<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 quarterly period ended September 29, 1996 or
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
___________________________
Commission file number 1-14378
ACME METALS INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 36-3802419
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13500 South Perry Ave., Riverdale, Illinois 60627-1182
(Address of principal executive offices) (Zip Code)
(708) 849-2500
(Registrant's telephone number, including area code)
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, and (2) has been subject to such filing
requirements for the past 90 days. Yes x No
--- ---
Number of shares of Common Stock outstanding as of October 24, 1996:
11,608,868.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACME METALS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
September 29, December 31,
1996 1995
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 43,241 $ 53,043
Short term investments 13,739 83,756
Receivables, less allowances of $1,369 in 1996 and $1,335 in 1995 58,292 55,344
Inventories 51,818 51,932
Deferred income taxes 12,857 12,857
Other current assets 2,206 1,855
------------ ------------
Total current assets 182,153 258,787
------------ ------------
INVESTMENTS AND OTHER ASSETS:
Investments in associated companies 17,862 16,112
Restricted cash and investments 50,305
Other assets 17,897 19,309
Deferred income taxes 31,052 31,052
------------ ------------
Total investments and other assets 66,811 116,778
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost 373,629 372,959
Construction in progress 437,691 279,799
Accumulated depreciation (283,469) (273,580)
------------ ------------
Total property, plant and equipment 527,851 379,178
------------ ------------
$ 776,815 754,743
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 41,067 $ 62,355
Accrued expenses 36,948 41,192
Income taxes payable 4,833 4,783
------------ ------------
Total current liabilities 82,848 108,330
------------ ------------
LONG-TERM LIABILITIES:
Long-term debt 306,591 276,831
Other long-term liabilities 10,855 10,143
Postretirement benefits other than pensions 91,425 86,856
Retirement benefit plans 27,188 24,472
------------ ------------
Total long-term liabilities 436,059 398,302
------------ ------------
Commitments and contingencies (see note titled Commitments and
Contingencies)
SHAREHOLDERS' EQUITY:
Preferred stock, $1 par value, 2,000,000 shares authorized, no shares issued
Common stock, $1 par value, 20,000,000 shares authorized, 11,605,818
and 11,579,768 shares issued in 1996 and 1995, respectively 11,606 11,580
Additional paid-in capital 165,273 164,987
Retained earnings 105,450 95,965
Minimum pension liability adjustment (24,421) (24,421)
------------ ------------
Total shareholders' equity 257,908 248,111
------------ ------------
$ 776,815 $ 754,743
============ ============
</TABLE>
The accompanying notes are an integral part of this financial statement.
2
<PAGE> 3
ACME METALS INCORPORATED
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For The Three Months Ended For The Nine Months Ended
-------------------------------- ---------------------------------
September 29, September 24, September 29, September 24,
1996 1995 1996 1995
-------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
NET SALES $ 125,174 $ 122,211 $ 378,307 $ 389,930
COSTS AND EXPENSES:
Cost of products sold 105,733 101,402 323,869 312,793
Depreciation expense 3,096 2,898 9,391 10,953
----------- ---------- ---------- ---------
Gross profit 16,345 17,911 45,047 66,184
Selling and administrative expense 9,187 8,654 26,511 26,345
Training and start-up - Modernization Project 3,280 6,431
----------- ---------- ---------- ---------
Operating income 3,878 9,257 12,105 39,839
NON-OPERATING INCOME (EXPENSE):
Interest expense (289) (4,438) (1,226) (18,150)
Interest income 1,022 3,464 4,887 11,148
Other - net 155 (70) 43 1,668
----------- ---------- ---------- ---------
Income before income taxes 4,766 8,213 15,809 34,505
Income tax provision 1,907 2,957 6,324 12,422
----------- ---------- ---------- ---------
Net income $ 2,859 $ 5,256 $ 9,485 $ 22,083
=========== ========== ========== =========
PER COMMON SHARE:
Net income $ 0.25 $ 0.45 $ 0.82 $ 1.90
=========== ========== ========== =========
</TABLE>
The accompanying notes are an integral part of this financial statement.
3
<PAGE> 4
ACME METALS INCORPORATED
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For The Nine Months Ended
------------------------------------
September 29, September 24,
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,485 $ 22,083
ADJUSTMENTS TO RECONCILE NET INCOME TO
NET CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation 9,973 11,391
Accretion of Senior Discount Note 9,830 8,596
CHANGE IN CURRENT ASSETS AND LIABILITIES:
Receivables (2,948) 3,681
Inventories 114 (6,149)
Accounts payable (5,496) (2,340)
Other current accounts (4,545) (8,159)
Other, net 10,156 3,660
--------- ----------
Net cash provided by operating activities 26,569 32,763
--------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (24,669) (346,058)
Sales and/or maturities of investments 144,991 441,870
Reclass of restricted cash 7,619
Investment in joint venture (1,750) (500)
Capital expenditures - other (19,007) (13,363)
Capital expenditures - modernization project (155,725) (141,179)
--------- ----------
Net cash used for investing activities (56,160) (51,611)
--------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt, net of discount 19,873
Long-term debt issuance cost (396)
Other 312 382
--------- ----------
Net cash provided by investing activities 19,789 382
--------- ----------
Net decrease in cash and cash equivalents (9,802) (18,466)
Cash and cash equivalents at beginning of period 53,043 76,639
--------- ----------
Cash and cash equivalents at end of period $ 43,241 $ 58,173
========= ==========
</TABLE>
The accompanying notes are an integral part of this financial statement.
