<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 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: 0-25900
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 November 14, 1997: 19,706,578 million
===============================================================================
Page 1 of 14
<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 SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . $185,971 $183,421
Cost of product sold (including depreciation
of $6,565 and $6,466 for 1997 and 1996) . . 168,673 170,519
-------- --------
Gross profit. . . . . . . . . . . . . . . 17,298 12,902
Selling expenses . . . . . . . . . . . . . . . 2,064 2,595
General and administrative expenses. . . . . . 7,531 8,909
Postretirement benefits charges. . . . . . . . 3,724 4,319
Non-cash ESOP charges. . . . . . . . . . . . . 7,280 7,928
Other charges (credits), net
Interest expense. . . . . . . . . . . . . 6,573 6,669
Interest income . . . . . . . . . . . . . (132) (122)
Miscellaneous, net. . . . . . . . . . . . (109) (138)
-------- --------
Loss before income taxes . . . . . . . . . . . $ (9,633) $(17,258)
Income tax benefit. . . . . . . . . . . . 1,927 6,903
-------- --------
Net loss . . . . . . . . . . . . . . . . . . $ (7,706) $(10,355)
-------- --------
-------- --------
(NET LOSS) PER COMMON SHARE
Primary. . . . . . . . . . . . . . . . . . . . ($.39) ($.53)
Average shares and share equivalent
outstanding. . . . . . . . . . . . . . . . . 19,706,578 19,706,578
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 2 of 14
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997 AND JUNE 30, 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS 9/30/97 6/30/97*
----------- ----------
(unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents. . . . . . . . . . . . . . $ 2,364 $ 6,412
Receivables, less trade receivable allowance for
doubtful accounts of $1,627 (unaudited) at
September 30, 1997 and $1,624 at June 30, 1997 . . . 73,403 75,596
Inventories . . . . . . . . . . . . . . . . . . . . . 161,861 151,708
Deferred income taxes . . . . . . . . . . . . . . . . 5,712 7,382
Other current assets. . . . . . . . . . . . . . . . . 2,380 2,067
--------- ---------
Total current assets. . . . . . . . . . . . . . . . 245,720 243,165
Property, plant and equipment, net . . . . . . . . . . . 308,534 313,235
Intangibles and other assets, net. . . . . . . . . . . . 27,437 27,711
Restricted cash. . . . . . . . . . . . . . . . . . . . . 1,131 1,183
Deferred income taxes. . . . . . . . . . . . . . . . . . 50,671 47,074
--------- ---------
Total assets. . . . . . . . . . . . . . . . . . . . 633,493 632,368
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current liabilities . . . . . . . . . . . . . . . . 109,744 107,834
--------- ---------
Total current liabilities . . . . . . . . . . . . . 109,744 107,834
--------- ---------
Long-term debt, excluding current maturities . . . . . . 273,935 273,939
Postretirement benefit obligation. . . . . . . . . . . . 131,196 128,073
Defined benefit pension obligation . . . . . . . . . . . 16,213 16,885
Accrued environmental costs. . . . . . . . . . . . . . . 13,536 16,862
Other liabilities. . . . . . . . . . . . . . . . . . . . 3,522 3,521
--------- ---------
Total liabilities . . . . . . . . . . . . . . . . . $ 548,146 $ 547,114
Special preferred stock, $.01 par value, one share
authorized, 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). . . . . . . . . . . . . . . . . . (180,793) (173,086)
--------- ---------
94,676 102,383
Less receivable from Employee Stock Ownership Trust. . . 9,321 17,121
Less treasury stock, at cost, including 1,345 common
shares at June 30, 1997 and 1,345 (unaudited) common
shares at September 30, 1997. . . . . . . . . . . . . . 8 8
--------- ---------
Total shareholders' equity. . . . . . . . . . . . . 85,347 85,254
Commitments and contingencies (notes 4 and 5). . . . . . -- --
--------- ---------
$ 633,493 $ 632,368
--------- ---------
--------- ---------
</TABLE>
* Condensed from audited consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.
