<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 FEBRUARY 29, 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: (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 .
--- ---
28,705,400 Shares of Common Stock, Par Value $.10 Outstanding at April 10, 1996.
1 of 13
<PAGE> 2
INDEX
CHAPARRAL STEEL COMPANY
PART I. FINANCIAL INFORMATION Page
- ----------------------------- ----
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--February 29,
1996 and May 31, 1995 3
Condensed consolidated statements of income--three and nine
months ended February, 1996 and 1995 4
Condensed consolidated statements of cash flows
--nine months ended February, 1996 and 1995 5
Notes to condensed consolidated financial statements
--February 29, 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)
February 29, May 31,
1996 1995
--------- ---------
(In thousands)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 20,455 $ 19,140
Trade accounts receivable, net of allowance
of $2.7 million and $2.5 million, respectively 60,504 51,679
Inventories 108,923 101,377
Prepaid expenses 8,769 8,110
--------- ---------
TOTAL CURRENT ASSETS 198,651 180,306
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 49,291 48,689
Machinery and equipment 460,902 447,982
Land 1,288 1,288
--------- ---------
511,481 497,959
Less allowance for depreciation (295,977) (275,476)
--------- ---------
215,504 222,483
OTHER ASSETS
Goodwill, commissioning costs and other assets,
net of accumulated amortization of $26 million
and $22.3 million, respectively 63,435 67,038
--------- ---------
$ 477,590 $ 469,827
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 29,100 $ 37,818
Accrued interest payable 2,810 1,862
Other accrued expenses 17,918 13,236
Current portion of long-term debt 12,381 13,645
--------- ---------
TOTAL CURRENT LIABILITIES 62,209 66,561
LONG-TERM DEBT 74,762 81,065
DEFERRED INCOME TAXES
AND OTHER CREDITS 51,845 52,333
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000
authorized, none outstanding -- --
Common stock, $.10 par value, 29,112,100 and
29,679,900 shares outstanding, respectively 2,994 2,994
Paid-in capital 178,521 178,611
Retained earnings 115,152 90,767
Cost of common stock in treasury (7,893) (2,504)
--------- ---------
288,774 269,868
--------- ---------
$ 477,590 $ 469,827
========= =========
</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 Nine months ended
February February
1996 1995 1996 1995
-------- -------- -------- --------
(In thousands except per share)
<S> <C> <C> <C> <C>
Net sales $ 158,954 $ 132,388 $ 452,085 $ 383,043
Costs and expenses:
Cost of sales (exclusive of items stated
separately below) 124,054 109,006 357,502 317,998
Depreciation and amortization 8,091 8,579 24,269 25,397
Selling, general and administrative 7,116 5,193 19,626 13,801
Interest 2,474 2,952 7,712 9,366
Other income (1,480) (1,533) (3,723) (2,550)
--------- --------- --------- ---------
140,255 124,197 405,386 364,012
INCOME BEFORE INCOME TAXES 18,699 8,191 46,699 19,031
Provision for income taxes 6,804 3,121 17,891 7,239
--------- --------- --------- ---------
NET INCOME $ 11,895 $ 5,070 $ 28,808 $ 11,792
========= ========= ========= =========
Per common share:
NET INCOME $ .41 $ .17 $ .98 $ .40
========= ========= ========= =========
CASH DIVIDENDS $ .05 $ .05 $ .15 $ .15
========= ========= ========= =========
Average shares outstanding - Note B 29,423 29,716 29,658 29,713
========= ========= ========= =========
</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>
Nine months ended
February
1996 1995
-------- -------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 28,808 $ 11,792
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 24,269 25,397
Deferred income taxes (1,471) 1,621
Other deferred credits 985 12
Changes in operating assets and liabilities:
Trade accounts receivable, net (8,825) (11,143)
Inventories (7,546) 12,221
Prepaid expenses (659) (469)
Trade accounts payable (8,718) 3,080
Accrued interest payable 948 822
Other accrued expenses 4,682 (3,741)
-------- --------
Net cash provided by operating activities 32,473 39,592
INVESTING ACTIVITIES
Capital expenditures (14,340) (9,914)
Other 1,575 (298)
-------- --------
Net cash used in investing activities (12,765) (10,212)
FINANCING ACTIVITIES
Repayments on short-term debt -- (15,000)
Long-term borrowings 52 266
Repayments on long-term debt (7,619) (12,284)
Purchase of treasury stock (6,402) --
Dividends paid (4,424) (4,452)
-------- --------
Net cash used in financing activities (18,393) (31,470)
-------- --------
Increase (decrease) in cash and cash equivalents 1,315 (2,090)
Cash and cash equivalents at beginning of period 19,140 3,203
-------- --------
Cash and cash equivalents at end of period $ 20,455 $ 1,113
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
February 29, 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. Effective March 1, 1996,
the Company's assets were transferred to a Limited Partnership. The Company will
continue to control all operations through wholly owned affiliates. Operating
results for the nine month period ended February 29, 1996 are not necessarily
indicative of the results that may be expected for the year ending May 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 May 31, 1995.
