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, 1999
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: 29,647,281 Shares of Common
Stock, Par Value $.01 Outstanding at May 13, 1999.
<PAGE>
BIRMINGHAM STEEL CORPORATION
Consolidated Balance Sheets
(in thousands, except per share data)
March 31, June 30,
ASSETS 1999 1998
(Unaudited) (Audited)
---------------- ---------------
Current assets:
Cash and cash equivalents $ 1,414 $ 902
Accounts receivable, net of
allowance for doubtful accounts
$936 at March 31, 1999
and $1,838 at June 30, 1998 107,962 121,854
Inventories 175,380 243,275
Other 19,947 27,967
---------------- ---------------
Total current assets 304,703 393,998
Property, plant and equipment
Land and buildings 267,205 258,905
Machinery and equipment 658,835 652,240
Construction in progress 156,903 67,401
--------------- ---------------
1,082,943 978,546
Less accumulated depreciation (257,655) (221,051)
---------------- ---------------
Net property, plant and equipment 825,288 757,495
Excess of cost over net assets acquired 41,630 44,420
Other 54,145 48,865
---------------- ---------------
Total assets $ 1,225,766 $ 1,244,778
================ ===============
<PAGE>
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current
portion of long-term debt $ 38,323 $ 10,119
Accounts payable 72,166 92,813
Accrued interest payable 8,307 1,761
Accrued payroll expenses 6,188 12,015
Accrued operating expenses 9,386 12,901
Other current liabilities 19,644 26,715
-------------- ---------------
Total current liabilities 154,014 156,324
Deferred income taxes 44,171 47,922
Deferred liabilities 9,515 7,630
Long-term debt less current portion 572,517 558,820
Minority interest in subsidiary 9,749 13,475
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, par value
$.01; authorized: 5,000 shares - -
Common stock, par value
$.01; authorized: 75,000
shares; issued: 29,830 at
March 31, 1999 and
29,780 at June 30, 1998 298 298
Additional paid-in capital 329,105 331,859
Treasury stock, 167 and 191
shares at March 31,
1999 and June 30, 1998,
respectively, at cost (902) (2,929)
Unearned compensation (851) (912)
Retained earnings 108,150 132,291
------------- ------------
Total stockholders' equity $ 435,800 $ 460,607
------------- ------------
Total liabilities and
stockholders' equity $ 1,225,766 $1,244,778
============= ===========
See accompanying notes.
<PAGE>
BIRMINGHAM STEEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
Three months ended Nine months ended
March 31, March 31,
------- --------- -----------------
1999 1998 1999 1998
-------- --------- --------- --------
Net sales $224,486 $298,199 $722,296 $853,199
Cost of sales:
Other than depreciation
and amortization 193,642 254,893 619,745 728,007
Depreciation and amortization 14,939 14,778 44,922 40,393
-------- --------- --------- ---------
Gross profit 15,905 28,528 57,629 84,799
Pre-operating/start-up
costs 20,623 14,648 40,467 23,753
Selling, general and administrative 11,380 12,168 31,801 34,063
Interest 8,113 8,160 25,496 20,740
-------- --------- -------- --------
(24,211) (6,448) (40,135) 6,243
Other income, net 1,801 1,087 13,087 6,613
Loss from equity investments (3,434) (2,159) (6,789) (4,058)
Minority interest in loss of subsidiary 1,796 430 3,725 1,243
-------- -------- ------- --------
Income (loss) before income taxes (24,048) (7,090) (30,112) 10,041
Provision for income taxes (8,417) (2,942) (10,539) 4,167
-------- -------- --------- --------
Net income (loss) $ (15,631) $(4,148) $(19,573) $ 5,874
======== ======== ========= ========
Weighted average shares outstanding 29,509 29,654 29,416 29,683
======== ======== ========= ========
Basic and diluted earnings
(loss) per share $ (0.53) $ (0.14) $ (.67) $ 0.20
======== ======== ========= ========
Dividends declared per share $ 0.025 $ 0.100 $ 0.150 $ 0.300
======== ======== ========= ========
<PAGE>
BIRMINGHAM STEEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine Months Ended
March 31,
---------------------------
1999 1998
(Unaudited) (Unaudited)
------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (19,573) $ 5,874
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 44,922 40,393
Provision for doubtful accounts receivable 126 -
Deferred income taxes (3,751) 3,209
Minority interest in loss of subsidiary (3,725) (1,243)
Loss from equity investments 6,789 4,058
Other 2,571 1,462
Changes in operating assets and liabilities,
