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, 1999
------------------------------------------------
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, 1999 (unaudited)
and December 31, 1998 .................................. 2
Consolidated Statements of Income (unaudited)
Three months and nine months ended September 30, 1999
and 1998 ............................................... 3
Consolidated Statements of Cash Flows (unaudited)
Nine months ended September 30, 1999
and 1998 ............................................... 4
Notes to Consolidated Financial
Statements (unaudited).................................5-7
Financial Statements - CF&I Steel, L.P.
----------------
Balance Sheets
September 30, 1999 (unaudited)
and December 31, 1998 .................................. 8
Statements of Operations (unaudited)
Three months and nine months ended September 30, 1999
and 1998 ............................................... 9
Statements of Cash Flows (unaudited)
Nine months ended September 30, 1999
and 1998 .............................................. 10
Notes to Financial
Statements (unaudited)...............................11-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................13-16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...........................17
SIGNATURES....................................................................17
-1-
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
NEW CF&I, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4 $ 3
Trade accounts receivable, net 18,914 32,259
Inventories 34,668 44,693
Deferred tax asset 5,048 5,048
Other 1,310 1,794
--------- --------
Total current assets 59,944 83,797
--------- --------
Property, plant and equipment:
Land and improvements 3,574 3,574
Buildings 18,525 18,525
Machinery and equipment 240,428 238,792
Construction in progress 2,720 1,991
-------- --------
265,247 262,882
Accumulated depreciation (58,522) (48,012)
-------- --------
206,725 214,870
-------- --------
Excess of cost over net assets acquired 34,158 34,923
Other assets 27,051 18,763
-------- --------
$327,878 $352,353
======== ========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 7,861 $ 7,164
Accounts payable 24,527 39,593
Accrued expenses 17,290 21,755
-------- --------
Total current liabilities 49,678 68,512
Long-term debt 23,162 31,023
Long-term debt - Oregon Steel Mills, Inc. 196,200 186,000
Environmental liability 30,850 30,850
Deferred employee benefits 6,947 6,748
-------- --------
306,837 323,133
-------- --------
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 (17,403) (9,224)
-------- --------
(799) 7,380
-------- --------
$327,878 $352,353
======== ========
</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,
--------------------------- --------------------------
1999 1998 1999 1998
-------- ------- -------- ---------
<S> <C> <C> <C> <C>
Sales $60,774 $94,766 $196,732 $283,842
Costs and expenses:
Cost of sales 56,013 82,902 182,578 253,670
Settlement of litigation (855) (4,545) (4,539) (4,545)
Gain on sale of assets - - - (4,746)
Selling, general and administrative
expenses 4,380 5,863 14,907 16,933
Profit participation - 363 - 363
------- ------- -------- --------
Operating income 1,236 10,183 3,786 22,167
Other income (expense):
Interest and dividend income 3 10 6 28
Interest expense (6,486) (6,698) (19,488) (19,110)
Minority interest 268 (148) 804 168
Other, net 129 233 317 231
------- ------- -------- --------
Income (loss) before income taxes (4,850) 3,580 (14,575) 3,484
Income tax benefit (expense) 2,128 (1,357) 6,396 (1,766)
------- ------- -------- --------
Net income (loss) $(2,722) $ 2,223 $ (8,179) $ 1,718
======= ======= ======== ========
</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,
-----------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (8,179) $ 1,718
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 11,473 11,679
Deferred income taxes (6,368) 786
Minority interest (804) (169)
Gain on disposal of property, plant and equipment - (4,764)
Changes in current assets and liabilities, net 5,270 (11,946)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,392 (2,696)
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (2,467) (5,361)
Proceeds from disposal of property, plant and equipment -- 4,830
Other, net (1,960) --
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (4,427) (531)
--------- ---------
Cash flows from financing activities:
Borrowings from Oregon Steel Mills, Inc. 124,600 184,484
Payments to Oregon Steel Mills, Inc. (114,400) (173,884)
Payment of long-term debt (7,164) (7,373)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,036 3,227
--------- ---------
Net increase in cash and cash equivalents 1 --
Cash and cash equivalents at beginning of period 3 3
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4 $ 3
========= =========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 20,548 $ 21,369
Income taxes $ 574 $ --
</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"). 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 January 1998, CF&I assumed the trade name
Rocky Mountain Steel Mills. Oregon Steel Mills, Inc. ("Oregon Steel")
holds an 87 percent ownership interest in the 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 1998 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,
1999 1998
------------ ------------
(In thousands)
Raw materials $ 7,099 $ 9,318
Semifinished product 6,190 16,154
Finished product 12,509 11,200
Stores and operating supplies 8,870 8,021
------- -------
$34,668 $44,693
======= =======
3. Contingencies
-------------
ENVIRONMENTAL. All material environmental remediation liabilities, which
are probable and estimable, are recorded in the financial statements based
on current technologies and current environmental standards at the time of
evaluation. Adjustments are made when additional information is available
that suggest different remediation methods or periods may be required,
and affect the total cost. The best estimate of the probable cost within a
range is recorded. If there is no best estimate, the low end of the range
is recorded, and the range is disclosed.
