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
April 1, 1995
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 13,803,684
(Class) (Outstanding at May 8, 1995)
NS GROUP, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1 -- Financial Statements
Condensed Consolidated Balance Sheets . . . . . . . . 3
Condensed Consolidated Statements of Operations . . . 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 . . . . . . . . . . . . . . . 10
PART II OTHER INFORMATION
Item 1 -- Legal Proceedings . . . . . . . . . . . . 20
Item 4 -- Submission of Matters to a Vote of
Security-Holders . . . . . . . . . . . . 20
Item 6 -- Exhibits and Reports on Form 8-K . . . . 20
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF APRIL 1, 1995 AND SEPTEMBER 24, 1994
(Dollars in thousands)
(Unaudited)
April 1, September 24,
1 9 9 5 1 9 9 4
CURRENT ASSETS
Cash and cash equivalents $ 1,350 $ 4,405
Short-term investments 20,082 40,071
Accounts receivable, less
allowance for doubtful accounts
of $503 and $637,respectively 49,050 42,651
Inventories 45,624 32,290
Other current assets 19,647 16,793
Total current assets 135,753 136,210
PROPERTY, PLANT AND EQUIPMENT 270,038 262,721
Less - accumulated depreciation (111,569) (102,182)
158,469 160,539
OTHER ASSETS 18,391 18,578
Total assets $312,613 $315,327
CURRENT LIABILITIES
Notes payable $ 29,913 $ 28,872
Accounts payable 33,454 27,312
Other current liabilities 19,375 19,281
Current portion of long-term debt 17,505 15,543
Total current liabilities 100,247 91,008
LONG-TERM DEBT 126,395 138,110
DEFERRED TAXES 9,607 9,745
COMMON SHAREHOLDERS' EQUITY
Common stock, no par value,
40,000,000 shares authorized;
13,762,013 shares issued and
outstanding 48,988 48,988
Common stock options and warrants 291 262
Unrealized gain (loss) on available
for sale securities (775) (124)
Retained earnings 27,860 27,338
Total common shareholders'
equity 76,364 76,464
Total liabilities and
shareholders' equity $312,613 $315,327
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED
APRIL 1, 1995 AND MARCH 26, 1994
(Dollars in thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
April 1, March 26, April 1, March 26,
1995 1994 1995 1994
NET SALES $ 97,055 $ 66,012 $ 190,544 $137,971
COST AND EXPENSES
Cost of products
sold 86,910 64,181 168,909 128,349
Selling and
administrative
expenses 6,688 6,296 13,620 12,276
Operating income
(loss) 3,457 (4,465) 8,015 (2,654)
OTHER INCOME
(EXPENSE)
Gain on sale of
subsidiary - - - 35,292
Interest expense (4,938) (5,068) (10,294) (10,079)
Interest income 388 388 920 847
Other, net 1,819 70 2,208 623
Income (loss)
before income
taxes and
cumulative effect
of a change in
accounting
principle 726 (9,075) 849 24,029
PROVISION (CREDIT)
FOR INCOME TAXES 279 (3,492) 327 9,586
Income (loss)
before cumulative
effect of a change
in accounting
principle 447 (5,583) 522 14,443
CUMULATIVE EFFECT,
AS OF SEPTEMBER 25,
1993, OF A CHANGE
IN THE METHOD OF
ACCOUNTING FOR INCOME
TAXES - - - 1,715
Net income (loss) $ 447 $ (5,583) $ 522 $16,158
PER COMMON SHARE
Income (loss)
before cumulative
effect of a change
in accounting
principle $ .03 $(.40) $ .04 $1.05
Cumulative effect
of a change in the
method of accounting
for income taxes - - - .12
Net income (loss) $ .03 $(.40) $ .04 $1.17
WEIGHTED AVERAGE SHARES
OUTSTANDING (000's) 13,795 13,802 13,803 13,772
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
APRIL 1, 1995 AND MARCH 26, 1994
(Dollars in thousands)
(Unaudited)
APRIL 1, MARCH 26,
1 9 9 5 1 9 9 4
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 522 $16,158
Adjustments to reconcile net
income to net cash flows from
operating activities:
Depreciation and amortization 9,695 9,307
Increase (decrease) in deferred
taxes 261 (1,325)
Gain on sale of subsidiary - (35,292)
(Increase) decrease in accounts
receivable, net 6,399) 1,614
Increase in inventories (13,334) (5,988)
(Increase) decrease in other
current assets (2,854) 4,380
Increase in accounts payable 6,142 647
Increase (decrease) in accrued
liabilities 94 4,675
Net cash flows from operating
activities (5,873) (5,824)
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 (7,317) (3,655)
Increase in other assets (324) (4,818)
(Increase) decrease in short-term
investments 19,989 (39,761)
Net cash flows from investing
activities 12,348 9,010
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in notes payable 1,041 1,317
Proceeds from issuance of
long-term debt - 431
Repayments on long-term debt (9,753) (3,683)
Increase in deferred financing
costs (818) (50)
Proceeds from issuance of
common stock - 682
Net cash flows from
financing activities (9,530) (1,303)
Net increase (decrease) in
cash and cash equivalents (3,055) 1,883
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 4,405 5,797
CASH AND CASH EQUIVALENTS AT END
OF PERIOD $ 1,350 $ 7,680
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest $12,059 $ 9,460
Income taxes $ 724 $ 2,530
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)
Note 1: Principles of Consolidation
The condensed consolidated financial statements include
the accounts of NS Group, Inc. and its wholly-owned
subsidiaries (the Company): Newport Steel Corporation
(Newport), Koppel Steel Corporation (Koppel), Erlanger
Tubular Corporation (Erlanger), Imperial Adhesives, Inc.
