<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 December 31, 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: 33-70578
REPUBLIC ENGINEERED STEELS, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 52-1635079
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
410 OBERLIN ROAD, S.W.
MASSILLON, OHIO 44647
(330) 837-6000
(Address, Including Zip Code, and Telephone Number, Including Area Code
of Registrant's Principal Executive Offices)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 February 7, 1997: 19,706,578 million
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Pagr 1 of 17
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
THREE-MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
-------- --------
(unaudited) (unaudited)
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . $174,673 $172,926
Cost of product sold (including depreciation
of $6,483 and $4,088 for 1996 and 1995). . . . . . . . . . 164,849 156,319
-------- --------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . 9,824 16,607
Selling expenses . . . . . . . . . . . . . . . . . . . . . . 2,648 2,825
General and administrative expenses. . . . . . . . . . . . . 8,306 8,930
Other postretirement benefits charges. . . . . . . . . . . . 4,319 4,079
Non-cash ESOP charges. . . . . . . . . . . . . . . . . . . . 7,677 7,970
Other charges (credits), net
Interest Expense. . . . . . . . . . . . . . . . . . . . . 6,671 6,476
Capitalized Interest. . . . . . . . . . . . . . . . . . . -- (4,365)
Interest Income . . . . . . . . . . . . . . . . . . . . . (146) (166)
Miscellaneous, net. . . . . . . . . . . . . . . . . . . . (310) (135)
-------- --------
Loss before income taxes . . . . . . . . . . . . . . . . . . (19,341) (9,007)
Income tax benefit. . . . . . . . . . . . . . . . . . . . 7,737 3,603
-------- --------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . ($11,604) ($5,404)
-------- --------
-------- --------
Net loss per Common Share
Primary . . . . . . . . . . . . . . . . . . . . . . . . . ($.59) ($.27)
Average shares and share equivalents outstanding. . . . . 19,706,578 19,706,578
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
Page 2 of 17
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
SIX-MONTH PERIODS ENDED DECEMBER 31, 1996 AND 1995 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $358,094 $355,931
Cost of product sold (including depreciation of $12,949
and $8,099 for 1996 and 1995). . . . . . . . . . . . . . . . . . . . 335,368 320,985
----------- -----------
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,726 34,946
Selling expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,243 5,497
General and administrative expenses. . . . . . . . . . . . . . . . . . 17,215 18,134
Other postretirement benefits charges. . . . . . . . . . . . . . . . . 8,638 8,159
Non-cash ESOP charges. . . . . . . . . . . . . . . . . . . . . . . . . 15,605 16,161
Other charges (credits), net
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . 13,340 13,137
Capitalized Interest . . . . . . . . . . . . . . . . . . . . . . . -- (8,491)
Interest income. . . . . . . . . . . . . . . . . . . . . . . . . . (268) (324)
Miscellaneous, net . . . . . . . . . . . . . . . . . . . . . . . . (448) (355)
----------- -----------
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . (36,599) (16,972)
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . 14,640 6,789
----------- -----------
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( $21,959) ($10,183)
----------- -----------
----------- -----------
Net Loss per Common Share
Primary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($1.11) ($.52)
Average shares and share equivalents outstanding . . . . . . . . . 19,706,578 19,706,578
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
Page 3 of 17
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 (UNAUDITED) AND JUNE 30, 1996
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
12/31/96 6/30/96*
----------- ---------
Assets (unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . $2,799 $2,074
Receivables, less allowance for doubtful accounts
of $1,636 (unaudited) at December 31, 1996
and $1,949 as of June 30, 1996. . . . . . . . . . . . . . . . . . . 57,488 76,712
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 172,461 163,426
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . 8,851 10,639
Other current assets . . . . . . . . . . . . . . . . . . . . . . . . 4,611 2,052
-------- --------
Total current assets. . . . . . . . . . . . . . . . . . . . . . . . 246,210 254,903
Property, plant and equipment, net . . . . . . . . . . . . . . . . . . 319,440 331,079
Intangibles and other assets, net. . . . . . . . . . . . . . . . . . . 30,201 31,097
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . . 37,676 21,248
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,267 2,250
-------- --------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . $634,794 $640,577
