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 September 30, 1995
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-16254
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Steel of West Virginia, Inc.
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(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
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(Address of principal executive offices, Zip Code)
(304) 696-8200
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(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 October 31, 1995, is as follows:
6,562,260 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
September 30, 1995 and December 31, 1994
Condensed Consolidated Statements of Income for 4
the Three-Month and Nine-Month Periods Ended
September 30, 1995 and September 30, 1994
Condensed Consolidated Statements of Cash Flows 5
for the Three-Month and Nine-Month Periods Ended
September 30, 1995 and September 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
None
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)
September 30 December 31
1995 1994
------------ -----------
ASSETS
CURRENT ASSETS
Cash $ 100 $ 1,400
Receivables, net of allowances of $395
and $379 14,040 11,097
Inventories 18,181 15,846
Deferred income taxes 2,143 2,143
Other current assets 148 241
---------- --------
TOTAL CURRENT ASSETS 34,612 30,727
Property, plant, and equipment 41,378 43,011
Goodwill 19,305 19,817
Other assets 672 619
---------- --------
TOTAL ASSETS $95,967 $94,174
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Overdraft $ 1,603 $ 757
Accounts payable 4,956 7,894
Accrued payroll and benefits payable 6,909 5,029
Income taxes payable 28 41
Other current liabilities 1,939 1,630
Current maturities of long-term debt 5,610 4,860
-------- --------
TOTAL CURRENT LIABILITIES 21,045 20,211
Long-term debt 10,827 11,542
Deferred income taxes 7,478 7,728
Other long-term liabilities 761 759
-------- --------
TOTAL LIABILITIES 40,111 40,240
STOCKHOLDERS' EQUITY
Common stock, $.01 par value: 12,000,000
voting shares authorized, 6,630,260
issued and outstanding 71 71
Paid-in capital 26,597 26,597
Treasury stock (5,235) 0
Retained earnings 34,423 27,266
-------- --------
TOTAL STOCKHOLDERS' EQUITY 55,856 53,934
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $95,967 $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)
<TABLE><CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1995 1994 1995 1994
==================== ==================
<S> <C> <C> <C> <C>
Net sales $32,551 $34,106 $97,092 $93,878
Cost of sales 26,789 28,630 80,391 77,891
-------- --------- -------- --------
GROSS PROFIT 5,762 5,476 16,701 15,987
Selling and administrative
expenses 1,158 1,645 3,851 4,224
Interest expense 455 280 1,253 634
Other (income) expense 48 3 (185) (7)
-------- --------- --------- --------
INCOME BEFORE INCOME TAXES 4,101 3,548 11,782 11,136
Income Taxes 1,652 1,388 4,625 4,368
-------- --------- --------- --------
NET INCOME $ 2,449 $ 2,160 $ 7,157 $ 6,768
======== ========= ========= ========
NET INCOME PER COMMON SHARE,
based on 6,630,260 and
6,891,104 weighted average
shares of common stock
outstanding during the
three months and nine
months ended September 30,
1995 and 7,091,360
outstanding shares during
1994. $.37 $.30 $1.04 $.95
==== ==== ===== ====
</TABLE>
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 Nine Months Ended
September 30 September 30
1995 1994 1995 1994
------------------------ ----------------------
<S> <C> <C> <C> <C>
CASH FROM OPERATIONS $ 1,378 $ 7,501 $ 5,650 $ 11,421
INVESTMENT ACTIVITIES
Additions to property,
plant, ( 447) (5,656) (2,451) (17,131)
and equipment
FINANCING ACTIVITIES
Revolving credit loan (273) 819 3,535 6,005
Long-term debt repayments (1,215) (1,000) (3,645) (3,000)
Purchase of treasury stock 0 0 (5,235) 0
---------- --------- --------- ---------
(1,488) (181) (5,345) 3,005
---------- --------- --------- ---------
INCREASE (DECREASE) IN CASH $ (557) $ 1,664 $(2,146) $ (2,705)
========== ========= ========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
September 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
nine-month periods ended September 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 6,630,260 and 6,891,104
weighted average number of shares of common stock outstanding during the three
months and nine months ended September 30, 1995, respectively, and 7,091,360
shares outstanding during 1994.
NOTE B--INVENTORIES
Inventories consist of the following (in thousands):
September 30 December 31
1995 1994
------------ -----------
Raw materials $ 1,801 $ 1,908
Work-in-process 5,750 4,846
Finished goods 12,041 10,372
Manufacturing supplies 3,385 2,750
------- -------
22,977 19,876
Less LIFO reserve 4,796 4,030
------- -------
$18,181 $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 September
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.
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 September 30, 1995, the
revolving credit line loan balance was $3,535,000 and the unused borrowing
availability approximated $6,465,000. 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
September 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 1996). A liability
has been established for those illnesses and injuries occurring on or before
September 30, 1995, for which an amount of expected loss could be reasonably
estimated.
