ ------------
Total liabilities and shareholders' equity $ 374,118 $ 383,199
============ ============
</TABLE>
The accompanying notes are an integral part
of the unaudited consolidated financial statements
-3-
<PAGE> 4
NORTHWESTERN STEEL AND WIRE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months Ended
October 31,
---------------------------------
1998 1997
---------- -----------
(Unaudited)
(In thousands of dollars)
<S> <C> <C>
Cash Flows From Operations:
Net (loss) income $ (24,568) $ 7,770
Depreciation 3,744 4,543
Non-recurring item 41,597 -
Amortization of deferred financing costs and debt discount 331 329
Deferred income tax (benefit) expense (13,680) 5,201
Income tax receivable - 10,535
Decrease in receivables 6,735 3,576
(Increase) decrease in inventories (5,660) 1,275
(Increase) in other current assets (11,344) -
(Decrease) increase in accounts payable and accrued expenses (20,159) (14,705)
Increase in other long term liabilities 449 777
------------ ----------
Net cash (used in) provided by operations (22,555) 19,301
------------ ----------
Cash Flows From Investing Activities:
Capital expenditures (3,198) (2,107)
------------ ----------
Net cash used in investing activities (3,198) (2,107)
------------ ----------
Cash Flows From Financing Activities:
Payments of long term debt (25) (56,876)
Proceeds from issuance of long term debt and revolver loans - 35,000
Cash overdraft - 1,035
------------ ----------
Net cash used in financing activities (25) (20,841)
------------ ----------
Decrease in cash and cash equivalents (25,777) (3,647)
Cash and Cash Equivalents:
Beginning of period 36,930 4,078
------------ ----------
End of period $ 11,153 $ 431
============ ==========
Supplemental Disclosures of Cash Flow Information:
Cash Paid (Received) During the Period For:
Interest $ 214 $ 1,801
Income taxes - -
</TABLE>
The accompanying notes are an integral part
of the unaudited consolidated financial statements
-4-
<PAGE> 5
NORTHWESTERN STEEL AND WIRE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts are in thousands except share data)
1. These consolidated financial statements included herein should be read
together with the fiscal 1998 audited financial statements and notes included in
the Company's Annual Report on Form 10-K filed with the Securities and Exchange
Commission.
2. The Consolidated Financial Statements for the three month periods ended
October 31, 1998 and 1997 have not been audited. However, the Company believes
the information reflects all adjustments which, in the opinion of management,
are necessary to present fairly the results shown for the periods indicated.
Management believes all adjustments were of a normal recurring nature.
3. Basic net income (loss) per share amounts, as presented on the Consolidated
Statements of Operations, are based on the weighted average actual shares
outstanding of 24,484,823 and 24,483,280 for the three months ended October 31,
1998 and 1997, respectively. Only basic net income (loss) per share was
presented for all periods since income (loss) per share remain the same for
basic and diluted earnings per share. The dilutive impact for options issued
pursuant to the various Company stock option plans are immaterial.
4. An income tax provision or benefit is recorded by estimating the annual
effective income tax rate and applying that rate to pretax income or loss. The
effective income tax rate was approximately 35% and 40% for the three months
ended October 31, 1998 and 1997, respectively, which approximates the combined
Federal and State statutory rates.
5. On October 7, 1998 the Company announced that it will exit the majority of
its wire products business by the end of calendar 1998. This decision is more
fully described in Item 2 of this Form 10-Q, Management's Discussion and
Analysis of Financial Condition and Results of Operations.
6. On July 24, 1998, the Company signed a letter of intent to sell the Company's
idled Houston facility including land and buildings in exchange for cash. On
December 7, 1998 the Company was notified by the potential purchaser of their
decision to cancel their letter of intent. The Houston facility has been placed
on the market for sale.
7. The Company is subject to a broad range of federal, state and local
environmental requirements, including those governing discharges to the air and
water, the handling and disposal of solid and/or hazardous wastes and the
remediation of contamination associated with releases of hazardous substances.
Primarily because the scrap melting process produces dust that contains low
levels of lead and cadmium, the Company is classified, in the same manner as
other similar steel mills in its industry, as a generator of hazardous waste.
5
<PAGE> 6
The Company has been cited by the U. S. Environmental Protection Agency
("USEPA") for alleged violations of the 1990 Clean Air Act ("CAA") and other
requirements at its Sterling furnace operations. The Company has agreed to
settle this claim pending final approval. The agreement, if approved, would
require the Company to pay a civil penalty of approximately $600,000 and achieve
and maintain compliance with the CAA through future capital expenditures that
the Company anticipates to range between $5.0 and $7.0 million. Additionally,
the Company would also undertake several Supplementary Environmental Projects
that could total $1.0 million in capital expenditures.
