UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------------- --------------------
NEW CF&I, INC.
(Exact name of registrant as specified in its charter)
Delaware 02-20781 93-1086900
- -------------------------------------------------------------------------------
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Identification Number)
1000 Broadway Building, Suite 2200, Portland, Oregon 97205
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(503) 223-9228
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
CF&I STEEL, L.P.
(Exact name of registrant as specified in its charter)
Delaware 02-20779 93-1103440
- -------------------------------------------------------------------------------
(State or other
jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Identification Number)
1000 Broadway Building, Suite 2200, Portland, Oregon 97205
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(503) 223-9228
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- ------------------------------------------------------------------------------
(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 Sections 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
----- -----
<PAGE>
NEW CF&I, INC.
CF&I STEEL, L.P.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements - New CF&I, Inc.
--------------
Consolidated Balance Sheets
September 30, 1998 (unaudited)
and December 31, 1997 ............................... 2
Consolidated Statements of Income (unaudited)
Three months and nine months ended September 30, 1998
and 1997 ............................................ 3
Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 1998
and 1997 ............................................ 4
Notes to Consolidated Financial
Statements (unaudited)...............................5-6
Financial Statements - CF&I Steel, L.P.
Balance Sheets
September 30, 1998 (unaudited)
and December 31, 1997 ............................... 7
Statements of Operations (unaudited)
Three months and nine months ended September 30, 1998
and 1997 ............................................ 8
Statements of Cash Flows (unaudited)
Nine months ended September 30, 1998
and 1997 ............................................ 9
Notes to Financial
Statements (unaudited).............................10-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..............12-15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.........................16
SIGNATURES....................................................... 16
1
<PAGE>
<TABLE>
NEW CF&I, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
September 30,
1998 December 31,
(Unaudited) 1997
------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3 $ 3
Trade accounts receivable, net 45,577 37,165
Inventories 41,180 41,842
Deferred tax asset 5,404 4,290
Other 2,501 2,500
-------- --------
Total current assets 94,665 85,800
-------- --------
Property, plant and equipment:
Land and improvements 3,574 3,635
Buildings 18,536 15,710
Machinery and equipment 238,398 231,159
Construction in progress 1,302 7,302
-------- --------
261,810 257,806
Accumulated depreciation (44,531) (34,485)
-------- --------
217,279 223,321
-------- --------
Excess of cost over net assets acquired 35,178 35,943
Other assets 17,058 19,023
-------- --------
$364,180 $364,087
======== ========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 7,164 $ 7,373
Accounts payable 39,966 36,728
Accrued expenses 18,717 26,793
-------- --------
Total current liabilities 65,847 70,894
Long-term debt 31,023 38,187
Long-term debt - Oregon Steel Mills, Inc. 192,800 182,200
Environmental liability 32,941 32,941
Deferred employee benefits 6,798 6,643
-------- --------
329,409 330,865
-------- --------
Minority interests 150 319
-------- --------
Redeemable common stock 21,840 21,840
-------- --------
Contingencies (Note 3)
STOCKHOLDERS' EQUITY
Common stock 1 1
Additional paid-in capital 16,603 16,603
Accumulated deficit (3,823) (5,541)
-------- --------
12,781 11,063
-------- --------
$364,180 $364,087
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
2
<PAGE>
<TABLE>
NEW CF&I, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales $ 94,766 $ 118,099 $ 283,842 $ 348,867
Costs and expenses:
Cost of sales 82,902 97,297 253,670 300,412
Settlement of litigation (4,545) -- (4,545) --
Selling, general and administrative
expenses 5,863 5,430 16,933 15,791
Profit participation 363 987 363 1,330
--------- --------- --------- ---------
Operating income 10,183 14,385 17,421 31,334
Other income (expense):
Interest and dividend income 10 19 28 44
Interest expense (6,698) (6,080) (19,110) (19,560)
Minority interest (148) (283) 168 (399)
Other, net 233 1,309 4,977 1,516
--------- --------- --------- ---------
