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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark one)
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 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 number 1-11126-60
J&L SPECIALTY STEEL, INC.
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 25-1564186
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. BOX 3373
ONE PPG PLACE, PITTSBURGH, PA 15230-3373
(Address of principal executive offices) (Zip code)
412-338-1600
(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 (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 [ ]
Number of shares of Common Stock outstanding as of October 31, 1996: 38,670,000
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J&L SPECIALTY STEEL, INC.
SEC FORM 10-Q
Quarter Ended September 30, 1996
Index
PART I. - FINANCIAL INFORMATION Page No.
Item 1. Financial Statements
Condensed Consolidated Statements of Income 3
Condensed Consolidated Balance Sheets 5
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
Signature 12
2
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PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
J&L SPECIALTY STEEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------------
1996 1995
-------- --------
<S> <C> <C>
Trade sales, net $135,703 $204,036
Sales to affiliates, net 11,113 16,936
-------- --------
Total sales, net 146,816 220,972
Cost of products sold 125,980 168,154
Depreciation and amortization expenses 5,693 5,645
-------- --------
Gross profit 15,143 47,173
Selling, general and administrative expenses 4,742 5,553
Research and technology expense 1,488 1,027
-------- --------
Operating income 8,913 40,593
Interest income (33) (915)
Interest expense 971 2,006
Other (income) expense, net (21) 651
-------- --------
Income before income taxes 7,996 38,851
Income taxes 4,162 16,226
-------- --------
Net income $ 3,834 $ 22,625
======== ========
Per share data:
Net income per common share $ .10 $ .59
======== ========
Dividends declared per common share $ .10 $ .09
======== ========
Weighted average number of common
shares outstanding 38,670,000 38,670,000
</TABLE>
The accompanying notes are an integral part of these statements.
3
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J&L SPECIALTY STEEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1996 1995
-------- --------
<S> <C> <C>
Trade sales, net $457,358 $647,742
Sales to affiliates, net 38,088 56,316
-------- --------
Total sales, net 495,446 704,058
Cost of products sold 414,258 537,423
Depreciation and amortization expenses 17,077 16,850
-------- --------
Gross profit 64,111 149,785
Selling, general and administrative expenses 14,263 14,991
Research and technology expense 4,584 3,007
-------- --------
Operating income 45,264 131,787
Interest income (227) (2,191)
Interest expense 3,206 7,293
Other expense, net 398 1,725
-------- --------
Income before income taxes 41,887 124,960
Income taxes 19,598 53,049
-------- --------
Net income $ 22,289 $ 71,911
======== ========
Per share data:
Net income per common share $ .58 $ 1.86
======== ========
Dividends declared per common share $ .30 $ .27
======== ========
Weighted average number of common
shares outstanding 38,670,000 38,670,000
</TABLE>
The accompanying notes are an integral part of these statements.
4
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J&L SPECIALTY STEEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Sept. 30, Dec. 31,
ASSETS 1996 1995
----------- --------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,108 $ 35,428
Trade receivables, less allowances of $4,373 and $4,336, respectively 59,045 64,575
Trade receivables from affiliates 7,958 7,523
Inventories 133,238 161,787
Deferred income taxes 8,046 9,326
Prepaid expenses and other current assets 644 1,192
-------- --------
Total current assets 210,039 279,831
-------- --------
Property, plant and equipment, net 278,841 217,060
Goodwill, net of accumulated amortization of $66,412 and
$61,066, respectively 239,991 245,337
Other noncurrent assets 13,315 11,590
-------- --------
Total assets $742,186 $753,818
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Common stock dividend payable $ 3,867 $ 3,480
Short-term debt 8,290 402
Trade accounts payable 51,979 86,976
Construction accounts payable 24,925 24,246
Accrued employee compensation and benefits 20,605 30,741
Accrued income taxes 402 3,882
Reserve for claims and allowances 6,220 9,445
Other accrued liabilities 9,486 7,635
-------- --------
Total current liabilities 125,774 166,807
-------- --------
Long-term debt 157,844 147,620
Postretirement benefits liability 49,766 46,786
Other noncurrent liabilities 16,602 12,380
Shareholders' equity:
Preferred stock (par value $.01 per share; 2,000,000 shares
authorized, no shares issued and outstanding) -- --
Common stock (par value $.01 per share; 100,000,000 shares
authorized, 38,670,000 shares issued and outstanding) 387 387
Additional paid-in capital 307,949 306,662
Retained earnings 83,864 73,176
-------- --------
Total shareholders' equity 392,200 380,225
-------- --------
Total liabilities and shareholders' equity $742,186 $753,818
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
5
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J&L SPECIALTY STEEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1996 1995
-------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by operating activities $ 32,101 $ 142,519
-------- ---------
Cash flows from investing activities:
Capital expenditures (73,319) (73,675)
-------- ---------
Net cash used by investing activities (73,319) (73,675)
-------- ---------
Cash flows from financing activities:
Borrowings on lines of credit, net 7,700 --
Borrowings of industrial development notes, net 2,912 (47)
Borrowing on revolving credit facility 7,500 --
Borrowing of long-term bank loan -- 125,000
Repayment of long-term bank loan -- (145,000)
Common stock dividends paid (11,214) (10,440)
-------- ---------
Net cash provided (used) by financing activities 6,898 (30,487)
-------- ---------
Net (decrease) increase in cash and cash equivalents (34,320) 38,357
Cash and cash equivalents at beginning of period 35,428 28,219
-------- ---------
Cash and cash equivalents at end of period $ 1,108 $ 66,576
======== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 6,518 $ 8,717
Income taxes 22,201 59,334
</TABLE>
The accompanying notes are an integral part of these statements.
