<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, 1997
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 _____.
28,454,000 Shares of Common Stock, Par Value $.10 Outstanding at September 22,
1997.
1 of 13
<PAGE> 2
INDEX
CHAPARRAL STEEL COMPANY
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
- ----------------------------- ----
<S> <C> <C>
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--August 31,
1997 and May 31, 1997 3
Condensed consolidated statements of income--three
months ended August 31, 1997 and 1996 4
Condensed consolidated statements of cash flows
--three months ended August 31, 1997 and 1996 5
Notes to condensed consolidated financial statements
--August 31, 1997 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
- ----------
</TABLE>
2
<PAGE> 3
CONDENSED CONSOLIDATED BALANCE SHEETS
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited)
August 31, May 31,
1997 1997
--------- ------
(In thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 14,928 $ 14,291
Trade accounts receivable, net of allowance
of $2.1 million and $2.7 million, respectively 67,511 66,266
Inventories 114,953 131,034
Prepaid expenses 15,603 9,218
----------- ---------
TOTAL CURRENT ASSETS 212,995 220,809
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 57,572 57,506
Machinery and equipment 501,618 464,485
Land 1,288 1,288
---------- ----------
560,478 523,279
Less allowance for depreciation (316,036) (308,359)
---------- ----------
244,442 214,920
OTHER ASSETS
Goodwill, commissioning costs and other assets,
net of accumulated amortization of $31.9 million
and $28.5 million, respectively 58,008 58,481
---------- ----------
$ 515,445 $ 494,210
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 38,382 $ 31,466
Accrued interest payable 2,163 965
Other accrued expenses 25,034 20,681
Current portion of long-term debt 12,421 12,445
---------- ----------
TOTAL CURRENT LIABILITIES 78,000 65,557
LONG-TERM DEBT 52,467 52,554
DEFERRED INCOME TAXES
AND OTHER CREDITS 50,269 49,839
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000
authorized, none outstanding - -
Common stock, $.10 par value, 28,454,000 and
28,403,700 shares outstanding, respectively 2,994 2,994
Paid-in capital 178,871 178,689
Retained earnings 169,300 161,392
Cost of common stock in treasury (16,456) (16,815)
---------- ----------
334,709 326,260
---------- ----------
$ 515,445 $ 494,210
========== ==========
See notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE> 4
(Unaudited)
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three months ended
August 31,
1997 1996
---- ----
(In thousands except per share)
<S> <C> <C>
Net sales $ 179,006 $ 149,527
Costs and expenses:
Cost of sales (exclusive of items stated
separately below) 146,538 118,865
Depreciation and amortization 8,182 8,872
Selling, general and administrative 8,684 7,344
Interest 1,449 2,144
Other income (417) (1,062)
---------- ---------
INCOME BEFORE INCOME TAXES 14,570 13,364
Provision for income taxes 5,240 5,050
---------- ---------
NET INCOME $ 9,330 $ 8,314
========== ==========
Average shares outstanding - Note B 28,850 28,904
========= =========
Per common share:
NET INCOME $ .33 $ .29
========= =========
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,
1997 1996
---- ----
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 9,330 $ 8,314
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 8,182 8,872
Deferred income taxes (491) (563)
Other deferred credits 921 860
Changes in operating assets and liabilities:
Trade accounts receivable, net (1,245) (7,349)
Inventories 16,081 (6,239)
Prepaid expenses (6,385) (6,268)
Trade accounts payable 6,916 (1,709)
Accrued interest payable 1,198 1,101
Other accrued expenses 4,353 5,245
-------- --------
Net cash provided by operating activities 38,860 2,264
INVESTING ACTIVITIES
Capital expenditures (37,550) (10,535)
Other 320 120
-------- --------
Net cash used in investing activities (37,230)
(10,415)
FINANCING ACTIVITIES
Long-term borrowings -- 105
Repayments on long-term debt (111) (87)
Purchase of treasury stock -- (3,770)
Proceeds from issuance of treasury stock 541 --
Dividends paid (1,423) (1,418)
-------- --------
Net cash used in financing activities (993) (5,170)
-------- --------
Increase (decrease) in cash and cash equivalents 637 (13,321)
Cash and cash equivalents at beginning of period 14,291 20,014
-------- --------
Cash and cash equivalents at end of period $ 14,928 $ 6,693
======== ========
</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, 1997
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, 1997 are not necessarily
indicative of the results that may be expected for the year ending May 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 May 31, 1997.
