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, 1998
------------------------------------------------
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------------- --------------------
NEW CF&I, INC.
(Exact name of registrant as specified in its charter)
Delaware 02-20781 93-1086900
- -------------------------------------------------------------------------------
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Identification Number)
1000 Broadway Building, Suite 2200, Portland, Oregon 97205
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(503) 223-9228
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
CF&I STEEL, L.P.
(Exact name of registrant as specified in its charter)
Delaware 02-20779 93-1103440
- -------------------------------------------------------------------------------
(State or other
jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Identification Number)
1000 Broadway Building, Suite 2200, Portland, Oregon 97205
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(503) 223-9228
- ------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
<PAGE>
NEW CF&I, INC.
CF&I STEEL, L.P.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements - New CF&I, Inc.
--------------
Consolidated Balance Sheets
June 30, 1998 (unaudited)
and December 31, 1997 ..................................2
Consolidated Statements of Income (unaudited)
Three months and six months ended June 30, 1998
and 1997 ...............................................3
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 1998
and 1997 ..............................................4
Notes to Consolidated Financial
Statements (unaudited)...............................5-6
Financial Statements - CF&I Steel, L.P.
----------------
Balance Sheets
June 30, 1998 (unaudited)
and December 31, 1997 .................................7
Statements of Operations (unaudited)
Three months and six months ended June 30, 1998
and 1997 ..............................................8
Statements of Cash Flows (unaudited)
Six months ended June 30, 1998
and 1997 ............................................. 9
Notes to Financial
Statements (unaudited).............................10-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ..............12-14
PART II. OTHER INFORMATION
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>
June 30,
1998 December 31,
(Unaudited) 1997
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3 $ 3
Trade accounts receivable, net 46,755 37,165
Inventories 46,544 41,842
Deferred tax asset 5,404 4,290
Other 2,370 2,500
-------- --------
Total current assets 101,076 85,800
-------- --------
Property, plant and equipment:
Land and improvements 3,574 3,635
Buildings 18,182 15,710
Machinery and equipment 234,326 231,159
Construction in progress 5,158 7,302
-------- --------
261,240 257,806
Accumulated depreciation (40,837) (34,485)
-------- --------
220,403 223,321
-------- --------
Excess of cost over net assets acquired 35,433 35,943
Other assets 18,308 19,023
-------- --------
$375,220 $364,087
======== ========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 7,801 $ 7,373
Accounts payable 54,901 36,728
Accrued expenses 21,548 26,793
-------- --------
Total current liabilities 84,250 70,894
Long-term debt 34,688 38,187
Long-term debt - Oregon Steel Mills, Inc. 184,200 182,200
Environmental liability 32,941 32,941
Deferred employee benefits 6,741 6,643
-------- --------
342,820 330,865
-------- --------
Minority interests 2 319
-------- --------
Redeemable common stock 21,840 21,840
-------- --------
Contingencies (Note 3)
STOCKHOLDERS' EQUITY
Common stock 1 1
Additional paid-in capital 16,603 16,603
Accumulated deficit (6,046) (5,541)
-------- --------
10,558 11,063
-------- --------
$375,220 $364,087
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-2-
<PAGE>
<TABLE>
NEW CF&I, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ----------
<S> <C> <C> <C> <C>
Sales $ 89,947 $ 119,549 $ 189,077 $ 230,769
Costs and expenses:
Cost of sales 82,860 104,244 170,768 203,115
Selling, general and administrative
expenses 5,517 5,382 11,071 10,360
Profit participation -- 344 -- 344
--------- --------- --------- ---------
Operating income 1,570 9,579 7,238 16,950
Other income (expense):
Interest and dividend income 7 17 17 25
Interest expense (6,236) (6,646) (12,412) (13,480)
Minority interest 259 (147) 317 (117)
Other, net 4,645 314 4,744 207
--------- --------- --------- ---------
Income (loss) before income taxes 245 3,117 (96) 3,585
Income tax expense (66) (1,345) (410) (1,748)
--------- --------- --------- ---------
Net income (loss) $ 179 $ 1,772 $ (506) $ 1,837
========= ========= ========= =========
