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 March 31, 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
March 31, 1999 (unaudited)
and December 31, 1998 ................................2
Consolidated Statements of Income (unaudited)
Three months ended March 31, 1999
and 1998 .............................................3
Consolidated Statements of Cash Flows (unaudited)
Three months ended March 31, 1999
and 1998 .............................................4
Notes to Consolidated Financial
Statements (unaudited)..............................5-6
Financial Statements - CF&I Steel, L.P.
----------------
Balance Sheets
March 31, 1999 (unaudited)
and December 31, 1998 ................................7
Statements of Operations (unaudited)
Three months ended March 31, 1999
and 1998 .............................................8
Statements of Cash Flows (unaudited)
Three months ended March 31, 1999
and 1998 ............................................ 9
Notes to Financial
Statements (unaudited)............................10-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations .............12-14
Item 3. Quantitative and Qualitative Disclosures
about Market Risk....................................14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................15
Item 6. Exhibits and Reports on Form 8-K....................15
SIGNATURES.................................................... 15
-1-
<PAGE>
<TABLE>
NEW CF&I, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
March 31,
1999 December 31,
(Unaudited) 1998
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4 $ 3
Trade accounts receivable, net 32,144 32,259
Inventories 53,612 44,693
Deferred tax asset 5,048 5,048
Other 2,285 1,794
--------- ---------
Total current assets 93,093 83,797
--------- ---------
Property, plant and equipment:
Land and improvements 3,574 3,574
Buildings 18,525 18,525
Machinery and equipment 239,635 238,792
Construction in progress 2,077 1,991
--------- ---------
263,811 262,882
Accumulated depreciation (51,440) (48,012)
--------- ---------
212,371 214,870
--------- ---------
Excess of cost over net assets acquired, net 34,668 34,923
Other assets 19,697 18,763
--------- ---------
$ 359,829 $ 352,353
========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 7,504 $ 7,164
Accounts payable 36,562 39,593
Accrued expenses 25,222 21,755
--------- ---------
Total current liabilities 69,288 68,512
Long-term debt 27,183 31,023
Long-term debt - Oregon Steel Mills, Inc. 198,500 186,000
Environmental liability 30,850 30,850
Deferred employee benefits 6,824 6,748
--------- ---------
332,645 323,133
--------- ---------
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 (11,260) (9,224)
--------- ---------
5,344 7,380
--------- ---------
$ 359,829 $ 352,353
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-2-
<PAGE>
NEW CF&I, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
(Unaudited)
Three Months Ended March 31,
----------------------------
1999 1998
--------- --------
Sales $ 71,722 $ 99,130
Costs and expenses:
Cost of sales 63,483 87,909
Selling, general and administrative
expenses 5,173 5,553
-------- --------
Operating income 3,066 5,668
Other income (expense):
Interest and dividend income 27 10
Interest expense (6,352) (6,176)
Minority interest 177 58
Other, net 93 99
-------- --------
Loss before income taxes (2,989) (341)
Income tax (expense) benefit 953 (343)
-------- --------
Net loss $ (2,036) $ (684)
======== ========
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>
Three Months Ended March 31,
------------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,036) $ (684)
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,796 3,813
Deferred income taxes (969) (448)
Minority interest (177) (58)
Other, net 43 3
Changes in current assets and liabilities, net (8,612) 4,352
-------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (7,955) 6,978
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (1,040) (2,766)
Other, net (5) 3
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (1,045) (2,763)
-------- --------
Cash flows from financing activities:
Borrowings from Oregon Steel Mills, Inc. 45,300 52,800
Payments to Oregon Steel Mills, Inc. (32,800) (56,900)
Payment of long-term debt (3,499) --
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 9,001 (4,100)
-------- --------
Net increase in cash and cash equivalents 1 115
Cash and cash equivalents at beginning of period 3 3
-------- --------
Cash and cash equivalents at end of period $ 4 $ 118
======== ========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 1,814 $ 5,314
</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.
Reference0 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:
March 31, December 31,
1999 1998
--------- ------------
(In thousands)
Raw materials $10,004 $ 9,318
Semifinished product 20,775 16,154
Finished product 14,619 11,200
Stores and operating supplies 8,214 8,021
------- -------
Total Inventory $53,612 $44,693
======= =======
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 the 1993 acquisition of CF&I, the Company accrued 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 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 of a
straight-line rate of expenditure over 30 years. The State of Colorado
stated that the schedule for corrective action could be accelerated if new
data indicated a greater threat to the environment than is currently known
to exist. At March 31, 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 guarantees
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 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, 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 March 1999, 90
former striking employees had returned to work as a result of their
unconditional offer. Approximately 720 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. 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. Testimony and other evidence was presented on various hearing
dates in the latter part of 1998 and early 1999. The hearing concluded on
February 25, 1999. The Administrative Law Judge will render a decision
which is automatically appealable 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 430 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 Maintenance of Way
Employees, the National Conference of Firemen and Oilers, the United
Transportation Union, and certain members of those organizations
individually (jointly "Plaintiffs") filed in 1998 various 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 which would result from an adverse legal
or arbitration decision.
