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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 MARCH 31, 1997
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 Identification No.)
incorporation or organization)
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 April 30, 1997: 38,670,000
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J&L SPECIALTY STEEL, INC.
SEC FORM 10-Q
Quarter Ended March 31, 1997
Index
<TABLE>
<CAPTION>
Page No.
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements
of Income 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of
Cash Flows 5
Notes to Condensed Consolidated
Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results
of Operations 7
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
Signature 11
</TABLE>
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PART I. 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
March 31,
----------------------------
1997 1996
-------- --------
<S> <C> <C>
Trade sales, net $ 154,332 $ 171,861
Sales to affiliates, net 10,763 13,065
---------- ----------
Total sales, net 165,095 184,926
Cost of products sold 148,001 152,045
Depreciation and amortization expenses 5,920 5,695
---------- ----------
Gross profit 11,174 27,186
Selling, general and administrative expenses 5,001 4,846
Research and technology expense 1,567 1,535
Unusual item (5,907) --
---------- ----------
Operating income 10,513 20,805
Interest income (35) (158)
Interest expense 715 1,213
Other (income) expense, net (41) 304
---------- ----------
Income before income taxes 9,874 19,446
Income taxes 4,833 8,764
---------- ----------
Net income $ 5,041 $ 10,682
========== ==========
Per share data:
Net income per common share $ .13 $ .28
========== ==========
Dividends declared per common share $ .10 $ .10
========== ==========
Weighted average number of common
shares outstanding 38,670,000 38,670,000
</TABLE>
The accompanying notes are an integral part of these
financial statements.
3
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J&L SPECIALTY STEEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1997 1996
---------- ------------
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 921 $ 499
Trade receivables, less allowances of
$3,904 and $3,869, respectively 69,309 55,153
Trade receivables from affiliates 8,293 6,191
Inventories 147,359 143,576
Deferred income taxes 7,383 7,172
Prepaid expenses and other current assets 661 605
-------- --------
Total current assets 233,926 213,196
-------- --------
Property, plant and equipment, net of accumulated depreciation
of $98,219 and $94,169, respectively 325,869 304,721
Goodwill, net of accumulated amortization
of $69,977 and $68,194, respectively 236,426 238,209
Deferred income taxes 3,995 3,587
Other noncurrent assets 12,141 12,215
-------- --------
Total assets $812,357 $771,928
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Common stock dividend payable $ 3,867 $ 3,867
Short-term debt 8,625 6,205
Trade accounts payable 85,014 72,621
Construction accounts payable 18,219 22,914
Accrued employee compensation and benefits 16,932 19,571
Accrued income taxes 7,931 3,360
Reserve for claims and allowances 4,574 6,090
Other accrued liabilities 10,233 9,810
-------- --------
Total current liabilities 155,395 144,438
-------- --------
Long-term debt 196,651 170,452
Postretirement benefits liability 49,689 48,729
Other noncurrent liabilities 18,281 17,571
Shareholders' equity:
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 308,807 308,378
Retained earnings 83,147 81,973
-------- --------
Total shareholders' equity 392,341 390,738
-------- --------
Total liabilities and shareholders' equity $812,357 $771,928
======== ========
</TABLE>
The accompanying notes are an integral part of these
financial statements.
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J&L SPECIALTY STEEL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided (used) by operating activities $ 867 $(18,668)
-------- --------
Cash flows from investing activities:
Capital expenditures (25,197) (16,796)
-------- --------
Net cash used by investing activities (25,197) (16,796)
-------- --------
Cash flows from financing activities:
Borrowings on lines of credit, net 2,300 5,000
Borrowings on revolving credit facility, net 25,000 --
Borrowings of industrial development notes, net 1,319 (105)
Common stock dividends paid (3,867) (3,480)
-------- --------
Net cash provided by financing activities 24,752 1,415
-------- --------
Net increase (decrease) in cash and cash equivalents 422 (34,049)
Cash and cash equivalents at beginning of period 499 35,428
-------- --------
Cash and cash equivalents at end of period $ 921 $ 1,379
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 2,624 $ 2,028
Income taxes 452 3,386
</TABLE>
The accompanying notes are an integral part of these
financial statements.
5
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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 March 31, 1997, 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, 1996. The
accompanying unaudited Condensed Consolidated Financial Statements of J&L
Specialty Steel, Inc. (the "Company") 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>
March 31, December 31,
Inventories consisted of the following: 1997 1996
- --------------------------------------- --------- ------------
<S> <C> <C>
Raw materials $ 24,670 $ 14,567
Work-in-process 103,608 104,512
Finished goods 42,374 39,448
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Total inventories at current cost 170,652 158,527
Less allowance to reduce current cost
values to LIFO basis (23,293) (14,951)
-------- --------
Total inventories $147,359 $143,576
======== ========
</TABLE>
NOTE 3 UNUSUAL ITEM
In January 1997, the Company reached a settlement with a third-party vendor
concerning a commercial dispute relating to the quality of certain material
purchased by the Company from 1991 to 1996. As a result of this settlement, the
Company received a $5.9 million cash payment.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Following is management's discussion and analysis of financial condition which
provides information with respect to the results of operations of the Company
for the three-month periods ended March 31, 1997 and 1996, 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 to $165.1 million in the first quarter of 1997 from $184.9
million in the first quarter of 1996. This 10.7% reduction in net sales was due
to significantly lower selling prices, somewhat offset by higher shipments.
