FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
-----------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------------- -------------
Commission file number 0-16254
--------------
Steel of West Virginia, Inc.
-----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 55-0684304
- --------------------------------- --------------------
(State or other jurisdiction I.R.S. Employer
of incorporation or organization) Identification No.
17th Street and 2nd Avenue, Huntington, West Virginia 25703
-------------------------------------------------------------
(Address of principal executive offices, Zip Code)
(304) 696-8200
------------------------------------------------------------
(Registrant's telephone number, including area code)
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
--- ---
The number of shares outstanding of each of the issuer's classes of common
stock, as of July 31, 1995, is as follows:
6,630,260 shares of common stock, par value $.01 per share.
<PAGE>
STEEL OF WEST VIRGINIA, INC.
AND SUBSIDIARIES
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of 3
June 30, 1995 and December 31, 1994
Condensed Consolidated Statements of Income for 4
the Three-Month and Six Month Periods Ended June 30, 1995
and June 30, 1994
Condensed Consolidated Statements of Cash Flows 5
for the Three-Month and Six-Month Periods Ended
June 30, 1995 and June 30, 1994
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of 9
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 11
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. CONDENSED CONSOLIDATED BALANCE SHEETS
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)
June 30 December 31
1995 1994
----------- -----------
ASSETS
CURRENT ASSETS
Cash $ 100 $ 1,400
Receivables, net of allowances of
$389 and $379 12,658 11,097
Inventories 18,840 15,846
Deferred income taxes 2,143 2,143
Other current assets 167 241
-------- --------
TOTAL CURRENT ASSETS 33,908 30,727
Property, plant, and equipment 42,381 43,011
Goodwill 19,475 19,817
Other assets 681 619
-------- --------
TOTAL ASSETS $96,445 $94,174
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Overdraft $ 1,046 $ 757
Accounts payable 7,977 7,894
Accrued payroll and benefits payable 5,515 5,029
Income taxes payable 226 41
Other current liabilities 1,908 1,630
Current maturities of long-term debt 5,360 4,860
-------- --------
TOTAL CURRENT LIABILITIES 22,032 20,211
Long-term debt 12,517 11,542
Deferred income taxes 7,728 7,728
Other long-term liabilities 761 759
-------- --------
TOTAL LIABILITIES 43,038 40,240
STOCKHOLDERS' EQUITY
Common stock, $.01 par value:
12,000,000 voting shares
authorized, 6,865,360
issued and outstanding 71 71
Paid-in capital 26,597 26,597
Treasury stock (5,235) 0
Retained earnings 31,974 27,266
-------- --------
TOTAL STOCKHOLDERS' EQUITY 53,407 53,934
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $96,445 $94,174
======== ========
NOTE: The balance sheet at December 31, 1994, has been derived from the
audited financial statements at that date.
See notes to condensed consolidated financial statements.
3
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)
Three Months Six Months
Ended Ended
June 30 June 30
1995 1994 1995 1994
------------------ ----------------
Net sales $31,641 $31,410 $64,541 $59,772
Cost of sales 26,043 26,146 53,601 49,262
-------- -------- -------- --------
GROSS PROFIT 5,598 5,264 10,940 10,510
Selling and administrative
expenses 1,295 1,284 2,693 2,579
Interest expense 412 144 798 354
Other (income) expense (192) (245) (233) (11)
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 4,083 4,081 7,682 7,588
Income Taxes (1,570) (1,601) (2,974) (2,980)
-------- -------- -------- --------
NET INCOME $ 2,513 $ 2,480 $ 4,708 $ 4,608
======== ======== ======== ========
NET INCOME PER COMMON SHARE,
based on 6,951,693 and
7,021,527 weighted
average shares of common
stockoutstanding during
the three months and six
months ended June 30, 1995
and 7,091,360 outstanding
shares during 1994. $.36 $.35 $.67 $.65
==== ==== ==== ====
See notes to condensed consolidated financial statements.