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt . . . . . . . . . . . . . . . . $ 12,500 $ --
Other current liabilities. . . . . . . . . . . . . . . . . . . . . . 102,055 112,723
-------- --------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 114,555 112,723
-------- --------
Long-term debt, excluding current maturities . . . . . . . . . . . . . 273,948 280,956
Other postretirement benefits . . . . . . . . . . . . . 120,637 113,169
Defined benefit pension. . . . . . . . . . . . . . . . . . . . . . . . 20,385 21,601
Environmental costs. . . . . . . . . . . . . . . . . . . . . . . . . . 19,005 19,605
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . 3,551 3,550
-------- --------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 552,081 551,604
-------- --------
-------- --------
Shareholders' Equity
Special preferred stock, $.01 par value,
one shareauthorized, one share
issued, liquidation value of $1,500. . . . . . . . . . . . . . . . . 2 2
Common stock, $.01 par value; authorized 27,000,000 shares;
issued 19,707,923 shares . . . . . . . . . . . . . . . . . . . . . . 197 197
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 275,270 275,270
(Accumulated deficit). . . . . . . . . . . . . . . . . . . . . . . . . (160,727) (138,767)
-------- --------
114,742 136,702
Less receivable from Employee Stock Ownership Trust. . . . . . . . . . 32,021 47,721
Less treasury stock, at cost, including 1,345
(unaudited) common shares at
December 31, 1996 and 1,345 common shares at June 30, 1996 . . . . . 8 8
-------- --------
Total shareholder's equity . . . . . . . . . . . . . . . . . . . . 82,713 88,973
Commitments and contingencies. . . . . . . . . . . . . . . . . . . . . -- --
-------- --------
$634,794 $640,577
-------- --------
-------- --------
</TABLE>
* Condensed from audited consolidated financial statements.
See accompanying notes to the condensed consolidated financial statements
Page 4 of 17
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX-MONTHS ENDED DECEMBER 31, 1996 (UNAUDITED) AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
(UNAUDITED) (UNAUDITED)
----------- -----------
<S> <C> <C>
Cash flows from operating activities
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($21,959) ($10,183)
Adjustments to reconcile net loss to net cash used
by operating activities
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 14,566 9,745
Non-cash ESOP charges . . . . . . . . . . . . . . . . . . . . . . . . 15,605 16,161
Deferred income tax benefit . . . . . . . . . . . . . . . . . . . . . (14,640) (6,789)
Change in operating assets and liabilities
Increase in working capital. . . . . . . . . . . . . . . . . . . . . (2,719) (23,689)
Decrease in other operating assets and liabilities . . . . . . . . . 5,126 4,818
------- -------
Total Adjustments. . . . . . . . . . . . . . . . . . . . . . . . . 17,938 246
------- -------
Net cash (used) provided by operating activities . . . . . . . . . (4,021) (9,937)
------- -------
Cash flows from investing activities
Additions to property, plant and equipment . . . . . . . . . . . . . (2,795) (27,660)
Capitalized interest . . . . . . . . . . . . . . . . . . . . . . . . -- (8,491)
------- -------
Net cash used by investing activities. . . . . . . . . . . . . . . . (2,795) (36,151)
------- -------
Cash flows from financing activities
Net borrowings under revolving credit facility . . . . . . . . . . . 5,492 41,492
Proceeds from environmental financing. . . . . . . . . . . . . . . . 984 2,315
Other financing activities . . . . . . . . . . . . . . . . . . . . . 1,065 812
------- -------
Net cash provided by financing activities . . . . . . . . . . . . . 7,541 44,619
------- -------
Net decrease in cash and cash equivalents. . . . . . . . . . . . . . . 725 (1,469)
Cash and cash equivalents at beginning of period . . . . . . . . . . . 2,074 4,609
------- -------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . $ 2,799 $ 3,140
------- -------
------- -------
Supplemental disclosure of cash flow information
Cash interest paid . . . . . . . . . . . . . . . . . . . . . . . . . $13,593 $14,386
------- -------
------- -------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
Page 5 of 17
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT
DECEMBER 31, 1996 AND 1995 (UNAUDITED) AND JUNE 30, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) FINANCIAL STATEMENT PRESENTATION:
The consolidated interim financial statements presented herein have
been prepared by Republic Engineered Steels, Inc., without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission with respect
to Form 10-Q. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations; however, the Company believes that all adjustments necessary for a
fair presentation have been made. These interim financial statements should be
read in conjunction with the financial statements and the notes thereto included
in the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
1996.
