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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2002.
--------------------
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: 333-48245
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RENCO STEEL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-1854775
- ---------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
30 Rockefeller Plaza, 42nd Floor, New York, New York 10112
- ----------------------------------------------------- ----------------------
(Address of principal executive offices) (Zip Code)
(212) 541-6000
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ ] Yes [X] No
Note: The Registrant files pursuant to an indenture but is not otherwise
subject to Section 13 or 15(d) filing requirements.
As of September 16, 2002, the registrant had 100 shares of its common
stock, no par value, $.01 stated value, outstanding.
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Page 2
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements of Renco Steel Holdings, Inc.
Consolidated Balance Sheets as of
July 31, 2002 and October 31, 2001. 3
Consolidated Statements of Operations for the
three months and nine months ended
July 31, 2002 and 2001. 4
Consolidated Statements of Cash Flows for the
nine months ended July 31, 2002 and 2001. 5
Condensed Notes to Consolidated Financial Statements. 6
Financial Statements of WCI Steel, Inc.
Consolidated Balance Sheets as of
July 31, 2002 and October 31, 2001. 11
Consolidated Statements of Operations for the
three and nine months ended July 31, 2002 and 2001. 12
Consolidated Statements of Cash Flows for the
nine months ended July 31, 2002 and 2001. 13
Notes to Consolidated Financial Statements. 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 30
PART II OTHER INFORMATION
Item 1. Legal Proceedings 31
Item 6. Exhibits and Reports on Form 8-K 31
Signatures 32
Page 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amount)
July 31, October 31,
2002 2001
------------ ------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents ............... $ 2,816 $ 25
Restricted cash and cash equivalents .... 2,800 32,244
Accounts receivable, less allowances for
doubtful accounts of $3,326 and $3,100,
respectively .......................... 58,219 48,875
Inventories ............................. 83,525 87,847
Prepaid expenses ........................ 1,707 1,049
------------ ------------
Total current assets ............... 149,067 170,040
Property, plant and equipment, net ........ 225,311 233,267
Intangible pension asset, net ............. 31,921 36,470
Other assets, net ......................... 4,745 6,127
------------ ------------
Total assets ....................... $ 411,044 $ 445,904
============ ============
LIABILITIES and SHAREHOLDER'S DEFICIT
Current liabilities
Current portion of long-term debt ....... $ 121,154 $ 120,334
Accounts payable ........................ 42,803 45,939
Accrued liabilities ..................... 69,082 74,289
Due to related party .................... 7,529 1,125
------------ ------------
Total current liabilities .......... 240,568 241,687
Long-term debt, excluding current portion . 334,544 301,111
Postretirement health care benefits ....... 121,989 118,214
Pension benefits, excluding current portion 17,006 35,062
Other liabilities ......................... 15,857 15,381
------------ ------------
Total liabilities .................. 729,964 711,455
------------ ------------
Shareholder's deficit
Common stock, no par value, stated value
$.01 per share, 850 shares authorized,
100 shares issued and outstanding ..... -- --
Additional paid-in capital .............. 10,508 5,118
Accumulated deficit ..................... (329,428) (270,669)
------------ ------------
Total shareholder's deficit ........ (318,920) (265,551)
Commitments and contingencies ............. -- --
------------ ------------
Total liabilities and
shareholder's deficit ......... $ 411,044 $ 445,904
============ ============
See accompanying notes to consolidated financial statements
Page 4
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
Three months Nine months
ended July 31, ended July 31,
------------------------ ------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales .................... $ 132,756 $ 109,988 $ 350,038 $ 307,447
Operating costs and expenses
Cost of products sold ....... 122,230 112,755 346,809 315,677
Depreciation and amortization 5,515 5,709 16,444 18,864
Selling, general and
administrative expenses .... 5,523 3,627 10,977 13,206
Asset impairment and related
charges (note 9) ........... -- -- -- 3,909
--------- --------- --------- ---------
133,268 122,091 374,230 351,656
--------- --------- --------- ---------
Operating loss ............... (512) (12,103) (24,192) (44,209)
--------- --------- --------- ---------
Other income (expense)
Interest expense ............ (11,791) (11,418) (35,069) (34,213)
Interest, investment and
other income (expense), net 40 556 502 (7,901)
--------- --------- --------- ---------
(11,751) (10,862) (34,567) (42,114)
--------- --------- --------- ---------
Loss before income taxes ..... (12,263) (22,965) (58,759) (86,323)
Income tax (benefit) expense . -- -- -- --
--------- --------- --------- ---------
Net loss ................... $ (12,263) $ (22,965) $ (58,759) $ (86,323)
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
Page 5
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine months
ended July 31,
-----------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................... $(58,759) $(86,323)
Adjustments to reconcile net loss
to net cash provided by operating activities
Depreciation and amortization ............. 16,444 17,362
Amortization of deferred maintenance costs -- 1,502
Amortization of financing costs ........... 1,493 1,431
Postretirement health care benefits ....... 5,275 9,875
Pension benefits .......................... (13,994) 2,938
Provision for losses on accounts receivable 2,373 2,450
Asset impairment and other charges ........ -- 14,745
Gain on other investments ................. -- (204)
Other ..................................... 134 93
Cash used by changes in certain
assets and liabilities
Accounts receivable ....................... (11,717) (7,244)
Inventories ............................... 4,323 5,316
Prepaid expenses and other assets ......... (819) (3,319)
Accounts payable .......................... (3,136) 1,316
Accrued liabilities ....................... (5,673) (4,760)
Other liabilities ......................... (71) 458
Due to related party ...................... 6,404 --
-------- --------
Net cash used by operating activities ..... (57,723) (44,364)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property, plant and equipment ....... (8,526) (8,248)
Gross proceeds from the sale of assets ........... -- 105
Other investments, net ........................... -- 7,717
-------- --------
Net cash used by investing activities ..... (8,526) (426)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in WCI Revolver ....................... 34,250 --
Other changes in long term debt .................. (44) 174
Capital contribution by parent ................... 5,390 3,225
-------- --------
Net cash provided by financing activities . 39,596 3,399
-------- --------
Net decrease in cash and cash equivalents .......... (26,653) (41,391)
Total cash and cash equivalents at
beginning of period ............................... 32,269 90,607
-------- --------
Total cash and cash equivalents at end of period ... $ 5,616 $ 49,216
======== ========
Supplemental disclosure of cash flow information
Cash paid for interest .................... $ 34,400 $ 37,014
Cash paid for income taxes ................ -- --
See accompanying notes to consolidated financial statements.
Page 6
RENCO STEEL HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and nine months ended July 31, 2002 and 2001
( Unaudited )
NOTE 1: BASIS OF PRESENTATION
Renco Steel Holdings, Inc. (Renco Steel) is a holding company incorporated
in the state of Ohio on January 20, 1998 and is a wholly owned subsidiary of The
Renco Group, Inc. (Renco). On January 29, 1998, Renco contributed to Renco Steel
its interest in its wholly owned subsidiary WCI Steel, Inc. (WCI). Accordingly
the accompanying financial statements include the accounts of Renco Steel and
WCI (collectively, the Company).
The financial information included herein is unaudited; however, such
information reflects all adjustments (consisting solely of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
statement of results for the interim periods. Certain reclassifications of prior
year data have been made to conform to the 2002 presentation. The results of
operations for the three and nine months ended July 31, 2002 are not necessarily
indicative of the results to be expected for the full year.
These interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the fiscal year ended October 31, 2001.
NOTE 2: CASH AND CASH EQUIVALENTS
Cash and cash equivalents of Renco Steel and WCI include cash on hand and
short-term investments with maturities of three months or less from the date of
acquisition. Renco Steel is generally restricted from utilizing the cash and
cash equivalents of WCI under the terms of the indenture governing WCI's 10%
Senior Secured Notes due 2004, except as permitted for the distribution of
dividends to Renco Steel.