net of effects from business
acquisitions:
Accounts receivable 13,766 (4,091)
Inventories 67,895 9,796
Prepaid expenses 904 (2,340)
Other current assets (2,886) (7,010)
Accounts payable (20,647) (4,471)
Other accrued liabilities (9,280) 9,448
Deferred compensation 1,298 924
------------ -----------
Net cash provided by operating activities 78,409 56,009
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (including
expenditures reimburseable under lease agreement) (118,081) (122,679)
Proceeds from lease agreement 7,779 75,000
Proceeds from disposal of property,
plant and equipment 3,377 17,357
Proceeds from sale of 50% equity in scrap subsidiaries - 65
Equity investment in Laclede Steel Company - (15,003)
Equity investment in American Iron Reduction, LLC (3,750) (20,000)
Additions to other non-current assets (4,994) (5,201)
Reductions in other non-current assets 3,645 4,220
-------------- -----------
Net cash used in investing activities (112,024) (66,241)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net short-term borrowings and repayments 5,000 15,000
Proceeds from issuance of long-term debt - 1,500
Borrowings under $30 million bridge facility 13,200 -
Borrowings under revolving credit facility 1,388,706 1,597,246
Payments on revolving credit facility (1,365,005) (1,590,398)
Proceeds from issuance of common stock - 126
Purchase of treasury stock (3,209) (1,053)
Cash dividends paid (4,565) (8,905)
-------------- -----------
Net cash provided by financing activities 34,127 13,516
-------------- -----------
Net increase in cash and cash equivalents 512 3.284
Cash and cash equivalents at:
Beginning of period 902 959
-------------- ------------
End of period $ 1,414 $ 4,243
============== ============
Supplemental cash flow disclosures: Cash paid during the period for:
Interest (net of amounts capitalized) $ 17,955 $ 15,770
Income taxes 883 6,347
See accompanying notes.
<PAGE>
BIRMINGHAM STEEL COOPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 SBQ
(special bar quality) bar, rod and wire. The Company sells to third parties
primarily in the construction and automotive industries throughout the United
States and Canada.
Basis of Presentation
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.
All such adjustments are of a normal recurring nature only. All significant
intercompany accounts and transactions have been eliminated. When necessary,
prior year amounts have been reclassified to conform to the current year's
presentation.
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.
Earnings per share
The Company reports earnings per share according to FASB 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. The adoption of Statement No. 128 had no effect on
earnings per share in the prior year period reflected herein.
Accounting Pronouncements
In June 1997, the FASB issued Statement No. 131 "Disclosures about Segments of
an Enterprise and Related Information" effective for fiscal years beginning
after December 15, 1997. The Company will adopt Statement No. 131 in its annual
financial statements for the fiscal year ending June 30, 1999. The statement
requires companies to report certain financial information based on operating
segments of the business. Management is currently considering the impact, if
any, Statement No. 131 will have on the Company's financial reporting.
<PAGE>
2. INVENTORIES
Inventories were valued at the lower of cost (first-in, first-out) or market as
summarized in the following table (in thousands):
March 31, June 30,
1999 1998
--------- ---------
Raw materials and mill supplies $ 49,654 $ 60,960
Work-in-progress 47,828 84,325
Finished goods 77,898 97,990
--------- ---------
$ 175,380 $ 243,275
======== =========
3. LONG TERM DEBT
The Company amended its debt agreements in the second quarter of Fiscal 1999.
The amendment to the $300,000,000 Revolving line of credit included a variable
increase in interest rates based on certain ratio calculations. The Company's
average interest rate under the revolver at March 31, 1999 was 6.01%. The
amendment to the $130,000,000 and $150,000,000 Senior unsecured notes included
an annual amendment fee of 0.55% until certain ratios are met. The interest
rates under the $130,000,000 and $150,000,000 Senior unsecured notes are 7.28%
and 7.05%, respectively. In return for the increase in interest rates and an
increase in certain fees, the lenders have agreed to less restrictive debt
covenants.
