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 26, 1999
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 21,419,524
(Class) (Outstanding at July 23, 1999)
NS GROUP, INC.
INDEX
PART I FINANCIAL INFORMATION
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
Item 3 Quantitative and Qualitative Disclosures
About Market Risk 21
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 26, 1999 AND JUNE 27, 1998
(In thousands, except per share amounts) (Unaudited)
Three Months Ended Nine Months Ended
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
NET SALES $59,582 $96,882 $170,311 $344,181
COST AND EXPENSES
Cost of products
sold 63,186 87,129 185,742 300,658
Selling and admin-
istrative expenses 6,309 7,080 19,967 21,004
Operating income
(loss) (9,913) 2,673 (35,398) 22,519
OTHER INCOME
(EXPENSE)
Investment income 1,617 2,230 4,832 6,643
Interest expense (2,884) (3,048) (8,691) (9,629)
Other income, net 2,636 (24) 2,911 409
Income (loss) before
income taxes and
extraordinary items (8,544) 1,831 (36,346) 19,942
PROVISION (CREDIT) FOR
INCOME TAXES 37 642 (2,689) 6,480
Income (loss) before
extraordinary items (8,581) 1,189 (33,657) 13,462
EXTRAORDINARY ITEMS - - (3,837) -
Net income (loss) $(8,581) $1,189 $(37,494) $13,462
PER COMMON SHARE - BASIC
Income (loss) before
extraordinary items $(.40) $.05 $(1.53) $.56
Extraordinary items - - (.17) -
Net income (loss) $(.40) $.05 $(1.70) $.56
PER COMMON SHARE - DILUTED
Income (loss) before
extraordinary items $(.40) $.05 $(1.53) $.54
Extraordinary items - - ( .17) -
Net income (loss) $(.40) $.05 $(1.70) $.54
WEIGHTED AVERAGE SHARES
OUTSTANDING
Basic 21,417 23,655 21,995 23,902
Diluted 21,417 24,528 21,995 25,006
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 26, 1999 AND SEPTEMBER 26, 1998
(Dollars in thousands) (Unaudited)
June 26, September 26,
1 9 9 9 1 9 9 8
CURRENT ASSETS
Cash $ 2,107 $ 1,783
Short-term investments 28,751 64,689
Accounts receivable, less
allowance for doubtful
accounts of $945 and $752,
respectively 29,509 36,640
Inventories 59,720 66,041
Other current assets 27,164 30,892
Total current assets 147,251 200,045
PROPERTY, PLANT AND EQUIPMENT 331,509 306,900
Less - accumulated depreciation (186,393) (171,700)
145,116 135,200
LONG-TERM INVESTMENTS 64,726 75,626
OTHER ASSETS 7,425 7,800
Total assets $364,518 $418,671
CURRENT LIABILITIES
Accounts and notes payable $ 23,326 $ 28,305
Accrued liabilities 26,856 23,608
Current portion of long-term
debt 198 678
Total current liabilities 50,380 52,591
LONG-TERM DEBT 72,754 76,325
DEFERRED TAXES 8,914 11,706
COMMON SHAREHOLDERS' EQUITY
Common stock, no par value 279,931 279,886
Treasury stock (23,675) (15,992)
Common stock options and
warrants 885 898
Accumulated other
comprehensive income (3,268) (2,834)
Accumulated earnings (deficit) (21,403) 16,091
Total common shareholders'
equity 232,470 278,049
Total liabilities and
shareholders' equity $364,518 $418,671
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 26, 1999 AND JUNE 27, 1998
(Dollars in thousands) (Unaudited)
June 26, June 27,
1999 1998
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(37,494) $ 13,462
Adjustments to reconcile net income
(loss) to net cash flows from
operating activities:
Depreciation and amortization 14,954 13,390
Amortization of debt discount and
finance costs 971 946
Increase (decrease) in long-term
deferred taxes (2,792) 362
(Gain) loss on sales of investments 292 (8)
Decrease in accounts receivable, net 7,131 11,249
Decrease in inventories 6,321 3,712
Decrease in other current assets 3,728 2,208
Decrease in accounts payable (4,763) (24,410)
Increase (decrease) in accrued
liabilities 3,248 (7,449)
Net cash flows from operating
activities (8,404) 13,462
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and
equipment, net (24,609) (22,662)
Net (purchases) sales of long-term
investments 10,062 (65,855)
(Increase) decrease in other assets (172) 177
Net cash flows from investing
activities (14,719) (88,340)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in notes payable (216) (402)
Repayments on long-term debt (4,626) (53,819)
Proceeds from issuance of common stock 34 17,543
Purchases of treasury stock (7,683) (13,723)
Net cash flows from financing
activities (12,491) (50,401)
Net decrease in cash and
short-term investments (35,614) (125,279)
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF YEAR 66,472 195,343
CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD $ 30,858 $ 70,064
Cash paid during the period for:
Interest $5,260 $7,400
Income taxes, net of refunds $(3,017) $4,452
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 condensed 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 26, 1998 for
additional footnote disclosure, including a summary of
significant accounting policies.