(Imperial), Northern Kentucky Management, Inc., Northern
Kentucky Air, Inc. and NSub I, Inc., formerly known as
Kentucky Electric Steel Corporation (KES). 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/A for the fiscal year ended
September 24, 1994 for additional footnote disclosure,
including a summary of significant accounting policies.
In the first quarter of fiscal 1995, the Company
adopted the provision of Statement of Financial Accounting
Standards No. 112, "Employers' Accounting for Postemployment
Benefits" (Statement 112). The impact on the Company's
financial statements from the adoption of Statement 112 was
not material.
The Company's fiscal year ends on the last Saturday of
September. The first quarter and six month periods of
fiscal 1995 and 1994 are 14 and 13 week and 27 and 26 week
periods, respectively.
Note 2: Inventories
At April 1, 1995 and September 24, 1994, inventories
stated at the lower of LIFO (last-in, first-out) cost or
market represent approximately 39% and 27% of total
inventories before the LIFO reserve, respectively.
Inventories consist of the following components ($000's):
APRIL 1, SEPTEMBER 24,
1 9 9 5 1 9 9 4
Raw materials $ 8,615 $ 6,699
Semi-finished and
finished goods 39,248 27,695
47,863 34,394
LIFO reserve (2,239) (2,104)
$45,624 $32,290
Note 3: Other Current Assets
Included in other current assets at April 1, 1995 are
receivables for various insurance claims aggregating
approximately $6.3 million.
Note 4: Commitments and Contingencies
The Company has various commitments for the purchase of
materials, supplies and energy arising in the ordinary
course of business.
As previously reported, Newport was named as a co-
defendant in a claim for breach of implied warranty in the
United States District Court for the Southern District of
Texas arising from the failure of two joints of welded pipe
during testing of an offshore pipeline. Subsequent to the
end of the fiscal 1995 second quarter, the Company reached a
settlement for an amount significantly less than the
plaintiff's original claim and the litigation was dismissed.
The Company is subject to various claims, lawsuits and
administrative proceedings arising in the ordinary course of
business with respect to commercial, product liability and
other matters, which seek remedies or damages. Based upon
its evaluation of available information, management does not
believe that any such matters, including the above-mentioned
settlement, are likely, individually or in the aggregate, to
have a material adverse effect upon the Company's
consolidated financial position, results of operations or
cash flows.
The Company is subject to federal, state and local
environmental laws and regulations, including, among others,
the Resource Conservation and Recovery Act (RCRA), the Clean
Air Act, the 1990 Amendments to the Clean Air Act (the 1990
Amendments), the Clean Water Act and all regulations
promulgated in connection therewith, including those
concerning the discharge of contaminants as air emissions or
waste water effluents and the disposal of solid and/or
hazardous wastes such as electric arc furnace dust. As
such, the Company is from time to time involved in
administrative and judicial proceedings and administrative
inquiries related to environmental matters.
As with similar mills in the industry, the Company's
steel mini-mills produce dust which contains lead, cadmium
and chromium, which is classified as a hazardous waste. The
Company currently collects the dust resulting from its
electric arc furnace operations through emission control
systems and contracts with a company for treatment and
disposal of the dust at an EPA-approved facility. The
Company also has on its property at Newport a permitted
hazardous waste disposal facility.
In separate incidents occurring in fiscal 1992 and
1993, radioactive substances were accidentally melted at
Newport, resulting in the contamination of the melt shop's
electric arc furnace emission control facility, or "baghouse
facility". The occurrences of the accidental melting of
radioactive materials have not resulted in any notice of
violations from federal or state environmental regulatory
agencies. The Company is investigating and evaluating
various issues concerning storage, treatment and disposal of
the radiation contaminated baghouse dust; however a final
determination as to method of treatment and disposal, cost
and further regulatory requirements cannot be made at this
time. Depending on the ultimate timing and method of
treatment and disposal, which will require appropriate
federal and state regulatory approval, the actual cost of
disposal could substantially exceed current estimates and
the Company's insurance coverage. As of April 1, 1995,
claims recorded in connection with disposal costs exhaust
available insurance coverage. Based on current knowledge,
management believes the recorded gross reserves of $4.4
million for disposal costs pertaining to these incidents are
adequate.