6
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J&L SPECIALTY STEEL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars In Thousands, Except Per Share Data)
(Unaudited)
NOTE 1 FINANCIAL STATEMENTS
The information contained in these financial statements and notes for the
quarter ended September 30, 1996 should be read in conjunction with the audited
financial statements and notes contained in the J&L Specialty Steel, Inc.
Annual Report and Form 10-K for the year ended December 31, 1995. The
accompanying unaudited Condensed Consolidated Financial Statements have been
prepared in accordance with generally accepted accounting principles and the
rules and regulations of the Securities and Exchange Commission. The condensed
interim statements do not include all of the information and footnotes required
for complete financial statements. It is management's opinion that all
adjustments (including all normal recurring adjustments) considered necessary
for a fair presentation have been made; however, results for the interim period
are not necessarily indicative of results to be expected for the full year.
Certain amounts in the prior year financial statements have been reclassified
to conform to the current year presentation.
NOTE 2 INVENTORIES
Inventories are stated at the lower of cost or market. Raw materials in all
levels of inventory are valued using the last in, first out (LIFO) method. The
remaining costs of work-in-process and finished goods inventories are valued
using the specific identification cost method.
<TABLE>
<CAPTION>
Inventories consisted of the following: September 30, December 31,
1996 1995
------------- -----------
<S> <C> <C>
Raw materials $ 12,633 $ 29,559
Work-in-process 98,153 157,236
Finished goods 42,905 22,426
-------- --------
Total inventories at current cost 153,691 209,221
Less allowance to reduce current cost values to LIFO basis (20,453) (47,434)
-------- --------
Total inventories $133,238 $161,787
======== ========
</TABLE>
7
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following management's discussion and analysis of financial condition
provides information with respect to the results of operations of the Company
for the three- and nine-month periods ended September 30, 1996 and 1995,
respectively. This discussion should be read in connection with the information
in the Condensed Consolidated Financial Statements and the notes pertaining
thereto.
RESULTS OF OPERATIONS
Net sales decreased 33.6% to $146.8 million in the third quarter of 1996
compared with $221.0 million in the third quarter of 1995. Net sales in the
first nine months of 1996 decreased 29.6% to $495.4 million compared with
$704.1 million in the 1995 period. The decreases in net sales were due to lower
selling prices and lower shipments. Through the first eight months of 1996,
stainless steel sheet and strip imports were up 14.0% compared to the same
period a year ago due to a firming dollar and excess capacity in Europe and the
Far East. Falling import prices have continued to place pressure on domestic
prices and were a major cause of the Company's lower reported earnings. Selling
prices for the current periods were also negatively impacted by lower raw
material surcharges than were realized in the year-ago periods.
Shipments totaling 74,969 tons in the third quarter of 1996 were 16.0% lower
than in the 1995 quarter. Shipments in the nine-month period were 234,942 tons
or 21.5% lower than in the record 1995 nine-month period. The lower shipments in
both 1996 periods were the result of a highly competitive domestic marketplace
significantly influenced by the 14.0% increase in imports of stainless steel
sheet and strip.
Cost of products sold as a percentage of net sales increased to 85.8% for the
third quarter of 1996 from 76.1% in the 1995 third quarter and increased to
83.6% for the 1996 nine-month period from 76.3% in the 1995 nine-month period.
The higher cost of products sold as a percentage of net sales in both the
three- and nine-month periods was largely due to the significantly lower selling
prices and shipments during the 1996 periods. Lower raw material costs partially
offset the effect of these lower selling prices.
Selling, general and administrative expenses decreased 14.6% and 4.9%,
respectively, during the three- and nine-month periods. This decrease primarily
resulted from a reduction of the stock appreciation rights accrued liability,
somewhat offset by higher engineering and other employee compensation costs.
Research and technology expense increased $.5 million and $1.6 million,
respectively, during the three- and nine-month periods. These increases were
due to a scheduled increase in the cost of services provided under the
Company's Research and Technology Agreement with Ugine, a division of Usinor
Sacilor.
8
<PAGE> 9
The significant decreases in interest income for the third quarter and the
first nine months of 1996 from the comparable periods of 1995 were the result
of lower cash balances available for investment.