(b) ORGANIZATION
On April 28, 1995, the Company sold 8,050,000 shares of its common
stock in an Initial Public Offering (IPO). Prior to the IPO, the Company was
owned by substantially all of its employees through an Employee Stock Ownership
Plan (ESOP). The ESOP acquired all of the originally issued common shares of
the Company on November 28, 1989 with the proceeds of two loans from the Company
in the amounts of $190 million (Loan A) and $30 million (Loan B), respectively,
each bearing interest at 10 percent per annum. The ESOP obtains the funds to
repay the loans primarily through tax deductible contributions made by the
Company to the ESOP based on annual stipulated percentages of employee
compensation or dividends. The ESOP is repaying Loan A and Loan B (plus
interest) over their respective maturity periods. As of December 31, 1996, the
ESOP owned approximately 57 percent of the common stock of the Company.
The company produces a wide range of special bar quality (SBQ)
hot-rolled and cold finished steels and specialty steel bars for the automotive,
heavy equipment manufacturing, aerospace and power generation industries.
The Company's principal customers are manufacturers in the automotive,
machinery, industrial equipment, machine and hand tools, and aviation and
aerospace industries, as well as independent forgers who supply finished parts
to the aforementioned industries. The Company also has significant sales to
steel service centers.
Although the Company has a nationwide customer base, approximately 67
percent of its shipments for fiscal year 1996 were to customers in the states of
Indiana, Illinois, Michigan, New York, Ohio and Pennsylvania.
(c) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Republic
Engineered Steels, Inc. and its wholly owned subsidiaries, Nimishillen &
Tuscarawas Railway Company and The Oberlin Insurance Company. All significant
intercompany balances have been eliminated in consolidation.
Page 6 of 17
<PAGE>
(d) CASH EQUIVALENTS
The Company considers all short-term investments with maturities at
date of purchase of three months or less to be cash equivalents.
(e) INVENTORIES
Inventories are carried at the lower of cost or market, with cost
determined using the last-in, first-out (LIFO) method.
(f) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost less depreciation
accumulated to date. Depreciation is computed on the straight-line method over
the estimated useful lives of the assets; the range of useful lives is 15-25
years for buildings and 3-25 years for machinery and equipment. Accelerated
methods are used for income tax purposes.
(g) INTANGIBLES
Intangible assets consist primarily of deferred loan and bond fees and
intangible pension assets. The deferred loan and bond fees are being amortized
on a straight-line basis over the lives of the related debt instruments and the
pension asset is being amortized over the workforce's estimated remaining years
of service.
(h) INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities resulting from a change in tax rates is recognized in
income in the period that includes the enactment date.
(i) ENVIRONMENTAL COSTS
The Company and other basic steel companies are subject to
increasingly demanding environmental standards imposed by federal, state, and
local environmental laws and regulations. It is the policy of the Company to
endeavor to comply with applicable environmental laws and regulations. The
Company established a liability for an amount which the Company believes is
adequate, based on information currently available, to cover the costs of
remedial actions it will likely be required to take to comply with existing
environmental laws and regulations.
