FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 1996
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________________ to
______________________.
Commission File No. 0-22416
KENTUCKY ELECTRIC STEEL, INC.
(Exact name of Registrant as specified in its charter)
Delaware 61-
1244541 (State or other jurisdiction of
(I.R.S. Employer incorporation or organization)
Identification
Number)
P. O. Box 3500, Ashland, Kentucky 41105-3500
(Address of principal executive office, Zip Code)
(606) 929-1222
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES x NO
The number of shares outstanding of each of the issuer's classes of common
stock, as of August 7, 1996, is as follows:
4,722,099 shares of voting common stock, par value $.01 per share.
<PAGE>
KENTUCKY ELECTRIC STEEL, INC.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Balance Sheets ..............................
3
Condensed Statements of Operations ....................
4
Condensed Statements of Cash Flows ....................
5
Notes to Condensed Financial Statements ...............
6-7
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations .................
8-11
PART II. OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8-K ......................
12
SIGNATURES ...........................................
13
<PAGE>
<TABLE>
KENTUCKY ELECTRIC STEEL, INC.
CONDENSED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
June 29, Sept. 30,
1996 1995
<C> <C>
<S> ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 125 $ 327
Accounts receivable, less allowance for doubtful
accounts of $355 at June 29, 1996 and $625
at September 30, 1995 13,857 12,928
Inventories 15,416 18,205
Operating supplies and other current assets 5,211 5,273
Refundable income taxes 899 452
Deferred tax assets 196 193
------- -------
Total current assets 35,704 37,378
------- -------
PROPERTY, PLANT AND EQUIPMENT
Land and buildings 4,275 3,766
Machinery and equipment 27,685 25,980
Construction in progress 9,482 4,093
Less - accumulated depreciation (7,148) (5,673)
------- -------
Net property, plant and equipment 34,294 28,166
------- -------
DEFERRED TAX ASSETS 5,905 6,881
------- -------
OTHER ASSETS 546 200
------- -------
Total assets $ 76,449 $ 72,625
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Advances on line of credit $ 4,382 $ 11,131
Accounts payable 7,017 7,295
Capital expenditure payable 3,368 3,076
Accrued liabilities 2,856 3,713
Current portion of long-term debt 125 1,839
------- -------
Total current liabilities 17,748 27,054
------- -------
LONG-TERM DEBT 20,000 7,287
------- -------
OTHER LIABILITIES 343 187
------- -------
Total liabilities 38,091 34,528
------- -------
SHAREHOLDERS' EQUITY
Preferred stock, $.01 par value, 1,000,000
shares authorized, no shares issued - -
Common stock, $.01 par value, 15,000,000
shares authorized, 4,974,099 shares
issued, respectively 50 50
Additional paid-in capital 15,710 15,710
Less treasury stock - 187,500 and 100,000
shares at cost, respectively (1,512) (869)
Deferred compensation (492) (672)
Retained earnings 24,602 23,878
------- -------
Total shareholders' equity 38,358 38,097
------- -------
Total liabilities and shareholders' equity $ 76,449 $ 72,625
<FN>
See notes to condensed financial statements
</TABLE>
<TABLE>
KENTUCKY ELECTRIC STEEL, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
June 29, July 1, June 29, July 1,
1996 1995 1996 1995
<C> <C> <C> <C>
<S>
NET SALES $ 26,483 $ 27,910 $ 74,796 $ 83,887
COST OF GOODS SOLD 23,814 23,720 67,104 71,013
------- ------- ------- -------
Gross Profit 2,669 4,190 7,692 12,874
SELLING AND ADMINISTRATIVE EXPENSES 1,819 1,931 5,806 5,772
------- ------- ------- -------
Operating income 850 2,259 1,886 7,102
INTEREST INCOME AND OTHER 5 12 24 39
INTEREST EXPENSE (343) (150) (1,116) (344)
GAIN ON INVOLUNTARY CONVERSION
OF EQUIPMENT - - 369 -
------- ------- ------- -------
Income before income taxes 512 2,121 1,163 6,797
PROVISION FOR INCOME TAXES 193 811 439 2,564
------- ------- ------- -------
Net income $ 319 $ 1,310 $ 724 $ 4,233
NET INCOME PER COMMON SHARE $ .07 $ .27 $ .15 $ .86
WEIGHTED AVERAGE SHARES OUTSTANDING 4,790,885 4,883,414 4,831,054 4,916,110
<FN>
See notes to condensed financial statements
</TABLE>
<TABLE>
KENTUCKY ELECTRIC STEEL, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
June 29, July 1,
1996 1995
<C> <C>
<S>
Cash Flows From Operating Activities:
Net income $ 724 $ 4,233
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 1,990 868