Page 7
NOTE 3: INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
by the last-in, first-out (LIFO) method. The composition of inventories at July
31, 2002 and October 31, 2001 was as follows:
July 31, October 31,
2002 2001
(Unaudited)
------------ ------------
(Dollars in thousands)
Raw materials .................... $ 23,372 $ 33,710
Finished and semi-finished product 60,331 54,042
Supplies ......................... 176 95
------------ ------------
83,879 87,847
Less LIFO reserve ................ 354 --
------------ ------------
$ 83,525 $ 87,847
============ ============
NOTE 4: RELATED PARTY TRANSACTIONS
Renco Steel has borrowed $7.3 million from Renco since July 2001 under the
terms of three separate demand promissory notes ("the Renco Loans"). Renco's
right to payment under the Renco Loans is contractually subordinated to Renco
Steel's $120.0 million 10 7/8% Senior Secured Notes due 2005 ("Senior Secured
Notes"). The Renco Loans bear interest at a rate of 8.75% and are payable upon
demand. These loans and accrued interest thereon are reflected as due to related
party on the Consolidated Balance Sheet at July 31, 2002.
As of July 31, 2002, Renco owned $69,470 principal amount of Renco
Steel's Senior Secured Notes after purchasing an additional $7.15 million
principal amount during the third fiscal quarter of 2002. Renco has
irrevocably waived its right to receive interest in regard to its ownership
of the Senior Secured Notes from February 1, 2001 to and including July 31,
2002. Accordingly, capital contributions of $5.4 million and $3.2 million
have been recorded in the nine months ended July 31, 2002 and 2001,
respectively, and interest expense of the same amounts were also recorded in
the Company's Statement of Operations for the same periods. From February 1,
2001, Renco's aggregate capital contribution has been $10.2 million in
respect to its waiver of interest.
NOTE 5: ENVIRONMENTAL MATTERS and OTHER CONTINGENCIES
In common with much of the steel industry, WCI's facilities are located on
sites that have been used for heavy industrial purposes for decades. WCI is and
will continue to be subject to numerous federal, state and local environmental
laws and regulations governing, among other things, air emissions, waste water
discharge and solid and hazardous waste management. WCI has made and intends to
continue to make the necessary expenditures for environmental remediation and
compliance with environmental laws and regulations. Environmental laws and
regulations continue to change and have generally become more stringent, and WCI
may be subject to more
Page 8
stringent environmental laws and regulations in the future. Compliance with more
stringent environmental laws and regulations could have a material adverse
effect on WCI's financial condition and results of operations.
WCI is subject to a consent decree as a result of a civil action instituted
by the Department of Justice (DOJ), on behalf of the Environmental Protection
Agency (EPA). The consent decree requires WCI to complete certain supplemental
environmental projects with a remaining estimated cost of $2.0 million that will
be expended by late 2002. These projects include sediment removal from the
Mahoning River at an estimated cost of $0.8 million and the installation of a
liner for a surface impoundment estimated to cost approximately $1.2 million.
The consent decree also provides for stipulated penalties in the event of
noncompliance which WCI does not believe will be material.
As a condition of a previous Resource Conservation and Recovery Act (RCRA)
operating permit, WCI is required to undertake a corrective action program with
respect to historical material handling practices at the Warren facility. WCI
has completed the initial phase of the first investigation step of the
corrective action program, the RCRA Facility Investigation (RFI), and has
submitted its report to the EPA. WCI and the EPA agreed that additional sampling
would be required to complete a full RFI which is expected to be completed by
the end of 2003. The RFI workplan identifies thirteen historical solid waste
management units to be investigated. The final scope of corrective action
required to remediate any contamination that may be present at or emanating from
the Warren facility is dependent upon the completion and findings of the RFI and
the development and approval of a corrective action program. Accordingly, WCI is
unable at this time to estimate the final cost of the corrective action program
or the period over which such costs may be incurred and there can be no
assurance that any such corrective action program would not have a material
adverse effect on the operating results or financial condition of WCI.
On January 23, 1996, two retired employees instituted an action against WCI
and the United Steelworkers of America (USWA) in the United States District
Court for the Northern District of Ohio alleging in substance that certain
distributions made by WCI to employees and benefit plans violated certain
agreements, the Employee Retirement Income Security Act (ERISA), the National
Labor Relations Act (NLRA) and common law. On July 31, 1997, the court granted
WCI's motion to dismiss this action and entered judgement in favor of WCI and
the USWA. The Plaintiffs filed an appeal regarding the court's decision to
dismiss, which was heard in June 1998. In March 1999, the appellate court upheld
the dismissal of the claims under ERISA and common law, but reversed the
dismissal of the NLRA claim and remanded to the district court for further
proceedings. On October 9, 2000 the court granted WCI's motion to dismiss this
action and entered judgement in favor of WCI and the USWA. The plaintiffs filed
an appeal regarding the court's decision to dismiss which was heard on April 23,
2002. On May 24, 2002 the appellate court affirmed the decision to dismiss this
action. No appeal has been filed regarding the decision and the time frame for
filing an appeal has expired.
In addition to the above-described matters, WCI is contingently liable with
respect to lawsuits and other claims incidental to the
Page 9
ordinary course of its business. A liability has been established for an amount,
which WCI believes is adequate, based on information currently available, to
cover the costs to resolve the above described matters, including remediation,
if any, except for any costs of corrective action that may result from the RFI
for which no estimate can currently be made. The outcome of the above described
matters could have a material adverse effect on the future operating results of
WCI in a particular quarter or annual period; however, WCI believes that the
effect of such matters will not have a material adverse effect on WCI's
consolidated financial position.
NOTE 6: SEGMENT REPORTING
The Company applies Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information," which
requires that companies disclose segment data based on how management makes
resource allocation decisions and evaluates segment operating performance.
In applying the Statement, the Company considered its operating and
management structure and the types of information subject to regular review by
its "chief operating decision maker." On this basis, the Company's only
reportable segment is WCI. The segment disclosure is presented on this basis for
the nine months ended July 31, 2002 and July 31, 2001, respectively.
All revenues are generated by WCI. Geographic revenues are based on the
region in which the customer invoice was generated and all revenue was generated
within the United States. The Company measures segment profit for internal
reporting purposes as net income (loss).
A reconciliation of segment income (loss) to consolidated net income (loss)
is presented below for the three and nine months ended July 31, 2002 and 2001:
Three months ended Nine months ended
July 31, July 31,
----------------------- -----------------------
2002 2001 2002 2001
-------- -------- -------- --------
WCI ..................... $ (8,063) $(18,730) $(45,448) $(73,448)
Other ................... (4,200) (4,235) (13,311) (12,875)
-------- -------- -------- --------
Total consolidated
net loss ........ $(12,263) $(22,965) $(58,759) $(86,323)
======== ======== ======== ========
NOTE 7: OTHER MATTERS
In the past, Renco Steel's primary sources of liquidity were investments in
limited partnerships (which were liquidated in 2001) and dividend payments from
WCI. Renco Steel's sole source of liquidity currently is advances and
contributions from its parent, Renco. Dividends from WCI are currently
prohibited under the terms of the indenture governing WCI's 10% Senior Secured
Notes due 2004 due to WCI's significant cumulative losses, as defined. WCI is
required to
Page 10
earn in excess of its cumulative losses before it is permitted to resume
dividend payments to Renco Steel. At July 31, 2002, WCI's cumulative losses were
$154.1 million. It is not anticipated that WCI will be able to generate earnings
in excess of its cumulative losses in the foreseeable future and therefore,
Renco Steel does not expect to receive any dividends from WCI. Support from
Renco will be necessary for Renco Steel to meet its debt service, and to a much
lesser extent, its administrative requirements. As of July 31, 2002, Renco has
provided loans amounting to $7.3 million and has irrevocably waived its right to
collect interest of $10.2 million in the aggregate from February 1, 2001 through
July 31, 2002 on the Senior Secured Notes it owns. Renco may make future
advances or contributions to Renco Steel and may waive its right to future
interest payments on the Senior Secured Notes it owns, however, Renco has no
obligation to do so.