In connection with the 1993 acquisition of the Pueblo Mill, CF&I recorded
a liability of $36.7 million for environmental remediation. CF&I believed
$36.7 million was the best estimate from a range of $23.1 million to $43.6
million. CF&I's estimate of this liability was based on two separate
remediation investigations conducted by independent environmental
engineering consultants. The accrual includes costs for the Resource
Conservation and Recovery Act facility investigation, a corrective
measures study, remedial action, and operation and maintenance associated
with the proposed remedial actions. In October 1995, CF&I and the Colorado
Department of Public Health and Environment finalized a postclosure permit
for hazardous waste units at the Pueblo Mill. As part of the postclosure
permit requirements, CF&I must conduct a corrective action program for
the 82 solid waste management units at the facility and continue to
address projects on a prioritized corrective action schedule which is
substantially reflective of a straight-line rate of expenditure over 30
years. The State of Colorado mandated that the schedule for corrective
action could be accelerated if new data indicated a greater threat
existed to the environment than was presently believed to exist. At
September 30, 1999, the accrued liability was $32.8 million, of which
$30.9 million was classified as non-current in the consolidated balance
sheet.
-5-
<PAGE>
GUARANTEES. Oregon Steel has outstanding $235 million principal amount of
11% First Mortgage Notes ("Notes") due 2003. The Company and CF&I
(collectively "Guarantors") 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 Guarantors, excluding accounts receivable and inventory.
In addition, Oregon Steel maintains a $125 million credit agreement with a
syndicate of lenders that is collateralized, in part, by the accounts
receivable and inventory of the Guarantors, and is guaranteed by
the Guarantors.
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 1,000 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 Company 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.
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 1999,
118 former striking employees had returned to work as a result of their
unconditional offer. Approximately 690 former striking workers remain
unreinstated ("Unreinstated Employees").
On February 27, 1998 the Regional Director of the National Labor Relations
Board's ("NLRB") Denver office issued a complaint against CF&I, alleging
violations of several provisions of the National Labor Relations Act
("NLRA"). The Company 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 was 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
("Judge"). Testimony and other evidence were presented at various
sessions held in the latter part of 1998 and early 1999, concluding on
February 25, 1999. The Judge will render a decision that is automatically
subject to appeal by either party to the NLRB in Washington, D.C. Among
the items pending in the litigation is CF&I's motion asserting that the
Judge should consider the Union's alleged NLRA violations and that the
alleged misconduct should invalidate the Unreinstated Employees' right to
reinstatement. The ultimate determination of these issues may require a
ruling from the appropriate United States appellate court. In the event
there is an adverse determination of these issues, Unreinstated Employees
could be entitled to back pay, including benefits, from the date of the
Union's unconditional offer to return to work through the date of the
determination ("Backpay Liability"). The number of Unreinstated Employees
entitled to back pay would probably be limited to the number of past and
present replacement workers; however, the Union might assert that all
Unreinstated Employees should 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.
In addition, during the strike by the Union at CF&I, 39 bargaining unit
employees of the Colorado & Wyoming Railway Company ("C&W"), a
wholly-owned subsidiary of the Company that provides rail service to the
Pueblo Mill, refused to report to work for an extended period of time.
The bargaining unit employees of C&W were not on strike. C&W considered
these employees to have quit their employment and accordingly, C&W
declined to allow those individuals to return to work. The unions
representing these individuals have filed lawsuits in the U.S. District
Court of Colorado against C&W claiming union members had refused to cross
the picket line because they were honoring the picket line of another
organization or because of safety concerns stemming from those picket
lines. The unions demand reinstatement of the former employees, back pay
and other damages. The Company believes it has substantial defenses
against these claims. However, it is possible that one or more of them
will proceed to arbitration before the National Railroad Adjustment Board
or otherwise. The outcome of such proceedings is inherently uncertain and
it is not possible to estimate any potential settlement amount that would
result from an adverse legal or arbitration decision.
