SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 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 December 25, 1993
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 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 13,802,363
(Class) (Outstanding at January 31, 1994)
NS GROUP, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1 -- Financial Statements
Condensed Consolidated Balance Sheets . . . . . . . . 3
Condensed Consolidated Statements of Income . . . . . 4
Condensed Consolidated Statements of Cash Flows . . . 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 -- Management's Discussion and Analysis of
Financial Condition and Results of
Operations . . . . . . . . . . . . . . . 9
PART II OTHER INFORMATION
Item 6 -- Exhibits and Reports on Form 8-K . . . . 13
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 25, 1993 AND SEPTEMBER 25, 1993
(Dollars in thousands)
(Unaudited)
December 25, September 25,
1 9 9 3 1 9 9 3
CURRENT ASSETS
Cash and cash equivalents $ 10,531 $ 5,797
Short-term investments 53,576 3,457
Accounts receivable, less allow-
ance for doubtful accounts of
$597 and $819, respectively 33,628 48,602
Inventories 36,515 41,691
Other current assets 19,770 27,175
Total current assets 154,020 126,722
PROPERTY, PLANT AND EQUIPMENT 256,479 265,093
Less - Accumulated depreciation (92,514) (91,627)
163,965 173,466
OTHER ASSETS 21,683 17,054
TOTAL ASSETS $339,668 $317,242
CURRENT LIABILITIES
Notes payable $ 30,560 $ 26,967
Accounts payable 25,575 28,300
Other current liabilities 26,573 23,263
Current portion of long-term debt 8,098 9,132
Total current liabilities 90,806 87,662
LONG-TERM DEBT 151,068 156,056
DEFERRED TAXES 12,808 10,902
COMMON SHAREHOLDERS' EQUITY
Common stock, no par value, 40,000,000
shares authorized; 13,795,013 and
13,696,104 shares issued and
outstanding, respectively 48,926 48,284
Common stock options and warrants 219 208
Retained earnings 35,841 14,130
Total common shareholders' equity 84,986 62,622
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $339,668 $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 PERIODS ENDED
DECEMBER 25, 1993 AND DECEMBER 26, 1992
(Dollars in thousands, except per share amounts)
(Unaudited)
DECEMBER 25, DECEMBER 26,
1 9 9 3 1 9 9 2
NET SALES $ 71,959 $ 77,779
COST AND EXPENSES
Cost of products sold 64,168 70,413
Selling and administrative
expenses 5,980 7,188
Operating income 1,811 178
OTHER INCOME (EXPENSE)
Gain on sale of subsidiary 35,292 -
Interest expense (5,011) (5,308)
Interest income 459 81
Other, net 553 (18)
Income (loss) before income taxes and
cumulative effect of a change in the
method of accounting for income taxes 33,104 (5,067)
PROVISION (CREDIT) FOR INCOME TAXES 13,078 (1,712)
Income (loss) before cumulative
effect of a change in accounting
principle 20,026 (3,355)
CUMULATIVE EFFECT, AS OF SEPTEMBER 25,
1993, OF A CHANGE IN THE METHOD OF
ACCOUNTING FOR INCOME TAXES 1,715 -
Net income (loss) $ 21,741 $ (3,355)
PER COMMON SHARE
Income (loss) before cumulative effect
of a change in accounting principle $1.46 $(.25)
Cumulative effect of a change in the
method of accounting for income taxes .12 -
Net income (loss) $1.58 $(.25)
WEIGHTED AVERAGE SHARES OUTSTANDING 13,742,596 13,508,442
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 THREE MONTH PERIODS ENDED
DECEMBER 25, 1993 AND DECEMBER 26, 1992
(Dollars in thousands)
(Unaudited)
DECEMBER 25, DECEMBER 26,
1 9 9 3 1 9 9 2
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 21,741 $ (3,355)
Adjustments to reconcile net income
(loss) to net cash flows from
operating activities:
Depreciation and amortization 4,661 4,698
Increase (decrease) in deferred
taxes 1,906 (1,705)
Gain on sale of subsidiary (35,292) -
Decrease in accounts
receivable, net 1,102 2,321
Increase in inventories (7,393) (1,184)
(Increase) decrease in other
current assets 2,332 (277)
Increase (decrease) in accounts
payable 4,045 (3,767)
Increase (decrease) in accrued
liabilities 7,643 (857)
Net cash flows from operating