Income before income taxes 3,580 9,350 3,484 12,935
Income tax expense (1,357) (3,738) (1,766) (5,486)
--------- --------- --------- ---------
Net income $ 2,223 $ 5,612 $ 1,718 $ 7,449
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
3
<PAGE>
<TABLE>
NEW CF&I, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,718 $ 7,449
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 11,679 10,212
Deferred income taxes 786 6,452
Minority interest (169) 399
Gain on disposal of property, plant and equipment (4,764) (3,209)
Changes in current assets and liabilities, net (11,946) 20,578
--------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (2,696) 41,881
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (5,361) (8,398)
Proceeds from disposal of property, plant and equipment 4,830 6,561
Other, net -- (164)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (531) (2,001)
--------- ---------
Cash flows from financing activities:
Borrowings from Oregon Steel Mills, Inc. 184,484 141,039
Payments to Oregon Steel Mills, Inc. (173,884) (175,189)
Payment of long-term debt (7,373) (5,730)
--------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 3,227 (39,880)
========= =========
Net increase in cash and cash equivalents -- --
Cash and cash equivalents at beginning of period 3 3
--------- ---------
Cash and cash equivalents at end of period $ 3 $ 3
========= =========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 21,369 $ 21,435
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
4
<PAGE>
NEW CF&I, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The consolidated financial statements include the accounts of New CF&I,
Inc. and its subsidiaries ("Company"). All significant intercompany
balances and transactions have been eliminated.
The unaudited financial statements include all adjustments (consisting of
normal recurring accruals) which, in the opinion of management, are
necessary for a fair presentation of the interim periods. Results for an
interim period are not necessarily indicative of results for a full year.
Reference should be made to the Company's 1997 Annual Report on Form 10-K
for additional disclosures including a summary of significant accounting
policies.
2. Inventories
-----------
Inventories consist of:
September 30, December 31,
1998 1997
------------- ------------
(In thousands)
Raw materials $11,605 $15,051
Semifinished product 12,786 13,840
Finished product 9,891 3,868
Stores and operating supplies 6,898 9,083
------- -------
$41,180 $41,842
======= =======
3. Contingencies
-------------
ENVIRONMENTAL. The Company owns a 95.2 percent interest in CF&I Steel,
L.P. ("CF&I") which owns the Pueblo, Colorado steel mill ("Pueblo Mill").
In connection with CF&I's acquisition of certain assets from CF&I Steel
Corporation in 1993, CF&I established a reserve of $36.7 million for
environmental remediation. The Colorado Department of Public Health and
Environment issued a 10-year post-closure permit with two ten-year
renewals to CF&I which became effective on October 30, 1995. The permit
contains a schedule for corrective actions to be completed which is
substantially reflective of a straight-line rate of expenditure over 30
years. At September 30, 1998, CF&I has a reserve of $34.3 million related
to this remediation, of which $32.9 million is classified as non-current
in the consolidated balance sheet.
GUARANTEES. Oregon Steel Mills, Inc. ("Oregon Steel") has outstanding $235
million principal amount of 11% First Mortgage Notes ("Notes") due 2003.
The Company guaranteed the obligations of Oregon Steel under the Notes,
and those guarantees are secured by a lien on substantially all of the
property, plant and equipment and certain other assets of the Company,
excluding accounts receivable and inventory.
In addition, Oregon Steel maintains a $125 million credit agreement with a
group of banks which is collateralized, in part, by the accounts
receivable and inventory of the Company, and also guaranteed by the
Company.
5
<PAGE>
LABOR DISPUTE
The labor contract at CF&I expired on September 30, 1997. After a brief
contract extension intended to help facilitate a possible agreement, on
October 3, 1997 the United Steel Workers of America ("Union") initiated a
strike of approximately 1,060 bargaining unit employees at the Pueblo
Mill. The parties failed to reach final agreement on a new labor contract
due to differences on economic issues. As a result of contingency
planning, CF&I was able to avoid complete suspension of operations at the
Pueblo Mill by utilizing a combination of permanent replacement workers,
striking employees who returned to work and salaried employees. By
December 1997, CF&I had sufficient permanent replacement employees to
reach full production capacity.
