<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 June 29, 1997 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 Avenue, Riverdale, Illinois 60827-1182
(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 July 25, 1997: 11,631,145.
1
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ACME METALS INCORPORATED
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
<TABLE>
<CAPTION>
For the Three Months Ended For the Six Months Ended
---------------------------- --------------------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
NET SALES $123,471 $127,268 $248,802 $253,133
COSTS AND EXPENSES:
Cost of products sold 112,682 109,891 232,327 218,136
Depreciation expense 9,943 3,120 19,946 6,295
------------ ------------ ----------- -----------
Gross margin 846 14,257 (3,471) 28,702
Training and Pre-Start-up-Modernization Project -- 1,686 -- 3,151
Selling and administrative expense 10,142 8,644 20,334 17,324
------------ ------------ ----------- -----------
Operating income (loss) (9,296) 3,927 (23,805) 8,227
NON-OPERATING INCOME (EXPENSE):
Interest expense (10,025) (289) (19,895) (937)
Interest income 107 1,678 460 3,865
Other-net (109) -- (124) (112)
------------ ------------- ----------- -----------
Income (loss) before income taxes (19,323) 5,316 (43,364) 11,043
Income tax (benefit) provision (6,570) 2,126 (14,744) 4,417
------------ ------------ ----------- -----------
Net income (loss) $(12,753) $ 3,190 $(28,620) $ 6,626
============ ============ =========== ===========
PER COMMON SHARE:
Net income (loss) $ (1.10) $ 0.27 $ (2.46) $ 0.57
============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
2
<PAGE> 3
ACME METALS INCORPORATED
UNAUDITED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
June 29, December 29,
1997 1996
----------- ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,759 $ 33,224
Short-term investments -- 11,817
Receivables, less allowances of $1,418 in 1997 and $1,320 in 1996 58,791 52,502
Inventories 61,444 68,884
Deferred income taxes 27,358 14,957
Other current assets 1,786 1,453
--------- ------------
Total current assets 154,138 182,837
--------- ------------
INVESTMENTS AND OTHER ASSETS:
Investments in associated companies 17,228 17,862
Other assets 18,154 19,028
Deferred income taxes 31,740 25,297
--------- ------------
Total investments and other assets 67,122 62,187
--------- ------------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost 856,373 841,034
Construction in progress 12,364 6,319
Accumulated depreciation (305,679) (286,628)
--------- ------------
Total property, plant and equipment 563,058 560,725
--------- ------------
$ 784,318 $ 805,749
========= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 61,761 $ 73,796
Accrued expenses 41,960 39,966
Income taxes payable 2,310 2,178
--------- ------------
Total current liabilities 106,031 115,940
--------- ------------
LONG-TERM LIABILITIES:
Long-term debt 319,953 310,085
Other long-term liabilities 19,420 13,026
Postretirement benefits other than pensions 96,180 93,247
Retirement benefit plans 10,298 12,750
--------- ------------
Total long-term liabilities 445,851 429,108
--------- ------------
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, 11,631,373
and 11,610,723 shares issued in 1997 and 1996, respectively 11,631 11,611
Additional paid-in capital 165,677 165,342
Retained earnings 70,012 98,632
Minimum pension liability adjustment (14,884) (14,884)
--------- ------------
Total shareholders' equity 232,436 260,701
--------- ------------
$ 784,318 $ 805,749
========= ============
</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 Six Months Ended
--------------------------
June 29, June 30,
1997 1996
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(28,620) $ 6,626
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES:
Depreciation 20,229 6,738
Accretion of Senior Discount Notes 7,368 6,422
Deferred Income Taxes (14,744) --
CHANGE IN CURRENT ASSETS AND LIABILITIES:
Receivables (6,289) 2,012
Inventories 7,440 5,666
Accounts payable (19,088) (9,668)
Other current accounts 1,893 (2,298)
Other, net 4,289 4,653
----------- -----------
Net cash (used for) provided by operating activities (27,522) 20,151
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (331) (22,678)
Sales and/or maturities of investments 12,148 133,346
Capital expenditures - Modernization and Expansion Project (8,451) (8,981)
Capital expenditures - Other (7,164) (112,442)
----------- -----------
Net cash (used for) investing activities (3,798) (10,755)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit agreement 13,500
Repayment of revolving credit agreement (11,000)
Issuance of bonds, net of discount -- 11,288
Debt issue costs -- (186)
Other 355 373
----------- -----------
Net cash provided by financing activities 2,855 11,475
----------- -----------
Net (decrease) increase in cash and cash equivalents (28,465) 20,871
Cash and cash equivalents at beginning of period 33,224 53,043
----------- -----------
Cash and cash equivalents at end of period $ 4,759 $ 73,914
=========== ===========
</TABLE>
The accompanying notes are an integral part of this financial statement.