The stated amount represents an estimate of the environmental
remediation costs associated with future events triggering or confirming the
losses that are likely to occur in management's judgment. This estimate is
based on currently available facts, existing technology, and presently enacted
laws and regulations, and it takes into consideration the likely effects of
inflation and other societal and economic factors. The precise timing of such
events cannot be reliably determined at this time due to absence of any
deadlines for remediation under the applicable environmental laws and
regulations
Page 7 of 17
<PAGE>
pursuant to which such remediation costs will be expended. No claims for
recovery are netted against the stated amount.
(j) NET LOSS PER COMMON SHARE
The net loss per common share computations are based upon the weighted
average number of common stock equivalents outstanding during each period.
(k) RECLASSIFICATIONS
Certain previously reported amounts have been reclassified to conform
to the current reporting presentation.
(2) INVENTORIES
Inventories are carried at the lower of cost or market with cost
determined using the last-in, first-out (LIFO) method.
Inventories consist of the following :
(in thousands)
December 31, June 30,
1996 1996
-------- --------
(unaudited)
Raw materials $11,783 $10,401
Finished and semifinished product 159,189 150,711
Supplies, molds, and stools 1,489 2,314
-------- --------
$172,461 $163,426
-------- --------
-------- --------
(3) LONG-TERM DEBT
Long-term debt of the Company consists of the following:
<TABLE>
<CAPTION>
(in thousands)
December 31, June 30,
1996 1996
---------- --------
(unaudited)
<S> <C> <C>
9% Solid Waste Revenue Bonds, Series 1996, due June 1, 2021 $53,700 $53,700
8 1/4% Solid Waste Revenue Bonds due October 1, 2014 20,200 20,200
9 7/8% First Mortgage Notes due December 15, 2001 200,000 200,000
Revolving Credit Agreement 12,500 7,000
Other 48 56
-------- --------
286,448 280,956
Less Current Maturities of Long-term debt 12,500 --
-------- --------
$273,948 $280,956
-------- --------
-------- --------
</TABLE>
On October 28, 1994, the Company obtained $20.2 million of financing
through the issuance of 8 1/4 percent Solid Waste Revenue Bonds due October 1,
2014 (Bonds) in connection with the solid waste disposal facilities installed at
the Cast-Roll facility. On June 1, 1996, the Company obtained $53.7 million of
financing through the issuance of 9
Page 8 of 17
<PAGE>
percent Solid Waste Revenue Bonds, Series 1996, due June 1, 2021 in connection
with the solid waste disposal facilities installed at its Cast-Roll facility.
These bonds were issued in addition to the Solid Waste Revenue Bonds, Series
1994, noted above, to assist in financing the facilities. As of December 31,
1996, the Company had available $1,267,000 of the $53.7 million, which is
classified as long-term restricted cash in the accompanying consolidated balance
sheet.
On December 15, 1993, the Company issued $200 million aggregate
principal amount of 9 7/8% First Mortgage Notes due December 15, 2001 (the
"Notes") in an underwritten public offering. The Notes are redeemable, in whole
or in part, at the option of the Company, on or after December 15, 1998 at
specified premiums set forth therein which decline over three years. At any
time before December 15, 1996, the Company may redeem the Notes with the
proceeds of a public offering of its common stock at a redemption price of
109 7/8 percent of the principal amount thereof plus accrued interest provided
that at least $140 million aggregate principal amount remains outstanding after
the redemption. The Notes are secured by a mortgage on substantially all of the
Company's property, plant and equipment as of December 15, 1993. The Notes
contain affirmative and negative covenants, including provisions for
restrictions on additional borrowings, investments, payments, the sale or
disposal of assets, payment of dividends and liens, as well as change of control
provisions.
The Company's $90 million revolving credit facility (Credit Agreement)
has a four-year term expiring in December 1997. As of December 31, 1996
(unaudited) and June 30, 1996, $77.5 million and $83.0 million respectively, of
the credit facility remained available. The facility is secured by the
Company's receivables, inventories, subsidiaries' stock, short-term investments,
and certain intangible assets. Advances under the facility are limited to
specified percentages of the Company's eligible receivables and inventories.
The Company has $12.5 million under the Credit Agreement due to be
repaid in fiscal 1998. Otherwise, no long-term debt matures during the next five
years.