In March 1995, Koppel and the EPA signed a Consent
Order relating to an April 1990 RCRA facility assessment
(the Assessment) completed by the EPA and the Pennsylvania
Department of Environmental Resources. The Assessment was
performed in connection with a permit application pertaining
to landfill that is adjacent to the Koppel facilities. The
Assessment identified potential releases of hazardous
constituents at or adjacent to the Koppel facilities prior
to the Company's acquisition of the Koppel facilities. The
Consent Order establishes a schedule for investigating,
monitoring, testing and analyzing the potential releases.
Contamination documented as a result of the investigation
may require cleanup measures. Pursuant to various indemnity
provisions in agreements entered into at the time of the
Company's acquisition of the Koppel facilities, certain
parties have agreed to indemnify the Company against various
known and unknown environmental matters. While such parties
have not at this time acknowledged full responsibility for
potential costs under the Consent Order, the Company
believes that the indemnity provisions provide for it to be
fully indemnified against all matters covered by the Consent
Order, including all associated costs, claims and
liabilities.
Subject to the uncertainties concerning the Consent
Order and the storage and disposal of the radiation
contaminated dust, the Company believes that it is currently
in compliance with all known material and applicable
environmental regulations.
Regulations under the 1990 Amendments to the Clean Air
Act that will pertain to the Company's operations are
currently not expected to be promulgated until 1997 or
later. The Company cannot predict the level of required
capital expenditures or operating costs resulting from
future environmental regulations such as those forthcoming
as a result of the 1990 Amendments. However, the Company
believes that while the 1990 Amendments may require
additional expenditures, such expenditures will not have a
material impact on the Company's business or consolidated
financial position for the foreseeable future.
Capital expenditures for fiscal 1995 relating to
environmental control facilities are not expected to be
material, however, such expenditures could be influenced by
new and revised environmental regulations and laws.
As of April 1, 1995, the Company had environmental
remediation reserves of $4.7 million of which $4.4 million
pertain to accrued disposal costs for radiation contaminated
baghouse dust. As of April 1, 1995, the possible range of
estimated losses related to the environmental contingency
matters discussed above in excess of those accrued by the
Company is $0 to $3.0 million; however, with respect to the
Consent Order, the Company cannot estimate the possible
range of losses should the Company ultimately not be
indemnified. Based upon its evaluation of available
information, management does not believe that any of the
environmental contingency matters discussed above are
likely, individually or in the aggregate, to have a material
adverse effect upon the Company's consolidated financial
position, results of operations or cash flows. However,
the Company cannot predict with certainty that new
information or developments with respect to the Consent
Order or its other environmental contingency matters,
individually or in the aggregate, will not have a material
adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
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:
specialty steel and industrial adhesives. Within the
specialty steel segment are the operations of Newport, a
manufacturer of welded tubular steel products and hot rolled
coils; Koppel, a manufacturer of seamless tubular steel
products, special bar quality (SBQ) products and
semi-finished steel products; and Erlanger, a tubular steel
product finishing operation. The Company's specialty steel
products consist of: (i) seamless and welded oil country
tubular goods (OCTG) primarily used in oil and natural gas
drilling and production operations; (ii) line pipe used in
the transmission of oil, gas and other fluids; (iii) SBQ
products primarily used in the manufacture of heavy
industrial equipment; and (iv) hot rolled coils which are
sold to service centers and other manufacturers for further
processing. Within the adhesives segment are the operations
of Imperial, a manufacturer of industrial adhesives
products.
In October 1993, the Company sold KES, a manufacturer
of SBQ products, to a newly formed public company in
exchange for $45.6 million in cash and 400,000 shares
(approximately 8%) of the newly formed public company, then
valued at $4.8 million. Reference is made to Note 2 to the
audited annual Consolidated Financial Statements included in
the Company's Form 10-K, as amended, for the fiscal year
ended September 24, 1994 concerning the Company's sale of
KES.
Results of Operations
The Company's net sales, cost of products sold and
operating results by industry segment for the three and six
month periods ended April 1, 1995 and March 26, 1994 are
summarized below. The first quarters of fiscal 1995 and
1994 are 14 and 13 week periods, respectively. As such, the
increases and decreases in operating results for the six
month comparative periods, as discussed below, were
partially attributable to the additional week of operations
in the first quarter of fiscal 1995.
