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 June 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
June 30, 1999 (unaudited)
and December 31, 1998 ...............................2
Consolidated Statements of Income
Three months and six months ended June 30, 1999
and 1998 (unaudited).................................3
Consolidated Statements of Cash Flows
Six months ended June 30, 1999
and 1998 (unaudited).................................4
Notes to Consolidated Financial
Statements (unaudited).............................5-7
Financial Statements - CF&I Steel, L.P.
----------------
Balance Sheets
June 30, 1999 (unaudited)
and December 31, 1998 ...............................8
Statements of Operations
Three months and six months ended June 30, 1999
and 1998 (unaudited).................................9
Statements of Cash Flows
Six months ended June 30, 1999
and 1998 (unaudited)............................... 10
Notes to Financial
Statements (unaudited)...........................11-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............13-16
Item 3. Quantitative and Qualitative Disclosures about
Market Risk.........................................16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.......................17
SIGNATURES ...................................................... 17
1
<PAGE>
<TABLE>
NEW CF&I, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
June 30, December 31,
1999 1998
--------- -------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4 $ 3
Trade accounts receivable, net 27,271 32,259
Inventories 43,381 44,693
Deferred tax asset 5,048 5,048
Other 2,141 1,794
--------- --------
Total current assets 77,845 83,797
--------- --------
Property, plant and equipment:
Land and improvements 3,574 3,574
Buildings 18,525 18,525
Machinery and equipment 240,131 238,792
Construction in progress 2,526 1,991
--------- --------
264,756 262,882
Accumulated depreciation (55,140) (48,012)
--------- --------
209,616 214,870
--------- --------
Excess of cost over net assets acquired 34,413 34,923
Other assets 24,967 18,763
--------- --------
$ 346,841 $352,353
========= ========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 7,504 $ 7,164
Accounts payable 25,354 39,593
Accrued expenses 20,703 21,755
--------- --------
Total current liabilities 53,561 68,512
Long-term debt 27,183 31,023
Long-term debt - Oregon Steel Mills, Inc. 204,600 186,000
Environmental liability 30,850 30,850
Deferred employee benefits 6,884 6,748
--------- --------
323,078 323,133
--------- --------
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 (14,681) (9,224)
--------- --------
1,923 7,380
--------- --------
$ 346,841 $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 Six Months Ended
June 30, June 30,
---------------------- -----------------------
1999 1998 1999 1998
--------- --------- ---------- ---------
<S> <C> <C> <C> <C>
Sales $ 64,236 $ 89,947 $ 135,958 $ 189,077
Costs and expenses:
Cost of sales 63,082 82,860 126,565 170,768
Settlement of litigation (3,684) -- (3,684) --
Selling, general and administrative
expenses 5,353 5,517 10,526 11,071
--------- --------- --------- ---------
Operating income (loss) (515) 1,570 2,551 7,238
Other income (expense):
Interest and dividend income 27 7 54 17
Interest expense (6,702) (6,236) (13,054) (12,412)
Minority interest 359 259 536 317
Other income, net 95 4,645 188 4,744
--------- --------- --------- ---------
Income (loss) before income taxes (6,736) 245 (9,725) (96)
Income tax benefit (expense) 3,315 (66) 4,268 (410)
--------- --------- --------- ---------
Net income (loss) $ (3,421) $ 179 $ (5,457) $ (506)
========= ========= ========= =========
</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>
Six Months Ended June 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (5,457) $ (506)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,798 7,691
Deferred income taxes (4,271) (464)
Minority interest (536) (317)
Loss (Gain) on disposal of property, plant and equipment 43 (4,549)
Changes in current assets and liabilities, net (8,687) (824)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (11,110) 1,031
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (1,976) (4,791)
Proceeds from disposal of property, plant and equipment -- 4,831
Other, net (2,013) --
--------- ---------
NET CASH PROVIDED BY (USED IN)INVESTING
ACTIVITIES (3,989) 40
--------- ---------
Cash flows from financing activities:
Borrowings from Oregon Steel Mills, Inc. 85,000 122,384
Payments to Oregon Steel Mills, Inc. (66,400) (120,384)
Payment of long-term debt (3,500) (3,071)
--------- ---------
NET CASH PROVIDED BY (USED IN)FINANCING
ACTIVITIES 15,100 (1,071)
--------- ---------
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 $ 13,045 $ 12,718
</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"). 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:
June 30, December 31,
1999 1998
-------- ------------
(In thousands)
Raw materials $ 7,101 $ 9,318
Semifinished product 14,192 16,154
Finished product 13,220 11,200
Stores and operating supplies 8,868 8,021
------- -------
$43,381 $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 may require different remediation methods or periods, and ultimately
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.
