<PAGE> 1
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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 March 30, 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 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 April 27, 1997: 11,631,373.
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<PAGE> 2
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
--------------------------
March 30, March 31,
1997 1996
--------- ---------
<S> <C> <C>
NET SALES $125,331 $125,865
COSTS AND EXPENSES:
Cost of products sold 119,609 108,245
Depreciation expense 10,039 3,175
-------- --------
Gross margin (4,317) 14,445
Training and Pre-start-up--Modernization
and Expansion Project -- 1,465
Selling and administrative expense 10,192 8,680
-------- --------
Operating income (loss) (14,509) 4,300
NON-OPERATING INCOME (EXPENSE):
Interest expense (9,870) (648)
Interest income 353 2,187
Other - net (15) (112)
-------- --------
Income (loss) before income taxes (24,041) 5,727
Income tax (benefit) provision (8,174) 2,291
-------- --------
Net income (loss) $(15,867) $ 3,436
======== ========
PER COMMON SHARE:
Net income (loss) $ (1.36) $ 0.30
======== ========
</TABLE>
The accompanying notes are an integral part of this financial statement.
2
<PAGE> 3
ACME METALS INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
(Unaudited)
March 30, December 29,
1997 1996
--------- ------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 8,841 $ 33,224
Short-term investments 5,458 11,817
Receivables, less allowances of $1,403 in 1997 and $1,320 in 1996 54,010 52,502
Inventories 65,651 68,884
Deferred income taxes 22,886 14,957
Other current assets 2,104 1,453
--------- ---------
Total current assets 158,950 182,837
--------- ---------
INVESTMENTS AND OTHER ASSETS:
Investments in associated companies 17,863 17,862
Other assets 18,646 19,028
Deferred income taxes 29,497 25,297
--------- ---------
Total investments and other assets 66,006 62,187
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost 851,248 841,034
Construction in progress 8,548 6,319
Accumulated depreciation (296,779) (286,628)
--------- ---------
Total property, plant and equipment 563,017 560,725
--------- ---------
$ 787,973 $ 805,749
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 66,310 $ 73,796
Accrued expenses 34,709 39,966
Income taxes payable 2,025 2,178
--------- ---------
Total current liabilities 103,044 115,940
--------- ---------
LONG-TERM LIABILITIES:
Long-term debt 313,723 310,085
Other long-term liabilities 19,095 13,026
Postretirement benefits other than pensions 95,254 93,247
Retirement benefit plans 11,668 12,750
--------- ---------
Total long-term liabilities 439,740 429,108
--------- ---------
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 82,765 98,632
Minimum pension liability adjustment (14,884) (14,884)
--------- ---------
Total shareholders' equity 245,189 260,701
--------- ---------
$ 787,973 $ 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 Three Months Ended
----------------------------
March 30, March 31,
1997 1996
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(15,867) $ 3,436
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES:
Depreciation 10,151 3,385
Accretion of Senior Discount Notes 3,638 3,149
Deferred Income Taxes (8,174) -
CHANGE IN CURRENT ASSETS AND LIABILITIES:
Receivables (1,508) (77)
Inventories 3,233 6,138
Accounts payable (12,713) (9,618)
Other current accounts (5,816) (5,134)
Other, net 3,191 1,714
-------- --------
Net cash (used for) provided by operating activities (23,865) 2,993
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments (331) (19,033)
Sales and/or maturities of investments 6,690 109,865
Capital expenditures (2,902) (3,562)
Capital expenditures Modernization and Expansion Project (4,330) (43,295)
-------- --------
Net cash (used for) provided by investing activities (873) 43,975
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Other 355 (1)
-------- --------
Net cash provided by (used for) financing activities 355 (1)
-------- --------
Net (decrease) increase in cash and cash equivalents (24,383) 46,967
Cash and cash equivalents at beginning of period 33,224 53,043
-------- --------
Cash and cash equivalents at end of period $ 8,841 $100,010
======== ========
</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 March 30, 1997 and
March 31, 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.