(4) ENVIRONMENTAL COMPLIANCE
The Company is subject to a broad range of federal, state and local
environmental laws and regulations, including those governing discharges into
the air and water, the handling and disposal of solid and hazardous wastes and
the remediation of contamination associated with the disposal of waste. The
Company continuously monitors its compliance with such environmental laws and
regulations and, accordingly, believes that it is currently in substantial
compliance with such laws and regulations. The Company does not anticipate the
need to make substantial expenditures for environmental control measures during
the next twenty-four months. As is the case with most steel producers, the
Company could possibly incur significant costs related to environmental
compliance, in particular those arising from remediation costs for historical
waste disposal practices at certain facilities. The Company believes that these
costs are most likely to be in the range of $13 million to $27 million. This
range represents the estimated aggregate cost to resolve the environmental
contingencies. The Company does not anticipate any third party recoveries. The
reserve to cover potential environmental liabilities was $19.4 million
(unaudited) at December 31, 1996 and $20.0 million at June 30, 1996.
Page 9 of 17
<PAGE>
The reserve has been established and is monitored based on continuing
reviews of the reserve, each matter comprising the reserve, and whether any new
matters should be included in the reserve, using currently available information
relative to enacted laws and regulations and existing technology. These reviews
are performed periodically by an in-house committee comprised of representatives
experienced in environmental matters from the environmental, law, operating, and
accounting departments in consultation with outside legal and technical experts,
as necessary.
(5) LEGAL PROCEEDINGS
In September 1992, a lawsuit was filed against the Company in the U.S.
District Court for the Northern District of Ohio (Eastern Division) on behalf of
nineteen former Company salaried employees whose employment was terminated on
February 19, 1991. The claims asserted on behalf of each former employee are
age discrimination under both federal and state laws, breach of employment
contract, promissory estoppel and violation of Ohio public policy (by reason of
age discrimination). The relief sought for each former employee is lost pay and
fringe benefits, liquidated damages (doubling the claimed lost pay and
benefits), compensatory damages of $500,000 on each count, punitive damages of
$500,000 under the public policy count, prejudgment interest and attorneys'
fees. The Company has denied all of the claims and intends to contest them
vigorously. The Company's motion for summary judgment with respect to these
cases was partially granted on May 15, 1996, dismissing all claims of the former
employees other than the age discrimination claims. Management does not believe
that these actions will have a material adverse effect upon the Company.
The Company is involved in other legal proceedings, including various
environmental proceedings with governmental authorities, product liability
litigation and claims by present and former employees under federal and
counterpart state anti-discrimination and other laws relating to employment.
The Company does not believe that any of these proceedings, either individually
or in the aggregate, will have a material adverse effect on the consolidated
financial condition or results of operations of the Company.
In accordance with mid-contract re-opener provisions contained in the
six year collective bargaining agreement dated as of June 1, 1993 between the
Company and the United Steelworkers of America ("USWA"), negotiations between
the Company and the USWA on economic items (wages, payroll items and
benefits) did not result in an agreement and, unresolved issues were
submitted to an impartial arbitrator. In making any decision, the
arbitrator is required to consider "the Company's ability to carry out its
modernization program, and the wage and benefit levels enjoyed by
Union-represented employees at competitive facilities." The decision of the
arbitrator is scheduled to be rendered on February 19, 1997.
(6) SUBSEQUENT EVENT
Following the January 23, 1997 meeting of the Company's Board of
Directors, the Company announced a plan for organizational restructuring and
cost cutting initiatives. In addition, the Board of Directors approved a
revision to the salaried employees health care plan changing eligibility
requirements from age 57 with 30 years service or age 60 with 15 or more years
service to age 65 with 15 or more years service. For the transition
Page 10 of 17
<PAGE>
to the new plan, the Board also approved a Special Retirement Window which will
provide retiree health care benefits under the old plan to employees who retire
by March 31, 1997.