4
<PAGE> 5
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION:
The accompanying financial statements for the periods ended September 29, 1996
and September 24, 1995 are unaudited. The statements should be read in
conjunction with the audited financial statements included in the Company's
1995 Annual Report on Form 10-K. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments necessary for a
fair statement of such financial statements have been included. The financial
statements have been subjected to a limited review by Price Waterhouse LLP, the
Company's independent accountants, whose report appears on page 11 of this
filing. Such report is not a "report" or "part of the Registration Statement"
within the meaning of Sections 7 and 11 of the Securities Act of 1933 and the
liability provisions of Section 11 of such Act do not apply.
The Company's fiscal year ends on December 29, 1996 and will contain 52 weeks.
Third quarter results for 1996 and 1995 cover 13-week periods.
SEGMENT INFORMATION:
The Company presents its operations in two segments, Steel Making and Steel
Fabricating.
Steel Making operations include the manufacture of sheet, strip and
semifinished steel in low-, mid-, and high-carbon, alloy and special grades.
Principal markets include agricultural, automotive, industrial equipment,
industrial fasteners, welded steel tubing, processor and tool manufacturing
industries.
The Steel Fabricating Segment processes and distributes steel strapping,
strapping tools and industrial packaging (Acme Packaging Corporation), welded
steel tube (Alpha Tube Corporation) and auto and light truck jacks (Universal
Tool & Stamping Company, Inc.). The Steel Fabricating Segment sells to a
number of markets.
All sales between Segments are recorded at current market prices. Income from
operations consists of total sales less operating expenses. Operating expenses
include an allocation of expenses incurred at the Corporate Office which are
considered by the Company to be operating expenses of the Segments rather than
general corporate expenses. Income from operations does not include other
non-operating income or expense, interest income or expense, or income taxes.
The products and services of the Steel Making and Steel Fabricating Segments
are distributed through their own respective sales organizations which have
sales offices at various locations in the United States. Export sales are
insignificant.
5
<PAGE> 6
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
<TABLE>
<CAPTION>
For the For the
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
September 29, September 24, September 29, September 24,
1996 1995 1996 1995
------------- ------------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Net Sales:
Steel Making:
Sales to unaffiliated customers $ 56,121 $ 53,794 $169,712 $175,542
Intersegment sales 26,153 25,559 85,548 87,118
-------- -------- -------- --------
82,274 79,353 255,260 262,660
Steel Fabricating:
Sales to unaffiliated customers 69,053 68,417 208,595 214,388
Intersegment sales 491 351 1,190 1,218
-------- -------- -------- --------
69,544 68,768 209,785 215,606
Eliminations (26,644) (25,910) (86,738) (88,336)
-------- -------- -------- --------
Total $125,174 $122,211 $378,307 $389,930
======== ======== ======== ========
Income (loss) from operations:
Steel Making $ (1,469) $ 4,727 $ (3,545) $ 23,357
Steel Fabricating 5,347 4,530 15,650 16,482
-------- -------- -------- --------
Total $ 3,878 $ $9,257 $ 12,105 $ 39,839
======== ======== ======== ========
Depreciation:
Steel Making $ 2,275 $ 2,064 $ 6,918 $ 8,446
Steel Fabricating 881 965 2,813 2,859
Corporate 79 32 242 86
-------- -------- -------- --------
Total $ 3,235 $ 3,061 $ 9,973 $ 11,391
======== ======== ======== ========
Capital Expenditures:
Steel Making $ 41,081 $ 68,155 $154,506 $165,480
Steel Fabricating 2,079 1,919 4,411 2,968
Corporate 14 1,183 24 1,332
-------- -------- -------- --------
Total $ 43,174 $ 71,257 $158,941 $169,780
======== ======== ======== ========
Flat Roll Steel Shipments (in tons) 146,192 125,653 459,309 455,624
======== ======== ======== ========
</TABLE>
6
<PAGE> 7
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
INVENTORIES:
Inventories are summarized as follows:
<TABLE>
<CAPTION>
September 29, December 31,
1996 1995
------------- ------------
(in thousands)
<S> <C> <C>
Raw materials $ 6,816 $ 8,397
Semi-finished and finished products 38,010 36,339
Supplies 6,992 7,196
------- -------
$51,818 $51,932
======= =======
</TABLE>
PROPERTY, PLANT AND EQUIPMENT:
The Company has capitalized expenditures related to the construction of the
Modernization and Expansion Project totaling $401.3 million at September 29,
1996. The capitalized expenditures are comprised of $336.8 million of cash and
accrued payments to Raytheon Engineers & Constructors Inc. ("Raytheon"), the
general contractor, $43.2 million of related capitalized interest, and $21.3
million of other costs related directly to the construction of the
Modernization and Expansion Project. Accrued payments to the general
contractor at September 29, 1996 and December 31, 1995 include accounts payable
of $3.1 million and $18.9 million, respectively. Due to the non-cash nature of
such payables at each date they have been excluded from the Statements of Cash
Flows. The remainder of construction in progress at September 29, 1996 was
primarily for an upgrade of the Company's management information systems and to
a lesser extent the replacement and rehabilitation of various production
facilities.