-6-
<PAGE>
4. Settlement of Litigation
------------------------
The Company credited operating income $855,000 and $4.5 million for the
three months and nine months ended September 30, 1999, respectively, from
litigation settlements with certain graphite electrode suppliers. A
settlement of similar claims totaled $4.5 million for the comparable
periods in 1998.
-7-
<PAGE>
<TABLE>
CF&I STEEL, L.P.
BALANCE SHEETS
(In thousands)
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1 $ --
Trade accounts receivable, net 18,133 31,653
Inventories 34,487 44,516
Other 1,084 1,603
--------- ---------
Total current assets 53,705 77,772
--------- ---------
Property, plant and equipment:
Land and improvements 3,569 3,569
Buildings 18,419 18,419
Machinery and equipment 237,925 236,288
Construction in progress 2,720 1,990
--------- ---------
262,633 260,266
Accumulated depreciation (57,080) (46,751)
--------- ---------
205,553 213,515
--------- ---------
Excess of cost over net assets acquired 34,158 34,923
Other assets 14,931 13,089
--------- ---------
$ 308,347 $ 339,299
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 7,861 $ 7,164
Accounts payable 32,108 46,932
Accrued expenses 17,568 20,235
--------- ---------
Total current liabilities 57,537 74,331
Long-term debt 23,163 31,023
Long-term debt - Oregon Steel Mills, Inc. 196,200 186,000
Long-term debt - New CF&I, Inc. 21,755 21,755
Environmental liability 30,850 30,850
Deferred employee benefits 6,947 6,748
--------- ---------
336,452 350,707
--------- ---------
Contingencies (Note 3)
PARTNERS' DEFICIT
General partner (28,105) (11,408)
--------- ---------
$ 308,347 $ 339,299
========= =========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
-8-
<PAGE>
<TABLE>
CF&I STEEL, L.P.
STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ---------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Sales $ 59,177 $ 93,038 $ 191,783 $ 278,750
Costs and expenses:
Cost of sales 54,535 81,528 177,972 249,400
Settlement of litigation (855) (4,545) (4,539) (4,545)
Gain on sale of assets -- -- -- (4,746)
Selling, general and administrative
expenses 4,263 5,727 14,522 16,525
Profit participation - 363 - 363
--------- --------- --------- ---------
Operating income 1,234 9,965 3,828 21,753
Other income (expense):
Interest and dividend income 3 10 5 28
Interest expense (6,951) (7,187) (20,847) (20,576)
Other, net 129 218 317 216
--------- --------- --------- ---------
Net income (loss) $ (5,585) $ 3,006 $ (16,697) $ 1,421
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
-9-
<PAGE>
<TABLE>
CF&I STEEL, L.P.
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
-------------------------------
1999 1998
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (16,697) $ 1,421
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 11,286 11,477
Other, net 43 (4,749)
Changes in current assets and liabilities, net 6,755 (10,845)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,387 (2,696)
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (2,462) (5,361)
Proceeds from disposal of property, plant and equipment -- 4,830
Other, net (1,960) --
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (4,422) (531)
--------- ---------
Cash flows from financing activities:
Borrowings from related parties 124,600 184,484
Payments to related parties (114,400) (173,884)
Payment of long-term debt (7,164) (7,373)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,036 3,227
--------- ---------
Net increase in cash and cash equivalents 1 --
Cash and cash equivalents at beginning of year -- --
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1 $ --
========= =========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 20,548 $ 21,369
</TABLE>
The accompanying notes are an integral part of the
financial statements.
-10-
<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.
("Partnership"). Oregon Steel Mills, Inc. ("Oregon Steel") owns an 87
percent interest in New CF&I, Inc. ("CF&I") which owns a 95.2 percent
interest in the Partnership. Oregon Steel also owns directly an
additional 4.3 percent interest in the 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 1998 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,
1999 1998
------------- ------------
(In thousands)
Raw materials $ 7,099 $ 9,318
Semifinished product 6,190 16,154
Finished product 12,509 11,200
Stores and operating supplies 8,689 7,844
------- -------
$34,487 $44,516
======= =======
3. Contingencies
-------------
ENVIRONMENTAL. All material environmental remediation liabilities, which
are probable and estimable, are recorded in the financial statements
based on current technologies and current environmental standards at the
time of evaluation. Adjustments are made when additional information is
available that suggest different remediation methods or periods may be
required and affect the total cost. The best estimate of the probable cost
within a range is recorded. If there is no best estimate, the low end of
the range is recorded, and the range is disclosed.