Earnings Per Share
Basic earnings per share is computed by dividing net
income (loss) by the weighted-average number of common
shares outstanding for the period. Diluted earnings per
share reflects the potential dilution from securities that
could result in additional common shares being issued which,
for the Company, are comprised of stock options and
warrants.
Securities that could potentially result in dilution of
basic EPS through the issuance of 2.6 million shares of the
Company's common stock were not included in the computation
of diluted EPS for the third quarter and nine month periods
of fiscal 1999 because the Company incurred losses before
extraordinary items. For the prior fiscal year periods,
securities representing 40,000 shares 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: Comprehensive Income
The Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income (SFAS
130), in the first quarter of fiscal 1999. SFAS 130
requires the Company to report "other comprehensive income,"
as defined, that is not otherwise presented in its Condensed
Consolidated Statements of Operations. Currently, the
Company's other comprehensive income consists solely of
unrealized gains/losses on available for sale securities.
Comprehensive income was as follows:
Three Months Ended Nine Months Ended
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
Net income (loss) $(8,581) $1,189 $(37,494) $13,462
Unrealized gains
(losses) on
available for
sale securities (1,141) (618) (185) (721)
Comprehensive
income (loss) $(9,722) $ 571 $(37,679) $12,741
Note 3: Other Income, Net
Included in other income, net in the fiscal 1999 third
quarter and nine month periods is income of $2.8 million, or
$.13 per diluted share, for a claim settlement pertaining to
the Company's purchases of electrodes during the years from
1992 to 1997.
Note 4: Extraordinary Items
In the second quarter of fiscal 1999, the Company
accrued an additional $4.3 million in disposal costs as well
as additional expected insurance recoveries of $0.9 million
in connection with ongoing efforts to dispose of radiation
contaminated dust generated at the Company's Newport
facility in 1993. Such amounts were recorded as an
extraordinary charge of $3.4 million.
In the first quarter of fiscal 1999, the Company
incurred prepayment costs and wrote off unamortized debt
issuance costs in connection with the early retirement of
$4.0 million principal amount of long-term indebtedness,
resulting in an extraordinary charge of $0.4 million, net of
applicable income tax benefit of $0.1 million.
Note 5: Inventories
Inventories are stated at the lower of FIFO (first-in,
first-out) cost or market, or the lower of average cost or
market. Until fiscal 1999, one subsidiary used the LIFO
(last-in, first-out) method to determine cost. Effective
September 27, 1998 the subsidiary changed to the FIFO
method. The change in accounting principle was made to
provide a better matching of sales and expenses and has been
applied retroactively. This change increased inventories by
$0.6 million and retained earnings by $0.5 million,
respectively, as of September 26, 1998. Since this change
was accounted for retroactively, it had no effect on the
Company's results of operations and cash flows for fiscal
1999. At June 26, 1999 and September 26, 1998, inventories
consisted of the following components ($000's):
June 26, September 26,
1999 1998
Raw materials $10,956 $ 7,921
Semi-finished and
finished goods 48,764 58,120
$59,720 $66,041
Note 6: 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. Such laws and regulations include 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 processing
of the dust at an EPA-approved facility.