In February 1999, the Company obtained a $30,000,000 bridge facility with Bank
of American (formerly known as NationsBank) to provide financing of the
Cartersville rolling mill project. Under the facility, the Company has the
option to borrow amounts at various interest rates. The facility matures on June
1, 1999. At March 31, the Company had $13,200,000 outstanding borrowings under
the agreement.
4. 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 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.
5. OTHER INCOME
In the first nine months of fiscal 1999, the Company sold real estate in
Cleveland, Ohio and recognized a gain of $2,232,000. Gains on sales of property,
plant and equipment are included in "other income, net" in the Consolidated
Statements of Operations.
In the first nine months of fiscal 1999, the Company recorded settlements from
electrode suppliers of $4,355,000 which were included in "other income, net" in
the Consolidated Statements of Operations.
6. PRE-OPERATING/START-UP COSTS
Pre-operating/start-up costs in the accompanying financial statements consists
of the following (in thousands):
Nine Months Ended March 31,
-------------------------------------------
1999 1998
-------- --------
Pre-operating/start-up expenses:
Memphis $ 31,536 $ 21,521
Cartersville 8,931 2,232
-------- --------
$ 40,467 $ 23,753
======== ========
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 1999, the Company reported a loss of
$15,631,000, or $(0.53) per share, basic and diluted, compared with a loss of
$4,148,000, or $(0.14) per share in the third quarter of fiscal 1998.
Net Sales
The Company reported net sales of $224,486,000 in the third quarter of fiscal
1999, a decrease of 24.7 percent from $298,199,000 reported in the third period
of fiscal 1998. Primarily because of record levels of steel imports, the
Company's shipments were 707,000 tons, down 17.8 percent from 860,000 tons
reported in the same period last year.
Cost of Sales
As a percentage of net sales, cost of sales (other than depreciation and
amortization) was 86.3% in the current period compared with 85.5% in the third
quarter last year. Primarily because of record levels of steel imports, selling
prices for the Company's products were significantly below prior year levels,
and resulted in a decline in total revenues. Comparative quarterly average
selling prices for the Company's principal products are presented below:
Quarter ended March 31
1999 1998
Rebar $262 $302
Merchant $302 $345
SBQ $412 $442
Pre-operating/Start-up Costs
Pre-operating/start-up costs in the third quarter of fiscal 1999 were
$20,623,000, compared with $14,648,000 in the same period last year.
Start-up costs at the Memphis facility, which commenced operations in November,
1997, were $14,787,000 and primarily consisted of excess production costs. In
March, 1999, the Memphis melt shop achieved a target production run rate of 75%,
which represents the operating level management believes is necessary to sustain
breakeven financial results for the Memphis operation.
Commencement of start-up operations at the new mid-section rolling mill at
Cartersville, Georgia began on March 1, 1999. In the third quarter of fiscal
1999, the Company recorded pre-operating/start-up expenses of $5,846,000
relating to the Cartersville project. Initial start-up operations at
Cartersville have been consistent with management's expectations. Management
expects that start-up expenses associated with Cartersville will be reflected in
the Company's financial results for the next two fiscal quarters.
Selling, General and Administrative Expenses ("SG&A")
SG&A expense was $11,380,000 in the third quarter of fiscal 1999, compared with
$12,168,000 in the same period last year. As a result of the decline in
revenues, SG&A expense as a percentage of sales increased to 5.1% from 4.1% in
the prior year period.
Interest Expense
Interest expense in the third quarter of fiscal 1999 was $8,113,000, essentially
unchanged from $8,160,000 reported last year. The Company's total debt at March
31, 1999 was $610,840,000, up from $549,404,000 reported as of March 31, 1998.
However, capitalized interest in the current year period was $1,999,000,
compared with $592,000 in the third quarter of fiscal 1998. Capitalized interest
rose in the current year because of increased capital spending associated with
the Cartersville project.
Income Taxes
Effective income tax rates for the nine months ended March 31, 1999 were 35.0%,
down from 41.5% for the same period last year. This decrease is primarily
related to the non recognition of state income tax benefits in the Company's
financial statements.
Liquidity and Capital Resources
Operating Activities:
For the nine months ended March 31, 1999, net cash provided by operating
activities was $78.4 million, compared with net cash used of $56.0 million in
the same period of the prior fiscal year. Net cash provided by operating
activities increased primarily because of decreases in accounts receivable
($26.3 million) and inventories ($23.4 million), partially offset by a decline
in accounts payable ($15.6 million).