Gain on involuntary conversion of equipment (369) -
Change in deferred taxes 976 1,796
Change in other (259) (57)
Change in current assets and current
liabilities:
Accounts receivable (929) (1,697)
Inventories 2,789 90
Operating supplies and other
current assets 62 (765)
Deferred tax assets (3) (96)
Accounts payable (278) 1,550
Accrued liabilities (857) (344)
Accrued income taxes refundable/payable (447) 237
------- -------
Net cash flows from operating activities 3,399 5,815
------- -------
Cash Flows From Investing Activities:
Proceeds from involuntary conversion of equipment 912 -
Capital expenditures (8,412) (14,209)
Increase in capital expenditure payable 292 1,676
------- -------
Net cash flows from investing activities (7,208) (12,533)
------- -------
Cash Flows From Financing Activities:
Net advances (repayments) on line of credit (6,749) 7,702
Repayments on long-term debt (9,001) (1,411)
Proceeds from long-term debt borrowings 20,000 -
Purchases of treasury stock (643) (869)
------- -------
Net cash flows from financing activities 3,607 5,422
------- -------
Net decrease in cash and
cash equivalents (202) (1,296)
Cash and Cash Equivalents at Beginning of Period 327 1,500
------- -------
Cash and Cash Equivalents at End of Period $ 125 $ 204
Interest Paid, net of amount capitalized $ 955 $ 271
Income Taxes Paid $ 297 $ 1,277
<FN>
See notes to condensed financial statements
</TABLE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
KENTUCKY ELECTRIC STEEL, INC
(1) Basis of Presentation
The accompanying unaudited condensed financial statements of Kentucky
Electric Steel, Inc. (the Company) have been prepared in accordance with
generally accepted accounting principles for interim financial information
and the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the nine-month period ended June
29, 1996, are not necessarily indicative of the results that may be expected
for the year ended September 28, 1996. For further information, refer to
the financial statements and footnotes thereto included in the Company's
annual report on Form 10-K for the year ended September 30, 1995.
Net income per common share is calculated based on 4,790,885 and
4,883,414 weighted average number of common shares outstanding during the
quarters ended June 29, 1996, and July 1, 1995, respectively. Net income
per common share is calculated based on 4,831,054 and 4,916,110 weighted
average number of shares outstanding for the nine months ended June 29, 1996
and July 1, 1995, respectively.
(2) Accounting Policies
Fiscal Year End
The Company's fiscal year ends on the last Saturday of September. The
fiscal year normally consists of fifty-two weeks, however, the fiscal year
ended September 30, 1995 had fifty-three weeks. The first nine months of
1996 consists of thirty-nine weeks as compared to forty weeks for the first
nine months of 1995.
Reclassifications
Certain reclassifications have been made to prior year income statement
data in order to conform with the fiscal 1996 presentation.
Property, Plant, Equipment and Depreciation
Property, plant and equipment is recorded at cost, less accumulated
depreciation. For financial reporting purposes, depreciation is provided on
the straight-line method over the estimated useful lives of the assets,
generally 3 to 12 years for machinery and equipment and 15 to 30 years for
buildings and improvements. Depreciation for income tax purposes is
computed using accelerated methods. Expenditures for maintenance and
repairs are charged to expense as incurred. Expenditures for equipment
renewals which extend the useful life of any asset are capitalized.
The Company capitalizes interest costs as part of the historical cost of
constructing major capital assets. Interest costs of $75,000 and $167,000
were capitalized for the quarters ended June 29, 1996 and July 1, 1995,
respectively. Interest costs of $159,000 and $474,000 were capitalized for
the nine months ended June 29, 1996 and July 1, 1995, respectively.
(3) Inventories
Inventories at June 29, 1996 and September 30, 1995 consist of the
following ($000's):]
<TABLE>
<CAPTION>
June 29, September 30,
1996 1995
<C> <C>
<S>
Raw materials $ 2,657 $ 3,621
Semi-finished and finished goods 12,759 14,584
Total inventories $ 15,416 $ 18,205
</TABLE>
(4) Commitments and Contingencies
The Company has various commitments for the purchase of materials,
supplies and energy arising in the ordinary course of business.
