SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 26, 1994
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 1-9838
NS GROUP, INC.
Exact name of registrant as specified in its charter
KENTUCKY 61-0985936
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Ninth and Lowell Streets, Newport, Kentucky 41072
(Address of principal executive offices)
Registrant's telephone number, including area code (606) 292-6809
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
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common stock, no par value 13,803,913
(Class) (Outstanding at May 2, 1994)
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 26, 1994 AND SEPTEMBER 25, 1993
(Dollars in thousands)
(Unaudited)
March 26, September 25,
1 9 9 4 1 9 9 3
CURRENT ASSETS
Cash and cash equivalents $ 7,680 $ 5,797
Short-term investments 43,218 3,457
Accounts receivable, less allowance
for doubtful accounts of $674 and
$819, respectively 33,116 48,602
Inventories 35,110 41,691
Other current assets 17,722 27,175
Total current assets 136,846 126,722
PROPERTY, PLANT AND EQUIPMENT 258,892 265,093
Less - Accumulated depreciation (96,954) (91,627)
161,938 173,466
OTHER ASSETS 21,407 17,054
TOTAL ASSETS $320,191 $317,242
CURRENT LIABILITIES
Notes payable $ 28,284 $ 26,967
Accounts payable 22,177 28,300
Other current liabilities 23,605 23,263
Current portion of long-term debt 9,390 9,132
Total current liabilities 83,456 87,662
LONG-TERM DEBT 147,826 156,056
DEFERRED TAXES 9,577 10,902
COMMON SHAREHOLDERS' EQUITY
Common stock no par value,
40,000,000 shares authorized;
13,803,913 and 13,696,104 shares
issued and outstanding, respectively 48,966 48,284
Common stock options and warrants 233 208
Retained earnings 30,133 14,130
Total common shareholders' equity 79,332 62,622
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $320,191 $317,242
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED
MARCH 26, 1994 AND MARCH 27, 1993
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
March 26, March 27, March 26, March 27,
1994 1993 1994 1993
NET SALES $ 66,012 $ 86,735 $137,971 $164,514
COST AND EXPENSES
Cost of products sold 64,181 76,320 128,349 146,502
Selling and admini-
strative expenses 6,296 8,125 12,276 15,544
Operating income (loss) (4,465) 2,290 (2,654) 2,468
OTHER INCOME (EXPENSE)
Gain on sale of
subsidiary - - 35,292 -
Interest expense (5,068) (5,325) (10,079) (10,633)
Interest income 388 61 847 142
Other, net 70 (307) 623 (325)
Income (loss) before
income taxes and
cumulative effect of a
change in the method
of accounting for
income taxes (9,075) (3,281) 24,029 (8,348)
PROVISION (CREDIT) FOR
INCOME TAXES (3,492) (1,166) 9,586 (2,878)
Income (loss) before
cumulative effect of a
change in accounting
principle (5,583) (2,115) 14,443 (5,470)
CUMULATIVE EFFECT, AS OF
SEPTEMBER 25, 1993, OF
A CHANGE IN THE METHOD
OF ACCOUNTING FOR
INCOME TAXES - - 1,715 -
Net income (loss) $ (5,583) $(2,115) $16,158 $(5,470)
PER COMMON SHARE
Income (loss) before
cumulative effect of
a change in accounting
principle $(.40) $(.16) $1.05 $(.40)
Cumulative effect of a
change in the method
of accounting for
income taxes - - .12 -
Net income (loss) $(.40) $(.16) $1.17 $(.40)
WEIGHTED AVERAGE SHARES
OUTSTANDING 13,801,774 13,510,048 13,772,185 13,509,245
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED
MARCH 26, 1994 AND MARCH 27, 1993
(Dollars in thousands)
(Unaudited)
March 26, March 27,
1 9 9 4 1 9 9 3
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 16,158 $ (5,470)
Adjustments to reconcile net income
(loss) to net cash flows from
operating activities:
Depreciation and amortization 9,307 9,425
Decrease in deferred taxes (1,325) (2,716)
Gain on sale of subsidiary (35,292) -
(Increase) decrease in accounts
receivable, net 1,614 (5,802)
Increase in inventories (5,988) (871)
Decrease in other current assets 4,380 4,360
Increase (decrease) in accounts
payable 647 (1,210)
Increase (decrease) in accrued
liabilities 4,675 (24)
Net cash flows from operating
activities (5,824) (2,308)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of subsidiary 50,426 -