</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,
----------------------------------
1998 1997
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (506) $ 1,837
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,691 6,586
Deferred income taxes (464) 4,455
Minority interest (317) 117
Gain on disposal of property, plant and equipment (4,549) (1,976)
Changes in current assets and liabilities, net (824) 27,860
--------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,031 38,879
--------- ----------
Cash flows from investing activities:
Additions to property, plant and equipment (4,791) (3,752)
Proceeds from disposal of property, plant and equipment 4,831 4,861
Other, net - (165)
--------- ----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 40 944
--------- ----------
Cash flows from financing activities:
Borrowings from Oregon Steel Mills, Inc. 122,384 87,400
Payments to Oregon Steel Mills, Inc. (120,384) (117,100)
Payment of long-term debt (3,071) (2,798)
--------- ----------
NET CASH USED BY FINANCING ACTIVITIES (1,071) (32,498)
--------- ----------
Net increase in cash and cash equivalents - 7,325
Cash and cash equivalents at beginning of period 3 3
--------- -----------
Cash and cash equivalents at end of period $ 3 $ 7,328
========= ==========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 12,718 $ 14,043
</TABLE>
The accompanying notes are an integral part of the consolidated
financial statements.
-4-
<PAGE>
NEW CF&I, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The consolidated financial statements include the accounts of New CF&I,
Inc. and its subsidiaries ("Company"). All significant intercompany
balances and transactions have been eliminated.
The unaudited financial statements include all adjustments (consisting of
normal recurring accruals) which, in the opinion of management, are
necessary for a fair presentation of the interim periods. Results for an
interim period are not necessarily indicative of results for a full year.
Reference should be made to the Company's 1997 Annual Report on Form 10-K
for additional disclosures including a summary of significant accounting
policies.
2. Inventories
-----------
Inventories consist of:
June 30, December 31,
1998 1997
-------- ------------
(In thousands)
Raw materials $18,199 $ 15,051
Semifinished product 9,231 13,840
Finished product 12,902 3,868
Stores and operating supplies 6,212 9,083
------- --------
$46,544 $ 41,842
======= ========
3. Contingencies
-------------
ENVIRONMENTAL. The Company owns a 95.2 percent interest in CF&I Steel,
L.P. ("CF&I") which owns the Pueblo, Colorado steel mill ("Pueblo Mill").
In connection with CF&I's acquisition of certain assets from CF&I Steel
Corporation in 1993, CF&I established a reserve of $36.7 million for
environmental remediation. The Colorado Department of Public Health and
Environment issued a 10-year post-closure permit with two ten-year
renewals to CF&I which became effective on October 30, 1995. The permit
contains a schedule for corrective actions to be completed which is
substantially reflective of a straight-line rate of expenditure over 30
years. At June 30, 1998, CF&I has a reserve of $34.8 million related to
this remediation, of which $32.9 million is classified as non-current in
the consolidated balance sheet.
GUARANTEES. Oregon Steel Mills, Inc. ("Oregon Steel") has outstanding $235
million principal amount of 11% First Mortgage Notes ("Notes") due 2003.
The Company guaranteed the obligations of Oregon Steel under the Notes,
and those guarantees are secured by a lien on substantially all of the
property, plant and equipment and certain other assets of the Company,
excluding accounts receivable and inventory.
In addition, Oregon Steel maintains a $125 million credit agreement with a
group of banks which is collateralized, in part, by the accounts
receivable and inventory of the Company, and also guaranteed by the
Company.
-5-
<PAGE>
LABOR DISPUTE
The labor contract at CF&I expired on September 30, 1997. After a brief
contract extension intended to help facilitate a possible agreement, on
October 3, 1997 the United Steel Workers of America ("Union") initiated a
strike of approximately 1,060 bargaining unit employees at the Pueblo
Mill. The parties failed to reach final agreement on a new labor contract
due to differences on economic issues. As a result of contingency
planning, CF&I was able to avoid complete suspension of operations at the
Pueblo Mill by utilizing a combination of permanent replacement workers,
striking employees who returned to work and salaried employees. By
December 1997, CF&I had sufficient permanent replacement employees to
reach full production capacity.
