<PAGE>
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, 1997
--------------
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
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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
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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, 1997, is as follows:
5,991,276 shares of common stock, par value $.01 per share.
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STEEL OF WEST VIRGINIA, INC.
AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of March 31, 1997 and December 31, 1996....... 3
Condensed Consolidated Statements of Income for the Three-Month Periods Ended March 31,
1997 and March 31, 1996.............................................................. 4
Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended March
31, 1997 and March 31, 1996.......................................................... 5
Notes to Condensed Consolidated Financial Statements................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................................... 10
</TABLE>
2
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED BALANCE SHEETS
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1997 1996
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash................................................................ $ 0 $ 0
Receivables, net of allowances of $614 and $599..................... 10,720 6,579
Inventories......................................................... 18,597 17,307
Deferred income taxes............................................... 3,121 3,121
Other current assets................................................ 257 220
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TOTAL CURRENT ASSETS............................................... 32,695 27,227
Property, plant, and equipment....................................... 35,549 33,298
Goodwill............................................................. 18,281 18,452
Other assets......................................................... 329 322
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TOTAL ASSETS......................................................... $ 86,854 $ 79,299
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Overdraft........................................................... $ 1,631 $ 1,097
Accounts payable.................................................... 4,992 4,161
Accrued payroll and benefits payable................................ 4,591 3,599
Income taxes payable (refundable)................................... 392 (1,146)
Other current liabilities........................................... 1,821 2,021
Current maturities of long-term debt................................ 887 2,434
----------- ------------
TOTAL CURRENT LIABILITIES.......................................... 14,314 12,166
Long-term debt....................................................... 14,988 10,975
Deferred income taxes................................................ 6,332 6,332
Other long-term liabilities.......................................... 668 819
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TOTAL LIABILITIES.................................................. 36,302 30,292
STOCKHOLDERS' EQUITY
Common stock, $.01 par value: 12,000,000 voting shares authorized,
7,096,576 and 7,091,360 issued, including treasury stock.......... 71 71
Paid-in capital..................................................... 26,627 26,627
Treasury stock--1,105,300 shares at cost............................ (11,483) (11,483)
Retained earnings................................................... 35,337 33,792
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3
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TOTAL STOCKHOLDERS' EQUITY........................................ 50,552 49,007
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......................... $ 86,854 $ 79,299
----------- ------------
----------- ------------
</TABLE>
NOTE: The balance sheet at December 31, 1996, has been derived from the
audited financial statements at that date.
See notes to condensed consolidated financial statements.
4
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31
1997 1996
--------- -----------
<S> <C> <C>
Net sales............................................................... $ 24,429 $ 26,647
Cost of sales........................................................... 20,368 23,240
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GROSS PROFIT.......................................................... 4,061 3,407
Selling and administrative expenses..................................... 1,409 1,168
Interest expense........................................................ 260 365
(Gain)/Loss on disposal of assets....................................... (223) 1,949
Other (income) expense.................................................. (67) (98)
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INCOME BEFORE INCOME TAXES............................................ 2,682 23
Income Taxes............................................................ 1,137 9
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NET INCOME............................................................ $ 1,545 $ 14
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--------- -----------
NET INCOME PER COMMON SHARE, based on 5,991,859 and 6,134,393 average
shares of common stock and equivalents outstanding during 1997 and
1996.................................................................. $ .26 $ .00
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--------- -----------
</TABLE>
See notes to condensed consolidated financial statements.
5
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
(In thousands)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1997 1996
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<S> <C> <C>
CASH FROM OPERATIONS....................................................... $ 410 $ 2,509
INVESTMENT ACTIVITIES
Additions to property, plant, and equipment............................... (3,410) (646)
FINANCING ACTIVITIES
Revolving credit loan..................................................... 4,235 3,826
Long-term debt repayments................................................. (1,769) (1,471)
Purchase of treasury stock................................................ 0 (3,500)
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2,466 (1,145)
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INCREASE (DECREASE) IN CASH............................................... $ (534) $ 718
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</TABLE>
See notes to condensed consolidated financial statements.
6
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
MARCH 31, 1997
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, 1997 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1997. 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, 1996.
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 5,991,859 weighted
average shares of common stock outstanding during the three months ended March
31, 1997 and 6,134,393 weighted average shares of common stock outstanding
during the three months ended March 31, 1996. The effect of the Company's stock
option plans was anti-dilutive for all periods presented.
