UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
Commission File
No. 1-9820
BIRMINGHAM STEEL CORPORATION
DELAWARE 13-3213634
(State of Incorporation) (I.R.S. Employer Identification No.)
1000 Urban Center Parkway, Suite 300
Birmingham, Alabama 35242
(205) 970-1200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and 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 ( ) .
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 29,779,976 Shares of Common
Stock, Par Value $.01 Outstanding at March 8, 1998.
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Birmingham Steel Corporation
Consolidated Balance Sheets
(in thousands, except number of shares)
March 31, 1998 June 30, 1997
(Unaudited) (Audited)
-------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,243 $ 959
Accounts receivable, net of allowance
for doubtful accounts of $1,975 at
March 31, 1998 and $1,797 at June 30, 1997 133,567 129,476
Inventories 198,799 208,595
Other 36,922 27,834
----------- -----------
Total current assets 373,531 366,864
Property, plant and equipment
Land and buildings 257,761 199,363
Machinery and equipment 649,201 572,802
Construction in progress 55,366 162,957
----------- -----------
962,328 935,122
Less accumulated depreciation (209,235) (173,554)
----------- -----------
Net property, plant and equipment 753,093 761,568
Excess of cost over net assets acquired 45,351 50,089
Other assets 64,804 32,468
----------- -----------
Total assets $ 1,236,779 $ 1,210,989
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ 15,000 $ -
Accounts payable 87,739 94,273
Accrued interest payable 7,121 2,068
Accrued operating expenses 10,845 7,503
Accrued payroll expenses 8,145 7,387
Income taxes payable 169 170
Other current liabilities 25,915 26,581
Current portion of long-term debt 88 -
----------- -----------
Total current liabilities 155,022 137,982
Deferred income taxes 57,561 54,352
Deferred compensation and rent 7,357 5,933
Long-term debt less current portion 534,316 526,056
Minority interest in subsidiary 13,875 15,118
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, par value $.01;
authorized 5,000,000 shares - -
Common stock, par value $.01;
authorized: 75,000,000 shares;
issued and outstanding: 29,760,476
at March 31, 1998 and 29,735,815 at
June 30, 1997 298 297
Additional paid-in capital 331,585 331,139
Treasury stock, 103,749 and 55,342
shares at March 31, 1998 and
June 30, 1997, respectively, at cost (1,710) (996)
Unearned compensation (1,027) (1,425)
Retained earnings 139,502 142,533
----------- -----------
Total stockholders' equity 468,648 471,548
----------- -----------
Total liabilities and stockholders' equity $ 1,236,779 $ 1,210,989
=========== ===========
See accompanying notes.
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Birmingham Steel Corporation
Consolidated Statements of Operations
(in thousands, except per share data; unaudited)
Three months ended Nine months ended
March 31, March 31,
---------------------- --------------------
1998 1997 1998 1997
--------- --------- -------- ---------
<S> <C> <C> <C> <C>
Net sales $ 298,199 $ 257,858 $853,199 $701,420
Cost of sales:
Other than depreciation and amortization 254,893 223,675 728,007 601,295
Depreciation and amortization 14,778 12,155 40,393 33,743
--------- --------- -------- --------
Gross profit 28,528 22,028 84,799 66,382
Pre-operating/start-up costs 14,648 6,557 23,753 9,091
Selling, general and administrative 12,168 10,490 34,063 26,852
Interest 8,160 5,677 20,740 14,310
--------- --------- -------- --------
(6,448) (696) 6,243 16,129
Other income (expense), net (1,072) 664 2,555 4,511
Minority interest in loss of subsidiary 430 1,039 1,243 1,160
--------- --------- -------- --------
Income (loss) before income taxes (7,090) 1,007 10,041 21,800
Provision for (benefit from) income taxes (2,942) 413 4,167 8,938
--------- --------- -------- --------
Net income (loss) $ (4,148) $ 594 $ 5,874 $ 12,862
========= ========= ======== ========
Weighted average shares outstanding 29,654 29,423 29,683 28,896
========= ========= ======== ========
Earnings (loss) per share, basic and diluted $ (0.14) $ 0.02 $ 0.20 $ 0.45
========= ========= ======== ========
Dividends declared per share $ 0.10 $ 0.10 $ 0.30 $ 0.30
========= ========= ======== ========
See accompanying notes.