In August 1998, Newport received separate Notices of
Violation (NOV) from the Kentucky Division of Waste
Management and the Kentucky Division of Water related to a
release of oil into the Licking River and certain related
actions taken by Newport in connection therewith. Based
upon the information available to date, the Company believes
any civil penalties assessed in connection with this
incident will not have a material adverse effect on the
Company's consolidated financial position, results of
operations or cash flows.
In November 1996, Koppel received an NOV 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 emissions regulations. Based upon information available
to date, the Company believes any civil penalties assessed
in connection with this incident will not have a material
adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
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 has contracted with
a company to dispose of the dust at an EPA-approved
facility. The Company believes disposal costs will not
exceed its reserves as of June 26, 1999 of $5.6 million.
The Company has an insurance receivable outstanding of $1.6
million as of June 26, 1999.
Subject to the uncertainties concerning 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 $2.1 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 26, 1999, the Company had environmental
remediation reserves of $5.9 million which pertain almost
exclusively to accrued disposal costs for radiation
contaminated dust. 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 7: 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 26, September 26,
1999 1998
(Dollars in thousands)
Current assets $108,263 $130,708
Non-current assets $150,561 $140,942
Current liabilities $ 41,471 $ 43,990
Payable to parent $194,531 $174,432
Other non-current
liabilities 1,233 1,379
Total non-current
liabilities $195,764 $175,811
Three Months Ended Nine Months Ended
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
(Dollars in thousands)
Net sales $59,582 $96,882 $170,311 $344,181
Gross profit
(loss) $(3,604) $ 9,753 $(15,431) $ 43,523
Income (loss)
before extra-
ordinary items $(7,557) $ 491 $(36,792) $ 11,935
Net income (loss) $(7,557) $ 491 $(40,192) $ 11,935
NS GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
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 Condensed Consolidated
Financial Statements and related Notes of the Company.
General
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
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 regarding future prices. 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 in the third
quarter and first nine months of fiscal 1999 declined
significantly from the comparable prior year periods. The
decline was attributable to decreased domestic drilling
activity coupled with excess industry-wide OCTG and line
pipe inventories. The average number of oil and natural gas
drilling rigs in operation in the United States (rig count)
in the third quarter and first nine months of fiscal 1999
was 523 and 589, respectively, a decline of 40% and 38%,
respectively, from the comparable prior year periods.
During the fiscal 1999 third quarter, however, rig count
began to improve and at the end of July 1999, rig count was
602.
The Company's net sales, gross profit (loss) and
operating income (loss) by business segment for the three
and nine month periods ended June 26, 1999 and June 27, 1998
are summarized below.
Three Months Ended Nine Months Ended
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
(Dollars in thousands)
Net sales
Specialty steel segment
Newport $24,587 $32,638 $ 62,636 $137,888
Koppel 23,656 53,565 74,724 176,626
48,243 86,203 137,360 314,514
Adhesives segment 11,339 10,679 32,951 29,667
$59,582 $96,882 $170,311 $344,181
Gross profit (loss)
Specialty steel segment
Newport $(4,789) $ 84 $(16,086) $ 13,452
Koppel (2,112) 6,616 (8,706) 22,202
(6,901) 6,700 (24,792) 35,654
Adhesives segment 3,297 3,053 9,361 7,869
$(3,604) $ 9,753 $(15,431) $ 43,523
Operating income (loss)
Specialty steel segment
Newport $(6,331) $(1,628) $(21,006) $ 7,796
Koppel (3,743) 4,571 (13,578) 16,861
(10,074) 2,943 (34,584) 24,657
Adhesives segment 1,013 783 1,900 1,467
Corporate
allocations (852) (1,053) (2,714) (3,605)
$(9,913) $ 2,673 $(35,398) $ 22,519
Sales data for the Company's specialty steel segment for the
three and nine month periods ended June 26, 1999 and June 27,
1998 were as follows:
Three Months Ended Nine Months Ended
June 26, June 27, June 26, June 27,
1999 1998 1999 1998
Tons shipped
Newport
Welded tubular 66,100 60,400 155,800 248,500
Hot rolled coils
and other products 2,600 7,200 5,800 22,500
Koppel
Seamless tubular 15,400 39,100 44,800 132,500
SBQ 31,400 45,700 97,800 128,200
115,500 152,400 304,200 531,700
Net sales ($000's)
Newport
Welded tubular $23,772 $ 29,825 $60,604 $128,557
Hot rolled coils
and other
products 815 2,813 2,032 9,331
Koppel
Seamless tubular 11,045 32,900 33,304 118,474
SBQ 12,611 20,665 41,420 58,152
$48,243 $86,203 $137,360 $314,514
Net sales for the third quarter of fiscal 1999 decreased
$37.3 million, or 38.5%, from the third quarter of fiscal 1998 to
$59.6 million. For the nine month comparable periods, net sales
decreased $173.9 million, or 50.5%, to $170.3 million. Specialty
steel segment net sales decreased $38.0 million, or 44.0%, and
$177.2 million, or 56.3%, for the three and nine month periods,
respectively. The overall decrease in specialty steel segment
net sales for the three and nine month periods was primarily
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 increased $0.7 million, or 6.2%, and
$3.3 million, or 11.1%, for the three and nine month periods,
respectively, on volume increases of 12.8% and 15.6%,
respectively.
