<PAGE> 1
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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, 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 October 31, 1997:
38,670,000
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J&L SPECIALTY STEEL, INC.
SEC FORM 10-Q
Quarter Ended September 30, 1997
Index
Page No.
--------
PART I. FINANCIAL INFORMATION
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
<PAGE> 3
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
September 30,
------------------------------
1997 1996
-------- --------
<S> <C> <C>
Trade sales, net $132,136 $135,703
Sales to affiliates, net 10,425 11,113
-------- --------
Total sales, net 142,561 146,816
Cost of products sold 136,562 125,980
Depreciation and amortization expenses 6,066 5,693
-------- --------
Gross profit (67) 15,143
Selling, general and administrative expenses 4,824 4,742
Research and technology expense 1,463 1,488
Unusual item (10,000) -
-------- --------
Operating income 3,646 8,913
Interest income (22) (33)
Interest expense 1,043 971
Other income, net (68) (21)
-------- --------
Income before income taxes 2,693 7,996
Income taxes 2,038 4,162
-------- --------
Net income $ 655 $ 3,834
======== ========
Per share data:
Net income per common share $ .02 $ .10
======== ========
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
<PAGE> 4
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,
-----------------------------
1997 1996
-------- --------
<S> <C> <C>
Trade sales, net $433,305 $457,358
Sales to affiliates, net 35,647 38,088
-------- --------
Total sales, net 468,952 495,446
Cost of products sold 435,531 414,258
Depreciation and amortization expenses 18,192 17,077
-------- --------
Gross profit 15,229 64,111
Selling, general and administrative expenses 15,129 14,263
Research and technology expense 4,531 4,584
Unusual items (15,907) --
-------- --------
Operating income 11,476 45,264
Interest income (93) (227)
Interest expense 3,070 3,206
Other (income) expense, net (129) 398
-------- --------
Income before income taxes 8,628 41,887
Income taxes 6,318 19,598
-------- --------
Net income $ 2,310 $ 22,289
======== ========
Per share data:
Net income per common share $ .06 $ .58
======== ========
Dividends declared per common share $ .30 $ .30
======== ========
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.
4
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J&L SPECIALTY STEEL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1997 1996
---- ----
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 733 $ 499
Trade receivables, less allowances of
$3,918 and $3,869, respectively 59,296 55,153
Trade receivables from affiliates 6,041 6,191
Inventories 140,295 143,576
Deferred income taxes 7,333 7,172
Prepaid expenses and other current assets 1,718 605
--------- ---------
Total current assets 215,416 213,196
--------- ---------
Property, plant and equipment, net of accumulated depreciation
of $106,737 and $94,169, respectively 342,710 304,721
Goodwill, net of accumulated amortization
of $73,541 and $68,194, respectively 232,862 238,209
Deferred income taxes 6,811 3,587
Other noncurrent assets 11,119 12,215
--------- ---------
Total assets $ 808,918 $ 771,928
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Common stock dividend payable $ 3,867 $ 3,867
Short-term debt 19,007 6,205
Trade accounts payable 66,105 72,621
Construction accounts payable 14,479 22,914
Accrued employee compensation and benefits 17,409 19,571
Accrued income taxes 6,005 3,360
Reserve for claims and allowances 4,585 6,090
Other accrued liabilities 12,619 9,810
--------- ---------
Total current liabilities 144,076 144,438
--------- ---------
Long-term debt 210,892 170,452
Postretirement benefits liability 51,548 48,729
Other noncurrent liabilities 19,668 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 309,665 308,378
Retained earnings 72,682 81,973
--------- ---------
Total shareholders' equity 382,734 390,738
--------- ---------
Total liabilities and shareholders' equity $ 808,918 $ 771,928
========= =========
</TABLE>
The accompanying notes are an integral part of these financial 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,
-------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by operating activities $ 9,154 $ 32,101
------- --------
Cash flows from investing activities:
Capital expenditures (50,561) (73,319)
------- --------
Net cash used by investing activities (50,561) (73,319)
------- --------
Cash flows from financing activities:
Borrowings on lines of credit, net 52,300 15,200
Refinancing of long-term bank loan 125,000 --
Repayment of long-term bank loan (125,000) --
Borrowings of industrial development notes, net 942 2,912
Common stock dividends paid (11,601) (11,214)
------- --------
Net cash provided by financing activities 41,641 6,898
------- --------
Net decrease in cash and cash equivalents 234 (34,320)
Cash and cash equivalents at beginning of period 499 35,428
------- --------
Cash and cash equivalents at end of period $ 733 $ 1,108
======= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $10,825 $ 6,518
Income taxes 5,771 22,201
</TABLE>
The accompanying notes are an integral part of these financial 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, 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.