4
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
(In thousands)
<TABLE><CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1995 1994 1995 1994
--------------------------- ------------------------
<S> <C> <C>
CASH FROM OPERATIONS $ 915 $ (739) $ 1,627 $ 3,921
INVESTMENT ACTIVITIES
Additions to property, plant,
and equipment (1,313) (5,654) (2,004) (11,476)
FINANCING ACTIVITIES
Revolving credit loan 3,810 5,186 3,808 5,186
Long-term debt repayments (1,215) (1,000) (2,430) (2,000)
Purchase of treasury stock (2,590) 0 (2,590) 0
----------- ---------- ---------- -----------
5 4,186 (1,212) 3,186
----------- ---------- ---------- -----------
DECREASE IN CASH $ (393) $(2,207) $(1,589) $ (4,369)
=========== ========== ========== ===========
<FN>
On June 30, 1995 the Company repurchased shares of its outstanding common stock for an aggregate purchase price of $2,645,000
and the actual settlement date was subsequent to the end of the quarter.
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
June 30, 1995
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements include
the accounts of Steel of West Virginia, Inc. (the Company) and its wholly-owned
subsidiaries SWVA, Inc. and Marshall Steel, Inc. Such condensed financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the three-
month and six-month periods ended June 30, 1995 are not necessarily indicative
of the results that may be expected for the year ended December 31, 1995. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1994.
Net income per common share is calculated based on the 6,951,693 and 7,021,527
weighted average number of shares of common stock outstanding during the three
months and six months ended June 30, 1995, respectively, and 7,091,360 shares
outstanding during 1994.
NOTE B--INVENTORIES
Inventories consist of the following (in thousands):
June 30 December 31
1995 1994
------------ -----------
Raw materials $ 2,008 $ 1,908
Work-in-process 6,699 4,846
Finished goods 11,292 10,372
Manufacturing supplies 3,382 2,750
------- -------
23,381 19,876
Less LIFO reserve 4,541 4,030
------- -------
$18,840 $15,846
======= =======
Annually, at the end of each year, management determines inventory levels based
on the taking of a physical inventory. The amount of inventories at June 30,
1995, has been determined based upon inventory levels indicated by perpetual
inventory accounting records. In addition, an actual valuation of inventory
under the LIFO method can be made only at the end of each year based on the
inventory levels and costs at that time. Accordingly, interim LIFO
calculations must necessarily be based on management's estimates of expected
year-end inventory levels and costs. Since these are subject to many forces
beyond management's control, interim results are subject to the final year-end
LIFO inventory valuation.
6
<PAGE>
NOTE C--CREDIT ARRANGEMENTS
The Company entered into a senior financing agreement on December 30, 1986, as
subsequently amended, that provides for revolving credit borrowings and term
loans. During 1994, the Company amended its senior credit agreement to permit
the Company to borrow $6 million in 1994 and provide for equivalent term
borrowing availability in 1995 under a new "Capital Expenditure Line" of
credit. The terms of the loan amendment also enabled the Company to reduce the
interest rates on its existing revolving credit line and term loans outstanding
from the greater of 7% or 3/4% over prime and the greater of 7% or 1% over
prime, respectively, to the Chemical Bank prime rate or LIBOR plus 1-3/4%;
reduce the annual revolving credit line commitment fee from 1/2% to 1/8% of the
unused balance; and extend the term of the revolving credit line to January 1,
1998. In addition, the amendment permits the Company to convert up to $7
million of its indebtedness to a fixed interest rate. The senior credit
agreement may be terminated by the Company or, on or after January 1, 1998 and
upon 90 days written notice, by the lender. In the event the Company makes
certain prepayments prior to October 1, 1995, prepayment fees of 1-3/4% of the
amount prepaid could result.
Amounts outstanding under the term loan portion of the senior financing
agreement are scheduled to be repaid in quarterly principal installments
totaling as follows: 1995--$4,000,000; 1996--$5,000,000; 1997--$1,547,050.
The Capital Expenditure Line portion of the loan agreement is required to be
repaid in 27 quarterly principal installments of $215,000, beginning January 1,
1995, with a final principal payment of $195,000. As of June 30, 1995, the
revolving credit line loan balance was $3,808,000 and the unused borrowing
availability approximated $6,192,000. In addition, the unused borrowing
availability on the Capital Expenditure Line approximated $6,000,000.
The Company's senior lending agreement contains various restrictive covenants,
including that the Company must maintain specified levels of working capital
and net worth (as defined in the agreement). In addition, capital expenditures
and dividends are limited to the annual amounts set forth in the agreement. At
June 30, 1995, the Company's retained earnings available for dividends in 1995
was $4,074,000. As a result of the lending agreement, substantially all of the
Company's property, plant, and equipment, inventory and accounts receivable are
subject to a third party's security interests.