Page 11
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amount)
July 31, October 31,
2002 2001
------------ ------------
(Unaudited)
ASSETS
Current assets
Cash and cash equivalents ................................ $ 2,800 $ 32,244
Accounts receivable, less allowances
for doubtful accounts of $3,326 and
$3,100, respectively .................................... 58,219 48,875
Inventories .............................................. 83,525 87,075
Prepaid expenses and other current assets ................ 1,707 1,049
------------ ------------
Total current assets .............................. 146,251 169,243
Property, plant and equipment, net ......................... 187,794 193,453
Intangible pension asset, net .............................. 34,776 39,556
Other assets, net .......................................... 3,388 4,361
------------ ------------
Total assets ...................................... $ 372,209 $ 406,613
============ ============
LIABILITIES and SHAREHOLDER'S EQUITY
Current liabilities
Current portion of long-term debt ........................ $ 1,309 $ 536
Accounts payable ......................................... 42,803 45,939
Accrued liabilities ...................................... 66,099 72,361
------------ ------------
Total current liabilities ......................... 110,211 118,836
Long-term debt, excluding current portion .................. 334,544 301,111
Postretirement health care benefits ........................ 121,530 117,719
Pension benefits ........................................... 16,949 35,000
Other liabilities .......................................... 15,857 15,381
------------ ------------
Total liabilities ................................. 599,091 588,047
Shareholder's equity (deficit)
Preferred stock, par value $1,000 per share,
5,000 shares authorized, none issued ................... -- --
Common stock, no par value, stated value
$.01 per share, 40,000,000 shares
authorized, 100 shares issued and
outstanding ............................................ -- --
Additional paid-in capital ............................... 279 279
Accumulated deficit ...................................... (227,161) (181,713)
------------ ------------
Total shareholder's equity (deficit) .............. (226,882) (181,434)
Commitments and contingencies .............................. -- --
------------ ------------
Total liabilities and
shareholder's equity (deficit) .................. $ 372,209 $ 406,613
============ ============
See accompanying notes to consolidated financial statements.
Page 12
WCI STEEL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands)
(Unaudited)
Three months Nine months
ended July 31, ended July 31,
------------------------- -------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net sales ...................... $ 132,756 $ 109,988 $ 350,038 $ 307,447
Operating costs and expenses
Cost of products sold ....... 122,322 112,827 346,310 315,893
Depreciation and amortization 4,748 4,808 14,145 16,160
Selling, general and
administrative expenses .... 5,514 3,619 10,941 13,162
Unusual charges ............. -- -- -- 3,909
--------- --------- --------- ---------
132,584 121,254 371,396 349,124
--------- --------- --------- ---------
Operating income (loss) ...... 172 (11,266) (21,358) (41,677)
--------- --------- --------- ---------
Other income (expense)
Interest expense ............ (8,275) (8,004) (24,592) (23,972)
Interest and other income
(expense), net .......... 40 540 502 (7,799)
--------- --------- --------- ---------
(8,235) (7,464) (24,090) (31,771)
--------- --------- --------- ---------
Income (loss) before income
taxes ...................... (8,063) (18,730) (45,448) (73,448)
Income tax (benefit) expense . -- -- -- --
--------- --------- --------- ---------
Net income (loss) ............ $ (8,063) $ (18,730) $ (45,448) $ (73,448)
========= ========= ========= =========
See accompanying notes to consolidated financial statements.
Page 13
WCI STEEL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine months
ended July 31,
------------------------
2002 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................... $(45,448) $(73,448)
Adjustments to reconcile net income (loss)
to net cash provided (used) by operating
activities:
Depreciation and amortization ................ 14,145 14,658
Amortization of deferred maintenance costs ... -- 1,502
Amortization of financing costs .............. 1,040 977
Postretirement health care benefits .......... 5,311 9,913
Pension benefits ............................. (13,758) 3,174
Provision for losses on accounts receivable .. 2,373 2,450
Asset impairment and other charges ........... -- 14,393
Other ........................................ 134 93
Cash provided (used) by changes in certain
assets and liabilities
Accounts receivable .......................... (11,717) (7,244)
Inventories .................................. 3,550 5,258
Prepaid expenses and other assets ............ (819) (3,319)
Accounts payable ............................. (3,136) 1,316
Accrued and other liabilities ................ (6,799) (5,371)
-------- --------
Net cash (used) provided by
operating activities ............... (55,124) (35,648)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment .......... (8,526) (8,248)
Gross proceeds from the sale of assets .............. -- 105
-------- --------
Net cash used by investing activities (8,526) (8,143)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under Revolver Credit Facility ....... 34,250 --
Other changes in long-term debt ..................... (44) 175
-------- --------
Net cash provided (used) by
financing activities ............... 34,206 175
-------- --------
Net increase (decrease) in cash and cash
equivalents ........................................ (29,444) (43,616)
Cash and cash equivalents at
beginning of year .................................. 32,244 89,478
-------- --------
Cash and cash equivalents at end of period ............ $ 2,800 $ 45,862
======== ========
Supplemental disclosure of cash flow information
Cash paid for interest .............................. $ 31,069 $ 30,489
Cash paid for income taxes .......................... -- --
See accompanying notes to consolidated financial statements.
Page 14
WCI STEEL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three and nine months ended July 31, 2002 and 2001
( Unaudited )
NOTE 1: BASIS OF PRESENTATION
WCI Steel, Inc. (Company or WCI) is a wholly-owned subsidiary of Renco
Steel Holdings, Inc. (Renco Steel) and an indirect wholly-owned subsidiary of
The Renco Group, Inc. (Renco). The financial information included herein is
unaudited; however, such information reflects all adjustments (consisting solely
of normal recurring adjustments) which are, in the opinion of management,
necessary for a fair statement of results for the interim periods. Certain
reclassifications of prior year data have been made to conform to the 2002
classifications. The results of operations for the three and nine months ended
July 31, 2002 are not necessarily indicative of the results to be expected for
the full year.
These interim consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K for the fiscal year ended October 31, 2001.
NOTE 2: INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
by the last-in, first-out (LIFO) method. Market value is determined based on
expected selling price of each product. Inventories consist of the following:
July 31, October 31,
2002 2001
------------ ------------
(Unaudited)
(Dollars in Thousands)
Raw materials .................... $ 23,372 $ 33,542
Finished and semi-finished product 60,331 53,438
Supplies ......................... 176 95
------------ ------------
83,879 87,075
Less LIFO reserve ................ (354) --
------------ ------------
$ 83,525 $ 87,075
============ ============
Page 15
NOTE 3: LONG-TERM DEBT
Long-term debt consists of the following:
July 31, October 31,
2002 2001
------------ ------------
(Unaudited)
(Dollars in Thousands)
Senior Secured Notes with
interest at 10% payable semi-
annually, due December 1, 2004 ... $ 300,000 $ 300,000
Revolving Credit Facility (Revolver)
with interest at 5.87% at
July 31, 2002 payable monthly .... 34,250 --
Other .............................. 1,603 1,647
------------ ------------
335,853 301,647
Less current portion of
long-term debt ................... 1,309 536
------------ ------------
$ 334,544 $ 301,111
============ ============
The $300 million 10% Senior Secured Notes due December 1, 2004 (Senior
Secured Notes) are secured by a first priority lien on substantially all of the
existing property, plant and equipment of the Company. A Voluntary Employee
Beneficiaries Association trust fund, established to hold Company contributions
to fund postretirement health care and life insurance obligations for the
benefit of hourly employees, holds a second priority lien on the security for
the Senior Secured Notes.