During the three- and nine-month periods for 1996, interest expense decreased
$1.0 million and $4.1 million, respectively, from the 1995 periods even though
average debt outstanding increased from a year ago. The decrease was due
primarily to the capitalization of $1.7 million and $4.1 million of interest
related to capital projects in the third quarter and first nine months of 1996,
respectively. This represents increases of $1.0 million and $3.0 million from
the comparable periods of 1995. To a lesser extent, lower interest rates on
borrowings during 1996 also contributed to the interest expense decrease.
Other (income) expense decreased $.7 million and $1.3 million for the third
quarter and first nine months of 1996, respectively. The decrease in expense
was due to a reduction in demolition and disposal projects relating to
non-operating facilities at the Midland Plant.
The effective income tax rates for the third quarter of 1996 and 1995 were
52.1% and 41.8%, respectively. The effective income tax rates for the nine
months ended September 30, 1996 and 1995 were 46.8% and 42.5%, respectively.
The 1996 effective income tax rates were higher than the rates in the 1995
periods due to the fact that the amortization of the purchase accounting
adjustment, primarily goodwill which is not deductible for income tax purposes,
was a relatively larger component of pre-tax income in the 1996 periods.
Due to the items described above, net income for the third quarter of 1996
decreased 83.1% to $3.8 million, or $.10 per share, from $22.6 million ,or $.59
per share, in the 1995 period. For the first nine months of 1996, net income
decreased 69.0% to $22.3 million, or $.58 per share, from $71.9 million, or
$1.86 per share, in the 1995 period.
LIQUIDITY AND CAPITAL RESOURCES
Working capital decreased by $28.8 million from the prior year end to $84.3
million as of September 30, 1996. Cash and cash equivalents decreased $34.3
million during the first nine months of 1996 primarily due to capital
expenditures of $73.3 million and dividend payments of $11.2 million. Lower
business activity levels contributed to the other major changes in working
capital, including a decrease in inventories of $28.5 million, which was offset
by a decrease in accounts payable of $35.0 million. The Company utilized
established borrowing facilities as a supplemental source of working capital
during the nine-month period. As of September 30, 1996, $7.7 million was
outstanding under short-term lines of credit. Also, the Company borrowed $7.5
million under its $100.0 million revolving credit facility, which is included
in long-term debt.
9
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The majority of the capital expenditures for the first nine months of 1996 were
related to the Direct Roll Anneal and Pickle (DRAP) line and other finishing
mill equipment as included in the Company's five year capital plan.
The Company believes that cash flow provided by operating activities and
amounts available under its financing sources will enable it to satisfy planned
capital expenditures and other cash requirements for the foreseeable future.
The Company paid dividends to its shareholders of $11.2 million during the
first nine months of 1996. On September 18, 1996, the Company declared a
quarterly cash dividend of $.10 per share payable on October 23, 1996 to
shareholders of record as of the close of business on October 9, 1996.
OUTLOOK
The construction phase of the DRAP line at the Company's Midland, PA plant is
to be completed in December 1996. Commissioning is planned during the first
half of 1997, with full production expected to be achieved by the end of 1997.
The Company believes, based on its current commissioning plan, that the net
impact of starting-up the new line, including depreciation, will reduce 1997
net income by $.30 to $.35 per share. This impact will occur predominately in
the second, third and fourth quarters.
Imports of stainless steel sheet and strip are up 14% through August 1996
compared to the same period of the prior year. This increase in imports has
adversely affected the Company's shipments and pricing for its products.
Imports are expected to remain at these high levels for the remainder of 1996.
The forward-looking statements contained in this report involve risks and
uncertainties that could cause actual results to differ materially from those
in such forward-looking statements. Notably, the new DRAP line utilizes novel
technology which could cause construction delays or unforeseen start-up expense
and benefits.
10
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
11
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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.
J&L SPECIALTY STEEL, INC.
(Registrant)
November 14, 1996 /s/ KIRK F. VINCENT
---------------------------
Kirk F. Vincent
Vice President - Finance and Law
(Principal financial officer and duly
authorized signatory)
12
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EXHIBIT INDEX
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Condensed Consolidated Balance Sheet at September 30, 1996 (Unaudited) and
the Condensed Consolidated Statement of Income for the Nine Months Ended
September 30, 1996 (Unaudited) and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,108
<SECURITIES> 0
<RECEIVABLES> 63,053
<ALLOWANCES> 4,373
<INVENTORY> 133,238
<CURRENT-ASSETS> 210,039
<PP&E> 368,926
<DEPRECIATION> 90,085
<TOTAL-ASSETS> 742,186
<CURRENT-LIABILITIES> 125,774
<BONDS> 157,844
0
0
<COMMON> 387
<OTHER-SE> 391,813
<TOTAL-LIABILITY-AND-EQUITY> 742,186
<SALES> 495,446
<TOTAL-REVENUES> 495,446
<CGS> 414,258
<TOTAL-COSTS> 414,258
<OTHER-EXPENSES> 17,077
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,206
<INCOME-PRETAX> 41,887
<INCOME-TAX> 19,598
<INCOME-CONTINUING> 22,289
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,289
<EPS-PRIMARY> .58
<EPS-DILUTED> .58
</TABLE>
