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 27, 1998
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission file number 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 23,050,360
(Class) (Outstanding at July 24, 1998)
NS GROUP, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 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 12
PART II OTHER INFORMATION
Item 1 Legal Proceedings 21
Item 6 Exhibits and Reports on Form 8-K 21
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED
JUNE 27, 1998 AND JUNE 28, 1997
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Nine Months Ended
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
NET SALES $ 96,882 $132,853 $344,181 $349,130
COST AND EXPENSES
Cost of products
sold 87,129 113,499 300,658 301,696
Selling and
administrative
expenses 7,080 6,753 21,004 20,034
Operating income 2,673 12,601 22,519 27,400
OTHER INCOME (EXPENSE)
Investment income 2,230 236 6,643 694
Interest expense (3,048) (6,130) (9,629) (18,298)
Other, net (24) 87 409 292
Income before income
taxes 1,831 6,794 19,942 10,088
PROVISION FOR INCOME
TAXES 642 1,864 6,480 2,740
Net income $ 1,189 $ 4,930 $ 13,462 $ 7,348
NET INCOME
PER COMMON SHARE
Basic $.05 $.36 $.56 $.53
Diluted $.05 $.33 $.54 $.52
WEIGHTED AVERAGE SHARES
OUTSTANDING
Basic 23,655 13,887 23,902 13,836
Diluted 24,528 16,398 25,006 14,239
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 27, 1998 AND SEPTEMBER 27, 1997
(Dollars in thousands) (Unaudited)
June 27, September 27,
CURRENT ASSETS 1 9 9 8 1 9 9 7
Cash $ 2,781 $ 6,998
Short-term investments 67,283 128,828
Funds held for debt
called for redemption - 59,517
Accounts receivable,
less allowance for doubtful
accounts of $702 and $712,
respectively 51,902 63,151
Inventories 69,762 73,474
Other current assets 30,720 32,953
Total current assets 222,448 364,921
PROPERTY, PLANT AND EQUIPMENT 301,157 278,779
Less -accumulated depreciation (167,918) (154,962)
133,239 123,817
LONG-TERM INVESTMENTS 67,591
OTHER ASSETS 7,883 11,578
Total assets $431,161 $500,316
CURRENT LIABILITIES
Notes payable $ 320 $ 722
Payments due on debt called
for redemption - 59,517
Accounts payable 23,257 47,667
Accrued liabilities 27,756 28,126
Current portion of
long-term debt 1,197 1,958
Total current liabilities 52,530 137,990
LONG-TERM DEBT 76,193 76,424
DEFERRED TAXES 13,065 13,087
COMMON SHAREHOLDERS' EQUITY
Common stock, no par value 279,343 261,368
Common stock options and
warrants 1,016 1,612
Treasury stock (13,340) -
Unrealized loss on available
for sale securities (1,953) (1,238)
Retained earnings 24,307 11,073
Total common shareholders'
equity 289,373 272,815
Total liabilities and
shareholders' equity $431,161 $500,316
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 27, 1998 AND JUNE 28, 1997
(Dollars in thousands) (Unaudited)
June 27, June 28,
1 9 9 8 1 9 9 7
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income $13,462 $ 7,348
Adjustments to reconcile net
income to net cash flows from
operating activities:
Depreciation and amortization 13,390 13,209
Amortization of debt discount
and finance costs 946 1,258
Increase (decrease) in long-term
deferred taxes 362 (77)
(Increase) decrease in accounts
receivable, net 11,249 (10,920)
(Increase) decrease in
inventories 3,712 (19,406)
(Increase) decrease in other
current assets 2,208 (1,260)
Increase (decrease) in accounts
payable (24,410) 7,945
Increase (decrease) in accrued
liabilities (7,449) 7,548
Net cash flows from operating
activities 13,470 5,645
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in property, plant and
equipment, net (22,662) (3,043)
Net purchases of long-term
investments (65,863) -
Decrease in other assets 177 1,669
Net cash flows from investing
activities (88,348) (1,374)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in notes
payable (402) 207
Repayments on long-term debt (53,819) (1,838)
Proceeds from issuance of common
stock 17,543 1,246
Purchases of treasury stock (13,723) -
Net cash flows from financing
activities (50,401) (385)
Net increase (decrease) in
cash and short-term
investments (125,279) 3,886
CASH AND SHORT-TERM INVESTMENTS
AT BEGINNING OF YEAR 195,343 17,297
CASH AND SHORT-TERM INVESTMENTS
AT END OF PERIOD $70,064 $21,183
Cash paid during the period for:
Interest $ 7,400 $12,502
Income taxes, net of refunds $ 4,452 $ 477
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: Summary of Significant Accounting Policies
Basis of Presentation
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) and Northern Kentucky Management, 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 27, 1997 for additional
footnote disclosure, including a summary of significant
accounting policies.
