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 June 29, 1996
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 13,809,413
(Class) (Outstanding at July 29,
1996)
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 Operation 11
PART II OTHER INFORMATION
Item 6 --- Exhibits and Reports on Form 8-K 21
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 29, 1996 AND SEPTEMBER 30, 1995
(Dollars in thousands) (Unaudited)
June 29, September 30,
1 9 9 6 1 9 9 5
<TABLE>
<S> <C> <C>
CURRENT ASSETS
Cash and cash
equivalents $ 2,897 $ 4,838
Short-term
investments 16,070 6,413
Accounts receivable,
less allowance for
doubtful accounts of
$1,139 and $1,021,
respectively 50,851 45,858
Inventories 56,712 44,716
Other current assets 19,773 21,497
Total current assets 146,303 123,322
PROPERTY, PLANT AND
EQUIPMENT 280,145 276,262
Less - accumulated
depreciation (134,407) (120,887)
145,738 155,375
OTHER ASSETS 16,036 19,800
Total assets $308,077 $298,497
CURRENT LIABILITIES
Notes payable $ 1,260 $ 509
Accounts payable 44,863 32,897
Other current liabilities 27,939 22,167
Current portion of long-
term debt 2,421 1,872
Total current liabilities 76,483 57,445
LONG-TERM DEBT 166,270 166,528
DEFERRED TAXES 4,003 6,414
COMMON SHAREHOLDERS' EQUITY
Common stock, no par
value, 40,000,000 shares
authorized; 13,809,413
shares issued and
outstanding for each period 49,004 49,004
Common stock options and
warrants 2,779 2,737
Unrealized loss on available
for sale securities (961) (713)
Retained earnings 10,499 17,082
Total common shareholders'
equity 61,321 68,110
Total liabilities and
SHAREHOLDERS' EQUITY $308,077 $298,497
</TABLE>
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 NINE MONTH PERIODS ENDED
JUNE 29, 1996 AND JULY 1, 1995
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
<TABLE>
<S> <C> <C> <C> <C>
NET SALES $103,766 $ 94,804 $297,787 $285,348
COST AND
EXPENSES
Cost of
products
sold 92,366 84,212 269,636 253,121
Selling
and admini
strative
expenses 7,281 6,611 20,534 20,231
Operating
income 4,119 3,981 7,617 11,996
OTHER INCOME (EXPENSE)
Interest
expense (6,107) (4,849) (18,244) (15,143)
Interest
income 204 286 475 1,206
Other, net 49 1,066 300 3,274
Income(loss)
before income
taxes (1,735) 484 (9,852) 1,333
PROVISION
(CREDIT) FOR
INCOME
TAXES 136 (45) (3,269) 282
Net income
(loss) $ (1,871) $ 529 $(6,583) $ 1,051
NET INCOME
(LOSS) PER
COMMON
SHARE $(.14) $.04 $(.48) $.08
WEIGHTED
AVERAGE
SHARES
OUTSTANDING 13,809 13,809 13,809 13,809
</TABLE>
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 NINE MONTH PERIODS ENDED
JUNE 29, 1996 AND JULY 1, 1995
(Dollars in thousands) (Unaudited)
June 29, July 1,
1 9 9 6 1 9 9 5
<TABLE>
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) $ (6,583) $ 1,051
Adjustments to reconcile
net income (loss) to net
cash flows from operating
activities:
Depreciation and amortization 14,335 13,849
Amortization of debt
discount and finance costs 1,223 414
Increase (decrease) in
long-term deferred taxes (2,259) 252
Loss on disposal of equipment 635 -
Increase in accounts
receivable, net (4,993) (7,290)
Increase in inventories (11,996) (10,939)
(Increase) decrease in other
current assets 4,355 (3,080)
Increase in accounts payable 11,966 1,912
Increase (decrease) in
accrued liabilities 5,772 (450)
Net cash flows from
operating activities 12,455 (4,281)
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in property, plant
and equipment, net (6,622) (9,546)
Proceeds from the sale of
equipment 1,729 -
Increase in other assets (414) (185)
(Increase) decrease in
short-term investments (9,657) 22,927
Net cash flows from
investing activities (14,964) 13,196
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in notes payable 751 3,126
Repayments on long-term debt (1,460) (14,205)
Proceeds from issuance of
long-term debt 1,277 -
Increase in deferred financing
costs - (938)
Net cash flows from financing
activities 568 (12,017)
Net decrease in cash and cash
equivalents (1,941) (3,102)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 4,838 4,405
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,897 $ 1,303
Cash paid during the period for:
Interest $ 11,979 $ 15,869
Income taxes, net of
refunds $ (4,238) $ 743
</TABLE>
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. and Northern Kentucky 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.