Shipments for the first quarter of 1997 were 92,761 tons, an 11.2% increase
over the 83,433 tons shipped in the first quarter of 1996. Intense price
competition experienced throughout all of 1996 continued into the first quarter
of 1997 with average selling prices falling 20% below first quarter 1996
average selling prices. The Company announced a 5% price increase effective
March 2, 1997. This increase provided limited financial benefit in the 1997
first quarter. The Company had also announced a second 5% price increase
scheduled for May 4, 1997. Due to market conditions, the Company recently
announced that the effective date of the second price increase will be delayed
by one month.
Cost of products sold as a percentage of net sales for the first quarter of
1997 increased to 89.6% compared to 82.2% for the first quarter of 1996 due to
the significantly lower selling prices realized in the current quarter. The
average cost of products sold during the first quarter of 1997 was 12.4% lower
than during the same period of 1996, principally due to lower raw material
costs.
Included in operating income in the first quarter of 1997 is a pretax gain of
$5.9 million. In January 1997, the Company reached a settlement with a
third-party vendor concerning a commercial dispute relating to the quality of
certain material purchased by the Company from 1991 to 1996. As a result of
this settlement, the Company received a $5.9 million cash payment.
Interest expense decreased $.5 million, or 41.1%, in the first quarter of 1997
compared to the first quarter of 1996. While total interest cost incurred
increased due to higher outstanding debt, capitalized interest reduced interest
expense in the first quarters of 1997 and 1996 by $2.4 million and $1.1
million, respectively. The capitalized interest in both periods primarily
related to the Direct Roll Anneal and Pickle ("DRAP") Line capital project at
the Company's Midland, Pennsylvania plant.
Other (income) expense improved significantly in the current period versus 1996
due to the absence of demolition and disposal activities relating to
non-operating facilities at the Midland plant which occurred in the 1996 first
quarter.
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The effective income tax rates were 49.0% and 45.1% for the first quarter of
1997 and 1996, respectively. The higher rate for the 1997 quarter is 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 pretax income in 1997.
Due to the items described above, net income for the first quarter of 1997
decreased 52.8% to $5.0 million, or $.13 per share, from net income of $10.7
million, or $.28 per share, in the first quarter of 1996.
LIQUIDITY AND CAPITAL RESOURCES
Cash from operating activities of $.9 million and borrowings of $28.6 million
were used to pay $25.2 million of capital expenditures and dividends of $3.9
million. Included in cash from operating activities was the receipt of $5.9
million from a third-party vendor related to a commercial dispute. The Company
increased its borrowings by $25.0 million under its $100.0 million revolving
credit facility and $2.3 million under short term lines of credit during the
first quarter of 1997. Total borrowings under the revolving credit facility and
short term lines of credit were $45.0 million and $7.9 million, respectively,
as of March 31, 1997. The majority of the capital expenditures for the first
quarter of 1997 were related to the DRAP Line.
Working capital increased $9.8 million from the prior year end to $78.5 million
as of March 31, 1997. The increase in working capital was primarily due to
higher inventories and accounts receivable partly offset by higher accounts
payables.
In addition to the $3.9 million dividend mentioned above, on February 20, 1997,
the Company declared a quarterly cash dividend of $.10 per share payable on
April 23, 1997 to shareholders of record as of the close of business on April
9, 1997.
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.
OTHER MATTERS
The $16 million upgrade of the Bright Anneal line at the Company's Louisville,
Ohio plant was completed in January 1997. In February, the Board of Directors
authorized the acquisition of a new $27 million temper mill for the Louisville
plant. This new mill, scheduled for installation in 1999, will provide increased
capacity for bright anneal and Kool Line(R) products.
8
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The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 128, "Earnings per Share," ("SFAS No. 128") in
February 1997. SFAS No. 128 simplifies the standards for computing earnings per
share ("EPS") previously found in APB Opinion No. 15, "Earnings per Share."
SFAS No. 128 replaces the presentation of primary EPS with a presentation of
basic EPS, which includes only the weighted average number of common shares
outstanding and does not include any dilutive securities in the calculation.
Adoption of SFAS No. 128 is required for interim and annual periods ending
after December 15, 1997. Had the Company applied the provisions of SFAS No. 128
in the first quarter of 1997, there would have been no impact compared to that
which was reported.
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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
10
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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)
May 15, 1997 /s/ KIRK F. VINCENT
-------------------------------------
Kirk F. Vincent
Vice President - Finance and Law
(Principal financial officer and
duly authorized signatory)
11
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 1997 (UNAUDITED) AND THE CONSOLIDATED
STATEMENT OF INCOME FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 921
<SECURITIES> 0
<RECEIVABLES> 73,005
<ALLOWANCES> 3,904
<INVENTORY> 147,359
<CURRENT-ASSETS> 233,926
<PP&E> 424,088
<DEPRECIATION> 98,219
<TOTAL-ASSETS> 812,357
<CURRENT-LIABILITIES> 155,395
<BONDS> 196,651
0
0
<COMMON> 387
<OTHER-SE> 391,954
<TOTAL-LIABILITY-AND-EQUITY> 812,357
<SALES> 165,095
<TOTAL-REVENUES> 165,095
<CGS> 148,001
<TOTAL-COSTS> 148,001
<OTHER-EXPENSES> 13
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 715
<INCOME-PRETAX> 9,874
<INCOME-TAX> 4,833
<INCOME-CONTINUING> 5,041
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,041
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