Page 3 of 14
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities
Net loss. . . . . . . . . . . . . . . . . . . . . $(7,706) $(10,355)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization . . . . . . . . . . 7,271 7,276
Non-cash ESOP charges . . . . . . . . . . . . . . 7,280 7,928
Deferred income tax benefit . . . . . . . . . . . (1,927) (6,903)
Change in operating assets and liabilities
(Increase) decrease in working capital . . . . (6,170) 4,696
Decrease in other operating assets and
liabilities . . . . . . . . . . . . . . . . . (1,112) 2,378
------- --------
Total Adjustments . . . . . . . . . . . . . 5,342 15,375
------- --------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . (2,364) 5,020
------- --------
Cash flows from investing activities
Additions to property, plant and equipment. . . . (2,054) (1,040)
Capitalized interest. . . . . . . . . . . . . . . -- --
------- --------
Net cash used in investing activities . . . (2,054) (1,040)
------- --------
Cash flows from financing activities
Borrowings under revolving credit facility, net . (4) 3,296
Other financing activities. . . . . . . . . . . . 374 181
------- --------
Net cash provided by financing activities . 370 3,477
------- --------
Net increase (decrease) in cash and cash
equivalents . . . . . . . . . . . . . . . . . . . . (4,048) 7,457
Cash and cash equivalents at beginning of period . . 6,412 2,074
------- --------
Cash and cash equivalents at end of period . . . . . $ 2,364 $ 9,531
------- --------
------- --------
Supplemental disclosure of cash flow information
Interest paid . . . . . . . . . . . . . . . . . . $ 10 $ 359
------- --------
------- --------
</TABLE>
See accompanying notes to condensed consolidated financial statements.
Page 4 of 14
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 (UNAUDITED) AND JUNE 30, 1997
(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. (the "Company"), 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, 1997.
(b) ORGANIZATION
In November 1989, the Company was formed to purchase substantially all of
the assets of LTV Steel Company, Inc.'s ("LTV Steel") Bar Division (the
"Acquisition"). Until the initial public offering (the "IPO") of 8,050,000
shares of its Common Stock, par value $.01 per share (the "Common Stock") in
April 1995, the Company had been virtually wholly-owned by its employees through
an employee common stock ownership plan ("ESOP"). The ESOP is a defined
contribution plan, designed to be invested primarily in shares of Common Stock
of the Company and intended to be qualified under Section 401(a) of the Internal
Revenue Code which the Company maintains for the benefit of substantially all of
its salaried and hourly employees. As of September 30, 1997 the ESOP held
approximately 56% of the outstanding shares of Common Stock of the Company.
Republic Engineered Steels, Inc. (the "Company"), is a major producer of
special bar quality ("SBQ") steel and specialty steel bars (collectively,
"Engineered Steels"). SBQ steel bars are higher quality hot-rolled and
cold-finished carbon and alloy steel bars, and specialty steels are stainless,
tool and vacuum remelted steels. Engineered Steels generally contain more
alloys than merchant quality and commodity grades of carbon and alloy steel and
require precise metallurgical content and compliance with rigorous customer
quality specifications for consistency, internal soundness, straightness and
surface finish.
The Company believes that, on the basis of net tons shipped, it is the
leading domestic producer of SBQ steel bars and one of the top three domestic
producers of specialty steel bars. The Company produces the widest range of SBQ
products in the domestic industry, as measured by dimension, shape, process and
grade, and the Company's SBQ and specialty steel products are widely recognized
for their quality and strength. SBQ products sell for higher prices per net ton
than merchant and commodity grade bar products and, within the SBQ market, the
Company concentrates on higher end products (i.e. ones that require greater
product sophistication and, therefore, usually carry a higher selling price per
net ton). The principal markets for SBQ steel bars are automotive, heavy
equipment manufacturing and independent forgers. Within the specialty steels
market, the Company is one of the two largest domestic producers of vacuum
remelted steels, which are used for critical aerospace and power generation
applications, and is one of a number of producers of commodity grade stainless
steel bars and tool steels.
Page 5 of 14
<PAGE>
(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.
(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) LONG-LIVED ASSETS
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 39 years
for buildings and 3-30 years for machinery and equipment. Accelerated methods
are used for income tax purposes.
The Company adopted the provisions of Financial Accounting Standards Board
(FASB) No. 121, ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS TO BE
DISPOSED OF, during fiscal year 1997. This statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceed the amount or fair value, as defined,
of the assets. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. Adoption of the FASB No. 121
did not have a material impact on the Company's consolidated financial position,
results of operations, or liquidity.
(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.
(h) INCOME TAXES
The Company accounts for income taxes pursuant to the asset and liability
method. Under that method, 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, and
the effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Page 6 of 14
<PAGE>
(i) ENVIRONMENTAL COSTS
The Company and other basic steel companies have in recent years become
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 establishes 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 costs that, in
management's judgment, are likely to occur. 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 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 shares of common stock equivalents outstanding during each
fiscal year.