NOTE D--COMMITMENTS AND CONTINGENCIES
The Company is principally self-insured for employees' medical care costs and
workers' compensation claims up to certain specified dollar limits. Under the
medical care program, the Company is insured by a private carrier for
individual claims in excess of specified dollar limits. The Company also has
excess coverage provided by the West Virginia Workers' Compensation Fund (a
state agency) for certain work related injuries. In connection with the self-
insured workers' compensation program, the Company has obtained an irrevocable
standby letter of credit in the amount of $1,000,000 (through July 1995). A
liability has been established for those illnesses and injuries occurring on or
before June 30, 1995, for which an amount of expected loss could be reasonably
estimated.
7
<PAGE>
NOTE E--STOCKHOLDERS' EQUITY
In December 1994 the Company announced that its Board of Directors had
authorized management to buy back up to two hundred and fifty thousand shares
of its common stock from time to time. In June 1995 the Board of Directors
authorized management to increase such number of shares by an additional two
hundred and fifty thousand shares.
In June 1995 the Company's shareholders voted to approve the Steel of West
Virginia, Inc. 1995 Employee Stock Option Plan and the 1995 Non-Employee
Director Stock Option Plan. In addition, the shareholders approved the
amendment of the Company's Certificate of Incorporation to authorize 4,000,000
additional shares of Common Stock and to eliminate all of the authorized non-
voting common stock.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Sales
Net sales increased .7% in the second quarter of 1995 to $31,641,000 up
$231,000 from $31,410,000 for the second quarter of 1994, primarily due to
higher average selling prices caused by favorable product mix and selected
price increases. Finished tonnage sales decreased to 45,485 tons in the second
quarter of 1995 from 48,806 tons for the second quarter of 1994. Billet sales
decreased to 2,607 tons for the second quarter of 1995 from 4,105 tons in the
second quarter of 1994.
Net sales for the six months ended June 30, 1995 increased 8.0% to $64,541,000
from $59,772,000 for the comparable period in 1994, primarily due to higher
average selling prices caused by favorable product mix and selected price
increases. Finished tonnage sales decreased to 90,472 tons for the six months
ended June 30, 1995 from 92,699 tons for the comparable period in 1994. Billet
sales increased to 13,014 tons for the same period in 1995, from 6,424 tons for
the comparable period in 1994.
Cost of Sales
Cost of sales decreased to 82.3% of net sales or $26,043,000 for the second
quarter of 1995 from 83.2% of net sales for the second quarter of 1994. The
decrease in cost of goods sold was principally due to increased finished
production which allocated fixed costs to inventory, and favorable product mix.
Cost of sales for the six months ended June 30, 1995 increased to 83.0% of net
sales from 82.4% of net sales for the comparable period in 1994. This increase
was primarily due to increased low margin billet sales and higher mill roll and
maintenance expense.
Selling and Administrative Expenses
Selling and administrative expenses for the second quarter of 1995 were
$1,295,000 as compared to $1,284,000 for the second quarter of 1994. As a
percentage of net sales, selling and administrative expense was 4.1% in the
second quarter of 1995 and 1994.
Selling and administrative expenses for the six month period ended June 30,
1995 were $2,693,000, compared to $2,579,000 for the comparable period in 1994.
This increase was primarily due to recognition of $200,000 in costs in the
first quarter 1995 upon discontinuing efforts to acquire another steel company.
As a percentage of net sales, selling and administrative expense decreased to
4.2% in the six month period ended June 30, 1995, from 4.3% for the comparable
period in 1994.
Interest Expense and Other (Income) Expense
Interest expense for the second quarter of 1995 was 1.3% of net sales or
$412,000, as compared to .5% of net sales or $144,000 for the second quarter of
1994. Interest expense increased as a result of higher average debt
outstanding due to the modernization and expansion program and the Company's
repurchase of shares of its Common Stock. Other (income) expense decreased to
$192,000 of income in the second
9
<PAGE>
quarter of 1995, compared to $245,000 of income for the second quarter of 1994,
due primarily to lower reimbursement of mill roll expense.