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 the 1993 acquisition of CF&I, the Company recorded a liability of
$36.7 million for environmental remediation at the Pueblo Mill. The
Company believed $36.7 million was the best estimate from a range of $23.1
million to $43.6 million. The Company 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 historic 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
5
<PAGE>
of a straight-line rate of expenditure over 30 years. The State of
Colorado mandated that the schedule for corrective action could be
accelerated provided if new data indicated a greater threat existed to
the environment than was presently believed to exist. At June 30, 1999,
the accrued liability was $32.8 million, of which $30.9 million was
classified as noncurrent in the consolidated balance sheet.
GUARANTEES. Oregon Steel has outstanding $235 million principal amount of
11% First Mortgage Notes ("Notes") due 2003. The Company and CF&I
guarantee 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 owned by the Company and
CF&I, 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 Company and CF&I, and also guaranteed by
the Company and CF&I.
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 at CF&I for approximately 1,000 bargaining unit employees. 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.
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 June 1999, 117
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 ("NLRB") 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 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. The hearing
concluded on February 25, 1999. The Administrative Law Judge will render a
decision that is automatically subject to appeal by either party to the
NLRB in Washington, D.C. 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 420 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.
In addition, during the union strike, 39 bargaining unit employees of the
Colorado & Wyoming Railway Company ("C&W"), a wholly-owned subsidiary of
the Company which 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 determined that the employees
quit their employment and, accordingly, C&W declined to allow those
individuals to return to work. The Brotherhood of
6
<PAGE>
Maintenance of Way Employees, the National Conference of Firemen and
Oilers, the United Transportation Union, and certain members of those
organizations individually (collectively, "Plaintiffs") filed in 1998
assorted 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 Plaintiffs 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.
4. Settlement of Litigation
------------------------
During the second quarter of 1999, the Company recorded a $3.7 million gain
in operating income resulting from a settlements of litigation with a
graphite electrode supplier.
7
<PAGE>
<TABLE>
CF&I STEEL, L.P.