activities 745 (4,126)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of subsidiary 50,426 -
Cash dividend from sold subsidiary 6,818 -
Increase in property, plant &
equipment, net (1,242) (1,853)
Increase in other assets (4,777) (142)
(Increase) decrease in short-term
investments (50,119) 352
Net cash flows from investing
activities 1,106 (1,643)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in notes payable 3,593 5,710
Proceeds from issuance of long-term
debt 431 576
Repayments on long-term debt (1,733) (2,374)
Increase in deferred financing
costs (50) (14)
Proceeds from issuance of common
stock 642 15
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED
DECEMBER 25, 1993 AND DECEMBER 26, 1992
(Dollars in thousands)
(Unaudited)
DECEMBER 25, DECEMBER 26,
1 9 9 3 1 9 9 2
Net cash flows from financing
activities 2,883 3,913
Net increase (decrease) in
cash and cash equivalents 4,734 (1,856)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 5,797 8,714
CASH AND CASH EQUIVALENTS AT END OF
PERIOD $10,531 $ 6,858
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest $ 4,959 $ 4,548
Income taxes $ - $ -
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 are currently invested in
short-term marketable securities.
The sale of KES resulted in a pre-tax gain of $35.3 million in
the fiscal 1994 first quarter and increased net income and
earnings per common share by $21.5 million and $1.57,
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 December 25, 1993 and September 25, 1993, inventories
stated at the lower of LIFO (last-in, first-out) cost or market
represent approximately 38% and 23% of total inventories before
the LIFO reserve, respectively. Inventories consist of the
following components ($000's):
DECEMBER 25, SEPTEMBER 25,
1 9 9 3 1 9 9 3
Raw materials $ 7,015 $ 5,736
Semi-finished and
finished goods 31,515 37,830
38,530 43,566
LIFO reserve (2,015) (1,875)
$36,515 $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 for the three months ended December 25, 1993 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
1992 and 1993 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 period.
Results of Operations
The Company's sales and operating results for the three month
periods ended December 25, 1993 and December 26, 1992 were as
follows ($000's):
DECEMBER 25, DECEMBER 26,
1 9 9 3 1 9 9 2
Net Sales:
Specialty steel segment
Excluding KES $63,762 $52,193
KES - 19,348
63,762 71,541
Adhesives segment 8,197 6,238
Total $71,959 $77,779
Operating income (loss):
Specialty steel segment
Excluding KES $ 2,153 $(1,226)
KES - 1,772
2,153 546
Adhesives segment 241 152
Corporate allocations and
income (583) (520)
Total $ 1,811 $ 178
Consolidated net sales for the first quarter of fiscal 1994
decreased $5.8 million, or 7.5% from the comparable fiscal 1993
quarter, to $72.0 million. The specialty steel products segment
net sales, excluding KES, increased $11.6 million, or 22.2%,
while total specialty steel product net sales decreased $7.8
million, or 10.9%, due to the sale of KES in the first quarter of
fiscal 1994. The adhesives segment net sales increased $2.0
million, or 31.4% from the comparable fiscal 1993 quarter.
Newport/Erlanger sales decreased $1.8 million, or 5.3% on a
volume decline of 7.8%. The decrease in shipments was due in
large part to greater drilling activity in the prior year
comparable quarter which was stimulated by the impending
expiration of tax credits for natural gas drilling. Average
selling prices for all welded tubular products increased
approximately 4% from the prior year comparative quarter despite
being negatively impacted by a less favorable sales product mix.
Koppel's seamless tubular sales increased $6.5 million, or 58% on
a volume increase of 49.6%. Steel bar products sales, excluding
KES, increased $6.8 million, or 90.5% on a volume increase of
68.6%. Overall seamless tubular and steel bar selling prices
increased approximately 6% and 13%, respectively, from the prior
year comparative quarter.