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>
September 30, Dec. 31,
Inventories consisted of the following: 1997 1996
------- ---------
<S> <C> <C>
Raw materials $ 18,794 $ 14,567
Work-in-process 106,519 104,512
Finished goods 32,951 39,448
--------- ---------
Total inventories at current cost 158,264 158,527
Less allowance to reduce current cost
values to LIFO basis (17,969) (14,951)
--------- ---------
Total inventories $ 140,295 $ 143,576
========= =========
</TABLE>
NOTE 3 UNUSUAL ITEMS
During the first and third quarters of 1997, the Company reached settlements
with third-party vendors concerning commercial disputes relating to the quality
of certain material purchased by the Company. As a result of these settlements,
the Company recorded pretax gains of $5.9 million in the first quarter and $10.0
million in the third quarter.
NOTE 4 SUBSEQUENT EVENT
The Company announced that it intends to indefinitely idle certain production
facilities at its Detroit Plant during the fourth quarter of 1997, and as a
result will record a $25 million to $35 million after-tax charge, or $.65 to
$.91 per share, in the fourth quarter. The idling is expected to occur
gradually as orders are completed and shipped.
7
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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- and nine-month periods ended September 30, 1997 and 1996,
respectively. This discussion should be read in connection with the information
in the unaudited Condensed Consolidated Financial Statements and the notes
pertaining thereto.
RESULTS OF OPERATIONS
Net sales decreased 2.6% to $132.1 million in the third quarter of 1997
compared with $135.7 million in the third quarter of 1996. Net sales in the
first nine months of 1997 decreased 5.3% to $433.3 million compared with $457.4
in the 1996 period. The decreases in net sales were due to significantly lower
selling prices, somewhat offset by higher shipments. While the Company's
average selling price in the third quarter of 1997 decreased 3.1% from the
second quarter of 1997, average selling prices for the first nine months of
1997 were 13.5% lower than the first nine months of 1996.
The domestic market continues to be very competitive due to the high levels of
imported stainless steel sheet and increased domestic capacity. Shipments for
the third quarter of 1997 were 78,403 tons, an increase of 4.6% over the 74,969
tons shipped in the third quarter of 1996. Shipments for the first nine months
of 1997 were 257,102 tons, or 9.4% higher than the 234,942 tons shipped in the
first nine months of 1996.
Cost of products sold as a percentage of net sales increased from 85.8% for the
1996 third quarter to 95.8% for the 1997 third quarter, and from 83.6% for the
first nine months of 1996, to 92.9% for the first nine months of 1997. The
higher cost of products sold as a percentage of net sales in both the three-
and nine- month periods was largely due to lower realized selling prices and
pre-operating costs for the Direct Roll Anneal & Pickle ("DRAP") Line at the
Midland, Pa. plant. DRAP line commissioning costs were $10.0 million and $18.2
million in the third quarter and first nine months of 1997, respectively.
Depreciation and amortization expense increased $.4 million for the third
quarter of 1997 and $1.1 million for the first nine months of 1997, from the
year ago periods. These increases were due to the completion of the capital
improvement projects primarily at the Louisville, Ohio plant.
Selling, general and administrative expenses increased $.1 million and $.9
million in the respective three- and nine-month 1997 periods versus the
comparable periods of 1996. These increases were primarily due to a reversal of
a liability for stock appreciation rights in 1996, for which no provision was
made in 1997.
8
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Operating income in 1997 included pretax gains of $5.9 million in the first
quarter and $10.0 million in the third quarter from settlements with
third-party vendors concerning commercial disputes relating to the quality of
certain material purchased by the Company.
Interest expense increased $.1 million in the third quarter of 1997 as compared
to the third quarter of 1996. The effect of higher outstanding debt balances
was offset by higher amounts of capitalized interest in the 1997 period due to
the DRAP Line project. The capitalized interest amount for the third quarter of
1997 was $2.6 million as compared to $1.7 million in the same period a year
ago. Capitalized interest for the nine months ended September 30, 1997 was
$7.4 million as compared to $4.1 million for the nine months ended September
30, 1996.