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Birmingham Steel Corporation
Consolidated Statements of Cash Flows
(In thousands)
Nine Months Ended
March 31,
--------------------------
1998 1997
(Unaudited) (Unaudited)
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 5,874 $ 12,862
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation and amortization 40,393 33,743
Provision for doubtful accounts receivable - 15
Deferred income taxes 3,209 (780)
Gain on sale of 50% equity in scrap subsidiary - (1,746)
Minority interest in loss of subsidiary (1,243) (1,160)
Loss from equity investments 4,881 -
Other 639 824
Changes in operating assets and liabilities,
net of effects from business
acquisitions:
Accounts receivable (4,091) (20,456)
Inventories 9,796 9,865
Prepaid expenses (2,340) (371)
Other current assets (7,010) (4,606)
Accounts payable (4,471) (24,392)
Income taxes payable - (369)
Other accrued liabilities 9,448 (17,666)
Deferred compensation 924 152
----------- ---------
Net cash provided by (used in) operating activities 56,009 (14,085)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (including
expenditures reimburseable under lease agreement) (122,679) (144,581)
Proceeds from lease agreement 75,000 -
Payment for business acquisition - (43,309)
Proceeds from disposal of property,
plant and equipment 17,357 108
Proceeds from sale of 50% equity in scrap subsidiaries 65 5,372
Investment in scrap subsidiary - (9,250)
Equity investment in Laclede Steel Company (15,003) -
Equity investment in American Iron Reduction, LLC (20,000) -
Additions to other non-current assets (5,201) (21,530)
Reductions in other non-current assets 4,220 662
----------- ---------
Net cash used in investing activities (66,241) (212,528)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings and repayments 15,000 -
Proceeds from issuance of long-term debt 1,500 26,000
Borrowings under revolving credit facility 1,597,246 266,505
Payments on revolving credit facility (1,590,398) (81,536)
Proceeds from issuance of common stock 126 19,498
Purchase of treasury stock (1,053) -
Cash dividends paid (8,905) (8,694)
----------- ---------
Net cash provided by financing activities 13,516 221,773
----------- ---------
Net increase (decrease) in cash and cash equivalents 3,284 (4,840)
Cash and cash equivalents at:
Beginning of period 959 6,663
----------- ---------
End of period $ 4,243 $ 1,823
=========== =========
Supplemental cash flow disclosures:
Cash paid during the period for:
Interest (net of amounts capitalized) $ 15,770 $ 9,868
Income taxes 6,347 8,209
See accompanying notes.
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BIRMINGHAM STEEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998 and 1997
1. Description of the Business and Significant Accounting Policies
Description of the Business
Birmingham Steel Corporation (the Company) operates steel mini-mills in the
United States producing steel reinforcing bar, merchant products and special
quality bar, rod and wire. The Company operates in one industry segment and
sells to third parties primarily in the construction and automotive industries
throughout the United States and Canada.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly-owned and majority-owned subsidiaries. In the opinion of management,
all adjustments considered necessary for a fair presentation have been included
and such adjustments are of a normal and recurring nature. All significant
intercompany accounts and transactions have been eliminated.
Inventories
Inventories are stated at the lower of cost or market value. The cost of
inventories is determined using the first-in, first-out method.
Pre-Operating/Start-up Costs
Pre-operating/start-up costs consist of non-capitalized costs incurred prior to
a facility reaching commercial production levels.
Earnings Per Share
In the second quarter of fiscal 1998, the Company adopted Financial Accounting
Standards Board Statement No. 128, "Earnings per Share". Basic earnings per
share is computed using the weighted average number of outstanding common shares
for the period. Diluted earnings per share is computed using the weighted
average number of outstanding common shares and any dilutive equivalents. Prior
year earnings per share amounts have been recalculated in conformance with the
current year presentation with no effect on prior years.
<PAGE>
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. Business Acquisitions and Joint Ventures
On September 26, 1997, Midwest Holdings Inc., a wholly owned subsidiary of the
Company, purchased 24.9% of the outstanding common shares and 44.0% of the
outstanding non-voting convertible preferred shares of Laclede Steel Company
(Laclede) for a purchase price of approximately $14,953,000, bringing the
Company's total investment in Laclede to 25.4% when combined with shares
previously owned. The investment in Laclede, a manufacturer of carbon and alloy
steel products including pipe, hot rolled and wire products and welded chain,
may ultimately provide the Company with an opportunity to participate in new
product markets. The investment in Laclede is accounted for in accordance with
the equity method.