Cash dividend from sold subsidiary 6,818 -
Increase in property, plant and
equipment, net (3,655) (3,421)
Increase in other assets (4,818) (399)
(Increase) decrease in short-term
investments (39,761) 67
Net cash flows from investing
activities 9,010 (3,753)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in notes payable 1,317 6,522
Proceeds from issuance of long-term
debt 431 1,150
Repayments on long-term debt (3,683) (4,817)
Increase in deferred financing costs (50) (14)
Proceeds from issuance of common stock 682 20
Net cash flows from financing
activities (1,303) 2,861
Net increase (decrease) in cash
and cash equivalents 1,883 (3,200)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 5,797 8,714
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $ 7,680 $ 5,514
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 9,460 $ 9,467
Income taxes $ 2,530 $ 275
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) The condensed consolidated financial statements include the
accounts of NS Group, Inc. and its wholly owned subsidiaries (the
Company): Newport Steel Corporation, Koppel Steel Corporation,
Erlanger Tubular Corporation, NSub I, Inc. (formerly known as
Kentucky Electric Steel Corporation - see Note 2), Imperial
Adhesives, Inc., N.K. Management, Inc. and N.K. Air, Inc. All
significant intercompany balances and transactions have been
eliminated.
The accompanying information reflects, in the opinion of
management, all adjustments (which consist only of normal
recurring adjustments) necessary to present fairly the results
for the interim periods. Reference should be made to NS Group,
Inc.'s Form 10-K for the year ended September 25, 1993 for
additional footnote disclosure, including a summary of
significant accounting policies.
(2) On October 6, 1993, the Company sold all of the assets and
liabilities of its wholly owned subsidiary, Kentucky Electric
Steel Corporation (KES), to a newly formed public company in
exchange for $45.6 million in cash and 400,000 shares
(approximately 8%) of the new entity, valued at $4.8 million. In
addition, the Company received $6.8 million in cash from the new
entity in satisfaction of a dividend declared by KES prior to the
sale. Cash proceeds from the sale were invested in short-term
marketable securities.
The sale of KES resulted in a pre-tax gain of $35.3 million and
increased net income and earnings per common share by $21.5
million and $1.56, respectively.
Subsequent to the sale, the Company changed the name of KES to
NSub I, Inc., which currently holds the majority of the proceeds
from the sale. The accompanying financial statements include the
financial position, results of operations and changes in cash
flows of KES for the comparative prior periods presented.
(3) At March 26, 1994 and September 25, 1993, inventories
stated at the lower of LIFO (last-in, first-out) cost or market
represent approximately 35% and 23% of total inventories before
the LIFO reserve, respectively. Inventories consist of the
following components ($000's):
MARCH 26, SEPTEMBER 25,
1 9 9 4 1 9 9 3
Raw materials $ 5,882 $ 5,736
Semi-finished and
finished goods 31,453 37,830
37,335 43,566
LIFO reserve (2,225) (1,875)
$35,110 $41,691
(4) Effective September 26, 1993, the Company adopted the
provisions of Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("Statement 109"). Prior to
adoption of Statement 109, deferred tax expense was based on
items of income and expense that were reported in different years
in the financial statements and tax returns and were measured at
the tax rate in effect in the year the difference originated.
Under Statement 109, deferred tax liabilities and assets are
based upon differences in the basis of assets and liabilities for
financial statements and tax returns and are determined based on
the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The significant components
of the Company's deferred tax liabilities and assets as of the
date of adoption of Statement 109 are as follows ($000's).