In March 1998, the American Institute of Certified
Public Accountants issued Statement of Position (SOP 98-1)
which addresses the recognition, measurement and disclosure
issues for costs of computer software developed for internal
use. SOP 98-1 requires companies to capitalize certain
costs related to software developed or obtained for internal
use. The Company adopted SOP 98-1 in the third quarter of
fiscal 1998 and the impact was not material.
Short-term and Long-term Investments
At June 27, 1998, short-term investments consist
primarily of money market mutual funds, U.S. government
securities and commercial paper, for which market value
approximates cost. Long-term investments consist primarily
of corporate and government bonds which are classified as
"available for sale" and are recorded at current market
value.
Earnings Per Share
Basic earnings per share is computed by dividing net
income by the weighted -average number of common shares
outstanding for the period. Diluted earnings per share
reflects the potential dilution from instruments that could
result in additional common shares being issued which, for
the Company, includes stock options and warrants.
Options to purchase 858,925 shares of common stock were
outstanding at the end of the 1998 fiscal third quarter but
were not included in the computation of diluted EPS because
they were antidilutive.
Fiscal Year-End
The Company's fiscal year ends on the last Saturday of
September.
Note 2: Inventories
At June 27, 1998 and September 27, 1997, inventories
stated at the lower of LIFO (last-in, first-out) cost or
market represent approximately 48% and 53% of total
inventories before the LIFO reserve, respectively.
Inventories consist of the following components ($000's):
June 27, September 27,
1 9 9 8 1 9 9 7
Raw materials $ 9,885 $10,300
Semi-finished and
finished goods 62,708 66,005
72,593 76,305
LIFO reserve (2,831) (2,831)
$69,762 $73,474
Note 3: Long-term Debt
In October 1997 the Company redeemed $52.4 million
principal amount of its outstanding 13.5% Senior Secured
Notes due 2003 (Notes). The redemption was made from the
proceeds of the Company's September 1997 public offering and
included a prepayment penalty of $7.1 million, which was
recorded in the fourth quarter of fiscal 1997, plus accrued
interest.
Note 4: Common Stock and Stock Option Transactions
During the first quarter of fiscal 1998, the Company
issued 540,295 shares of its common stock through the
exercise of the underwriters' over-allotment option related
to the Company's September 1997 public offering. The
Company also issued 512,729 shares of its common stock in
the first nine months of fiscal 1998 in connection with the
exercise of stock options and warrants.
The Company purchased 884,900 and 1,082,500 shares of
its common stock during the third quarter and first nine
months of fiscal 1998, respectively, in open market
transactions. The repurchased shares are recorded as
treasury shares.
Note 5: Commitments and Contingencies
The Company has various commitments for the purchase of
materials, supplies and energy arising in the ordinary
course of business.
Legal Matters
The Company is subject to various claims, lawsuits and
administrative proceedings arising in the ordinary course of
business with respect to workers compensation, health care
and product liability coverages (each of which is
self-insured to certain levels), as well as commercial and
other matters. The Company accrues for the cost of such
matters when the incurrence of such costs is probable and
can be reasonably estimated. 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 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 steel 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.
In November 1996, Koppel received a Notice of Violation
from the EPA alleging violations of the Clean Air Act and
the Pennsylvania State Implementation Plan. The violations
allegedly occurred during 1995 and 1996 and pertain to air
emissions from Koppel's electric arc furnace operations.