Based on continuing review of applicable regulatory requirements by the
Company's internal environmental compliance manager and advice from independent
consultants, the Company believes that it is currently in substantial compliance
with applicable environmental requirements, except as noted in the Company's
fiscal 1998 Annual Report on Form 10-K for Commitments and Contingencies.
8. In accordance with Statement of Financial Accounting Standard No. 130
"Reporting Comprehensive Income" ("SFAS 130"), the Company has implemented the
requirements of SFAS 130 on August 1, 1998. The adoption of SFAS 130 has not
had a significant impact on the Company's financial statements for the three
months ended October 31, 1998, since no change occurred in the Company's minimum
pension liability, which represents the Company's only comprehensive income
item.
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following discussion should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations included as Item 7 of Part II of the Company's Annual Report on Form
10-K for the year ended July 31, 1998 ("1998 10-K MD&A").
FORWARD LOOKING INFORMATION
- ---------------------------
Except for historical information, matters discussed in this Item 2 contain
forward looking information and describe the Company's belief concerning future
business conditions and the outlook for the Company based on currently available
information. The Company has identified these "forward looking" statements by
words such as "should", "lead to", "expects", "anticipates" and similar
expressions. Risks and uncertainties which could cause the Company's actual
results or performance to differ materially from those expressed in these
statements include the following: volumes of production and product shipments;
changes in product mix and pricing; costs of scrap steel and other raw material
inputs; changes in domestic manufacturing capacity; the level of non-residential
construction and overall economic growth in the United States; changes in
legislative, regulatory or industrial requirements; the level of imported
products in the Company's markets; and the uncertainties described in the 1998
10-K MD&A and in this Item 2. The Company assumes no obligation to update the
information contained herein.
6
<PAGE> 7
RESULTS OF OPERATIONS
- ---------------------
Net sales for the Company were $113.5 million on shipments of 295,059 net
tons for the three months ended October 31, 1998, compared to $138.9 million on
shipments of 366,639 net tons for the three months ended October 31, 1997. The
Company recorded the previously announced exit from a significant portion of its
wire business in the first quarter, resulting in a net loss for the quarter of
$24.6 million, or $1.00 per share. Excluding the wire business exit costs, the
Company earned $2.5 million, or $.10 per share. In the first quarter of the
prior year, the Company reported net earnings of $7.8 million, or $.32 per
share, which included $3.1 million, or $.12 per share, in settlement of
previously disputed property tax payments made in prior years. Excluding
property tax settlements, net earnings in last year's first quarter were $4.7
million, or $.20 per share.
Tons shipped in the quarter decreased approximately 20% compared to the
prior year period. During the first quarter of fiscal 1999, the Company
continued to see record import levels of foreign steel in its rod and structural
markets which significantly impacted volume shipped during the three months
ended October 31, 1998. Additionally, the Company anticipates continued high
levels of foreign imports through the Company's third fiscal quarter.
These record import levels of foreign steel in the Company's steel markets
put downward pressure on pricing in addition to decreased shipments. Pricing
for wire rod were lower by approximately 13% in the quarter ended October 31,
1998 compared to the prior year three month period. Pricing for the Company's
structural products were greater in the first quarter of fiscal 1999 than the
same period in the prior year. In order to remain competitive, the Company has
adjusted its structural pricing and estimates that the realized value for
structural products is expected to decrease almost 15% in the second fiscal
quarter of 1999.
Cost of goods sold, excluding depreciation, as a percentage of net sales
for the three-month period ended October 31, 1998 increased to 88.5% compared to
the prior year at 85.7%. With the increased presence of foreign steel in the
Company's markets, and the resulting volume decrease, operating efficiencies
achieved in the prior year period could not be duplicated. As noted above, the
downward pressure on pricing also impacted the cost of goods sold to net sales
percentage. In future periods the cost of goods sold to net sales percentage is
expected to increase further as structural price decreases are recognized. The
increase in the cost of goods sold to net sales percentage resulting from
decreased selling prices and less efficient operating levels will be somewhat
offset by lower scrap costs. Scrap costs have been decreasing as a result of
the weakening steel industry and export demand for scrap.
7
<PAGE> 8
Depreciation expense decreased almost 18% from $4.5 million in the first
quarter of fiscal 1998 to $3.7 million in the current year's first quarter. This
decrease was due primarily to major capital projects implemented in the early
1980's period becoming fully depreciated.
For the quarter ended October 31, 1998, selling and administrative expense
was $2.5 million compared to $3.1 million in the prior fiscal year period. The
decrease is due primarily to somewhat lower compensation expense.
Interest expense was $3.2 million for the quarter ended October 31, 1998
compared to $4.4 million in the prior fiscal year period. The decrease in
interest expense is primarily due to the effect of reduced debt levels.