The preparation of financial statements in conformity
with generally accepted accounting principles requires
that management make certain estimates and assumptions
that affect the amounts reported in the consolidated
financial statements and accompanying notes. Actual
results could differ from those estimates. Reference
should be made to NS Group, Inc.'s Form 10-K for the
fiscal year ended September 30, 1995 for additional
footnote disclosure, including a summary of significant
accounting policies.
In March 1995, the Financial Accounting Standards
Board (FASB) issued Statement No. 121 (Statement 121)
on accounting for the impairment of long-lived assets
to be held and used. Statement 121 also establishes
accounting standards for long-lived assets that are to
be disposed. Statement 121 is required to be applied
prospectively for assets to be held and used. The
initial application of Statement 121 to assets held for
disposal is required to be reported as the cumulative
effect of a change in accounting principle. The
Company is required to adopt Statement 121 no later
than fiscal 1997. The Company has not yet determined
when it will adopt Statement 121 or the impact, if any,
that the adoption will have on its financial position
or results of operations.
In October 1995, the FASB issued Statement No. 123
(Statement 123) establishing financial accounting and
reporting standards for stock-based employee
compensation plans. Statement 123 encourages the use
of the fair valued based method to measure compensation
cost for stock-based employee compensation plans,
however, it also continues to allow the intrinsic value
based method of accounting as prescribed by APB Opinion
No. 25, which is currently used by the Company. If the
intrinsic value based method continues to be used,
Statement 123 requires pro forma disclosures of net
income and earnings per share, as if the fair value
based method of accounting had been applied. The fair
value based method requires compensation cost be
measured at the grant date based upon the value of the
award and recognized over the service period, which is
normally the vesting period. The Company is required
to adopt Statement 123 no later than fiscal 1997. The
Company has not yet determined when it will adopt
Statement 123 or the valuation method it will use.
The Company's fiscal year ends on the last
Saturday of September. The first quarter and nine
month periods of fiscal 1996 and 1995 are 13 and 14
week and 39 and 40 week periods, respectively.
Note 2: Inventories
At June 29, 1996 and September 30, 1995,
inventories stated at the lower of LIFO (last-in,
first-out) cost or market represent approximately 38%
and 31% of total inventories before the LIFO reserve,
respectively. Inventories consist of the following
components ($000's):
June 29, September 30,
1 9 9 6 1 9 9 5
<TABLE>
<S> <C> <C>
Raw materials $ 7,330 $ 6,591
Semi-finished and
finished goods 52,209 40,570
59,539 47,161
LIFO reserve (2,827) (2,445)
$56,712 $44,716
</TABLE>
Note 3: Income Taxes
Tax benefits recorded by the Company in fiscal
1996 and in prior years substantially offset previously
recorded net long-term deferred tax liabilities. As
such, the Company is currently unable to record tax
benefits associated with operating losses. The three
month period reflects a provision for certain state
income taxes payable. The nine month periods includes
a credit of approximately $1.6 million related to the
favorable settlement of certain state income tax
issues.
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.