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 $59.7 million, $61.2 million and $73
million at February 29, 1996, May 31, 1995 and May 31, 1994, respectively. 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, 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
shares outstanding.
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 also
contributed to 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>
February 29, May 31,
1996 1995
--------- ---------
(In thousands)
<S> <C> <C>
Finished goods $ 56,184 $ 54,323
Work in process 12,906 9,856
Raw materials 15,962 14,052
Rolls 19,144 18,148
Supplies 16,707 15,487
LIFO adjustment (11,980) (10,489)
--------- ---------
$ 108,923 $ 101,377
========= =========
</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 $2.7 million and $5 million at
February 29, 1996 and May 31, 1995, respectively. Amortization of $2.3 million
was recorded in the first nine months of fiscal 1996 and 1995, 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.
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 February 29, 1996, and the
related condensed consolidated statements of income for the three month and nine
month periods ended February 29, 1996 and February 28, 1995, and the condensed
consolidated statements of cash flows for the nine month periods ended February
29, 1996 and February 28, 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, 1995, 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, 1995, 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, 1995, is
fairly stated, in all material respects, in relation to the consolidated balance
sheet from which it has been derived.
Ernst and Young LLP
Dallas, Texas
March 15, 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 and
nine months ended February 29, 1996 to the quarter and nine months ended
February 28, 1995.
RESULTS OF OPERATIONS
An increase in average selling price and shipments of approximately 10% resulted
in a $26.6 million increase in net sales in the three month period ended
February 29, 1996 compared to the same quarter in the prior year. Net sales
increased $69 million in the nine month period ended February 29, 1996 due to an
11% increase in average selling price and an increase in shipments of 71,000
tons. The improved demand exhibited in the first half of fiscal 1996 continued
in the current quarter as demand from service centers, fabricators and the
mobile home industry for structural mill products has increased substantially
from the prior year. However, continued growth in construction volume is
generally dependent on the health of the economy and changes in interest rates.
Demand for bar products continued to decrease in the February 1996 quarter as
U.S. manufacturing weakened. The Company continues to monitor and change its
product mix in order to maximize profit margins.
Cost of sales (exclusive of depreciation and amortization) increased $15 million
to $124.1 million for the three month period ended February 29, 1996 compared to
the same period in the prior year. The increase was predominately caused by an
increase in shipments of 35,000 tons and higher conversion costs. Cost of sales
increased $39.5 million to $357.5 million for the nine month period ended
February 29, 1996 compared to the same period in the prior year due primarily to
the increase in shipments and higher scrap and conversion costs. Scrap prices
followed their seasonal pattern of moving slightly upward during the winter but
are expected to moderate in the spring. Combined rolling conversion costs
increased slightly from the prior year periods.
Selling, general and administrative expense increased $1.9 million and $5.8
million in the three and nine month periods ended February 29, 1996 compared to
the prior year periods primarily due to increases in employee incentive programs
which are based on profitability.
Interest expense decreased $.5 million and $1.7 million in the three and nine
month periods ended February 29, 1996 compared to the same periods in the prior
year. Interest expense in the current periods was reduced by 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.
The increase in net income in the current periods was due to higher average
selling prices and increased shipments. Over the near term, shipment levels are
expected to continue to exceed those of last year at prices that have begun to
stabilize. Scrap prices are expected to moderate in the spring of 1996. In the
upcoming quarters, the Company anticipates positive earnings comparisons to the
prior year.
