<PAGE> 1
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 AUGUST 31, 1996
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: (972) 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
--- -----.
28,358,300 Shares of Common Stock, Par Value $.10 Outstanding at October 7,
1996.
1 of 13
<PAGE> 2
INDEX
CHAPARRAL STEEL COMPANY
PART I. FINANCIAL INFORMATION Page
- ----------------------------- ----
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--August 31,
1996 and May 31, 1996 3
Condensed consolidated statements of income--three
months ended August 31, 1996 and 1995 4
Condensed consolidated statements of cash flows
--three months ended August 31, 1996 and 1995 5
Notes to condensed consolidated financial statements
--August 31, 1996 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
<PAGE> 3
CONDENSED CONSOLIDATED BALANCE SHEETS
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited)
August 31, May 31,
1996 1996
---------- -------
(In thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,693 $ 20,014
Trade accounts receivable, net of allowance
of $2.7 million and $2.8 million, respectively 56,879 49,530
Inventories 128,030 121,791
Prepaid expenses 14,025 7,757
-------- --------
TOTAL CURRENT ASSETS 205,627 199,092
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 55,368 55,342
Machinery and equipment 447,035 436,886
Land 1,288 1,288
-------- --------
503,691 493,516
Less allowance for depreciation (287,055) (279,447)
-------- --------
216,636 214,069
OTHER ASSETS
Goodwill, commissioning costs and other assets,
net of accumulated amortization of $28.5 million
and $27.3 million, respectively 61,152 62,176
-------- --------
$483,415 $475,337
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $32,422 $34,131
Accrued interest payable 2,503 1,402
Other accrued expenses 19,715 14,470
Current portion of long-term debt 12,379 12,366
-------- --------
TOTAL CURRENT LIABILITIES 67,019 62,369
LONG-TERM DEBT 66,702 66,697
DEFERRED INCOME TAXES
AND OTHER CREDITS 51,603 51,306
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000
authorized, none outstanding - -
Common stock, $.10 par value, 28,358,300 and
28,707,400 shares outstanding, respectively 2,994 2,994
Paid-in capital 178,517 178,517
Retained earnings 133,781 126,885
Cost of common stock in treasury (17,201) (13,431)
-------- --------
298,091 294,965
-------- --------
$483,415 $475,337
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three months ended
August 31,
1996 1995
---- ----
(In thousands except per share)
<S> <C> <C>
Net sales $149,527 $138,141
Costs and expenses:
Cost of sales (exclusive of items stated
separately below) 118,865 112,081
Depreciation and amortization 8,872 8,088
Selling, general and administrative 7,344 5,732
Interest 2,144 2,620
Other income (1,062) (1,106)
--------- ---------
INCOME BEFORE INCOME TAXES 13,364 10,726
Provision for income taxes 5,050 4,298
--------- ---------
NET INCOME $ 8,314 $ 6,428
========= =========
Average shares outstanding - Note B 28,904 29,803
========= =========
Per common share:
NET INCOME $ .29 $ .22
========= =========
CASH DIVIDENDS $ .05 $ .05
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three months ended
August 31,
1996 1995
---- ----
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,314 $ 6,428
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation and amortization 8,872 8,088
Deferred income taxes (563) (378)
Other deferred credits 860 359
Changes in operating assets and liabilities:
Trade accounts receivable, net (7,349) (2,014)
Inventories (6,239) (4,084)
Prepaid expenses (6,268) (9,297)
Trade accounts payable (1,709) (3,491)
Accrued interest payable 1,101 1,066
Other accrued expenses 5,245 3,276
------- -------
Net cash provided (used) by operating activities 2,264 (47)
INVESTING ACTIVITIES
Capital expenditures (10,535) (7,504)
Other 120 270
------- -------
Net cash used in investing activities (10,415) (7,234)
FINANCING ACTIVITIES
Long-term borrowings 105 -
Repayments on long-term debt (87) (1,324)
Purchase of treasury stock (3,770) -
Dividends paid (1,418) (1,484)
------- ------
Net cash used in financing activities (5,170) (2,808)
------- -------
Decrease in cash and cash equivalents (13,321) (10,089)
Cash and cash equivalents at beginning of period 20,014 19,140
------- -------
Cash and cash equivalents at end of period $ 6,693 $ 9,051
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
August 31, 1996
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 three month period ended August 31, 1996 are not necessarily
indicative of the results that may be expected for the year ending May 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 May 31, 1996.
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 was recorded as goodwill and
additional paid-in-capital. During May 1995, the Company recorded a $9.4
million adjustment to the original amount of goodwill. The amount of goodwill,
net of accumulated amortization included in other assets was $58.7 million and
$59.2 million at August 31, 1996 and May 31, 1996, respectively. This goodwill
is being amortized over 40 years using the straight-line method and reduced
earnings by $.5 million and $.5 million in the three months ended August 31,
1996 and 1995, respectively. Management reviews the remaining goodwill with
consideration toward recovery through future operating results (undiscounted)
at the current rate of amortization.