In connection with the 1993 acquisition of the Pueblo, Colorado steel mill
("Pueblo Mill"), the Partnership accrued a liability of $36.7 million for
environmental remediation at the Pueblo Mill. The Partnership believed
$36.7 million was the best estimate from a range of $23.1 to $43.6
million. The Partnership's estimate of this liability was based on two
separate remediation investigations conducted by independent environmental
engineering consultants. The accrual includes costs for the Resource
Conservation and Recovery Act facility investigation, a corrective
measures study, remedial action, and operation and maintenance associated
with the proposed remedial actions. In October 1995, the Partnership and
the Colorado Department of Public Health and Environment finalized a
postclosure permit for hazardous waste units at the Pueblo Mill.
As part of the postclosure permit requirements, the Partnership must
conduct a corrective action program for the 82 solid waste management
units at the facility and continue to address projets on a prioritized
corrective action schedule which is substantially reflective of a
straight-line rate of expenditure over 30 years. The State of Colorado
mandated that the schedule for corrective action could be accelerated if
new data indicated a greater threat existed to the environment than was
presently believed to exist. At September 30, 1999, the accrued liability
was $32.8 million, of which $30.9 million was classified as noncurrent in
the consolidated balance sheet.
-11-
<PAGE>
GUARANTEES. Oregon Steel has outstanding $235 million principal amount of
11% First Mortgage Notes ("Notes") due 2003. The Partnership and CF&I
(collectively "Guarantors" 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 Guarantors, excluding accounts receivable and inventory.
In addition, Oregon Steel maintains a $125 million credit agreement with a
syndicate of lenders that is collateralized, in part, by the accounts
receivable and inventory of the Guarantors, and is guaranteed by the
Guarantors.
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 1,000 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.
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
1999, 118 former striking employees had returned to work as a result of
their unconditional offer. Approximately 690 former striking workers
remain unreinstated ("Unreinstated Employees").
On February 27, 1998, the Regional Director of the National Labor
Relations Board's ("NLRB") Denver office issued a complaint against the
Partnership alleging violations of several provisions of the National
Labor Relations Act ("NLRA"). 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 ("Judge"). Testimony and other evidence
were presented at various sessions held in the latter part of 1998 and
early 1999, concluding on February 25, 1999. The Judge will render a
decision that is automatically subject to appeal by either party to the
NLRB in Washington, D.C. Among the items pending in the litigation is the
Partnership's motion asserting that the Judge should consider the Union's
alleged NLRA violations and that the alleged misconduct should invalidate
the Unreinstated Employees' right to reinstatement. Ultimate determination
of these issues may require a ruling from the appropriate United States
appellate court. In the event there is an adverse determination of these
issues, Unreinstated Employees could be entitled to back pay, including
benefits, 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 past and present replacement workers;
however, the Union might assert that all Unreinstated Employees should 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.
4. Settlement of Litigation
------------------------
The Partnership credited operating income $855,000 and $4.5 million for
the three months and nine months ended September 30, 1999, respectively,
from litigation settlements with certain graphite electrode suppliers. A
settlement of similar claims totaled $4.5 million for the comparable
periods in 1998.
-12-
<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, work stoppages; plant
construction and repair delays, and failure to accurately predict the costs to
address year 2000 issues or the lost revenues associated with interruption of
New CF&I, Inc.'s ("Company"), its customers' or suppliers' operations.
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, 1999 and 1998 and the nine months ended September 30, 1999
and 1998, sales of the Partnership were 97.4 percent, 98.2 percent, 97.5 percent
and 98.2 percent, respectively, of the consolidated sales of the Company. For
the three months ended September 30, 1999 and 1998 and the nine months ended
September 30, 1999 and 1998, cost of sales of the Partnership were 97.4 percent,
98.3 percent, 97.5 percent and 98.3 percent, respectively, of the consolidated
cost of sales of the Company.