CASH FLOWS:
Cash payments for interest expense were $21.8 million and $19.6 million during
the first nine months of 1996 and 1995, respectively; in these periods cash
payments for income taxes were $6.2 million and $18.6 million, respectively.
In the first nine months of 1995, cash flows from investing activities were
increased by a reclassification of $7.6 million of non-current restricted cash
to cash and cash equivalents. The restricted cash was reclassified to
recognize an amount currently owed to the general contractor. Due to the
non-cash nature of this capital expenditure it has been excluded from the
Statements of Cash Flows. Cash transactions relating to the first nine months
of 1996 for the Modernization and Expansion Project are discussed in the
Property, Plant and Equipment footnote. Also during the first nine months of
1996, the Company made additional cash contributions of $1.8 million to its
steel processing joint venture. At September 29, 1996 the Company had
contributed a total of $3.5 million to this joint venture.
LONG TERM DEBT:
On September 25, 1996 the Company sold $8.6 million of tax-exempt
bonds at face value. The Environmental Improvement Revenue bonds have a coupon
rate and an effective interest rate of 7.90 percent and a maturity of 28 years.
Previously, on April 23, 1996, the Company sold $11.3
7
<PAGE> 8
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
million of similar bonds, which were issued at a price of 99.5, have an
effective interest rate of 7.99 percent and a maturity of 29 years. The net
proceeds of the bonds reimbursed the Company for funds expended for the
acquisition, construction and installation of solid waste disposal facilities
which are part of the Modernization and Expansion Project. The bonds are
secured by the Company's pledge of loan payments and a secured interest in the
solid waste disposal facilities.
COMMITMENTS AND CONTINGENCIES:
The Company's interest in an iron ore mining joint venture requires payment of
its proportionate share of all fixed operating costs, regardless of the
quantity of ore received, plus the variable operating costs of minimum ore
production for the Company's account. Normally, the Company reimburses the
joint venture for these costs through its purchase of ore.
During 1994, the Company entered into a turnkey contract with Raytheon to
construct a new facility in conjunction with its Modernization and Expansion
Project at its steel making facilities located in Riverdale, Illinois. Based
on the turnkey contract without taking into account financing costs, internally
generated costs directly related to the project or additional changes that may
be requested by Acme during construction, management estimates the cost of the
Modernization and Expansion Project, including ancillary facilities,
construction, general contractor fees and certain other project costs that will
be paid by the Company will approximate $392 million.
The Company is subject to various Federal, state and local environmental
statutes and regulations which provide a comprehensive program for controlling
the release of materials into the environment and require responsible parties
to remediate certain waste disposal sites. In addition, various health and
safety statutes and regulations apply to the work-place environment.
Administrative, civil and criminal penalties may be applicable for failure to
comply with these laws. These environmental laws and regulations are subject
to periodic revision and modification. The United States Environmental
Protection Agency, for example, is currently evaluating changes to the National
Air Quality Standards for particulate matter and ozone.
From time to time, the Company is also involved in administrative proceedings
involving the issuance, or renewal, of environmental permits relating to the
conduct of its business. The final issuance of these permits has been
resolved on terms satisfactory to the Company; and, in the future, the Company
expects such permits will similarly be resolved on satisfactory terms.
Although management believes it will be required to make further substantial
expenditures for pollution abatement facilities in future years, because of the
continuous revision of these regulatory and statutory requirements, the Company
is not able to reasonably estimate the specific pollution abatement
requirements or the amount or timing of such expenditures to maintain
compliance with these environmental laws. While such expenditures in future
years may be substantial, management does not presently expect they will have a
material adverse effect on the Company's future ability to compete within its
markets.