4
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ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
BASIS OF PRESENTATION:
The accompanying financial statements for the periods ended June 29, 1997 and
June 30, 1996 are unaudited. The statements should be read in conjunction with
the audited financial statements included in the Company's 1996 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 28, 1997 and will contain 52 weeks.
Second quarter results for 1997 and 1996 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 contractual prices determined on an
annual basis and reviewed periodically to reflect current market conditions.
Income from operations consists of total sales less operating expenses.
Operating expenses include an allocation of expenses incurred at the Corporate
Office that 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,
income taxes, or extraordinary items.
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 for the periods presented.
5
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ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
For The For The
Three Months Ended Six Months Ended
-------------------------- --------------------------
June 29, June 30, June 29, June 30,
1997 1996 1997 1996
-------------- -------------- --------------------------
(in thousands, except for steel shipments)
<S> <C> <C> <C> <C>
Net Sales:
Steel Making:
Sales to unaffiliated customers $ 49,964 $ 55,877 $104,331 $113,591
Intersegment sales 25,031 30,626 49,785 59,395
--------- -------- -------- --------
74,995 86,503 154,116 172,986
Steel Fabricating:
Sales to unaffiliated customers 73,507 71,391 144,471 139,542
Intersegment sales 279 277 577 699
--------- -------- -------- --------
73,786 71,668 145,048 140,241
Eliminations (25,310) (30,903) (50,362) (60,094)
--------- -------- -------- --------
Total $ 123,471 $127,268 $248,802 $253,133
========= ======== ======== ========
Income (loss) from Operations:
Steel Making $ (16,671) $ (2,370) $(36,596) $ (2,076)
Steel Fabricating 7,375 6,297 12,791 10,303
--------- -------- -------- --------
Total $ (9,296) $ 3,927 $(23,805) $ 8,227
========= ======== ======== ========
Depreciation:
Steel Making $ 9,071 $ 2,302 $ 18,295 $ 4,643
Steel Fabricating 1,004 969 1,926 1,932
Corporate 3 82 8 163
--------- -------- -------- --------
Total $ 10,078 $ 3,353 $ 20,229 $ 6,738
========= ======== ======== ========
Capital Expenditures:
Steel Making $ 8,215 $ 52,195 $ 18,780 $113,425
Steel Fabricating 1,986 1,380 3,835 2,332
Corporate 8 -- 53 10
--------- -------- -------- --------
Total $ 10,209 $ 53,575 $ 22,668 $115,767
========= ======== ======== ========
Operating Data (in tons)
Steel Production (hot band) 167,413 160,166 359,291 322,541
Steel Shipments (flat roll) 157,761 156,696 322,070 313,117
</TABLE>
PER SHARE DATA:
Per share amounts for 1997 and 1996 are based on the weighted average number of
common and dilutive common equivalent shares outstanding during the three month
and six-month periods, respectively (11,631,373 in 1997 and 11,622,957 in 1996
and 11,628,214 in 1997 and 11,619,816 in 1996).
6
<PAGE> 7
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
INVENTORIES:
Inventories are summarized as follows:
June 29, December 29,
1997 1996
------- -------
Raw materials $ 9,446 15,642
Semi-finished and finished products 46,598 46,493
Supplies 5,400 6,749
------- -------
$61,444 $68,884
======= =======
PROPERTY, PLANT AND EQUIPMENT:
The Company has capitalized expenditures related to the construction of a
continuous thin slab caster and hot strip mill (the "Modernization and
Expansion Project") totaling $448.1 million at June 29, 1997. Total cash
payments for the Modernization and Expansion Project in the second quarter of
1997 were $4.1 million. Accrued payments to the general contractor at June 29,
1997 and December 29, 1996 include accounts payable of $19.0 million and $12.0
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
capital expenditures classified as construction in progress at June 29, 1997
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 $11.1 million during the first six
months of 1997 and $10.3 million in the first six months of 1996; in these
periods cash payments for income taxes were $0.5 million and $2.0 million,
respectively. Cash transactions in the second quarter of 1997 for the
Modernization and Expansion Project are discussed in the Property, Plant and
Equipment footnote.
