<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-Q
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[X]Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended March 31, 1998
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 Company 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 Company's Principal Executive Offices)
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the company: (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 company 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 the issuer's common stock, as of May 8,
1998: 19,706,578 shares
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Page 1 of 19
<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 MARCH 31, 1998 AND 1997
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . $217,470 $196,610
Cost of product sold (including depreciation
of $6,589 and $6,501 for 1998 and 1997) (Note 2) . . . . . 191,792 180,164
---------- ----------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . 25,678 16,446
Selling expenses 2,074 2,532
General and administrative expenses . . . . . . . . . . . . 9,893 8,159
Special charges (Note 6). . . . . . . . . . . . . . . . . . -- 2,763
Other Postretirement benefits charges . . . . . . . . . . . 3,724 4,319
Non-cash ESOP charges . . . . . . . . . . . . . . . . . . . 2,241 7,361
Other charges (credits), net. . . . . . . . . . . . . . . .
Interest expense. . . . . . . . . . . . . . . . . . . . . 6,634 6,883
Interest income . . . . . . . . . . . . . . . . . . . . . (86) (112)
Miscellaneous, net. . . . . . . . . . . . . . . . . . . . (139) (209)
---------- ----------
Income (loss) before income taxes. . . . . . . . . . . . 1,337 (15,250)
Income tax benefit (expense). . . . . . . . . . . . . . . (267) 6,100
---------- ----------
Net income (loss) . . . . . . . . . . . . . . . . . . . . $1,070 ($9,150)
---------- ----------
---------- ----------
Per share data:
Net income (loss) from continuing operations - basic. . . $0.05 ($0.46)
Net income (loss) per common share - basic and diluted. . $0.05 ($0.46)
Average shares outstanding - basic and diluted. . . . . . 19,706,578 19,706,578
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
Page 2 of 19
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Loss)
NINE-MONTH PERIODS ENDED MARCH 31, 1998 AND 1997
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . $597,978 $554,705
Cost of product sold (including depreciation of
$19,743 and $19,450 for 1998 and 1997 (Note 2) . . . . . . 533,648 515,532
Gross profit . . . . . . . . . . . . . . . . . . . . . . 64,330 39,173
---------- ----------
Selling expenses . . . . . . . . . . . . . . . . . . . . . . 6,195 7,775
General and administrative expenses. . . . . . . . . . . . . 26,522 25,248
Special charges (Note 6) . . . . . . . . . . . . . . . . . . -- 2,763
Other postretirement benefits charges . . . . . . . . . . . 11,173 12,957
Non-cash ESOP charges. . . . . . . . . . . . . . . . . . . . 16,919 23,092
Other charges (credits), net . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . 19,781 20,224
Interest income. . . . . . . . . . . . . . . . . . . . . (364) (380)
Miscellaneous, net . . . . . . . . . . . . . . . . . . . (313) (657)
---------- ----------
Loss before income taxes . . . . . . . . . . . . . . . . . . (15,583) (51,849)
Income tax benefit . . . . . . . . . . . . . . . . . . . . . 3,117 20,740
---------- ----------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . ($12,466) ($31,109)
---------- ----------
---------- ----------
Per share data:
Loss from continuing operations - basic. . . . . . . . ($0.63) ($1.58)
Net loss per common share - basic and diluted. . . . . ($0.63) ($1.58)
Average shares outstanding - basic and diluted . . . . 19,706,578 19,706,578
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
Page 3 of 19
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND JUNE 30, 1997
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS 3/31/98 6/30/97*
---------- ----------
(Unaudited)
<S> <C> <C>
Current assets
Cash and cash equivalents. . . . . . . . . . . . . . . . . $ 8,436 $ 6,412
Receivables, less allowance for doubtful accounts of
$1,575 (unaudited) at March 31, 1998 and $1,624 at
June 30, 1997. . . . . . . . . . . . . . . . . . . . . . 81,917 75,596
Inventories. . . . . . . . . . . . . . . . . . . . . . . . 160,011 151,708
Deferred income taxes . . . . . . . . . . . . . . . . . . 5,271 7,382
Other current assets . . . . . . . . . . . . . . . . . . . 4,262 2,067
---------- ----------
Total current assets . . . . . . . . . . . . . . . . . . 259,897 243,165