8
<PAGE> 9
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
In those cases where the Company has been identified as a Potentially
Responsible Party ("PRP") or is otherwise made aware of a possible exposure to
incur costs associated with an environmental matter, management determines (i)
whether, in fact, the Company has been properly named or is otherwise
obligated, (ii) the extent to which the Company may be responsible for costs
associated with the site in question, (iii) an assessment as to whether another
party may be responsible under various indemnification agreements or insurance
policies the Company is a party to, and (iv) an estimate, if one can be made,
of the costs associated with the clean-up efforts or settlement costs. It is
the Company's policy to make provisions for environmental clean-up costs at the
time that a reasonable estimate can be made. At September 29, 1996 and
December 31, 1995, the Company had recorded reserves of approximately $0.3
million for environmental clean-up matters. While it is not possible to
predict the ultimate costs of resolving environmental related issues facing the
Company, based upon information currently available, they are not expected to
have a material effect on the consolidated financial condition or results of
operations of the Company.
In connection with the Spin-Off from The Interlake Corporation ("Interlake") on
May 29, 1986, Acme Steel Company (a subsidiary of the Company) entered into
certain indemnification agreements with Interlake. Pursuant to the terms of
the indemnification agreements, Interlake undertook to defend, indemnify and
hold Acme Steel Company harmless from any claims, as defined, relating to Acme
Steel Company operations or predecessor operations occurring before May 29,
1986, the inception of Acme Steel Company. The indemnification agreements
cover certain environmental matters including certain litigation and Superfund
sites in Duluth, Minnesota and Gary, Indiana for which either Interlake or Acme
Steel Company's predecessor operations have been named as defendants or PRP's,
as applicable. To date, Interlake has met its obligations under the
indemnification agreements and has provided the defense and paid all costs
related to these environmental matters. The Company does not have sufficient
information to determine the potential liability, if any, for the matters
covered by the indemnification agreements in the event Interlake fails to meet
its obligations thereunder in the future. In the event that Interlake, for any
reason, were unable to fulfill its obligations under the indemnification
agreements, the Company could have increased future obligations which could be
significant.
Also in connection with the Spin-Off from Interlake, Acme Steel Company entered
into a Tax Indemnification Agreement ("TIA") which generally provides for
Interlake to indemnify Acme Steel Company for certain tax matters. While
certain issues have been negotiated and settled between the Company, Interlake
and the Internal Revenue Service, certain significant issues for the tax years
beginning in 1982 through 1986 remain unresolved.
On March 17, 1994, Acme Steel Company received a Statutory Notice of Deficiency
("Notice") in the amount of $16.9 million in tax as a result of the Internal
Revenue Service's examination of the 1982-1984 tax years. The Company is
contesting the unresolved issues and the Notice. Should the government sustain
its position as proposed for those unresolved issues and those contained in the
Notice, substantial interest would also be due (potentially in an amount
greater than the tax claimed). The taxes claimed relate principally to
adjustments for which Acme Steel Company is
9
<PAGE> 10
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
indemnified by Interlake pursuant to the TIA. The Company has adequate
reserves to cover that portion for which it believes it may be responsible per
the TIA. To date, Interlake has met its obligations under the TIA with respect
to all covered matters. In the event that Interlake, for any reason, were
unable to fulfill its obligations under the TIA, the Company could have
increased future obligations.
The Company's subsidiaries also have various litigation matters pending which
arise out of the ordinary course of their businesses. In the opinion of
management, the ultimate resolution of these matters will not have a material
adverse effect on the financial position of the Company.
10
<PAGE> 11
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholders of
Acme Metals Incorporated
We have reviewed the accompanying consolidated balance sheet as of September
29, 1996, the consolidated statements of operations for the three-month and
nine-month periods ended September 29, 1996 and September 24, 1995, and the
consolidated statements of cash flows for the nine-month periods ended
September 29, 1996 and September 24, 1995 (the "consolidated financial
information") of Acme Metals Incorporated and its subsidiaries. This
consolidated financial information is the responsibility of the Company's
management.
We conducted our review 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, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial information for it to be in
conformity with generally accepted accounting principles.
We previously audited, in accordance with generally accepted auditing standards,
the consolidated balance sheet as of December 31, 1995, and the related
consolidated statements of operations, of shareholders' equity, and of cash
flows for the year then ended (not presented herein), and in our report dated
January 25, 1996 we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet information as of December 31, 1995, is
fairly stated in all material respects in relation to the consolidated balance
sheet from which it has been derived.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
Chicago, Illinois
October 18, 1996
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months Ended For the Years Ended
------------------------- -------------------
September 29, September 24, December 31, December 25, December 26,
1996 1995 1995 1994 1993
------------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET SALES 100.0% 100.0% 100.0% 100.0% 100.0%
COSTS AND EXPENSES:
Cost of products sold 85.6 80.2 81.3 82.5 86.9
Depreciation expense 2.5 2.8 2.5 2.9 3.2
---- ------ ------ ------ ------
Gross Profit 11.9 17.0 16.2 14.6 9.9
Training and start-up -Modernization
and Expansion Project 1.7 0.0 0.0 0.0 0.0
Selling and administrative expense 7.0 6.8 6.8 6.4 6.7
Restructuring/Nonrecurring charge 0.0 0.0 0.0 1.8 0.4
---- ------ ------ ------ ------
Operating income 3.2 10.2 9.4 6.4 2.8
Interest income (expense) net 1.0 (1.8) (1.3) (1.2) (0.9)
Other non-operating income, net 0.0 0.4 0.3 0.3 0.1
Unusual income items 0.0 0.0 0.0 0.0 0.3
Income tax provision 1.7 3.2 3.0 1.9 0.9
------ ------ ------ ------ ------
Net income before extraordinary
item 2.5 5.6 5.4 3.6 1.4
Extraordinary item, net of taxes 0.0 0.0 0.0 (0.3) 0.0
------ ------ ------ ------ ------
Net income 2.5% 5.6% 5.4% 3.3% 1.4%
====== ====== ====== ====== ======
</TABLE>
Third Quarter 1996 as compared to Third Quarter 1995
NET SALES. Consolidated net sales of $125.2 million in the third quarter
of 1996 were $3.0 million, or 2 percent higher than third quarter 1995 net
sales. A decrease in selling prices reducing sales by $3.2 million was more
than offset by increased shipments of $6.2 million.