NOTE B--INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1997 1996
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<S> <C> <C>
Raw materials........................................................ $ 1,501 $ 1,638
Work-in-process...................................................... 6,005 6,624
Finished goods....................................................... 11,375 9,103
Manufacturing supplies............................................... 3,741 3,967
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22,622 21,332
Less LIFO reserve.................................................... 4,025 4,025
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$ 18,597 $ 17,307
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</TABLE>
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, 1997, 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
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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
A summary of indebtedness under the Company's credit arrangements consists
of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31 DECEMBER 31
1997 1996
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<S> <C> <C>
Term loan I.......................................................... $ 0 $ 1,120
Term loan II......................................................... 0 427
Capital expenditure line............................................. 4,065 4,280
Revolver............................................................. 11,540 7,305
Other notes payable.................................................. 270 277
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15,875 13,409
Less current maturities.............................................. (887) (2,434)
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$ 14,988 $ 10,975
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</TABLE>
The Company maintains a senior financing agreement that, as last amended
April 1997, provides for up to $15,000,000 of revolving credit borrowings,
capital expenditure line term loans, and other term loans. The interest rates on
its existing credit lines and term loans vary based on the Chemical Bank prime
rate or LIBOR plus 1-3/4%; and the annual revolving credit line commitment fee
is 1/8% of the unused balance. Under the terms of its senior financing
agreement, the Company is permitted to convert its Capital Expenditure Line
indebtedness to a fixed interest rate. The senior credit agreement may be
terminated by the Company or, on or after January 1, 2001 and upon 90 days
written notice, by the lender.
The final principal installments totaling $1,547,050 under the Term Loan I
and II portions of the senior financing agreement were repaid in full during the
quarter ended March 31, 1997. As of March 31, 1997, the revolving credit line
loan balance, due January 1, 2001, was $11,540,000, and the unused borrowing
availability approximated $3,460,000. 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.
Effective April 1997, the Company's senior lending agreement was amended to
provide, under the terms of an "Additional Capital Expenditure Line," up to
$23,000,000 additional borrowing availability to finance current machinery and
equipment expenditures, governed by a percentage of such expenditures. Under the
terms of the amendment the total borrowings under this new borrowing line may,
at the Company's election, through January 1, 1999, bear a fixed interest rate,
and certain prepayments of the credit through January 1, 1999, could result in
prepayment fees of 1.5% of the amounts prepaid.
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, 1997, the Company's retained earnings available for
dividends is $-0-. As a
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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
1997). A liability has been established for those illnesses and injuries
occurring on or before March 31, 1997, for which an amount of expected loss
could be reasonably estimated.
NOTE E--STOCKHOLDERS' EQUITY
Commencing in April 1995 through March 31, 1996, the Company repurchased
1,105,000 shares at a total cost of $11,483,000, including 350,000 shares
purchased at a cost of $3,500,000 during the quarter ended March 31, 1996.
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 that has been included in the gain/loss on
disposal of assets.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
NET SALES
Net sales decreased 8.3% in the first quarter of 1997 to $24,429,000 down
$2,218,000 from the first quarter of 1996, 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 37,457
tons in the first quarter of 1997 from 40,386 tons for the first quarter of
1996. Billet sales increased to 2,010 tons for the first quarter of 1997 from
1,145 tons in the first quarter of 1996.
COST OF SALES
Cost of sales decreased to 83.4% of net sales or $20,368,000 for the first
quarter of 1997 from 87.2% of net sales or $23,240,000 for the first quarter of
1996. The percent decrease in cost of goods sold is principally due to an
increase in productivity and lower costs for maintenance spending and labor.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Selling, general, and administrative expenses for the first quarter of 1997
were $1,409,000 as compared to $1,168,000 for the first quarter of 1996. This
increase was due primarily to higher legal expenses. As a percentage of net
sales, selling and administrative expense was 5.8% in the first quarter of 1997
and 4.4% for the comparable period in 1996.