On December 30, 1997 the Union called off the strike and made an
unconditional offer to return to work. At the time of this offer, only a
few vacancies existed at the Pueblo Mill. As of the end of June 1998, 90
former striking employees had returned to work as a result of their
unconditional offer. Approximately 750 former striking workers remain
unreinstated ("Unreinstated Employees").
On February 27, 1998 the Regional Director of the National Labor Relations
Board's Denver office issued a complaint against CF&I alleging violations
of several provisions of the National Labor Relations Act. CF&I not only
denies the allegations, but rather believes that both the facts and the
law fully support its contention that the strike was economic in nature
and that it is not obligated to displace the properly hired permanent
replacement employees. 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 600 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. New Accounting Standard
-----------------------
Currently, the Company has no significant derivative instruments and
accordingly, the adoption of Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities (FAS
------------------------------------------------------------
133) issued by the Financial Accounting Standards Board (FASB) on June 15,
1998, is expected to have no significant effect on the Company's results
of operations or its financial position.
-6-
<PAGE>
<TABLE>
CF&I STEEL, L.P.
BALANCE SHEETS
(In thousands)
<CAPTION>
June 30,
1998 December 31,
(Unaudited) 1997
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ - $ -
Trade accounts receivable, net 46,069 36,652
Inventories 46,385 41,666
Other 2,109 2,350
-------- --------
Total current assets 94,563 80,668
-------- --------
Property, plant and equipment:
Land and improvements 3,569 3,629
Buildings 18,075 15,604
Machinery and equipment 231,823 228,656
Construction in progress 5,158 7,302
-------- --------
258,625 255,191
Accumulated depreciation (39,705) (33,488)
-------- --------
218,920 221,703
-------- --------
Excess of cost over net assets acquired 35,433 35,943
Other assets 13,157 13,223
-------- --------
$362,073 $351,537
======== ========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 7,801 $ 7,373
Accounts payable 60,702 41,489
Accrued expenses 19,854 25,973
-------- --------
Total current liabilities 88,357 74,835
Long-term debt 34,688 38,187
Long-term debt - Oregon Steel Mills, Inc. 184,200 182,200
Long-term debt - New CF&I, Inc. 21,756 21,756
Environmental liability 32,941 32,941
Deferred employee benefits 6,741 6,643
-------- --------
368,683 356,562
-------- --------
Contingencies (Note 3)
PARTNERS'
EQUITY
(DEFICIT)
Limited partner 2 319
General partner (6,612) (5,344)
-------- --------
(6,610) (5,025)
-------- --------
$362,073 $351,537
======== ========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
-7-
<PAGE>
<TABLE>
CF&I STEEL, L.P.
STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ---------------------------
1998 1997 1998 1997
-------- -------- ---------- --------
<S> <C> <C> <C> <C>
Sales $88,217 $117,749 $185,712 $227,502
Costs and expenses:
Cost of sales 81,430 102,733 167,872 200,384
Selling, general and administrative
expenses 5,377 5,247 10,798 10,093
Profit participation - 344 - 344
------- -------- -------- --------
Operating income 1,410 9,425 7,042 16,681
Other income (expense):
Interest and dividend income 8 17 17 25
Interest expense (6,725) (7,139) (13,388) (14,580)
Other, net 4,645 314 4,744 207
------- -------- -------- --------
Net income (loss) $ (662) $ 2,617 $ (1,585) $ 2,333
======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of the
financial statements.
-8-
<PAGE>
<TABLE>
CF&I STEEL, L.P.