Three Months Ended Six Months Ended
April 1, March 26, April 1, March 26,
1995 1994 1995 1994
(in thousands of dollars)
Net sales
Specialty steel
segment... $88,227 $58,347 $172,943 $122,109
Adhesives segment. 8,828 7,665 17,601 15,862
$97,055 $66,012 $190,544 $137,971
Cost of products
sold
Specialty steel
segment... $79,932 $58,138 $155,142 $115,955
Adhesives
Segment.. 6,978 6,043 13,767 12,394
$86,910 $64,181 $168,909 $128,349
Operating income
Specialty steel
segment... $ 4,148 $(3,746) $ 9,444 $(1,593)
Adhesives segment 251 131 524 372
Corporate allocations
and income...... (942) (850) (1,953) (1,433)
$ 3,457 $(4,465) $ 8,015 $(2,654)
Sales data for the Company's specialty steel segment
for the three and six month periods ended April 1, 1995 and
March 26, 1994 were as follows:
Three Months Ended Six Months Ended
April 1, March 26, April 1, March 26,
1995 1994 1995 1994
Tons shipped
Welded tubular.. 78,000 54,600 164,800 121,300
Seamless tubular 29,700 20,200 57,600 40,700
SBQ............. 47,300 37,000 90,200 70,900
Other........... 17,900 7,600 29,900 17,000
172,900 119,400 342,500 249,900
Net sales ($000's)
Welded tubular. $35,487 $23,124 $ 74,238 $ 50,930
Seamless tubular 22,466 15,825 44,252 33,575
SBQ............. 23,808 16,467 43,267 30,813
Other........... 6,466 2,931 11,186 6,791
$88,227 $58,347 $172,943 $122,109
Net sales for the second quarter of fiscal 1995
increased $31.0 million, or 47.0%, from the second quarter
of fiscal 1994 to $97.1 million. For the six month
comparable period, net sales increased $52.6 million, or
38.1%, to $190.5 million. Specialty steel segment net sales
increased $29.9 million, or 51.2% and $50.8 million, or
41.6%, for the three and six month periods, respectively.
Adhesives segment net sales increased $1.2 million, or
15.2%, and $1.7 million, or 11.0%, for the three and six
month periods, respectively. The overall increase in
specialty steel segment net sales was the result of both
higher average selling prices and increased shipment levels
as more fully discussed below.
Welded tubular net sales increased $12.4 million, or
53.5%, on a volume increase of 42.9%, and $23.3 million, or
45.8%, on a volume increase of 35.9%, for the comparable
three and six month periods, respectively. The increase in
welded tubular net sales for the second quarter was due
partially to an overall 7.6% increase in average selling
prices for all welded tubular products and an increase in
shipments of both welded OCTG and line pipe products over
the second quarter of fiscal 1994. Shipments in the second
quarter of fiscal 1994 were abnormally low due to customers'
resistance to announced price increases that ultimately
failed to take hold, as well as severe winter weather
conditions. Fiscal 1995 second quarter average selling
price for welded OCTG products was $501 per ton, an increase
of 7.7% and 2.2% over the second quarter of fiscal 1994 and
the first quarter of fiscal 1995, respectively. Fiscal 1995
second quarter average selling prices for welded line pipe
was $500 per ton, an increase of 8.9% and 5.7% over the
second quarter of a year ago and the first quarter of fiscal
1995, respectively.
Seamless tubular net sales increased $6.6 million, or
42.0%, on a volume increase of 47.0% and $10.7 million, or
31.8%, on a volume increase of 41.5%, for the comparable
three and six month periods, respectively. The increase in
seamless tubular net sales for the second quarter was
partially attributable to an increase in shipments, which
resulted in large part from product line expansion in fiscal
1995. Average selling prices for the second quarter of
fiscal 1995 for all seamless tubular products declined 3.1%
from the second quarter of fiscal 1994, due in part to
changes in product mix, including the introduction of new
OCTG products with lower average selling prices. Fiscal
1995 second quarter average selling prices for all seamless
tubular products declined by 2.8% from the first quarter of
fiscal 1995, due almost entirely to changes in product mix,
primarily the mix of OCTG products. Fiscal 1995 second
quarter average selling price for seamless OCTG products was
$784 per ton, a decline of 4.0% and 2.6% from the second
quarter of fiscal 1994 and the first quarter of fiscal 1995,
respectively. Fiscal 1995 second quarter average selling
price for seamless line pipe products was $617 per ton, an
increase of 4.6% and 9.0% from the second quarter of fiscal
1994 and the first quarter of fiscal 1995, respectively.
Price and volume levels in the domestic tubular market
are primarily dependent on the level of drilling activity in
the United States and abroad, the level of foreign imports,
as well as general economic conditions. According to Baker
Hughes, Inc., the average number of oil and natural gas
drilling rigs in operation in the United States (rig count)
decreased 6.2%, from 760 in the second quarter of fiscal
1994 to 713 in the second quarter of fiscal 1995. The rig
count decreased 13.4% from the first quarter of fiscal 1995.
On June 30, 1994, the Company and six other U.S. steel
companies filed antidumping petitions against imports of
OCTG products from seven foreign nations. The cases ask the
U.S. government to take action to offset injury to the
domestic OCTG industry from unfairly traded imports. The
antidumping petitions were filed against OCTG imports from
Argentina, Austria, Italy, Japan, Korea, Mexico and Spain.