The Company also announced plans to restructure and reduce the
salaried work force over the next several months by more than 200 people and to
further reduce the hourly work force by more than 300 people as the Company
reaches full capacity utilization of the Cast-Roll-TM- facility and completes
other smaller capital projects.
Reasonable estimates of the financial impact of these plans cannot be
made at this time due to uncertainties inherent at this early stage in the
planning process. However, third quarter results will include appropriate
provisions, if any, to recognize the effect of the organizational restructuring.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH THREE MONTHS ENDED
DECEMBER 31, 1995
The Company's disappointing financial performance for the second
quarter of fiscal year 1997 reflects a decrease of 11.3% in average selling
price which outstripped decreases totaling 7.4% in raw materials and other
operating costs per ton from the year earlier quarter.
During the second quarter of fiscal year 1997, production from the
Cast-Roll-TM- facility increased to approximately 50% of carbon and alloy
products manufactured by the Company which represents 73% of the facility's
capacity. However, a significant percentage of the Cast-Roll-TM- production
was sold as lower margin semi-finished product while certain of the company's
customers continue their process of Cast-Roll-TM- product qualification.
Although production costs were again reduced during the quarter, the savings
will be realized only after this product qualification process is complete
and the Cast-Roll-TM- product is applied to finished products.
Net sales for the second quarter of fiscal year 1997 totaled
approximately $174.7 million on 232,399 net tons of steel shipments compared to
approximately $172.9 million and shipments of 204,007 net tons for the year ago
quarter. Despite the 13.9% increase in shipping volume, sales revenues
increased only slightly. The Company's average selling price per ton fell by
11.3% to $752 per ton versus $848 per ton in the year earlier quarter. The
decrease is the result of a higher percentage of semi-finished carbon and alloy
products, a lower percentage of value added cold finished and specialty products
and decreased prices created by new entrants into the SBQ market.
Cost of products sold increased by 5.5% to $164.8 million versus
$156.3 million for the year earlier quarter. The increase is the result of
higher production and shipment levels and a $2.4 million increase in
depreciation charges associated with the Cast-Roll-TM- facility. Scrap costs
decreased considerably, representing 22.8% of total cost of goods sold compared
to 26.2% in the year earlier quarter. Prices for nickel and molybdenum also
decreased significantly versus the year earlier quarter and other raw material
prices
Page 11 of 17
<PAGE>
were also weaker during the quarter. Overall, on a cost per ton basis,
manufacturing costs decreased from $766 per ton to $709 per ton in the current
quarter or approximately 7.4%.
Selling, general and administrative expenses totaled approximately
$11.0 million for the current quarter versus $11.8 million during the year
earlier quarter and represent approximately 6.3% and 6.8% of sales revenue,
respectively.
Net periodic postretirement benefit charges totaled approximately $4.3
million for the quarter ended December 31, 1996, an increase of approximately
$.2 million versus the second quarter of fiscal year 1996 and is the result of
additional service costs and interest related to the unfunded liability. Cash
payments totaled $.7 million and $.3 million for the quarters ended December 31,
1996 and 1995, respectively.
Non-cash ESOP charges totaled approximately $7.7 million versus $8.0
million in the year earlier quarter. The charges were based on a contribution
rate of 18% of employee compensation during both periods and the decreased
charge for the current quarter reflects lower labor utilization despite the
increased shipment level.
Cash interest expense totaled approximately $6.7 million for the
second quarter of fiscal year 1997, an increase of approximately $.2 million
versus the year earlier quarter. In the second quarter of fiscal year 1996, the
Company recorded a $4.4 million credit for capitalized interest associated with
the construction of the Cast-Roll-TM- facility. Effective January 1, 1996, the
new facility was substantially complete, and accordingly, interest is no longer
being capitalized.
SIX MONTHS ENDED DECEMBER 31, 1996 COMPARED WITH SIX MONTHS ENDED
DECEMBER 31, 1995
The Company's disappointing financial performance for the six months
ended December 31, 1996 reflects a decrease of 8.7% in average selling price
which outstripped decreases totaling 5.2% in raw materials and other operating
costs versus the year earlier period.