The conditions which contributed to the alleged violations
were corrected and Koppel has demonstrated compliance with
air emission regulations. At this time, the Company is
unable to determine the extent of any civil penalties which
the EPA may assess.
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. In
accordance with the Consent Order, investigation,
monitoring, testing and analysis of the potential releases
has been completed and a final report has been forwarded to
the EPA; however, additional remediation may be required.
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. To date, the Company has been fully indemnified
against all matters pertaining to the Consent Order and the
Company believes that the indemnity provisions provide for
it to be fully indemnified against all future 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 a quantity of
electric arc furnace dust. The Company is investigating and
evaluating various issues concerning storage, treatment and
disposal of the radiation contaminated electric arc furnace
dust; however, a final determination as to method of
treatment and disposal, cost and further regulatory
requirements has not been 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. The Company expects to recover and has recorded a
$2.3 million receivable relating to insurance claims for the
recovery of disposal costs which will be filed with the
applicable insurance carrier at the time such disposal costs
are incurred. Such insurance claims will exhaust available
insurance coverage pertaining to these incidents. Based on
current knowledge, management believes the recorded gross
reserves of $4.3 million for disposal costs pertaining to
these incidents are adequate.
Subject to the uncertainties concerning the Consent
Order and the storage of the radiation contaminated dust,
the Company believes that it is currently in compliance in
all material respects with all applicable environmental
regulations. The Company cannot predict the level of
required capital expenditures or operating costs that may
result from future environmental regulations.
Capital expenditures for the next twelve months
relating to environmental control facilities are expected to
be approximately $4.0 million; however, such expenditures
could be influenced by new or revised environmental
regulations and laws or new information or developments with
respect to the Company's operating facilities.
As of June 27, 1998, the Company had environmental
remediation reserves of $4.3 million which pertain almost
exclusively to accrued disposal costs for radiation
contaminated dust. As of June 27, 1998, 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. 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 its
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 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. All
significant intercompany accounts and transactions between
the Subsidiary Guarantors have been eliminated.
June 27, September 27,
1998 1997
(Dollars in thousands)
Current assets $151,332 $168,412
Noncurrent assets $139,643 $131,526
Current liabilities $ 43,302 $ 70,871
Payable to parent $192,727 $174,495
Other noncurrent liabilities 1,269 2,003
Total noncurrent liabilities $193,996 $176,498
Three Months Ended Nine Months Ended
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
(Dollars in thousands)
Net sales $96,882 $132,853 $344,181 $349,130
Gross profit $ 9,753 $ 19,354 $ 43,523 $ 47,434
Net income $ 491 $ 5,612 $ 11,935 $ 10,169
NS GROUP, INC. AND SUBSIDIARIES
MANAGEMENT's DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
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: (i) the
level and cyclicality of domestic as well as worldwide oil
and natural gas drilling activity; (ii) general economic
conditions; (iii) product demand, inventory levels and
industry capacity; (iv) industry pricing; (v) the level of
imports and the presence or absence of governmentally
imposed trade restrictions; (vi) manufacturing efficiencies;
(vii) volatility in raw material costs, particularly steel
scrap; (viii) costs of compliance with environmental
regulations; and (ix) product liability or other claims.
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.
The following analysis of financial condition and
results of operations of the Company should be read in
conjunction with the unaudited Consolidated Financial
Statements and related Notes of the Company.
The Company operates in two 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 and special bar quality (SBQ) products. The
Company's specialty steel products consist of: (i) welded
and seamless oil country tubular goods (OCTG) used primarily
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 used primarily 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.
Results of Operations
The Company's net sales, gross profit and operating
income by business segment for the three and nine month
periods ended June 27, 1998 and June 28, 1997 are summarized
below.