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 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, among others, 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 other 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 has on its property at Newport a
permitted hazardous waste disposal facility. Newport's
permit for operating the hazardous waste disposal
facility requires that it investigate, test, and
analyze for potential releases of hazardous
constituents from its closed loop water recirculating
system. Any contamination documented as a result of
the investigation would require certain cleanup
measures; however, the Company believes that the cost
of any such cleanup measures will not be material.
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 requires cleanup measures and certain
remediation has begun. 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.
In two separate incidents occurring in fiscal 1993
and 1992, 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 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 June 29, 1996, 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.
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 in all material respects
with all 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 the next twelve months
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 June 29, 1996, the Company had environmental
remediation reserves of $4.4 million which pertain
almost exclusively to accrued disposal costs for
radiation contaminated baghouse dust. As of June 29,
1996, the estimated range of possible 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.
Note 5: Revolving Credit Facility
At June 29, 1996, approximately $26.7 million of
the Company's $45.0 million revolving credit facility
(Credit Facility) was utilized to collateralize various
letters of credit and $18.3 million was available for
borrowing. The letters of credit were issued primarily
in connection with the purchase of steel slabs at
Newport to supplement Newport's operations. The Credit
Facility contains certain financial covenants measured
on a quarterly basis, including, among others,
maintenance of minimum net worth. Although the Company
is in compliance with all of its Credit Facility
covenants at June 29, 1996, the likelihood of violating
the minimum net worth covenant in the fiscal fourth
quarter has led the Company to contact its working
capital lenders concerning modifications to the Credit
Facility covenants. While the Company believes that
adequate modifications will be obtained, allowing the
Company to remain in compliance with its covenants,
there can be no assurance that its lenders will provide
modifications to the Credit Facility.
Note 6: Summarized Financial Information
The Company's Senior Secured Notes are
unconditionally guaranteed in full, jointly and
severally, by each of the Company's subsidiaries
(Subsidiary Guarantors), each of which is wholly-owned.
Separate financial statements of the Subsidiary
Guarantors are not presented because they are not
deemed material to investors. The following is
summarized financial information of the Subsidiary
Guarantors as of June 29, 1996 and September 30, 1995
and for the three and nine month periods ended June 29,
1996 and July 1, 1995. All significant intercompany
accounts and transactions between the Subsidiary
Guarantors have been eliminated.
June 29, September 30,
1996 1995
(In thousands)
<TABLE>
<S> <C> <C>
Current assets $127,825 $111,371
Noncurrent assets $155,105 $167,863
Current liabilities $ 63,537 $ 50,933
Payable to parent $165,053 $169,079
Other noncurrent
liabilities 10,212 9,779
Total noncurrent
liabilities $175,265 $178,858
</TABLE>
Three Months Ended Nine Months Ended
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
(In thousands)
<TABLE>
<S> <C> <C> <C> <C>
Net sales $103,766 $94,804 $297,787 $285,348
Gross profit $ 11,400 $10,592 $ 28,151 $ 32,227
Net income
(loss) $ (725) $ 1,962 $ (3,958) $ 4,079
</TABLE>
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 and Koppel, a
manufacturer of seamless tubular steel products,
special bar quality (SBQ) products and semi-finished
steel products. 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.
The matters discussed or incorporated by reference
in this Report on Form 10-Q that are forward-looking
statements (as defined in the Private Securities
Litigation Reform Act of 1995) involve risks and
uncertainties. Such risks and uncertainties include,
but are not limited to, the level of domestic as well
as worldwide oil and natural gas drilling activity;
general economic conditions; product demand and
industry capacity; industry pricing; the presence or
absence of governmentally imposed trade restrictions;
manufacturing efficiencies; volatility in raw material
costs, particularly steel scrap; costs of compliance
with environmental regulations; product liability or
other claims; the Company's ability to meet operating
cash requirements, including capital expenditures; and
the Company's capital structure, which may limit its
operational and financial flexibility. These risks and
uncertainties may cause the actual results or
performance of the Company to differ materially from
any future results or performance expressed or implied
by such forward-looking statements.