Property, plant and equipment, net . . . . . . . . . . . . . 302,847 313,235
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 52,303 47,074
Intangibles and other assets, net. . . . . . . . . . . . . . 26,820 27,711
Restricted cash. . . . . . . . . . . . . . . . . . . . . . . 706 1,183
---------- ----------
Total assets . . . . . . . . . . . . . . . . . . . . . . $642,573 $632,368
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt . . . . . . . . . . . $ -- $ --
Other current liabilities. . . . . . . . . . . . . . . . . 110,881 107,834
---------- ----------
Total current liabilities. . . . . . . . . . . . . . . . 110,881 107,834
---------- ----------
Long-term debt, excluding current maturities . . . . . . . . 273,926 273,939
Other postretirement benefits. . . . . . . . . . . . . . . . 137,628 128,073
Defined benefit pension. . . . . . . . . . . . . . . . . . . 14,868 16,885
Environmental costs. . . . . . . . . . . . . . . . . . . . . 13,536 16,862
Other liabilities. . . . . . . . . . . . . . . . . . . . . . 1,826 3,521
---------- ----------
Total liabilities. . . . . . . . . . . . . . . . . . . . 552,665 547,114
---------- ----------
Shareholders' equity
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. . . . . . . . . . . . . . . . . . . . . (185,553) (173,086)
---------- ----------
89,916 102,383
Less receivable from Employee Stock Ownership Trust. . . . . -- 17,121
Less treasury stock, at cost, including 1,345 (unaudited)
common shares at March 31, 1998 and 1,345 common shares
at June 30, 1997 . . . . . . . . . . . . . . . . . . . . . 8 8
---------- ----------
Total shareholders' equity . . . . . . . . . . . . . . . 89,908 85,254
Commitments and contingencies (Notes 4,5). . . . . . . . . . -- --
---------- ----------
$642,573 $632,368
---------- ----------
---------- ----------
</TABLE>
* Condensed from audited consolidated financial statements.
See accompanying notes to the condensed consolidated financial statements
Page 4 of 19
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE-MONTHS ENDED MARCH 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
(Unaudited) (Unaudited)
---------- ----------
<S> <C> <C>
Cash flows from operating activities
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . ($12,466) ($31,109)
Adjustments to reconcile net loss to net cash provided
by operating activities
Depreciation and amortization. . . . . . . . . . . . . . . 21,856 21,871
Provision for non-cash ESOP charges. . . . . . . . . . . . 16,919 23,092
Deferred income tax benefit. . . . . . . . . . . . . . . . (3,117) (20,740)
Special charges. . . . . . . . . . . . . . . . . . . . . . -- 2,763
Change in operating assets and liabilities
(Increase) decrease in working capital . . . . . . . . . . (14,270) 1,534
Decrease in other operating assets and liabilities . . . 1,699 6,544
---------- ----------
Total Adjustments. . . . . . . . . . . . . . . . . . . 23,087 35,064
---------- ----------
Net cash provided by operating activities. . . . . . . 10,621 3,955
---------- ----------
Cash flows from investing activities
Additions to property, plant and equipment . . . . . . . . (9,757) (5,471)
---------- ----------
Net cash used by investing activities. . . . . . . . . . . (9,757) (5,471)
---------- ----------
Cash flows from financing activities
Restricted cash - environmental bonds. . . . . . . . . . . 477 968
Other financing activities . . . . . . . . . . . . . . . . 683 1,803
---------- ----------
Net cash provided by financing activities. . . . . . . 1,160 2,771
---------- ----------
Net increase in cash and cash equivalents. . . . . . . . . . 2,024 1,255
Cash and cash equivalents at beginning of period . . . . . . 6,412 2,074
---------- ----------
Cash and cash equivalents at end of period . . . . . . . . . $ 8,436 $ 3,329
---------- ----------
---------- ----------
Supplemental disclosure of cash flow information
Interest paid . . . . . . . . . . . . . . . . . . . . . . $13,218 $13,914
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
Page 5 of 19
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 (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., 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 March 31, 1998 the ESOP held
approximately 55% 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
Page 6 of 19
<PAGE>
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.
(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 SFAS 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 SFAS 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.
Page 7 of 19
<PAGE>
(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.