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. The Company reimburses the joint venture
for these costs through its purchase of ore.
7
<PAGE> 8
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
During 1994, the Company entered into a turnkey contract with Raytheon
Engineers & Constructors, Inc. ("Raytheon") to build the 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 Modernization and
Expansion Project or additional changes that may be requested by the Company
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 has long-term operating lease commitments, principally for building
space for its Alpha Tube subsidiary and for various computer hardware and
software. A current lease agreement relating to building space currently under
construction for the Alpha Tube subsidiary contains provisions for the Company
to guarantee the lessor a recovery of a fixed percentage of its interest in the
property upon termination of the lease. In the event the Company does not
maintain compliance with financial covenants which are consistent with those of
the Working Capital Facility, the Company could be required to purchase the
lessors' interest in the property. See financial statement note entitled
Long-term Debt and Revolving Credit Agreement for a description of financial
covenants in the 1996 Annual Report on Form 10-K. Lease terms cover periods
from 3 to 6 years.
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
8
<PAGE> 9
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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.
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 June 29, 1997 and December 29,
1996, 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 PRPs,
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.
9
<PAGE> 10
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
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 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 which could be
significant.
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 June 29,
1997, the consolidated statements of operations for the three and six-month
periods ended June 29, 1997 and June 30, 1996, and the consolidated statements
of cash flows for the six-month periods ended June 29, 1997 and June 30, 1996
(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 29, 1996, 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 24, 1997 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 29,
1996, 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
July 25, 1997
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Six Months Ended For the Years Ended
------------------------ ----------------------------
June 29, June 30, Dec. 29, Dec. 31, Dec. 25,
1997 1996 1996 1995 1994
------ ------- ------- -------- -------
<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 93.4 86.2 86.7 81.3 82.5
Depreciation expense 8.0 2.5 3.2 2.5 2.9
------ ------- ------- -------- -------
Gross margin (1.4) 11.3 10.1 16.2 14.6
Training/Pre-start-up-Modernization
and Expansion Project 0.0 1.2 2.0 0.0 0.0
Selling and administrative expense 8.2 6.8 7.1 6.8 6.4
Restructuring/Nonrecurring charge 0.0 0.0 0.0 0.0 1.8
------ ------- ------- -------- -------
Operating income (loss) (9.6) 3.3 1.0 9.4 6.4
Interest (expense) income, net (7.8) 1.1 (0.1) (1.3) (1.2)
Other non-operating income, net 0.0 0.0 0.1 0.3 0.3
Income tax (benefit) provision (5.9) 1.7 0.5 3.0 1.9
------ ------- ------- -------- -------
Net income (loss) before extraordinary item (11.5) 2.7 0.5 5.4 3.6
Extraordinary item, net of taxes 0.0 0.0 0.0 0.0 (0.3)
------ ------- ------- -------- -------
Net income (loss) (11.5)% 2.7% 0.5% 5.4% 3.3%
====== ======= ======= ======== =======
</TABLE>
Second Quarter 1997 as compared to Second Quarter 1996
NET SALES. Consolidated net sales of $123.5 million in the second quarter of
1997 were $3.8 million lower than second quarter 1996 net sales. A slight
increase in the Fabricating Segment's selling prices was more than offset by an
unfavorable steel product mix as compared to the second quarter of 1996.
Steel Making Segment. Net sales for the Steel Making Segment were $75.0
million in the second quarter of 1997, an $11.5 million, or 13 percent,
decrease over last year's comparable period. Sales to unaffiliated customers
decreased 11 percent to $50.0 million while intersegment sales of $25.0 million
fell below the second quarter 1996 level by nearly 18 percent. Decreases in
the average selling prices, reduced shipments to affiliates, and lower sales of
non-flat roll products accounted for the decreased sales in the second quarter
of 1997 versus the second quarter of 1996. Sales of non-flat roll products
totaled $6.8 million, which was $8.8 million lower than the prior year, due
primarily to decreased volume.
Steel Fabricating Segment. The Steel Fabricating Segment net sales of
$73.8 million in the second quarter of 1997 were $2.1 million, or 3 percent,
better than the comparable period in the prior year. A slight increase in
selling prices along with sales volume gains were the principal contributor.