Scrap raw material costs on a per ton basis have increased
approximately 40% over the first quarter of a year ago. 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 in the current quarter
declined approximately 3% from the first quarter of 1993 and has
continued to decline into the fiscal 1994 second quarter,
resulting in further tubular pricing pressure. Additional price
increases and improvements in 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 adhesives segment sales increased $2.0 million, or 31.4% from
the first quarter of a year ago primarily the result of the
growth and development of product lines acquired over the past
year.
Consolidated operating income increased $1.6 million, from
$178,000 in the first quarter of fiscal 1993 to $1.8 million in
the current quarter. The increase was primarily attributable to
improvements within the specialty steel segment.
Newport/Erlanger incurred an operating loss of $981,000 compared
to an operating profit of $529,000 in the first quarter of fiscal
1993. The decrease was primarily attributable to the decline in
shipments and higher scrap raw material costs as discussed above.
Koppel earned an operating profit of $3.1 million in the current
quarter versus an operating loss of $1.8 million for the
comparable period of a year ago. The improvement was primarily
attributable to improved operating efficiencies due to greater
production and sales volumes, as discussed above, partially
offset by increased scrap raw material costs. Imperial earned an
operating profit of $241,000 compared to $152,000 for the first
quarter of fiscal 1993. The increase was primarily related to
increased sales volumes and operating efficiencies.
Interest expense decreased by $297,000 from the first quarter of
fiscal 1993 primarily as a result of a decrease in long-term debt
obligations. Interest income increased $378,000 from the first
quarter of fiscal 1993 primarily due to interest earnings on the
proceeds from the sale of KES. Included in the caption "Other
Income (Expense) - Other, net" for the current quarter is
$327,000 in insurance proceeds received in excess of amounts
previously recorded as receivable at fiscal 1993 year end
pertaining to Newport's contaminated dust clean up and disposal
costs.
The sale of KES resulted in a pre-tax gain in the current quarter
of $35.3 million and increased net income and earnings per common
share by $21.5 million and $1.57, 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". Also
see Note 4 to the Condensed Consolidated Financial Statements
included herein.
Liquidity and Capital Resources
Working capital at December 25, 1993 was $63.2 million compared
to $39.1 million at September 25, 1993. The current ratio was
1.70 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 December 25, 1993, the Company had cash and short-
term investments totaling $64.1 million compared to $9.3 million
at September 25, 1993. At December 25, 1993, the Company had
unused aggregate lines of credit available for borrowing of $4.9
million, of which $3.4 million was restricted for use at Koppel,
with the remainder available for general corporate purposes.
Cash flows from operating activities was $745,000 in the first
quarter of fiscal 1994, compared with a $4.1 million use in the
prior year quarter. The improvement in operating cash flow,
before the effect of the sale of KES and the adoption of
Statement 109 was primarily attributable to a $1.9 million
reduction in net loss as compared to the prior year; a decrease
in other current assets resulting from the sale of land held for
development; and an increase in accounts payable which was
substantially offset by an increase in inventories. The increase
in inventories and accounts payable were 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 includes approximately $8.9 million in accrued income
taxes related to the gain on the sale of KES.
Net cash flows from investing activities was $1.1 million for the
quarter. 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. Cash proceeds of $50.1 million were invested
in short-term marketable securities during the quarter.
The Company made payments on long-term debt of $1.7 million
during the quarter and increased its borrowings under its lines
of credit since 1993 fiscal year end by $3.6 million. 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 6. Exhibits and Reports on Form 8-K
a) Exhibits - None.
b) Reports on Form 8-K - Current Report on Form
8-K dated October 6, 1993 and filed November
24, 1993 reporting under Item 2 the Company's
sale of all of the assets and liabilities of
its wholly-owned subsidiary, Kentucky Electric
Steel Corporation; under Item 7(b) the unaudited
proforma condensed balance sheet dated September
25, 1993 and the unaudited proforma condensed
statement of income for the year ended
September 25, 1993, and; under Item 7(c) certain
agreements related to the sale.
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: February 3, 1994 By: /s/Clifford R. Borland
Clifford R. Borland
President
Date: February 3, 1994 By: /s/John R. Parker
John R. Parker
Vice President and Treasurer