Welded tubular product net sales for the current quarter
decreased $6.1 million, or 20.3%, on a volume increase of 9.4%,
from the third quarter of fiscal 1998. Average selling price for
all welded tubular products for the third quarter of fiscal 1999
decreased 27.3% from the prior fiscal year third quarter. Welded
tubular product net sales for the first nine months of fiscal
1999 decreased $68.0 million, or 52.9%, on a volume decrease of
37.3%, from the comparable prior year period. The average
selling price for all welded tubular products for the first nine
months of fiscal 1999 declined 24.8% from the same period in
fiscal 1998. The increase in total welded tubular shipments for
the quarter was primarily the result of increased shipments
of welded line pipe as compared to the third quarter of fiscal
1998. Welded OCTG shipments were unchanged between quarters.
The decline in average selling prices for the third quarter of
fiscal 1999, as compared to the prior year period, was the result
of lower selling prices for both welded OCTG and line pipe
products. The decline in shipments and average selling prices
for the first nine months of fiscal 1999, as compared to the
prior year comparable period, were primarily attributable to
decreases in shipments and selling prices of welded OCTG
products, which was driven by the decline in drilling activity as
well as excessive industry-wide inventory levels.
Total seamless tubular product net sales for the fiscal
1999 third quarter decreased $21.9 million, or 66.4%, on a
volume decrease of 60.6% from the third quarter of fiscal
1998. For the comparable nine month periods, net sales of
seamless tubular products decreased $85.2 million, or 71.9%,
on a volume decrease of 66.2%. Average selling prices for
all seamless tubular products for the third quarter and
first nine months of fiscal 1999 declined 14.5% and 16.8%,
respectively, from the comparable fiscal 1998 periods. As
with welded tubular products, the decline in seamless
tubular product shipments and selling price was attributable
primarily to OCTG products, caused by the decline in
drilling activity and excessive industry-wide inventory
levels.
Since 1995, the U.S. government has been 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 primarily pertain to the import of
seamless OCTG products and are subject to annual review by
the U.S. Department of Commerce through 2000. Also, the
Company, together with certain other line pipe producers,
has recently filed petitions with the U.S. government
seeking relief from imports of welded and seamless line pipe
products. The Company cannot predict the U.S. government's
actions regarding these petitions or any other future
actions regarding import duties or other trade restrictions
on imports of OCTG and line pipe products.
SBQ product net sales decreased $8.1 million, or 39.0%,
on a volume decrease of 31.3%, and $16.7 million, or 28.8%,
on a volume decrease of 23.7% for the comparable three and
nine month periods, respectively. Average selling price for
SBQ products for the same periods decreased 11.1% and 6.6%,
respectively. The demand for the Company's SBQ products is
cyclical in nature and is sensitive to general economic
conditions.