BALANCE SHEETS
(In thousands)
<CAPTION>
June 30, December 31,
1999 1998
--------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1 $ --
Trade accounts receivable, net 26,514 31,653
Inventories 43,210 44,516
Other 1,881 1,603
--------- ---------
Total current assets 71,606 77,772
--------- ---------
Property, plant and equipment:
Land and improvements 3,569 3,569
Buildings 18,419 18,419
Machinery and equipment 237,630 236,288
Construction in progress 2,525 1,990
--------- ---------
262,143 260,266
Accumulated depreciation (53,760) (46,751)
--------- ---------
208,383 213,515
--------- ---------
Excess of cost over net assets acquired 34,413 34,923
Other assets 15,022 13,089
--------- ---------
$ 329,424 $ 339,299
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 7,504 $ 7,164
Accounts payable 33,036 46,932
Accrued expenses 20,131 20,235
--------- ---------
Total current liabilities 60,671 74,331
Long-term debt 27,183 31,023
Long-term debt - Oregon Steel Mills, Inc. 204,600 186,000
Long-term debt - New CF&I, Inc. 21,755 21,755
Environmental liability 30,850 30,850
Deferred employee benefits 6,885 6,748
--------- ---------
351,944 350,707
--------- ---------
Contingencies (Note 3)
PARTNERS' DEFICIT
General partner (22,520) (11,408)
--------- ---------
$ 329,424 $ 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 Six Months Ended
June 30, June 30,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Sales $ 62,569 $ 88,217 $ 132,606 $ 185,712
Costs and expenses:
Cost of sales 61,490 81,430 123,437 167,872
Settlement of litigation (3,684) -- (3,684) --
Selling, general and administrative
expenses 5,219 5,377 10,259 10,798
--------- --------- --------- ---------
Operating income (loss) (456) 1,410 2,594 7,042
Other income (expense):
Interest and dividend income 2 8 3 17
Interest expense (7,124) (6,725) (13,897) (13,388)
Other income, net 95 4,645 188 4,744
--------- --------- --------- ---------
Net loss $ (7,483) $ (662) $ (11,112) $ (1,585)
========= ========= ========= =========
</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>
Six Months Ended June 30,
-------------------------
1999 1998
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (11,112) $ (1,585)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,672 7,556
Other, net 45 (4,549)
Changes in current assets and liabilities, net (7,719) (391)
--------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES (11,114) 1,031
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (1,972) (4,791)
Proceeds from disposal of property, plant and equipment -- 4,831
Other, net (2,013) --
--------- ---------
NET CASH PROVIDED BY (USED IN) BY INVESTING
ACTIVITIES (3,985) 40
--------- ---------
Cash flows from financing activities:
Borrowings from Oregon Steel Mills, Inc. 85,000 122,384
Payments to Oregon Steel Mills, Inc. (66,400) (120,384)
Payment of long-term debt (3,500) (3,071)
--------- ---------
NET CASH PROVIDED BY (USED IN) BY FINANCING
ACTIVITIES 15,100 (1,071)
--------- ---------
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 $ 11,231 $ 10,673
</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. 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:
June 30, December 31,
1999 1998
--------- ------------
(In thousands)
Raw materials $ 7,101 $ 9,318
Semifinished product 14,192 16,154
Finished product 13,220 11,200
Stores and operating supplies 8,697 7,844
------- -------
$43,210 $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 may require different remediation methods or periods, and
ultimately 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 historic 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 projects
on a prioritized corrective action schedule which is substantially
reflective of a straight-line rate of expenditure over 30 years. The
11
<PAGE>
State of Colorado mandated that the schedule for corrective action could
be accelerated provided if new data indicated a greater threat existed
to the environment than was presently believed to exist. At June 30,
1999, the accrued liability was $32.8 million, of which $30.9 million
was classified as noncurrent in the consolidated balance sheet.
GUARANTEES. 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 syndicate of lenders which is collateralized, in part, by the accounts
receivable and inventory of the Partnership, and also guaranteed by the
Partnership.
LABOR DISPUTE. The labor contract at the Partnership 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 at the Partnership for
approximately 1,000 bargaining unit employees. 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 June 1999, 117
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 ("NLRB") 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 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. The hearing concluded on February 25, 1999.
The Administrative Law Judge will render a decision that is automatically
subject to appeal by either party to the NLRB in Washington, D.C.
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 420 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.
4. Settlement of Litigation
------------------------
During the second quarter of 1999, the Partnership recorded a $3.7
million gain in operating income resulting from a settlement with a
graphite electrode supplier.