Steel Making Segment. Net sales for the Steel Making Segment were $82.3
million in the third quarter of 1996, a $2.9 million, or 4 percent, increase
over last year's comparable period. Sales to unaffiliated customers increased
4 percent to $56.1 million while intersegment sales of $26.2 million
approximated the third quarter 1995. Decreases in the selling prices were
offset by increased flat-rolled and semi-finished shipment volume. Sales of
iron products totaled $10.8 million, which was $3.7 million lower than the
prior year, due primarily to decreased volume.
Steel Fabricating Segment. The Steel Fabricating Segment net sales of
$69.5 million in the third quarter of 1996 was just $0.8 million, or 1 percent,
above the comparable period in the prior year. A
12
<PAGE> 13
decrease in selling prices primarily at Alpha Tube and lower shipments at
Universal Tool were offset by increased shipments and lower raw material costs
for both the Packaging and Tube subsidiaries.
GROSS PROFIT. The gross profit margin for the third quarter of 1996 of
$16.3 million was $1.6 million lower than the margin recorded during
last year's comparable period. The decrease in margin was due partially to
lower average selling prices for steel and tube products. Operating costs were
also significantly higher in the third quarter of 1996 mostly due to higher
natural gas and other conversion costs. The gross profit, as a percentage of
sales, was 13 percent in the third quarter of 1996 versus 15 percent in the
third quarter of 1995.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expense
was $9.2 million in the third quarter of 1996, $0.5 million higher than the
third quarter of 1995. Selling and administrative expenses represented 7
percent of net sales in 1996 which matched the comparable period in 1995.
OPERATING INCOME. Operating income for the Company for the third quarter
of 1996 of $3.9 million was $5.4 million lower than the $9.3 million recorded
for the same period in 1995.
Steel Making Segment. The Steel Making Segment recorded a $1.5 million
loss from operations in the third quarter of 1996, down $6.2 million
from 1995. The significant decline in earnings in the third quarter of 1996 was
driven by higher labor, natural gas and other conversion costs. In addition,
employee training costs to prepare for start-up of the Modernization and
Expansion Project decreased third quarter 1996 results by $3.3 million.
Somewhat offsetting these unfavorable items were sales of iron products
contributing $1.0 million in the third quarter of 1996 compared to $1.2 million
for the same period in the prior year. The slightly decreased margin of iron
products was due primarily to increased natural gas costs. Sales to external
customers were 4 percent higher than last year's comparable period, and
shipments to the Steel Fabricating Segment were only slightly higher than in
the third quarter of 1995. Approximately 62 percent of flat-roll shipments and
69 percent of gross profit in 1996 was attributable to external customers while
the remainder was generated by sales to the Steel Fabricating Segment, as
compared to 60 percent of shipments and gross profit in the prior
year.
Steel Fabricating Segment. The Steel Fabricating Segment's operating
income of $5.3 million for the third quarter of 1996 was $0.8 million higher
than in last year's comparable period, resulting primarily from increased
shipments and lower raw material costs. Partially offsetting the above
mentioned favorable items were decreased selling prices for tube products.
INTEREST INCOME / EXPENSE. Interest income for the third quarter of 1996
totaled $1.0 million, falling below the third quarter of 1995 by $2.4 million.
The decrease in interest income is the result of reduced on-hand cash and
investment balances resulting from progress payments for the construction of
the Modernization and Expansion Project. Interest expense of $0.3 million for
the third quarter of 1996 was below the same period of the prior year by $4.1
million resulting from the increased capitalization of interest costs
associated with the Modernization and Expansion Project. In the third quarter
of 1996 and 1995, interest costs of $9.3 million and $4.2 million,
respectively, were capitalized as part of the Modernization and Expansion
Project. The Company will cease capitalization of interest costs upon
completion and start-up of the Modernization and Expansion Project which will
occur in the fourth quarter of 1996.