4. Subsequent Event:
-----------------
Due to the continuing adverse market conditions, effective May 7, 1999,
the Company began a temporary indefinite shutdown of its seamless tube
mill. The shutdown is expected to result in a charge for employee
severance costs in the second quarter of 1999 of approximately $870,000
after taxes.
-6-
<PAGE>
<TABLE>
CF&I STEEL, L.P.
BALANCE SHEETS
(In thousands)
<CAPTION>
March 31,
1999 December 31,
(Unaudited) 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1 $ --
Trade accounts receivable, net 31,470 31,653
Inventories 53,443 44,516
Other 1,990 1,603
--------- ---------
Total current assets 86,904 77,772
--------- ---------
Property, plant and equipment:
Land and improvements 3,569 3,569
Buildings 18,419 18,419
Machinery and equipment 237,130 236,288
Construction in progress 2,076 1,990
--------- ---------
261,194 260,266
Accumulated depreciation (50,114) (46,751)
--------- ---------
211,080 213,515
--------- ---------
Excess of cost over net assets acquired, net 34,668 34,923
Other assets 13,054 13,089
--------- ---------
$ 345,706 $339,299
========= ========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 7,504 $ 7,164
Accounts payable 44,307 46,932
Accrued expenses 23,401 20,235
--------- ---------
Total current liabilities 75,212 74,331
Long-term debt 27,183 31,023
Long-term debt - Oregon Steel Mills, Inc. 198,500 186,000
Long-term debt - New CF&I, Inc. 21,756 21,755
Environmental liability 30,850 30,850
Deferred employee benefits 6,824 6,748
--------- ---------
360,325 350,707
--------- ---------
Contingencies (Note 3)
PARTNERS'
(DEFICIT)
Common Stock 1 --
General partner (14,620) (11,408)
--------- ---------
(14,619) (11,408)
--------- ---------
$ 345,706 $339,299
========= =========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
-7-
<PAGE>
CF&I STEEL, L.P.
STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
Three Months Ended
March 31,
------------------------------
1999 1998
--------- ---------
Sales $ 70,037 $ 97,495
Costs and expenses:
Cost of sales 61,947 86,442
Selling, general and administrative
expenses 5,040 5,421
-------- --------
Operating income 3,050 5,632
Other income (expense):
Interest and dividend income 1 10
Interest expense (6,773) (6,664)
Other, net 93 99
-------- --------
Net loss $ (3,629) $ (923)
======== ========
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>
Three Months Ended March 31,
----------------------------
1999 1998
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,629) $ (923)
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 3,733 3,746
Other, net 43 3
Changes in current assets and liabilities, net (8,102) 3,743
-------- --------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (7,955) 6,569
-------- --------
Cash flows from investing activities:
Additions to property, plant and equipment (1,040) (2,357)
Other, net (5) 3
-------- --------
NET CASH USED BY INVESTING ACTIVITIES (1,045) (2,354)
-------- --------
Cash flows from financing activities:
Borrowings from related parties 45,300 52,800
Payments to related parties (32,800) (56,900)
Payment of long-term debt (3,499) --
-------- --------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 9,001 (4,100)
-------- --------
Net increase in cash and cash equivalents 1 115
Cash and cash equivalents at beginning of year -- --
-------- --------
Cash and cash equivalents at end of year $ 1 $ 115
======== ========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 3,505 $ 5,314
</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"). 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:
March 31, December 31,
1999 1998
--------- ------------
(In thousands)
Raw materials $10,004 $ 9,318
Semifinished product 20,775 16,154
Finished product 14,619 11,200
Stores and operating supplies 8,045 7,844
------- -------
Total Inventory $53,443 $44,516
======= =======
3. Contingencies
-------------
ENVIRONMENTAL. 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, 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 of a straight-line rate
of expenditure over 30 years. The State of Colorado stated that the
schedule for corrective action could be accelerated if new data indicated
a greater threat to the environment than is currently known to exist. At
March 31, 1999, the accrued liability was $32.8 million, of which $30.9
million was classified as noncurrent in the consolidated balance sheet.
-10-
<PAGE>
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 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, 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 March 1999, 90
former striking employees had returned to work as a result of their
unconditional offer. Approximately 720 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. 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. Testimony
and other evidence was presented on various hearing dates in the latter
part of 1998 and early 1999. The hearing concluded on February 25, 1999.
The Administrative Law Judge will render a decision which is automatically
appealable 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
430 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. Subsequent Event:
-----------------
Due to the continuing adverse market conditions, effective May 7, 1999,
the Company began a temporary indefinite shutdown of its seamless tube
mill. The shutdown is expected to result in a charge for employee
severance costs in the second quarter of 1999 of approximately $870,000
after taxes.