During the six months ended December 31, 1996, production from the
Cast-Roll-TM- facility increased to approximately 47% of the total carbon and
alloy products manufactured by the Company which represents approximately 66% of
the facility's capacity. However, a significant percentage of the Cast-Roll-TM-
production was sold as lower margin semi-finished product while certain of the
company's customers continue their process of Cast-Roll-TM- product
qualification. Although production costs were again reduced during the first
six months, the savings will be realized only after this product qualification
process is complete and the Cast-Roll-TM- product is applied to finished
products.
Net sales for the first six months of fiscal year 1997 totaled $358.1
million on 467,111 net tons of steel shipments compared to $355.9 million on
shipments of 423,884 net tons for the year earlier period. Sales revenues
increased by only .6% despite the 10.2% increase in net tons shipped. The
average selling price dropped from $840 per ton to $767 per ton and is the
result of a higher percentage of semi-finished carbon and alloy products, a
lower percentage of value added cold finished and specialty products coupled
with decreased prices created by new entrants into the SBQ market.
Page 12 of 17
<PAGE>
The Company's cost of product sold increased by 4.5% to $335.4 million
versus $321.0 for the year earlier period. The increase is the result of higher
production and shipment levels and a $4.9 million increase in depreciation
expense associated with the Cast-Roll-TM- facility. Scrap costs decreased to
23.7% of total cost of goods sold during the six months ended December 31, 1996
compared to 25.2% during the same period one year earlier. Prices were also
lower on other raw materials, particularly nickel and molybdenum. Overall, on
a cost per ton basis, manufacturing costs decreased by 5.2% from $757 per ton to
$718 per ton in the current period.
Selling, general and administrative expenses decreased from $23.6
million to $22.5 million for the first six months of fiscal year 1997 compared
to the same period in the prior fiscal year and represent approximately 6.6% and
6.3% of sales revenue for the first six months of fiscal years 1996 and 1997
respectively.
Net periodic postretirement benefits accrued during the six months
ended December 31, 1996 amounted to an expense of $8.6 million compared to $8.2
million in the same period of the prior fiscal year primarily as the result of
additional service and interest costs. Cash payments for postretirement
benefits totaled $1.2 million and $1.1 million during the six months ended
December 31, 1996 and 1995, respectively.
Non-cash ESOP charges totaled approximately $15.6 million for the
first six months ended December 31, 1996 versus $16.2 million for the year
earlier period. The charges were based on a contribution rate of 18% of
employee compensation during both periods and the decreased charge for the
current period reflects lower labor utilization despite the increased shipment
level.
Cash interest expense totaled approximately $13.3 million for the six
months ended December 31, 1996, an increase of approximately $.2 million versus
the year earlier period. For the six month period ended December 31, 1995, the
Company recorded a credit of $8.5 million for interest associated with the
construction of the Cast-Roll-TM- facility. Effective January 1, 1996, the new
facility was substantially complete, and accordingly, interest is no longer
being capitalized.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short term investments as of December 31, 1996 totaled $2.8
million compared to $2.1 million as of June 30, 1996. Also, as of December 31,
1996, the Company had available $77.5 million under its $90 million revolving
credit agreement with the First National Bank of Boston (the "Revolving Credit
Agreement").
On December 15, 1993, the Company issued $200 million aggregate
principal amount of 9 7/8 percent First Mortgage Notes due December 15, 2001
(Notes) in an underwritten public offering. The Notes are redeemable, in whole
or in part, at the option of the Company, on or after December 15, 1998 at
specified premiums set forth therein which decline over three years. At any
time before December 15, 1996, the Company had the option to redeem a portion of
the Notes with the proceeds of a public offering of its common stock at a
redemption price of 109 7/8 percent of the principal amount thereof plus accrued
interest provided that at least $140 million aggregate principal amount remains
outstanding. The Notes are secured by a mortgage on substantially all of the
Company's property, plant and equipment as of December 15, 1993. Capital
Page 13 of 17
<PAGE>
expenditures subsequent to that date for plant and equipment (including the
Cast-Roll-TM- facility) aggregating approximately $211.5 million are not part of
the security for the Notes. The Notes contain affirmative and negative
covenants including provisions for restrictions on additional borrowings,
certain investments, certain payments, sale or disposal of assets, payment of
dividends and liens, as well as change of control provisions.
