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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED FEBRUARY 28, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE
NO. 1-9944
CHAPARRAL STEEL COMPANY
Incorporated in
STATE OF DELAWARE
IRS Employer Identification
NO. 75-1424624
300 WARD ROAD
MIDLOTHIAN, TEXAS 76065
Telephone: (214) 775-8241
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 periods 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 .
----- -----
29,679,900 Shares of Common Stock, Par Value $.10 Outstanding at April 11,
1994.
1 of 13
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INDEX
CHAPARRAL STEEL COMPANY
PART I. FINANCIAL INFORMATION Page
- ----------------------------- ----
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--February 28,
1994 and May 31, 1993 3
Condensed consolidated statements of income--three and nine
months ended February 28, 1994 and 1993 4
Condensed consolidated statements of cash flows
--nine months ended February 28, 1994 and 1993 5
Notes to condensed consolidated financial statements
--February 28, 1994 6
Independent accountants' review report 8
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 11
SIGNATURES 11
- ----------
2
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CONDENSED CONSOLIDATED BALANCE SHEETS
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited)
February 28, May 31,
1994 1993
------------ -------
(In thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,685 $ 3,763
Trade accounts receivable, net of allowance
of $3.4 million and $3.4 million, respectively 43,753 34,187
Inventories 112,355 92,672
Prepaid expenses 8,192 8,147
--------- ---------
TOTAL CURRENT ASSETS 165,985 138,769
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 47,118 46,634
Machinery and equipment 433,969 430,614
Land 1,288 1,288
--------- ---------
482,375 478,536
Less allowance for depreciation (243,381) (222,974)
--------- ---------
238,994 255,562
OTHER ASSETS
Goodwill, commissioning costs and other assets,
net of accumulated amortization of $15.6 million
and $11.6 million, respectively 83,344 86,480
--------- ---------
$ 488,323 $ 480,811
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 10,000 $ -
Trade accounts payable 32,992 27,202
Accrued interest payable 3,522 3,044
Other accrued expenses 13,591 14,902
Current portion of long-term debt 9,911 12,720
--------- ---------
TOTAL CURRENT LIABILITIES 70,016 57,868
LONG-TERM DEBT 104,332 113,997
DEFERRED INCOME TAXES
AND OTHER CREDITS 50,831 49,348
STOCKHOLDERS' EQUITY
Common stock, $.10 par value, 29,679,900
and 29,675,400 shares outstanding, respectively 2,994 2,994
Paid-in capital 188,036 188,050
Retained earnings 74,618 71,113
Cost of common stock in treasury (2,504) (2,559)
--------- ---------
263,144 259,598
--------- ---------
$ 488,323 $ 480,811
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
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(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three months ended Nine months ended
February 28, February 28,
1994 1993 1994 1993
---- ---- ---- ----
(In thousands except per share)
<S> <C> <C> <C> <C>
Net sales $118,687 $103,396 $337,808 $311,522
Costs and expenses:
Cost of sales 96,284 87,596 276,485 267,804
Selling, general and administrative 3,995 3,390 12,369 10,525
Depreciation and amortization 8,557 8,856 25,373 25,958
Interest 3,411 3,527 10,198 11,107
Other income (846) (817) (2,210) (1,367)
-------- -------- -------- --------
111,401 102,552 322,215 314,027
INCOME (LOSS) BEFORE
INCOME TAXES 7,286 844 15,593 (2,505)
Provision (benefit) for income taxes:
Current period provision (benefit) 2,878 254 6,193 (1,453)
Change in statutory federal tax rate - - 1,443 -
-------- -------- -------- --------
2,878 254 7,636 (1,453)
NET INCOME (LOSS) $ 4,408 $ 590 $ 7,957 $ (1,052)
======== ======== ======== ========
Per common share:
NET INCOME (LOSS) $ .15 $ .02 $ .27 $ (.03)
======== ======== ======== ========
CASH DIVIDENDS $ .05 $ .05 $ .15 $ .15
======== ======== ======== ========
Average shares outstanding - Note B 29,733 29,744 29,719 29,675
======== ======== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Nine months ended
February 28,
1994 1993
---- ----
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 7,957 $ (1,052)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 25,373 25,958
Deferred income taxes 2,430 2,135
Other deferred credits (947) (2,038)
Changes in operating assets and liabilities:
Trade accounts receivable, net (10,429) 1,489
Inventories (19,683) 1,180
Prepaid expenses (45) (168)
Trade accounts payable 5,790 (7,916)