Deferred tax liabilities, principally
related to depreciation $29,085
Deferred tax assets:
Reserves and accruals 5,445
Net operating tax loss carryforward 17,773
Alternative minimum tax and other
tax credit carryforwards 2,684
Total deferred tax assets 25,902
Net deferred tax liability $ 3,183
The cumulative effect of the change in accounting increased net
income by $1.7 million, or $.12 per share.
During the first quarter of fiscal 1994, the Company also adopted
the provisions of Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity
Securities" ("Statement 115").
Statement 115 requires the Company to mark certain of its
investments to market either through the income statement or
directly to common shareholders' equity, depending on the nature
of the investment. The impact on the Company's financial
statements from the adoption of Statement 115 was not material.
(5) As previously reported, the Company is investigating and
evaluating various alternatives for treatment and disposal of
radioactive contaminated baghouse dust stored at Newport Steel
Corporation (Newport) stemming from two separate incidents in
1993 and 1992 in which a radioactive substance was accidently
melted in Newport's melt shop operations. A final determination
as to disposal methodology and cost and further regulatory
requirements cannot be made at this time. Depending on the
ultimate method of disposal, which will require appropriate
federal and state regulatory approval, the actual cost of
disposal could substantially exceed current recorded reserve
estimates and the Company's insurance coverage. Based on current
knowledge, management believes the recorded reserves for disposal
costs pertaining to the 1993 and 1992 incidents of $4.4 million
are adequate and the ultimate outcome will not have a material
adverse effect on the Company's consolidated financial position;
however, the impact on the Company's consolidated results of
operations for a given year could be material.
NS GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company operates in two separate business segments. Within
the specialty steel products segment are the operations of
Newport Steel Corporation (Newport), a manufacturer of welded
tubular steel products; Koppel Steel Corporation (Koppel), a
manufacturer of seamless tubular steel, hot-rolled bar and semi-
finished steel products; and Erlanger Tubular Corporation
(Erlanger), a pipe finishing operation. Within the adhesives
segment are the operations of Imperial Adhesives, Inc.
(Imperial), a manufacturer of industrial adhesives products.
Reference is made to Note 2 to the Condensed Consolidated
Financial Statements included herein concerning the Company's
sale of Kentucky Electric Steel Corporation (KES) in early
October, 1993. The following discussion includes the results of
operations of KES for the comparative prior year periods.
Results of Operations
The Company's sales and operating results for the three and six
month periods ended March 26, 1994 and March 27, 1993 were as
follows ($000's):
Three Months Ended Six Months Ended
March 26, March 27, March 26, March 27,
1 9 9 4 1 9 9 3 1 9 9 4 1 9 9 3
Net sales:
Specialty steel
segment
Excluding KES $58,347 $57,123 $122,109 $109,316
KES - 22,932 - 42,280
58,347 80,055 122,109 151,596
Adhesives segment 7,665 6,680 15,862 12,918
Total $66,012 $86,735 $137,971 $164,514
Operating income
(loss):
Specialty steel
segment
Excluding KES $(3,746) $ 179 $ (1,593) $ (1,047)
KES - 2,677 - 4,449
(3,746) 2,856 (1,593) 3,402
Adhesives segment 131 222 372 374
Corporate allocations
and income (850) (788) (1,433) (1,308)
Total $(4,465) $ 2,290 $ (2,654) $ 2,468
Consolidated net sales for the second quarter of fiscal 1994
decreased $20.7 million, or 23.9% from the comparable fiscal 1993
quarter, to $66.0 million. For the six month comparable period,
consolidated net sales decreased $26.5 million, or 16.1%, to
$138.0 million.