(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 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 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 INCOME (LOSS) PER COMMON SHARE
The net income (loss) per common share computations are based upon the
weighted average number of shares of common stock outstanding during each period
and are presented in accordance with SFAS No. 128 which is effective for periods
ending after December 15, 1997.
(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.
Page 8 of 19
<PAGE>
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 SFAS 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, SFAS 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 SFAS 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 SFAS No. 123.
(M) RECLASSIFICATIONS
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 :
<TABLE>
<CAPTION>
(in thousands)
March 31, June 30,
1998 1997
----------- -----------
(unaudited)
<S> <C> <C>
Raw materials $ 10,639 $ 10,923
Finished and semifinished product 147,805 138,950
Supplies, molds, and stools 1,567 1,835
----------- -----------
$160,011 $151,708
----------- -----------
----------- -----------
</TABLE>
Cost of products sold include estimated credits related to Lifo
liquidations of $1.8 million and $3.0 million for third quarters 1998 and 1997,
respectively and $3.0 million for the nine month periods ended March 31, 1998
and 1997, respectively.
Page 9 of 19
<PAGE>
(3) LONG-TERM DEBT
Long-term debt of the Company consists of the following:
<TABLE>
<CAPTION>
(in thousands)
March 31, June 30,
1998 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, Series 1994, 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 26 39
----------- -----------
273,926 273,939
Less Current Maturities of Long-term debt -- --
----------- -----------
$273,926 $273,939
----------- -----------
----------- -----------
</TABLE>
The Company's revolving credit facility, which had permitted borrowings up
to $90 million and was 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, a subsidiary's stock, short term investments and certain intangible
assets. As of March 31, 1998 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.
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 March 31, 1998 the Company had available $.706
million from the 1996 Bonds which is classified as restricted cash in the
accompanying consolidated balance sheet, and zero from the 1994 Bonds.
Page 10 of 19
<PAGE>
The Company's $200,000 First Mortgage Notes represent 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 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 $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 $14.1 million
(unaudited) at March 31, 1998 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 Company 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 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. In July 1997, all nineteen age discrimination claims were settled for
an amount that is not deemed to be material either individually or in the
aggregate.
The Company is involved in various legal proceedings, including
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
Page 11 of 19
<PAGE>
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.
(6) OTHER
In January 1997 the Company announced a plan for organizational
restructuring and cost cutting initiatives which included a revision to the
salaried employees retiree health care plan changing eligibility requirements
for receiving retiree health care benefits 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 to the new plan, a provision was made for a Special
Retirement Window which provided retiree health care benefits under the old plan
to employees who were eligible for benefits as of March 31, 1997 under the old
plan and who retired by March 31, 1997. Sixty-eight (68) individuals elected to
avail themselves of the Special Retirement Window.
The Company also announced plans to restructure and reduce the salaried
workforce by more than 200 people and to further reduce the hourly workforce by
more than 300 people as the Company reaches full capacity utilization of its
CAST-ROLL-TM- facility and completes other smaller capital projects. The
financial impact of the restructuring of the salaried workforce was estimated to
be $2.8 million and is reflected as a special charge in the fiscal 1997 three
month and nine month periods.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1997
Net sales for the third quarter of fiscal year 1998 totaled approximately
$217.5 million on 295,226 net tons of steel shipments compared to approximately
$196.6 million and shipments of 271,609 net tons for the year ago quarter. The
10.6% increase in sales revenues is primarily the result of the 8.7% increase in
shipping volume and a $10 per ton increase in selling price surcharges which
partially offset the increased raw material costs.
Cost of products sold increased to $191.8 million or $650 per ton shipped
versus $180.2 million or $663 per ton shipped for the year ago quarter. The
overall net improvement in manufacturing costs per ton is a result of three
major factors; 1) improved conversion costs associated with the CAST-ROLL-TM-
facility, realized as production was increased by 20% over the year earlier
quarter to 93.3% of its capacity; 2) operating cost efficiencies associated with
the higher production and shipment levels, offset in part by significant
increased raw material costs; and 3) a pretax LIFO credit of $1.8 million
associated with the displacement of ingot produced products with cast products
versus a credit of $3.0 million for the year earlier quarter. Scrap costs
increased dramatically, representing 24.4% of total cost of goods sold compared
to 22.5% in the year earlier quarter. Price changes of alloying additions were
mixed, with nickel prices dropping substantially, molybdenum prices decreasing
slightly and other alloys increasing moderately. On balance, the average price
of alloys were relatively unchanged.
