<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 28, 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 _____.
28,386,000 Shares of Common Stock, Par Value $.10 Outstanding at April 8, 1997.
1 of 13
<PAGE> 2
INDEX
CHAPARRAL STEEL COMPANY
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION Page
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets--February 28,
1997 and May 31, 1996 3
Condensed consolidated statements of income--three and nine
months ended February 1997 and 1996 4
Condensed consolidated statements of cash flows
--nine months ended February 1997 and 1996 5
Notes to condensed consolidated financial statements
--February 28, 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>
<PAGE> 3
CONDENSED CONSOLIDATED BALANCE SHEETS
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
(Unaudited)
February 28, May 31,
1997 1996
--------- ---------
(In thousands)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 586 $ 20,014
Trade accounts receivable, net of allowance
of $2 million and $2.8 million, respectively 68,815 49,530
Inventories 135,864 121,791
Prepaid expenses 11,471 7,757
--------- ---------
TOTAL CURRENT ASSETS 216,736 199,092
PROPERTY, PLANT AND EQUIPMENT
Buildings and improvements 56,255 55,342
Machinery and equipment 460,459 436,886
Land 1,288 1,288
--------- ---------
518,002 493,516
Less allowance for depreciation (302,101) (279,447)
--------- ---------
215,901 214,069
OTHER ASSETS
Goodwill, commissioning costs and other assets,
net of accumulated amortization of $30.8 million
and $27.3 million, respectively 58,883 62,176
--------- ---------
$ 491,520 $ 475,337
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 30,778 $ 34,131
Accrued interest payable 2,395 1,402
Other accrued expenses 20,580 14,470
Current portion of long-term debt 12,454 12,366
--------- ---------
TOTAL CURRENT LIABILITIES 66,207 62,369
LONG-TERM DEBT 60,639 66,697
DEFERRED INCOME TAXES
AND OTHER CREDITS 51,410 51,306
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value, 500,000
authorized, none outstanding -- --
Common stock, $.10 par value, 28,386,100 and
28,707,400 shares outstanding, respectively 2,994 2,994
Paid-in capital 178,546 178,517
Retained earnings 148,698 126,885
Cost of common stock in treasury (16,974) (13,431)
--------- ---------
313,264 294,965
--------- ---------
$ 491,520 $ 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 Nine months ended
February February
1997 1996 1997 1996
--------- --------- --------- ---------
(In thousands except per share)
<S> <C> <C> <C> <C>
Net sales $ 147,715 $ 158,954 $ 440,879 $ 452,085
Costs and expenses:
Cost of sales (exclusive of items stated
separately below) 114,977 124,054 347,339 357,502
Depreciation and amortization 8,452 8,091 26,203 24,269
Selling, general and administrative 6,919 7,116 21,522 19,626
Interest 2,069 2,474 6,395 7,712
Other income (494) (1,480) (2,308) (3,723)
--------- --------- --------- ---------
131,923 140,255 399,151 405,386
INCOME BEFORE INCOME TAXES 15,792 18,699 41,728 46,699
Provision for income taxes 6,086 6,804 15,660 17,891
--------- --------- --------- ---------
NET INCOME $ 9,706 $ 11,895 $ 26,068 $ 28,808
========= ========= ========= =========
Average shares outstanding 28,639 29,423 28,753 29,658
========= ========= ========= =========
Per common share:
NET INCOME $ .34 $ .41 $ .91 $ .98
========= ========= ========= =========
CASH DIVIDENDS $ .05 $ .05 $ .15 $ .15
========= ========= ========= =========
</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
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 26,068 $ 28,808
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 26,203 24,269
Deferred income taxes (1,313) (1,471)
Other deferred credits 1,417 985
Changes in operating assets and liabilities:
Trade accounts receivable, net (19,285) (8,825)
Inventories (14,073) (7,546)
Prepaid expenses (3,714) (659)
Trade accounts payable (3,353) (8,718)
Accrued interest payable 993 948
Other accrued expenses 6,110 4,682
-------- --------
Net cash provided by operating activities 19,053 32,473
INVESTING ACTIVITIES
Capital expenditures (25,590) (14,340)
Other 1,105 1,575
-------- --------
Net cash used in investing activities (24,485) (12,765)
FINANCING ACTIVITIES
Long-term borrowings 456 52
Repayments on long-term debt (6,427) (7,619)
Purchase of treasury stock (3,770) (6,402)
Dividends paid (4,255) (4,424)
-------- --------
Net cash used in financing activities (13,996) (18,393)
-------- --------
Increase (decrease) in cash and cash equivalents (19,428) 1,315
Cash and cash equivalents at beginning of period 20,014 19,140
-------- --------
Cash and cash equivalents at end of period $ 586 $ 20,455
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE> 6
(Unaudited)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
CHAPARRAL STEEL COMPANY AND SUBSIDIARIES
February 28, 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 nine month period ended February 28, 1997 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 $57.7 million,
$59.2 million and $61.2 million at February 28, 1997, May 31, 1996 and 1995,
respectively. This goodwill is being amortized over 40 years using the
straight-line method and reduced earnings by $.5 million and $1.5 million in
the three and nine months ended February 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 shares
outstanding.