Interest expense for the six months ended June 30, 1995 increased to 1.2% of
net sales or $798,000, as compared to .6% of net sales or $354,000 for the
second quarter of 1994. Interest expense increased as a result of higher
average debt outstanding due to the expansion and modernization program and the
Company's repurchase of shares of its Common Stock. Other (income) expense
changed to $233,000 of income for the six months ended June 30, 1995 from
$11,000 of income for the comparable period in 1994, principally due to a
reduction in losses from the disposal of fixed assets.
Net Income
As a result of the above, net income for the second quarter of 1995 increased
by $33,000 (1.3%) to $2,513,000 from $2,480,000 for the second quarter of 1994.
As a percentage of net sales, net income was 7.9% in the second quarter of 1995
and 1994.
As a result of the above and a lower effective income tax rate caused by
changes in state tax apportionments, net income for the six months ended June
30, 1995 increased by $100,000 (2.2%) from $4,608,000 for the comparable period
in 1994. As a percentage of net sales, net income decreased to 7.3% for the
six months ended June 30, 1995 from 7.7% for the comparable period in 1994.
Liquidity and Sources of Capital
The Company's primary ongoing cash needs are for working capital requirements,
debt service and capital expenditures. The three present sources for the
Company's liquidity needs are internally generated funds, a capital expenditure
term loan line, and the Company's revolving credit facility, which the Company
anticipates will be sufficient for its ongoing cash needs. Working capital at
the end of the second quarter of 1995 was $11,876,000, compared to $10,516,000
at the end of the prior fiscal year. This increase in working capital was due
primarily to working capital provided by operations. The Company's
expenditures for required capital replacements are currently anticipated to
average approximately $1,000,000 annually over the next several years. In
addition, from time to time, the Company evaluates discretionary capital
expenditures and acquisition opportunities. Any such expenditure would be
subject to availability of funds and approval by the Company's Board of
Directors.
10
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders held on June 29, 1995, for which proxies
for the meeting were solicited pursuant to Regulation 14A of the Securities
Exchange Act of 1934, the stockholders elected five directors, each for a term
of one year. The tabulation of the votes cast for each nominee for director
was as follows:
Name of Nominee Voted For Withheld Authority to Vote
- --------------- --------- --------------------------
Stephen A. Albert 4,685,898 592,425
Robert L. Bunting, Jr. 4,936,323 342,000
Albert W. Eastburn 4,932,823 345,500
Daniel N. Pickens 4,932,823 345,500
Paul E. Thompson 4,919,098 359,225
At the Annual Meeting of Stockholders, the stockholders also approved the
following:
(i) the appointment of Ernst & Young as independent auditors, by a
vote of 5,267,699 shares in favor, 2,274 shares against and 8,350
shares abstained;
(ii) the Steel of West Virginia, Inc. 1995 Employee Stock Option Plan,
by a vote of 3,419,158 shares in favor, 1,313,455 shares against
and 545,710 shares abstained;
(iii) the Steel of West Virginia, Inc. 1995 Non-Employee Director Stock
Option Plan, by a vote of 3,613,075 shares in favor, 1,120,558
shares against and 544,690 shares abstained; and
(iv) the amendment of the Company's Certificate of Incorporation to
authorize 4,000,000 additional shares of Common Stock and to
eliminate all of the authorized non-voting common stock, by a vote
of 4,645,837 shares in favor, 511,026 shares against and 121,460
shares abstained.
11
<PAGE>
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.
DATED: August 11, 1995 STEEL OF WEST VIRGINIA, INC.
-------------------------------
(Registrant)
/s/ Timothy R. Duke
--------------------------------
Timothy R. Duke, Vice President,
Treasurer and Chief Financial
Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1995
<CASH> 100
<SECURITIES> 0
<RECEIVABLES> 12,658
<ALLOWANCES> 389
<INVENTORY> 18,840
<CURRENT-ASSETS> 33,908
<PP&E> 67,003
<DEPRECIATION> (24,622)
<TOTAL-ASSETS> 96,445
<CURRENT-LIABILITIES> 22,032
<BONDS> 12,517
<COMMON> 71
0
0
<OTHER-SE> 53,336
<TOTAL-LIABILITY-AND-EQUITY> 96,445
<SALES> 31,641
<TOTAL-REVENUES> 31,641
<CGS> 26,043
<TOTAL-COSTS> 26,043
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 412
<INCOME-PRETAX> 4,083
<INCOME-TAX> 1,570
<INCOME-CONTINUING> 2,513
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,513
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
</TABLE>