First 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,
or 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
<PAGE> 6
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------
March 30, March 31,
1997 1996
--------- ---------
<S> <C> <C>
(in thousands, except for steel shipments)
Net Sales:
Steel Making:
Sales to unaffiliated customers $ 54,367 $ 57,714
Intersegment sales 24,754 28,769
--------- ---------
79,121 86,483
Steel Fabricating:
Sales to unaffiliated customers 70,964 68,151
Intersegment sales 298 422
--------- ---------
71,262 68,573
Eliminations (25,052) (29,191)
--------- ---------
Total $ 125,331 $ 125,865
========= =========
Income (loss) from Operations:
Steel Making $ (19,925) $ 294
Steel Fabricating 5,416 4,006
--------- ---------
Total $ (14,509) $ 4,300
========= =========
Depreciation:
Steel Making $ 9,224 $ 2,341
Steel Fabricating 922 963
Corporate 5 81
--------- ---------
Total $ 10,151 $ 3,385
========= =========
Capital Expenditures:
Steel Making $ 10,565 $ 61,230
Steel Fabricating 1,849 952
Corporate 45 10
--------- ---------
Total $ 12,459 $ 62,192
========= =========
Operating Data (in tons)
Steel Production (hot band) 191,878 162,375
Steel Shipments (flat roll) 164,309 156,421
</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
period (11,661,447 in 1997 and 11,607,211 in 1996).
6
<PAGE> 7
ACME METALS INCORPORATED
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
INVENTORIES:
Inventories are summarized as follows:
<TABLE>
<CAPTION>
March 30, December 29,
1997 1996
--------- ------------
<S> <C> <C>
Raw materials $10,725 $15,642
Semi-finished and finished products 46,916 46,493
Supplies 8,010 6,749
------- -------
$65,651 $68,884
======= =======
</TABLE>
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 $442.2 million at March 30, 1997. Total cash
payments for the Modernization and Expansion Project in the first quarter of
1997 were $4.3 million. Accrued payments to the general contractor at March
30, 1997 and December 29, 1996 include accounts payable of $17.2 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
March 30, 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 $9.8 million during the first three
months of 1997 and $9.1 million in the first three months of 1996; in these
periods cash payments for income taxes were $0.2 million. Cash transactions in
the first 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 March 30, 1997 and December
29, 1996, the Company had recorded reserves of approximately $0.2 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 March 30,
1997, the consolidated statements of operations for the three-month periods
ended March 30, 1997 and March 31, 1996, and the consolidated statements of
cash flows for the three-month periods ended March 30, 1997 and March 31, 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
May 7, 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 Three Months Ended For the Years Ended
-------------------------- -------------------
March 30, March 31, 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 95.4 86.0 86.7 81.3 82.5
Depreciation expense 8.0 2.5 3.2 2.5 2.9
--------- --------- -------- -------- --------
Gross profit (3.4) 11.5 10.1 16.2 14.6
Training/start-up--Modernization
and Expansion Project 0.0 1.2 2.0 0.0 0.0
Selling and administrative expense 8.1 6.9 7.1 6.8 6.4
Restructuring/Nonrecurring charge 0.0 0.0 0.0 0.0 1.8
--------- --------- -------- -------- --------
Operating income (loss) (11.5) 3.4 1.0 9.4 6.4
Interest (expense) income, net (7.6) 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 (6.5) 1.8 0.5 3.0 1.9
--------- --------- -------- -------- --------
Net income (loss) before extraordinary item (12.6) 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) (12.6)% 2.7% 0.5% 5.4% 3.3%
========= ========= ======== ======== ========
</TABLE>
First Quarter 1997 as compared to First Quarter 1996
NET SALES. Consolidated net sales of $125.3 million in the first quarter of
1997 were $0.5 million lower than first quarter 1996 net sales. A slight
increase in non-flat roll product selling prices was more than offset by an
unfavorable steel product mix as compared to the first quarter of 1996.
Steel Making Segment. Net sales for the Steel Making Segment were $79.1
million in the first quarter of 1997, a $7.4 million, or 9 percent, decrease
over last year's comparable period. Sales to unaffiliated customers decreased
6 percent to $54.4 million while intersegment sales of $24.8 million fell below
the first quarter 1996 level by nearly 14 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 first quarter of 1997
versus the first quarter of 1996. Sales of non-flat roll products totaled $8.0
million, which was $5.4 million lower than the prior year, due primarily to
decreased volume.
Steel Fabricating Segment. The Steel Fabricating Segment net sales of
$71.3 million in the first quarter of 1997 were $2.7 million, or 4 percent,
above the comparable period in the prior year. A slight decrease in selling
prices was more than offset by sales volume gains for all the fabricating
businesses.
12
<PAGE> 13
GROSS MARGIN. The gross margin for the first quarter of 1997 was a $4.3
million loss which was $18.8 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 quarter of 1997 the Steel Making Segment incurred
approximately $10.0 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 14.9 percent lower in
the first quarter of 1997 than the first quarter of 1996.