The Company has a $100,000,000 Revolver secured by inventories and
receivables and subject to eligibility requirements, as defined, reduced by any
outstanding letters of credit. The Revolver is subject to a monthly service fee
of $15,000 and an annual commitment fee of 0.5% of the unused balance up to
$60,000,000 payable monthly. There were borrowings of $34,250,000 outstanding
under the Revolver as of July 31, 2002. The Revolver, which expires December 29,
2003, also provides for up to an aggregate amount of $20,000,000 in letters of
credit. On September 13, 2002 the Company and its lenders under the Revolver
agreed to amend the loan agreement as described below. At July 31, 2002 assuming
this amendment had been in place, the Company had borrowing availability of
$51,836,000 based on eligible inventory and receivables after deducting
$34,250,000 of borrowings outstanding and $14,870,000 in letters of credit
outstanding and before reflecting a $20,000,000 minimum borrowing availability
covenant as discussed below. The Revolver is subject to a penalty of $250,000 if
terminated before October 31, 2003.
The Company's Revolver and Senior Secured Notes contain certain financial
and other covenants, including maintenance of specified levels of net worth as
defined, working capital, and debt service and limitations on capital
expenditures. Additional covenants limit the incurrence of additional
indebtedness, payments affecting subsidiaries, transactions with affiliates,
sale/leaseback transactions, impairment
Page 16
of security interest, consolidations, mergers and transfer of the Company's
assets. On January 25, 2002 the Company and its lenders under the Revolver
agreed to amend the loan agreement to require the Company to maintain a
minimum net worth, as defined, of not less than the following for each period
indicated: negative $225 million through January 31, 2002, negative $240
million from February 1, 2002 through April 30, 2002, negative $255 million
from May 1, 2002 through July 31, 2002, and negative $260 million on August
1, 2002 and thereafter. In addition, the Company was required to maintain
minimum borrowing availability under the Revolver of $25 million. The January
amendment also changes the interest charged from prime rate to prime rate
plus 1.5% or as to Eurodollar Rate Loans, a rate of 3.5% in excess of the
Adjusted Eurodollar Rate applicable for the interest period selected by the
Company. On September 13, 2002 the Company and its lenders under the Revolver
further agreed to reduce the minimum borrowing availability requirement from
$25 million to $20 million provided the Company is able to meet certain
minimum cumulative earnings before interest, taxes, depreciation and
amortization (EBITDA) targets. A mimimum cumulative EBITDA target has been
established for each month from August 2002 to December 2003 and totals $73.0
million with monthly increments of not more than $5.5 million and not less
than $4.0 million. In addition, while loans and letters of credit continue to
be subject to a $100 million maximum, WCI can use up to $105 million of
qualifying inventories and receivables based on established advance rates in
determining availability with respect to the minimum availability covenant.
The Company is permitted to declare and pay dividends, and make other
transactions with affiliates provided no condition of default exists or will
exist, and the accumulated amount of such transactions is no greater than
fifty percent (50%) of the consolidated net income as defined (less 100% of
any consolidated net loss) earned for periods subsequent to October 31, 1996
when taken as a single accounting period less management fees paid to Renco
in excess of $1,200,000 annually for the same period. Under these agreements,
there were no amounts available for dividends and other transactions with
affiliates at July 31, 2002.
NOTE 4: ENVIRONMENTAL MATTERS AND OTHER CONTINGENCIES
In common with much of the steel industry, the Company's facilities are
located on sites that have been used for heavy industrial purposes for decades.
The Company is and will continue to be subject to numerous federal, state and
local environmental laws and regulations governing, among other things, air
emissions, waste water discharge and solid and hazardous waste management. The
Company has made and intends to continue to make the necessary expenditures for
environmental remediation and compliance with environmental laws and
regulations. Environmental laws and regulations continue to change and have
generally become more stringent, and the Company may be subject to more
stringent environmental laws and regulations in the future. Compliance with more
stringent environmental laws and regulations could have a material adverse
effect on the Company's financial condition and results of operations.
The Company is subject to a consent decree as a result of a civil action
instituted by the Department of Justice (DOJ), on behalf of the Environmental
Protection Agency (EPA). The consent decree requires the Company to complete
certain supplemental environmental projects with a
Page 17
remaining estimated cost of $2.0 million that will be expended by late 2002.
These projects include sediment removal from the Mahoning River at an estimated
cost of $0.8 million and the installation of a liner for a surface impoundment
estimated to cost approximately $1.2 million. The consent decree also provides
for stipulated penalties in the event of noncompliance which the Company does
not believe will be material.
As a condition of a previous Resource Conservation and Recovery Act (RCRA)
operating permit, the Company is required to undertake a corrective action
program with respect to historical material handling practices at the Warren
facility. The Company has completed the initial phase of the first investigation
step of the corrective action program, the RCRA Facility Investigation (RFI),
and has submitted its report to the EPA. The Company and the EPA agreed that
additional sampling would be required to complete a full RFI which is expected
to be completed by the end of 2003. The RFI workplan identifies thirteen
historical solid waste management units to be investigated. The final scope of
corrective action required to remediate any contamination that may be present at
or emanating from the Warren facility is dependent upon the completion and
findings of the RFI and the development and approval of a corrective action
program. Accordingly, the Company is unable at this time to estimate the final
cost of the corrective action program or the period over which such costs may be
incurred and there can be no assurance that any such corrective action program
would not have a material adverse effect on the operating results or financial
condition of the Company.
On January 23, 1996, two retired employees instituted an action against the
Company and the United Steelworkers of America (USWA) in the United States
District Court for the Northern District of Ohio alleging in substance that
certain distributions made by the Company to employees and benefit plans
violated certain agreements, the Employee Retirement Income Security Act
(ERISA), the National Labor Relations Act (NLRA) and common law. On July 31,
1997, the court granted the Company's motion to dismiss this action and entered
judgement in favor of the Company and the USWA. The Plaintiffs filed an appeal
regarding the court's decision to dismiss, which was heard in June 1998. In
March 1999, the appellate court upheld the dismissal of the claims under ERISA
and common law, but reversed the dismissal of the NLRA claim and remanded to the
district court for further proceedings. On October 9, 2000 the court granted the
Company's motion to dismiss this action and entered judgement in favor of the
Company and the USWA. The plaintiffs filed an appeal regarding the court's
decision to dismiss which was heard on April 23, 2002. On May 24, 2002 the
appellate court affirmed the decision to dismiss this action. No appeal has been
filed regarding the decision and the time frame for filing an appeal has
expired.
In addition to the above-described matters, the Company is contingently
liable with respect to lawsuits and other claims incidental to the ordinary
course of its business. A liability has been established for an amount, which
the Company believes is adequate, based on information currently available, to
cover the costs to resolve the above described matters, including remediation,
if any, except for any costs of corrective action that may result from the RFI
for which no estimate can currently be made. The outcome of the above described
Page 18
matters could have a material adverse effect on the future operating results of
the Company in a particular quarter or annual period; however, the Company
believes that the effect of such matters will not have a material adverse effect
on the Company's consolidated financial position.
NOTE 5: OTHER MATTERS
Based on WCI's current order intake rate and backlog, the Company expects
shipping volume to be approximately 330,000 tons in the fourth quarter of 2002.