Accrued interest payable 478 (26)
Other accrued expenses (1,311) (2,579)
-------- --------
Net cash provided by operating activities 9,613 16,983
INVESTING ACTIVITIES
Capital expenditures (4,805) (4,271)
Other 40 3
-------- --------
Net cash used in investing activities (4,765) (4,268)
FINANCING ACTIVITIES
Short-term borrowings 20,000 7,000
Repayments on short-term debt (10,000) (7,000)
Long-term borrowings 260 -
Repayments on long-term debt (12,734) (12,711)
Dividends paid (4,452) (4,452)
-------- --------
Net cash used in financing activities (6,926) (17,163)
-------- --------
Decrease in cash and cash equivalents (2,078) (4,448)
Cash and cash equivalents at beginning of period 3,763 4,753
-------- --------
Cash and cash equivalents at end of period $ 1,685 $ 305
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
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(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
February 28, 1994
NOTE A - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of
Chaparral Steel Company and Subsidiaries (the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. 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 nine month period ended February 28, 1994 are not necessarily
indicative of the results that may be expected for the year ending May 31,
1994. 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 May 31, 1993.
NOTE B - Earnings Per Share
Texas Industries, Inc. ("TXI") owned 100% of the Company from November 1985,
when it acquired the remaining 50% of the outstanding securities of the Company
from Co-Steel Inc. ("Co-Steel"), until July 1988, when approximately 19.8% of
the outstanding securities were sold in an initial public offering of common
stock by the Company. Under terms of the purchase agreement between TXI and
Co- Steel, TXI made a $42 million initial cash payment and made a $73 million
final payment in August 1990.
The acquisition by TXI has been accounted for using the purchase method of
accounting. The $115 million total purchase price exceeded the value of
acquired assets by $83 million and the excess has been recorded as goodwill and
additional paid-in-capital. This goodwill is being amortized over 40 years
using the straight-line method and reduced earnings by $.6 million and $1.7
million in the three and nine months ended February 28, 1994 and 1993,
respectively. The amount of goodwill, net of accumulated amortization included
in other assets was $73.6 million, $75.3 million and $77.6 million at February
28, 1994, May 31, 1993 and May 31, 1992, respectively.
Net income (loss) per common share is calculated based upon a weighted average
of shares outstanding (including common stock equivalents that are not
antidilutive).
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NOTE C - Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
February 28, May 31,
1994 1993
---- ----
(In thousands)
<S> <C> <C>
Finished goods $ 65,059 $49,596
Work in process 17,598 7,817
Raw materials:
Scrap 8,660 10,843
Crushed cars 68 171
Rolls 14,735 14,579
Supplies 14,773 14,684
LIFO reserve (8,538) (5,018)
-------- -------
$112,355 $92,672
======== =======
</TABLE>
Inventories are stated at the lower of cost (last-in, first-out) or market,
except rolls which are stated at cost (specific identification) and supplies
which are stated at average cost.
NOTE D - Income Tax Provision
The provision (benefit) for income taxes has been included in the accompanying
financial statements on the basis of an estimated annual rate. In August 1993,
President Clinton signed into law the Omnibus Budget Reconciliation Act of 1993
that contained a provision raising the top effective rate for corporations to
35%. This rate increase, when applied to the Company's temporary differences,
resulted in a charge of $1.4 million which is included in the income tax
provision in the August 1993 quarter. Goodwill amortization also contributed
to the difference between provision (benefit) amounts and amounts computed by
applying the statutory federal income tax rates.
NOTE E - Commissioning Costs
The Company's policy for new facilities is to capitalize certain costs until
the facility is substantially complete and ready for its intended use. The
Large Beam Mill was substantially complete and ready for its intended use in
the third quarter of fiscal 1992 with a total of $15.1 million of costs
deferred, including $4.4 million of interest and $3.4 million of depreciation.
Amortization of $2.3 million was recorded in the first nine months of fiscal
1994 and 1993, respectively, based on a five year period.
