<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, 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: 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 January 30, 1998: 19,706,578 million
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Page 1 of 18
<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, 1997 AND 1996 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $194,537 $174,673
Cost of product sold (including depreciation
of $6,589 and $6,483 for 1997 and 1996) . . . . . . . . . . . . . 173,183 164,849
----------- -----------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . 21,354 9,824
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 2,057 2,648
General and administrative expenses. . . . . . . . . . . . . . . . . 9,017 8,306
Other postretirement benefits charges . . . . . . . . . . . . . . . 3,725 4,319
Non-cash ESOP charges. . . . . . . . . . . . . . . . . . . . . . . . 7,479 7,677
Other charges (credits), net
Interest Expense. . . . . . . . . . . . . . . . . . . . . . . . 6,574 6,671
Interest Income . . . . . . . . . . . . . . . . . . . . . . . . (146) (146)
Miscellaneous, net. . . . . . . . . . . . . . . . . . . . . . . (65) (310)
----------- -----------
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . (7,287) (19,341)
Income tax benefit. . . . . . . . . . . . . . . . . . . . . . . 1,457 7,737
----------- -----------
Net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . ($5,830) ($11,604)
----------- -----------
----------- -----------
Per share data:
Loss from continuing operations - basic . . . . . . . . . . . . ($.30) ($.59)
Net loss per common share - basic . . . . . . . . . . . . . . . ($.30) ($.59)
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 18
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
SIX-MONTH PERIODS ENDED DECEMBER 31, 1997 AND 1996 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $380,508 $358,094
Cost of product sold (including depreciation of $13,154
and $12,949 for 1997 and 1996). . . . . . . . . . . . . . . . . . 341,856 335,368
----------- -----------
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . 38,652 22,726
Selling expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 4,121 5,243
General and administrative expenses. . . . . . . . . . . . . . . . . 16,548 17,215
Other postretirement benefits charges. . . . . . . . . . . . . . . . 7,449 8,638
Non-cash ESOP charges. . . . . . . . . . . . . . . . . . . . . . . . 14,759 15,605
Other charges (credits), net
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . 13,147 13,340
Interest income . . . . . . . . . . . . . . . . . . . . . . . . (278) (268)
Miscellaneous, net. . . . . . . . . . . . . . . . . . . . . . . (174) (448)
----------- -----------
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . (16,920) (36,599)
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . 3,384 14,640
----------- -----------
Net Loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . ($13,536) ($21,959)
----------- -----------
----------- -----------
Per share data:
Loss from continuing operations - basic . . . . . . . . . . . . . ($.69) ($1.11)
Net loss per common share - basic . . . . . . . . . . . . . . . . ($.69) ($1.11)
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 18
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 (UNAUDITED) AND JUNE 30, 1997
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
12/31/97 6/30/97*
----------- ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . $410 $6,412
Receivables, less allowance for doubtful accounts
of $1,573 (unaudited) at December 31, 1997
and $1,624 as of June 30, 1997 . . . . . . . . . . . . . 67,738 75,596
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . 169,156 151,708
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . 4,767 7,382
Other current assets. . . . . . . . . . . . . . . . . . . . . . . 4,048 2,067
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . 246,119 243,165
Property, plant and equipment, net . . . . . . . . . . . . . . . . . 304,750 313,235
Intangibles and other assets, net. . . . . . . . . . . . . . . . . . 27,025 27,711
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . . . . 53,073 47,074
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . 1,108 1,183
--------- ---------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . . $632,075 $632,368
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current maturities of long-term debt. . . . . . . . . . . . . . . $ -- $ --
Other current liabilities . . . . . . . . . . . . . . . . . . . . 99,697 107,834
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . 99,697 107,834
--------- ---------
Long-term debt, excluding current maturities . . . . . . . . . . . . 279,731 273,939
Other postretirement benefits . . . . . . . . . . . . . . . . . . . 134,431 128,073
Defined benefit pension. . . . . . . . . . . . . . . . . . . . . . . 15,540 16,885
Environmental costs. . . . . . . . . . . . . . . . . . . . . . . . . 13,536 16,862
Other liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . 2,822 3,521
--------- ---------
Total liabilities. . . . . . . . . . . . . . . . . . . . . . . 545,757 547,114
--------- ---------
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). . . . . . . . . . . . . . . . . . . . . . . . (186,622) (173,086)
--------- ---------
88,847 102,383
Less receivable from Employee Stock Ownership Trust . . . . . . . . 2,521 17,121
Less treasury stock, at cost, including 1,345 (unaudited)
common shares at December 31, 1997 and
1,345 common shares at June 30, 1997. . . . . . . . . . . . . 8 8
--------- ---------
Total shareholder's equity. . . . . . . . . . . . . . . . . . . 86,318 85,254
Commitments and contingencies. . . . . . . . . . . . . . . . . . . . -- --
--------- ---------
$632,075 $632,368
--------- ---------
--------- ---------
</TABLE>
* Condensed from audited consolidated financial statements.