WCI's order backlog was approximately 293,000 tons at July 31, 2002 compared to
158,000 at July 31, 2001 and 352,000 at April 30, 2002. We expect net sales per
ton shipped to increase approximately 10% during the fourth quarter compared to
the third quarter. WCI expects cost of products sold per ton shipped to increase
approximately 2% in the fourth quarter compared to the third quarter due
primarily to changes in product mix with capacity utilization remaining at
approximately 90% or greater. During the fourth quarter of 2002, the Company
expects its working capital needs to increase by approximately $15 million as a
result of increasing iron ore pellet inventories prior to the end of the
shipping season and due to increased accounts receivable resulting from
increasing revenues. Assuming no change in the U.S. economy or level of steel
imports, WCI expects shipping volume during the first fiscal quarter of 2003 to
decline approximately 5% compared to the fourth quarter of 2002 with net sales
and cost of goods sold per ton remaining flat. Based on these expectations, the
Company believes that it has adequate availability of cash resources to maintain
operations and meet its debt service requirements into 2003 and if current
market conditions persist, the Company expects to generate significant free cash
flow both from operations and working capital in the first half of 2003.
Significant uncertainty remains regarding the direction of the U.S. economy
and the short-term as well as long-term condition of the steel market.
Improvements in order intake rates and pricing realized during 2002 could be
reversed by a number of factors including increasing domestic supply through the
restart of closed facilities, increases in steel imports due to rising domestic
steel prices or the granting of exemptions to tariffs imposed as a result of the
Section 201 investigation or the failure of an economic recovery to materialize
or be sustained in the U.S. If the volume or net sales prices expected to be
realized by WCI during the fourth quarter are not sustained in subsequent
quarters due to these or other factors, WCI may not have adequate availability
under its existing financing arrangements to sustain its operations and may
require additional sources of financing. WCI cannot assure that it has the
ability to obtain such additional financing or what the terms of such additional
financing might be. Failure to obtain such additional financing in these
circumstances would likely have a material adverse effect on WCI's operations.
Page 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATION
Three months ended July 31, 2002 compared to
Three months ended July 31, 2001
Net sales for the three months ended July 31, 2002 were $132.8 million on
334,367 tons shipped, representing a 20.7% increase in net sales and a 20.0%
increase in tons shipped compared to the three months ended July 31, 2001. When
the third fiscal quarter of 2002 is compared to the prior quarter ended April
30, 2002, net sales showed a more modest increase of 4.0%, however tons shipped
decreased by 6.0%. Net sales per ton shipped of $397 for the three months ended
July 31, 2002 was 0.5% higher than the net sales per ton shipped of $395 for the
comparable prior year period ended July 31, 2001, with net selling prices up
6.0% offset by changes to product mix. Net sales per ton increased 10.6% for the
third fiscal quarter of 2002 compared to the second fiscal quarter of 2002, with
net selling prices increasing 9.4%. Shipments of custom carbon, alloy and
electrical steels accounted for 47.4% of total shipments for the three months
ended July 31, 2002 compared to 52.4% for the three months ended July 31, 2001
and 47.6% for the three months ended April 30, 2002. The improvements in
shipping volume and increased net selling prices in the third quarter 2002
compared to the third quarter 2001 resulted from a variety of factors including
a decrease in domestic supply due to the closing of facilities during the last
several years, the implementation of tariffs under a favorable Section 201
decision on certain imported steel which became effective for imports entering
the U.S. on or after March 20, 2002, a conclusion to inventory reductions by
customers and a slight improvement in overall economic activity.
Page 20
The table below shows WCI's product mix for the three months ended July 31,
2002 and July 31, 2001.
Net Tons Shipped Percent of Total
------------------ -------------------
Three Months Ended Three Months Ended
July 31, July 31,
------------------ -------------------
2002 2001 2002 2001
------- ------- ------- -------
CUSTOM PRODUCTS:
Hot Rolled .......... 104,156 75,747 31.1% 27.2%
Cold Rolled ......... 5,537 5,193 1.7% 1.9
Coated products ..... 48,740 64,899 14.6% 23.3%
------- ------- ------- -------
Total Custom Products .. 158,433 145,839 47.4% 52.4%
Total Commodity Products 175,934 132,713 52.6% 47.6%
------- ------- ------- -------
Total Steel Products ... 334,367 278,552 100.0% 100.0%
======= ======= ======= =======
The following table sets forth the percentage of WCI's net tons shipped to
various markets for the three months ended July 31, 2002 and July 31, 2001.
Three Months Ended
July 31,
------------------
CUSTOMER CATEGORY 2002 2001
- ------------------------------------------ ------------------
Conversion/further processing.............. 55.9% 51.6%
Steel service centers...................... 20.0% 16.5%
Construction............................... 12.0% 18.2%
Electrical equipment....................... 3.2% 4.4%
Direct automotive.......................... 5.1% 4.8%
Other...................................... 3.8% 4.5%
----- -----
Total............................. 100.0% 100.0%
===== =====
Gross margin (sales less cost of products sold) was $10.5 million for the
three months ended July 31, 2002 compared to gross margin (loss) of ($2.8)
million for the three months ended July 31, 2001. The increase in gross margin
reflects the increased shipping volume and lower production costs resulting from
a higher production volume and its effect on fixed operating costs per ton.
Production volume for the three months ended July 31, 2002 was approximately 89%
of operating capacity compared to approximately 82% for the three months ended
July 31, 2001.
Operating loss was ($0.5) million, or ($2) per ton, for the three months
ended July 31, 2002 compared to operating loss of ($12.1) million, or ($44) per
ton, for the three months ended July 31, 2001. The improvement in operating loss
reflects the increased gross margin discussed above partially offset by a charge
of $2.1 million in the
Page 21
2002 period to establish a reserve for amounts due from a financially distressed
customer.
Interest, investment and other income (expense), net was $40,000 for the
three months ended July 31, 2002 compared to $0.6 million for the three months
ended July 31, 2001. This decrease was due primarily to a decrease in interest
income resulting from lower cash balances for the three months ended July 31,
2002 compared to the three months ended July 31, 2001.
As a result of the items discussed above, the Company had a loss before
taxes of ($12.3) million for the three months ended July 31, 2002 compared to a
loss before taxes of ($23.0) million for the three months ended July 31, 2001.
Effective November 1, 1998, the Company was designated as a qualified
subchapter S subsidiary by Renco. Accordingly, the Company is generally not
subject to income taxes.
Nine Months Ended July 31, 2002 Compared to
Nine Months Ended July 31, 2001.
Net sales for the nine months ended July 31, 2002 were $350.0 million on
934,920 tons shipped, representing a 13.9% increase in net sales and a 23.6%
increase in tons shipped compared to the nine months ended July 31, 2001.
Shipping volume for 2002 began to increase more substantially during the second
fiscal quarter and has leveled off to more historical levels during the third
fiscal quarter. This is a result of a variety of favorable factors that included
a decrease in domestic supply due to the closing of facilities during the past
several years, the implementation of tariffs under a favorable Section 201
decision on certain imported steel which became effective for imports entering
the U.S. on or after March 20, 2002, and a conclusion to inventory reductions by
customers and a slight improvement in overall economic activity. Net sales per
ton shipped decreased 7.9% to $374 in the 2002 period compared to $406 for the
2001 period, with net selling prices down 1.9% coupled with a less favorable
product mix. Shipments of custom carbon, alloy and electrical steels accounted
for 47.2% of total shipments for the nine months ended July 31, 2002 compared to
53.7% for the nine months ended July 31, 2001.
Page 22
The table below shows WCI's product mix for the nine months ended July 31,
2002 and July 31, 2001.
Net Tons Shipped Percent of Total
-------------------- -------------------
Nine Months Ended Nine Months Ended
July 31, July 31,
-------------------- -------------------
2002 2001 2002 2001
------- ------- ------- -------
CUSTOM PRODUCTS:
Hot Rolled ............ 283,697 229,557 30.4% 30.3%
Cold Rolled ........... 18,196 13,567 1.9% 1.8%
Coated products ....... 139,450 163,392 14.9% 21.6%
------- ------- ------- -------
Total Custom Products .... 441,343 406,516 47.2% 53.7%
Total Commodity Products . 493,577 350,190 52.8% 46.3%
------- ------- ------- -------
Total Steel Products ..... 934,920 756,706 100.0% 100.0%
======= ======= ======= =======
The following table sets forth the percentage of WCI's net tons shipped to
various markets for the nine months ended July 31, 2001 and July 31, 2000.