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
<CAPTION>
Six Months Ended June 30,
------------------------------------
1998 1997
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,585) $ 2,333
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,556 6,476
Other, net (4,549) (1,945)
Changes in current assets and liabilities, net (391) 27,536
----------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,031 34,400
----------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (4,790) (3,628)
Proceeds from disposal of property, plant and equipment 4,830 4,861
Other, net - (164)
----------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES 40 1,069
----------- --------
Cash flows from financing activities:
Borrowings from related parties 122,384 91,756
Payments to related parties (120,384) (117,100)
Payment of long-term debt (3,071) (2,799)
----------- ---------
NET CASH USED BY FINANCING ACTIVITIES (1,071) (28,143)
----------- ---------
Net increase in cash and cash equivalents - 7,326
Cash and cash equivalents at beginning of year - -
----------- ---------
Cash and cash equivalents at end of year $ - $ 7,326
=========== =========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 10,673 $ 14,043
</TABLE>
The accompanying notes are an integral part of the
financial statements.
-9-
<PAGE>
CF&I STEEL, L.P.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
---------------------
The financial statements include the accounts of CF&I Steel, L.P. ("CF&I"
or "Partnership"). In January 1998, the Partnership assumed the trade name
of Rocky Mountain Steel Mills.
The unaudited financial statements include all adjustments (consisting of
normal recurring accruals) which, in the opinion of management, are
necessary for a fair presentation of the interim periods. Results for an
interim period are not necessarily indicative of results for a full year.
Reference should be made to the Partnership's 1997 Annual Report on Form
10-K for additional disclosures including a summary of significant
accounting policies.
2. Inventories
-----------
Inventories consist of:
June 30, December 31,
1998 1997
-------- ------------
(In thousands)
Raw materials $18,199 $15,051
Semifinished product 9,231 13,840
Finished product 12,902 3,868
Stores and operating supplies 6,053 8,907
------- -------
$46,385 $41,666
======= =======
3. Contingencies
-------------
ENVIRONMENTAL. The Partnership acquired certain assets from CF&I Steel
Corporation in 1993 and established a reserve of $36.7 million for
environmental remediation related to its Pueblo, Colorado steel mill
("Pueblo Mill"). The Colorado Department of Public Health and Environment
issued a 10-year post-closure permit with two ten-year renewals to the
Partnership which became effective on October 30, 1995. The permit
contains a schedule for corrective actions to be completed which is
substantially reflective of a straight-line rate of expenditure over 30
years. At June 30, 1998, the Partnership has a reserve of $34.8 million
related to this remediation, of which $32.9 million is classified as
non-current in the balance sheet.
GUARANTEES. Oregon Steel Mills, Inc. ("Oregon Steel") has outstanding $235
million principal amount of 11% First Mortgage Notes ("Notes") due 2003.
The Partnership guaranteed the obligations of Oregon Steel under the
Notes, and those guarantees are secured by a lien on substantially all of
the property, plant and equipment and certain other assets of the
Partnership, excluding accounts receivable and inventory.
In addition, Oregon Steel maintains a $125 million credit agreement with a
group of banks which is collateralized, in part, by the accounts
receivable and inventory of the Partnership, and also guaranteed by the
Partnership.
-10-
<PAGE>
LABOR DISPUTE
The Partnership's labor contract expired on September 30, 1997. After a
brief contract extension intended to help facilitate a possible
agreement, on October 3, 1997 the United Steel Workers of America
("Union") initiated a strike for approximately 1,060 bargaining unit
employees at the Publo Mill. The parties failed to reach final agreement
on a new labor contract due to differences on economic issues. As a
result of contingency planning, the Partnership was able to avoid complete
suspension of operations at the Pueblo Mill by utilizing a combination of
permanent replacement workers, striking employees who returned to work
and salaried employees. By December 1997, the Partnership had sufficient
permanent replacement employees to reach full production capacity.
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 1998, 90
former striking employees had returned to work as a result of their
unconditional offer. Approximately 750 former striking workers remain
unreinstated ("Unreinstated Employees").
On February 27, 1998, the Regional Director of the National Labor
Relations Board's Denver office issued a complaint against the
Partnership alleging violations of several provisions of the National
Labor Relations Act. The Partnership not only denies the allegations, but
rather believes that both the facts and the law fully support its
contention that the strike was economic in nature and that it is not
obligated to displace the properly hired permanent replacement employees.