See accompanying notes to the condensed consolidated financial statements
Page 4 of 18
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX-MONTHS ENDED DECEMBER 31, 1997 AND 1996 (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996
----------- -----------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($13,536) ($21,959)
Adjustments to reconcile net loss to net cash used
by operating activities
Depreciation and amortization . . . . . . . . . . . . . . . . . . 14,565 14,566
Non-cash ESOP charges . . . . . . . . . . . . . . . . . . . . . . 14,759 15,605
Deferred income tax benefit . . . . . . . . . . . . . . . . . . . (3,384) (14,640)
Change in operating assets and liabilities
Increase in working capital . . . . . . . . . . . . . . . . . . (20,821) (2,719)
Decrease in other operating assets and liabilities. . . . . . . 534 5,126
-------- --------
Total Adjustments . . . . . . . . . . . . . . . . . . . . . . 5,653 17,938
-------- --------
Net cash (used) provided by operating activities. . . . . . (7,883) (4,021)
-------- --------
Cash flows from investing activities
Additions to property, plant and equipment. . . . . . . . . . . . (4,936) (2,795)
Net cash used by investing activities . . . . . . . . . . . . . . (4,936) (2,795)
-------- --------
Cash flows from financing activities
Net borrowings under revolving credit facility . . . . . . . . . 5,792 5,492
Proceeds from environmental financing . . . . . . . . . . . . . . 75 984
Other financing activities. . . . . . . . . . . . . . . . . . . . 950 1,065
-------- --------
Net cash provided by financing activities . . . . . . . . . 6,817 7,541
-------- --------
Net decrease in cash and cash equivalents . . . . . . . . . . . . . (6,002) 725
Cash and cash equivalents at beginning of period . . . . . . . . . . 6,412 2,074
-------- --------
Cash and cash equivalents at end of period . . . . . . . . . . . . . $410 $ 2,799
-------- --------
-------- --------
Supplemental disclosure of cash flow information
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . $13,147 $13,593
-------- --------
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
Page 5 of 18
<PAGE>
REPUBLIC ENGINEERED STEELS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENT
DECEMBER 31, 1997 AND 1996 (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 December 31,
1997 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
Page 6 of 18
<PAGE>
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.
(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.
Page 7 of 18
<PAGE>
(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.
(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 outstanding during each period and are
presented in accordance with "SFAS 128" which is effective for periods ending
after December 15, 1997.
Page 8 of 18
<PAGE>
(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.
(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)
December 31, June 30,
1997 1997
------------ --------
(unaudited)
Raw materials $11,414 $10,923
Finished and semifinished product 155,874 138,950
Supplies, molds, and stools 1,868 1,835
-------- --------
$169,156 $151,708
-------- --------
-------- --------
Page 9 of 18
<PAGE>
(3) LONG-TERM DEBT
Long-term debt of the Company consists of the following:
<TABLE>
<CAPTION>
(in thousands)
December 31, 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, 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 5,800 --
Other 31 39
-------- --------
279,731 273,939
Less Current Maturities of Long-term debt -- --
-------- --------
$279,731 $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 December 31, 1997, the Company had
$5.8 million outstanding and as of 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
December 31, 1997 the Company had available $1.108 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 18
<PAGE>
Borrowings under the Revolving Credit Agreement and 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 December 31, 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 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 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
Page 11 of 18
<PAGE>
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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH THREE MONTHS ENDED
DECEMBER 31, 1996
Net sales for the second quarter of fiscal year 1998 totaled
approximately $194.5 million on 265,670 net tons of steel shipments compared
to approximately $174.7 million and shipments of 232,399 net tons for the
year ago quarter. Despite the 14.3% increase in shipping volume, sales
revenues increased only 11.4% as the Company's average selling price per ton
fell by 2.7% to $732 per ton versus $752 per ton in the year earlier quarter.
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 $173.2 million or $652 per ton
shipped versus $164.8 million or $709 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) significantly improved conversion costs
associated with the CAST-ROLL-TM- facility, which production level was
increased by 27% over the year earlier quarter or 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 gain of $1.2 million associated with the displacement of
ingot produced products with cast products. Scrap costs increased
dramatically, representing 26.4% of total cost of goods sold compared to
22.8% in the year earlier quarter. Prices of alloying additions were mixed,
with nickel prices dropping substantially, molybdenum prices increasing
dramatically and other alloys increasing moderately. On balance, the average
price of alloys were relatively flat.