NOTE C - Income Tax Provision
The provision for income taxes has been calculated on the basis of an estimated
annual rate. The current year effective tax rates declined from the prior year
due to a decrease in the state tax provision. Goodwill amortization contributed
to the difference between provision amounts and income tax amounts computed by
applying the statutory federal income tax rates.
6
<PAGE> 7
NOTE D - Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
February 28, May 31,
1997 1996
--------- ---------
(In thousands)
<S> <C> <C>
Finished goods $ 82,555 $ 64,962
Work in process 10,470 11,851
Raw materials 13,587 21,082
Rolls and molds 22,535 20,693
Supplies 18,854 16,377
LIFO adjustment (12,137) (13,174)
--------- ---------
$ 135,864 $ 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 $-0- and $2
million at February 28, 1997 and May 31, 1996, respectively. Amortization of $2
million and $2.3 million was recorded in the first nine months 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, state or local 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 February 28, 1997, and the
related condensed consolidated statements of income for the three month and
nine month periods ended February 28, 1997 and February 29, 1996, and the
condensed consolidated statements of cash flows for the nine month periods
ended February 28, 1997 and February 29, 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, 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
Dallas, Texas
March 20, 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 three and nine months
ended February 28, 1997 to the three and nine months ended February 29, 1996.
RESULTS OF OPERATIONS
A 22,000 ton decrease in shipments coupled with a $7 decrease in selling prices
resulted in an $11.2 million decrease in net sales in the three month period
ended February 28, 1997 compared to the same quarter in the prior year. Net
sales decreased $11.2 million to $440.9 million in the nine month period ended
February 28, 1997 as shipments decreased 25,000 tons compared to those in the
prior year. Shipments of bar products improved in the February 1997 quarter due
to steady demand from fabricators. Although structural shipments declined by
12% from the February 1996 quarter, U.S. nonresidential construction activity
remains consistent with a relatively stable and satisfactory level of demand.
However, construction volume is generally dependent on the health of the
economy and changes in interest rates.
Cost of sales (exclusive of depreciation and amortization) decreased $9.1
million to $115 million for the three month period ended February 28, 1997
compared to the same period in the prior year. The decrease was predominately
caused by the decrease in shipments of 22,000 tons and a $7 per ton decrease in
cost of sales. Cost of sales decreased $10.2 million to $347.3 million for the
nine month period ended February 28, 1997 compared to the same period in the
prior year due primarily to the 25,000 ton decrease in shipments as per ton
costs were unchanged from the prior year. Scrap prices stabilized in the winter
months but are expected to move slightly upward during the spring.
Depreciation expense increased from the prior year periods 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 decreased from the levels in the prior year
due to the completed amortization of commissioning costs for the large beam
mill.
Selling, general and administrative expense increased $1.9 million in the nine
month period ended February 28, 1997 compared to the prior year periods
primarily due to increases in long-term employee incentive programs which are
based on profitability.