Nine Months Ended
July 31,
-------------------
CUSTOMER CATEGORY 2002 2001
- ----------------------------------------- -------------------
Conversion/further processing............ 58.6% 50.3%
Steel service centers.................... 17.1% 19.7%
Construction............................. 20.0% 15.4%
Electrical equipment..................... 3.1% 4.9%
Direct automotive........................ 4.6% 5.0%
Other.................................... 4.6% 4.7%
-------- --------
Total.................................... 100.0% 100.0%
======== ========
Gross margin (sales less cost of products sold) was $3.2 million for the
nine months ended July 31, 2002 compared to gross margin (loss) of ($8.2)
million for the nine months ended July 31, 2001. The increase in gross margin
reflects the lower per ton production costs resulting from significantly higher
volume and its effect on fixed operating costs per ton and higher shipping
volume partially offset by lower transaction prices and less favorable product
mix discussed above. The 2002 period included favorable adjustments to inventory
valuation reserves of $4.1 million. Excluding these favorable adjustments the
gross margin (loss) was ($0.9) million for the 2002 period. Production volume
during the nine months ended July 31, 2002 was approximately 85% of operating
capacity compared to approximately 73% in the 2001 period.
Operating income (loss) was ($24.2) million, or ($26) per ton, for the nine
months ended July 31, 2002 compared to operating income (loss) of ($44.2)
million, or ($58) per ton, for the nine months ended July 31, 2001.
Page 23
The decrease in operating loss reflects lower depreciation expense and the
decrease in gross margin (loss) discussed above and also included significant
non-recurring items for both periods. The operating loss for the 2002 period
included a $1.6 million gain realized from the resolution of contract issues
relating to the sale of a third party owned coke plant adjacent to WCI's
facility and a charge of $2.1 million to establish a reserve for amounts due
from a financially distressed customer. The operating loss for the 2001 period
included a charge of $3.9 million associated with WCI's wholly-owned subsidiary,
Youngstown Sinter Company, announced indefinite idling of its operating facility
by July 15, 2001 and a charge of $2.1 million to establish a reserve for amounts
due from a financially distressed steel company. Excluding the gain and
adjustments to inventory valuation reserves for the 2002 period and the
non-recurring charges in both the 2002 and 2001 periods, the operating loss was
($27.8) million, or ($30) per ton for the nine months ended July 31, 2002
compared to an operating loss of ($38.2) million, or ($51) per ton for the nine
months ended July 31, 2001.
Interest, investment and other income (expense), net was $0.5 million for
the nine months ended July 31, 2002 compared to ($7.9) million for the nine
months ended July 31, 2001. Declining cash balances during the 2002 period
resulted in a decrease in interest income. In the 2001 period, the Company
recorded a charge of $10.8 million to write down the carrying value of its
investment in Acme Metals, Inc. 10.875% Senior Unsecured Notes.
As a result of the items discussed above, the Company had a loss before
taxes of ($58.8) million for the nine months ended July 31, 2002 compared to a
loss before taxes of ($86.3) million for the nine months ended July 31, 2001.
Effective November 1, 1998, the Company was designated as a qualified
subchapter S subsidiary by Renco. Accordingly, the Company is generally not
subject to income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Renco Steel
In February 1998, Renco Steel issued $120.0 million 10 7/8% Senior Secured
Notes due 2005 ("Senior Secured Notes") which are secured by the stock of WCI.
Interest on the Senior Secured Notes is payable semi-annually in arrears on
February 1, and August 1 of each year.
As of July 31, 2002, and the date hereof, Renco owns the principal amount
of $69,470,000 and $70,470,000, respectively of Renco Steel's Senior Secured
Notes. Renco continues to seek additional Senior Secured Notes to purchase.
Renco is entitled to receive interest payments from Renco Steel in accordance
with the terms of the indenture governing the Senior Secured Notes, however,
Renco irrevocably waived its right to collect interest for the interest payment
that was made on August 1, 2002 and Renco previously waived all interest it was
entitled to collect from February 1, 2001. Renco's waiver of interest has
resulted in capital contributions to the Company in the amounts of $5.4 million
and $3.2 million in the nine months ended July 31, 2002
Page 24
and 2001, respectively, and interest expense of the same amounts were also
recorded in the Company's statement of operations for the same nine month
periods. As of July 31, 2002, in the aggregate, Renco has waived a total of
$10.2 million of interest.
At July 31, 2002 Renco Steel had available cash of $68,000, net of cash
appropriated for the August 1, 2002 interest payment on the Senior Secured
Notes. Renco Steel's liquidity requirements result from its debt service
obligations related to the Senior Secured Notes, as well as to a nominal extent
general corporate overhead. In the past, Renco Steel has met these requirements
through distributions from WCI, from its cash and limited partnership
investments, and from Renco support in the form of loans and waiver of its right
to collect certain interest (from February 1, 2001 to July 31, 2002) on the
Senior Secured Notes it owns. Due to significant losses incurred by WCI in 2001
and 2002 , WCI does not expect to pay dividends to Renco Steel in the
foreseeable future. WCI's ability to pay dividends to Renco Steel is restricted
by the terms of the indenture governing WCI's 10% Senior Secured Notes due 2004
(Senior Secured Notes of WCI). Pursuant to the indenture, dividends are
generally limited to 50% of WCI's cumulative earnings since October 31, 1996
(Dividend Basket). As of July 31, 2002, WCI had a negative Dividend Basket of
$154.1 million, therefore, WCI will not be permitted to pay dividends to Renco
Steel until its earnings exceed such amount. Other than allowable dividends,
WCI's assets may not be utilized by Renco Steel. Renco Steel's ability to meet
its debt service and working capital needs, given WCI's inability to provide
dividends in the foreseeable future, will be completely dependent upon future
support from Renco. Renco has provided advances amounting to $7.3 million to
Renco Steel since July 2001 under the terms of three separate demand promissory
notes ("Renco Loans") that each bear interest of 8.75%. Renco may make future
advances or contributions to Renco Steel and may waive its right to future
interest payments on the Senior Secured Notes, however, Renco has no obligation
to do so.
The indenture governing the Senior Secured Notes contains numerous
covenants and prohibitions that limit the financial activities of Renco Steel,
including, among others, limitations on the incurrence of additional
indebtedness and additional liens. The ability of Renco Steel to comply with
such covenants will be completely dependent upon future support from Renco. The
limitation on the incurrence of additional indebtedness is $15.0 million from a
related party and $15.0 million from other sources that may include related
parties. Based upon the outstanding principal and accrued interest of the Renco
Loans, approximately $22.5 million is permitted for future borrowing.
At July 31, 2002 Renco Steel was in compliance with the terms of the
indenture governing the Senior Secured Notes. The Senior Secured Notes have been
classified as a current liability on the Company's consolidated balance sheet as
of July 31, 2002 and October 31, 2001 due to Renco Steel's insufficient
liquidity position.
Renco Steel's ability to meet its debt service and working capital
obligations is completely dependent upon support from Renco. Failure to receive
such support will have a material adverse effect on Renco Steel's financial
condition and liquidity position.
Page 25
Cash used by operating activities was $57.7 million for the nine months
ended July 31, 2002 compared to $44.4 million for the 2001 period. The decreased
operating cash flow in the 2002 period compared to the 2001 period resulted
primarily from changes in working capital due to an increase in accounts
receivable resulting from increased revenue and by an increase in pension
funding partially offset by a reduction in net loss.