On November 15, 1996, the Company entered into a Contribution Agreement with
Atlantic Steel Industries, Inc. (Atlantic) and IVACO, Inc., the parent of
Atlantic, pursuant to which the Company and Atlantic formed Birmingham
Southeast, LLC (Birmingham Southeast), a limited liability company owned 85
percent by Birmingham East Coast Holdings, a wholly owned subsidiary of the
Company, and 15 percent by a subsidiary of IVACO, Inc. On December 2, 1996,
pursuant to the Contribution Agreement the Company contributed the assets of its
Jackson, Mississippi facility to Birmingham Southeast which had no impact on the
accompanying consolidated financial statements. Birmingham Southeast then
purchased the operating assets of Atlantic located in Cartersville, Georgia for
$43,309,000 in cash and assumed liabilities approximating $44,257,000. The
purchase price has been allocated to the assets and liabilities of the Company
as follows (in thousands):
Current assets $31,667
Property, plant and equipment 63,400
Other non-current assets, primarily
goodwill 9,964
--------
Total assets acquired 105,031
Fair value of liabilities assumed (44,257)
Minority interest (17,465)
--------
Total purchase price $ 43,309
========
The non-cash financing and investing activities related to the purchase of the
Cartersville, Georgia assets have been excluded from the statement of cash
flows. Pro forma results for fiscal 1997 would not be materially different from
the amounts reported in the Company's consolidated statements of operations if
the acquisition had occurred as of the beginning of the period.
<PAGE>
On September 18, 1996, the Company entered into an agreement with Raw Materials
Development Co., Ltd., an affiliate of Mitsui & Co., Ltd. forming Pacific Coast
Recycling, LLC (Pacific Coast), a 50/50 joint venture established to operate in
southern California as a collector, processor and seller of scrap. The Company
made equity investments in Pacific Coast of approximately $7,500,000 on December
27, 1996 and $1,750,000 on January 23, 1997. Pacific Coast is accounted for
using the equity method. On December 27, 1996, Pacific Coast purchased certain
assets from the estate of Hiuka America Corporation and its affiliates with a
minimum annual scrap processing capacity of approximately 600,000 tons. Pacific
Coast is utilizing the facility at the Port of Long Beach to export scrap. At
March 31, 1998, the Company had current and non-current loans outstanding to
Pacific Coast in the amount of $10,300,000 and $10,000,000 respectively.
On August 30, 1996, the Company entered into an Equity Contribution Agreement
with American Iron Reduction, L.L.C. (AIR), a 50 percent owned subsidiary of the
Company, for the purpose of constructing a direct reduced iron (DRI) facility in
Louisiana. Under the Equity Contribution Agreement, the Company is required to
make an equity contribution to AIR of not less than $20,000,000 and not more
than $27,500,000. In the second and third quarters of fiscal 1998, the Company
made equity contributions totaling approximately $20,000,000 to AIR. The Company
also entered into a DRI Purchase Agreement with AIR on August 30, 1996, whereby
the Company will purchase a minimum of 600,000 metric tons of DRI annually. The
DRI purchased will be utilized primarily at the Memphis melt shop as a
substitute for premium, low-residual scrap. The DRI facility began operations in
January, 1998.
3. Inventories
Inventories were valued as summarized in the following table (in thousands):
March 31, June 30,
1998 1997
-------- --------
At lower of cost
(first-in, first-out)
or market:
Raw materials and mill supplies $ 52,687 $ 51,832
Work-in-progress 58,162 71,693
Finished goods 87,950 85,070
-------- --------
$198,799 $208,595
======== ========
4. Borrowing Arrangements
The Company has a five year, unsecured revolving credit agreement whereby the
Company may borrow up to $300,000,000 with interest at market rates mutually
agreed upon by the Company and the lender or at other contractual borrowing
rates. Approximately $100,595,000 was available under this credit facility at
March 31, 1998.
<PAGE>
Under two line of credit arrangements for short-term borrowings, the Company may
borrow up to $35,000,000 with interest at market rates mutually agreed upon by
the Company and the lender. At March 31, 1998, $20,000,000 was available under
these credit facilities.
5. Contingencies
Environmental
The Company is subject to federal, state and local environmental laws and
regulations concerning, among other matters, waste water effluents, air
emissions and furnace dust management and disposal. The Company believes that it
is currently in compliance with all known material and applicable environmental
regulations.