13
<PAGE> 14
INCOME TAX EXPENSE. Income tax expense in the third quarter of 1996
totaled $1.9 million based on an effective tax rate of 40 percent as compared
to the $3.0 million in 1995's third quarter, based on a 36 percent effective
tax rate. The increase in the effective tax rate is primarily attributable to
the lower levels of tax exempt investment earnings realized in 1996.
NET INCOME. The Company recorded earnings of $2.9 million, or $0.25 per
share in the third quarter of 1996 versus income of $5.3 million, or $0.45 per
share, recorded in the third quarter of 1995. Per share amounts for 1996 and
1995 are based on the weighted average number of common shares and dilutive
common equivalent shares outstanding during the three month periods (11,631,654
in 1996 and 11,610,259 in 1995).
Nine Months Ended September 29, 1996 as compared to Nine Months Ended September
24, 1995
NET SALES. Consolidated net sales of $378.3 million for the first nine
months of 1996 were $11.6 million, or 3 percent, lower than net sales in the
same period of 1995. Lower selling prices resulted in a $13.5 million decrease
in sales, while slightly higher sales volume of $1.9 million somewhat offset
the decrease versus last year's comparable period.
Steel Making Segment. Net sales for the Steel Making Segment of $255.3
million in the first nine months of 1996 were $7.4 million, or approximately 3
percent, below last year's comparable period. Sales to unaffiliated customers
decreased 3 percent to $169.7 million while intersegment sales of $85.5 million
were 2 percent lower than in the first nine months of 1995. The decrease in
the Steel Making Segment's net sales was the result of a 4 percent decrease in
average selling prices and slightly lower flat-rolled and semi-finished
shipments. Sales of iron products increased during the period to a total of
$32.9 million as compared to $25.6 million for the same period in the prior
year, while semi-finished product sales decreased $6.5 million.
Steel Fabricating Segment. Steel Fabricating Segment net sales of $209.8
million in the first nine months of 1996 were $5.8 million, or 3
percent lower than the comparable period in the prior year. The majority of
the $5.8 million decrease in sales was caused by lower selling prices for tube
products while lower shipments for jacks and tools accounted for the remainder
of the reduction in sales as compared to last year's first nine months.
GROSS PROFIT. The gross profit for the first nine months of 1996 of $45.0
million was $21.1 million lower than the gross profit recorded during last
year's comparable period. The substantial decrease in gross profit was due
principally to lower average selling prices for the Company's products and
significant increases in operating costs for the Steel Making Segment as
compared to the first nine months of 1995.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expenses
for the first nine months of 1996 and 1995 were $26.5 million and $26.3
million, respectively, approximating 7 percent of sales in each period.
OPERATING INCOME. Operating income for the Company for the nine months
ended September 29, 1996 was $12.1 million as compared to operating income of
$39.8 million in the first nine months of 1995.
14
<PAGE> 15
Steel Making Segment. The Steel Making Segment recorded an operating loss
of $3.5 million compared to the $23.4 million of income recorded in the first
nine months of 1995. The loss was driven by a 4 percent decrease in selling
prices reducing results by $12.1 million. Flat-rolled and semi-finished
shipments to external customers were approximately 16,000 tons or 5 percent
lower than last year's comparable period while shipments to the Steel
Fabricating Segment were 1,500 tons, or 1 percent higher than in the first nine
months of 1995. Also contributing to the Steel Making Segment's loss for the
first nine months of 1996 were higher costs relating to the purchase and usage
of natural gas along with increased maintenance and repair and labor costs.
Finally, employee training and start-up costs for the Modernization and
Expansion Project decreased income from operations by $6.4 million as compared
to the prior year. Somewhat offsetting the decreased shipments and increased
costs were increased iron product sales contributing $3.5 million in the first
nine months of 1996 versus $2.0 million in the same period of the prior year.
Approximately 61 percent of shipments and 65 percent of gross profit in 1996
were attributable to external customers while the remainder was generated by
sales to the Steel Fabricating Segment. In 1995's first nine months, the Steel
Making Segment shipped 62 percent of shipments to and derived 64 percent of its
gross profit from external customers.
Steel Fabricating Segment. The Steel Fabricating Segment's operating
income of $15.6 million for the first nine months of 1996 was $0.8 million
lower than in last year's comparable period with virtually all of the decrease
related to slightly higher production costs.
INTEREST INCOME/EXPENSE. Interest income for the first nine months of
1996 totaled $4.9 million, falling below the first nine months of 1995
by $6.3 million due to decreased cash balances reflecting progress payments for
construction of the Modernization and Expansion Project. Interest expense of
$1.2 million for the first nine months of 1996 was lower than the same period
of the prior year by $16.9 million resulting from increased capitalization of
interest expense associated with the Modernization and Expansion Project. In
the first nine months of 1996, interest expense of $26.6 million was
capitalized as part of the Modernization and Expansion Project compared with
$8.0 million in the prior year comparable period. The Company will cease
capitalization of interest costs subsequent to the completion and start-up of
the Modernization and Expansion Project which will occur in the fourth quarter
of 1996.