(k) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
In the preparation of the consolidated financial statements, the Company
uses estimates for, among others, deferred income tax benefits, defined benefit
pension obligations, other postretirement benefit obligations, and environmental
remediation, all of which are significant to the consolidated financial
statements taken as a whole. Changes in circumstances in the near term could
have an impact on these estimates, and the change in estimate could have a
material effect on the consolidated financial statements.
(l) STOCK BASED COMPENSATION
During fiscal year 1997, the Company adopted FASB No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the grant date.
Alternatively, FASB No. 123 allows entities to continue to measure the
compensation cost for stock-based awards using the intrinsic value based method
of accounting prescribed by the Accounting Principles Board (APB) Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and to provide pro forma net
income and pro forma earnings per share disclosures as if the fair value based
method defined in FASB No. 123 had been applied. The Company has elected to
continue to apply the provisions of APB Opinion No. 25 and provide the pro forma
disclosures of FASB No. 123.
Page 7 of 14
<PAGE>
(m) RECLASSIFICATION
Certain previously reported amounts have been reclassified to conform with
the current 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):
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
Raw materials. . . . . . . . . . . . . . . . . . $ 10,655 $ 10,923
Finished and semifinished product. . . . . . . . 149,444 138,950
Supplies, molds, and stools. . . . . . . . . . . 1,762 1,835
-------- --------
$161,861 $151,708
-------- --------
-------- --------
</TABLE>
(3) LONG-TERM DEBT
Long-term debt of the Company consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1997
------------- ------------
(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 . . . . . . . . . . . -- --
Other. . . . . . . . . . . . . . . . . . . . . . 35 39
-------- --------
273,935 273,939
Less Current Maturities of Long-term debt. . . . -- --
-------- --------
$273,935 $273,939
-------- --------
-------- --------
</TABLE>
The Company's revolving credit facility, which had permitted borrowings up
to $90 million and was due to expire in December 1997, was amended on April 25,
1997 to expire on April 25, 2000 and permit borrowings up to $115 million (the
"Revolving Credit Agreement"), secured by the Company's receivables,
inventories, subsidiaries stock, short term investments and certain intangible
assets. As of September 30 and June 30, 1997 there were no outstanding
borrowings under the Revolving Credit Agreement.
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 higher of the base rate of BankBoston and 1/2 percent
above the Federal Funds effective rate plus 1/4 percent; or LIBOR plus 2 1/4
percent, at the Company's option. The borrowing base under the Revolving Credit
Agreement is the sum of 55 percent of "Eligible Inventory" up to a maximum of
$75 million and 85 percent of "Eligible Accounts Receivable." Fees of 2 1/2
percent per annum on the maximum drawing amount of each standby or documentary
letter of credit are
Page 8 of 14
<PAGE>
payable on the date of issuance of such letter of credit. A commitment fee of
3/8 percent per annum on the average unused portion of the facility is
payable quarterly. The Revolving Credit Agreement contains certain limited
negative and affirmative covenants, including failure to pay interest or
principal when due, inaccurate or false representations or warranties and
limitations on restricted payments.
On October 28, 1994, the Ohio Water Development Authority (the "Authority")
issued $20.2 million of 8 1/4% Solid Waste Revenue Bonds (the "1994 Bonds") due
2014, on behalf of the State of Ohio, at 98% of 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
solid waste recycling facilities installed at the CAST-ROLL-TM- facility. The
proceeds of the 1996 Bonds were used to reduce outstanding borrowings under the
Revolving Credit Facility. As of September 30, 1997 the Company had available
$1.131 million from the 1996 Bonds which is classified as restricted cash in the
accompanying consolidated balance sheet, and zero from the 1994 Bonds.
The Company's $200,000 First Mortgage Notes represent the only long-term
debt which matures during the next five years (December 15, 2001).
(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 material 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 $10 million to $24 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 $13.5 million (unaudited) at September
30, 1997 and $17.8 million at June 30, 1997.
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 salaried employees of the Company 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
Page 9 of 14
<PAGE>
damages of $500,000 on each count, punitive damages of $500,000 under the
public policy count, prejudgment interest and attorneys' fees. The Company
denied all of the claims and contested them vigorously. The Company's motion
for summary judgment was partially granted on May 15, 1996, dismissing all
claims of the former employees other than the age discrimination claims. All
nineteen age discrimination claims have now been settled for an amount that
is not deemed to be material either individually or in the aggregate.