Cash used by investing activities was $8.5 million in the nine months ended
July 31, 2002 compared to $0.4 million in the 2001 period. Capital expenditures
accounted for all of the investing activity in 2002 and were comparable to the
$8.2 million spent in the 2001 period. Capital expenditures are expected to be
approximately $10 million for all of fiscal 2002. At July 31, 2002, WCI had
commitments for capital expenditures of approximately $1.5 million. WCI expects
to complete a reline of its blast furnace within the next two years at an
estimated cost of up to $30 million. In 2001, Renco Steel redeemed a portion of
its investment in a limited partnership investment and received proceeds of $7.7
million.
Cash provided by financing activities was $39.6 million in the nine months
ended July 31, 2002 primarily due to borrowing by WCI under its $100 million
revolving credit agreement (WCI Revolver) in the net amount of $34.3 million and
to the capital contribution of $5.4 million resulting from Renco's waiver of its
right to receive interest from the Senior Secured Notes it owns. WCI did not
borrow under the WCI Revolver in 2001.
Renco Steel paid no dividends and was not permitted to do so under the
Senior Secured Notes indenture during the nine months ended July 31, 2002.
WCI
WCI's liquidity requirements result from capital investments, working
capital requirements, postretirement health care and pension funding, interest
expense and, to a lesser extent, principal payments on its indebtedness. WCI's
primary sources of liquidity as of July 31, 2002 consisted of cash and cash
equivalents of $2.8 million and available borrowing under the WCI Revolver.
The WCI Revolver has a maximum borrowing limit of $100 million, is secured
by inventories and receivables and is subject to eligibility requirements, as
defined therein, and expires on December 29, 2003. On September 13, 2002 WCI and
its lenders under the WCI Revolver agreed to amend the loan agreement as
described below. As of July 31, 2002, assuming this amendment had been in place,
WCI had borrowing availability of $51.8 million based on eligible inventories
and receivables after deducting $34.3 million of borrowings outstanding and
$14.9 million in letters of credit outstanding and before reflecting a $20
million minimum borrowing availability covenant.
Cash from Operations
Cash used by operating activities was $55.1 million for the nine months
ended July 31, 2002 compared to $35.6 million for the nine
Page 26
months ended July 31, 2001. The decreased operating cash flow for the 2002
period compared to the 2001 period resulted primarily from changes in working
capital due to an increase in accounts receivable resulting from increased
revenue and by an increase in pension funding partially offset by a reduction in
net loss.
Capital Expenditures
Capital expenditures were $8.5 million and $8.2 million for the nine months
ended July 31, 2002 and July 31, 2001, respectively. Capital expenditures are
expected to be approximately $10 million for all of fiscal 2002. At July 31,
2002, WCI had commitments for capital expenditures of approximately $1.5
million. WCI expects to complete a reline of its blast furnace within the next
two years at an estimated cost of up to $30 million.
Debt Covenants
The WCI Revolver and the indenture governing the Senior Secured Notes of
WCI contain numerous covenants and prohibitions that limit the financial
activities of WCI, including requirements that WCI satisfy certain financial
ratios and limitations on the incurrence of additional indebtedness. On
January 25, 2002 WCI and its lenders under the WCI Revolver agreed to amend
the loan agreement to require WCI to maintain a minimum net worth, as
defined, of not less than the following for each period indicated: negative
$225 million through January 31, 2002, negative $240 million from February 1,
2002 through April 30, 2002, negative $255 million from May 1, 2002 through
July 31, 2002, and negative $260 million on August 1, 2002 and thereafter. In
addition, WCI was required to maintain minimum availability under the WCI
Revolver of $25 million. On September 13, 2002 WCI and its lenders under the
WCI Revolver further agreed to reduce the minimum borrowing availability
requirement from $25 million to $20 million provided WCI is able to meet
certain minimum cumulative earnings before interest, taxes, depreciation and
amortization (EBITDA) targets. A minimum cumulative EBITDA target has been
established for each month from August 2002 to December 2003 and totals $73.0
million with monthly increments of not more than $5.5 million and not less
than $4.0 million. In addition, while loans and letters of credit continue to
be subject to a $100 million maximum, WCI can use up to $105 million of
qualifying inventories and receivables based on established advance rates in
determining availability with respect to the minimum availability covenant.
The ability of WCI to meet its debt service requirements and to comply with
such covenants will be dependent upon future operating performance and
financial results of WCI, which will be subject to financial, economic,
political, competitive and other factors affecting WCI, many of which are
beyond its control.
Dividends
WCI paid no dividends and was not permitted to do so under the Senior
Secured Notes of WCI indenture during the nine months ended July 31, 2002. WCI
does not expect to be permitted to pay dividends for the foreseeable future
based on limitations under the Senior Secured Notes of WCI indenture.
Page 27
Defined Benefit Pension Plan
WCI has a defined benefit pension plan (DBP) which covers substantially all
bargained for employees. WCI expects to contribute approximately $29.6 million,
$26.3 million and $21.1 million to the DBP during fiscal years 2002, 2003 and
2004, respectively, which is expected to satisfy the minimum funding
requirements of ERISA for those periods. This funding reflects the results of
the actuarial valuation completed as of November 1, 2001. Due primarily to the
reduction in the offset from the frozen defined contribution plan resulting from
adverse investment experience and from changes in the status of plan
participants different from assumptions, WCI's projected benefit obligation
increased from $98.7 million as reported in WCI's 10-K as of October 31, 2001 to
$114.9 million. WCI contributed $24.6 million, $7.2 million, $4.2 million and
$6.7 million to the DBP during the nine months ended July 31, 2002 and fiscal
years ended October 31, 2001, 2000 and 1999, respectively.
Outlook
During the last four years steel imports into the U.S. have adversely
affected shipping volume and have contributed significantly to pricing
volatility. During this period, WCI and the steel industry have filed various
trade cases against hot-rolled and cold-rolled carbon steel flat products from
various countries in response to this increase in imports. While various duties
have been imposed on these products from certain countries, to date these duties
have been ineffective in reducing overall steel imports to the U.S.
In response to the surging imports, in June 2001 the U.S. Trade
Representative, at the direction of President Bush, requested an investigation
by the International Trade Commission under Section 201 of the Trade Act of 1974
to determine whether steel is being imported into the U.S. in such quantities as
to be a substantial cause of serious injury to the U.S. steel industry. This
request included the investigation of carbon and alloy flat rolled products
among other products. On October 22, 2001 the ITC determined that the requisite
injury had been demonstrated related to carbon and alloy slabs, hot-rolled,
cold-rolled and coated products. These determinations pertain to imports from
all countries except Canada. On December 19, 2001 the ITC forwarded its remedy
recommendations to President Bush.
On March 5, 2002 President Bush issued his remedy regarding the Section 201
investigation which became effective for imports entering the U.S. on or after
March 20, 2002. This remedy includes a tariff rate quota on carbon and alloy
slabs of 30% in excess of 5.4 million tons per year adjusting over a three year
period to 18% on imports in excess of 6.4 million tons and a 30% tariff on
hot-rolled, cold-rolled and coated sheet and strip declining over a three year
period to 18%. These remedies pertain to imports from all countries except
Canada, Mexico, Jordan, Israel and certain developing countries. A significant
number of exemption requests have been filed by various countries regarding the
tariffs imposed and granted by the U.S. government with a significant number of
exemption requests still pending.
For the longer term, the shipping levels and realized selling prices of WCI
products will continue to be influenced by the levels of
Page 28
imported steel, the strength of the manufacturing sector of the domestic economy
and production capacity changes by domestic competitors. Domestic flat rolled
steel production capacity has been reduced by the closing of seven producers
during the past several years with total hot strip mill capacity of 16.7 million
tons. This has contributed to the recent increases in product pricing and order
intake. A portion of this capacity has been or is expected to be restarted at
potentially significantly lower production costs during the next six months and
as a result the impact of this closed capacity may be reversed in part.