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 600 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. New Accounting Standard
-----------------------
Currently, the Partnership has no significant derivative instruments and
accordingly, the adoption of Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and Hedging Activities
------------------------------------------------------------
(FAS 133) issued by the Financial Accounting Standars Board (FASB) on
June 15, 1998, is expected to have no significant effect on the
Partnership's results of operations or its financial position.
-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 June 30, 1998
and 1997 and the six months ended June 30, 1998 and 1997, sales of the
Partnership were 98.1 percent, 98.5 percent, 98.2 percent and 98.6 percent,
respectively, of the consolidated sales of the Company. For the three months
ended June 30, 1998 and 1997 and the six months ended June 30, 1998 and 1997,
cost of sales of the Partnership were 98.3 percent, 98.6 percent, 98.3 percent
and 98.7 percent, respectively, of the consolidated cost of sales of the
Company.
Results of Operations
- ---------------------
<TABLE>
The following table sets forth for the Company tonnage sold, sales and average
selling price per ton:
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ----------------------
1998 1997 1998 1997
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Tonnage sold:
Rail 84,800 104,300 183,000 199,000
Rod, Bar and Wire 88,900 123,500 185,200 236,000
Seamless Pipe 23,800 34,700 43,100 67,900
Semifinished 13,300 12,100 34,500 19,600
-------- -------- -------- --------
Total 210,800 274,600 445,800 522,500
======== ======== ======== ========
Sales (in thousands): $ 89,947 $119,549 $189,077 $230,769(1)
Average selling price per ton: $ 427 $ 435 $ 424 $ 437(2)
</TABLE>
(1) Includes insurance proceeds of approximately $2.5 million as reimbursement
of lost profits resulting from lost production during the third and fourth
quarters of 1996 related to the failure of one of the power transformers
servicing the Company.
(2) Excludes insurance proceeds referred to in Note (1) above.
-----------------------
The Company's sales decreased 24.8 percent to $89.9 million in the second
quarter of 1998 and decreased 18.1 percent to $189.1 million for the first six
months of 1998, compared to the corresponding 1997 periods. Shipments decreased
23.2 percent to 210,800 tons in the second quarter of 1998 and decreased 14.7
percent to 445,800 tons in the first six months of 1998, compared to the
corresponding 1997 periods. The decrease in sales and shipments was primarily
due to the strike by the Union (see Note 3 to the Consolidated Financial
Statements), an extensive power outage in May 1998, which affected steelmaking
volumes, and by a softening of demand for seamless pipe products. In addition,
rail shipments were reduced during the second quarter of 1998 as a result of an
equipment failure in the rail mill.
-12-
<PAGE>
The Company's consolidated average selling price decreased $8 to $427 per
ton for the second quarter of 1998 and decreased $13 to $424 per ton for the
first six months of 1998, compared to the corresponding 1997 periods. The
decrease in consolidated average selling price was primarily due to decreased
shipments of the generally higher priced rail, seamless pipe and wire products,
and increased shipments of the generally lower priced semifinished products.
Average sales price was also adversely affected by a weakening market for
seamless pipe and rod products. Of the $29.6 million sales decrease in the
second quarter of 1998 compared to the prior year, $27.8 million was the result
of volume decreases and $1.8 million resulted from lower average selling prices.
Of the $41.7 million sales decrease for the first six months of 1998 compared to
the prior year, $33.5 million was the result of volume decreases,
$5.7 million was the result of lower average selling prices, and $2.5 million
was from the proceeds of an insurance settlement in 1997.
The Company's gross profit for the three month and six month periods ended
June 30, 1998 was 7.9 and 9.7 percent, respectively, compared to 12.8 and 11.0
percent (excluding insurance proceeds) for the corresponding 1997 periods. The
gross profit decline in 1998 compared to 1997 was due to higher than normal
manufacturing costs and reduced production and shipments resulting from the
strike by the Union (see Note 3 to the Consolidated Financial Statements), the
May 1998 power outage which reduced steelmaking volume and the equipment failure
in the rail mill in the second quarter of 1998 and by a softening of demand for
seamless pipe and rod products.