The Company also joined in filing countervailing duty cases
charging subsidization of OCTG imports from Austria and
Italy. In August, 1994, the International Trade Commission
(ITC) voted unanimously that there was reasonable indication
of material injury which warranted further investigation of
the petitions. In December 1994 and January 1995, the
International Trade Administration of the United States
Department of Commerce issued certain favorable preliminary
determinations concerning the existence and extent of
dumping and subsidization and imposed significant
preliminary tariffs on imports from Austria, Italy and Japan
and minor preliminary tariffs on imports from Argentina and
Korea. Final determinations by the Department of Commerce
are expected in the summer of 1995. The United States ITC
will then assess whether dumping and subsidization have
caused or threatened to cause material injury to the United
States OCTG industry. While the Company cannot predict the
outcome of the cases at this time, the Company believes that
a favorable final ruling could have a positive impact on
shipments and selling prices of certain of the Company's
products.
SBQ product net sales increased $7.3 million, or 44.6%,
on a volume increase of 27.8%, and $12.5 million, or 40.4%,
on a volume increase of 27.2%, for the comparable three and
six month periods, respectively. Fiscal 1995 second quarter
average selling price for SBQ product was $503 per ton, an
increase of 13.0% and 10.8% over the second quarter of
fiscal 1994 and the first quarter of fiscal 1995,
respectively. SBQ product volume and prices increased as a
result of stronger market demand in fiscal 1995 as compared
to fiscal 1994. Second quarter selling prices also have
increased as a result of the implementation of surcharges to
recover increases in certain raw material costs. Other
product shipments and sales for the second quarter of fiscal
1995 were primarily attributable to shipments of hot rolled
coils and steel slabs. The increase in shipments was
primarily attributable to stronger market demand for these
products and the sale of approximately 5,500 tons of steel
slab in the fiscal 1995 second quarter versus none in the
prior year quarter. Future levels of shipments and net
sales of SBQ products and hot rolled coils will be largely
dependent on the general state of the economy and the
overall strength of the steel industry.
Gross profit for the second quarter of fiscal 1995
increased $8.3 million from the second quarter of fiscal
1994 for a gross profit margin of 10.5% in fiscal 1995
compared to 2.8% in the second quarter of fiscal 1994. For
the six month comparable period, gross profit increased
$12.0 million for a gross profit margin of 11.4% compared to
7.0% for the first six months of fiscal 1994. The specialty
steel segment accounted for $8.1 million and $11.6 million
of the increase in gross profit for the second quarter and
six month periods, respectively. The increase in specialty
steel segment gross profit and margin was attributable to
improved operating efficiencies resulting from increased
production volume as well as increases in average selling
prices, as discussed above. Gross profit margin for the
fiscal 1995 second quarter declined, however, from a gross
profit margin of 12.3% in the first quarter of fiscal 1995,
due in large part to production and shipment interruptions
caused by the failure and subsequent replacement of a 5000-
HP motor in Newport's hot strip mill as well as increases in
the cost of raw materials over the first quarter of fiscal
1995.
The adhesives segment gross profit increased $0.2
million and $0.4 million for the second quarter and six
month comparable periods, respectively. Gross profit
margins were virtually unchanged for the comparable periods.
Selling and administrative expenses increased $0.4
million and $1.3 million for the second quarter and six
month comparable periods, respectively. Selling and
administrative expenses declined as a percentage of net
sales from 9.5% in the second quarter of fiscal 1994 to 6.9%
in the current quarter and from 8.9% for the fiscal 1994 six
month periods to 7.1% for the current six month period. The
overall increase in selling and administrative expenses was
primarily attributable to increased production and sales
volumes as well as costs accrued in connection with
litigation settled subsequent to the end of the fiscal 1995
second quarter. See "Other Matters - Legal Matters".
As a result of the above factors, operating income
increased $7.9 million, from operating loss of $4.4 million
in the second quarter of fiscal 1994 to operating income of
$3.5 million in the current quarter. For the six month
period, operating income increased $10.7 million, from an
operating loss of $2.7 million in fiscal 1994 to an
operating profit of $8.0 million in the first six months of
fiscal 1995. The specialty steel segment earned an
operating profit of $4.1 million and $9.4 million for the
second quarter and six month periods, respectively, compared
to operating losses of $3.7 million and $1.6 million for the
second quarter and six month periods of fiscal 1994,
respectively. The improvement in operating results from the
prior year periods were primarily due to an overall increase
in shipments, as discussed above, as well as increases in
selling prices and improvements in production efficiencies.
The Company's second quarter operating results were
negatively impacted, however, by production and shipment
interruptions stemming from a motor failure at Newport's hot
strip mill, as discussed above. The adhesives segment
earned an operating profit of $0.3 million and $0.5 million
for the three and six month periods, respectively, compared
to $0.1 million and $0.4 for the comparative periods of a
year ago.