On December 30, 1997 the Union called off the strike and made an
unconditional offer to return to work. At the time of this offer, only a
few vacancies existed at the Pueblo Mill. As of the end of September 1998,
90 former striking employees had returned to work as a result of their
unconditional offer. Approximately 750 former striking workers remain
unreinstated ("Unreinstated Employees").
On February 27, 1998 the Regional Director of the National Labor Relations
Board's Denver office issued a complaint against CF&I alleging violations
of several provisions of the National Labor Relations Act. CF&I not only
denies the allegations, but rather believes that both the facts and the
law fully support its contention that the strike was economic in nature
and that it is not obligated to displace the properly hired permanent
replacement employees. On August 17, 1998, a hearing on these allegations
commenced before an Administrative Law Judge. Testimony and other evidence
has been and will be presented on various scheduled hearing dates through
at least early 1999. Ultimate determination of the issue may well require
action by an appropriate United States Court of Appeals. In the event
there is an adverse determination of these issues, Unreinstated Employees
could be entitled to back pay from the date of the Union's unconditional
offer to return to work through the date of the adverse determination
("Backpay Liability"). The number of Unreinstated Employees entitled to
back pay would probably be limited to the number of replacement workers,
currently approximately 500 workers. However, the Union might assert that
all Unreinstated Employees could be entitled to back pay. Back pay is
generally measured by the quarterly earnings of those working less interim
wages earned elsewhere by the Unreinstated Employees. In addition, each
Unreinstated Employee has a duty to take reasonable steps to mitigate the
Backpay Liability by seeking employment elsewhere that has comparable
demands and compensation. It is not presently possible to estimate the
extent to which interim earnings and failure to mitigate the Backpay
Liability would affect the cost of an adverse determination.
EARLY RETIREMENT OFFERING. The Company has offered an early retirement
package to certain management employees. Depending on the number of
employees who accept the package, the Company expects to record a net
charge to earnings in the range of $1 million to $2 million during the
fourth quarter of 1998.
4. New Accounting Standard
-----------------------
Currently, the Company has no significant derivative instruments and
accordingly, the adoption of Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS
133) issued by the Financial Accounting Standards Board (FASB) on June 15,
1998, is expected to have no significant effect on the Company's results
of operations or its financial position.
5. Settlement of Litigation
------------------------
During the third quarter of 1998, the Company recorded in operating
income a $4.5 million gain resulting from a legal settlement with
certain graphite electrode suppliers.
6
<PAGE>
<TABLE>
CF&I STEEL, L.P.
BALANCE SHEETS
(In thousands)
<CAPTION>
September 30,
1998 December 31,
(Unaudited) 1997
-------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ - $ -
Trade accounts receivable, net 44,877 36,652
Inventories 40,994 41,666
Other 2,275 2,350
-------- --------
Total current assets 88,146 80,668
-------- --------
Property, plant and equipment:
Land and improvements 3,569 3,629
Buildings 18,429 15,604
Machinery and equipment 235,893 228,656
Construction in progress 1,302 7,302
-------- --------
259,193 255,191
Accumulated depreciation (43,335) (33,488)
-------- --------
215,858 221,703
-------- --------
Excess of cost over net assets acquired 35,178 35,943
Other assets 13,158 13,223
-------- --------
$352,340 $351,537
======== ========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 7,164 $ 7,373
Accounts payable 46,581 41,489
Accrued expenses 16,881 25,973
-------- --------
Total current liabilities 70,626 74,835
Long-term debt 31,023 38,187
Long-term debt - Oregon Steel Mills, Inc. 192,800 182,200
Long-term debt - New CF&I, Inc. 21,756 21,756
Environmental liability 32,941 32,941
Deferred employee benefits 6,798 6,643
-------- --------
355,944 356,562
-------- --------
Contingencies (Note 3)
PARTNERS' EQUITY
(DEFICIT)
Limited partner 150 319
General partner (3,754) (5,344)
-------- --------
(3,604) (5,025)
-------- --------
$352,340 $351,537
======== ========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
7
<PAGE>
<TABLE>
CF&I STEEL, L.P.
STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales $93,038 $116,690 $278,750 $344,192
Costs and expenses:
Cost of sales 81,528 96,303 249,400 296,686
Settlement of litigation (4,545) -- (4,545) --
Selling, general and administrative
expenses 5,727 5,292 16,525 15,387
Profit participation 363 987 363 1,330
------- -------- -------- --------
Operating income 9,965 14,108 17,007 30,789
Other income (expense):
Interest and dividend income 10 19 28 44
Interest expense (7,187) (6,573) (20,576) (21,153)
Other, net 218 1,309 4,962 1,517
------- -------- -------- --------
Net income $ 3,006 $ 8,863 $ 1,421 $ 11,197
======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
8
<PAGE>
<TABLE>
CF&I STEEL, L.P.
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,421 $ 11,197
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 11,477 10,047
Other, net (4,749) (3,007)
Changes in current assets and liabilities, net (10,845) 18,934
--------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (2,696) 37,171
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (5,361) (8,044)
Proceeds from disposal of property, plant and equipment 4,830 6,561
Other, net -- (164)
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (531) (1,647)
--------- ---------
Cash flows from financing activities:
Borrowings from related parties 184,484 145,395
Payments to related parties (173,884) (175,189)
Payment of long-term debt (7,373) (5,730)
--------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 3,227 (35,524)
--------- ---------
Net increase in cash and cash equivalents -- --
Cash and cash equivalents at beginning of year -- --
--------- ---------
Cash and cash equivalents at end of year $ -- $ --
========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 21,368 $ 21,435
</TABLE>
The accompanying notes are an integral part of the
financial statements.
9
<PAGE>
CF&I STEEL, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The financial statements include the accounts of CF&I Steel, L.P. ("CF&I"
or "Partnership"). In January 1998, the Partnership assumed the trade name
of Rocky Mountain Steel Mills.
The unaudited financial statements include all adjustments (consisting of
normal recurring accruals) which, in the opinion of management, are
necessary for a fair presentation of the interim periods. Results for an
interim period are not necessarily indicative of results for a full year.
Reference should be made to the Partnership's 1997 Annual Report on Form
10-K for additional disclosures including a summary of significant
accounting policies.
2. Inventories
-----------
Inventories consist of:
September 30, December 31,
1998 1997
------------- ------------
(In thousands)
Raw materials $11,605 $15,051
Semifinished product 12,786 13,840
Finished product 9,891 3,868
Stores and operating supplies 6,712 8,907
------- -------
$40,994 $41,666
======= =======
3. Contingencies
-------------
ENVIRONMENTAL. The Partnership acquired certain assets from CF&I Steel
Corporation in 1993 and established a reserve of $36.7 million for
environmental remediation related to its Pueblo, Colorado steel mill
("Pueblo Mill"). The Colorado Department of Public Health and Environment
issued a 10-year post-closure permit with two ten-year renewals to the
Partnership which became effective on October 30, 1995. The permit
contains a schedule for corrective actions to be completed which is
substantially reflective of a straight-line rate of expenditure over 30
years. At September 30, 1998, the Partnership has a reserve of $34.3
million related to this remediation, of which $32.9 million is classified
as non-current in the balance sheet.
GUARANTEES. Oregon Steel Mills, Inc. ("Oregon Steel") has outstanding $235
million principal amount of 11% First Mortgage Notes ("Notes") due 2003.
The Partnership guaranteed the obligations of Oregon Steel under the
Notes, and those guarantees are secured by a lien on substantially all of
the property, plant and equipment and certain other assets of the
Partnership, excluding accounts receivable and inventory.
In addition, Oregon Steel maintains a $125 million credit agreement with a
group of banks which is collateralized, in part, by the accounts
receivable and inventory of the Partnership, and also guaranteed by the
Partnership.