Results of Operations
- ---------------------
<TABLE>
The following table sets forth tonnage sold, sales and average selling
price per ton for the Company:
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------- -------------------------
1999 1998 1999 1998
-------- -------- -------- ---------
<S> <C> <C> <C> <C>
Tonnage sold:
Rail 71,300 121,400 240,000 304,400
Rod and Bar 105,300 82,000 305,800 267,200
Seamless Pipe 1,900 19,400 18,000 62,500
Semifinished 2,900 600 7,900 35,100
-------- -------- -------- --------
Total 181,400 223,400 571,700 669,200
======== ======== ======== ========
Sales (in thousands): $ 60,774 $ 94,766 $196,732 $283,842
Average selling price per ton: $ 335 $ 424 $ 344 $ 424
</TABLE>
The Company's sales decreased 35.9 percent to $60.8 million in the third
quarter of 1999 and decreased 30.7 percent to $196.7 million for the first nine
months of 1999, compared to the corresponding 1998 periods. The Company shipped
181,400 and 571,700 tons of product during the three and nine month periods
ended September 30, 1999, respectively, compared to 223,400 and 669,200 tons of
product during the corresponding periods in 1998. The decrease in shipments was
primarily due to a softening of demand for the Company's seamless pipe and rail
products. Seamless pipe shipments decreased to 1,900 and 18,000 tons for the
three and nine month periods ended September 30, 1999, respectively, compared to
19,400 and 62,500 tons for the corresponding 1998 periods. The Company ceased
production at its seamless mill during the second quarter of 1999 due to adverse
market conditions caused in large part by a lack of drilling activity and a
decrease in U.S. rig counts. There are no immediate plans to reopen the mill.
Rail shipments decreased to 71,300 and 240,000 tons for the three and nine month
periods ended September 30, 1999, respectively, compared to 121,400 and 304,400
tons. The overall domestic rail market has declined approximately 30 percent
from the level experienced in 1998.
-13-
<PAGE>
The Company's consolidated average selling price decreased $89 to $335
per ton, a 21.0 percent decline, for the third quarter of 1999 and decreased $80
to $344 per ton for the first nine months of 1999, compared to the corresponding
1998 periods. The decrease in consolidated average selling price was primarily
due to reduced average selling prices in rail and rod and the closure of the
seamless mill with a resulting shift in product mix. Lower priced rod and bar
products represented 58.0 percent and 53.5 percent, respectively, of the
shipments for the three month and nine month periods ended September 30, 1999,
while seamless pipe, generally the highest priced product among the product
lines, accounted for 1.0 percent and 3.1 percent for the same periods. For the
corresponding periods in 1998, rod and bar products accounted for 36.7 percent
and 39.9 percent, respectively, while seamless pipe accounted for 8.7 percent
and 9.3 percent of shipments, respectively.
The Company's gross profit for the three month and nine month periods
ended September 30, 1999 was 7.8 percent and 7.2 percent, respectively, compared
to 12.5 percent and 10.6 percent for the corresponding 1998 periods. The gross
profit decline in 1999 compared to 1998 was due to several factors, including
the lower average selling prices noted previously, the shift in product mix, and
the shutdown and severance costs incurred in the temporary closure of the
seamless pipe mill.
Operating results for the fourth quarter will continue to be negatively
impacted by reduced rail shipments, and depressed pricing for rod products. The
Company does anticipate that the average cost of its raw materials will remain
at current levels and partially offset negative pricing factors.
The Company recorded $855,000 and $4.5 million gains for the three months
and nine months ended September 30, 1999, from litigation settlements with
various graphite electrode suppliers. A settlement of similar claims totaled
$4.5 million for the comparable periods in 1998.
The Company's selling, general and administrative expenses for the three
and nine month periods ended September 30, 1999 decreased $1.5 million and $2.1
million respectively, from the corresponding 1998 periods, but increased as a
percentage of sales from 6.2 percent and 6.0 percent in the three and nine month
periods ended September 30, 1998, respectively, to 7.2 percent and 7.6 percent
for the corresponding 1999 periods. The decrease in actual expenses was due to a
decline in 1999 of costs specifically related to the labor dispute with the
Union and a reduction in the support workforce that occurred in the fourth
quarter of 1998.
The Company's total interest cost for the three and nine month periods
ended September 30, 1999 was $6.6 million and $19.7 million, respectively,
compared to $6.7 million and $19.5 million for the corresponding 1998 periods.
The differences between periods are primarily due to changes in the average
long-term debt balances.