Three Months Ended Nine Months Ended
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
(Dollars in thousands)
Net sales
Specialty steel segment
Newport $ 32,638 $ 64,052 $137,888 $160,382
Koppel 53,565 57,980 176,626 157,529
86,203 122,032 314,514 317,911
Adhesives segment 10,679 10,821 29,667 31,219
$96,882 $132,853 $344,181 $349,130
Gross profit
Specialty steel segment
Newport $ 84 $ 8,225 $ 13,452 $21,655
Koppel 6,616 8,228 22,202 17,931
6,700 16,453 35,654 39,586
Adhesives segment 3,053 2,901 7,869 7,848
$ 9,753 $ 19,354 $ 43,523 $47,434
Operating income (loss)
Specialty steel segment
Newport $(1,628) $ 6,503 $ 7,796 $16,805
Koppel 4,571 6,562 16,861 12,719
2,943 13,065 24,657 29,524
Adhesives segment 783 558 1,467 1,185
Corporate
allocations (1,053) (1,022) (3,605) (3,309)
$2,673 $12,601 $22,519 $ 27,400
Sales data for the Company's specialty steel segment
for the three and nine month periods ended June 27, 1998 and
June 28, 1997 were as follows:
Three Months Ended Nine Months Ended
June 27, June 28, June 27, June 28,
1998 1997 1998 1997
Tons shipped
Newport
Welded tubular 60,400 121,800 248,500 305,800
Hot rolled coils
and other
products 7,200 6,100 22,500 21,400
Koppel
Seamless tubular 39,100 47,200 132,500 121,200
SBQ 45,700 40,200 128,200 115,700
152,400 215,300 531,700 564,100
Net sales ($000's)
Newport
Welded tubular $ 29,825 $ 61,725 $128,557 $151,915
Hot rolled coils
and other
products 2,813 2,327 9,331 8,467
Koppel
Seamless tubular 32,900 40,208 118,474 106,335
SBQ 20,665 17,772 58,152 51,194
$ 86,203 $122,032 $314,514 $317,911
Net sales for the third quarter of fiscal 1998
decreased $36.0 million, or 27.1%, from the third quarter of
fiscal 1997 to $96.9 million. For the nine month comparable
periods, net sales decreased $4.9 million, or 1.4%, to
$344.2 million. Specialty steel segment net sales decreased
$35.8 million, or 29.4%, and $3.4 million, or 1.1%, for the
three and nine month periods, respectively. The overall
decline in specialty steel segment net sales was
attributable to a decline in shipments and average selling
prices of the Company's tubular products as more fully
discussed below. Adhesives segment net sales decreased $0.1
million, or 1.3%, and $1.6 million, or 5.0%, for the three
and nine month periods, respectively. The decline in
adhesives segment net sales was attributable to a decline in
sales of methylene chloride-based products, which were
largely restricted by OSHA regulations beginning in the
fiscal 1998 first quarter, as well as Imperial's emphasis on
eliminating certain non-strategic, low margin product lines.
Welded tubular product net sales for the current
quarter decreased $31.9 million, or 51.7%, on a volume
decline of 50.4%, from the third quarter of fiscal 1997.
Welded tubular product net sales for the first nine months
of fiscal 1998 decreased $23.4 million, or 15.4%, on a
volume decline of 18.7%, from the comparable prior year
period. The average selling price for all welded tubular
products for the third quarter of fiscal 1998 was $494 per
ton, a 2.6% decline from the third quarter of fiscal 1997.
The decline in shipments and average selling prices was
attributable to welded OCTG products, which was driven by a
decline in drilling activity as well as an increase in
industry inventory levels compared to the prior year.
Total seamless tubular product net sales for the fiscal
1998 third quarter decreased $7.3 million, or 18.2%, on a
volume decline of 17.2% from the third quarter of fiscal
1997. For the comparable nine month periods, net sales of
seamless tubular products increased $12.1 million, or 11.4%,
on a volume increase of 9.3%. Average selling prices for
all seamless tubular products for the third quarter of
fiscal 1998 was $841 per ton, a 1.4% decline from the third
quarter of fiscal 1997. Like welded tubular products, the
decline in third quarter seamless tubular shipments and
average selling prices was attributable to seamless OCTG
products caused by the decline in drilling rig activity and
an increase in industry inventory levels. The Company
expects a significant decline in fiscal 1998 fourth quarter
operating levels and results in its seamless operations due
to market conditions.