Results of Operations
The Company's net sales, cost of products sold and
operating results by business segment for the three and
nine month periods ended June 29, 1996 and July 1, 1995
are summarized below. The first quarters of fiscal
1996 and 1995 are 13 and 14 week periods, respectively.
As such, the increases and decreases in operating
results for the nine 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 Nine Months Ended
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
<TABLE>
<S> <S> <S> <S> <S>
(In thousands)
Net sales
Specialty
steel
segment $ 93,169 $85,666 $268,626 $258,609
Adhesives
segment 10,597 9,138 29,161 26,739
$103,766 $94,804 $297,787 $285,348
Cost of
products
sold
Specialty
steel
segment $ 84,452 $77,226 $247,412 $232,368
Adhesives
segment 7,914 6,986 22,224 20,753
$ 92,366 $84,212 $269,636 $253,121
Operating
income
Specialty
steel
segment $ 4,768 $ 4,314 $ 10,000 $ 13,758
Adhesives
segment 587 590 1,080 1,114
Corporate
allocations
and income (1,236) (923) (3,463) (2,876)
$ 4,119 $ 3,981 $ 7,617 $ 11,996
</TABLE>
Sales data for the Company's specialty steel
segment for the three and nine month periods ended June
29, 1996 and July 1, 1995 were as follows:
Three Months Ended Nine Months Ended
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
<TABLE>
<S> <C> <C> <C> <C>
Tons shipped
Welded
tubular 87,500 78,700 254,400 248,500
Seamless
tubular 40,900 28,700 116,100 86,300
SBQ 35,600 45,100 96,500 135,200
Other 9,100 12,000 31,700 37,000
173,100 164,500 498,700 507,000
Net sales ($000's)
Welded
tubular $ 38,715 $ 35,996 $113,237 $112,580
Seamless
tubular 34,590 22,521 97,682 66,773
SBQ 16,412 22,665 45,437 65,931
Other 3,452 4,484 12,270 13,325
$ 93,169 $ 85,666 $268,626 $258,609
</TABLE>
Net sales for the third quarter of fiscal 1996
increased $9.0 million, or 9.5%, from the third quarter
of fiscal 1995 to $103.8 million. For the nine month
comparable periods, net sales increased $12.4 million,
or 4.4%, to $297.8 million. Specialty steel segment
net sales increased $7.5 million, or 8.8% and $10.0
million, or 3.9%, for the three and nine month periods,
respectively. Adhesives segment net sales increased
$1.5 million, or 16.0%, and $2.4 million, or 9.1%, for
the three and nine month periods, respectively. The
overall increase in specialty steel segment net sales
was primarily attributable to increased shipments of
the Company's tubular products as more fully discussed
below.
Welded tubular net sales increased $2.7 million,
or 7.6%, on a volume increase of 11.2%, for the
comparable three month periods. The increase in welded
tubular net sales for the third quarter was primarily
attributable to an increase in shipments of welded line
pipe products over the third quarter of fiscal 1995
while welded OCTG shipments increased modestly.
Partially offsetting the impact of the increase in
welded tubular shipments was a 3.3% decline in the
average selling price for all welded tubular products.
For the comparable nine month periods, total welded
tubular net sales were relatively unchanged, on a
volume increase of 2.4%.
Seamless tubular net sales increased $12.1
million, or 53.6%, on a volume increase of 42.5%, and
$30.9 million, or 46.3%, on a volume increase of 34.5%,
for the comparable three and nine month periods,
respectively. The increase in seamless tubular net
sales and shipments was primarily due to increases in
seamless OCTG product shipments and average selling
prices which were attributable in part to a decline in
the level of foreign imports, increased off-shore
drilling activity, as well as, with respect to pricing,
changes in OCTG product mix. Fiscal 1996 third quarter
average selling prices for all seamless tubular
products increased 7.6% over the third quarter of
fiscal 1995. For the current nine month period,
average selling prices increased 8.7% over the
comparable prior year period.