The benefit for income taxes was $13.0 million for the three months ended
October 31, 1998 as a result of recording the costs to exit a significant
portion of its wire business. This compared to a provision for income taxes of
$5.2 million due to the pre-tax earnings generated for same period in the prior
year. The Company will pay very little in cash taxes during fiscal 1999 due to
the loss resulting from the exit of a significant portion of its wire operations
and its tax net operating loss position.
ANNOUNCEMENT OF WIRE PRODUCTS BUSINESS EXIT
During the first quarter of fiscal 1999, the Company announced the exit of
the majority of its wire products business by the end of calendar 1998.
Specifically, the Company will cease, in an orderly fashion, production and
marketing of its agricultural, nail and lawn and garden product lines. The
Company has incurred losses in these product lines during the last three years.
The Company will continue to produce and market manufacturer's wire and cut rod
products at its Sterling facility. As a result of the exit, the Company
recorded a non-recurring, pre-tax charge of $41.6 million in the first quarter
of fiscal 1999. The charge includes employee termination expenses, asset
writedowns associated with the facility, equipment and inventory and other
closure costs, as follows:
Employee termination costs $ 32.9
Asset impairment 6.4
Other closure costs 2.3
-------
$ 41.6
=======
The employee termination costs include unrecognized pension and
postretirement healthcare costs and employee severance expenses. Unrecognized
pension costs will be funded over a five year period while postretirement
healthcare costs will be funded over the lives of the affected employees. The
production equipment is being prepared for sale. The other closure costs and
employee severance expenses are anticipated to be paid over the next year. The
proceeds from the liquidation of these wire product's working capital, net of
the above cash closure costs, is expected to generate a modest amount of cash,
after all closure costs have been paid.
8
<PAGE> 9
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
GENERAL. Funds for the Company's operational needs have been provided from
internally generated cash. As of October 31, 1998, total liquidity, comprising
cash, cash equivalents and funds available under the Company's credit facility,
was $76.2 million compared to $108.3 million at July 31, 1998. The Company used
cash in operations of $22.6 million in the first quarter of fiscal 1999 compared
to operations providing cash of $19.3 million in the prior year period. The
decrease is attributable to decreased operating profits, reduction of accounts
payable associated with planned inventory decreases and increased pension
funding associated with meeting minimum funding standards of the Pension Benefit
Guaranty Corporation.
Net cash used in investing activities amounted to $3.2 million in the first
quarter of fiscal 1999 compared to $2.1 million in the prior year period. The
Company continues lower levels of capital spending in fiscal 1999 (currently
expected to be from $11 to $14 million) in anticipation of potentially
significant capital commitments resulting from studies the Company is pursuing
to upgrade, modernize or replace its rolling mills in Sterling, Illinois.
The Company has significant future debt service obligations, primarily
consisting of $115 million of senior notes that are scheduled to be redeemed on
June 15, 2001, and significant unfunded employee benefit obligations. The
Company's ability to satisfy these obligations and to secure adequate capital
resources in the future are dependent on its ability to generate adequate and
sustainable cash flow. This will be dependent on the Company's overall
operating performance and successful implementation of the Company's internal
plans. Additionally, the Company is subject to general business, financial,
capital markets, labor cooperation and competitive conditions, including
competitors' new steel plants which will increase capacity in the structural
steel market by approximately 1.9 million tons during calendar 1999. If the
Company is not able to modernize or replace its existing mills and renegotiate
certain provisions of its existing labor agreement in a timely manner, the
Company believes it is unlikely that its operating cash flow will be sufficient
to repay or refinance its future obligations as they become due. Additionally,
the Company is uncertain as to its ability to refinance these obligations due to
factors outlined above as well as general business and economic competitive
factors affecting the Company and the domestic steel industry, as more fully
described in the Company's 1998 10-K MD&A.
The Company has had under consideration for some time various ways to
address these issues. If the Company is unable to develop or implement plans
that adequately address these challenges in a timely manner, the Company's
business, financial condition and operations will be materially and adversely
affected. As the Company faces the prospect of being unable to modernize or
replace its existing mills and the potential inability to repay its future debt
service obligations as they become due, the Company is considering a number of
alternatives including reorganization.
9
<PAGE> 10
YEAR 2000
In 1997, the Company identified the following areas critical for its
successful implementation of Year 2000 ("Y2K") compliance: (1) financial and
information system applications, (2) manufacturing applications and (3) vendor
and other third-party relationships. For each of these areas, the Company has
established the following procedures to enable it to meet its Y2K compliance
obligation: (a) identifying systems potentially susceptible to Y2K compliance
issues, (b) developing and implementing corrective actions and (c) testing to
ensure compliance. Management believes that the Company is devoting the
necessary resources to identify and resolve significant Y2K issues in a timely
manner.