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<PAGE> 13
GROSS MARGIN. The gross margin for the second quarter of 1997 totaled $0.8
million profit which was $13.4 million lower than the gross profit recorded
during last year's comparable period. The decrease in margin was due to
increased operating costs and an unfavorable sales mix for steel products.
During the second quarter of 1997 the Steel Making Segment incurred
approximately $7.0 million of production cost inefficiencies related to the
start-up of the Modernization and Expansion Project and the phase-out of older,
redundant operations. Also, increased depreciation expense related primarily
to the Modernization and Expansion Project reduced operating income by $6.8
million. The gross margin, as a percentage of sales, was 11 percent lower in
the second quarter of 1997 than the second quarter of 1996.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expense was
$10.1 million in the second quarter of 1997, $1.5 million higher than the
second quarter of 1996. Selling and administrative expenses represented
approximately 8 percent of net sales in 1997 which exceeded the comparable
period in 1996 by 1.4 percent. The increased expense was principally due to
costs related to the upgrade of the Company's management information systems.
OPERATING INCOME / LOSS. The operating loss for the Company in the second
quarter of 1997 of $9.3 million was $13.2 million lower than the $3.9 million
of income recorded during the same period in 1996.
Steel Making Segment. The Steel Making Segment recorded a $16.7 million
loss from operations in the second quarter of 1997, an increase of $14.3
million from the loss recorded in the second quarter of 1996. The significant
decline in earnings in the second quarter of 1997 was primarily the result of
the production inefficiencies due to the continued commissioning of the
Modernization and Expansion Project and the on-going phase-out of the redundant
operations along with an unfavorable product mix. The Steel Making Segment
incurred approximately $7.0 million of production cost inefficiencies related
to the start-up of the new facility and phase-out of redundant operations.
Depreciation expense increased $6.8 million over the second quarter of 1996
primarily related to the Modernization and Expansion Project. The remainder of
the operating loss resulted from an unfavorable product mix. As the new
facility continued to ramp-up, the Steel Making Segment is in the process of
developing and producing high carbon and alloy products which serve the higher
margin niche customers. This transition along with the completion of the final
decommissioning phase of its redundant ingot operation late in the second
quarter has adversely affected the steel product mix during the second quarter
of 1997. Also affecting shipments in the second quarter of 1997 was the
delayed start-up of the slitting line at NACME Steel Processing (the Company's
joint venture). Sales to external customers were 11 percent lower than last
year's comparable period, and sales to the Steel Fabricating Segment were 18
percent lower than in the second quarter of 1996. Approximately 65 percent of
shipments and 60 percent of gross margin in the second half of 1997 was
attributable to external customers while the remainder was generated by sales
to the Steel Fabricating Segment, as compared to 62 percent of shipments and 64
percent gross profit in the prior year.
Steel Fabricating Segment. The Steel Fabricating Segment's operating
income of $7.4 million for the second quarter of 1997 was $1.1 million higher
than in last year's comparable period, resulting primarily from a slight
increase in selling prices and lower raw material costs.
13
<PAGE> 14
INTEREST INCOME / EXPENSE. Interest income for the second quarter of 1997
totaled $0.1 million, falling below the second quarter of 1996 by $1.6 million.
The decrease in interest income is the result of reduced cash and investment
balances resulting from payments for the construction of the Modernization and
Expansion Project and increased operating requirements. Interest expense of
$10.0 million for the second quarter of 1997 increased as compared to the same
period of the prior year by $9.7 million. The increase resulted from charging
all interest costs to current operations versus capitalization of the interest
costs associated with the Modernization and Expansion Project during the prior
year. In the second quarter of 1996, interest costs of $9.0 million were
capitalized as part of the Modernization and Expansion Project. The Company
ceased capitalization of interest costs relating to the Modernization and
Expansion Project mid-way through the fourth quarter of 1996 when the facility
was placed in service.
INCOME TAXES. Income tax benefits recorded in the second quarter of 1997
totaled $6.6 million based on an effective tax rate of 34 percent as compared
to $2.1 million of tax expense in the second quarter of 1996, based on a 40
percent effective tax rate.
NET INCOME (LOSS). The Company recorded a loss of $12.8 million, or $1.10 per
share in the second quarter of 1997 versus income of $3.2 million, or $0.27 per
share, recorded in the second quarter of 1996. Per share amounts for 1997 and
1996 are based on the weighted average number of common shares and dilutive
common equivalent shares outstanding during the six-month periods (11,631,373
in 1997 and 11,622,957 in 1996).