On October 28, 1994, the Ohio Water Development Authority ("the
Authority") issued $20.2 million of 8 1/4 percent Solid Waste Revenue Bonds
(the"1994 Bonds") due 2014, on behalf of the State of Ohio, 98% of the face
amount in connection with the solid waste disposal facilities installed at the
Cast-Roll-TM- facility. Additionally, on June 1, 1996, the Authority issued
$53.7 million of 9.0% Solid Waste Revenue Bonds (the "1996 Bonds") due June 1,
2021 in connection with the Cast-Roll-TM- facility. The proceeds of the 1996
Bonds were used to reduce outstanding borrowings under the Revolving Credit
Facility. The Company had available $1.267 million and $2.25 million as of
December 31 and June 30, 1996, respectively, from the 1996 Bonds which is
classified as restricted cash in the accompanying consolidated balance sheet,
and zero from the 1994 Bonds.
The Revolving Credit Agreement, which expires in December 1997, is
secured by the Company's receivables, inventories, subsidiaries' stock, short
term investments, and certain intangible assets. Advances under the facility
are limited to specified percentages of the Company's eligible receivables and
inventories. As of December 31, 1996, the Company had $12.5 million outstanding
under its Revolving Credit Agreement, which borrowings are due in December 1997.
Otherwise, no long-term debt matures during the next five years.
The Revolving Credit Agreement provides up to $20 million for letters of
credit. Borrowings under the Revolving Credit Agreement bear interest at a per
annum rate equal to the Eurodollar rate plus 2 1/2 percent or the Alternate Base
Rate plus 1 1/4 percent of the First National Bank of Boston ("FNBB"), at the
Company's option. These rates increase by 2 percent if the Company does not
meet certain financial tests. The borrowing base under the Credit Agreement is
the sum of 53 percent of "Eligible Inventory" up to a maximum of $75 million and
80 percent of "Eligible Accounts Receivable." Fees of 2 1/2 percent per annum
on the maximum drawing amount of each standby letter of credit and 2 percent per
annum on the maximum drawing amount of each documentary letter of credit are
payable on the date of issuance of such letter of credit. A commitment fee of
1/2 percent per annum on the average daily unused amount of the facility is
payable quarterly.
The Revolving Credit Agreement contains affirmative and negative
covenants including provisions for the maintenance of increasing levels of
consolidated net worth, requirements for minimum coverage of interest and debt
service, restrictions on additional borrowings, capital expenditures, certain
investments, stock issuances, and the payment of dividends.
The Company believes that cash on hand, cash flow from operations and
borrowings under the $90 million Revolving Credit Agreement will be sufficient
to meet its cash needs in the foreseeable future.
Forward looking statements herein are made pursuant to safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
forward looking statements are subject to certain risks and uncertainties that
could cause actual results to differ
Page 14 of 17
<PAGE>
materially from those projected. Readers are cautioned not to place undue
reliance on these forward looking statements which speak only as of the date
hereof. Such risks and uncertainties include, but are not limited to, general
business and economic conditions; competitive factors such as the availability
and pricing of steel, fluctuations in demand, specifically in the automotive
market; potential equipment malfunction; and construction and repair delays.
Page 15 of 17
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Item 1, Financial Statements, footnote (5) Legal
Proceedings.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
None
Page 16 of 17
<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.
REPUBLIC ENGINEERED STEELS, INC.
By: /s/ Russell W. Maier
-------------------------------
Russell W. Maier
President
and Chief Executive Officer
By: /s/ James Burns Riley
--------------------------------
James Burns Riley
Executive Vice President
and Chief Financial Officer
Dated: February 7, 1997
Page 17 0f 17
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<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
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