INCOME TAX EXPENSE. The income tax expense for the first nine months of
1996 totaled $6.3 million based on a 40 percent effective tax rate as compared
to the $12.4 million expense in the first nine months of 1995, based on a 36
percent effective rate. As indicated in the quarter as compared to quarter
discussion, the increase in the effective tax rate for 1996 is primarily
attributable to the lower levels of tax exempt investment income earned in
1996.
NET INCOME. The Company recorded earnings of $9.5 million, or $0.82 per
share, in the first nine months of 1996 versus the $22.1 million, or $1.90 per
share, recorded in the first nine months of 1995. Per share amounts for 1996
and 1995 are based on the weighted average number of common shares and dilutive
common equivalent shares outstanding during the nine month periods (11,617,902
in 1996 and 11,604,437 in 1995).
15
<PAGE> 16
LIQUIDITY AND CAPITAL RESOURCES
At the end of the third quarter, the Company's cash and cash equivalents
balance was $43.2 million, down $9.8 million from the December 31, 1995
balance. At September 29, 1996, the Company had total liquid investments of
$57.0 million including cash and cash equivalents and short term investments,
compared to $187.1 million in available funds at December 31, 1995.
Operating activities generated $26.6 million of cash in the quarter due to a
combination of net income, an add-back of $10.0 million of non-cash
depreciation, $9.8 million of non-cash accretion on the Company's Senior
Discount Notes, and the remainder resulting from changes in working capital and
other non-current accounts. Investing activities decreased cash $56.2 million
as the sale of investments (net of purchases) of $120.3 million was more than
offset by $174.7 million of capital expenditures, primarily related to the
Modernization and Expansion Project, along with a $1.8 million contribution to
the Company's steel processing joint venture. (Note: Capital expenditures
include an account payable of $18.9 million at December 31, 1995 and $3.1
million at September 29, 1996. The amount payable at year-end 1995 was
liquidated during the first quarter of 1996.)
Capital expenditures were $158.9 million for the first nine months of 1996.
Total capital expenditures for the Modernization and Expansion Project were
$139.9 million which included $96.0 million for current amounts paid and owing
the general contractor, capitalized interest of $26.5 million, and other costs
of $17.4 million directly relating to the Modernization and Expansion Project.
The remaining $19.0 million of capital expenditures were primarily for the
upgrade of the Company's management information systems and to a lesser extent
the replacement and rehabilitation of various production facilities.
At September 29, 1996, the Company's long-term indebtedness was $306.6
million. Long-term debt increased $29.7 million in the first nine months of
1996 due partially to the accretion of Senior Secured Discount Notes of $9.8
million. In addition, on April 23, 1996 and September 25, 1996 the Company sold
$11.3 million and $8.6 million of Environmental Improvement Revenue bonds,
respectively. The net proceeds of these bonds will reimburse the Company for
funds expended for the acquisition, construction and installation of solid
waste disposal facilities that are part of the Modernization and Expansion
Project. The bonds are secured by the Company's pledge of loan payments and an
interest in the solid waste disposal facilities.
Working capital of $99.3 million at the end of the third quarter of
1996 was $51.2 million lower than the year-end 1995 balance, reflecting
progress payments for the construction of the Modernization and Expansion
Project. The Company also currently has an unused working capital facility, of
which $77.6 million remains available at September 29, 1996 as determined by a
borrowing base calculation. The working capital facility agreement, which
provides for borrowing up to $80.0 million based on collateral, was recently
extended to August 1999. At September 29, 1996 the Company's ratio of debt to
capitalization was .54 to 1.
MODERNIZATION AND EXPANSION PROJECT. The hot-commissioning phase of the
Modernization and Expansion Project began on October 3, 1996 when the
Company announced that its Steel Making Segment produced a test coil through
its continuous thin slab caster and hot strip mill. The new facility is
expected to replace the old facility by the middle of 1997. During this
transition period the Company will continue to incur training costs as well as
production inefficiencies related to the start-up of the new facility in 1996
and the decommissioning of the redundant operations in the existing facilities
in 1997. The total amount of these transitional costs is expected to be
approximately $15 million and will
16
<PAGE> 17
be charged to the Steel Making Segment operations. Additionally, interest
costs (approximately $2.9 million per month) previously capitalized as a cost
of construction, will be charged to the operations of the new facility
coincident with its start-up in the fourth quarter of 1996. Depreciation
expense will also commence with the start-up of the new facility, approximating
$2.0-$2.5 million per month. All of these charges will significantly reduce
the results of operations of the Steel Making Segment in the fourth quarter of
1996 and during the start-up phase of operations in the first half of 1997.