Six Months Ended June 29, 1997 as compared to Six Months Ended June 30, 1996
NET SALES. Consolidated net sales of $248.8 million for the six months ended
June 29, 1997 were $4.3 million lower than the prior year comparable period. A
decrease in non-flat roll product shipments as compared to the first half of
1996 was somewhat offset by Fabricating Segment sales volume.
Steel Making Segment. Net sales for the Steel Making Segment were $154.1
million in the first six months of 1997, a $18.9 million, or 11 percent,
decrease over last year's comparable period. Sales to unaffiliated customers
decreased 8 percent or $9.3 million while intersegment sales of $49.8 million
fell below the first six months of 1996 level by 16 percent. Decreases in the
shipments to affiliates, an unfavorable product mix, and lower sales of
non-flat roll products accounted for the decreased sales in the first half of
1997 versus the first half of 1996. Sales of non-flat roll products totaled
$14.8 million, which was $14.2 million lower than the prior year, due to
decreased volume.
Steel Fabricating Segment. The Steel Fabricating Segment net sales of
$145.0 million in the first six months of 1997 were $4.8 million, or 3 percent,
above the comparable period in the prior year. A slight increase in selling
prices along with strong sales volume gains for the fabricating businesses
accounted for the improvement.
GROSS MARGIN. The gross loss for the first half of 1997 was $23.8 million
which was $32.0 million lower than the gross profit recorded during last year's
comparable period. The decrease in margin was due to increased operating costs
and an unfavorable sales mix for steel products. During the first half of 1997,
the Steel Making Segment incurred approximately $17.0 million of production
cost inefficiencies related to the start-up of the Modernization and Expansion
Project and the phase-out of older, redundant operations. Also, increased
depreciation expense related
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<PAGE> 15
primarily to the Modernization and Expansion Project reduced gross margin by
$13.7 million. The gross margin, as a percentage of sales, was 12.7 percent
lower in the first half of 1997 than the first half of 1996.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expense was
$20.3 million in the first half of 1997, $3.0 million higher than the first
half of 1996. Selling and administrative expenses represented approximately 8
percent of net sales in 1997 which exceeded the comparable period in 1996 by
approximately 1 percent. The increased expense was principally due to costs
related to the upgrade of the Company's management information systems.
OPERATING INCOME / LOSS. The operating loss for the Company in the first six
months of 1997 of $23.8 million was $32.0 million lower than the $8.2 million
of income recorded during the same period in 1996.
Steel Making Segment The Steel Making Segment recorded a $36.6 million
loss from operations in the first half of 1997, an increase of $34.5 million
from the loss recorded in the first half of 1996. The significant decline in
earnings in the first half of 1997 was primarily the result of the production
inefficiencies due to the continued commissioning of the Modernization and
Expansion Project and the on-going phase-out of the redundant operations. The
Steel Making Segment incurred approximately $17.0 million of production cost
inefficiencies related to the start-up of the new facility and phase-out of
redundant operations. Depreciation expense increased $13.7 million over the
first half of 1996 primarily related to the Modernization and Expansion
Project. The remainder of the operating loss resulted from an unfavorable
product mix. As the new facility continued to ramp-up, the Steel Making
Segment is in the process of developing and producing high carbon and alloy
products which serve the higher margin niche customers. This transition along
with the completion of the final decommissioning phase of its redundant ingot
operation late in the first half has adversely affected the steel product mix
during the first half of 1997. Sales to external customers were 8 percent
lower than last year's comparable period, and sales to the Steel Fabricating
Segment were 16 percent lower than in the first half of 1996. Approximately 66
percent of shipments and 60 percent of gross margin in 1997 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 64 percent of
gross profit in the prior year.
Steel Fabricating Segment. The Steel Fabricating Segment's operating
income of $12.8 million for the first half of 1997 was $2.5 million higher than
in last year's comparable period, resulting primarily from a slight increase in
selling prices and lower raw material costs.