Other (income) expense improved due to the absence of demolition and disposal
activities relating to non-operating facilities at the Midland plant.
The increases in the effective income tax rates for the 1997 periods as
compared to the same periods in 1996 were due to the amortization of the
purchase accounting adjustment, primarily goodwill, not being deductible for
income tax purposes.
Due to the items described above, net income for the third quarter of 1997
decreased 82.9% to $.7 million, or $.02 per share, from $3.8 million, or $.10
per share, in the 1996 period. For the first nine months of 1997, net income
decreased 89.6% to $2.3 million, or $.06 per share, from $22.3 million, or $.58
per share, in the 1996 period.
LIQUIDITY AND CAPITAL RESOURCES
Cash from operating activities of $9.2 million and net borrowings of $53.2
million were used to pay $50.6 million of capital expenditures (including $7.4
million of capitalized interest) and dividends of $11.6 million during the
first nine months of 1997. Included in cash from operating activities was the
receipt of $15.9 million from third-party vendors related to commercial
disputes. The Company increased its borrowings by $52.3 million under its lines
of credit during the first nine months of 1997. The majority of the capital
expenditures for the first nine months of 1997 were related to the DRAP Line.
Working capital increased $2.6 million from the prior year end to $71.3 million
as of September 30, 1997. The change in working capital was due to an increase
in short term lines of credit discussed above and an offsetting decrease in
accounts payable resulting from the completion of certain construction projects
and lower operating levels.
9
<PAGE> 10
In addition to the $11.6 million dividend mentioned above, on September 25,
1997, the Company declared a quarterly cash dividend of $.10 per share payable
on October 22, 1997 to shareholders of record as of the close of business on
October 8, 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 Company announced that it intends to indefinitely idle certain production
facilities at its Detroit Plant during the fourth quarter of 1997, and as a
result will record a $25 million to $35 million after-tax charge, or $.65 to
$.91 per share, in the fourth quarter. The idling is expected to occur gradually
as orders are completed and shipped.
Cold rolled product was successfully produced on the DRAP Line in September,
1997. The final commissioning phase of the DRAP Line is expected to extend
through the fourth quarter. The Company expects that the fourth quarter impact
of commissioning, including the commencement of depreciation, will be slightly
higher than the third quarter's costs.
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 unforeseen commissioning delays and expense and
the Detroit plant closing could create unforeseen expense or delays.
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 third quarter and first nine months of 1997, there would have been no
impact compared to that which was reported.
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
Registrant filed the following reports on Form 8-K relating
to Item 5 thereof: SEPTEMBER 4, 1997- The Company reached a
settlement agreement with unrelated third-party vendors
concerning a commercial dispute relating to the quality of
material purchased by the Company. As part of this settlement
the Company realized $10 million on August 29, 1997. This $10
million pretax gain was recognized in the third quarter of
1997; SEPTEMBER 8, 1997- Philippe Choppin de Janvry resigned
as Chairman of the Board of Directors of J&L Specialty Steel,
Inc., effective September 8, 1997; SEPTEMBER 25, 1997- On
September 25, 1997 the Board of Directors elected Guy Dolle
as a new director of the Corporation for a term expiring at
the Annual Shareholders Meeting to be held in 1999. The Board
of Directors further elected Mr. Dolle Chairman of the Board
of Directors and, effective January 1, 1998, elected Eugene
A. Salvadore, President and Chief Executive Officer.
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 13, 1997 /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
CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 1997 (UNAUDITED) AND THE
CONSOLIDATED STATEMENT OF INCOME FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 733
<SECURITIES> 0
<RECEIVABLES> 62,843
<ALLOWANCES> 3,918
<INVENTORY> 140,295
<CURRENT-ASSETS> 215,416
<PP&E> 449,447
<DEPRECIATION> 106,737
<TOTAL-ASSETS> 808,918
<CURRENT-LIABILITIES> 144,076
<BONDS> 210,892
0
0
<COMMON> 387
<OTHER-SE> 382,347
<TOTAL-LIABILITY-AND-EQUITY> 808,918
<SALES> 468,952
<TOTAL-REVENUES> 468,952
<CGS> 435,531
<TOTAL-COSTS> 435,531
<OTHER-EXPENSES> 2,285
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,070
<INCOME-PRETAX> 8,628
<INCOME-TAX> 6,318
<INCOME-CONTINUING> 2,310
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,310
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