Legal Proceedings
The Company is involved in litigation relating to claims arising out of its
operations in the normal course of business. Such claims are generally covered
by various forms of insurance. In the opinion of management, any uninsured or
unindemnified liability resulting from existing litigation would not have a
material effect on the Company's business, its financial position, liquidity or
results of operations.
6. Disposition of Idle Facilities
In the second quarter of fiscal 1998, the Company completed the sale of idle
properties located in Norfolk, Virginia and Emeryville, California. The Company
entered into an agreement with a third party whereby the third party assumed
environmental liability for the cleanup and sale of the Norfolk, Virginia
property. Under the terms of the contract, the Company placed an amount into
escrow which approximates the environmental reserve for cleanup of the property.
The Emeryville, California property was sold for approximately $13,608,000.
Disposal of the two properties resulted in a pre-tax gain of approximately
$2,129,000.
On October 15, 1997, the Company sold its idle rolling mill in Cartersville,
Georgia, acquired in December 1996, for $1,600,000 and recognized a pre-tax gain
of approximately $1,239,000.
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The statements contained in this report that are not purely historical or which
might be considered an opinion or projection concerning the Company or its
business, whether express or implied, are forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements include the Company's expectations, hopes, anticipations, intentions,
plans and strategies regarding the future. Forward-looking statements include,
but are not limited to: expectations about environmental remediation costs,
assessments of expected impact of litigation and adequacy of insurance coverage
for litigation, expectations regarding the costs of new projects, expectations
regarding future earnings, expectations concerning the anticipated performance
of new ventures, and expectations regarding the date when facilities under
construction will be operational and the future performance and capabilities of
those facilities. Moreover, when making forward-looking statements, management
must make certain assumptions that are based on management's collective opinion
concerning future events, and blend these assumptions with information available
to management when such assumptions are made. Whether these assumptions are
valid will depend not only on management's skill, but also on a variety of
volatile and highly unpredictable risk factors. Some, but not all, of these risk
factors are described below under the heading "Risk Factors That May Affect
Future Operating Results". The Company's actual results could differ materially
from those described or implied by any forward-looking statements herein. Any
forward-looking statements contained in this document speak only as of the date
hereof, and the Company disclaims any intent or obligation to update such
forward-looking statements. Comparisons of results for current and prior periods
are not necessarily indicative of future performance, and should not be relied
on for any purpose other than as historical data.
For the third quarter of fiscal 1998, the Company reported a loss of $4,148,000,
or $.14 per share, basic and diluted, compared with earnings of $594,000, or
$.02 per share in the third quarter of fiscal 1997.
For the nine months ended March 31, 1998, the Company reported earnings of
$5,874,000, compared with $12,862,000 in the prior year comparable period.
Earnings per share, basic and diluted, for the nine month period of fiscal 1998
were $.20, compared with $.45 in the prior year period.
Net Sales
The Company reported net sales of $298,199,000 in the third quarter of fiscal
1998, up 16 percent from $257,858,000 reported in the third period of fiscal
1997. In the third quarter, the Company achieved record steel shipments of
860,000 tons, up 15 percent from 747,000 tons reported in the third quarter of
fiscal 1997.
For the nine months ended March 31, 1998, the Company reported net sales of
$853,199,000, up 22 percent from $701,420,000 in the same period of the prior
year. Total shipments for the nine month period of the current year were
2,499,000 tons, up 23 percent from 2,025,000 tons in the same period last year.
Cost of Sales
As a percentage of net sales, cost of sales (other than depreciation and
amortization) declined to 85.5% compared with 86.7% in the third quarter last
year. The decline resulted from increased shipment volumes and improved
conversion costs.
For the nine months ended March 31, 1998, cost of sales as a percentage of net
sales was 85.3%, compared with 85.7% in the same period last year.
Average billet costs (yielded) at the Company's SBQ facilities in Cleveland were
$350 per ton in the third quarter this year, compared with $367 in the same
period last year. The lower billet costs are primarily attributable to increased
purchases of lower priced industrial quality billets from affiliates.
Rebar/merchant conversion costs were $122 per ton for the third quarter of
fiscal 1998, down from $125 per ton in the immediately preceding quarter and
$130 per ton in the third quarter of fiscal 1997. Conversion costs at the
Company's SBQ facility fell to $57 per ton, compared with $70 per ton in the
second quarter and $71 per ton in the prior year third quarter. The Company set
melting and rolling production records during the third quarter of fiscal 1998,
contributing to the decline in conversion costs.