The Company is subject to various claims, lawsuits and administrative
proceedings arising in the ordinary course of business with respect to
commercial, product liability and other matters, which seek remedies or
damages. The Company believes that any liability that may ultimately be
determined will not have a material effect on its financial position or
results of operations.
The Company generates both hazardous wastes and non-hazardous wastes
which are subject to various governmental regulations. Estimated costs to
be incurred in connection with environmental matters are accrued when the
prospect of incurring costs for testing or remedial action is deemed
probable. The Company is not aware of any material asserted or unasserted
environmental claims against the Company and no accruals for such matters
have been recorded in the accompanying balance sheets. However, discovery
of unknown conditions could result in the recording of accruals in the
periods in which they become known.
<PAGE>
KENTUCKY ELECTRIC STEEL, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General. The Company manufactures special bar quality alloy and carbon
steel bar flats to precise customer specifications for sale in a variety of
niche markets. Its primary markets are manufacturers of leaf-spring
suspensions, cold drawn bar converters, flat bed truck trailers, and steel
service centers.
Net Sales. Net sales decreased $1.4 million (5.1%) in the third quarter
of fiscal 1996 to $26.5 million, as compared to $27.9 million for the third
quarter of fiscal 1995. The decrease in net sales is due to a 2.8% decrease
in shipments and a decrease in average selling price during the third
quarter of fiscal 1996 as compared to the third quarter of fiscal 1995. The
decrease in shipments reflects softening demand in selected markets and lost
productivity due to trial production of the new product sizes through 12" in
width. The decrease in average selling price is primarily attributable to
price reductions on selected products reflecting market conditions and
pricing pressures.
Net sales for the nine months ended June 29, 1996 decreased $9.1 million
(10.8%) to $74.8 million, as compared to $83.9 million for the nine months
ended July 1, 1995. The decrease in net sales is attributed to an 11.2%
decrease in shipments. The decline in shipments was due to customer
inventory adjustments and loss of production as a result of the caster fire
in the second quarter of fiscal 1996 combined with softening demand in
several of our markets. Due to improvement in product mix, the average net
selling price per ton has remained relatively flat for the nine months ended
June 29, 1996 as compared to the nine months ended July 1, 1995.
Cost of Goods Sold. Cost of goods sold increased $94,000 (.4%) in the
third quarter of fiscal 1996 to $23.8 million, as compared to $23.7 million
for the third quarter of fiscal 1995. As a percentage of net sales, cost of
goods sold increased from 85.0% for the three months ended July 1, 1995 to
89.9% for the three months ended June 29, 1996. This increase reflects the
decline in the average selling price and the increase in per ton costs. The
reinstallation of the wider strand damaged by the caster fire, trial
production of the new wide products and additional depreciation expense
increased per ton costs. A large part of the increase in costs resulted from
the continued purchase of billets to rebuild our billet inventory and
prepare for the start-up of the new ladle metallurgy facility. The
additional depreciation expense is the result of the equipment placed in
service during the latter part of the third fiscal quarter of 1995.
Cost of goods sold for the nine months ended June 29, 1996 decreased
$3.9 million (5.5%) to $67.1 million as compared to $71.0 million for the
nine months ended July 1, 1995. As a percentage of net sales, cost of goods
sold increased from 84.7% for the nine months ended July 1, 1995 to 89.7%
for the nine months ended June 29, 1996. The increase in cost of goods sold
as a percentage of net sales was primarily due to an increase in conversion
costs and additional depreciation expense. The problems associated with the
start up of the new equipment and the effect of February's caster fire
negatively impacted productivity and increased per ton conversion cost. The
increase in conversion
cost was also related to additional depreciation as a result of the
equipment placed in service during the latter part of the third fiscal
quarter of 1995.
Gross Profit. As a result of the above, gross profit for the third
quarter of fiscal 1996 decreased by $1.5 million (36.3%) to $2.7 million
from $4.2 million for the third fiscal quarter of 1995. As a percentage of
net sales, gross profit decreased from 15.0% for the three months ended
July 1, 1995 to 10.1% for the three months ended June 29, 1996.