Selling, general and administrative expenses totaled approximately
$11.1 million for the current quarter versus $11.0 million during the year
earlier quarter and represent approximately 5.7% and 6.3% of sales revenue,
respectively.
Net periodic postretirement benefit charges totaled approximately $3.7
million for the quarter ended December 31, 1997, a decrease of approximately
$.6 million versus the second 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 years or
more years of service to age 65 with 15 or more years of service. Cash
payments totaled $.5 million and $.7 million for the quarters ended
December 31, 1997 and 1996, respectively.
Page 12 of 18
<PAGE>
Non-cash ESOP charges totaled approximately $7.5 million versus
$7.7 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. The non-cash charge (non-cash ESOP
charge) for allocating common stock to employees' accounts in the Employee
Stock Ownership Plan Trust will cease during the third fiscal quarter ending
in March 1998. Thereafter, the very large 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 $6.6 million for the second
quarter of fiscal year 1998, versus $6.7 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.
SIX MONTHS ENDED DECEMBER 31, 1997 COMPARED WITH SIX MONTHS ENDED
DECEMBER 31, 1996
Net sales for the first six months of fiscal year 1998 totaled
$380.5 million on 517,501 net tons of steel shipments compared to
$358.1 million on shipments of 467,111 net tons for the year earlier period.
Despite the 10.8% increase in shipping volume, sales revenues increased by
only 6.3% as the average selling price per ton decreased by 4.2% to $735 per
ton versus $767 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 $341.9 million or $661 per ton
shipped versus $335.4 million or $718 per ton shipped in the year period.
the overall net improvement in manufacturing costs per ton is a result of
four major factors; 1) significantly improved conversion costs associated
with the CAST-ROLL-TM- facility, which production level was increased by 34%
over the year earlier period or 88.3% of its capacity; 2) operating cost
efficiencies associated with the higher production and shipment levels,
somewhat offset by moderate increases in the cost of raw materials; 3) a
pretax LIFO gain of $1.2 million associated with the displacement of ingot
produced products with cast products; and 4) a pretax gain of approximately
$3.2 million which reflects an independent re-assessment of probable
environmental liabilities for certain historical waste disposal sites. For
the six months ended December 31, 1997, scrap costs represented 25.9% of
total cost of goods sold versus 23.7% in the year earlier period while the
average cost of alloying additions remained relatively flat.
Selling, general and administrative expenses decreased from
$22.5 million to $20.6 million for the first six months of fiscal year 1998
compared to the same period in the prior fiscal year and represent
approximately 6.3% and 5.4% of sales revenue for the first six months of
fiscal years 1997 and 1998, respectively. The decrease is primarily
Page 13 of 18
<PAGE>
the result of decreased salary expense related to the restructuring of the
salaried workforce which was announced in January 1997.
Net periodic postretirement benefits accrued during the six months ended
December 31, 1997 amounted to an expense of $7.4 million compared to
$8.6 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 years or
more years of service to age 65 with 15 or more years of service. Cash
payments for postretirement benefits totaled $1.1 million and $1.2 million
during the six months ended December 31, 1997 and 1996, respectively.
Non-cash ESOP charges totaled approximately $14.8 million for the first
six months ended December 31, 1997 versus $15.6 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.
The non-cash charge (non-cash ESOP charge) for allocating common stock to
employees' accounts in the Employee Stock Ownership Plan Trust will cease
during the third fiscal quarter ending in March 1998. Thereafter, the very
large 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 $13.1 million for the six
months ended December 31, 1997, a decrease of approximately $.2 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 tax rate.
LIQUIDITY AND CAPITAL RESOURCES
Cash and short-term investments as of December 31, 1997 totaled $.4
million compared to $6.4 million as of June 30, 1997. Also, as of
December 31, 1997, the Company had $5.8 million outstanding, and as of 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 December 31, 1997, the Company had
$5.8 million outstanding and as of 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; or
1/2 percent above the Federal Funds effective rate; or LIBOR plus
2 1/4 percent, at the Company's option. The borrowing
Page 14 of 18
<PAGE>
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
December 31, 1997 the Company had available $1.108 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 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).
Borrowings under the Revolving Credit Agreement and the Company's
$200,000 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.
Page 15 of 18
<PAGE>
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.
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 has
adopted SFAS 128 and has restated prior-period earnings per share data although
the restatement had no effect on previously reported data.
Page 16 of 18
<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 17 of 18
<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: January 30, 1998
Page 18 of 18
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