Page 12 of 19
<PAGE>
Selling, general and administrative expenses totaled approximately $12.0
million for the current quarter versus $10.7 million during the year earlier
quarter and represent approximately 5.5% and 5.4% of sales revenue,
respectively. The increase is due in part, to the expensing of charges
relating to organization costs for a possible joint venture and is reflected
in accordance with AICPA Statement of Position 98-5, REPORTING ON THE COSTS
OF START-UP ACTIVITIES, issued April 1998.
Net periodic postretirement benefit charges totaled approximately $3.7
million for the quarter ended March 31, 1998, a decrease of approximately $.6
million versus the third quarter of fiscal year 1997. 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. Cash payments totaled $.5
million and $.4 million for the quarters ended March 31, 1998 and 1997,
respectively.
Non-cash ESOP charges totaled approximately $2.2 million versus $7.4
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 the final ESOP payment. Hereafter, the
annual non-cash ESOP charge which has affected Republic's net income --- more
than $30 million in each of the past four fiscal years --- will no longer be
required.
Cash interest expense totaled approximately $6.6 million for the third
quarter of fiscal year 1998, versus $6.9 million in the year earlier quarter.
Income Taxes: The realization of deferred tax assets is dependent largely
upon generation of sufficient future taxable income. Taking into consideration
its net deferred tax asset, anticipated future taxable income and other factors,
the Company has established a 50 percent reserve for tax benefits for fiscal
year 1998 which results in a 20% effective tax rate.
NINE MONTHS ENDED MARCH 31, 1998 COMPARED WITH NINE MONTHS ENDED
MARCH 31, 1997
Net sales for the first nine months of fiscal year 1998 totaled $598.0
million on 812,727 net tons of steel shipments compared to $554.7 million on
shipments of 738,720 net tons for the year earlier period. Despite the 10.0%
increase in shipping volume, sales revenues increased by only 7.8% as the
average selling price per ton decreased by 2.0% to $736 per ton versus $751 per
ton in the year earlier period. The decrease is the result of a higher
percentage of hot rolled carbon and alloy products and a lower percentage 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 created by new entrants into the SBQ market.
Cost of products sold increased to $533.6 million or $657 per ton shipped
versus $515.5 million or $698 per ton shipped in the year earlier period. The
overall net improvement in manufacturing costs per ton is a result of three
major factors; 1) significantly improved conversion costs associated with the
CAST-ROLL-TM- facility, which
Page 13 of 19
<PAGE>
production level was increased by 25% over the year earlier period or 88.3% of
its capacity; 2) operating cost efficiencies asociated with the higher
production and shipment levels, somewhat offset by moderate increases in the
cost of raw materials; 3) a pretax gain of approximately $3.2 million which
reflects an independent re-assessment of probable environmental liabilities for
certain historical waste disposal sites versus $1.5 million for the year earlier
period. For the nine months ended March 31, 1998, scrap costs represented 25.4%
of total cost of goods sold versus 23.3% in the year earlier period while the
average cost of alloying additions remained relatively flat. The Company
recorded a pretax LIFO credit of $3.0 million for both nine month periods ended
March 31, 1998 and 1997, which credit is associated with the displacement of
ingot produced products with cast products.
Selling, general and administrative expenses decreased from $33.0 million
to $32.7 million for the first nine months of fiscal year 1998 compared to the
same period in the prior fiscal year and represent approximately 5.9% and 5.5%
of sales revenues for the first nine months of fiscal years 1997 and 1998,
respectively. The decrease is primarily the result of decreased salary expense
related to the restructuring of the salaried workforce which was announced in
January 1997, offset in part, due to the expensing of charges relating to
organization costs for a possible joint venture and is reflected in
accordance with AICPA Statement of Position 98-5, REPORTING ON THE COSTS OF
START-UP ACTIVITIES, issued April 1998.
Net periodic postretirement benefits accrued during the nine months ended
March 31, 1998 amounted to an expense of $11.2 million compared to $13.0 million
in the same period of the prior fiscal year. 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. Cash payments for postretirement
benefits totaled $1.6 million for both of the nine month periods ended March 31,
1998 and 1997.
