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 March 31, 1996
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OR
[X] 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
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(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 March 31, 1996, is as follows:
5,986,060 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
March 31, 1996 and December 31, 1995
Condensed Consolidated Statements of Income for 4
the Three-Month Periods Ended March 31, 1996
and March 31, 1995
Condensed Consolidated Statements of Cash Flows 5
for the Three-Month Periods Ended
March 31, 1996 and March 31, 1995
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 6. Exhibits and Reports on Form 8-K 12
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)
March 31 December 31
1996 1995
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ASSETS
CURRENT ASSETS
Cash $ 171 $ 100
Receivables, net of allowances of $976
and $692 11,757 13,148
Inventories 19,145 17,095
Deferred income taxes 3,110 3,110
Other current assets 576 1,021
TOTAL CURRENT ASSETS 34,759 34,474
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Property, plant, and equipment 37,510 40,807
Goodwill 18,964 19,134
Other assets 659 708
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TOTAL ASSETS $91,892 $95,123
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Overdraft $ 0 $ 647
Accounts payable 3,584 5,045
Accrued payroll and benefits payable 5,698 5,240
Income taxes payable 129 117
Other current liabilities 1,538 2,026
Current maturities of long-term debt 6,184 5,885
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TOTAL CURRENT LIABILITIES 17,133 18,960
Long-term debt 14,034 11,978
Deferred income taxes 8,005 8,005
Other long-term liabilities 791 765
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TOTAL LIABILITIES 39,963 39,708
STOCKHOLDERS' EQUITY
Common stock, $.01 par value:
12,000,000
voting shares authorized, 7,091,360 71 71
issued and outstanding
Paid-in capital 26,597 26,597
Treasury stock (11,483) (7,983)
Retained earnings 36,744 36,730
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TOTAL STOCKHOLDERS' EQUITY 51,929 55,415
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $91,892 $95,123
======= =======
NOTE: The balance sheet at December 31, 1995, 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
Ended March 31
1996 1995
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Net sales $26,647 $32,900
Cost of sales 23,240 27,559
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GROSS PROFIT 3,407 5,341
Selling and administrative expenses 1,168 1,398
Other operating expense (income) 1,851 (42)
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OPERATING INCOME 388 3,985
Interest expense 365 386
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INCOME BEFORE INCOME TAXES 23 3,599
Income Taxes 9 1,404
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NET INCOME $ 14 $ 2,195
======= =======
NET INCOME PER COMMON SHARE,
based on 6,134,393 and
7,091,360 shares of common
stock and equivalents
outstanding during 1996
and 1995. $.00 $.31
==== ====
See notes to condensed consolidated financial statements.
4
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
(In thousands)
Three Months Ended
March 31
1996 1995
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CASH FROM OPERATIONS $ 2,509 $ 712
INVESTMENT ACTIVITIES
Additions to property, plant,
and equipment (646) (691)
FINANCING ACTIVITIES
Revolving credit loan 3,826 (2)
Long-term debt repayments (1,471) (1,215)
Purchase of treasury stock (3,500) 0
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(1,145) (1,217)
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INCREASE (DECREASE) IN CASH $ 718 $ (1,196)
=========== =========
See notes to condensed consolidated financial statements.
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
March 31, 1996
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
period ended March 31, 1996 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1996. 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, 1995.
The preparation of the condensed consolidated financial statements in conformity
with generally accepted accounting principles requires that management make
certain estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ from
those estimates.
Net income per common share is calculated based on the 6,134,393 and 7,091,360
weighted average number of common stock equivalents outstanding during the
quarters ended March 31, 1996 and 1995, respectively. The effect of the
Company's Option Plans on the earnings per share calculation was anti-dilutive
in the first quarter of 1996.