SELLING AND ADMINISTRATIVE EXPENSE. Selling and administrative expense was
$10.2 million in the first quarter of 1997, $1.5 million higher than the first
quarter 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
quarter of 1997 of $14.5 million was $18.8 million lower than the $4.3 million
of income recorded during the same period in 1996.
Steel Making Segment The Steel Making Segment recorded a $19.9 million
loss from operations in the first quarter of 1997, down $20.2 million from the
first quarter of 1996. The significant decline in earnings in the first
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. The Steel Making Segment
incurred approximately $10.0 million of production cost inefficiencies related
to the start-up of the new facility and phase-out of redundant operations.
Depreciation expense increased $6.9 million over the first 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 continues 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, while continuing to phase out its redundant ingot
operation. This transition has adversely affected the steel product mix during
the first quarter of 1997. Sales to external customers were 6 percent lower
than last year's comparable period, and sales to the Steel Fabricating Segment
were 14 percent lower than in the first quarter of 1996. Approximately 62
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 65 percent of shipments and gross profit in
the prior year.
Steel Fabricating Segment. The Steel Fabricating Segment's operating
income of $5.4 million for the first quarter of 1997 was $1.4 million higher
than in last year's comparable period, resulting primarily from an increase in
shipments and lower raw material costs. Partially offsetting the above
mentioned favorable items were slightly decreased selling prices for strapping
products.
13
<PAGE> 14
INTEREST INCOME / EXPENSE. Interest income for the first quarter of 1997
totaled $0.4 million, falling below the first quarter of 1996 by $1.8 million.
The decrease in interest income is the result of reduced on-hand cash and
investment balances resulting from payments for the construction of the
Modernization and Expansion Project and increased operating requirements.
Interest expense of $9.9 million for the first quarter of 1997 increased as
compared to the same period of the prior year by $9.2 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 first quarter of 1996,
interest costs of $8.3 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.
INCOME TAXES. Income tax benefits recorded in the first quarter of 1997
totaled $8.2 million based on an effective tax rate of 34 percent as compared
to $2.3 million of tax expense in the first quarter of 1996, based on a 40
percent effective tax rate.
NET INCOME (LOSS). The Company recorded a loss of $15.9 million, or $1.36 per
share in the first quarter of 1997 versus income of $3.4 million, or $0.30 per
share, recorded in the first 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 three-month periods (11,661,447
in 1997 and 11,607,211 in 1996).
LIQUIDITY AND CAPITAL RESOURCES
At the end of the first quarter, the Company's cash and cash equivalents
balance was $8.8 million, down $24.4 million from the December 29, 1996
balance. At March 30, 1997, the Company had total liquid investments of $14.3
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 expects to finance
its operating and investing activities principally 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 early in the second quarter of 1997 and will continue to borrow and
repay amounts from time to time as conditions warrant.
Operating activities used $23.9 million of cash in the first quarter 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 $0.9 million as the sale of short-term investments
(net of purchases) of $6.4 million was more than offset by $7.2 million of
capital expenditures, primarily related to the Modernization and Expansion
Project.
Capital expenditures totaled $12.5 million in the first quarter of 1997.
(Note: Capital expenditures include accounts payable of $17.2 million at March
30, 1997 and $12.0 million at December 29, 1996.) Total capital expenditures
for the Modernization and Expansion Project were $9.6 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 $2.9 million of capital expenditures were primarily for the upgrade
of the Company's management
14
<PAGE> 15
information systems and to a lesser extent the replacement and rehabilitation
of various production facilities.
At March 30, 1997, the Company's long-term indebtedness was $313.7 million.
Long-term debt increased $3.6 million in the first quarter of 1997 due to the
accretion of the Senior Secured Discount Notes.
Working capital of $55.9 million at the end of the first quarter of 1997 which
was $11.0 million lower than the year-end 1996 balance, reflects current
operating requirements, a cash interest payment, and payments made on the
Modernization and Expansion Project. The Company currently has a Working
Capital Facility, of which approximately $71.0 million was available at March
30, 1997 as determined by a borrowings base calculation. The available
borrowing base is reduced by an amount equivalent to borrowings against the
Working Capital Facility. The Working Capital Facility agreement, which
provides for borrowings up to $80.0 million based on collateral, expires in
August 1999. At March 30, 1997, the Company's ratio of debt to capitalization
was .56 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, while decommissioning of redundant existing
facilities is expected to be complete by mid-year 1997. During the first
quarter of 1997, the Company incurred approximately $10.0 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 $6.0 million of depreciation expense related to the new
facility. In the first quarter, more than 50 percent of flat rolled production
came from the new facility versus 17 percent in the fourth quarter of 1996.