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. The amount of goodwill, net of accumulated
amortization included in other assets was $56.7 million and $57.2 million at
August 31, 1997 and May 31, 1997, 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, 1997 and 1996,
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
28,850,000 and 28,904,000 shares outstanding at August 31, 1997 and 1996,
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
<TABLE>
<CAPTION>
Inventories consist of the following:
August 31, May 31,
1997 1997
---- ----
(In thousands)
<S> <C> <C>
Finished goods $ 53,793 $ 73,926
Work in process 10,707 11,534
Raw materials 19,895 15,832
Rolls and molds 23,603 22,989
Supplies 17,214 17,012
LIFO adjustment (10,259) (10,259)
---------- ---------
$114,953 $131,034
========== =========
</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.
Commissioning costs were fully amortized at January 31, 1997. Amortization of
$0 million and $.7 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 - Merger Proposal
On May 22, 1997, the Board of Directors received an unsolicited offer to merge
with Texas Industries, Inc., ("TXI") owner of 85% of Chaparral Steel. Under
terms of the offer, owners of the publicly traded shares of Chaparral Steel
would receive consideration of $14.25 per share, pursuant to a cash merger. The
Board of Directors appointed a Special Committee to consider the offer and make
a recommendation to Chaparral's Board. On July 25, 1997, the Board of Directors
received a revised unsolicited offer of $15.50 per share. On July 29, 1997, the
Special Committee unanimously accepted the revised $15.50 per share cash offer
by TXI. On July 30, 1997, the Board of Directors of Chaparral Steel unanimously
accepted TXI's revised offer subject to stockholder approval.
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, 1997 and the related
condensed consolidated statements of income and cash flows for the three month
periods ended August 31, 1997 and 1996. 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, 1997, 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 8, 1997, 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, 1997, is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
Ernst & Young LLP
September 17, 1997
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, 1997, to the quarter ended August 31, 1996.
GENERAL
In April 1997, the Board of Directors approved the engineering and site
selection work in connection with a plan for the construction of a new
structural mill in the eastern United States with production scheduled to begin
in 1999. The new mill's annual capacity is expected to exceed one million tons
and is expected to produce a full range of structural beams up to 36" in depth
and sheet pile sections. The mill will be positioned to replace the decrease in
supply caused by the reduction in domestic suppliers that has taken place over
the last few years. Patented technologies and existing material recycling
expertise will be incorporated in the new location. Site selection for the new
facility is on schedule.
On May 22, 1997, the Board of Directors received an unsolicited offer to merge
with Texas Industries, Inc., ("TXI") owner of 85% of Chaparral Steel. Under
terms of the offer, owners of the publicly traded shares of Chaparral Steel
would receive consideration of $14.25 per share, pursuant to a cash merger. The
Board of Directors appointed a Special Committee to consider the offer and make
a recommendation to Chaparral's Board. On July 25, 1997, the Board of Directors
received a revised unsolicited offer of $15.50 per share. On July 29, 1997, the
Special Committee unanimously accepted the revised $15.50 per share cash offer
by TXI. On July 30, 1997, the Board of Directors of Chaparral Steel unanimously
accepted TXI's revised offer subject to stockholder approval.
RESULTS OF OPERATIONS
A 21% increase in shipments and a $4 per ton decrease in average selling price
in the first quarter resulted in a $29.5 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 industries. Steady demand for bar products contributed to the 5%
increase in average price from those of the prior year quarter.
Cost of sales (exclusive of depreciation and amortization) increased $27.7
million to $146.5 million for the three month period ended August 31, 1997,
compared to the same period in the prior year. The increase was predominately
caused by an increase in shipments of 80,000 tons. Combined rolling conversion
costs increased from the prior year due to decreased production volume that
historically accompanies the summer shutdown period.
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 costs
decreased due to the completion of the amortization of commissioning costs on
January 31, 1997.
Selling, general and administrative expense increased $1.3 million in the three
month period ended August 31, 1997, compared to the prior year period primarily
due to increases in employee incentive programs which are based on
profitability.
9
<PAGE> 10
Interest expense decreased $.7 million in the three month period ended August
31, 1997, 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.
CAPITAL RESOURCES AND LIQUIDITY
Working capital decreased $20.3 million to $135 million at August 31, 1997.