LABOR DISPUTE
The Partnership's labor contract expired on September 30, 1997. After a
brief contract extension intended to help facilitate a possible
agreement, on October 3, 1997 the United Steel Workers of America
("Union") initiated a strike for approximately 1,060 bargaining unit
employees at the Pueblo Mill. The parties failed to reach final agreement
on a new labor contract due to differences on economic issues. As a
result of contingency planning, the Partnership was able to avoid
complete suspension of operations at the Pueblo Mill by utilizing a
combination of permanent replacement workers, striking employees who
returned to work and salaried employees. By December 1997, the
Partnership had sufficient permanent replacement employees to reach full
production capacity.
10
<PAGE>
On December 30, 1997 the Union called off the strike and made an
unconditional offer to return to work. At the time of this offer, only a
few vacancies existed at the Pueblo Mill. As of the end of September
1998, 90 former striking employees had returned to work as a result of
their unconditional offer. Approximately 750 former striking workers
remain unreinstated ("Unreinstated Employees").
On February 27, 1998, the Regional Director of the National Labor
Relations Board's Denver office issued a complaint against the
Partnership alleging violations of several provisions of the National
Labor Relations Act. The Partnership not only denies the allegations, but
rather believes that both the facts and the law fully support its
contention that the strike was economic in nature and that it is not
obligated to displace the properly hired permanent replacement employees.
On August 17, 1998 a hearing on these allegations commenced before an
Administrative Law Judge. Testimony and other evidence has been and will
be presented on various scheduled hearing dates through at least early
1999. Ultimate determination of the issue may well require action by an
appropriate United States Court of Appeals. In the event there is an
adverse determination of these issues, Unreinstated Employees could be
entitled to back pay from the date of the Union's unconditional offer to
return to work through the date of the adverse determination ("Backpay
Liability"). The number of Unreinstated Employees entitled to back pay
would probably be limited to the number of replacement workers, currently
approximately 500 workers. However, the Union might assert that all
Unreinstated Employees could be entitled to back pay. Back pay is
generally measured by the quarterly earnings of those working less
interim wages earned elsewhere by the Unreinstated Employees. In
addition, each Unreinstated Employee has a duty to take reasonable steps
to mitigate the Backpay Liability by seeking employment elsewhere that
has comparable demands and compensation. It is not presently possible to
estimate the extent to which interim earnings and failure to mitigate the
Backpay Liability would affect the cost of an adverse determination.
EARLY RETIREMENT OFFERING. The Partnership has offered an early
retirement package to certain management employees. Depending on the
number of employees who accept the package, the Partnership expects to
record a net charge to earnings in the range of $1 million to $2 million
during the fourth quarter of 1998.
4. New Accounting Standard
-----------------------
Currently, the Partnership has no significant derivative instruments and
accordingly, the adoption of Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities
(FAS 133) issued by the Financial Accounting Standards Board (FASB) on
June 15, 1998, is expected to have no significant effect on the
Partnership's results of operations or its financial position.
5. Settlement of Litigation
------------------------
During the third quarter of 1998, the Partnership recorded in operating
income a $4.5 million gain resulting from a legal settlement with
certain graphite electrode suppliers.
11
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
- -------
The following information contains forward-looking statements which are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are subject to risks and
uncertainties and actual results could differ materially from those projected.
Such risks and uncertainties include, but are not limited to, general business
and economic conditions; competitive products and pricing, as well as
fluctuations in demand, potential equipment malfunction, automated systems
design and programming difficulties related to year 2000, work stoppages, and
plant construction and repair delays.
The New CF&I, Inc. ("Company") consolidated financial statements include
the accounts of CF&I Steel, L.P. ("Partnership"), a 95.2% owned subsidiary and
the Colorado & Wyoming Railway Company, a wholly-owned short-line railroad,
serving principally the Pueblo mill. For the three months ended September 30,
1998 and 1997 and the nine months ended September 30, 1998 and 1997, sales of
the Partnership were 98.2 percent, 98.8 percent, 98.2 percent and 98.7 percent,
respectively, of the consolidated sales of the Company. For the three months
ended September 30, 1998 and 1997 and the nine months ended September 30, 1998
and 1997, cost of sales of the Partnership were 98.3 percent, 99.0 percent, 98.3
percent and 98.8 percent, respectively, of the consolidated cost of sales of the
Company.