The demand for the Company's OCTG products is
cyclical in nature, being primarily dependent on the
number and depth of oil and natural gas wells being
drilled in the United States. The average number of
oil and natural gas drilling rigs in operation in the
United States (rig count) was 761 in the third quarter
of fiscal 1996, up from 677 in the comparable period of
fiscal 1995. Rig count increased slightly from 736 in
the first nine months of fiscal 1995, to 744 in the
first nine months of fiscal 1996. The level of
drilling activity is largely a function of the current
prices of oil and natural gas and the industry's future
price expectations. Demand for OCTG products is also
influenced by the levels of inventory held by
producers, distributors and end users. In addition,
the demand for OCTG products produced domestically is
also significantly impacted by the level of foreign
imports of OCTG products. The level of OCTG imports is
affected by: (i) the value of the U.S. dollar versus
other key currencies; (ii) overall world demand for
OCTG products; (iii) the production cost
competitiveness of domestic producers; (iv) trade
practices of, and government subsidies to, foreign
producers; and (v) the presence or absence of
governmentally imposed trade restrictions in the
United States.
In July 1995, the United States imposed duties on
the imports of various OCTG products from certain
foreign countries in response to antidumping and
countervailing duty cases filed by several U.S. steel
companies. Several foreign OCTG producers, as well as
certain U.S. producers, have appealed the
determinations to international courts or panels. The
Company cannot predict the outcome or timing of these
appeals at this time.
SBQ product net sales decreased $6.3 million, or
27.6%, on a volume decline of 21.1%, and $20.5
million, or 31.1%, on a volume decline of 28.6%, for
the comparable three and nine month periods,
respectively. Fiscal 1996 third quarter average
selling price for SBQ products declined 8.3% from the
third quarter of fiscal 1995. The decline in shipments
and selling price of SBQ products resulted from a
softening in the markets served by Koppel's SBQ
products as well as excessive inventory levels in the
SBQ marketplace. However, shipments of SBQ products
have increased for two consecutive quarters, with an
11.2% increase from the second quarter of fiscal 1996.
Other product shipments in the third quarter of fiscal
1996 were primarily attributable to the sale of hot
rolled coils.
The demand for the Company's SBQ and hot rolled
coil products is cyclical in nature and is sensitive to
general economic conditions. The demand for and the
pricing of the Company's SBQ and hot rolled coil
products is also affected by economic trends in areas
such as commercial and residential construction,
automobile production and industrial investment in new
plants and facilities.
Gross profit for the third quarter of fiscal 1996
increased $0.8 million from the third quarter of fiscal
1995 for a gross profit margin of 11.0% in fiscal 1996
compared to 11.2% in the third quarter of fiscal 1995.
For the nine month comparable periods, gross profit
decreased $4.1 million for a gross profit margin of
9.5% for the first nine months of fiscal 1996 compared
to 11.3% for the first nine months of fiscal 1995.
The specialty steel segment gross profit declined $5.0
million for the nine month comparable period and gross
profit margin declined from 10.1% in the prior year to
7.9% in the current nine month period. The decrease
in specialty steel segment gross profit and margin for
the nine month comparable periods was attributable to
Newport's welded tubular operations, where gross profit
margins declined from 6.8% to 1.6% as a result of lower
operating efficiencies as well as lower average selling
prices. Koppel's gross profit margins rose from 13.0%
in the prior year nine month period to 13.4% for the
current year. Gross profit margin for the current
three month period for Koppel was 14.5%.