As a result of the above, gross profit for the nine months ended June
29, 1996 decreased $5.2 million (40.3%) to $7.7 million as compared to $12.9
million for the nine months ended July 1, 1995. As a percentage of net
sales, gross profit decreased from 15.3% for the nine months ended July 1,
1995 to 10.3% for the nine months ended June 29, 1996.
Selling and Administrative Expenses. Selling and administrative
expenses include salaries and benefits, corporate overhead, insurance, sales
commissions and other expenses incurred in the executive, sales and
marketing, shipping, personnel, and other administrative departments.
Selling and administrative expenses decreased by approximately $112,000 for
the three months ended June 29, 1996 as compared to the comparable period in
fiscal 1995. As a percentage of net sales, such expenses were 6.9% for the
three months ended June 29, 1996 and for the three months ended July 1,
1995. The decrease in selling and administrative expenses is primarily the
result of a decrease in health benefit costs and a decrease in incentive
compensation (due to the decrease in pre-tax income) which have been
partially offset due to an increase in the provision for uncollectible
accounts.
Selling and administrative expenses increased by $34,000 for the nine
months ended June 29, 1996 as compared to the comparable period for fiscal
1995. As a percentage of net sales, such expenses increased from 6.9% for
the nine months ended July 1, 1995 to 7.8% for the nine months ended June
29, 1996. The selling and administrative expenses reflect an increase in
the provision for uncollectible accounts which has been offset by a decrease
in incentive compensation (due to the decrease in pre-tax income) and a
decrease in shipping wages (due to reorganization of the Shipping
Department, in connection with the completion of the capital expansion
plan). The increase in selling and administrative expenses as a percentage
of net sales was primarily attributed to the decrease in shipments,
resulting in lower net sales for the nine months ended June 29, 1996.
Operating Income. For the reasons described above, operating income
decreased by $1.4 million (62.4%) from $2.3 million in the third quarter of
fiscal 1995 to $.9 million in the third quarter of fiscal 1996. As a
percentage of net sales, operating income decreased from 8.1% in the third
quarter of 1995 to 3.2% in the third quarter of 1996.
Operating income for the nine months ended June 29, 1996 decreased by
$5.2 million (73.4%) to $1.9 million from $7.1 million for the nine months
ended July 1, 1995. As a percentage of net sales, operating income
decreased from 8.5% for the nine months ended July 1, 1995 to 2.5% for the
nine months ended June 29, 1996.
Interest Expense. Interest expense increased by $193,000 for the three
months ended June 29, 1996, from $150,000 for the third quarter of fiscal
1995 to $343,000 for the third quarter of fiscal 1996, net of interest
capitalized of $167,000 and $75,000, respectively. Interest expense for the
nine months ended June 29, 1996 increased $772,000 from $344,000 for the
nine months ended July 1, 1995 to $1.1 million for the nine months ended
June 29, 1996, net of interest capitalized of $474,000 and $159,000,
respectively. These increases in interest expense were attributed to the
additional debt incurred in financing Project '94 and other capital
expenditures, and the reduction in capitalized interest due to the
completion and start-up of Project '94.
Gain on Involuntary Conversion of Equipment. As a result of the caster
fire, the Company received insurance proceeds of $912,000 for the
replacement cost of the equipment destroyed which had a net book value of
$543,000. The excess of the replacement cost over the net book value of the
equipment destroyed resulted in a gain of approximately $369,000.
Net Income. As a result of the above, net income decreased by $1.0
million (75.6%) for the three months ended June 29, 1996 from $1.3 million
for the third quarter of fiscal 1995 to $319,000 for the third quarter of
fiscal 1996.
As a result of the above, net income for the nine months ended June 29,
1996 decreased $3.5 million (82.9%) from $4.2 million for the nine months
ended July 1, 1995 to $.7 million, for the nine months ended June 29, 1996.
Liquidity and Capital Resources.
The cash flows provided from operating activities were $3.4 million for
the first nine months of fiscal 1996 as compared to $5.8 million for the
first nine months of fiscal 1995. The first nine months of fiscal 1996
operating cash flows reflect the lower earnings which have partially been
offset by additional depreciation and a decrease in inventories. The cash
flows used by investing activities consist of capital expenditures of $8.4
million and $14.2 million for the first nine months of fiscal 1996 and 1995,
respectively. These amounts were offset by increases in construction
expenditures payable of $.3 million and $1.7 million, respectively. Cash
flows from investing activities for the nine months ended June 29, 1996 also
include the proceeds from the involuntary conversion of equipment of $.9
million.