The specialty steel products segment net sales, excluding KES,
increased $1.2 million, or 2.1% and $12.8 million, or 11.7% for
the three and six month periods, respectively. Total specialty
steel product net sales declined $21.7 million, or 27.1% and
$29.5 million, or 19.5% for the three and six month periods,
respectively, due to the sale of KES in the first quarter of
fiscal 1994. The adhesives segment net sales increased $985,000,
or 14.7% and $2.9 million, or 22.8% for the three and six month
periods, respectively.
Newport/Erlanger sales decreased $6.1 million, or 19.1% on a
volume decline of 23.4%, and $7.9 million, or 12.0% on a volume
decline of 15.5% for the comparable three and six month periods,
respectively. Shipments declined in the second quarter primarily
as a result of customers' resistance to announced price increases
that ultimately failed to take hold. In addition, severe winter
weather conditions impacted negatively upon shipments. Overall,
average selling prices for Newport's welded tubular products have
increased 6.0% from the comparable second quarter of a year ago
and 1.4% from fiscal 1994's first quarter. Koppel's second
quarter seamless tubular sales were virtually unchanged from a
year ago, while six month sales increased $6.5 million, or 24.2%
on a 22.5% volume increase over the prior year. Steel bar sales,
excluding KES, increased $7.3 million, or 80.1% on a volume
increase of 59% and $14.1 million, or 84.8% on a volume increase
of 63.4% for the three and six month periods, respectively.
Steel bar product prices increased approximately 13% for the
three and six month periods. Steel bar product volume and prices
have increased as a result of stronger user markets over the
prior year.
The Company's steel scrap costs on a per ton basis have increased
approximately 40% for the first six months over the comparable
prior year period. The Company has recovered a portion of the
increase through higher selling prices for its steel bar
products; however, it has been significantly less successful in
increasing tubular product sales prices. In addition, the
average number of oil and gas drilling rigs in operation in the
United States declined by approximately 13% during the first six
months of fiscal 1994. This decline, combined with an influx of
foreign product, has resulted in further tubular pricing
pressure. Additional price increases and improvements in tubular
product shipments will continue to be highly dependent on the
level of drilling activity in the U.S. and abroad as well as the
level of activity in the steel industry and the general state of
the economy.
The increase in the adhesives segment sales over the prior year
periods are primarily the result of the growth and development of
product lines acquired over the past year.
Consolidated operating income decreased $6.8 million from a $2.3
million profit in the second quarter of fiscal 1993 to a loss of
$4.5 million in the current quarter. For the six months,
consolidated operating income decreased $5.1 million, from a
profit of $2.5 million in fiscal 1993 to a loss of $2.7 in the
first six months of fiscal 1994. The sale of KES accounted for
$2.7 million and $4.4 million of the decline in operating profits
for the three and six month periods, respectively. The remaining
decrease in operating profits was primarily attributable to a
decline in production and shipments of welded tubular products.
Newport/Erlanger incurred operating losses of $5.1 million and
$6.1 million for the fiscal 1994 three and six month periods,
respectively, compared to operating losses of $845,000 and
$316,000 for the comparable periods of a year ago. The decreases
from the prior year periods were primarily attributable to the
decline in shipments, increased maintenance costs due to the
severe winter weather and higher steel scrap costs as discussed
above. Koppel earned an operating profit of $1.4 million and
$4.5 million for the current quarter and six month periods,
respectively, compared to a profit of $1.0 million and a loss of
$731,000 for the comparative prior year periods. The
improvements were primarily attributable to improved operating
efficiencies due to greater production and sales volumes,
particularly steel bar products, as discussed above, partially
offset by increased steel scrap costs from the prior year
periods. Imperial earned an operating profit of $131,000 and
$372,000 for the three and six month periods, respectively,
compared to $222,000 and $374,000 for the comparative periods of
a year ago. The decline in profit for the second quarter
comparative periods was primarily the result of costs associated
with the consolidation of certain manufacturing processes and
product lines.