Depreciation and amortization was $14,778,000 in the third quarter of fiscal
1998, compared with $12,155,000 in the prior year period. For the nine month
period of fiscal 1998, depreciation and amortization totaled $40,393,000, up
from $33,743,000 reported for the same period last year. The increase is
primarily attributable to the recognition of depreciation expense on assets
placed into service during the last quarter of fiscal 1997 and in the first
three quarters of fiscal 1998.
Pre-operating/Start-up Costs
Pre-operating/start-up costs amounted to $14,648,000 for the third quarter,
compared with $6,557,000 in the third quarter of last year. The current quarter
charges relate primarily to pre-operating/start-up costs at the Memphis,
Tennessee melt shop which began operations in November, 1997 and start-up costs
associated with the Company's direct reduced iron (DRI) joint venture in
Louisiana which began operations in January, 1998. The charges for the same
period a year ago relate primarily to pre-operating/start-up costs following the
acquisition of the Cartersville, Georgia facility in December, 1996 and
non-capitalized charges incurred during the construction of the Memphis,
Tennessee melt shop.
For the nine months ended March 31, 1998, pre-operating/start-up costs amounted
to $23,753,000 compared with $9,091,000 for the same period a year ago. The
current year charges primarily relate to the Memphis melt shop and DRI joint
venture discussed above. The prior year charges relate to pre-operating costs at
the Memphis, Tennessee facility and start-up expenses incurred at the
Cartersville, Georgia facility and the bar mill in Cleveland, Ohio which began
operations in July, 1996.
Selling, General and Administrative Expenses ("SG&A")
SG&A amounted to $12,168,000 in the third quarter compared with $10,490,000 in
the third quarter last year. As a percent of sales, SG&A was 4.1 percent in the
third quarter, unchanged from the prior year period.
For the nine months ended March 31, 1998, SG&A amounted to $34,063,000 compared
with $26,852,000 in the same period last year. As a percent of sales,
year-to-date SG&A were 4.0 percent, compared with 3.8 percent last year.
The change in SG&A is primarily attributable to increased salaries and benefits
and various SG&A expenses at the Cartersville, Georgia facility of Birmingham
Southeast, LLC, which was acquired in December 1996, the Memphis, Tennessee
facility which began operations in November 1997 and new administrative
personnel hired to support increased sales volumes and information technology
systems and programs.
Interest Expense
Interest expense increased to $8,160,000 in the third quarter of the current
year compared with $5,677,000 reported last year, due to increased borrowings on
the Company's long-term credit facility in the current quarter and a decline in
capitalized interest. In the third quarter of fiscal 1998, the Company
capitalized approximately $592,000 in interest related to construction projects,
compared with approximately $2,113,000 in the same period last year.
For the nine months ended March 31, 1998, interest expense increased to
$20,740,000, compared with $14,310,000 in the prior year due to interest
associated with increased borrowings on the long-term credit facility completed
in March, 1997 and the $26 million industrial revenue bond completed in October,
1996. The Company capitalized approximately $5,624,000 in interest related to
construction projects in the nine month period ended March 31, 1998, compared
with approximately $5,648,000 in the same period a year ago.
Income Taxes
Effective income tax rates for the nine months ended March 31, 1998 and 1997
were 41.5% and 41.0% respectively.
Liquidity and Capital Resources
Operating Activities:
For the nine months ended March 31, 1998, net cash provided by operating
activities was $56.0 million, compared with net cash used in operating
activities of $14.1 million in the third quarter a year ago. The favorable
increase in cash flow was due to an increase in deferred income taxes and
changes in operating assets and liabilities, primarily accounts receivable,
accounts payable and other accrued liabilities.
Investing Activities:
Net cash used in investing activities was $66.2 million at March 31, 1998,
compared with $212.5 million last year. On November 10, 1997, the Company
completed a 15 year operating lease agreement and received $75 million in cash
for equipment located at the Company's Memphis, Tennessee melt shop which was
previously reflected in construction in progress.
In the second quarter of fiscal 1998, the Company completed the sale of idle
properties located in Norfolk, Virginia and Emeryville, California. The
Company entered into an agreement with a third party whereby the third party
assumed environmental liability for the cleanup and sale of the Norfolk,
Virginia property. Under the terms of the contract, the Company placed an amount
into escrow which approximates the environmental reserve for cleanup of the
property. The Emeryville, California property was sold for approximately $13.6
million. Disposal of the two properties resulted in a pre-tax gain of
approximately $2.1 million.