Investing Activities:
Net cash used in investing activities was $112.0 million for the nine months
ending March 31, 1999, compared with cash used of $66.2 million used for
investing activities in the same period last year. The current period increase
was primarily attributable to capital expenditures for the Cartersville
mid-section mill project.
Through March 31, 1999, the Company had made equity investments of $23,750,000,
including $3,750,000 contributed during the third quarter of fiscal 1999, in
American Iron Reduction, L.L.C. (AIR), a 50 percent owned subsidiary of the
Company, that operates a direct reduced iron (DRI) facility in Louisiana.
Pursuant to the Equity Contribution Agreement, the Company may be obligated to
make additional equity investments in AIR of not more than $3,750,000. The
Company has agreed to purchase one-half of the annual output of the facility
(approximately 600,000 metric tons per year) at prices which are equivalent to
AIR's total cost excluding depreciation and amortization, but including debt
service payments. For financial reporting purposes, AIR is accounted for as an
equity method investee. Because AIR is a captive supplier of raw materials, the
Company recognizes its share of operating profits or losses of AIR as a
component of cost of sales.
On March 31, 1999, AIR elected not to convert the project finance loan with its
lenders to a term loan. Consequently, the lenders declared AIR to be in default.
However, the lenders have notified AIR that, at the present time, they do not
plan to exercise their remedies with respect to the default. The lenders and AIR
continue to negotiate with respect to the financing of the facility. Based upon
the current status of discussions between AIR and its lenders, management
believes the carrying value of the Company's investment in AIR ($17,512,000) is
appropriate.
Financing Activities:
Total debt increased to $611 million at March 31, 1999 from $549 million at
March 31, 1998. The increase in debt was attributable to capital expenditures
attributable to the Cartersville project. During the quarter, the Company
increased its borrowings under its revolving credit facility by $28.3 million.
The Company also paid dividends of $741,000 in the third quarter of fiscal 1999.
In February, 1999, the Company obtained a $30 million facility with Bank of
America to provide potential bridge financing for the Cartersville project. The
facility terminates June 1, 1999. The Company secured the bridge financing as a
means of insuring that the Cartersville project could be completed on time
should the Company's accounts receivable cash collections be negatively impacted
by a continuation of strong steel imports. At March 31, 1999, the Company had
outstanding borrowings of $13.2 million under the bridge facility. Subsequent to
the end of the quarter, steel import activity declined and the Company's
shipments and accounts receivable collections improved. As of May 14, 1999, the
Company had no borrowings outstanding under the bridge facility.
The Company is currently in compliance with the restrictive debt covenants
governing its loan agreements. However, should factors described under "Risk
factors" adversely affect fiscal 1999 operating results, the Company could
violate one or more of it's restrictive covenants within the next twelve months.
The Company has evaluated its alternatives, including refinancing the Company's
outstanding obligations, in the event that it is unable to comply with its
restrictive covenants in the near term. Earlier in the current fiscal year, the
Company amended its $300 million revolving credit facility and $280 million
private debt agreements in order to provide additional room for a temporary
period with respect to restrictive debt covenants. The impact of such measures
is not expected to have a significant impact on future results of operations.
Working Capital:
Working capital at the end of the third quarter was $163.9 million, compared
with $218.5 million at the end of March, 1998. The change in working capital was
primarily related to a significant decrease in accounts receivable and
inventories. Accounts receivable for the current year period declined because of
a reduction in the Company's shipments as impacted by the record level of steel
imports. The decline in inventories was primarily attributable to planned billet
reduction activities at the Cleveland operation. The majority of billet
requirements for the Cleveland operation are now supplied by the Memphis melt
shop.
Other Comments
On April 20, 1999, the Company declared a dividend of $.025 (two and one-half
cents) per share payable May 10, 1999 to shareholders of record on April 30,
1999.
The Company regrets to report the recent passing of Harry Holiday, Jr.,
director. Mr. Holiday had served as a director since May, 1991.
Year 2000 Issues
The following Year 2000 discussion is provided in response to the Securities and
Exchange Commission's recent interpretive statement expressing it's view that
public companies should include detailed discussion of Year 2000 issues in their
10Q submission of the MD&A.