Based on WCI's current order intake rate and backlog, the Company expects
shipping volume to be approximately 330,000 tons in the fourth quarter of 2002.
WCI's order backlog was approximately 293,000 tons at July 31, 2002 compared to
158,000 at July 31, 2001 and 352,000 at April 30, 2002. We expect net sales per
ton shipped to increase approximately 10% during the fourth quarter compared to
the third quarter. WCI expects cost of products sold per ton shipped to increase
approximately 2% in the fourth quarter compared to the third quarter due
primarily to changes in product mix with capacity utilization remaining at
approximately 90% or greater. During the fourth quarter of 2002, WCI expects its
working capital needs to increase by approximately $15 million as a result of
increasing iron ore pellet inventories prior to the end of the shipping season
and due to increased accounts receivable resulting from increasing revenues.
Assuming no change in the U.S. economy or level of steel imports, WCI expects
shipping volume during the first fiscal quarter of 2003 to decline approximately
5% compared to the fourth quarter of 2002 with net sales and cost of goods sold
per ton remaining flat. Based on these expectations, WCI believes that it has
adequate availability of cash resources to maintain operations and meet its debt
service requirements into 2003 and if current market conditions persist, WCI
expects to generate significant free cash flow both from operations and working
capital in the first half of 2003.
Significant uncertainty remains regarding the direction of the U.S. economy
and the short-term as well as long-term condition of the steel market.
Improvements in order intake rates and pricing realized during fiscal 2002 could
be reversed by a number of factors including increasing domestic supply through
the restart of closed facilities, increases in steel imports due to rising
domestic steel prices or the granting of exemptions to tariffs imposed as a
result of the Section 201 investigation or the failure of an economic recovery
to materialize or be sustained in the U.S. If the volume or net sales prices
expected to be realized by WCI during the fourth quarter are not sustained in
subsequent quarters due to these or other factors, WCI may not have adequate
availability under its existing financing arrangements to sustain its operations
and may require additional sources of financing. WCI cannot assure that it has
the ability to obtain such additional financing or what the terms of such
additional financing might be. Failure to obtain such additional financing in
these circumstances would likely have a material adverse effect on WCI's
operations.
In the past, Renco Steel's primary sources of liquidity were investments in
limited partnerships (which were liquidated in 2001) and dividend payments from
WCI. Renco Steel's sole source of liquidity currently is advances and
contributions from its parent, Renco.
Page 29
Dividends from WCI are currently prohibited under the terms of the indenture
governing WCI's 10% Senior Secured Notes due 2004 due to WCI's significant
cumulative losses, as defined. WCI is required to earn in excess of its
cumulative losses before it is permitted to resume dividend payments to Renco
Steel. At July 31, 2002, WCI's cumulative losses were $154.1 million. It is not
anticipated that WCI will be able to generate earnings in excess of its
cumulative losses in the foreseeable future and therefore, Renco Steel does not
expect to receive any dividends from WCI. Support from Renco will be necessary
for Renco Steel to meet its debt service, and to a much lesser extent, its
administrative requirements. As of July 31, 2002, Renco has provided loans
amounting to $7.3 million and has irrevocably waived its right to collect
interest of $10.2 million in the aggregate from February 1, 2001 through July
31, 2002 on the Senior Secured Notes it owns. Renco may make future advances or
contributions to Renco Steel and may waive its right to future interest payments
on the Senior Secured Notes it owns, however, Renco has no obligation to do so.
Accounting Standards
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement No. 142, Goodwill and Other Intangible Assets. Statement 142 requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of Statement 142. The Company adopted Statement 142
effective November 1, 2001. The adoption of Statement 142 did not have a
material effect on either financial position or results of operations.
In August 2001, the FASB issued Statement No. 143, Accounting for Asset
Retirement Obligations. Statement 143 applies to legal obligations associated
with the retirement of certain long-lived assets. It requires companies to
record the fair value of the liability for an asset retirement obligation in the
period in which it is incurred. When the liability is initially recorded, the
company capitalizes a cost by increasing the carrying amount of the related
long-lived asset. Over time, the liability is accreted to its present value each
period, and the capitalized cost is depreciated over the useful life of the
related asset. Upon settlement of the liability, the company either settles the
obligation for its recorded amount or incurs a gain or loss upon settlement.
Statement 143 is required to be adopted in fiscal years beginning after June 15,
2002. WCI has not yet determined the effect, if any, that adopting Statement 143
will have on future earnings and financial position.
In August 2001, the FASB issued Statement No. 144, Accounting for
Impairment or Disposal of Long-Lived Assets. This statement establishes a single
accounting model for long-lived assets to be disposed of by sale and provides
additional implementation guidance for assets to be held and used and assets to
be disposed of other than by sale. WCI adopted the statement effective November
1, 2001. There was no financial implication related to the adoption of Statement
No. 144, and the guidance will be applied on a prospective basis.
In July 2002, FASB issued Statement of Financial Accounting Standards
(SFAS) No. 146, Accounting for Costs Associated with Exit or Disposal
Activities.
Page 30
The statement requires companies to recognize costs associated with exit or
disposal activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. The statement is to be applied
prospectively to exit or disposal activities initiated after December 31, 2002,
and is not expected to have a significant impact on the Company's financial
position and results of operations.
Forward-Looking Statements
This report includes "forward-looking statements" which involve known and
unknown risks, uncertainties and other important factors that could cause the
actual results, performance or achievements of the Company to differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements. Such risks, uncertainties and other important
factors include, among others: general economic and business conditions; demand
for Company products; changes in industry capacity and levels of imports of
steel or steel products; effectiveness of the Section 201 remedies; industry
trends, including product pricing; competition; currency fluctuations; the loss
of any significant customers; availability of qualified personnel; major
equipment failures; changes in, or the failure or inability to comply with,
government regulation, including, without limitation, environmental regulations;
and the outcome of legal matters. These forward-looking statements speak only as
of the date of this report. The Company expressly disclaims any obligation or
undertaking to disseminate any updates or revisions to any forward-looking
statement contained herein to reflect any change in the Company's expectations
with regard thereto or any change in events, conditions or circumstances on
which any such statement is based.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
WCI is exposed to commodity price risk with respect to natural gas and
zinc. WCI uses forward purchase contracts to manage the volatility related to
the exposure. No contracts are entered into for speculative purposes. WCI's
market risk has not changed materially from that reported in the Company's 10-K
for the fiscal year ended October 31, 2001.
Page 31
PART II - OTHER INFORMATION
RENCO STEEL HOLDINGS, INC.
ITEM 1. LEGAL PROCEEDINGS
For information as to the environmental matters described in the Company's
Form 10-K for the year ended October 31, 2001, see Part I, Note 5 to Item 1,
Financial Satements.
WILLIAMS / REBER V. WCI STEEL, INC.
Reference is made to the description of this action instituted by two
retired employees contained in the Company's annual report on Form 10-K, Part I,
Item 3 for the year ended October 31, 2001 and as described in Note 5 to the
consolidated financial statements herein. The plaintiffs filed an appeal
regarding the court's decision to dismiss, which was heard on April 23, 2002. On
May 24, 2002 the appellate court affirmed the decision to dismiss this action.
No appeal has been filed regarding the decision and the time frame for filing an
appeal has expired.
ITEM 6. EXHIBITS and REPORTS ON FORM 8-K
Exhibits:
None
(b) Reports on Form 8-K:
None
Page 32
RENCO STEEL HOLDINGS, INC.
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.
RENCO STEEL HOLDINGS, INC.
(registrant)
Date: September 16, 2002 /s/ IRA L. RENNERT
------------------------------
Ira L. Rennert
Chairman of the Board,
President and Director
(principal executive officer)
/s/ ROGER L. FAY
-----------------------------
Roger L. Fay
Vice President and
Chief Financial Officer
(principal financial and
accounting officer)