The Company is involved in other legal proceedings, including various
environmental proceedings with governmental authorities, personal injury and
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
financial condition or results of operations of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1996
Net sales for the first quarter of fiscal year 1998 totaled approximately
$186.0 million on 251,831 net tons of steel shipments compared to approximately
$183.4 million and shipments of 234,712 net tons for the year earlier period.
Despite the 7.3% increase in shipping volume, sales revenues increased by only
1.4% as the company's average selling price per ton fell by 5.5% to $738 per ton
versus $781 per ton for the year earlier period as a result of a lower
percentage of shipments of value added stainless products which have been
adversely affected by increased imports and by generally lower selling prices
for hot rolled and cold finished products versus the year earlier quarter.
Cost of products sold decreased to $168.7 million or $670 per ton shipped
versus $170.5 million or $727 per ton shipped for the year earlier quarter
despite the 7.3% increase in shipping volume. The improvement is the result of
three major factors; 1) significantly improved conversion costs associated with
the CAST-ROLL-TM- facility, which production level was increased by 39% over the
year earlier quarter or 83.3% of capacity and 91% of capacity for the
August-September period; 2) a pretax gain of approximately $3.2 million which
reflects an independent re-assessment of probable environmental liabilities for
certain historical waste disposal sites and; 3) a $.7 million pretax gain
representing proceeds in excess of expenses relating to certain demolition
projects. In addition, scrap and other raw material costs moderated somewhat
versus the year earlier quarter. However, as a result of decreased selling
prices, scrap costs increased from 24.6% to 25.4%.
Selling, general and administrative expenses decreased to approximately
$9.6 million from approximately $11.5 million for the first quarter of fiscal
year 1998 versus the year earlier quarter, and represent approximately 5.2% and
6.3% of sales revenue for the first quarter 1998 and 1997, respectively. The
decrease is primarily the result of reduced salaried employment levels.
Net periodic postretirement benefit charges totaled approximately $3.7
million for the quarter ended September 30, 1997, a decrease of approximately
$.6 million versus the same quarter one year earlier. The decrease is a
reflection of the January 1997 revision to the salaried employees retiree
health care plan which changed eligibility requirements for receiving health
care benefits from age 57 with 30 years of service or age 60 with 15 or more
years of service to age 65 with 15 or more years of service.
Page 10 of 14
<PAGE>
Non-cash ESOP charges totaled approximately $7.3 million versus $7.9
million in the year ago quarter. The charges are based on a contribution rate
of 18% of employee compensation for both periods and the decreased charge for
the current period reflects lower labor utilization despite the increased
shipment level.
Cash interest expense totaled approximately $6.6 million for the first
quarter of fiscal year 1998 versus $6.7 million in the year earlier quarter.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments as of September 30, 1997 totaled $2.4
million compared to $6.4 million as of June 30, 1997. Also, as of September 30
and June 30, 1997 the Company had no outstanding borrowings under the Revolving
Credit Agreement.
The Company's revolving credit facility, which had permitted borrowings up
to $90 million and was due to expire in December 1997, was amended on April 25,
1997 to expire on April 25, 2000 and permit borrowings up to $115 million (the
"Revolving Credit Agreement"), secured by the Company's receivables,
inventories, subsidiaries stock, short term investments and certain intangible
assets. As of September 30 and June 30, 1997 there were no outstanding
borrowings under the Revolving Credit Agreement.
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 higher of the base rate of BankBoston and 1/2 percent
above the Federal Funds effective rate plus 1/4 percent; or LIBOR plus 2 1/4
percent, at the Company's option. The borrowing base under the Revolving Credit
Agreement is the sum of 55 percent of "Eligible Inventory" up to a maximum of
$75 million and 85 percent of "Eligible Accounts Receivable." Fees of 2 1/2
percent per annum on the maximum drawing amount of each standby or documentary
letter of credit are payable on the date of issuance of such letter of credit.
A commitment fee of 3/8 percent per annum on the average unused portion of the
facility is payable quarterly. The Revolving Credit Agreement contains certain
limited negative and affirmative covenants, including failure to pay interest or
principal when due, inaccurate or false representations or warranties and
limitations on restricted payments.