Demand for the Company's OCTG products is cyclical in
nature, being dependent on the number and depth of oil and
natural gas wells being drilled in the United States and
globally. The level of drilling activity is largely a
function of the current prices of oil and natural gas and
expectations of future prices. The average number of oil
and natural gas drilling rigs in operation in the United
States (rig count) decreased 7% for the third quarter of
fiscal 1998 from the comparable prior fiscal year period.
In addition, shipments by domestic producers of OCTG
products are influenced by the levels of inventory held by
producers, distributors and end users, as well as the level
of foreign imports of OCTG products.
Demand for the Company's OCTG products began to soften
in the latter part of the fiscal 1998 second quarter which
continued through the third fiscal quarter and into the
fourth fiscal quarter. The softness can be attributed to
high industry inventory levels as well as further declines
in rig count caused by lower prices for crude oil. Rig
count as of July 31, 1998 was 822, down from an average of
865 in the third quarter of fiscal 1998 and 990 in the
fourth quarter of fiscal 1997. As a result, the Company
anticipates a reduction in operating levels and results,
particularly in its seamless tubular operations, in the
fourth quarter of fiscal 1998 as compared to the fiscal 1998
third quarter and the fourth quarter of fiscal 1997.
The U.S. government is currently imposing 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. The duties are
subject to annual review by the U.S. Department of Commerce
through 2000. The Company believes the imposition of the
duties has had a positive effect on its shipments and the
pricing of certain of its seamless tubular products;
however, it cannot predict the U.S. government's future
actions regarding import duties or other trade restrictions
on imports of OCTG products.
SBQ product net sales increased $2.9 million, or 16.3%,
on a volume increase of 13.7%, and $7.0 million, or 13.6%,
on a volume increase of 10.8% for the comparable three and
nine month periods, respectively. Average selling price for
SBQ products for the same periods increased 2.5% and 2.7%,
respectively. The demand for the Company's SBQ products is
cyclical in nature and is sensitive to general economic
conditions.
Gross profit for the third quarter of fiscal 1998
decreased $9.6 million from the third quarter of fiscal
1997. Gross profit margin was 10.1% in the third quarter of
fiscal 1998 compared to 14.6% in the third quarter of the
prior fiscal year. For the nine month period, gross profit
decreased $3.9 million and gross profit margin was 12.6%
compared to 13.6% in the comparable prior year period.
Newport's gross profit margin for the three and nine month
comparable periods decreased to 0.3% and 9.8% from 12.8% and
13.5%, respectively, due to declines in average selling
prices, shipments and operating efficiencies. Koppel's
gross profit margin for the third quarter of fiscal 1998
decreased to 12.4% from 14.2% in the comparable quarter of
the prior fiscal year. Similar to Newport, the decline for
the quarter was due to a decrease in OCTG product shipments
and average selling price as well as lower operating
efficiencies. For the nine month comparable period,
Koppel's gross profit margin increased from 11.4% to 12.6%.
The adhesives segment gross profit increased $0.2
million in the third quarter of fiscal 1998 over the prior
year comparable period. Gross profit was unchanged for the
comparative nine month period. Gross profit margin
increased to 28.6% from 26.8% for the three month comparable
periods and increased to 26.5% from 25.1% for the
comparative nine month periods.
Selling and administrative expenses increased 4.8% for
each of the third quarter and nine month comparative
periods. As a percent of sales, selling and administrative
expenses were 7.3% for the third quarter of fiscal 1998
compared to 5.1% in the third quarter of a year ago.
As a result of the above factors, operating income
decreased $9.9 million, from $12.6 million in the third
quarter of fiscal 1997 to $2.7 million in the current fiscal
quarter. For the nine month period, operating income
decreased $4.9 million, from $27.4 million in fiscal 1997 to
$22.5 million in the first nine months of fiscal 1998.
Fiscal 1998 third quarter and nine month investment
income increased $2.0 million and $5.9 million from the
comparable prior year periods while interest expense for the
same comparable periods decreased $3.1 million and $8.7
million, respectively. The increase in investment income
and decrease in interest expense is the result of increased
average cash and investment balances and a decrease in
long-term debt obligations, respectively, which resulted
from the Company's September 1997 public offering (including
the exercise of the underwriters' overallotment option in
October 1997) (Offering) and related retirement of long-term
debt.