The adhesives segment gross profit increased $0.5
million and $1.0 million for the third quarter and nine
month periods, respectively, due primarily to an
increase in sales volume. Gross profit margin for the
third quarter of fiscal 1996 was 25.3% compared to
23.6% for the comparable fiscal 1995 period. The
increase was primarily a result of increased sales of
higher margin products.
Fiscal 1996 third quarter selling and
administrative expenses increased $0.7 million from the
third quarter of fiscal 1995 and was virtually
unchanged as a percentage of net sales at approximately
7.0%. For the nine month period, selling and
administrative expenses increased $0.3 million from the
prior year, but decreased slightly as a percentage of
sales.
As a result of the above factors, operating income
increased $0.1 million, from $4.0 million in the third
quarter of fiscal 1995 to $4.1 million in the current
quarter. For the nine month period, operating income
decreased $4.4 million, from $12.0 million in fiscal
1995 to $7.6 million in the first nine months of fiscal
1996. The decline in operating income for the
comparative nine month period was attributable almost
solely to the specialty steel segment and was primarily
due to lower operating efficiencies at the Company's
welded tubular operations and a decline in welded
tubular product average selling prices. Also
contributing to the decline in operating income was a
decrease in SBQ product shipments and average selling
prices. For the quarterly comparative periods, the
above mentioned factors were partially offset primarily
by increased shipments and average selling prices for
the Company's seamless tubular products.
Interest expense increased $1.3 million and $3.1
million for the three and nine month periods,
respectively, as a result of higher interest costs
associated with the Company's Senior Secured Notes
issued in the fourth quarter of fiscal 1995.
Interest income decreased $0.1 million and $0.7
million for the three and nine month periods,
respectively, as a result of a decline in average
invested cash and short-term investment balances during
the respective comparable periods.
Other income (expense), net decreased $1.0 million
and $3.0 million for the three and nine month periods,
respectively. The current nine month period was
impacted by a $0.7 million loss on the sale of
non-steel segment related fixed assets. The prior year
comparable nine month period includes income from
property claims filed with the Company's insurance
company in connection with a motor failure at Newport
in the fiscal 1995 second quarter.
Tax benefits recorded by the Company in fiscal
1996 and in prior years substantially offset previously
recorded net long-term deferred tax liabilities. As
such, the Company is currently unable to record tax
benefits associated with operating losses. The three
month period reflects a provision for certain state
income taxes payable. The nine month period includes
a credit of approximately $1.6 million related to the
favorable settlement of certain state income tax
issues.
As a result of the above factors, the Company
incurred a net loss of $1.9 million, or a $.14 loss per
share, in the third quarter of fiscal 1996 compared to
net income of $0.5 million, or $.04 per share in the
third quarter of fiscal 1995. For the current nine
month period, the Company incurred a net loss of $6.6
million, or a $.48 loss per share compared to net
income of $1.1 million, or $.08 per share for the first
nine months of fiscal 1995.
Liquidity and Capital Resources
Working capital at June 29, 1996 was $69.8 million
compared to $65.9 million at September 30, 1995. The
current ratio at June 29, 1996 was 1.91 to 1 compared
to 2.15 to 1 at September 30, 1995. At June 29,1996,
the Company had cash and short-term investments
totaling $19.0 million, $3.1 million of which was
restricted in an environmental trust account related to
a permitted hazardous waste disposal facility located
on the Company's property at Newport. At June 29,
1996, approximately $26.7 million of the Company's
$45.0 million revolving credit facility (Credit
Facility) was utilized to collateralize various letters
of credit and $18.3 million was available for
borrowing. The letters of credit were issued primarily
in connection with the purchase of steel slabs at
Newport to supplement Newport's operations. The Credit
Facility contains certain financial covenants measured
on a quarterly basis, including, among others,
maintenance of minimum net worth. Although the Company
is in compliance with all of its Credit Facility
covenants at June 29, 1996, the likelihood of violating
the minimum net worth covenant in the fiscal fourth
quarter has led the Company to contact its working
capital lenders concerning modifications to the Credit
Facility covenants. While the Company believes that
adequate modifications will be obtained, allowing the
Company to remain in compliance with its covenants,
there can be no assurance that its lenders will provide
modifications to the Credit Facility.