The Company's selling, general and administrative expenses for the three and
six month periods ended June 30, 1998 increased $135,000 and $711,000
respectively, from the corresponding 1997 periods, and increased as a percentage
of sales from 4.5 percent in the three and six month periods ended
June 30, 1997, to 6.1 and 5.9 percent for the corresponding 1998 periods. The
increase was due to costs specifically related to the labor dispute with the
Union.
The Company's profit participation expense was none for the first six months
of 1998, compared to $344,000 for the corresponding 1997 period. The decrease
reflects the decreased profitability of the Company in 1998.
The Company's total interest cost for the three and six month periods ended
June 30, 1998 was $6.4 million and $12.7 million, respectively, compared to $6.7
million and $13.6 million for the corresponding 1997 periods. The lower interest
cost is the result of lower average long-term debt during 1998.
The Company's other income, net for the three and six month periods ended
June 30, 1998, was $4.6 million and $4.7 million, respectively, compared to
$314,000 and $207,000 for the corresponding 1997 periods. The increase was due
to 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 27 percent and 427 percent for
the three and six month periods ended June 30, 1998, respectively, compared to
43 percent and 49 percent for the corresponding 1997 periods. The effective tax
rate for the first six months of 1998 and 1997 varied from the combined state
and federal statutory rates due to miscellaneous adjustments to the Company's
tax accounts.
Liquidity and Capital Resources
- -------------------------------
Cash flow from operations for the six months ended June 30, 1998 was $1.0
million compared to $38.9 million in the corresponding 1997 period. The major
items affecting this $37.9 million decrease were a net loss versus net income in
1997 ($2.3 million), a decrease in deferred income taxes versus an increase in
1997 ($4.9 million), increased gain on disposal of property, plant and equipment
($2.6 million), an increase in accounts receivable versus a decrease in 1997
($17.3 million), an increase in inventories versus a decrease in 1997 ($12.7
million), and a decrease in accrued expenses versus an increase in 1997 ($9.7
million). These cash uses were partially offset by a larger increase in accounts
payable ($9.5 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
-13-
<PAGE>
through a loan from Oregon Steel. As of June 30, 1998, $184.2 million of
aggregate principal amount of the loan was outstanding, all of which was
classified as long-term. The principal is due on demand or, if no demand is
made, December 31, 2002. Interest on the principal amount of the loan is payable
monthly. Because the loan from Oregon Steel is due on demand, the applicable
interest rate is effectively subject to renegotiation at any time, and there is
no assurance the interest rate will not be materially increased in the future.
In addition, Oregon Steel is not required to provide financing to the Company
and, although demand for repayment is not expected in 1998, it may in any event
demand repayment of the loan at any time. If Oregon Steel were to demand
repayment of the loan, it is unlikely that the Company would be able to obtain
from external sources financing necessary to repay the loan or to fund its
capital expenditures and other cash needs. Failure to obtain alternative
financing would have a material adverse effect on the Company and the
Partnership. If the Company were able to obtain the necessary financing, it is
likely that such financing would be at interest rates and on terms substantially
less favorable to the Company than those provided by Oregon Steel.
Term debt of $67.5 million was incurred by the Company as part of the
purchase price of the Pueblo Mill on April 3, 1993. This debt is without stated
collateral and is payable over 10 years with interest at 9.5 percent. As of June
30, 1998, the outstanding balance on the debt was $42.5 million, of which $34.7
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.
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 six months of 1998, the Company
expended approximately $4.5 million excluding capitalized interest, on capital
projects.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
None.
-14-
<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: August 11, 1998 /s/ Christopher D. Cassard
------------------------------
Christopher D. Cassard
Corporate Controller
CF&I STEEL, L.P.
By: New CF&I, Inc.
General Partner
Date: August 11, 1998 /s/ Christopher D. Cassard
-----------------------------
Christopher D. Cassard
Corporate Controller
New CF&I, Inc.
-15-
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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