7
<PAGE>
NOTE E--STOCKHOLDERS' EQUITY
On October 24, 1995 Steel of West Virginia, Inc. announced that its Board of
Directors authorized an increase in the number of common shares the Company can
buy back to up to 700,000 shares from the previous 500,000 shares. As of
October 30, 1995, the Company had purchased 529,100 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 decreased 4.6% in the third quarter of 1995 to $32,551,000 down
$1,555,000 from $34,106,000 for the third quarter of 1994. Finished tonnage
sales decreased to 44,564 tons in the third quarter of 1995 from 48,236 tons for
the third quarter of 1994 primarily as a result of weakness in the truck trailer
market and the Company's not yet having fully realized the improved productivity
and increased output anticipated to be realized from the Company's 1994 capital
expenditure program. Billet sales decreased to 10,967 tons for the third
quarter of 1995 from 13,544 tons in the third quarter of 1994.
Net sales for the nine months ended September 30, 1995 increased 3.4% to
$97,092,000 from $93,878,000 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 135,034 tons for the nine months
ended September 30, 1995 from 140,934 tons for the comparable period in 1994.
Billet sales increased to 23,980 tons for the same period in 1995 from 19,968
tons for the comparable period in 1994.
Cost of Sales
Cost of sales decreased to 82.3% of net sales or $26,789,000 for the third
quarter of 1995 from 83.9% of net sales for the third quarter of 1994. The
percent decrease in cost of goods sold was principally due to increased finished
production, improved product mix and selected selling price increases.
Cost of sales for the nine months ended September 30, 1995 decreased to 82.8% of
net sales from 83.0% of net sales for the comparable period in 1994. The
percent decrease in cost of goods sold was principally due to increased finished
production which allocated fixed costs to inventory, improved product mix and
selected selling price increases.
Selling and Administrative Expenses
Selling and administrative expenses for the third quarter of 1995 were
$1,158,000 as compared to $1,645,000 for the third quarter of 1994. This
decrease was due primarily to lower consulting expense. As a percentage of net
sales, selling and administrative expense was 3.6% in the third quarter of 1995
and 4.8% for the comparable period in 1994.
Selling and administrative expenses for the nine month period ended September
30, 1995 were $3,851,000, compared to $4,224,000 for the comparable period in
1994. This decrease was due primarily to lower consulting expense. As a
percentage of net sales, selling and administrative expense decreased to 4.0% in
the nine month period ended September 30, 1995, from 4.5% for the comparable
period in 1994.
9
<PAGE>
Interest Expense and Other (Income) Expense
Interest expense for the third quarter of 1995 was 1.4% of net sales or
$455,000, as compared to .8% of net sales or $280,000 for the third 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 increased to $48,000 of
expense in the third quarter of 1995, compared to $3,000 of expense for the
third quarter of 1994.
Interest expense for the nine months ended September 30, 1995 increased to 1.3%
of net sales or $1,253,000, as compared to .7% of net sales or $634,000 for the
nine months ended September 30, 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 $185,000 of income for the nine months ended September 30,
1995 from $7,000 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 third quarter of 1995 increased by
$289,000 (13.4%) to $2,449,000 from $2,160,000 for the third quarter of 1994.
As a percentage of net sales, net income was 7.5% in the third quarter of 1995
and 6.3% for the third quarter of 1994.
As a result of the above, net income of $7,157,000 for the nine months ended
September 30, 1995 increased by $389,000 (5.7%) from $6,768,000 for the
comparable period in 1994. As a percentage of net sales, net income increased
to 7.4% for the nine months ended September 30, 1995 from 7.2% 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 third quarter of 1995 was $13,567,000, 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>
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: November 9, 1995 STEEL OF WEST VIRGINIA, INC.
-------------------------------
(Registrant)
/s/ Timothy R. Duke
--------------------------------
Timothy R. Duke, Vice President,
Treasurer and Chief Financial
Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 100
<SECURITIES> 0
<RECEIVABLES> 14,040
<ALLOWANCES> 395
<INVENTORY> 18,181
<CURRENT-ASSETS> 34,612
<PP&E> 67,173
<DEPRECIATION> (25,795)
<TOTAL-ASSETS> 95,967
<CURRENT-LIABILITIES> 21,045
<BONDS> 0
<COMMON> 71
0
0
<OTHER-SE> 55,785
<TOTAL-LIABILITY-AND-EQUITY> 95,967
<SALES> 32,551
<TOTAL-REVENUES> 32,551
<CGS> 0
<TOTAL-COSTS> 26,789
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3
<INTEREST-EXPENSE> 455
<INCOME-PRETAX> 4,101
<INCOME-TAX> 1,652
<INCOME-CONTINUING> 2,449
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,449
<EPS-PRIMARY> 0.37
<EPS-DILUTED> 0.37
</TABLE>