Results of Operations
- ---------------------
The following table sets forth for the Company tonnage sold, sales and average
selling price per ton:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1998 1997 1998 1997
--------- --------- ----------- ----------
<S> <C> <C> <C> <C>
Tonnage sold:
Rail 121,400 100,900 304,400 299,900
Rod, Bar and Wire 82,000 119,200 267,200 355,200
Seamless Pipe 19,400 39,100 62,500 107,000
Semifinished 600 1,900 35,100 21,600
-------- -------- -------- --------
Total 223,400 261,100 669,200 783,700
======== ======== ======== ========
Sales (in thousands): $ 94,766 $118,099 $283,842 $348,867(1)
Average selling price per ton: $ 424 $ 452 $ 424 $ 442(2)
</TABLE>
(1) Includes insurance proceeds of approximately $2.5 million as reimbursement
of lost profits resulting from lost production during the third and fourth
quarters of 1996 related to the failure of one of the power transformers
servicing the Company.
(2) Excludes insurance proceeds referred to in Note (1) above.
- ------------------
The Company's sales decreased 19.8 percent to $94.8 million in the third
quarter of 1998 and decreased 18.6 percent to $283.8 million for the first nine
months of 1998, compared to the corresponding 1997 periods. Shipments decreased
14.4 percent to 223,400 tons in the third quarter of 1998 and decreased 14.6
percent to 669,200 tons in the first nine months of 1998, compared to the
corresponding 1997 periods. The decrease in sales and shipments during the third
quarter of 1998 was primarily due to adverse market conditions for seamless pipe
and rod products. In order to mitigate the negative impact of these market
conditions, during May 1998, the Company began reducing operations in the
seamless and rod mills and increasing production of its rail products. Reduced
seamless pipe shipments are due to the low levels of oil prices and a reduction
in U.S. rig counts in 1998 compared to 1997. Sales and shipments for the nine
months ended September 30, 1998 have been negatively affected by the strike by
the United Steelworkers of America ("Union") (see Note 3 to the Consolidated
Financial Statements), a rail mill outage in April 1998 and a power outage in
May 1988 which affected steelmaking volumes.
12
<PAGE>
The Company's consolidated average selling price decreased $28 to $424 per
ton for the third quarter of 1998 and decreased $18 to $424 per ton for the
first nine months of 1998, compared to the corresponding 1997 periods. The
decrease in consolidated average selling price was primarily due to decreased
shipments of seamless pipe and wire products and a weakening market for seamless
pipe and rod products. Seamless pipe products generally have the highest selling
price of any of the Company's products. Seamless pipe shipments decreased to
19,400 and 62,500 tons for the three and nine month periods ended September 30,
1998, compared to 39,100 and 107,000 tons for the corresponding 1997 periods.
Pricing for the Company's rod product has been severely impacted by the level of
imported rod shipments entering the U.S. The Company sold its wire operations in
June 1997.
Of the $23.3 million sales decrease in the third quarter of 1998 compared to
the prior year, $17.1 million was the result of volume decreases and $6.2
million resulted from lower average selling prices. Of the $65.0 million sales
decrease for the first nine months of 1998 compared to the prior year, $50.6
million was the result of volume decreases, $11.9 million was the result of
lower average selling prices, and $2.5 million was from the proceeds of an
insurance settlement in 1997.
The Company's gross profit for the three month and nine month periods ended
September 30, 1998 was 12.5 and 10.6 percent, respectively, compared to 17.6 and
13.3 percent (excluding insurance proceeds) for the corresponding 1997 periods.
The gross profit decline in 1998 compared to 1997 was due to higher than normal
manufacturing costs and reduced production and shipments resulting from the
strike by the Union (see Note 3 to the Consolidated Financial Statements) and by
a softening of demand for seamless pipe and rod products.