Interest expense was virtually unchanged from the prior
year comparable periods as a decline in interest expense on
long-term obligations was offset by increases in the average
borrowing and interest rates under the Company's short-term
borrowings.
Other income, net was $1.8 million and $2.2 million for
the fiscal 1995 second quarter and six month periods,
respectively, and increased by $1.7 million and $1.6 million
over the prior year comparable periods, respectively,
primarily due to the recording of property claims filed with
the Company's insurance carrier in connection with the motor
failure at Newport in the second quarter.
As a result of the above factors, net income was
$0.4 million, or $.03 per share in the second quarter of
fiscal 1995 compared to a loss of $5.6 million, or a $.40
loss per share in the second quarter of fiscal 1994. For
the six month period, net income was $0.5 million, or $.04
per share compared to $16.2 million, or $1.17 per share.
Fiscal 1994 six month net income includes a one-time after-
tax gain on the sale of KES of $21.5 million, or $1.56 per
share, and income of $1.7 million, or $.12 per share,
relating to the adoption of a new accounting standard.
Liquidity and Capital Resources
Working capital at April 1, 1995 was $35.5 million
compared to $45.2 million at September 24, 1994. The
current ratio at April 1, 1995 was 1.35 to 1 compared to
1.50 to 1 at September 24, 1994. At April 1, 1995, the
Company had cash and short-term investments totaling $21.4
million compared to $44.5 million at September 24, 1994. At
April 1, 1995, the Company had aggregate lines of credit
available for borrowing of $34.9 million, including a $16.2
million line of credit restricted for use at Koppel, of
which a total of $29.9 million was outstanding. These lines
have interest rates ranging from 1/2% to 1 1/2% over prime
and expire in fiscal 1995 and 1996. At April 1, 1995,
approximately $8.7 million in cash and short-term
investments were restricted, primarily in connection with
cash collateralized letters of credit. The Company is
currently negotiating an expansion of its existing credit
facilities. There can be no assurance that a new facility
will be entered into, however; the Company believes that it
will have sufficient credit facilities to meet its working
capital needs for the next twelve months.
Net cash flow used in operating activities totaled $5.9
million in the first six months of fiscal 1995, compared to
$5.8 million used in the comparable prior year period. The
Company recorded net income of $0.5 million in the first six
months of fiscal 1995 compared to a fiscal 1994 six month
net loss of $7.1 million before the effect of the sale of
KES and a change in accounting principle. Major uses of
cash in operating activities for fiscal 1995 included a $6.4
million increase in trade accounts receivable and a $13.3
million increase in inventories resulting from an increase
in business activity and, for the increase in inventories,
unusually low levels at fiscal year end due to scheduled
maintenance outages at Newport. Other current assets
increased $2.9 million primarily due to the recording of
various insurance claims. Offsetting these uses were $9.7
million in non-cash depreciation charges and $6.1 million
resulting from an increase in accounts payable. Accounts
payable increased primarily due to the increase in
inventories and a general increase in business activities.
Fiscal 1994 six month cash flows from operating
activities, before the effect of the sale of KES and the
change in accounting principle, were primarily impacted by
an increase in inventories, offset by a decrease in trade
accounts receivable and other current assets and an increase
in accrued liabilities. The increase in inventories was the
result of unusually low levels at the end of fiscal 1993,
due in part to a fiscal 1993 shutdown at Newport. The
decrease in other current assets resulted primarily from the
sale of land held for development and the increase in
accrued liabilities was primarily attributable to an
increase in accrued income taxes related to the gain on the
sale of KES.
The Company incurred $7.3 million in capital
expenditures during the first six months of fiscal 1995,
primarily related to improvements to and acquisition of
machinery and equipment in the specialty steel segment. The
Company currently estimates that capital spending in fiscal
1995 will approximate $13.2 million. It is anticipated that
capital spending will be funded through cash flow from
operations and available borrowing sources as well as
available cash and short-term investments. During the first
six months of fiscal 1995, short-term investments decreased
$20.0 million, due in large part to an increase in net
working capital, particularly the inventory component.
Management expects inventory levels will decline during the
remainder of the year as a portion of the increase was
attributable to a temporary inventory buildup associated
with production and shipment interruptions at Newport, as
previously discussed.
As a result of the sale of KES in the first quarter of
fiscal 1994, 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. The Company intends to hold as an
available-for-sale investment the common stock acquired in
the sale of KES. As of April 1, 1995 and September 24,
1994, such common stock was recorded at $3.5 million and
$4.6 million, respectively, and has resulted in a direct
after-tax charge to common shareholders' equity of $0.7
million in the first six months of fiscal 1995.
Net cash flows used by financing activities were $9.5
million in the first six months of fiscal 1995. The Company
made scheduled payments on long-term debt obligations of
$9.8 million during the first six months and increased its
borrowings under its lines of credit by $1.0 million.
