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, 1998
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
- --------------------------------------------------------------------------------
(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 March 31, 1998, is as follows:
6,010,795 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, 1998 and December 31, 1997
Condensed Consolidated Statements of Income for 4
the Three-Month Periods Ended
March 31, 1998 and 1997
Condensed Consolidated Statements of Cash Flows 5
for the Three-Month Periods Ended
March 31, 1998 and 1997
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 10
Item 6. Exhibits and Reports on Form 8-K 10
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
1998 1997
--------- ----------
ASSETS
CURRENT ASSETS
Cash $ 0 $ 0
Receivables, net of allowances of $609 15,436 11,181
Inventories 24,155 20,918
Deferred income taxes 1,555 1,555
Other current assets 639 660
--------- ---------
TOTAL CURRENT ASSETS 41,785 34,314
Property, plant, and equipment 67,294 61,002
Goodwill 17,599 17,770
Other assets 572 629
--------- ---------
TOTAL ASSETS $ 127,250 $ 113,715
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Overdraft $ 1,530 $ 968
Accounts payable 12,443 10,880
Accrued payroll and benefits payable 4,083 3,509
Income taxes payable 909 71
Other current liabilities 1,689 1,385
Current maturities of long-term debt 2,616 1,891
--------- ---------
TOTAL CURRENT LIABILITIES 23,270 18,704
Long-term debt 41,897 34,339
Deferred income taxes 6,194 6,194
Other long-term liabilities 179 176
--------- ---------
TOTAL LIABILITIES 71,540 59,413
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 26,785 26,663
Treasury stock - 1,105,300 shares at cost (11,483) (11,483)
Retained earnings 40,337 39,051
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 55,710 54,302
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 127,250 $ 113,715
========= =========
NOTE: The balance sheet at December 31, 1997, 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 share and per share data)
Three Months Ended
March 31
1998 1997
----------------------
Net sales $ 32,160 $ 24,429
Cost of sales 28,794 20,368
--------- ---------
GROSS PROFIT 3,366 4,061
Selling and administrative expenses 1,480 1,409
Interest Expense 350 260
Gain on disposal of assets (496) (223)
Other income (178) (67)
--------- ---------
INCOME BEFORE INCOME TAXES 2,210 2,682
Income Taxes 924 1,137
--------- ---------
NET INCOME $ 1,286 $ 1,545
========= =========
BASIC AND DILUTED EARNINGS PER COMMON SHARE $ .21 $ .26
========= =========
Weighted average common shares outstanding:
Basic 6,010,795 5,991,859
Diluted 6,011,675 5,991,859
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)
Three Months Ended
March 31
1998 1997
----------------------
CASH (USED IN) PROVIDED FROM OPERATIONS
Net income $ 1,286 $ 1,545
Adjustments for items not affecting funds
from operations:
Depreciation and amortization 1,772 1,324
Gain on disposal of assets (495) (223)
Other 520 (158)
Working capital changes related to operations (6,924) (2,078)
--------- ---------
CASH (USED IN) PROVIDED FROM OPERATIONS (3,841) 410
INVESTMENT ACTIVITIES
Additions to property, plant,
and equipment (5,004) (3,410)
FINANCING ACTIVITIES
Revolving credit loan 5,506 4,235
Proceeds from debt issue 3,000 0
Long-term debt repayments (223) (1,769)
--------- ---------
8,283 2,466
DECREASE IN CASH $ (562) $ (534)
========= =========
See notes to condensed consolidated financial statements.
5
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
STEEL OF WEST VIRGINIA, INC. AND SUBSIDIARIES
March 31, 1998
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, 1998 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1998. 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, 1997.
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.
Basic earnings per share excludes any dilutive effects of stock options and is
computed by dividing net income by the weighted average shares of common stock
outstanding for the period. Diluted earnings per share is computed by dividing
net income by the weighted average shares of common stock outstanding for the
period plus the shares that would be outstanding assuming the exercise of
dilutive stock options. The effect of dilutive stock options on weighted average
shares outstanding was 880 and 0 for the quarters ended March 31, 1998 and 1997.
NOTE B--INVENTORIES
Inventories consist of the following (in thousands):
March 31 December 31
1998 1997
--------- ----------
Raw materials $ 1,666 $ 2,354
Work-in-process 9,600 8,240
Finished goods 12,208 10,731
Manufacturing supplies 5,321 4,068
--------- ---------
28,795 25,393
Less LIFO reserve 4,640 4,475
--------- ---------
$ 24,155 $ 20,918
========= =========
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, 1998, 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
6
<PAGE>
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.
NOTE C--CREDIT ARRANGEMENTS
A summary of indebtedness under the Company's credit arrangements is as follows
(in thousands):
March 31 December 31
1998 1997
------- -----------
Capital Expenditure Line Term Loan #1 $ 3,205 $ 3,420
Capital Expenditure Line Term Loan #2 23,000 20,000
Revolver 18,047 12,541
Other notes payable 261 269
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TOTAL 44,513 36,230
Less current maturities of long-term debt (2,616) (1,891)
------- -------
$41,897 $34,339
======= =======
The Company maintains a senior financing agreement that, as last amended April
1998, provides for up to $21,000,000 of revolving credit borrowings and capital
expenditure line term loans. The interest rates on the Company's existing
revolving 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. As of March 31, 1998, the revolving credit line loan
balance, due January 1, 2001, was $18,047,000, and the unused borrowing
availability approximated $2,953,000.