INTEREST EXPENSE, GAIN/LOSS ON DISPOSAL OF ASSETS AND OTHER EXPENSE (INCOME)
Interest expense for the first quarter of 1997 was $260,000, compared to
$365,000 for the first quarter of 1996. As a percentage of net sales, interest
expense was 1.1% in the first quarter of 1997, compared to 1.4% for the first
quarter of 1996. The Company recognized a gain on the disposal of equipment
during the first quarter of 1997 in the amount of $223,000 as compared to a
$1,949,000 loss in the first quarter of 1996. Other expense (income) for the
first quarter of 1997 was $67,000 of income compared to $98,000 of income for
the first quarter of 1996.
NET INCOME
Net income for the first quarter of 1997 increased by $1,531,000 to
$1,545,000 from $14,000 for the first quarter of 1996. This increase in net
income reflected both an increase in gross profit and the absence, in this
year's results, of the loss on disposal of assets. As a percentage of net sales,
net income was 6.3% for the first quarter of 1997, compared to 0.0% for the
first quarter of 1996.
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 1997 was $18,381,000, compared to
$15,061,000 at the end of the prior fiscal year. This increase in working
capital was due primarily to working
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capital provided by the Company's revolving credit facility. The Company's
expenditures for required capital replacements are currently anticipated to
average approximately $1,000,000 annually over the next several years.
In December 1996, the Company's Board of Directors approved Phase II of the
Company's expansion and modernization program to the Huntington, West Virginia
plant. The program includes a new high speed reheat furnace, quick-change mill
roll stands, new warehouse space, and other miscellaneous equipment
enhancements. The project is expected to cost approximately $28 million (not
including capitalized interest) and is scheduled to be completed by late 1997
without material disruptions to existing operations. The Company will fund the
project from a combination of internally generated cash flow and bank debt. 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.
FORWARD LOOKING STATEMENTS
Any Forward Looking Statements contained herein are subject to the section
on Forward Looking Statements contained in the Company's Annual Report on Form
10-K for the year ended December 31, 1996, including the following risk factors
set forth therein: the cyclical and capital intensive nature of the industry;
pressure resulting from foreign and domestic competition; reduction in demand
for the Company's products and industry pricing; volatility of raw material
costs, especially steel scrap, resulting in reduced profit margins; excess
industry capacity resulting in reduced profit margins; and the cost of
compliance with environmental regulations. In addition, the Forward Looking
Statements contained herein are also subject to the timely completion of the
modernization and expansion program and the Company's ability to effectively
integrate new equipment.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit
11.1 Computation of Earnings Per Share Data.
(b) Reports on Form 8-K
Registrant filed a report on Form 8-K dated March 13, 1997, regarding
the adoption of a Stockholder Rights Plan, a copy of which was filed as an
exhibit thereto.
11
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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: May 13, 1997 STEEL OF WEST VIRGINIA, INC.
-----------------------------
(Registrant)
/s/ Mark G. Meikle
-----------------------------
Mark G. Meikle, Vice President,
Treasurer and Chief Financial
Officer
12
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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, 1997 and March 31, 1996 included in this Report.
CALCULATION
<TABLE>
<CAPTION>
THREE MONTHS ENDED
- ------------------
<S> <C> <C> <C> <C>
March 31, 1997 Net Income per common share Net Income = $1,545,000 = $.26
----------------------- ----------
Weighted average shares 5,991,859
of Common Stock for
the period
March 31, 1996 Net Income per common share Net Income
------------------------ = $14,000 = $.00
Weighted average shares ---------
of Common Stock for the 6,134,393
period
</TABLE>
For purposes of calculating earnings per share, there were 5,991,859 and
6,134,393 weighted average shares of common stock outstanding during the three
month periods ending March 31, 1997 and 1996. The effect of the Company's stock
option plans was anti-dilutive for all periods presented.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 10,720
<ALLOWANCES> 614
<INVENTORY> 18,597
<CURRENT-ASSETS> 32,695
<PP&E> 63,807
<DEPRECIATION> (28,258)
<TOTAL-ASSETS> 86,854
<CURRENT-LIABILITIES> 14,314
<BONDS> 14,988
0
0
<COMMON> 71
<OTHER-SE> 50,481
<TOTAL-LIABILITY-AND-EQUITY> 86,854
<SALES> 24,429
<TOTAL-REVENUES> 24,429
<CGS> 20,368
<TOTAL-COSTS> 20,368
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 15
<INTEREST-EXPENSE> 260
<INCOME-PRETAX> 2,682
<INCOME-TAX> 1,137
<INCOME-CONTINUING> 1,545
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,545
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