Scheduled long-term debt maturities are $15.5 million, $19.0
million and $18.6 million for fiscal 1995, 1996 and 1997
respectively. However, the Company is pursuing a refinancing
of a significant portion of its long-term debt. See "Other
Matters."
Certain of the Company's loan agreements contain
covenants restricting the payment of dividends to its
shareholders. Under the most restrictive of these
covenants, retained earnings available for dividends are
computed under a formula which is based in part on the
earnings and losses of the Company after fiscal 1988. Under
this covenant, the Company is currently prohibited from
paying dividends to its shareholders.
The Company believes that its current available cash
and short-term investments, 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.
Inflation
The Company believes that inflation has not had a
material effect on its results of operations to date.
Generally, the Company experiences inflationary increases in
its costs of raw materials, energy, supplies, salaries and
benefits and selling and administrative expenses. Except
with respect to significant increases in steel scrap prices,
the Company has generally been able to pass these
inflationary increases through to its customers.
Other Matters
Legal Matters
As previously reported, Newport was named as a
co-defendant in a claim for breach of implied warranty in
the United States District Court for the Southern District
of Texas arising from the failure of two joints of welded
pipe during testing of an off-shore pipeline. Subsequent to
the end of the fiscal 1995 second quarter, the Company
reached a settlement for an amount significantly less than
the plaintiff's original claim and the litigation was
dismissed. The Company is subject to various claims,
lawsuits and administrative proceedings arising in the
ordinary course of business with respect to commercial,
product liability and other matters, which seek remedies or
damages. Based upon its evaluation of available
information, management does not believe that any such
matters, including the above-mentioned settlement are
likely, individually or in the aggregate, to have a material
adverse effect upon the Company's consolidated financial
position, results of operations or cash flows.
Environmental Matters
The Company is subject to federal, state and local
environmental laws and regulations, including, among others,
RCRA, the Clean Air Act, the 1990 Amendments, the Clean
Water Act and all regulations promulgated in connection
therewith, including those concerning the discharge of
contaminants as air emissions or waste water effluents and
the disposal of solid and/or hazardous wastes such as
electric arc furnace dust. As such, the Company is from
time to time involved in administrative and judicial
proceedings and administrative inquiries related to
environmental matters.
As with similar mills in the industry, the Company's
steel mini-mills produce dust which contains lead, cadmium,
and chromium and is classified as a hazardous waste. The
Company currently collects the dust resulting from its
electric arc furnace operations through emission control
systems and contracts with a company for treatment and
disposal of the dust at an EPA-approved facility. The
Company also has on its property at Newport a permitted
hazardous waste disposal facility.
In separate incidents occurring in fiscal 1992 and
1993, radioactive substances were accidentally melted at
Newport, resulting in the contamination of the melt shop's
electric arc furnace emission control facility, or "baghouse
facility". The occurrences of accidental melting of
radioactive materials have not resulted in any notice of
violations from federal or state environmental regulatory
agencies. The Company is investigating and evaluating
various issues concerning storage, treatment and disposal of
the radiation contaminated baghouse dust; however, a final
determination as to method of treatment and disposal, cost
and further regulatory requirements cannot be made at this
time. Depending on the ultimate timing and method of
treatment and disposal, which will require appropriate
federal and state regulatory approval, the actual cost of
disposal could substantially exceed current estimates and
the Company's insurance coverage. As of April 1, 1995,
claims recorded in connection with disposal costs exhaust
available insurance coverage. Based on current knowledge,
management believes the recorded gross reserves of $4.4
million for disposal costs pertaining to these incidents are
adequate.
In March 1995, Koppel and the EPA signed a Consent
Order relating to an April 1990 RCRA facility assessment
(the "Assessment") completed by the EPA and the Pennsylvania
Department of Environmental Resources. The Assessment was
performed in connection with a permit application pertaining
to a landfill that is adjacent to the Koppel facilities.
The Assessment identified potential releases of hazardous
constituents at or adjacent to the Koppel facilities prior
to the Company's acquisition of the Koppel facilities. The
Consent Order establishes a schedule for investigating,
monitoring, testing and analyzing the potential releases.
Contamination documented as a result of the investigation
may require cleanup measures. Pursuant to various indemnity
provisions in agreements entered into at the time of the
Company's acquisition of the Koppel facilities in fiscal
1991, certain parties agreed to indemnify the Company
against various known and unknown environmental matters.
While such parties have not at this time acknowledged full
responsibility for potential costs under the Consent Order,
the Company believes that the indemnity provisions provide
for it to be fully indemnified against all matters covered
by the Consent Order, including all associated costs, claims
and liabilities.
Subject to the uncertainties concerning the Consent
Order and the storage and disposal of the radiation
contaminated baghouse dust, the Company believes it is in
compliance in all material respects with all applicable
environmental regulations.