Net cash flows provided by operating activities
totaled $12.5 million in the first nine months of
fiscal 1996, compared to a use of $4.3 million in the
comparable prior year period. The Company recorded a
net loss of $6.6 million in the first nine months of
fiscal 1996 compared to net income of $1.1 million in
the first nine months of fiscal 1995. Major uses of
cash in operating activities in the first nine months
of fiscal 1996 included a $2.3 million decrease in
long-term deferred taxes as a result of operating
losses in the first nine months and a $5.0 million and
$12.0 million increase in accounts receivable and
inventories, respectively, resulting from an increase
in business activity. Offsetting these uses were $15.6
million in non-cash depreciation and amortization
charges; a $5.6 million increase in accrued liabilities
primarily resulting from accrued interest expense on
the Company's long-term debt; a $4.4 million decrease
in other current assets resulting primarily from the
collection of previously filed insurance claims; and a
$12.0 million increase in accounts payable primarily
resulting from the purchase of steel slabs and a
general increase in business activity.
For the first nine months of fiscal 1995, net cash
flows used in operating activities of $4.3 million were
primarily impacted by a $7.3 million increase in
accounts receivable and a $10.9 million increase in
inventories resulting from an increase in business
activity and, for the increase in inventories,
unusually low levels at the beginning of fiscal 1995
due to scheduled maintenance outages at Newport. Other
current assets increased $3.1 million primarily due to
the recording of various insurance claims. Offsetting
these uses were $14.3 million in non-cash depreciation
and amortization charges and a $1.9 million increase in
accounts payable, resulting primarily from an increase
in inventories and business activities in general.
The Company invested $6.6 million in capital
expenditures during the first nine months of fiscal
1996, primarily related to improvements to and
acquisition of machinery and equipment in the specialty
steel segment. The Company currently estimates that
fiscal 1996 capital spending will approximate $10.0
million and its sources for funding capital
expenditures include cash flow from operations,
available cash and short-term investments, as well as
available borrowing sources. Short-term investments
increased $9.7 million in the first nine months of
fiscal 1996 primarily as a result of investment of
excess cash. During the first nine months of fiscal
1995, short-term investments deceased $22.9 million,
due in large part to an increase in net working
capital, particularly the inventory component.
Net cash flows from financing activities in the
first nine months of fiscal 1996 included repayments on
long-term debt of $1.5 million, compared to long-term
debt repayments of $14.2 million in the first nine
months of fiscal 1995. The reduction in debt
repayments is the result of the Company's fiscal 1995
fourth quarter debt refinancing.
Earnings before interest, taxes, depreciation and
amortization (EBITDA) was $9.2 million and $22.7
million in the third quarter and first nine months of
fiscal 1996, respectively, compared to $9.8 million
and $30.3 million in the third quarter and first nine
months of fiscal 1995, respectively. EBITDA is
calculated as net income (loss) plus interest expense,
taxes, depreciation and amortization. EBITDA provides
additional information for determining the Company's
ability to meet debt service requirements. EBITDA does
not represent and should not be considered as an
alternative to net income, any other measure of
performance as determined by generally accepted
accounting principles, as an indicator of operating
performance or as an alternative to cash flows from
operating, investing or financing activities or as a
measure of liquidity.
The Company believes that its current available
cash and short-term investments, its cash flow from
operations and its borrowing sources will be sufficient
to meet 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
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 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, 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, among others, 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 other 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 has on its property at Newport a
permitted hazardous waste disposal facility. Newport's
permit for operating a hazardous waste disposal
facility on its property requires that it investigate,
test, and analyze for potential releases of hazardous
constituents from its closed loop water recirculating
system. Any contamination documented as a result of
the investigation would require certain cleanup
measures; however, the Company believes that the cost
of any such cleanup measures will not be material.