Non-cash ESOP charges totaled approximately $16.9 million for the first
nine months of fiscal year 1998 as compared to $23.0 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 and the final payment to the ESOP Trust during the current quarter which
originated in 1989. Hereafter, the annual non-cash ESOP charge which has
affected Republic's net income --- more than $30 million in each of the past
four years --- will no longer be required.
Cash interest expense totaled approximately $19.8 million for the nine
months ended March 31, 1998, a decrease of approximately $.4 million versus the
year earlier period.
Income Taxes: The realization of deferred tax assets is dependent largely
upon generation of sufficient future taxable income. Taking into consideration
its net deferred tax asset, anticipated future taxable income and other factors,
the Company has established a 50 percent reserve for tax benefits for fiscal
year 1998 which results in a 20% effective rate.
Page 14 of 19
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments as of March 31, 1998 totaled $8.4 million
compared to $6.4 million as of June 30, 1997. Also, as of March 31, 1998, the
Company had available $115.0 million under its $115 million revolving credit
agreement with the BankBoston ("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
March 31, 1998 and as of June 30, 1997 the Company had 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; or 1/2
percent above the Federal Funds effective rate; 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.
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.
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, at 98% of the face amount in
connection with the solid waste disposal facilities installed at its
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 the
outstanding borrowings under the revolving credit facility. As of March 31,
1998 the Company had available $.7 million from the 1996 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
Page 15 of 19
<PAGE>
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 Million First Mortgage Notes represent 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
stated that the Company was exploring a joint venture to construct a new steel
making and bar rolling facility. On January 13, 1998, Republic announced that
its Board of Directors had approved the construction of such a facility and had
authorized the Officers to take steps necessary to form a joint venture through
which a facility consisting of melting, casting, rolling and finishing equipment
would be built, configured for a continuous flow unlike its existing steel and
bar producing facilities. The new complex would be designed to produce
engineered bars in sizes varying from 1 1/2 inches to 6 1/4 inches. Since the
January Board action, Republic's management has discussed the project, including
investment arrangements, with certain potential venture partners, has engaged in
site searches in several localities and pursued other activities related to the
project.
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 has adopted SFAS 128
and has restated prior-period earnings per share data although the reinstatement
had no effect on previously reported data.
In February 1998, the Financial Accounting Standards Board issued SFAS 132:
"Employer's Disclosures about Pensions and Other Postretirement Benefits"
effective for fiscal years beginning after December 15, 1997. The new standard
supersedes the disclosure requirements of SFAS 87, SFAS 88 and SFAS 106 and
standardizes the disclosure for pensions and other postretirement benefits to
the extent possible. The Company will analyze SFAS 132 to determine what
additional disclosures will be required.
In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-5, REPORTING ON THE COSTS OF
START-UP ACTIVITIES which requires that the costs of start-up activities,
including organization costs, be expensed as incurred. Accordingly, in March
1998, the Company has expensed certain prepaid formation costs.
Page 16 of 19
<PAGE>
PRIVATE SECURITIES LITIGATION REFORM ACT
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.
YEAR 2000
In response to the Year 2000 issue, the Company has formulated a plan to
address all known Year 2000 issues and has embarked upon various initiatives in
an attempt to assure that the Company's business systems and process control
equipment is or will be modified to be Year 2000 ready. Additionally, the
Company continues formal communications with suppliers, customers and other
service providers to ascertain that they, too, are actively pursuing Year 2000
compliance issues.
Internally, the Company is involved in a combination of system conversions,
the installation of certain purchased enterprise systems as well as working with
the Automotive Industry Action Group (AIAG) and other groups to assess Year 2000
readiness of process control equipment. It has established a Committee, made up
of various disciplines, to coordinate efforts to assure compliance of suppliers
as well as the Company's Year 2000 readiness.
Although the Company believes that it will not incur major expenditures or
experience disruptions in operations relative to Year 2000 issues, such
incurrence could have a material adverse effect on the Company's financial
condition. Accordingly, the Company plans to devote the necessary financial and
human resources to resolve significant Year 2000 issues in a timely manner.
Page 17 of 19
<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
Exhibit 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
Page 18 of 19
<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/ R. 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: May 8, 1998
Page 19 of 19
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