The Company's combined federal and state effective tax
rate for the fiscal 1998 nine month period was 32.5%. This
rate is lower than the combined federal and state statutory
rates primarily due to the utilization of net operating loss
carryforwards for which certain deferred tax valuation
allowances had been previously recorded. The Company is
currently paying federal taxes at the alternative minimum
tax rate of 20%.
As a result of the above factors, the Company reported
net income of $1.2 million, or $.05 per share (basic and
diluted), in the third quarter of fiscal 1998 compared to
$4.9 million, or $.36 per share ($.33 diluted), in the third
quarter of fiscal 1997. For the current nine month period,
the Company reported net income of $13.5 million, or $.56
per share, ($.54 diluted), compared to $7.3 million, or $.53
per share ($.52 diluted), for the first nine months of
fiscal 1997. Weighted average shares outstanding increased
for the comparable periods primarily as a result of the
Offering.
Liquidity and Capital Resources
Working capital at June 27, 1998 was $169.9 million
compared to $226.9 million at September 27, 1997. The
current ratio was 4.2 to 1 at June 27, 1998 compared to 2.6
to 1 at September 27, 1997. At June 27, 1998, the Company
had cash and investments totaling $137.7 million. At June
27, 1998, the Company had no outstanding advances against
its $45.0 million revolving credit facility; however $2.4
million of the facility secured various letters of credit
issued primarily in connection with the Company's
self-insured workers compensation liabilities.
Subsequent to the end of the fiscal quarter, the
Company replaced its credit facility with a new five year
$50 million revolving credit facility on terms similar to,
but no less favorable than, its previous facility.
Net cash flows provided by operating activities totaled
$13.5 million in the first nine months of fiscal 1998,
compared to cash provided by operations of $5.6 million in
the comparable prior year period. The Company recorded net
income of $13.5 million in the first nine months of fiscal
1998 compared to $7.3 million in the first nine months of
fiscal 1997. Major sources of cash from operating
activities in the first nine months of fiscal 1998 included
$14.3 million in non-cash depreciation and amortization
charges and decreases in accounts receivable and inventory
of $11.2 million and $3.7 million, respectively, due
primarily to a decline in business activity. Major uses of
cash in operating activities included a $24.4 million
decrease in accounts payable related primarily to a decline
in business activity as well as to payments for steel slabs
which Newport purchased in fiscal 1997; and a $7.4 million
decrease in accrued liabilities related primarily to the
fiscal first quarter debt prepayment penalty in connection
with the redemption of the Company's 13.5% Senior Secured
Notes (Notes) in October 1997.
For the first nine months of fiscal 1997, net cash
flows provided by operating activities were $5.6 million.
Major sources of cash from operating activities included
$14.5 million in non-cash depreciation and amortization
charges and increases in accounts payable and accrued
liabilities of $7.9 million and $7.5 million, respectively.
The major uses of cash in operating activities for the
period were for increases in accounts receivable and
inventories resulting from increased business activity
related primarily to the OCTG marketplace.
The Company invested $22.7 million in capital
expenditures during the first nine months of fiscal 1998,
primarily related to improvements to and acquisition of
machinery and equipment in the specialty steel segment. The
Company currently estimates that fiscal 1998 capital
spending will approximate $33.0 million, primarily in the
specialty steel segment. Of the total, approximately $10.0
million is estimated to be incurred in connection with the
purchase and installation of a new AC electric arc furnace
at Newport. Total spending for the furnace over fiscal 1998
and 1999 is estimated to be $25.0 million and start-up is
scheduled for the second quarter of fiscal 1999. A
significant portion of the remaining fiscal 1998 capital
expenditures will be used to invest in equipment which
should reduce operating costs and increase tubular product
finishing capabilities. The Company's sources for funding
capital expenditures include cash flow from operations,
available cash and investments, as well as available
borrowing sources. The Company expects capital spending in
fiscal 1999 will approximate the spending levels of fiscal
1998.