The significant decline in shipments and average
selling prices for the specialty steel segment resulted in a
gross loss and an operating loss of $6.9 million and $10.1
million, respectively, in the third quarter of fiscal 1999,
compared to a gross profit and an operating profit of $6.7
million and $2.9 million, respectively, in the comparable
quarter of a year ago. For the fiscal 1999 nine month
period, the gross loss and operating loss were $24.8 million
and $34.6 million, respectively, compared to gross profit
and operating income of $35.7 million and $24.7 million,
respectively, for the comparable prior year period. The
fiscal 1999 nine month comparative results were also
negatively impacted by lower operating efficiencies due to
significantly reduced operating levels at both Newport and
Koppel in response to poor market demand. Newport's melt
shop and pipe mill capacity utilization was 33.7% and 35.3%,
respectively, in the first nine months of fiscal 1999
compared to 78.2% and 92.1% for the same period of fiscal
1998. In addition, Newport's melt shop utilization and
operating costs were negatively affected by a fiscal 1999
second quarter six week shut-down for final installation of
its new electric arc furnace. Koppel's melt shop and tube
mill capacity utilization was 42.4% and 21.5%, respectively,
in the first nine months of fiscal 1999 compared to 88.2%
and 70.3%, respectively, for the first nine months of fiscal
1998.
The adhesives segment gross profit increased $0.2
million and $1.5 million for the third fiscal quarter and
nine month periods, respectively. Gross profit margin for
the third quarter of fiscal 1999 was 29.1% compared to 28.6%
for the comparable fiscal 1998 period. For the fiscal 1999
nine month period, gross profit margin was 28.4% versus
26.5% for the comparable prior year period. The increase in
gross profit margin was primarily the result of improved
sales volume and operating efficiencies.
Fiscal 1999 third quarter and nine month selling and
administrative expenses declined 10.9% and 4.9%,
respectively, from the fiscal 1998 comparable periods due to
the decline in specialty steel segment business activity.
Fiscal 1999 third quarter and nine month investment
income decreased $0.6 million and $1.8 million,
respectively, from the comparable prior year periods due
primarily to a decrease in average invested cash and
investment balances. Interest expense for the same
comparable periods decreased $0.2 million and $0.9 million,
respectively, due to a decrease in long-term debt
obligations.
Included in other income, net in the fiscal 1999 third
quarter and nine month periods is income of $2.8 million for
a claim settlement from the Company's electrode suppliers
relating to purchases from several prior years.
The Company's combined federal and state effective tax
rate for the fiscal 1999 nine month period was a benefit of
6.9%. The Company's tax loss benefits were limited to
available refunds for taxes paid in previous periods at the
alternative minimum tax rate. The Company has exhausted
such refund capability, and as such, beginning in the fiscal
1999 second quarter, tax benefits from operating losses were
offset by valuation allowances resulting in virtually no net
tax benefits being recorded for losses.
In the second quarter of fiscal 1999, the Company
recorded an additional $4.3 million in disposal costs as
well as additional expected insurance recoveries of $0.9
million in connection with ongoing efforts to dispose of
radiation contaminated dust generated at the Company's
Newport facility in 1993. Such amounts were recorded as an
extraordinary charge of $3.4 million.
In the first quarter of fiscal 1999, the Company
incurred prepayment costs and wrote off unamortized debt
issuance costs in connection with the early retirement of
$4.0 million principal amount of long-term indebtedness,
resulting in an extraordinary charge of $0.4 million, net of
applicable income tax benefit of $0.1 million.
As a result of the above factors, the Company reported
a net loss of $8.6 million, or a $.40 loss per basic and
diluted share, in the third quarter of fiscal 1999 compared
to net income of $1.2 million, or $.05 per basic and diluted
share in the third quarter of fiscal 1998. For the current
nine month period, the Company reported a net loss of $37.5
million, or a $1.70 loss per basic and diluted share,
compared to net income of $13.5 million, or $.56 per basic
share ($.54 diluted), for the first nine months of fiscal
1998. Weighted average shares outstanding decreased for the
comparable periods as a result of the Company's common stock
buyback program that was completed in the second quarter of
fiscal 1999.