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, 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 June 30, 1999
and 1998, and the six months ended June 30, 1999 and 1998, sales of the
Partnership were 97.4 percent, 98.1 percent, 97.5 percent and 98.2 percent,
respectively, of the consolidated sales of the Company. For the three months
ended June 30, 1999 and 1998, and the six months ended June 30, 1999 and 1998,
cost of sales of the Partnership were 97.5 percent, 98.3 percent, 97.5, and 98.3
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:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1999 1998 1999 1998
--------- -------- -------- ---------
Tonnage sold:
Rail 73,700 84,800 168,700 183,000
Rod and Bar 107,400 88,900 200,500 185,200
Seamless Pipe 7,600 23,800 16,100 43,100
Semifinished 2,900 13,300 5,000 34,500
-------- -------- -------- --------
Total 191,600 210,800 390,300 445,800
======== ======== ======== ========
Sales (in thousands): $ 64,236 $ 89,947 $135,958 $189,077
Average selling price per ton: $ 335 $ 427 $ 348 $ 424
The Company's sales decreased 28.6 percent to $64.2 million in the second
quarter of 1999 and decreased 28.1 percent to $136.0 million for the first six
months of 1999, compared to the corresponding 1998 periods. The Company shipped
191,600 and 390,300 tons during the three and six month periods ended June 30,
1999, respectively, compared to 210,800 and 445,800 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 7,600 and 16,100 for the three and six
month periods ended June 30, 1999, respectively compared to 23,800 and 43,100
tons for the corresponding 1998 periods. The decline in demand for seamless pipe
caused the Company to temporarily shut down the seamless pipe mill. The seamless
pipe market has been unfavorably affected by the lack of drilling activity and
a decrease in US rig counts. There are no immediate plans to reopen the mill.
Rail shipments decreased to 73,700 and 168,700 tons for the three and six month
periods ended June 30, 1999, respectively, compared to 84,800 and 183,000 tons
for the corresponding 1998 periods. The Company now expects to ship
approximately 340,000 tons of rail during 1999 primarily due to cutbacks in
customer rail programs.
13
<PAGE>
The Company's consolidated average selling price decreased $92 to $335 per
ton for the second quarter of 1999 and decreased $76 to $348 per ton for the
first six months of 1999, compared to the corresponding 1998 periods. The
decrease in average selling price was primarily due to reduced average selling
prices in rail and rod, the closure of the seamless mill and a resulting
shift in product mix. Lower priced rod and bar products represented 56.1 percent
and 51.4 percent, respectively, of the shipments for the three month and six
month periods ended June 30, 1999, while seamless pipe, generally the highest
priced product among the product lines, accounted for 4.0 percent and 4.1
percent for the same periods. For the corresponding periods in 1998, rod and bar
products accounted for 42.2 percent and 41.5 percent, respectively, while
seamless pipe represented 11.3 percent and 9.7 percent, respectively.
The Company's gross profit for the three month and six month periods ended
June 30, 1999 was 1.8 and 6.9 percent, respectively, compared to 7.9 percent and
9.7 percent for the corresponding 1998 periods. The gross profit decline in 1999
compared to 1998 was primarily due to losses in the seamless pipe business in
1999 and the subsequent shutdown and severance costs incurred in the temporary
closure of the seamless pipe mill. The impact of this charge and operational
losses in the seamless business were approximately $6.0 million and $8.0 million
for the three months and six months ended June 30, 1999, respectively.
The Company recorded a $3.7 million gain for the three months and the six
months ended June 30, 1999, resulting from a settlements of litigation with
a graphite electrode supplier.
The Company's selling, general and administrative expenses decreased
$164,000 and $545,000 respectively, for the three and six month periods ended
June 30, 1999 from the corresponding 1998 periods, but increased as a percentage
of sales to 8.3 percent and 7.7 percent in the three and six month periods ended
June 30, 1999, respectively, from 6.1 percent and 5.8 percent for the
corresponding 1998 periods. The dollar amount decrease was primarily due to a
decrease in costs directly associated with the labor dispute in 1999 as compared
to 1998.
The Company's total interest cost for the three and six month periods ended
June 30, 1999 was $7.2 million and $14.0 million, respectively, compared to $6.4
million and $12.7 million for the corresponding 1998 periods. The increased
interest cost is primarily the result of higher average long-term debt during
1999.