NOTE F - Severance Pay
In an effort to stay competitive and reduce costs, the Company decreased its
number of employees in the first quarter of fiscal 1994. As a result, a
non-recurring charge of $1.6 million for severance pay is included in selling,
general and administrative in fiscal 1994.
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EXHIBIT A
Independent Accountants' Review Report
Board of Directors
Chaparral Steel Company
We have reviewed the accompanying condensed consolidated balance sheet of
Chaparral Steel Company and subsidiaries as of February 28, 1994, and the
related condensed consolidated statements of income for the three-month and
nine-month periods ended February 28, 1994 and 1993, and the condensed
consolidated statements of cash flows for the nine-month periods ended February
28, 1994 and 1993. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Chaparral Steel Company as of May
31, 1993, and the related consolidated statements of income, stockholders'
equity, and cash flows for the year then ended (not presented herein) and in
our report dated July 14, 1993, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth
in the accompanying condensed consolidated balance sheet as of May 31, 1993, is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
Ernst and Young
March 18, 1994
8
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Comparison of operations and financial condition for the quarter and nine
months ended February 28, 1994 to the quarter and nine months ended February
28, 1993.
RESULTS OF OPERATIONS
An increase in average selling price of 14% and an increase in shipments of
3,000 tons resulted in a $15.3 million increase in net sales in the three month
period ended February 28, 1994 compared to the same quarter in fiscal 1993.
Net sales increased $26.3 million in the nine month period ending February 28,
1994 principally due to a $36 increase in average selling price. The pricing
strategy for certain structural products announced in the May 1993 quarter and
general price increases in the current fiscal year, intended to offset the
continued escalation in scrap prices, have combined to produce the improvement
in selling prices.
Cost of sales increased $8.7 million to $96.3 million for the three month
period ended February 28, 1994 compared to the same period in the prior year.
The increase was predominately caused by a $25 increase in cost of sales per
ton which resulted from a scrap price increase. Cost of sales for the nine
month period increased $8.7 million as a 12% increase in cost of sales per ton
was offset by a decrease in shipments of 32,000 tons. Scrap prices, which
fluctuate with market conditions, are up approximately 25% from the prior year.
Certain cost cutting measures implemented by the Company in the August 1993
quarter continued to reduce other manufacturing costs.
Selling, general and administrative expense increased $.6 million from the
prior year quarter primarily due to an increase in employee profit sharing
which is based on profitability. The $1.6 million charge for severance pay in
fiscal 1994 and an increase in employee profit sharing were the primary reason
for the increase of $1.8 million in selling, general and administrative expense
in the nine month period ended February 28, 1994. The Company continues to
experience decreases in costs in all other areas of administration and
marketing compared to the periods in the previous year.
Interest expense decreased $.1 million and $.9 million in the three and nine
month periods ended February 28, 1994 compared to the same periods in the prior
year. Interest expense in the current period was reduced by repayments of
long-term debt which is principally at fixed rates.
The provision (benefit) for income taxes has been calculated on the basis of an
estimated annual rate. The rate was affected by recently passed legislation,
which when applied to the Company's temporary differences, resulted in an
increase of $1.4 million in the amount of deferred tax expense recorded in the
August 1993 quarter. Goodwill amortization also contributed to the difference
between provision amounts and income tax amounts computed by applying the
statutory federal income tax rates.
The increase in net income (loss) in the current periods was due principally to
higher average selling prices. Lower depreciation and interest costs in fiscal
1994 increased profitability by $.3 million in the three month period and by
$.8 million in the nine month period ending February 28, 1994. The increase in
net income (loss) was achieved despite the adjustment for severance pay and the
additional $1.4 million income tax provision described above.
9
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CAPITAL RESOURCES AND LIQUIDITY
Working capital increased $15.1 million to $96 million at February 28, 1994
from the previous fiscal year-end. Accounts receivable increased $9.6 million
from May 1993 as the Days Sales Outstanding ratio increased by eleven days and
average selling price increased 13%. Cash provided by operations in the first
nine months of fiscal 1994 decreased by $7.4 million primarily due to the
change in accounts receivable and inventories. As a result, cash and cash
equivalents decreased $2.1 million after the Company acquired $4.8 million of
capital additions, repaid $12.8 million of long-term debt and paid cash
dividends of $4.5 million.