Interest expense decreased $.4 million and $1.3 million in the three and nine
month periods ended February 28, 1997 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. The current year effective tax rates declined from the prior year
due to a decrease in the state tax provision. 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 $13.8 million to an all-time high of $150.5 million
at February 28, 1997. Net income of $26.1 million provided additional working
capital in the first nine months of fiscal 1997. Accounts receivable increased
$19.3 million from the prior fiscal year-end due to changes in the Company's
discount policy. Inventories increased $14.1 million due to record production
in the melt shop and shipments in the February 1997 quarter below the record
levels of the previous year. Other accrued expenses increased $6.1 million to
$20.6 million due to increases in accruals for income taxes and employee
incentives. The other components of working capital were virtually unchanged
from the previous fiscal year-end. Net cash provided by operating activities in
the nine months ended February 28, 1997 decreased by $13.4 million due
primarily to the change in net cash used by accounts receivable and inventories
described above. As a result, cash and cash equivalents decreased $19.4 million
from the previous fiscal year-end after the Company bought $25.6 million of
capital additions, repaid $6.4 million of long-term debt, purchased $3.8
million of treasury stock and paid cash dividends of $4.3 million.
Capital expenditures for the nine months ended February 28, 1997 totaled $25.6
million and are estimated to be approximately $40 million in fiscal 1997. The
anticipated spending includes upgrades for the Recycled Products and Bar
Products business units of approximately $20 million.
The Company's capitalization of $373.9 million at February 28, 1997, consisted
of $60.6 million of long-term debt and $313.3 million of stockholders' equity.
The current portion of long-term debt totaled $12.5 million at February 28,
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 by 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 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 28, 1997.
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 10, 1997 /s/ Richard M. Fowler
- -------------- -------------------------------
Richard M. Fowler
Vice President - Finance
and Treasurer
April 10, 1997 /s/ Larry L. Clark
- -------------- -------------------------------
Larry L. Clark
Vice President - Controller
and Assistant Treasurer
11
<PAGE> 12
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 Nine months ended
February February
1997 1996 1997 1996
--------- --------- --------- ---------
(In thousands except per share)
<S> <C> <C> <C> <C>
AVERAGE SHARES OUTSTANDING
Primary:
Average shares outstanding 28,375 29,083 28,433 29,450
Stock options - treasury stock method
using average market prices 264 340 320 208
--------- --------- --------- ---------
TOTALS 28,639 29,423 28,753 29,658
========= ========= ========= =========
Fully diluted:
Average shares outstanding 28,375 29,083 28,433 29,450
Stock options - treasury stock method
using end of quarter market
price if higher than average 268 340 320 229
--------- --------- --------- ---------
TOTALS 28,643 29,423 28,753 29,679
========= ========= ========= =========
INCOME APPLICABLE
TO COMMON STOCK
Primary and fully diluted:
Net income $ 9,706 $ 11,895 $ 26,068 $ 28,808
Add:
Pre-September 1990 contingent
price amortization 58 58 174 174
--------- --------- --------- ---------
$ 9,764 $ 11,953 $ 26,242 $ 28,982
========= ========= ========= =========
PER SHARE
Net income per common share:
Primary $ .34 $ .41 $ .91 $ .98
========= ========= ========= =========
Fully diluted $ .34 $ .41 $ .91 $ .98
========= ========= ========= =========
</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 20, 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 February
28, 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
April 9, 1997
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 586
<SECURITIES> 0
<RECEIVABLES> 70,815
<ALLOWANCES> 2,000
<INVENTORY> 135,864
<CURRENT-ASSETS> 216,736
<PP&E> 518,002
<DEPRECIATION> 302,101
<TOTAL-ASSETS> 491,520
<CURRENT-LIABILITIES> 66,207
<BONDS> 60,639
0
0
<COMMON> 2,994
<OTHER-SE> 310,270
<TOTAL-LIABILITY-AND-EQUITY> 491,520
<SALES> 440,879
<TOTAL-REVENUES> 440,879
<CGS> 347,339
<TOTAL-COSTS> 347,339
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 225
<INTEREST-EXPENSE> 6,395
<INCOME-PRETAX> 41,728
<INCOME-TAX> 15,660
<INCOME-CONTINUING> 26,068
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,068
<EPS-PRIMARY> 0.91
<EPS-DILUTED> 0.91
</TABLE>