The Company's other income, net for the three and six month periods ended
June 30, 1999, was $95,000 and $188,000, respectively, compared to $4.6 million
and $4.7 million for the corresponding 1998 periods. Other income for 1998 was
favorably impacted by a $4.5 million gain on the sale of the Pueblo Railroad
Service, a rail welding business, recorded in the second quarter of 1998.
The Company's effective income tax rates were 49.2 percent and 43.9 percent
for the three and six month periods ended June 30, 1999, respectively, compared
to 26.9 percent and 427.1 percent for the corresponding 1998 periods. The
Company's effective income tax rates were 49.2 percent and 43.9 percent for the
three and six month periods ended June 30, 1999, respectively, compared
to 26.9 and 427.1 percent for the corresponding 1998 periods. The 1999
effective rates are greater than the statutory rate of 35 percent primarily due
to expected reductions in state and foreign tax credits. The effective tax rate
for the six months in 1998 was primarily due to the effect of a change in the
estimate of the 1997 tax liability.
Liquidity and Capital Resources
- - -------------------------------
Cash flow from operations for the six months ended June 30, 1999 was a
decrease in cash of $11.1 million compared to an increase in cash of $1.0
million in the corresponding 1998 period. The major items affecting this $12.1
million decrease were an increased net loss in 1999 ($5.0 million), a greater
increase in deferred income taxes ($3.8 million) and a decrease in accounts
payable versus an increase in 1998 ($32.7 million). These cash uses were
partially offset by decreases in accounts receivable and inventories versus
increases in 1998 ($14.6 million and $6.0 million, respectively), a smaller
decrease in accrued expenses ($6.0 million), and a decrease in gains on disposal
of property, plant and equipment ($3.8 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
14
<PAGE>
requirements for capital expenditures and other cash needs, both short-term and
long-term, are provided through a loan from Oregon Steel. As of June 30, 1999,
$204.6 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 1999, 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 June
30, 1999, the outstanding balance on the debt was $34.7 million, of which $27.2
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 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
syndicate of lenders which is partially collateralized by the accounts
receivable and inventory of the Company and the Partnership, and also guaranteed
by the Company and the Partnership.
In addition, Oregon Steel maintains a $125 million credit agreement with a
symdicate of lenders which is partially collateralized by the accounts
receivable and inventory of the Company and the Partnership, and also guaranteed
by the Company and the Partnership.
CAPITAL EXPENDITURES. During the first six months of 1999, the Company
expended approximately $1.8 million excluding capitalized interest, on capital
projects.
YEAR 2000. 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 or its customers' 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. Substantially all
of the remaining remediation effort and testing is expected to be completed by
the end of the third quarter of 1999. The most critical business systems have
been recently functionally upgraded, or are in process of upgrade, and
concurrently are becoming year
15
<PAGE>
2000 compliant. The Company is soliciting written confirmations from key
suppliers 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 at a 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 would be a
material 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 more than three-quarters has
been spent or committed to date. No reserve has been established. 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 the end of the
third quarter 1999, all critical systems will be remediated and under test
internally or by independent outside verification.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material change.
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.
99.1 Form of Credit Agreement between Oregon Steel Mills,
Inc., as borrower, and the Lender party thereto
and Material Differences Schedule. (Filed as exhibit
10.1 to Oregon Steel Mill, Inc. Form 10-Q dated June 30,
1999 and incorporated by reference herein.)**
(b) Reports on Form 8-K
None
**Certain exhibits and schedules to this Exhibit are omitted. A
list of omitted Exhibits is provided in the Exhibit and the
Registrant agrees to furnish supplementally to the Commission a
copy of any omitted Exhibit or Schedule upon request.
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: August 13, 1999 /s/ Christopher D. Cassard
---------------------------------
Christopher D. Cassard
Corporate Controller
CF&I STEEL, L.P.
By: New CF&I, Inc.
General Partner
Date: August 13, 1999 /s/ Christopher D. Cassard
---------------------------------
Christopher D. Cassard
Corporate Controller
New CF&I, Inc.
17
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