On October 15, 1997, the Company sold its idle rolling mill in Cartersville,
Georgia, acquired in December 1996, for $1.6 million and recognized a pre-tax
gain of approximately $1.2 million.
On September 26, 1997, Midwest Holdings Inc., a wholly owned subsidiary of the
Company, purchased 24.9% of the outstanding common shares and 44.0% of the
outstanding non-voting convertible preferred shares of Laclede Steel Company
(Laclede) for a purchase price of approximately $15.0 million, bringing the
Company's total investment in Laclede to 25.4% when combined with shares
previously owned. The investment in Laclede, a manufacturer of carbon and alloy
steel products including pipe, hot rolled and wire products and welded chain,
may ultimately provide the Company with an opportunity to participate in new
product markets. The investment in Laclede is accounted for in accordance with
the equity method.
On August 30, 1996, the Company entered into an Equity Contribution Agreement
with American Iron Reduction, L.L.C. (AIR), a 50 percent owned subsidiary of the
Company, for the purpose of constructing a direct reduced iron (DRI) facility in
Louisiana. Pursuant to the Equity Contribution Agreement, the Company is
required to make an equity contribution to AIR of not less than $20.0 million
and not more than $27.5 million. During the second and third quarters of the
current year, the Company made equity contributions of approximately $11.4
million and $8.6 million, respectively, to AIR. The Company also entered into a
DRI Purchase Agreement with AIR on August 30, 1996, whereby the Company will
purchase a minimum of 600,000 metric tons of DRI annually. The DRI purchased by
the Company will be utilized primarily as feedstock at the new Memphis melt
shop. The DRI facility began start-up operations in January, 1998.
On November 15, 1996, the Company entered into a Contribution Agreement with
Atlantic Steel Industries, Inc. (Atlantic) and IVACO, Inc., the parent of
Atlantic, pursuant to which the Company and Atlantic formed Birmingham
Southeast, LLC (Birmingham Southeast), a limited liability company owned 85
percent by Birmingham East Coast Holdings, a wholly owned subsidiary of the
Company, and 15 percent by a subsidiary of IVACO, Inc. On December 2, 1996,
pursuant to the Contribution Agreement, the Company contributed the assets of
its Jackson, Mississippi facility to Birmingham Southeast and Birmingham
Southeast purchased the assets of Atlantic located in Cartersville, Georgia for
$43.3 million in cash and assumed approximately $39.9 million in liabilities
(See Note 2 to Consolidated Financial Statements). During the second and third
quarters of fiscal 1997, the Company made equity investments of $7.5 million and
$1.8 million, respectively, in Pacific Coast Recycling, LLC, a joint venture
owned 50 percent by the Company and 50 percent by Raw Materials Development Co.,
Ltd., an affiliate of Mitsui & Co., Ltd. On December 26, 1996, Pacific Coast
completed the purchase of certain assets from the estate of Hiuka America
Corporation and its affiliates with a capacity to collect and process 1 million
tons of scrap annually. Pacific Coast is utilizing the facility at the Port of
Long Beach to export scrap (See Note 2 to Consolidated Financial Statements).
On December 20, 1996, Birmingham Recycling Investment Co., a wholly owned
subsidiary of the Company, sold 50 percent of the stock of Richmond Steel
Recycling Limited to SIMSMETAL Canada, Ltd. and recognized a pre-tax gain of
approximately $1.7 million.
Financing Activities:
Net cash provided by financing activities was $13.5 million in the first nine
months of fiscal 1998, compared with $221.8 million in the same nine month
period last year.
During the prior year period the Company completed a $26 million, 30 year
tax-free bond financing at Memphis, the proceeds of which were used to finance
certain portions of the Memphis melt shop. In March 1997 the Company completed a
five year, $300 million unsecured revolving credit agreement. Net borrowings on
the revolving credit facility amounted to $185.0 million for the nine months
ended March 31, 1997, $182.0 million of which was drawn to repay borrowings
under the Company's prior short-term borrowing arrangement. For the nine months
ended March 31, 1998, net borrowings under the revolving credit facility
amounted to $6.8 million. Net short-term borrowings for the current year period
amounted to $15.0 million.