9
<PAGE> 10
CAPITAL RESOURCES AND LIQUIDITY
Working capital increased $22.7 million to an all-time high of $136.4 million at
February 29, 1996. The increase in net income of $17 million provided additional
working capital in the first nine months of fiscal 1996. Accounts receivable
increased $8.8 million from the prior fiscal year-end due to strong sales in
February 1996 and the short month. Inventories increased $7.5 million as the
Company anticipates higher demand in the spring of 1996. Accounts payable
decreased $8.7 million to a more normal level of $29.1 million at February 29,
1996. Other accrued expenses increased $4.7 million to $17.9 million due to
increases in accruals for income taxes, payroll and employee incentives. The
other components of working capital were virtually unchanged from the previous
fiscal year-end. Net cash provided by operations in the nine months ended
February 29, 1996 decreased by $7.1 million due primarily to the change in net
cash provided by inventory. At May 31, 1994, inventory had increased as
management anticipated higher demand in the summer of 1994. As that higher
demand materialized, the amount of inventory returned to a more normal
historical level at November 30, 1994. As a result, cash and cash equivalents
increased $1.3 million after the Company bought $14.3 million of capital
additions, repaid $7.6 million of long-term debt, purchased $6.4 million of
treasury stock and paid cash dividends of $4.4 million.
Capital expenditures for the nine months ended February 29, 1996 totaled $14.3
million and are estimated to be approximately $20-$25 million in fiscal 1996;
which represents normal replacement and upgrades of existing equipment. The
Company currently does not plan any major capital expenditures requiring
significant capital resources within the next two years.
The Company's capitalization of $375.9 million at February 29, 1996, consisted
of $87.1 million of long-term debt and $288.8 million of stockholders' equity.
The current portion of long-term debt totaled $12.4 million at February 29,
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
$20 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.
Management determined that the short-term credit facilities with two banks
totaling $20 million were no longer necessary to support the operations of the
Company. No borrowings existed under these arrangements during the current
fiscal year before they expired January 31, 1996. The Company believes that it
will be able to renew these credit facilities or negotiate similar arrangements
with other financial institutions if they are deemed necessary. The Company
expects that current financial resources and anticipated cash provided from
operations in fiscal 1996 will be sufficient to provide funds for capital
expenditures, meet scheduled debt payments and satisfy other known working
capital needs for fiscal 1996. 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.
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 February 29, 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
April 11, 1996 Richard M. Fowler
- -------------- -----------------------------------
Richard M. Fowler
Vice President-Finance &
Chief Financial Officer
April 11, 1996 Larry L. Clark
- -------------- -----------------------------------
Larry L. Clark
Vice President - Controller
11
<PAGE> 1
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three months ended Nine months ended
February February
1996 1995 1996 1995
------- ------- ------- -------
(In thousands except per share)
<S> <C> <C> <C> <C>
AVERAGE SHARES OUTSTANDING
Primary:
Average shares outstanding 29,083 29,680 29,450 29,680
Stock options - treasury stock method
using average market prices 340 36 208 33
------- ------- ------- -------
TOTALS 29,423 29,716 29,658 29,713
======= ======= ======= =======
Fully diluted:
Average shares outstanding 29,083 29,680 29,450 29,680
Stock options - treasury stock method
using end of quarter market
price if higher than average 340 36 229 34
------- ------- ------- -------
TOTALS 29,423 29,716 29,679 29,714
======= ======= ======= =======
INCOME APPLICABLE
TO COMMON STOCK
Primary and fully diluted:
Net income $11,895 $ 5,070 $28,808 $11,792
Add:
Pre-September 1990 contingent
price amortization 58 58 174 174
------- ------- ------- -------
$11,953 $ 5,128 $28,982 $11,966
======= ======= ======= =======
PER SHARE
Net income per common share:
Primary $ .41 $ .17 $ .98 $ .40
======= ======= ======= =======
Fully diluted $ .41 $ .17 $ .98 $ .40
======= ======= ======= =======
</TABLE>
12
<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 March 15, 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 February
29, 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 and Young LLP
Dallas, Texas
April 8, 1996
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1996
<PERIOD-END> FEB-29-1996
<CASH> 20,455
<SECURITIES> 0
<RECEIVABLES> 63,189
<ALLOWANCES> 2,685
<INVENTORY> 108,923
<CURRENT-ASSETS> 198,651
<PP&E> 511,481
<DEPRECIATION> 295,977
<TOTAL-ASSETS> 477,590
<CURRENT-LIABILITIES> 62,209
<BONDS> 74,762
<COMMON> 2,994
0
0
<OTHER-SE> 285,780
<TOTAL-LIABILITY-AND-EQUITY> 477,590
<SALES> 452,085
<TOTAL-REVENUES> 452,085
<CGS> 357,502
<TOTAL-COSTS> 357,502
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 380
<INTEREST-EXPENSE> 7,712
<INCOME-PRETAX> 46,699
<INCOME-TAX> 17,891
<INCOME-CONTINUING> 28,808
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,808
<EPS-PRIMARY> .98
<EPS-DILUTED> .98
</TABLE>