Interest expense for the fiscal 1994 three and six month periods
declined $257,000 and $554,000, respectively, from the comparable
periods of a year ago primarily as a result of a decrease in
long-term debt obligations. Interest income increased $327,000
and $705,000 from the prior year three and six month periods,
respectively, primarily due to interest earnings on the proceeds
from the sale of KES.
The sale of KES in the first quarter resulted in a pre-tax gain
of $35.3 million and increased net income and earnings per common
share by $21.5 million and $1.56, respectively. See Note 2 to
the Condensed Consolidated Financial Statements included herein.
In the first quarter of fiscal 1994, the Company recorded an
increase to net income of $1.7 million, or $.12 per share, for
the cumulative effect of the adoption of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". See
Note 4 to the Condensed Consolidated Financial Statements
included herein.
Liquidity and Capital Resources
Working capital at March 26, 1994 was $53.4 million compared to
$39.1 million at September 25, 1993. The current ratio was 1.64
to 1 compared to 1.45 to 1. These increases are primarily due to
the Company's improved liquidity resulting from the sale of KES.
At March 26, 1994, the Company had cash and short-term
investments totaling $50.9 million compared to $9.3 million at
September 25, 1993. At March 26, 1994, the Company had unused
aggregate lines of credit available for borrowing of $3.3
million, of which $2.8 million was restricted for use at Koppel,
with the remainder available for general corporate purposes.
Cash flow used in operating activities totaled $5.8 million in
the first six months of fiscal 1994, compared to a $2.3 million
used in the prior year. The increase in cash used in operating
activities, before the effect of the sale of KES and the adoption
of Statement 109 was primarily attributable to a $1.6 million
increase in net loss as compared to the prior year and an
increase in inventories, partially offset by a decrease in
accounts receivable due to the decline in welded tubular sales
during the quarter.
The increase in inventories was the result of unusually low
levels at fiscal year end, partially due to the fiscal 1993
fourth quarter shutdown at Newport. The increase in accrued
liabilities is primarily attributable to an increase in accrued
income taxes related to the gain on the sale of KES.
Net cash flows from investing activities was $9.0 million for the
first six months of fiscal 1994. As a result of the sale of KES,
the Company received $45.6 million in cash and $4.8 million in
common stock of the new entity. In addition, the Company
received $6.8 million in cash from the new entity in satisfaction
of a dividend declared by KES prior to the sale. A portion of
the cash proceeds have been utilized to fund the current
quarter's operating losses. Remaining cash proceeds are invested
in short-term marketable securities.
The Company made payments on long-term debt of $3.7 million
during the first six months and increased its borrowings under
its lines of credit by $1.3 million since the 1993 fiscal year
end. The Company believes that its current available cash
position together with its cash flow from operations and
borrowing sources will be sufficient to meet its anticipated
operating cash requirements, including capital expenditures, for
at least the next twelve months.
PART II -- OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security-Holders
The annual meeting of shareholders was held on February 17, 1994.
In connection with the meeting, proxies were solicited pursuant
to the Securities Exchange Act. The following are the voting
results on proposals considered and voted upon at the meeting,
all of which were described in the proxy statement.
1. All nominees for director were elected. The vote was as
follows:
For Withheld
Clifford R. Borland 11,959,026 25,279
Ronald R. Noel 11,959,026 25,279
John B. Lally 11,959,526 24,779
Patrick J. B. Donnelly 11,959,526 24,779
R. Glen Mayfield 11,959,526 24,779
2. The proposal to ratify the Board of Directors' appointment of
Arthur Andersen & Co. as the Company's independent public
accountants for its fiscal year ending September 24, 1994 was
approved (For, 11,940,897; Against, 26,859; Abstain, 16,549).
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits - None.
b) Reports on Form 8-K - None.
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.
NS GROUP, INC.
Date: May 5, 1994 By: /s/Clifford R. Borland
Clifford R. Borland
President
Date: May 5, 1994 By: /s/John R. Parker
John R. Parker
Vice President and Treasurer