OUTLOOK. The Company anticipates an operating loss in the fourth
quarter of 1996. As mentioned in the above discussion of the Modernization and
Expansion Project, the start-up phase of the new facility will include training
costs, production inefficiencies, and the commencement of depreciation expense,
along with previously capitalized interest costs being charged to current
operations. In addition, despite stabilized steel selling prices,
significantly reduced sales and margins related to iron products and higher
operating costs in the Steel Making Segment's existing facility (including
labor, energy, and raw material) are expected in the fourth quarter of 1996 and
the first half of 1997. While the Company expects second-half 1997 results to
benefit from the full operations of the Modernization and Expansion Project,
the transition expenses in the first half of the year will prevent the Company
from realizing the total annual benefits of the new facility until 1998.
Actual events might materially differ from those projected in the above
forward looking statements. The timely arrival, successful installation and
testing of major equipment and computer systems are important assumptions in
the Company's projection of a second-half start-up of the new facility. If
the new facility is not completed in a timely manner or materially exceeds the
Company's cost expectations; if there are substantial unexpected production
interruptions or other start-up difficulties; if the new facility fails to
achieve the production levels; if quality levels or performance objectives
represented and guaranteed by the equipment suppliers and turn-key general
contractor (although mitigated by liquidated damages of up to 30% of the
contract) are not achieved,the competitive and financial position of the
Company could be materially adversely affected. In addition to uncertainties
with respect to the Modernization and Expansion Project, forward looking
statements regarding all of the Company's businesses, but particularly the
Steel Making Segment, are based on various economic assumptions. The
assumptions include projections regarding: selling prices for the Company
products; costs for labor, energy, raw material, supplies, pensions and retiree
medical care; volume or units of product sales; competitive developments in the
marketplace by domestic and foreign competitors and the competitive impact of
new facilities which are expected to compete with the Company's products;
general economic developments in the United States affecting the business of
the Company's customers, and similar events which may affect the costs, price
or volume of products sold by the Company.
There can be no assurances the results of these factors will conform with the
Company's assumptions and projections. If one or more of these factors fails
to meet the Company's projections, the adverse impact on the Company's business
and financial results could be significant. Similarly, in the event the
Company's assumptions and projections are too conservative, the Company's
performance may exceed these forecasts.
SUBSEQUENT EVENT. On October 25, 1996, the Company reached an agreement
with the United Steel Workers on a mid-term wage reopener. The six-year
contract which was ratified on October 1, 1993 provided for a mid-term
renegotiation of specific wage and benefit issues. The recent
17
<PAGE> 18
settlement was largely consistent with the pattern established within the steel
industry.
18
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)
(1) Exhibit 15 - Letter Regarding Unaudited Interim Financial
Information
(2) Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
(1) Report on Form 8-K dated September 25, 1996 reported the
issuance of $8.6 million of tax-exempt bonds, and the listing by
the New York Stock Exchange of the Company's Senior Secured and
Senior Secured Discount Notes.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACME METALS INCORPORATED
Date: November 12, 1996 By: /s/ Jerry F. Williams
-----------------------------------------------
Jerry F. Williams
Vice President - Finance and Administration
and Chief Financial Officer
(Principal Financial Officer)
By: /s/ Gregory J. Pritz
-----------------------------------------------
Gregory J. Pritz
Controller
(Principal Accounting Officer)
19
<PAGE> 1
Exhibit 15
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Dear Sirs:
We are aware that Acme Metals Incorporated has included our report dated
October 18, 1996 (issued pursuant to the provisions of Statement on Auditing
Standards No. 71) in the Prospectuses constituting part of its Registration
Statements on Form S-8 (Nos. 33-17235, 33-19437 and 33-30841) and in its
Registration Statements on Form S-8 (Nos. 33-38747 and 33-59627). We are also
aware of our responsibilities under the Securities Act of 1933.
Very truly yours,
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
November 11, 1996
Chicago, Illinois
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's Unaudited Consolidated Balance Sheets at September 29, 1996 and
Unaudited Consolidated Statements of Operations for the Nine Months Ended
September 29, 1996 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-29-1996
<CASH> 43,241
<SECURITIES> 13,739
<RECEIVABLES> 58,292
<ALLOWANCES> 1,369
<INVENTORY> 51,818
<CURRENT-ASSETS> 182,153
<PP&E> 811,320
<DEPRECIATION> 283,469
<TOTAL-ASSETS> 776,815
<CURRENT-LIABILITIES> 82,848
<BONDS> 306,591
<COMMON> 11,606
0
0
<OTHER-SE> 246,302
<TOTAL-LIABILITY-AND-EQUITY> 776,815
<SALES> 378,307
<TOTAL-REVENUES> 378,307
<CGS> 333,260
<TOTAL-COSTS> 366,202
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,226
<INCOME-PRETAX> 15,809
<INCOME-TAX> 6,324
<INCOME-CONTINUING> 9,485
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,485
<EPS-PRIMARY> 0.82
<EPS-DILUTED> 0
</TABLE>