Regulations resulting from the 1990 Amendments to the
Clean Air Act that will pertain to the Company's operations
are currently not expected to be promulgated until 1997 or
later. The Company cannot predict the level of required
capital expenditures or operating costs resulting from
future environmental regulations such as those forthcoming
as a result of the 1990 Amendments. However, the Company
believes that while the 1990 Amendments may require
additional expenditures, such expenditures will not have a
material impact on the Company's business or consolidated
financial position for the foreseeable future.
Capital expenditures during fiscal 1995 relating to
environmental control facilities are not expected to be
material; however, such expenditures could be influenced by
new and revised environmental laws and regulations.
As of April 1, 1995, the Company had environmental
remediation reserves of $4.7 million, of which $4.4 million
pertain to accrued disposal costs for radiation contaminated
baghouse dust. As of April 1, 1995, the possible range of
estimated losses related to the environmental contingency
matters discussed above in excess of those accrued by the
Company is $0 to $3.0 million; however, with respect to the
Consent Order, the Company cannot estimate the possible
range of losses should the Company ultimately not be
indemnified. Based upon its evaluation of available
information, management does not believe that any of the
environmental contingency matters discussed above are
likely, individually or in the aggregate, to have a material
adverse effect upon the Company's consolidated financial
position, results of operations or cash flows. However, the
Company cannot predict with certainty that new information
or developments with respect to the Consent Order or its
other environmental contingency matters, individually or in
the aggregate, will not have a material adverse effect on
the Company's consolidated financial position, results of
operations or cash flows.
Other
The Company is currently pursuing a refinancing of a
significant portion of its long-term debt through a proposed
sale of $125 million senior secured notes due 2003 (the
Offering). Completion of the Offering would substantially
reduce principal amortization requirements until the
maturity of the senior secured notes. Completion of the
Offering is subject to the Securities and Exchange
Commission allowing the registration of the senior secured
notes to become effective, the entering into a firm
commitment with the underwriters and the existence of market
conditions acceptable to the Company.
PART II -- OTHER INFORMATION
ITEM 1. Legal Proceedings
As previously reported, Newport was named as a co-defendant
in a claim for breach of implied warranty in the United
States District Court for the Southern District of Texas
arising from the failure of two joints of welded pipe during
testing of an offshore pipeline. Subsequent to the end of
the fiscal 1995 second quarter, the Company reached a
settlement for an amount significantly less than the
plaintiff's original claim and the litigation was dismissed.
ITEM 4. Submission of Matters to a Vote of Security-
Holders
The annual meeting of shareholders was held on February 16,
1995. 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 11,960,752 74,015
Ronald R. Noel 11,960,652 74,115
John B. Lally 11,960,752 74,015
Patrick J. B. Donnelly 11,960,752 74,015
R. Glen Mayfield 11,957,752 77,015
2. The proposal to ratify the Board of Directors'
appointment of Arthur Andersen LLP as the Company's
independent public accountants for its fiscal year ending
September 30, 1995 was approved (For, 11,972,012; Against,
48,465; Abstain, 14,290).
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits - Reference is made to the Index to
Exhibits, which is incorporated herein by
reference.
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 12, 1995 By: /s/Clifford R. Borland
Clifford R. Borland
President
Date: May 12, 1995 By: /s/John R. Parker
John R. Parker
Vice President and Treasurer
INDEX TO EXHIBITS
Number Description
3(a) Amended and Restated Articles of Incorporation of
Registrant, filed as Exhibit 3.1 to Amendment No.
1 to
Registrant's Form S-1 dated January 17, 1995, File
No.
33-56637, and incorporated herein by this
reference
3(b) Amended and Restated By-Laws of Registrant, dated
November 14, 1991, filed as Exhibit 3(b) to Registrant's
Form 10-K for the fiscal year ended September 28,1991, File
No. 1-9838, and incorporated herein by this
reference
27 Financial Data Schedule
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM NS GROUP, INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE THREE
AND SIX MONTH PERIODS ENDED APRIL 1, 1995, INCLUDED IN THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS.
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<NAME> NS GROUP, INC.
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> SEP-25-1994
<PERIOD-END> APR-1-1995
<EXCHANGE-RATE> 1
<CASH> 1,350
<SECURITIES> 20,082
<RECEIVABLES> 49,553
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<PP&E> 270,038
<DEPRECIATION> 111,569
<TOTAL-ASSETS> 312,613
<CURRENT-LIABILITIES> 100,247
<BONDS> 126,395
<COMMON> 49,279
0
0
<OTHER-SE> 27,085
<TOTAL-LIABILITY-AND-EQUITY> 312,613
<SALES> 190,544
<TOTAL-REVENUES> 190,544
<CGS> 168,909
<TOTAL-COSTS> 168,909
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 10,294
<INCOME-PRETAX> 849
<INCOME-TAX> 327
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