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 requires cleanup measures and certain
remediation has begun. 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.
In two separate incidents occurring in fiscal 1993
and 1992, 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 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 June 29, 1996, 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.
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 in all material respects
with all 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 the next twelve months
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 June 29, 1996, the Company had environmental
remediation reserves of $4.4 million, which pertain
almost exclusively to accrued disposal costs for
radiation contaminated baghouse dust. As of June 29,
1996, the estimated range of possible 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.
Recently Issued Accounting Standards
In March 1995, the Financial Accounting Standards
Board (FASB) issued Statement No. 121 (Statement 121)
on accounting for the impairment of long-lived assets
to be held and used. Statement 121 also establishes
accounting standards for long-lived assets that are to
be disposed. Statement 121 is required to be applied
prospectively for assets to be held and used. The
initial application of Statement 121 to assets held for
disposal is required to be reported as the cumulative
effect of a change in accounting principle. The
Company is required to adopt Statement 121 no later
than fiscal 1997. The Company has not yet determined
when it will adopt Statement 121 or the impact, if any,
that the adoption will have on its financial position
or results of operations.
In October 1995, the FASB issued Statement No. 123
(Statement 123) establishing financial accounting and
reporting standards for stock-based employee
compensation plans. Statement 123 encourages the use
of the fair value based method to measure compensation
cost for stock-based employee compensation plans,
however, it also continues to allow the intrinsic value
based method of accounting as prescribed by APB Opinion
No. 25, which is currently used by the Company. If the
intrinsic value based method continues to be used,
Statement 123 requires pro forma disclosures of net
income and earnings per share, as if the fair value
based method of accounting had been applied. The fair
value based method requires compensation cost be
measured at the grant date based upon the value of the
award and recognized over the service period, which is
normally the vesting period. The Company is required
to adopt Statement 123 no later than fiscal 1997. The
Company has not yet determined when it will adopt
Statement 123 or the valuation method it will use.
PART II -- OTHER INFORMATION
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: August 9, 1996 By: /s/Clifford R. Borland
Clifford R. Borland
Chairman and Chief Executive
Officer
Date: August 9, 1996 By: /s/John R. Parker
John R. Parker
Vice President and Treasurer
INDEX TO EXHIBITS
Number Description
3.1 Amended and Restated Articles of Incorporation of
Registrant, filed as Exhibit 3.1 to Amendment No.
1 to Registrants' Form S-1 dated January 17, 1995,
File No. 33-56637, and incorporated herein by this
reference
3.2 Amended and restated By-Laws of Registrant, dated
December 4,1995, filed as Exhibit 3.2 to Company's
Form 10-K for the fiscal year ended September 30,
1995, File No. 1-9838, and incorporated herein by
this reference
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<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 nine month periods ended June
29, 1996,
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.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-28-1996
<PERIOD-END> JUN-29-1996
<CASH> 2,897
<SECURITIES> 16,070
<RECEIVABLES> 50,851
<ALLOWANCES> 1,139
<INVENTORY> 56,712
<CURRENT-ASSETS> 146,303
<PP&E> 280,145
<DEPRECIATION> 134,407
<TOTAL-ASSETS> 308,077
<CURRENT-LIABILITIES> 76,483
<BONDS> 166,270
0
0
<COMMON> 51,783
<OTHER-SE> 9,538
<TOTAL-LIABILITY-AND-EQUITY> 308,077
<SALES> 297,787
<TOTAL-REVENUES> 297,787
<CGS> 269,636
<TOTAL-COSTS> 269,636
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,244
<INCOME-PRETAX> (9,852)
<INCOME-TAX> (3,269)
<INCOME-CONTINUING> (6,583)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,583)
<EPS-PRIMARY> (.48)
<EPS-DILUTED> (.48)
</TABLE>