Birmingham Steel Corporation is pursuing an organized program to assure the
Company's information technology systems and related infrastructure will be Year
2000 compliant. The Company has divided its Year 2000 issues into five areas
including: (1) business systems at corporate headquarters, (2) business systems
at the Cleveland, Ohio operation, (3) infrastructure systems at all locations,
(4) manufacturing systems at all locations, and (5) facility and support systems
at all locations. (The Company includes certain systems which might not be
considered as IT systems, such as phone switches and certain safety systems, in
the facility and support systems area of the Year 2000 project). The Company's
Year 2000 program includes three phases: (1) an audit and assessment phase
designed to identify Year 2000 issues; (2) a modification phase designed to
correct Year 2000 issues (this phase includes testing of individual
modifications as they are installed); and (3) a testing phase to test entire
systems for Year 2000 compliance after individual modifications have been
installed and tested. A dedicated Year 2000 project manager has been assigned to
this project for over one and a half years. Project teams have been assembled
for each area, specific responsibilities have been identified and specific time
lines have been prepared for the activities to take place within each area of
the project. Senior management receives monthly updates on the progress against
the time lines for each strategic area.
The Company has completed a major round of Year 2000 testing of its business
systems. The Company completed the audit, assessment and, where required,
modification of business system software in December, 1998. The Company then
completed comprehensive testing of the business systems at both the corporate
headquarters and at the Cleveland, Ohio operation in January, 1999. The upgraded
Year 2000 tested business system software at the Cleveland, Ohio operation was
placed into daily production usage at both corporate headquarters and at the
Cleveland, Ohio operation in February, 1999.
The Company plans to complete the second phase of its program (modifications and
testing) for its infrastructure systems, manufacturing systems, facility and
support systems by June 30, 1999, leaving six months of contingency time before
the December 31, 1999 deadline for completion of Year 2000 modifications of
these systems. Appropriate systems testing will be conducted after June 30, 1999
and problems which are identified will then be corrected.
Management has determined that the costs for correction of the Year 2000 issues,
including any software and hardware changes (but excluding any hardware systems
that would have been replaced in any event) and the cost of personnel involved
in working on this project, will be less than $3 million dollars. The Company
estimates that more than 70% of the costs have been spent to date. The Year 2000
upgrades are being funded out of the normal operating funds, and account for
less than 25% of the Company's IT budget.
The Year 2000 compliance effort is a priority project for the Company's IT
department. Other IT projects, however, including upgrades of certain existing
systems and design and installation of new systems, continue while the Year 2000
effort is being accomplished.
The Company's Year 2000 program also includes investigation of major vendors'
and customers' Year 2000 readiness. The Company is using questionnaires, letters
and protocols to determine its vendors' and customers' Year 2000 readiness. The
Company is contacting, for example, energy and scrap vendors and its phone and
data line service vendors to determine their Year 2000 compliance status. If any
such vendors indicate that they will not be Year 2000 compliant, the Company
will develop contingency plans to address the issue, which may include changing
vendors. In addition, the Company is contacting significant customers to
determine their progress towards Year 2000 compliance and to identify issues, if
any, which might develop because of customers' failure to be prepared for Year
2000 issues. In the event issues are identified, the Company expects to try to
develop procedures to permit the Company to continue to supply the customer
involved despite the Year 2000 issues. The Company has been assured by its key
financial institutions that they are already Year 2000 compliant or will be Year
2000 compliant in early 1999.
The Company is nearing completion of its Year 2000 compliance project and the
management believes it has an effective program in place to resolve the few
remaining Year 2000 issues in a timely manner. In the event that the Company
does not complete the remaining tasks, the Company could experience problems
that could result in the temporary interruption of production at some of the
Company's steel making facilities. In addition, disruptions in the economy
generally resulting from Year 2000 issues could also materially adversely affect
the Company. The Company could be subject to litigation for computer systems
product failure, for example, failure to properly date business records. The
amount of the potential liability and lost revenue cannot be reasonable
estimated at this time.
The Company will complete the development of a Year 2000 contingency plan for
its business systems by June, 1999. The plan will involve, among other actions,
manual workarounds, increasing inventories and adjusting staffing strategies.