FINANCIAL AND INFORMATION SYSTEM APPLICATIONS: The Company utilized the services
of outside consultants to identify areas of exposure and solution implementation
for the financial and information system applications. Financial and information
system applications consist of the Company's main-frame computer hardware and
operating system, and the applications software. The Company's main-frame
operating system, which is presently in use, has been successfully tested for
Y2K compliance. All applications software have been identified for Y2K
compliance, upgraded where necessary and are currently in use. The Company is
currently testing these upgraded systems for Y2K compliance and estimates that
the testing is 86% complete. The Company believes completion of such testing
will occur during the second quarter of fiscal 1999. The total cost of these
Y2K compliance activities, estimated at less than $1.0 million, has not been,
and is not anticipated to be material to the Company's financial position or its
results of operations and have all been or will be expensed as incurred. Based
on the information gathered and the testing performed to date, the Company does
not believe any material exposure to significant business interruption exists as
a result of Y2K issues from the financial and information system applications.
MANUFACTURING APPLICATIONS: The Company's manufacturing facilities rely on
systems for process control and production monitoring. Failure to identify,
correct and test Y2K sensitive systems at its manufacturing facilities could
result in manufacturing interruptions. The Company has identified and
catalogued hardware and software systems used in the manufacturing process and
is currently testing compliance with these hardware and software systems. At
the same time, the Company is also currently analyzing responses from the
suppliers of these manufacturing applications and thus does not, at this time,
have sufficient data to estimate the cost of achieving Y2K compliance for its
manufacturing applications. If the Company is unable to achieve Y2K compliance
for its manufacturing applications, the Year 2000 could have a material impact
on the operations of the Company. The Company currently estimates the analysis
of information and recommendation of corrective actions will be completed by
mid-fiscal 1999. Additionally, the Company expects implementation and testing
will be completed by the end of fiscal 1999.
10
<PAGE> 11
VENDOR AND OTHER THIRD-PARTY RELATIONSHIPS: The Company relies on third party
suppliers for raw materials, utilities, transportation and other key supplies
and services. Interruption of supplier operations due to Y2K issues could
adversely affect the Company's operations. The Company has initiated efforts to
evaluate the status of supplier's efforts to prepare for Y2K compliance issues
through a survey sent to its suppliers. The Company has received a 75% response
rate from the survey of suppliers. Unsatisfactory responses or non-responses
from critical suppliers will result, to the extent possible, in alternate
sources being utilized. These activities are intended to provide a means of
managing risk, but cannot eliminate the potential for disruption due to
third-party failure. The Company is also dependent upon its customers for sales
and cash flow. The Company does not currently have any formal information
concerning the Y2K compliance status of its customers but has received
indications that most of the Company's customers are working on Y2K compliance.
Y2K interruptions in the Company's customers' operations could result in reduced
sales, increased inventory or receivable levels and cash flow reductions. While
these events are possible, the Company believes its customer base is broad
enough to minimize the impact of isolated occurrences. The Company does not
believe it will experience material costs related to its Y2K compliance
activities for vendors and other third party relationships.
The foregoing assessment of the impact of the Y2K issue on the Company is
based on management's estimates at the present time. The assessment is based
upon numerous assumptions as to future events. There can be no assurance that
these estimates and assumptions will prove accurate, and the actual results
could differ materially. To the extent that Y2K issues cause significant delays
in production or limitation of sales, the Company's results of operations and
financial position would be materially adversely affected.
11
<PAGE> 12
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K. No reports on Form 8-K were filed by the
Company during the quarter ended October 31, 1998.
SIGNATURE
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.
NORTHWESTERN STEEL AND WIRE COMPANY
By /s/ T. M. Vercillo
--------------------------------------
Thomas M. Vercillo
Chief Financial Officer
(Principal Financial Officer)
December 15, 1998
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-END> OCT-31-1998
<CASH> 11,152
<SECURITIES> 0
<RECEIVABLES> 46,497
<ALLOWANCES> 1,175
<INVENTORY> 87,382
<CURRENT-ASSETS> 184,145
<PP&E> 317,755
<DEPRECIATION> 169,941
<TOTAL-ASSETS> 374,118
<CURRENT-LIABILITIES> 93,497
<BONDS> 0
0
0
<COMMON> 123,973
<OTHER-SE> (61,841)
<TOTAL-LIABILITY-AND-EQUITY> 374,118
<SALES> 113,516
<TOTAL-REVENUES> 113,930
<CGS> 100,448
<TOTAL-COSTS> 148,255
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,226
<INCOME-PRETAX> (37,548)
<INCOME-TAX> (12,980)
<INCOME-CONTINUING> (24,568)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (24,568)
<EPS-PRIMARY> (1.00)
<EPS-DILUTED> (1.00)
</TABLE>