Under the terms of its senior financing agreement, the Company is permitted to
convert its Capital Expenditure Line Term Loan #1 indebtedness to a fixed
interest rate. Effective with the April 1998 amendment, the Company's borrowing
availability under the Capital Expenditure Line Term Loan #2 was increased to
$28,000,000 to finance current machinery and equipment expenditures, as governed
by a percentage of such expenditures. The Company is permitted, at its election
through January 1, 1999, to convert such indebtedness to a fixed interest rate.
The Capital Expenditure Line Term Loan #1 portion of the loan agreement is
required to be repaid in quarterly installments of $215,000, with a final
principal payment of $195,000 on October 1, 2001. The Capital Expenditure Line
Term Loan #2 will be repaid in 40 equal quarterly installments of principal over
ten years commencing July 1, 1998.
The Company's senior lending agreement may be terminated by the Company or, on
or after January 1, 2001 and upon 90 days written notice, by the lender. The
agreement contains various restrictive covenants, including 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, 1998, the Company's retained earnings available
for dividends is $2,629,500. As a result of the lending agreement, substantially
all of
7
<PAGE>
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 1998). A liability
has been established for those illnesses and injuries occurring on or before
March 31, 1998, for which an amount of expected loss could be reasonably
estimated.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Sales
Net sales increased 31.6% in the first quarter of 1998 to $32,160,000 up
$7,731,000 from the first quarter of 1997, primarily due to an increase in
tonnage of products shipped. Finished tonnage sales increased to 50,924 tons in
the first quarter of 1998 from 37,457 tons for the first quarter of 1997. Billet
sales decreased to 697 tons for the first quarter of 1998 from 2,010 tons in the
first quarter of 1997. The average selling price per ton for finished products
decreased to $628 in the first quarter of 1998 compared to $638 per ton in the
first quarter of 1997 due to competitive pressures and efforts to increase
market penetration. The average selling price per ton for billets decreased to
$256 in the first quarter of 1998 compared to $271 in the first quarter of 1997.
Cost of Sales
Cost of sales increased to 89.5% of net sales or $28,794,000 for the first
quarter of 1998 from 83.4% of net sales or $20,368,000 for the first quarter of
1997. The percent increase in cost of goods sold is principally due to the
effect of a shutdown of approximately two weeks of the #2 Mill for installation
and start-up of new equipment, as well as higher alloy and mill roll expense.
Selling, General, and Administrative Expenses
Selling, general, and administrative expenses for the first quarter of 1998 were
$1,480,000 as compared to $1,409,000 for the first quarter of 1997. This
increase was due primarily to higher consulting fees. As a percentage of net
sales, selling and administrative expense was 4.6% in the first quarter of 1998
and 5.8% for the comparable period in 1997.
Interest Expense, Gain on Disposal of Assets and Other Operating Income
Interest expense for the first quarter of 1998 was $350,000, compared to
$260,000 for the first quarter of 1997 due to increased borrowings associated
with the Company's recently completed Phase II expansion and modernization
program. The Company recognized a gain on the disposal of assets during the
first quarter of 1998 in the amount of $496,000 as compared to a $223,000 gain
in the first quarter of 1997. Included in the gain on disposal of assets during
the first quarter of 1998 was a favorable settlement of $700,000 with regard to
equipment previously purchased from one of the Company's vendors. Other
operating income for the first quarter of 1998 was $178,000 compared to $67,000
for the first quarter of 1997.
Net Income
Net income for the first quarter of 1998 decreased by $259,000 to $1,286,000
from $1,545,000 for the first quarter of 1997. This decrease in net income was
due primarily to a decrease in gross profit. As a percentage of net sales, net
income was 4.0% for the first quarter of 1998, compared to 6.3% for the first
quarter of 1997.
9
<PAGE>
Liquidity and Sources of Capital
The Company's primary ongoing cash needs are for working capital, debt service
and capital expenditures. The Company's three sources of liquidity 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 1998 was $18,515,000, compared to $15,610,000 at the end of the prior
fiscal year. This increase in working capital was funded by proceeds from the
Company's credit arrangements with its senior lender. The Company's expenditures
for required capital replacements are currently anticipated to average
approximately $1,000,000 to $2,000,000 annually over the next several years.
In February 1998 the Company completed Phase II of its expansion and
modernization program to the Huntington, West Virginia plant. The program
included a new high speed reheat furnace, quick-change mill roll stands, new
warehouse space, and other miscellaneous equipment enhancements. The project,
costing approximately $36,000,000 (not including capitalized interest) was
completed without material disruptions to existing operations. The Company
funded the project with a combination of internally generated cash and bank
debt.
From time to time, the Company evaluates discretionary capital expenditures and
acquisition opportunities. Any such expenditures 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, 1997, 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 Company's ability to
effectively integrate new equipment.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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: May 14, 1998 STEEL OF WEST VIRGINIA, INC.
-------------------------------
(Registrant)
/s/ Timothy R. Duke
-------------------------------
Timothy R. Duke, President and
Chief Executive Officer
/s/ Mark G. Meikle
-------------------------------
Mark G. Meikle, Vice President,
Treasurer and Chief Financial
Officer
11
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 15,436
<ALLOWANCES> 609
<INVENTORY> 24,155
<CURRENT-ASSETS> 41,785
<PP&E> 100,388
<DEPRECIATION> (33,094)
<TOTAL-ASSETS> 127,250
<CURRENT-LIABILITIES> 23,270
<BONDS> 44,513
0
0
<COMMON> 71
<OTHER-SE> 55,639
<TOTAL-LIABILITY-AND-EQUITY> 27,250
<SALES> 32,160
<TOTAL-REVENUES> 32,160
<CGS> 28,794
<TOTAL-COSTS> 28,794
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 350
<INCOME-PRETAX> 2,210
<INCOME-TAX> 924
<INCOME-CONTINUING> 1,286
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,286
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