Liquidity and Capital Resources
Working capital at June 26, 1999 was $96.9 million
compared to $147.5 million at September 26, 1998. The
decline in working capital was primarily the result of a
reduction in short-term investments which were used to fund
operating losses, make investments in property, plant and
equipment and to retire long-term debt and purchase treasury
stock. The current ratio was 2.9 to 1 at June 26, 1999
compared to 3.8 to 1 at September 26, 1998. At June 26,
1999, the Company had cash and investments totaling $95.6
million and had no advances against its $50 million
revolving credit facility.
Net cash flows from operating activities were a net use
of $8.4 million in the first nine months of fiscal 1999
compared to a net source of $13.5 million in the comparable
prior fiscal year period. The Company recorded a net loss
of $37.5 million in the first nine months of fiscal 1999
compared to net income of $13.5 million in the first nine
months of fiscal 1998.
Major sources of cash from operating activities in the
first nine months of fiscal 1999 included $15.9 million in
non-cash depreciation and amortization charges; a $7.1
million and $6.3 million decrease in accounts receivable and
inventory, respectively, resulting from the decline in
business activity; and a $3.7 million decrease in other
current assets which resulted primarily from the receipt of
refundable federal income taxes. Accrued liabilities
increased $3.2 million, in part, due to an increase in costs
associated with environmental liabilities. Accounts payable
decreased $4.8 million primarily as a result of the decline
in business activity.
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 1998
first quarter debt prepayment penalty in connection with the
redemption of the Company's 13.5% Senior Secured Notes
(Notes) in October 1997.
The Company invested $24.6 million in capital
expenditures during the first nine months of fiscal 1999,
primarily related to the specialty steel segment. Of the
total spent, $18.1 million pertained to the purchase and
installation of a new AC electric arc furnace at Newport,
which started operation in the second quarter of fiscal
1999. The Company currently estimates that total capital
spending for fiscal 1999 will approximate $29.0 million,
primarily in the specialty steel segment.
During the first nine months of fiscal 1999 the Company
made net sales of long-term investments of $10.1 million to
fund operating losses and capital expenditures. The
Company's long-term investments and long-term debt, all of
which are for other than trading purposes, are subject to
interest rate risk. The Company utilizes professional
investment advisors and considers its net interest rate risk
when selecting the type and maturity of securities to
purchase for its portfolio. Other factors considered
include, but are not limited to, the timing of the expected
need for the funds invested and the repricing and credit
risks of the securities.
Repayments on long-term debt in the first nine months
of fiscal 1999 were $4.6 million and included the early
retirement of $4.0 million principal amount of the Company's
Notes in the first fiscal quarter. The Company completed a
three million share buyback program in the second quarter of
fiscal 1999, repurchasing 1.6 million shares of the
Company's common stock for $7.7 million.
Earnings before extraordinary items, interest expense,
taxes, depreciation and amortization (EBITDA) were a
negative $0.3 million and a negative $12.7 million in the
third quarter and first nine months of fiscal 1999,
respectively, compared to $9.4 million and $43.0 million in
the comparable periods of fiscal 1998. EBITDA is calculated
as income (loss) before extraordinary items 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. The
Company has generally been able to pass these inflationary
increases through to its customers.
Impact of Year 2000 Issue
The Year 2000 issue results from date sensitive
computer programs that use only the last two digits to refer
to a year. Such computer programs do not properly recognize
a year that begins with "20" instead of "19". This issue
impacts the Company and virtually every business that relies
on a computer. If not corrected, system failures or
miscalculation could occur causing disruption of the
Company's operations, including, among other things, a
temporary inability to process transactions, manufacture
products or engage in similar normal business activities.
The Company's subsidiaries operate autonomously and are
not dependent on an integrated or centralized corporate-wide
data processing system. As such, project teams have been
formed at each subsidiary to address the respective
subsidiaries' Year 2000 readiness. Information technology
(IT) systems, such as any hardware or software used to
process daily operational data and information, as well as
non-IT systems, such as micro controllers contained in
various manufacturing equipment, are being assessed for Year
2000 compliance.