Net income per common share is calculated based upon a weighted average of
28,904,000 and 29,803,000 shares outstanding at August 31, 1996 and 1995,
respectively.
NOTE C - Income Tax Provision
The provision for income taxes has been included in the accompanying financial
statements on the basis of an estimated annual rate. Goodwill amortization was
the primary reason for the difference between provision amounts and amounts
computed by applying the statutory federal income tax rates.
6
<PAGE> 7
NOTE D - Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
August 31, May 31,
1996 1996
---------- ------
(In thousands)
<S> <C> <C>
Finished goods $67,928 $64,962
Work in process 9,653 11,851
Raw materials 25,754 21,082
Rolls and molds 16,439 20,693
Supplies 21,430 16,377
LIFO adjustment (13,174) (13,174)
-------- --------
$128,030 $121,791
======== ========
</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 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.
The amounts of commissioning costs (net of amortization) were $1.3 million and
$2 million at August 31, 1996 and May 31, 1996, respectively. Amortization of
$.7 million and $.8 million was recorded in the first quarter of fiscal 1997
and 1996, respectively, based on a five year period.
NOTE F - Contingencies
The Company and subsidiaries are defendants in lawsuits which arose in the
normal course of business. In management's judgment (based on the opinion of
counsel) the ultimate liability, if any, from such legal proceedings will not
have a material effect on the Company's financial position.
The Company is subject to federal, state and local environmental laws and
regulations concerning, among other matters, air emission, furnace dust
disposal and wastewater discharge. The Company believes it is in substantial
compliance with applicable environmental laws and regulations. Notwithstanding
such compliance, if damage to persons or property or contamination of the
environment has been or is caused by the conduct of the Company's business or
by hazardous substances or wastes used in, generated or disposed of by the
Company, the Company could be held liable for such damages and be required to
pay the cost of investigation and remediation of such contamination. The
amount of such liability could be material. Changes in federal or state laws,
regulations or requirements or discovery of unknown conditions could require
additional expenditures by the Company.
NOTE G - New Accounting Pronouncements
The adoption of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
To Be Disposed Of", effective June 1, 1996, had no effect on the financial
statements of the Company. The Company has elected to continue utilizing the
accounting for stock issued to directors and employees prescribed by APB No.
25, and therefore, the required adoption of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation", is expected to
have no effect on the financial position or results of operations of the
Company.
7
<PAGE> 8
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 August 31, 1996 and 1995, and
the related condensed consolidated statements of income and cash flows for the
three month periods ended August 31, 1996 and 1995. 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, 1996, 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 12, 1996, 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, 1996, is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
Ernst & Young LLP
September 18, 1996
8
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Unaudited)
Comparison of operations and financial condition for the quarter ended
August 31, 1996, to the quarter ended August 31, 1995.
RESULTS OF OPERATIONS
An increase in shipments of 7% and a $5 increase in average selling price in
the first quarter resulted in a $11.4 million increase in net sales compared to
the same period in the prior year. The stable demand for our structural
products continued in the summer quarter due to the continued strength in the
construction and manufactured housing industries. Imports of wide-flange beams
into the North American market have increased this year compared to the prior
year. This is expected to have a short-term negative effect on the domestic
supply-demand balance as price reductions have been announced for some
structural products. Demand and prices for bar products have stabilized
recently, but prices are 10% below those of the prior year quarter. Bar
Products business unit margins should improve due to the anticipated recovery
in the Special Bar Quality market and as the Company shifts its product mix to
Special Bar Quality products.
Cost of sales (exclusive of depreciation and amortization) increased $6.8
million to $118.9 million for the three month period ended August 31, 1996,
compared to the same period in the prior year. The increase was predominately
caused by an increase in shipments of 25,000 tons and higher scrap costs.
Scrap prices are expected to decline in the 2nd quarter of 1997. Combined
rolling conversion costs decreased from the prior year period due to operating
efficiencies.
Depreciation expense increased from the prior year period due to increased
levels of capital spending. Depreciation is computed using the straight-line
method over the estimated useful lives of the property. Amortization of
goodwill and commissioning costs were unchanged from the prior year.
Selling, general and administrative expense increased $1.6 million in the three
month period ended August 31, 1996, compared to the prior year period primarily
due to increases in employee incentive programs which are based on
profitability and employee training programs.
Interest expense decreased $.5 million in the three month period ended August
31, 1996, compared to the same period in the prior year. Interest expense in
the current period was reduced due to repayments of long-term debt which is
principally at fixed rates.
The provision for income taxes has been calculated on the basis of an estimated
annual rate. Goodwill amortization contributed to the difference between
provision amounts and income tax amounts computed by applying the statutory
federal income tax rates.