Shipments from the new facility accounted for 37 percent of first quarter
shipments, as compared to 5 percent in 1996's fourth 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 production and shipments thus far consisted largely of low- and
medium- carbon grades.
OUTLOOK. In the second quarter 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. During the remainder of the transition period the Company
will continue to experience production inefficiencies related to the start-up
of the new facility as well as additional costs of decommissioning the
redundant operations. In the second quarter of 1997, the Company expects to
incur approximately $5.0 million of additional production cost inefficiencies
for an estimated total of $15.0 million in the first half of 1997, assuming the
ramp-up of the new facility as well as the decommissioning of redundant
operations are achieved in a manner consistent with the Company's expectations.
The Company expects to recognize a loss in the second quarter of 1997. The
results will continue to be adversely impacted by production inefficiencies
incurred relating to the start-up of the Modernization and Expansion Project
and the decommissioning costs of the existing steel ingot and rolling mill
operations. Steel Fabricating Segment earnings are expected to remain
relatively steady.
15
<PAGE> 16
When the Modernization and Expansion Project reaches full production levels it
is expected to reduce net cash manufacturing costs by approximately $70 per
ton, increase shipping capability and broaden the range of products while
improving the range and quality of all steel products and products it furnishes
to the Steel Fabricating Segment companies.
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% of the contract which was reduced from 30% 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, forwarding 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, 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.
16
<PAGE> 17
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1997 Annual Meeting of Shareholders was held on April 24, 1997.
In connection with the meeting, proxies were solicited pursuant to the
Securities Exchange Act. The following are the voting results on proposals
considered and voted upon at the meeting, all of which are described in the
Company's Proxy Statement dated March 26, 1997.
1. The four nominees for election as Class II Directors listed in the
Proxy Statement were elected:
NAME VOTES FOR VOTES WITHHELD
------------------ --------- --------------
Stephen D. Bennett 8,947,791 55,052
Buddy W. Davis 8,942,354 60,489
Andrew R. Laidlaw 8,820,335 182,508
Frank A. LePage 8,945,926 56,917
2. The proposal to adopt the Acme Metals Incorporated 1997 Non-Employee
Directors' Stock Option Plan was passed. (8,786,182 votes
FOR, 40,882 votes ABSTAINED, 175,779 votes AGAINST)
3. The proposal to approve the Amendment and Restatement of the Acme
Metals Incorporated 1994 Executive Incentive Compensation Plan was
passed. (8,410,215 votes FOR, 42,970 votes ABSTAINED, 115,399 votes
AGAINST)
4. The proposal to ratify the appointment of Price Waterhouse LLP as
the Company's independent accountants for the fiscal year 1997 was
passed. (8,971,671 votes FOR, 13,688 votes ABSTAINED, 17,484 votes
AGAINST)
ITEM 6. EXHIBITS
(a) Exhibit 15 - Letter regarding unaudited interim financial information
Exhibit 27 - Financial data schedule
17
<PAGE> 18
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: May 12, 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)
18
<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 May 7,
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
May 7, 1997
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED CONSOLIDATED BALANCE SHEETS AT MARCH 30, 1997 AND UNAUDITED
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 30, 1997
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> MAR-30-1997
<CASH> 8,841
<SECURITIES> 5,458
<RECEIVABLES> 55,413
<ALLOWANCES> 1,403
<INVENTORY> 65,651
<CURRENT-ASSETS> 158,950
<PP&E> 563,017
<DEPRECIATION> 296,779
<TOTAL-ASSETS> 787,973
<CURRENT-LIABILITIES> 103,044
<BONDS> 313,723
0
0
<COMMON> 11,631
<OTHER-SE> 233,558
<TOTAL-LIABILITY-AND-EQUITY> 787,973
<SALES> 125,331
<TOTAL-REVENUES> 125,331
<CGS> 129,648
<TOTAL-COSTS> 139,840
<OTHER-EXPENSES> 15
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,870
<INCOME-PRETAX> (24,041)
<INCOME-TAX> (8,174)
<INCOME-CONTINUING> (15,867)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,867)
<EPS-PRIMARY> (1.36)
<EPS-DILUTED> 0
</TABLE>