The Company expects that adverse market conditions for seamless pipe and rod
and bar products will continue through the fourth quarter and impact pricing and
demand for these products. Net operating results for the fourth quarter are
expected to be negatively impacted, but the volatility of the markets make it
difficult to quantify. The Company anticipates that the average cost of its raw
materials, including purchased semifinished steel, will remain low and
partially offset negative pricing and demand. Additionally, the Company has
offered an early retirement package to certain management employees. Depending
upon the number of employees who accept the package, the Company expects to
record a net charge to earnings in the range of $1 million to $2 million during
the fourth quarter of 1998.
During the third quarter of 1998, the Company recorded in operating income
a $4.5 million gain resulting from a legal settlement with certain graphite
electrode suppliers.
The Company's selling, general and administrative expenses for the three and
nine month periods ended September 30, 1998 increased $433,000 and $1.1 million
respectively, from the corresponding 1997 periods, and increased as a percentage
of sales from 4.6 and 4.5 percent in the three and nine month periods ended
September 30, 1997, respectively, to 6.2 and 6.0 percent for the corresponding
1998 periods. The increase was due to costs specifically related to the labor
dispute with the Union.
The Company's profit participation expense was $363,000 for the three and
nine month periods ended September 30, 1998, compared to $987,000 and $1.3
million for the corresponding 1997 periods. The decrease was related to the
decreased profitability of the Company in 1998.
The Company's total interest cost for the three and nine month periods ended
September 30, 1998 was $6.7 million and $19.5 million, respectively, compared to
$6.2 million and $19.8 million for the corresponding 1997 periods. The higher
interest cost for the third quarter of 1998 is the result of higher average
long-term debt during the quarter compared to the third quarter of 1997. The
lower interest cost for the first nine months of 1998 is the result of lower
average long-term debt during 1998.
13
<PAGE>
The Company's other income, net, for the three and nine month periods ended
September 30, 1998, was $233,000 and $5.0 million, respectively, compared to
$1.3 million and $1.5 million for the corresponding 1997 periods. The decrease
in the third quarter of 1998 was due to a gain on the sale of property, plant
and equipment recorded in the third quarter of 1997. The increase in the nine
months ended September 30, 1998 compared to the corresponding 1997 period was
due to a $4.5 million gain on the sale of the Pueblo Railroad Service, a rail
welding business, recorded in 1998.
The Company's effective income tax rates were 38 percent and 51 percent for
the three and nine month periods ended September 30, 1998, respectively,
compared to 40 percent and 42 percent for the corresponding 1997 periods. The
effective tax rate for the first nine months of 1998 varied from the combined
state and federal statutory rates due to miscellaneous adjustments to the
Company's tax accounts.
Liquidity and Capital Resources
- -------------------------------
Cash flow from operations for the nine months ended September 30, 1998 was a
negative $2.7 million compared to a positive $41.9 million in the corresponding
1997 period. The major items affecting this $44.6 million decrease were a lower
net income in 1998 ($5.7 million), a smaller increase in deferred income taxes
($5.7 million), a larger gain on disposal of property, plant and equipment ($1.6
million), an increase in accounts receivable versus a decrease in 1997 ($11.3
million), a smaller decrease in inventories ($2.8 million), a smaller increase
in accounts payable ($3.9 million), and a decrease in accrued expenses versus an
increase in 1997 ($14.1 million).
Since its acquisition by Oregon Steel Mills, Inc. ("Oregon Steel") in March
1993, the Company has required substantial amounts of cash to fund its
operations and capital expenditures. Borrowing requirements for capital
expenditures and other cash needs, both short-term and long-term, are provided
through a loan from Oregon Steel. As of September 30, 1998, $192.8 million of
aggregate principal amount of the loan was outstanding, all of which was
classified as long-term. The principal is due on demand or, if no demand is
made, December 31, 2002. Interest on the principal amount of the loan is payable
monthly. Because the loan from Oregon Steel is due on demand, the applicable
interest rate is effectively subject to renegotiation at any time, and there is
no assurance the interest rate will not be materially increased in the future.