During the first six months of fiscal 1998 the Company purchased 68,700 of its
common shares in the open market for a purchase price of approximately $1.0
million. The shares were purchased pursuant to a previous Board resolution. In
February 1998 the Board extended the stock buyback program until June 30, 1998.
Under the extension, the Company is authorized to purchase up to 200,000 shares
of its common stock in the open market at a purchase price not to exceed $20 per
share.
On January 15, 1997, the Company issued 1,000,000 additional shares of common
stock from treasury in a public offering. The proceeds of $19,188,000 from the
offering were used to offset certain payments made by the Company pursuant to
the acquisition of the assets of Atlantic Steel Industries, Inc. located in
Cartersville, Georgia (See Note 2 to Consolidated Financial Statements).
Working Capital:
Working capital at the end of the third quarter amounted to $218.5 million,
compared with $228.9 million at the end of fiscal 1997. The decline in working
capital was essentially due to a decline in inventories offset by increased
borrowings on the Company's short-term lines of credit and a decrease in
accounts payable.
Other Comments
On April 14, 1998, the Company declared a regular quarterly cash dividend of
$.10 (ten cents) per share payable May 5, 1998 to shareholders of record on
April 24, 1998.
Year 2000 Issues
Historically, certain computer programs have been written using two digits
rather than four digits to define the applicable year, which could result in
computers recognizing a date using "00" as the year 1900 rather than the year
2000. This could result in major system failures or miscalculations, and is
generally referred to as the "Year 2000" or "Y2K" problem or issue.
The Company has determined that it will need to modify significant portions of
its software, and replace other software and hardware, so that its computer
systems will function properly with respect to dates in the year 2000 and
beyond. The Company has also initiated discussions with its external service
organizations, significant suppliers, large customers and financial institutions
to better understand and evaluate how their respective Year 2000 issues may
affect the Company's operations.
The Company's comprehensive Year 2000 initiative is being managed by a team of
internal staff and outside consultants, with the intention of minimizing any
adverse effects on the Company's business operations. With respect to its core
business operations, the Company is well under way with these efforts, which are
scheduled to be completed by July 1999. While the Company believes its planning
efforts are adequate to address its Year 2000 concerns, there can be no
guarantee that these efforts will be successful, or that the systems of other
companies on which the Company's systems and operations rely will be converted
on a timely basis and will not have a material effect on the Company.
Risk Factors That May Affect Future Operating Results
The Company's actual results could differ materially from those described or
implied in any forward-looking statements contained in this document. Among the
factors that could cause actual results to differ materially are the factors
detailed below. In addition, readers should consider the risk factors described
from time to time in other Company reports filed with the Securities and
Exchange Commission.
The Company operates in the steel industry, an industry that is vulnerable to
unpredictable economic cycles. A downturn in the economy or in the Company's
markets could have an adverse effect on the Company's performance.
The Company has attempted to spread its sales across the reinforcing bar,
merchant product and special bar quality markets to reduce the Company's
vulnerability to an economic downturn in any one product market. The Company's
performance, however, can still be materially affected by changes in demand for
any one of its products and by changes in the economic condition of the
construction, manufacturing or automobile industries.
The cost of scrap is the largest element in the cost of the Company's finished
rebar and merchant products. The Company purchases most of its scrap on a
short-term basis. Changes in the price of scrap, therefore, can significantly
affect the Company's profitability. Changes in other raw material prices can
also influence the Company's profitability.
Prices for some of the Company's products are positively affected by the
influence of trade sanctions imposed on the Company's foreign competitors.
Changes in these sanctions or their enforcement could adversely affect the
Company's results.
Energy costs are also a significant factor influencing the Company's results.
Current reforms in the electric utility industry at the state and federal level
are expected to lower energy costs in the long run. However, numerous utilities
and political groups are fighting these reforms and states are approaching the
reforms in different fashions. The possibility exists, therefore, that the
Company could be exposed to energy costs which are less favorable than those
available to its competitors. Such a situation could materially affect the
Company's performance.
In the past, the Company's SBQ division purchased substantially all of its steel
billets from third parties. The cost of these steel billets is the largest
element in the cost of the SBQ division's finished products. With the new
Memphis melt shop, which began start-up operations in November 1997, the SBQ
division will begin supplying substantially all of its billet requirements from
Memphis. Until Memphis replaces third party suppliers, the performance of this
division, and in turn, the performance of the Company, can be materially
affected by changes in the price of the steel billets it buys from third
parties.