During the period from the Acquisition through September 1993, the
Company's primary focus was on improving the Company's capital structure by
reducing indebtedness. During this period, the Company repaid approximately
$119.2 million of indebtedness incurred in connection with the Acquisition. The
proceeds from the issuance in December 1993 of the $200.0 million First Mortgage
Notes were used to retire all $61.6 million of the Company's outstanding 15 1/2%
Subordinated Debentures at a discount for approximately $58.9 million and to pay
down $110.0 million of outstanding bank debt with the balance being applied
towards the cost of the CAST-ROLL-TM- facility. Since January 1994, the Company
has focused on improving liquidity in order to meet its ongoing cash
requirements, including those relating to the CAST-ROLL-TM- facility.
On October 28, 1994, the Ohio Water Development Authority (the "Authority")
issued $20.2 million of 8 1/4% Solid Waste Revenue Bonds (the "1994 Bonds") due
2014, on behalf of the State of Ohio, at 98% of 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
solid waste recycling facilities installed at the CAST-ROLL-TM- facility. The
proceeds of the 1996 Bonds were used to reduce outstanding borrowings under the
Revolving Credit Facility. As of September 30, 1997 the Company had available
$1.131 million from the 1996
Page 11 of 14
<PAGE>
Bonds which is classified as restricted cash in the accompanying consolidated
balance sheet, and zero from the 1994 Bonds.
The IPO was completed on May 5, 1995 at a price of $8.00 per share. Of the
shares of Common Stock sold to the public, the Company sold 6,895,020 shares,
the trustee of the ESOP sold 342,076 shares beneficially owned by former
employees and LTV Steel Company, Inc. sold to the underwriters the warrant which
entitled the holder thereof to purchase 812,904 shares of Common Stock for $.05
per share and the underwriters, in turn, exercised the warrant and sold 812,904
shares as part of the offering. The Company used substantially all of the net
proceeds of the IPO received by it to redeem all of the issued and outstanding
shares of its Preferred Stock (approximately $47.6 million) in May 1995 at a
redemption price of $10.10 per share (stated value of $10.00 per share plus a 1%
premium).
The Company's $200,000 First Mortgage Notes represent the only long-term
debt which matures during the next five years (December 15, 2001).
The Company believes that cash on hand, cash flow from operations and
borrowings under the Revolving Credit Agreement will be sufficient to meet its
cash needs in the foreseeable future.
At its October 23, 1997 Annual Meeting of Stockholders, Republic's Chairman
indicated that the Company was exploring alternatives which, without increasing
the Company's debt, would enable the construction of a new bar mill to produce
engineered bars in a size range which would cover the heart of the Company's
market franchise and also to upgrade its large bar capability by investing
additional capital in its CAST-ROLL-TM- facility. The Company will explore
raising equity, pursuing joint ventures, selling assets or some combination of
these options to build the new bar rolling mill or, in the alternative, a
complete mini-mill which would include an ultra-high powered electric furnace,
melt shop, a continuous large billet caster, a reheat furnace and a bar rolling
mill. These facilities would be devoted to producing engineered bars in sizes
ranging from 1 1/2 inches to 6 1/4 inches.
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 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.
IMPACTS OF ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued SFAS 128: "Earnings Per
Share" effective for fiscal years and interim periods ending after December
15, 1997. For the period ended December 31, 1997, the Company will present
earnings per share data on basic and diluted basis.
Page 12 of 14
<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
The 1997 Annual Meeting of Stockholders of the Company was held
on October 23, 1997. The only matter voted upon was the election of
seven directors. Set forth below is information with respect to the
nominees elected as directors of the Company at the 1997 Annual
Meeting of Stockholders and the votes cast and/or withheld with
respect to each such nominee.
For Withheld
Russell W. Maier 12,112,907 shares 6,268,458 shares
Carol A. Cartwright 14,335,906 shares 4,045,459 shares
Richard F. Celeste 12,679,467 shares 5,701,898 shares
Robert J. Farling 14,812,438 shares 3,568,927 shares
Daniel A. Albert 15,168,660 shares 3,212,705 shares
Jeffrey K. Fernandez 15,150,058 shares 3,231,307 shares
Norman T. Graybill 15,376,838 shares 3,004,527 shares
Each of the nominees listed above received a plurality of the
votes cast at the Annual Meeting of Stockholders. There were no
broker non votes with respect to the election of directors.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
Page 13 of 14
<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
(Chief Accounting Officer)
Dated: November 14, 1997
Page 14 of 14
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