In addition, Oregon Steel is not required to provide financing to the Company
and, although demand for repayment is not expected in 1998, it may in any event
demand repayment of the loan at any time. If Oregon Steel were to demand
repayment of the loan, it is unlikely that the Company would be able to obtain
from external sources financing necessary to repay the loan or to fund its
capital expenditures and other cash needs. Failure to obtain alternative
financing would have a material adverse effect on the Company and the
Partnership. If the Company were able to obtain the necessary financing, it is
likely that such financing would be at interest rates and on terms substantially
less favorable to the Company than those provided by Oregon Steel.
Term debt of $67.5 million was incurred by the Company as part of the
purchase price of the Pueblo Mill on April 3, 1993. This debt is without stated
collateral and is payable over 10 years with interest at 9.5 percent. As of
September 30, 1998, the outstanding balance on the debt was $38.2 million, of
which $31.0 million was classified as long-term.
Oregon Steel has outstanding $235 million principal amount of 11% First
Mortgage Notes due 2003. The Company and the Partnership have guaranteed the
obligations of Oregon Steel under the Notes, and those guarantees are secured by
a lien on substantially all of the property, plant and equipment and certain
other assets of the Company and the Partnership, excluding accounts receivable
and inventory.
In addition, Oregon Steel maintains a $125 million credit agreement with a
group of banks which is collateralized, in part, by the accounts receivable and
inventory of the Company and the Partnership, and also guaranteed by the Company
and the Partnership.
The Company expects that anticipated needs for working capital and capital
expenditures will be met from funds generated from operations and available
borrowings from Oregon Steel.
CAPITAL EXPENDITURES. During the first nine months of 1998, the
Company expended approximately $5.0 million excluding capitalized interest,
on capital projects.
14
<PAGE>
YEAR 2000 ISSUES. As the year 2000 approaches, the Company recognizes the
need to ensure its operations will not be adversely impacted by Year 2000
software failures. The Company has identified risks from, among other causes,
failure of internally-developed or purchased software and hardware in its
information technology (IT) systems, failure of process logic controller (PLC)
components of manufacturing equipment, and business or service interruptions of
certain key customers and suppliers. In mid-1997, the Company began to inventory
systems, assess the exposure to Year 2000 failures, and replace or remediate IT
and PLC systems as necessary. As of September 30, 1998, the inventory and
assessment of IT and PLC systems was substantially complete, and investments had
been made to replace or remediate critical IT systems and PLCs where there was
an apparent risk of failure at the year 2000. The remaining remediation effort
and testing is expected to continue into the second quarter of 1999. The most
critical business systems have been recently functionally upgraded, or are in
process of upgrade, and concurrently are becoming year 2000 compliant. The
Company is soliciting written confirmations from key business partners
confirming that they are addressing their year 2000 issues.
Although the potential effects of IT and PLC systems failures due to the
year 2000 change are not predictable or quantifiable with any certainty, the
Company expects that if a PLC failure occurred, the Company would still be able
to continue its core production processes, although at a reduced rate and
possibly substantially increased cost. Similarly, it is anticipated that any
affected IT business systems which failed could be supplemented with manual and
other procedures sufficient to continue operations, although at a reduced
efficiency. In general, the Company's customers and sources of supply are
sufficiently diverse to mitigate the effect on the Company of a supplier or
customer experiencing year 2000 related failures. However, there could be a
substantial adverse impact on the Company if any of its utility providers were
significantly interrupted. The total cost of preparation for the year 2000 is
expected to be between $1 million and $2 million, of which less than half has
been spent to date. The Company's preparations have not included a specific
contingency plan in the event of systems or supplier failures, however, it is
anticipated that by mid-1999 all critical systems will be tested internally or
by independent outside verification.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None
15
<PAGE>
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
27.1 Financial Data Schedule - New CF&I, Inc.
27.2 Financial Data Schedule - CF&I Steel, L.P.
(b) Reports on Form 8-K
None
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.
NEW CF&I, INC.
Date: November 10, 1998 /s/ Christopher D. Cassard
------------------------------
Christopher D. Cassard
Corporate Controller
CF&I STEEL, L.P.
By: New CF&I, Inc.
General Partner
Date: November 10, 1998 /s/ Christopher D. Cassard
-----------------------------
Christopher D. Cassard
Corporate Controller
New CF&I, Inc.
16
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