The Company also used cash and short-term investments
to make net investments of $65.9 million in long-term
investments, primarily government and corporate bonds.
Repayments on long-term debt of $53.8 million during
the first nine months of fiscal 1998 includes the redemption
of $52.4 million principal amount of the Company's Notes.
Reference is made to Note 3: Long-term Debt, to the Notes to
Condensed Consolidated Financial Statements. During the
first nine months of fiscal 1998, the Company received $17.5
million in proceeds from the issuance of common stock,
approximately $15.4 million of which represents the exercise
of the underwriters' over-allotment option in connection
with the Offering. The remainder represents the exercise of
stock options and warrants. The Company also purchased
1,082,500 shares of its common stock in open market
transactions for $13.7 million during the first nine months
of fiscal 1998. The shares were purchased pursuant to the
Board of Directors authorization to purchase up to three
million shares of the Company's common stock through June
1999.
Earnings before interest expense, taxes, depreciation
and amortization (EBITDA) were $9.4 million and $43.0
million in the third quarter and first nine months of fiscal
1998, respectively, compared to $17.2 million and $41.6
million in the comparable periods of fiscal 1997. EBITDA is
calculated as net income 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, 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 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
See "Note 5: Commitments and Contingencies" to the
Notes to Condensed Consolidated Financial Statements.
In March 1998, the American Institute of Certified
Public Accountants issued Statement of Position (SOP 98-1)
which addresses the recognition, measurement and disclosure
issues for costs of computer software developed for internal
use. SOP 98-1 requires companies to capitalize certain
costs related to software developed or obtained for internal
use. The Company adopted SOP 98-1 in the third quarter of
fiscal 1998 and the impact was not material.
Year 2000 Compliance Programs
The Company is currently conducting a review of all
systems serving the financial and operational activities of
its business units and is in various stages of developing
and implementing plans to identify and resolve year 2000
issues. The potential effect of year 2000 issues as it
pertains to customers and suppliers is also being
considered. The Company believes that, with modification of
existing computer systems, updates by vendors and conversion
to new software in the ordinary course of business, the year
2000 issue will not have a material impact on the Company's
operations. The costs of modifications and conversions are
not expected to be material. There can be no assurance,
however, that as a result of the failure of major customers
or suppliers to properly address their year 2000 issues, or
as a result of a delay or oversight in the Company's
efforts, that the year 2000 issue will not have a material
impact on the business and operations of the Company.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
For a discussion regarding the Consent Order entered
into by Koppel and the EPA in March 1995 and the Notice of
Violation received by Koppel from the EPA in November 1996,
see "Note 5: Commitments and Contingencies - Environmental
Matters" to the Notes to Condensed Consolidated Financial
Statements.
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: July 31, 1998 By: /s/Clifford R. Borland
Clifford R. Borland
Chairman and Chief Executive
Officer
Date: July 31, 1998 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 Exhibit 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 27, 1998, 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>
<CIK> 0000745026
<NAME> NS GROUP, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-26-1998
<PERIOD-START> SEP-28-1997
<PERIOD-END> JUN-27-1998
<EXCHANGE-RATE> 1
<CASH> 2,781
<SECURITIES> 67,283
<RECEIVABLES> 52,604
<ALLOWANCES> 702
<INVENTORY> 69,762
<CURRENT-ASSETS> 222,448
<PP&E> 301,157
<DEPRECIATION> 167,918
<TOTAL-ASSETS> 431,161
<CURRENT-LIABILITIES> 52,530
<BONDS> 76,193
0
0
<COMMON> 280,359
<OTHER-SE> 9,014
<TOTAL-LIABILITY-AND-EQUITY> 431,161
<SALES> 344,181
<TOTAL-REVENUES> 344,181
<CGS> 300,658
<TOTAL-COSTS> 300,658
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,629
<INCOME-PRETAX> 19,942
<INCOME-TAX> 6,480
<INCOME-CONTINUING> 13,462
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,462
<EPS-PRIMARY> .56
<EPS-DILUTED> .54
</TABLE>