The Company's effective income tax rate was 43.9 percent for the three
and nine month periods ended September 30, 1999, compared to 37.9 percent and
50.7 percent for the corresponding 1998 periods. The 1999 effective tax rate
exceeded the combined state and federal statutory rates due to expected
reductions in the state tax credits. The high effective tax rate for the first
nine months of 1998 was primarily due to a change in the estimated 1997 tax
liability.
Liquidity and Capital Resources
- -------------------------------
Cash flow from operations for the nine months ended September 30, 1999
was a net increase in cash of $1.4 million compared to a net decrease of $2.7
million in the corresponding 1998 period. The items primarily contributing to
this $4.1 million increase were a decrease in accounts receivable versus an
increase in 1998 ($21.8 million), a greater decrease in inventories in 1999
($9.4 million), a lesser decrease in accrued expenses in 1999 ($6.3 million) and
a negligible loss on disposal of property, plant and equipment in 1999 compared
to a significant gain in 1998 ($4.8 million). Partially offsetting these sources
of additional cash were a decrease in accounts payable versus an increase in
1998 ($18.8 million), a net loss in 1999 versus net income in 1998 ($6.5
million), and a greater provision for deferred income taxes in 1999 ($5.6
million). The decreases in accounts receivable and inventories are primarily
due to the lower sales volume. The change in accounts payable is related to
the decreased inventory levels due to lower sales and tighter inventory control.
-14-
<PAGE>
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, 1999, $196.2 million
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 within the next year, 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 or the Partnership
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 or the Partnership were able to obtain the
necessary financing, it is likely that such financing would be at interest rates
and on terms substantially less favorable than those provided by Oregon Steel.
The Company incurred $67.5 million in term debt as part of the 1993
purchase of the Pueblo Mill. This debt is without stated collateral and is
payable over 10 years with interest at 9.5 percent. As of September 30, 1999,
the outstanding balance on the debt was $31.0 million, of which $23.2 million
was classified as long-term.
Oregon Steel has outstanding $235 million principal amount of 11% First
Mortgage Notes ("Notes") due 2003. The Company and the Partnership (collectively
"Guarantors") 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 Guarantors, excluding
accounts receivable and inventory.
In addition, Oregon Steel maintains a $125 million credit agreement with
a syndicate of lenders which is collateralized, in part, by the accounts
receivable and inventory of the Guarantors, and is guaranteed by the Guarantors.
CAPITAL EXPENDITURES. During the first nine months of 1999, the Company
expended approximately $2.3 million, exclusive of capitalized interest, on
capital projects.
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's approach to the year 2000 issue is discussed
below. The Company necessarily makes certain forward looking statements. There
can be no assurance that actual results will not differ materially from the
projections contained in the forward looking statements. Factors which may cause
actual results to differ materially include, but are not limited to: failure of
Company personnel and outside consultants to properly assess and address the
Company's year 2000 issues; inaccurate or incomplete responses to questionnaires
sent to third parties or inaccurate disclosure to third parties regarding the
year 2000 issue; failure to address the year 2000 issue with all vendors,
including utility vendors; infrastructure failures such as disruptions in the
supply of electricity, gas, water or communications services, or major
institutions, such as the government and banking systems; and failure of the
Company to accurately predict the costs to address the year 2000 issues or the
lost revenues related to the interruption in the Company's, its customers' or
suppliers' businesses.
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
critical systems, assess the exposure to year 2000 failures, and replace or
remediate IT and PLC systems as necessary. As of December 31, 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. All remaining
remediation efforts were completed by the third quarter of 1999, and it is
anticipated that all testing, including external review of testing, and
documentation will be completed by the middle of the fourth quarter of 1999. The
most critical business systems have been functionally upgraded or replaced, and
concurrently were made to be year 2000 compliant. The Company has solicited
written confirmations from key business partners confirming that they have
addressed or are addressing their year 2000 issues.
-15-
<PAGE>
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 approximately $1.5 million, of which substantially all has been
spent or committed to date. The Company's preparations have not included a
specific contingency plan in the event of systems or supplier failures, however,
all critical systems have been remediated, if necessary, and it is expected that
all such systems will have been tested internally or otherwise verified by the
middle of the fourth quarter 1999.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes.
-16-
<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 15, 1999 /s/ Christopher D. Cassard
--------------------------------
Christopher D. Cassard
Corporate Controller
CF&I STEEL, L.P.
By: New CF&I, Inc.
General Partner
Date: November 15, 1999 /s/ Christopher D. Cassard
--------------------------------
Christopher D. Cassard
Corporate Controller
New CF&I, Inc.
-17-
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