INTEREST INCOME / EXPENSE. Interest income for the first half of 1997 totaled
$0.5 million, falling below the first half of 1996 by $3.4 million. The
decrease in interest income is the result of reduced cash and investment
balances resulting from payments for the construction of the Modernization and
Expansion Project and increased operating requirements. Interest expense of
$20.0 million for the first half of 1997 increased as compared to the same
period of the prior year by $19.0 million. The increase resulted principally
from charging all interest costs to current operations versus capitalization of
the interest costs associated with the Modernization and Expansion Project
during the prior year. In the first half of 1996, interest costs of $17.3
million were capitalized as part of the Modernization and Expansion Project.
The Company ceased capitalization of interest costs relating to the
Modernization and Expansion Project mid-way through the fourth quarter of 1996
when the facility was placed in service.
15
<PAGE> 16
INCOME TAXES. Income tax benefits recorded in the first six months of 1997
totaled $14.7 million based on an effective tax rate of 34 percent as compared
to $4.4 million of tax expense in the first six months of 1996, based on a 40
percent effective tax rate.
NET INCOME (LOSS). The Company recorded a loss of $28.6 million, or $2.46 per
share in the first half of 1997 versus income of $6.6 million, or $0.57 per
share, recorded in the first half of 1996. Per share amounts for 1997 and 1996
are based on the weighted average number of common shares and dilutive common
equivalent shares outstanding during the six-month periods (11,628,214 in 1997
and 11,619,816 in 1996).
LIQUIDITY AND CAPITAL RESOURCES
At the end of the second quarter, the Company's cash and cash equivalents
balance was $4.8 million, down $28.5 million from the December 29, 1996
balance. At June 29, 1997, the Company had total liquid investments of $4.8
million including cash and cash equivalents and short-term investments,
compared to $45.0 million in available funds at December 29, 1996.
The Company's current liquidity requirements include working capital needs,
cash interest payments and capital investments. The Company intends to finance
its current operating and investing activities with cash from operations and
borrowings against an $80 million Working Capital Facility. Consistent with
this strategy the Company has borrowed against its Working Capital Facility
during the second quarter of 1997 and will continue to borrow and repay amounts
from time to time as conditions warrant. At the end of the second quarter, the
Company had $2.5 million in outstanding borrowings against its Working Capital
Facility.
Operating activities used $27.5 million of cash in the first half of 1997 due
to a combination of operating losses, a cash interest payment, with the
remainder resulting from other changes in working capital. Investing
activities decreased cash $3.8 million as the sale of short-term investments
(net of purchases) of $11.8 million was more than offset by $15.6 million of
capital expenditures.
Capital expenditures totaled $22.7 million in the first half of 1997. (Note:
Capital expenditures include accounts payable of $19.0 million at June 29, 1997
and $12.0 million at December 29, 1996.) Total capital expenditures for the
Modernization and Expansion Project were $15.5 million for current amounts paid
and owing the general contractor, and to a lesser extent other costs related
directly to the Modernization and Expansion Project. The remaining $7.2
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 June 29, 1997, the Company's long-term indebtedness was $320.0 million.
Long-term debt increased $7.4 million in the first half of 1997 due to the
accretion of the Senior Secured Discount Notes and additional borrowings of
$2.5 million against the Working Capital Facility.
Working capital of $48.1 million at the end of the second quarter of 1997 which
was $18.8 million lower than the year-end 1996 balance, reflects current
operating requirements. The Company currently has a Working Capital Facility
which provides each operating subsidiary borrowing availability limited by its
own eligible inventory and accounts receivable with an overall limitation of
$80 million. Under the Working Capital Facility $77.0 million (net of
outstanding borrowings) was available at June 29, 1997 of which $34.0 million is
available to the Steel Making Segment and $43.0 million is available to the
Steel Fabricating Segment as determined by the respective borrowing base
calculations. The Working Capital Facility agreement expires in August of 1999.
16
<PAGE> 17
At June 29, 1997, the Company's ratio of debt to capitalization was .58 to 1.
MODERNIZATION AND EXPANSION PROJECT. The Company is continuing its ramp-up of
the Modernization and Expansion Project and plans to reach full production
capability as quickly as possible. On June 9, 1997 the Company announced its
subsidiary, Acme Steel Company, ceased operation at its ingot based primary and
hot strip mills and shifted all production to its new, more efficient
continuous thin slab caster and hot strip mill. During the first half of 1997,
the Company incurred approximately $17.0 million of production cost
inefficiencies related to the start-up of the Modernization and Expansion
Project and the phase-out of the older redundant operations. In addition, the
Company recorded $12.0 million of depreciation expense related to the new
facility. In the second quarter, more than 70 percent of flat rolled production
came from the new facility versus 53 percent in the first quarter of 1997.