NOTE B--INVENTORIES
Inventories consist of the following (in thousands):
March 31 December 31
1996 1995
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Raw materials $ 1,739 $ 2,013
Work-in-process 7,031 6,089
Finished goods 12,068 10,633
Manufacturing supplies 3,119 3,288
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23,957 22,023
Less LIFO reserve 4,812 4,928
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$19,145 $17,095
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Annually, at the end of each year, management determines inventory levels based
on the taking of a physical inventory. The amount of inventories at March 31,
1996, 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
6
<PAGE>
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.
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 under a new "Capital Expenditure Line"
of credit, and extend the term of the revolving credit line to January 1, 1998.
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%; and reduce the annual revolving
credit line commitment fee from 1/2% to 1/8% of the unused balance. In
addition, the amendment permits the Company to convert up to $7 million of its
indebtedness to a fixed interest rate. On February 28, 1996, the Company
amended its senior credit agreement to increase the revolver availability to
$15,000,000. 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 remaining quarterly principal
installments totaling as follows: 1996--$3,750,000; 1997--$1,547,050. The
Capital Expenditure Line portion of the loan agreement is required to be repaid
in quarterly principal installments of $215,000, with a final principal payment
of $195,000 on October 1, 2001. As of March 31, 1996, the revolving credit line
loan balance was $9,700,000 and the unused borrowing availability approximated
$5,300,000.
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
March 31, 1996, the Company's retained earnings available for dividends in 1996
was $4,710,000. 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
March 31, 1996, for which an amount of expected loss could be reasonably
estimated.
7
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NOTE E--STOCKHOLDERS' EQUITY
In June 1995 the Company's shareholders approved the Steel of West Virginia,
Inc. 1995 Employee Stock Option Plan and the 1995 Non-Employee Director Stock
Option Plan. Under these Plans, options to acquire 79,500 shares have been
granted and outstanding under the Plans at March 31, 1996, and can be
exercised commencing April 1, 1996 at an option price of $11 5/8. In October
1995, the Financial Accounting Standards Board issued Statement No. 123 -
"Accounting for Stock-Based Compensation," effective in 1996. As permitted by
this statement, the Company intends to continue its present accounting
practice of recognizing compensation expense related to stock options using
the "intrinsic method." Under this method, compensation expense is recognized
on the first date that both the number of shares the employee is entitled to
receive and the exercise price are known, in an amount equivalent to the
excess of the market value over the exercise price. The Company is required
to provide additional disclosures regarding the stock-based compensation
plans, including pro-forma disclosures of net income and earnings per share as
if the "fair value" method of accounting for stock-based compensation and been
applied, and the Company plans to include these required disclosures in its
1996 Annual Report.
As of March 31, 1996 the Company has purchased 1,105,000 shares of the
authorized 1,200,000 shares at a total cost of $11,483,000, including 350,000
shares acquired during the first quarter of 1996. Subsequent to March 31,
1996, the Board of Directors authorized an increase in the number of the
Company's shares that can be purchased, permitting the Company to acquire up
to 1,700,000 shares.
NOTE F--FIXED ASSET IMPAIRMENT
During the first quarter of 1996, the Company determined that certain cut-to-
length equipment utilized in one of the Company's production lines was not
performing up to expectations and the decision to replace the equipment was
made. Based upon this indication of impairment, the Company recorded a
$1,862,000 charge against operations, included in other operating expense,
equivalent to the net book value of the equipment less its estimated salvage
value. The replacement equipment is expected to reduce the cost of cutting
steel and improve product quality.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Sales
Net sales decreased 19.0% in the first quarter of 1996 to $26,647,000 down
$6,253,000 from $32,900,000 for the first quarter of 1995, primarily as a
result of weakness in certain of the industries that the Company serves, the
most significant of which being the truck trailer industry. Finished tonnage
sales decreased to 40,386 tons in the first quarter of 1996 from 44,986 tons
for the first quarter of 1995. Billet sales decreased to 1,145 tons for the
first quarter of 1996 from 10,407 tons in the first quarter of 1995.