Inventories at August 31, 1997 decreased $16.1 million primarily as demand for
the Company's products remained strong. Prepaid expenses increased $6.4 million
due to shutdown spending completed in August 1997. Trade accounts payable
increased $6.9 million due to summer shutdown spending. Other accrued expenses
increased $4.4 million to $25 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 increased $.6 million after the Company bought $37.6 million of
capital additions and paid cash dividends of $1.4 million.
Capital expenditures for the three months ended August 31, 1997, totaled $37.6
million and are expected to be in the range of $70-$80 million in fiscal 1998.
Total anticipated spending includes upgrades for the Recycled Products and Bar
Products business units of approximately $30 million.
The Company's capitalization of $387.2 million at August 31, 1997, consisted of
$52.5 million of long-term debt and $334.7 million of stockholders' equity. The
current portion of long-term debt totaled $12.4 million at August 31, 1997. 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 $22 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.
Effective January 1, 1997, the Company has a short-term credit facility with a
bank totaling $10 million which will expire December 31, 1997 if not renewed by
the bank or the Company. The Company believes that it will be able to renew
this credit facility 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
1998 will be sufficient to provide funds for capital expenditures, meet
scheduled debt payments and satisfy other known working capital needs for
fiscal 1998. 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.
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 Company filed the following reports on Form 8-K during the three
months ended August 31, 1997.
On June 2, 1997, Chaparral Steel Company filed a report on Form 8-K
relative to the offer to merger with Texas Industries, Inc., owner of
85% of Chaparral Steel Company. Under terms of the offer, owners of
the publicly traded shares of Chaparral Steel Company would receive
consideration of $14.25 per share, pursuant to a cash merger. The
Board of Directors appointed a Special Committee to consider the offer
and make a recommendation to Chaparral's Board.
On July 25, 1997, Chaparral Steel Company filed a report on Form 8-K
relative to a revised offer from Texas Industries, Inc., to purchase
all publicly traded shares of Chaparral Steel Company for $15.50 per
share.
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
September 26, 1997 /s/ Gordon E. Forward
- ------------------ ---------------------
Gordon E. Forward
President, Chief Executive
Officer and Director
September 26, 1997 /s/ Larry L. Clark
- ------------------ ------------------
Larry L. Clark
Vice President - Controller
and Assistant Treasurer
11
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EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C>
11 Statement re: Computation of earnings per share
15 Letter re: Unaudited interim financial information
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three months ended
August 31,
1997 1996
---- ----
(In thousands except per share)
<S> <C> <C>
AVERAGE SHARES OUTSTANDING
Primary:
Average shares outstanding 28,449 28,563
Stock options - treasury stock method
using average market prices 401 341
-------- --------
TOTALS 28,850 28,904
======== ========
Fully diluted:
Average shares outstanding 28,449 28,563
Stock options - treasury stock method
using end of quarter market
price if higher than average 449 342
-------- -------
TOTALS 28,898 28,905
======== ========
INCOME APPLICABLE TO COMMON STOCK
Primary and fully diluted:
Net income $ 9,330 $ 8,314
Add:
Pre-September 1990 contingent
price amortization 58 58
-------- --------
$ 9,388 $ 8,372
======== ========
PER SHARE
Net income per common share:
Primary $ .33 $ .29
======== ========
Fully diluted $ .33 $ .29
======== ========
</TABLE>
<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 17, 1997, 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, 1997.
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
September 24, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-START> JUN-01-1997
<PERIOD-END> AUG-31-1997
<CASH> 14,928
<SECURITIES> 0
<RECEIVABLES> 69,630
<ALLOWANCES> 2,119
<INVENTORY> 114,953
<CURRENT-ASSETS> 212,995
<PP&E> 560,478
<DEPRECIATION> 316,036
<TOTAL-ASSETS> 515,445
<CURRENT-LIABILITIES> 78,000
<BONDS> 52,467
0
0
<COMMON> 2,994
<OTHER-SE> 331,715
<TOTAL-LIABILITY-AND-EQUITY> 515,445
<SALES> 179,006
<TOTAL-REVENUES> 179,006
<CGS> 146,538
<TOTAL-COSTS> 146,538
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 75
<INTEREST-EXPENSE> 1,449
<INCOME-PRETAX> 14,570
<INCOME-TAX> 5,240
<INCOME-CONTINUING> 9,330
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,330
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.33
</TABLE>