Shipments from the new facility accounted for 63 percent of second quarter
shipments, as compared to 21 percent in 1997's first quarter. Although the new
facility has been successful in casting and rolling a number of high-carbon and
alloy products which serve the Company's higher margin niche customers, the
majority of shipments thus far consisted largely of low- and medium- carbon
grades. The new facility has produced approximately 95 percent of the grades
our customers require. During the remainder of 1997 the Company expects to
continue to improve performance of the new equipment and refine our operating
practices to process all our products on a consistent basis and in larger
volumes.
OUTLOOK. The Company expects to continue to recognize losses in the third
quarter of 1997. The results will be adversely impacted by production
inefficiencies incurred relating to the ramp-up of the Modernization and
Expansion Project. In the second half of 1997, the Company will continue its
transition as it moves towards completion of the commissioning phase of the
Modernization and Expansion Project as well as in its joint venture steel
processing facility. Beyond this transition period, the Company remains
confident that it will achieve the projected benefits of the new facility.
For the remainder of the year the Steel Fabricating Segment earnings are
expected to remain relatively steady. The packaging subsidiary expects to
complete the installation of two new plastic strapping lines late in 1997
enabling the subsidiary to broaden its potential customer base. In addition,
the tube subsidiary expects the relocation and consolidation of its tube mills
to progress toward full completion in early 1998. The consolidation project
will improve material handling capability resulting in increased capacity of
large diameter tubing and lower operating costs.
When the Modernization and Expansion Project reaches full production levels it
is expected to reduce manufacturing costs by approximately $70 per ton
excluding the additional depreciation and interest expense associated with the
project which are approximately $24 per ton and $38 per ton respectively.
Additionally, it will increase shipping capability and broaden the range of
products while improving the quality of all commercial steel products
providing the Company access to a larger portion of the marketplace. The Steel
Fabricating Segment will also derive production and market benefits from the
higher quality products supplied by the Steel Making Segment.
FORWARD LOOKING STATEMENTS. Actual events might materially differ from those
projected in the above forward looking statements. The timely and successful
ramp-up of the Modernization and Expansion Project and successful installation
of new computer systems are important assumptions in the Company's projection
of a fully operational facility and the related earnings benefits. If there
are substantial unexpected production interruptions or other start-up
difficulties; if the new facility fails to achieve certain production levels;
if quality levels or performance objectives represented and guaranteed by the
equipment suppliers and turnkey general contractor (although mitigated by
liquidated damages of up to 20 percent of the contract which was reduced from
30 percent as the general contractor has fulfilled some of the construction and
completion obligations, as well as certain performance obligations) 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. These assumptions
include projections regarding: selling prices for the Company's products;
costs for labor, energy, raw material, supplies,
17
<PAGE> 18
pensions and active 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 the 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, including the strength of the
U.S. dollar against other currencies 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.
18
<PAGE> 19
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
(a) Exhibit 15 - Letter regarding unaudited interim financial information
Exhibit 27 - Financial data schedule
19
<PAGE> 20
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: August 6, 1997 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)
20
<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 July
25, 1997 (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
Chicago, Illinois
August 6, 1997
21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONSOLIDATED BALANCE SHEETS AT JUNE 30, 1997 AND
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> JUN-29-1997
<CASH> 4,759
<SECURITIES> 0
<RECEIVABLES> 60,209
<ALLOWANCES> (1,418)
<INVENTORY> 61,444
<CURRENT-ASSETS> 154,138
<PP&E> 868,737
<DEPRECIATION> (305,679)
<TOTAL-ASSETS> 784,318
<CURRENT-LIABILITIES> 106,031
<BONDS> 319,953
0
0
<COMMON> 11,631
<OTHER-SE> 220,805
<TOTAL-LIABILITY-AND-EQUITY> 784,318
<SALES> 123,471
<TOTAL-REVENUES> 123,471
<CGS> 122,625
<TOTAL-COSTS> 132,767
<OTHER-EXPENSES> 109
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,025
<INCOME-PRETAX> (19,323)
<INCOME-TAX> (6,570)
<INCOME-CONTINUING> (12,753)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,753)
<EPS-PRIMARY> (1.10)
<EPS-DILUTED> 0
</TABLE>