Notice: various statements in this discussion of Year 2000 are forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements include statements of the Company's expectations,
statements with regard to schedules and expected completion dates and statements
regarding expected Year 2000 compliance. These forward-looking statements are
subject to various risk factors which may materially affect the Company's
efforts to achieve Year 2000 compliance. These risk factors include the
inability of the Company to complete the plans and modification that it has
identified, the failure of software vendors to deliver the upgrades and repairs
to which they have committed, the wide variety of information technology systems
and components, both hardware and software, that must be evaluated and the large
number of vendors and customers with which the Company interacts. The Company's
assessment of the effects of Year 2000 on the Company are based, in part, upon
information received from third parties upon which the Company reasonably relied
must be considered as a risk factor that might affect the Company's Year 2000
efforts. The Company is attempting to reduce the risks by utilizing an organized
approach, extensive testing, and allowance of ample contingency time to address
issues identified by tests.
*This Year 2000 Readiness Disclosure (the "Disclosure") is made pursuant to the
Year 2000 Information Readiness Disclosure Act, Public Law 105-271. This
Disclosure is not a warranty, and it does not alter the terms of service for any
customer. This Disclosure should not be used for purposes of making investment
decisions. Additional information may be found on the World Wide Web at
www.birsteel.com.
Market Risk Sensitive Instruments
The market risk inherent in the Company's financial instruments represents the
potential loss arising from adverse changes in interest rates (principally U.S.
Treasury and prime bank rates). In order to manage this risk, the Company
attempts to maintain certain ratios of fixed to variable rate debt. However, the
Company does not currently use derivative financial instruments. At March 31,
1999, the Company had fixed rate long-term debt with a carrying value of $282
million and variable rate borrowings of $329 million outstanding. Assuming a
hypothetical 10% adverse change in interest rates, the fair value of the
Company's fixed rate debt would decrease by $9.1 million and the Company would
incur an additional $1.8 million of annual interest expense on variable rate
borrowings. These amounts are determined by considering the impact of the
hypothetical change in interest rates on the Company's cost of borrowing. The
analysis does not consider the effects of the reduced level of overall economic
activity that could exist in such an environment. Further, in the event of a
change of such magnitude, management would likely take actions to further
mitigate its exposure to the change. However, due to the uncertainty of the
specific actions that would be taken and their possible effects, the sensitivity
analysis assumes no changes in the Company's financial structure.
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, including the Company's fiscal 1998 Annual Report filed on
Form 10K.
The Company's results are currently being impacted by disturbed economic
conditions in other countries creating a dramatic increase in steel imports in
the U.S. Until such time as the U.S. government intervenes with trade sanctions
or the foreign economic situation improves, the Company's performance will
continue to be adversely impacted by the import situation.
Until March, 1999, because of a number of factors primarily related to
management and workforce turnover the Company's new melt shop in Memphis,
Tennessee operated at less than a commercially viable production level. Failure
to sustain a 75% production run rate, continued delays or other start-up issues
in this project could materially adversely affect the Company's future results.
While in start-up operations, the facility can experience "learning curve"
problems which would prevent the Company from realizing the timing of certain
plans that it has made for the future.
Until the Memphis melt shop sustains production at acceptable levels and costs,
the Company's SBQ Division will continue to incur start-up losses.
The Company began start-up operations of a new mid section rolling mill at its
Cartersville facility in March, 1999. Results in fiscal 1999 will continue to
reflect pre-operating and start-up losses associated with this project.
Unexpected increases in the amount of pre-operating and start-up losses could
negatively impact the Company's financial performance.
The Company is committed, under a take-or-pay agreement, to purchase one half
(approximately 600,000 metric tons) of DRI production from AIR. Currently the
price paid to AIR for its DRI production exceeds the cost of alternative raw
materials sources (i.e.
scrap). This condition is expected to continue until the end of calendar 1999.
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., 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.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Refer to the information in MANAGEMENT'S DICUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS under the caption
MARKET RISK SENSITIVE INSTRUMENTS
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
<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 17, 1999
/s/ Kevin E. Walsh
--------------------------
Kevin E. Walsh
Executive Vice President and
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the March
31, 1999 Consolidated Balance Sheets and Consolidated Statements of Operations
of Birmingham Steel Corporation and is qualified in its entirety by reference to
such.
</LEGEND>
<CIK> 0000779334
<NAME> Birmingham Steel Corporation
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