Capital expenditures for the nine months ended February 28, 1994 totaled $4.8
million and are estimated to be approximately $10 million in fiscal 1994 which
represents normal replacement and upgrades of existing equipment. The Company
continues to study the possibility of new processes related to its primary
business.
The Company is subject to federal, state and local environmental laws and
regulations concerning, among other matters, waste water effluent, air
emissions and electric arc furnace ("EAF") dust disposal. From time to time,
the Company is involved in litigation relating to claims arising in the
ordinary course of business operations. No litigation (based on the opinion
of counsel) is pending against or currently affects the Company, the ultimate
liability of which, if any, would have a material effect on the Company's
financial position or results of operations. The Company maintains a hazardous
waste liability policy against certain third party claims, which insurance the
Company believes to be adequate in relation to the Company's business.
The Company has short-term credit facilities with two banks totaling $20
million which will expire January 31, 1995 if not renewed by the banks or the
Company. The Company had maximum borrowings of $15 million at any one time
under these arrangements during the first nine months of fiscal 1994. At
February 28, 1994, the Company had $10 million of outstanding borrowings under
these facilities. The Company expects that current financial resources and
anticipated cash provided from operations in fiscal 1994 will be sufficient to
provide funds for capital expenditures, meet scheduled debt payments and
satisfy other known working capital needs for fiscal 1994. If additional funds
are required to accomplish long-term expansion of its productive capabilities,
the Company believes that funding can be obtained to meet such requirements.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
The following exhibits are included herein:
(11) Statement re: Computation of earnings per share
(15) Letter re: Unaudited interim financial information
The Registrant did not file any reports on Form 8-K during the three
months ended February 28, 1994.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
CHAPARRAL STEEL COMPANY
April 11, 1994 /s/ RICHARD M. FOWLER
Richard M. Fowler
Senior Vice-President &
Chief Financial Officer
April 11, 1994 /s/ LARRY L. CLARK
Larry L. Clark
Vice President - Controller
11
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EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three months ended Nine months ended
February 28, February 28,
1994 1993 1994 1993
---- ---- ---- ----
(In thousands except per share)
<S> <C> <C> <C> <C>
AVERAGE SHARES OUTSTANDING
Primary:
Average shares outstanding 29,680 29,675 29,680 29,675
Stock options - treasury stock method
using average market prices 53 69 39 A) -
--------- --------- -------- ---------
TOTALS 29,733 29,744 29,719 29,675
========= ========= ======== =========
Fully diluted:
Average shares outstanding 29,680 29,675 29,680 29,675
Stock options - treasury stock method
using end of quarter market
price if higher than average 68 114 46 A) -
--------- --------- -------- ---------
TOTALS 29,748 29,789 29,726 29,675
========= ========= ======== =========
INCOME (LOSS) APPLICABLE
TO COMMON STOCK
Primary and fully diluted:
Net income (loss) $ 4,408 $ 590 $ 7,957 $ (1,052)
Add:
Pre-September 1990 contingent
price amortization 58 58 174 174
--------- --------- -------- ---------
$ 4,466 $ 648 $ 8,131 $ (878)
========= ========= ======== =========
PER SHARE
Net income (loss) per common share:
Primary $ .15 $ .02 $ .27 $ (.03)
========= ========= ======== =========
Fully diluted $ .15 $ .02 $ .27 $ (.03)
========= ========= ======== =========
</TABLE>
A) - Shares have been excluded as they are antidilutive.
12
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EXHIBIT 15
Board of Directors
Chaparral Steel Company
We are aware of the incorporation by reference in the Registration Statement
(Form S-8 No. 33-39626) pertaining to the Chaparral Steel Company Stock Option
Plan of our report dated March 18, 1994, relating to the unaudited condensed
consolidated interim financial statements of Chaparral Steel Company and
subsidiaries which are included in its Form 10-Q for the quarter ended February
28, 1994.
Pursuant to Rule 436(c) of Securities Act of 1933 our report is not a part of
the Registration Statement prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
Ernst and Young
Dallas, Texas
April 7, 1994
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