Start-up production issues associated with the new Memphis melt shop or the DRI
project in Louisiana could materially adversely affect the Company's future
results. These projects, like other start-up projects, can be affected or
delayed by factors such as equipment performance, design issues, workforce
training issues and management issues.
The Company is constantly engaged in the process of evaluating new opportunities
to strengthen its long-term business and financial prospects. From time to time,
this process may lead the Company to make strategic investments, such as
acquisitions and joint ventures, which have the potential to improve the
Company's position in the markets in which it currently competes, as well as new
markets it may choose to enter. In connection with these investments, the
Company may incur, either directly or indirectly, start-up expenses, losses and
other charges that may have a material affect on the Company's financial
performance. Further, there can be no assurance that these strategic investments
will in fact be profitable, and the Company could incur significant losses as a
result of one or more of these investments.
The Company believes its labor relations are generally good. The Company's work
force is substantially non-union and the Company has never suffered a strike or
other labor related work stoppage. If this situation changes, however, the
Company's performance could suffer material adverse effects.
The Company operates in an industry subject to numerous environmental
regulations. Changes in environmental regulations or in the interpretation or
manner of enforcement of environmental regulations could materially affect the
Company's performance. Further, the Company is in the process of effecting
certain environmental remediations. Unforeseen costs or undiscovered conditions
requiring unplanned expenditures in connection with such remediations could
materially affect the Company's results.
The Company's economic performance, like most manufacturing companies, is
vulnerable to a catastrophe that disables one or more of its manufacturing
facilities and to major equipment failure. Depending upon the nature of the
catastrophe or equipment failure, available insurance may or may not cover a
loss resulting from such a catastrophe or equipment failure and the loss
resulting from such a catastrophe or equipment failure could materially affect
the Company's earnings.
The Company anticipates that it will continue to borrow funds in the future.
Increases in interest rates or changes in the Company's ability to borrow funds
could materially affect the Company's performance.
Recent declines in the demand for steel products in the Pacific Rim region have
caused steel manufacturers in these countries to reduce their production of
steel products. Pacific Coast Recycling, LLC, the venture jointly owned by the
Company and Raw Materials Development Corporation, an affiliate of Mitsui and
Company, Ltd. (see Investing Activities above), is heavily involved in the
export of scrap products to Pacific Rim markets. Further significant erosion in
the demand for scrap products occasioned by the reduced demand for steel
products in these countries could have a material adverse effect on Pacific
Coast Recycling, LLC, and in turn, on the value of the Company's investment in
the joint venture.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is involved in litigation relating to claims arising out of its
operations in the normal course of business. Some of these claims against the
Company are covered by insurance, although the insurance policies do include
deductible amounts. It is the opinion of management that any uninsured or
unindemnified liability resulting from existing litigation would not have a
material adverse effect on the Company's business or financial position. There
can be no assurance that insurance, including product liability insurance, will
be available in the future at reasonable rates.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
No exhibits are required to be filed with this report.
During the quarter ended March 31, 1998, no reports on Form 8-K were required to
be filed.
<PAGE>
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.
Birmingham Steel Corporation
May 14, 1998 /s/J. Daniel Garrett
--------------------------------------
J. Daniel Garrett
Vice President-Finance
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the March
31, 1998 Consolidated Balance Sheets and Consolidated Statements of Operations
of Birmingham Steel Corporation and is qualified in its entirety by
reference to such.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-END> Mar-31-1998
<CASH> 4,243
<SECURITIES> 0
<RECEIVABLES> 133,567
<ALLOWANCES> 1,975
<INVENTORY> 198,799
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<PP&E> 962,328
<DEPRECIATION> 209,235
<TOTAL-ASSETS> 1,236,779
<CURRENT-LIABILITIES> 155,022
<BONDS> 53,500
0
0
<COMMON> 298
<OTHER-SE> 468,350
<TOTAL-LIABILITY-AND-EQUITY> 1,236,779
<SALES> 298,199
<TOTAL-REVENUES> 298,199
<CGS> 269,671
<TOTAL-COSTS> 269,671
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 14,648
<INTEREST-EXPENSE> 8,160
<INCOME-PRETAX> (7,090)
<INCOME-TAX> (2,942)
<INCOME-CONTINUING> (4,148)
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<NET-INCOME> (4,148)
<EPS-PRIMARY> (.14)
<EPS-DILUTED> (.14)
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