-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, 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 March 31, 1999
and 1998, sales of the Partnership were 97.7 percent and 98.4 percent,
respectively, of the consolidated sales of the Company. For the three months
ended March 31, 1999 and 1998, cost of sales of the Partnership were 97.6
percent 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 March 31,
----------------------------
1999 1998
--------- -------
Tonnage sold:
Rail 95,000 98,200
Rod, Bar and Wire 93,100 96,400
Seamless Pipe 8,500 19,200
Semifinished 2,100 21,200
-------- --------
Total 198,700 235,000
======== ========
Sales (in thousands): $ 71,722 $ 99,130
Consolidated average selling price per ton: $ 361 $ 422
- --------------
The Company's sales for the first quarter of 1999 of $71.7 million decreased
27.6 percent from sales of $99.1 million in the first quarter of 1998. Shipments
decreased 15.5 percent to 198,700 tons in the first quarter of 1999 from 235,000
tons in the first quarter of 1998. The decrease in shipments and average selling
price are a result of depressed seamless pipe and semifinished markets and
reduced rail and rod pricing. Pricing for the seamless pipe product has
decreased an average of $200 a ton since the first quarter of 1998. Seamless
pipe markets continue to be affected by lack of drilling activity and falling
rig counts. The U.S. rig count has fallen to 500 operating units compared to 875
a year ago. Shipments of the division's seamless products were 8,500 tons, a
decrease of more than 50 percent from the 19,200 tons shipped during the
comparable 1998 quarter. Rod prices have been severely impacted by the levels of
imported rod into the United States. Average rod pricing has fallen $70 a ton
compared to the first quarter of 1998. Rod shipments during the first quarter of
1999 were 93,100 tons compared to 96,400 tons during the first quarter of 1998.
The division shipped 95,000 tons of rail during the first quarter of 1999
compared to 98,200 tons in the first quarter of 1998.
The Company's gross profit for the first quarter of 1999 was $8.2 million or
11.5 percent compared to $11.2 million or 11.3 percent for the corresponding
1998 period. The decline in gross profit is
-12-
<PAGE>
primarily due to the reduced shipments and lower prices for seamless pipe,
rod, and semifinished steel. Reduced drilling activity has caused a
decline in tons sold and prices for seamless pipe while increasing imports
have caused an industry-wide decline in rod prices. Production efficiencies
improved product conversion costs, which partially offset the price declines
noted above.
The Company's selling, general and administrative expenses ("SG&A") for the
first quarter of 1999 decreased $380,000 from the corresponding 1998 period and
increased as a percentage of sales to 7.2 percent in the first quarter of 1999,
from 5.6 percent for the corresponding 1998 period. The decrease in SG&A dollars
is due to the lower shipments and shipping expenses compared to the prior year
and decreased costs associated with the labor dispute.
The Company's total interest cost was $6.3 million for the first quarter of
1999 and the corresponding 1998 period.
The Company's effective income tax rates were 32 percent and 101 percent for
the three month period ended March 31, 1999 and 1998, respectively. The
effective tax rate for the first quarters of 1999 and 1998 varied from the
combined state and federal statutory rates due to miscellaneous adjustments to
the Company's tax accounts.
Liquidity and Capital Resources
- -------------------------------
The Company's cash flow used by operations for the first quarter of 1999 was
$8.0 million compared to cash provided by operations of $7.0 million in the
first quarter of 1998. The major items affecting this $15.0 million decrease
were a $2 million increase in net loss, an increase in inventory of $9 million
compared to a $4 million decrease in the first quarter of 1998 and a smaller
increase in accounts payable ($9 million) offset partially by a smaller increase
in accounts receivable ($6 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 March 31, 1999, $198.5 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 March 3, 1993. This debt is without stated
collateral and is payable over 10 years with interest at 9.5 percent. As of
March 31, 1999, the outstanding balance on the debt was $29.3 million, of which
$21.7 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.
-13-
<PAGE>
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 quarter of 1999, the Company
expended approximately $986,000, excluding 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 disruption 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 issue or the
lost revenues related to interruption in the Company's or its customer's
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. The remaining
remediation effort and testing is expected to continue through the third quarter
of 1999. The most critical business systems have been recently functionally
upgraded, or are in the process of upgrade, and concurrently are becoming year
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 half has been
expended 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 mid 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 changes.
-14-
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
See discussion of labor dispute in Note 3 to the Company's
Consolidated Financial Statements and incorporated by reference
herein.
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: May 13, 1999 /s/ Christopher D. Cassard
------------------------------
Christopher D. Cassard
Corporate Controller
CF&I STEEL, L.P.
By: New CF&I, Inc.
General Partner
Date: May 13, 1999 /s/ Christopher D. Cassard
------------------------------
Christopher D. Cassard
Corporate Controller
New CF&I, Inc.
-15-
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