Cost of Sales
Cost of sales increased to 87.2% of net sales or $23,240,000 for the first
quarter of 1996 from 83.8% of net sales or $27,559,000 for the first quarter
of 1995. The percent increase in cost of goods sold was principally due to
lower sales coupled with higher costs for natural gas, medical care,
warehousing, maintenance and labor along with lower product yields.
Selling and Administrative Expenses
Selling and administrative expenses for the first quarter of 1996 were
$1,168,000 as compared to $1,398,000 for the first quarter of 1995. The
expense for the first quarter of 1995 included a $200,000 charge for costs
associated with a discontinued acquisition of another steel company. As a
percentage of net sales, selling and administrative expense was 4.4% in the
first quarter of 1996 and 4.2% for the comparable period in 1995.
Other Operating Expense (Income)
Other operating expense (income) for the first quarter of 1996 was $1,851,000
of expense, compared to $42,000 of income for the first quarter of 1995.
Other operating expense increased primarily due to the recognition of the
estimated loss on the disposal of certain equipment that is being replaced by
new equipment.
Interest Expense
Interest expense for the first quarter of 1996 was 1.4% of net sales or
$365,000, as compared to 1.2% of net sales or $386,000 for the first quarter
of 1995. Interest expense decreased primarily as a result of lower interest
rates.
Net Income
Net income for the first quarter of 1996 decreased by $2,181,000 (99.4%) to
$14,000 from $2,195,000 for the first quarter of 1995. This was principally
due to the significant charge to recognize the impairment of certain
equipment, higher operating costs and lower sales. As a percentage of net
sales, net income was 0.0% in the first quarter of 1996 and 6.7% for the
first quarter of 1995. In light of the downturn in sales, the Company
reduced the workforce by approximately 11% late in the quarter, and expects
to make further reductions in the workforce and management personnel.
9
<PAGE>
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 first quarter of 1996 was
$17,626,000, compared to $15,514,000 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: April 29, 1996 STEEL OF WEST VIRGINIA, INC.
-------------------------------
(Registrant)
/s/ Timothy R. Duke
--------------------------------
Timothy R. Duke, Vice President,
Treasurer and Chief Financial
Officer
11
<PAGE>
Exhibit - 11.1
Computation of Earnings Per Share Data
The following formulas were used to calculate the earnings per share data
shown in the Consolidated Statements of Income and Retained Earnings for the
quarter ended March 31, 1996 and March 31, 1995 included in this Report.
Calculation
-----------
Year Ended
- ----------
March 31, 1996 Net Income Net Income = $ 14,000 = $ .00
----------------------- ----------
per common Weighted average shares 6,134,393
share of Common Stock for the
period
March 31, 1995 Net Income Net Income = $2,195,000 = $ .31
----------------------- ----------
per common Weighted average shares 7,091,360
share of Common Stock for the
period
For purposes of calculating earnings per share, there were 6,134,393 and
7,091,360 weighted number of common shares outstanding during the three month
periods ending March 31, 1996 and 1995. Effective April 1, 1995, the Company
granted options of 79,500 shares of common stock. As of March 31, 1996,
these common stock equivalents are not included in the earnings per share
calculation as they have an anti-dilutive effect.
12
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 171
<SECURITIES> 0
<RECEIVABLES> 11,757
<ALLOWANCES> 976
<INVENTORY> 19,145
<CURRENT-ASSETS> 34,759
<PP&E> 65,325
<DEPRECIATION> (27,815)
<TOTAL-ASSETS> 91,892
<CURRENT-LIABILITIES> 17,133
<BONDS> 14,034
0
0
<COMMON> 71
<OTHER-SE> 51,858
<TOTAL-LIABILITY-AND-EQUITY> 91,892
<SALES> 26,647
<TOTAL-REVENUES> 26,647
<CGS> 23,240
<TOTAL-COSTS> 23,240
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 365
<INCOME-PRETAX> 23
<INCOME-TAX> 9
<INCOME-CONTINUING> 14
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<EXTRAORDINARY> 0
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<NET-INCOME> 14
<EPS-PRIMARY> .00
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