The cash flows from financing activities were $3.6 million for the first
nine months of fiscal 1996 as compared to $5.4 million for the first nine
months of fiscal 1995. The cash flows from financing activities of $3.6
million for fiscal 1996 reflect net repayments of $6.8 million on the
Company's line of credit, $9.0 million repayment on long-term debt, and $.6
million for purchase of treasury stock; however, these amounts have been
offset with the proceeds of $20.0 million of new long-term debt. The cash
flows from financing activities of $5.4 million for the first nine months of
fiscal 1995 reflect the $7.7 million of net advances under the Company's
line of credit, offset by $1.4 million repayment on long-term debt and $.9
million for purchase of treasury stock.
Working capital at June 29, 1996 $18.0 million as compared to $10.3
million at September 30, 1995, and the current ratio was 2.0 to 1.0 as
compared to 1.4 to 1.0. The increase in working capital and current ratio
is primarily attributed to the Company refinancing its debt through the
private placement of $20.0 million in unsecured notes, which require no
principal payments for five years. The remaining proceeds from the issuance
were utilized to pay down the Company's bank credit facility. The change in
working capital and current ratio can also be attributed to the reduction in
inventories.
The Company's primary ongoing cash requirements are for the final
installments on Project '94, which expanded the Company's casting, rolling,
and finishing capacity and the $8.0 million Ladle Metallurgy Project to
expand the melting capacity. The two sources for the Company's liquidity
are internally generated funds and its $24.5 million bank credit facility.
The Company had $4.4 million in borrowings outstanding as of June 29, 1996
under that facility. The Company believes that the bank credit facility and
internally generated funds will be sufficient to finance the capital
expansion projects and for its ongoing cash needs.
Outlook
The ladle metallurgy facility installation continues to progress well
and start up operations will begin on schedule in August. This facility
will remove the refining cycle from the electric arc furnace thus increasing
total melting capacity. The ladle metallurgy facility is expected to be
brought to full operation over several months to assure that our high
quality standards are maintained.
The Company's new product sizes are being well received by the
marketplace with shipments of new sizes to 27 customers and additional trial
orders for other applications. However, the fourth quarter will be another
difficult quarter due to current market conditions for our existing product
lines and the continued trial production of new products.
Certain Risk Factors
The matters discussed or incorporated by reference in this Report on
Form 10-Q that are forward-looking statements (as defined in the Private
Securities Litigation Reform Act of 1995) involve risks and uncertainities.
These risks and uncertainities include, but are not limited to, the reliance
on truck and utility vehicle industry; excess industry capacity; product
demand and industry pricing; volatility of raw material costs, especially
steel scrap; intense foreign and domestic competition; management's estimate
of niche market data; the cyclical and capital intensive nature of the
industry; and cost of compliance with environmental regulations. These
risks and uncertainities could cause actual results of the Company to differ
materially from those projected or implied by such forward-looking
statements.
<PAGE>
PART II. - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
A) Exhibits
27 - Financial Data Schedule
B) Reports on Form 8-K - None
<PAGE>
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.
DATED: August 7, 1996 KENTUCKY ELECTRIC STEEL, INC.
(Registrant)
William J. Jessie
William J. Jessie, Vice President,
Secretary, Treasurer, and
Principal Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from Kentucky
Electric Steel, Inc.'s condensed financial statements as of and for the nine
month period ended June 29, 1996 included in this Company's quarterly report
on Form 10-Q and is qualified in its entirety by reference to such condensed
financial statements.
</LEGEND>
<CIK> 0000910394
<NAME> KENTUCKY ELECTRIC STEEL, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-28-1996
<PERIOD-START> OCT-1-1995
<PERIOD-END> JUN-29-1996
<EXCHANGE-RATE> 1
<CASH> 125
<SECURITIES> 0
<RECEIVABLES> 14,212
<ALLOWANCES> 355
<INVENTORY> 15,416
<CURRENT-ASSETS> 35,704
<PP&E> 41,442
<DEPRECIATION> 7,148
<TOTAL-ASSETS> 76,449
<CURRENT-LIABILITIES> 17,748
<BONDS> 20,000
<COMMON> 50
0
0
<OTHER-SE> 38,308
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</TABLE>