9
<PAGE> 10
CAPITAL RESOURCES AND LIQUIDITY
Working capital increased $2.1 million to an all-time high of $138.6 million at
August 31, 1996. The increase in net income of $1.9 million provided additional
working capital in the first three months of fiscal 1997. Accounts receivable
increased $7.3 million from the prior fiscal year-end due in part to changes in
the Company's cash discount policy. August 31, 1996 inventories increased $6.2
million primarily as raw material levels rose as the Company anticipated higher
prices in the fall of 1996. Finished goods increased due to better levels of
production brought about by a shorter shutdown period in the summer of 1996.
Prepaid expenses increased $6.3 million due to shutdown spending completed in
July 1996. Other accrued expenses increased $5.2 million to $19.7 million due
to an increase in the accrual for federal income tax. The other components of
working capital were virtually unchanged from the previous fiscal year-end. As
a result, cash and cash equivalents decreased $13.3 million after the Company
bought $10.5 million of capital additions, purchased $3.8 million of treasury
stock and paid cash dividends of $1.4 million.
Capital expenditures for the three months ended August 31, 1996, totaled $10.5
million and are expected to be in the range of $40-$50 million in fiscal 1997.
Total anticipated spending includes upgrades for the Recycled Products and
Bar Products business units of approximately $25 million.
The Company's capitalization of $364.8 million at August 31, 1996, consisted of
$66.7 million of long-term debt and $298.1 million of stockholders' equity.
The current portion of long-term debt totaled $12.4 million at August 31, 1996.
The Company's average interest rate on long-term debt is 11%. The Company's
payments of principal and interest are expected to be approximately $23 million
during the next twelve months.
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 expects that current financial resources and anticipated cash
provided from operations in fiscal 1997 will be sufficient to provide funds for
capital expenditures, meet scheduled debt payments and satisfy other known
working capital needs for fiscal 1997. If additional funds are required to
support the short-term operations or to accomplish long-term expansion of its
productive capabilities, the Company believes that funding can be obtained to
meet such requirements.
All statements other than statements of historical fact contained in this 10-Q,
including statements in this "Management's Discussion and Analysis of Financial
Condition and Results of Operations" concerning the Company's financial
position and results of operations are forward looking statements. Although
the Company believes that the expectations reflected in such forward looking
statements are reasonable, no assurance can be given that such expectations
will prove correct.
10
<PAGE> 11
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
(27) Financial Data Schedule
The Registrant did not file any reports on Form 8-K during the three
months ended August 31, 1996.
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
October 7, 1996 /s/ Richard M. Fowler
- --------------- ---------------------------
Richard M. Fowler
Vice President - Finance
and Treasurer
October 7, 1996 /s/ Larry L. Clark
- --------------- ---------------------------
Larry L. Clark
Vice President - Controller
and Assistant Treasurer
11
<PAGE> 12
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
11 Statement re: Computation of earnings per share
15 Letter re: Unaudited interim financial information
27 Financial Data Schedule
12
<PAGE> 1
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three months ended
August 31,
1996 1995
---- ----
(In thousands except per share)
<S> <C> <C>
AVERAGE SHARES OUTSTANDING
Primary:
Average shares outstanding 28,563 29,680
Stock options - treasury stock method
using average market prices 341 123
------ ------
TOTALS 28,904 29,803
====== ======
Fully diluted:
Average shares outstanding 28,563 29,680
Stock options - treasury stock method
using end of quarter market
price if higher than average 342 158
------ ------
TOTALS 28,905 29,838
====== ======
INCOME APPLICABLE TO COMMON STOCK
Primary and fully diluted:
Net income $8,314 $6,428
Add:
Pre-September 1990 contingent
price amortization 58 58
------ ------
$8,372 $6,486
====== ======
PER SHARE
Net income per common share:
Primary $ .29 $ .22
====== ======
Fully diluted $ .29 $ .22
====== ======
</TABLE>
13
<PAGE> 1
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 September 18, 1996, 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
August 31, 1996.
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 & Young LLP
Dallas, Texas
October 4, 1996
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1996
<PERIOD-END> AUG-31-1996
<CASH> 6,693
<SECURITIES> 0
<RECEIVABLES> 59,622
<ALLOWANCES> 2,743
<INVENTORY> 128,030
<CURRENT-ASSETS> 205,627
<PP&E> 503,691
<DEPRECIATION> 287,055
<TOTAL-ASSETS> 483,415
<CURRENT-LIABILITIES> 67,019
<BONDS> 66,702
0
0
<COMMON> 2,994
<OTHER-SE> 295,097
<TOTAL-LIABILITY-AND-EQUITY> 483,415
<SALES> 149,527
<TOTAL-REVENUES> 149,527
<CGS> 118,865
<TOTAL-COSTS> 118,865
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 75
<INTEREST-EXPENSE> 2,144
<INCOME-PRETAX> 13,364
<INCOME-TAX> 5,050
<INCOME-CONTINUING> 8,314
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,314
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.29
</TABLE>