The Company is addressing the Year 2000 issue in a four
phase process. The first phase is one of awareness and
involves the inventorying of all IT and non-IT systems. The
Company has completed identifying all of its IT and non-IT
systems. The second phase of the Company's process is an
assessment stage, during which the Company determines
whether each of its identified systems are Year 2000
compliant. The Company completed this phase of the process
during the second fiscal quarter. The remediation and
testing phases of the Company's systems are in various
stages of completion. Remediation efforts may include
modifications or replacement of software and certain
hardware so that systems will properly utilize dates beyond
December 31, 1999. Approximately 85% of the Company's IT
systems have been remediated while remediation on its non-IT
systems is approximately 95% complete. The Company
currently anticipates completion of all remediation and
testing of its systems by November 1999.
The Company also faces certain risks to the extent that
its customers or suppliers of products and services do not
become Year 2000 compliant. The Company is evaluating the
status of significant customers and suppliers to determine
the extent to which the Company is vulnerable to
non-compliance by these third parties. Ongoing evaluation
will continue through 1999; however, the Company believes
its broad customer base and availability of alternative
suppliers will mitigate the risks associated with the
readiness of these third parties.
The Company is developing formal contingency plans in
the event it experiences Year 2000 related problems.
Back-up measures are being identified as systems are
assessed to determine the most likely contingency plan for
each system requiring remediation. For example, the
contingency plan for many IT systems would be to revert to a
manual record system and, for many non-IT systems, internal
clocks could be reset to an earlier date. Formal
contingency plans will be continually developed, as
required, as remediation and testing procedures are
completed in 1999.
Costs associated with the Company's Year 2000 efforts
were approximately $0.5 million and $1.2 million in the
third quarter and first nine months of fiscal 1999,
respectively, and estimated costs to complete are $1.4
million. Costs pertain primarily to system software and
hardware replacements and upgrades for both its IT and
non-IT systems.
Although the Company has not yet completed all the
necessary phases of its Year 2000 program, it believes that
with modifications to existing software and conversions to
new software, the Year 2000 issue will not pose significant
operational problems for its computer systems. However, if
such modifications and conversions are not made or are not
completed in time, or if a material third party fails to
properly remediate its Year 2000 issues, or if the costs are
higher than expected, the Year 2000 issue could have a
material effect on the Company's operations. While the
Company is not currently aware of any significant exposure,
there can be no assurance that the Year 2000 issue will not
have a material impact on the business and operations of the
Company.
Other Matters
See "Note 6: Commitments and Contingencies" to the
Notes to Condensed Consolidated Financial Statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital
Resources."
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
See "Note 6: Commitments and Contingencies - Environmental
Matters" to the Notes to Condensed Consolidated Financial
Statements regarding the NOV's received by Newport from the
Commonwealth of Kentucky in August 1998, and the NOV received by
Koppel from the EPA in November 1996.
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
Current Report on Form 8-K dated June
21, 1999 and filed June 25, 1999, reporting under Item 5 the
announcement of certain management changes.
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 5, 1999 By: /s/Clifford R. Borland
Clifford R. Borland
Chairman and Chief
Executive Officer
Date: August 5, 1999 By: /s/John R. Parker
John R. Parker
Vice President, Treasurer and
Chief Financial Officer
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
Registrant's 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.'s condensed consolidated financial statements
as of and for the nine month period ended June 26, 1999, 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-25-1999
<PERIOD-START> SEP-27-1998
<PERIOD-END> JUN-26-1999
<EXCHANGE-RATE> 1
<CASH> 2,107
<SECURITIES> 28,751
<RECEIVABLES> 30,454
<ALLOWANCES> 945
<INVENTORY> 59,720
<CURRENT-ASSETS> 147,251
<PP&E> 331,509
<DEPRECIATION> 186,393
<TOTAL-ASSETS> 364,518
<CURRENT-LIABILITIES> 50,380
<BONDS> 72,754
0
0
<COMMON> 257,141
<OTHER-SE> (24,671)
<TOTAL-LIABILITY-AND-EQUITY> 364,518
<SALES> 170,311
<TOTAL-REVENUES> 170,311
<CGS> 185,742
<TOTAL-COSTS> 185,742
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,691
<INCOME-PRETAX> (36,346)
<INCOME-TAX> (2,689)
<INCOME-CONTINUING> (33,657)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,837)
<CHANGES> 0
<NET-INCOME> (37,494)
<EPS-BASIC> (1.70)
<EPS-DILUTED> (1.70)
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