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 June 30, 1997
OR
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 33-22603
BAYOU STEEL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 72-1125783
(State of incorporation) (I.R.S. Employer
Identification No.)
RIVER ROAD, P.O. BOX 5000, LAPLACE, LOUISIANA 70069
(Address of principal executive offices)
(Zip Code)
(504) 652-4900
(Registrant's telephone number, including area code)
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 Exchange Act of 1934 during
the preceding 12 months, 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.
CLASS SHARES OUTSTANDING AT JUNE 30, 1997
- ------------------------------------ -----------------------------------
Class A Common Stock, $.01 par value 10,613,380
Class B Common Stock, $.01 par value 2,271,127
Class C Common Stock, $.01 par value 100
----------
12,884,607
==========
<PAGE>
BAYOU STEEL CORPORATION
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements
Consolidated Balance Sheets --
June 30, 1997 and
September 30, 1996 3
Consolidated Statements of Income --
Three Months and Nine Months
Ended June 30, 1997 and 1996 5
Consolidated Statements of Cash
Flow -- Nine Months Ended June
30, 1997 and 1996 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis
Results of Operations 13
Liquidity and Capital Resources 17
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 20
Page 2
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BAYOU STEEL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED) (AUDITED)
JUNE 30, SEPTEMBER 30,
1997 1996
------------- -------------
CURRENT ASSETS:
Cash and temporary cash investments ..... $ -- $ 748,608
Receivables, net of allowance for
doubtful accounts of $532,256 in
1997 and $352,965 in 1996 ............. 26,842,301 24,107,566
Inventories ............................. 75,912,602 79,856,062
Prepaid expenses ........................ 550,725 292,458
------------- -------------
Total current assets ................. 103,305,628 105,004,694
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land .................................... 3,790,398 3,790,398
Machinery and equipment ................. 107,633,199 104,683,209
Plant and office building ............... 21,061,177 20,975,997
------------- -------------
132,484,774 129,449,604
Less-Accumulated depreciation ........... (43,526,911) (39,115,207)
------------- -------------
Net property, plant and equipment .... 88,957,863 90,334,397
------------- -------------
OTHER ASSETS ............................... 3,141,535 3,932,594
------------- -------------
Total assets ......................... $ 195,405,026 $ 199,271,685
============= =============
The accompanying notes are an integral part of these consolidated statements.
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BAYOU STEEL CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED) (AUDITED)
JUNE 30, SEPTEMBER 30,
1997 1996
------------ ------------
CURRENT LIABILITIES:
Current maturities of long-term debt ...... $ 3,054,761 $ 1,601,851
Borrowings under line of credit ........... 5,300,000 3,000,000
Accounts payable .......................... 18,476,635 24,281,494
Accrued liabilities ....................... 5,394,154 3,856,341
Accrued dividends on redeemable
preferred stock ......................... -- 2,175,000
Total current liabilities .............. 32,225,550 34,914,686
------------ ------------
LONG-TERM DEBT ............................... 81,250,074 83,540,331
------------ ------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK ................... 12,439,030 10,489,091
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value -
Class A ................................. 106,134 106,134
Class B ................................. 22,711 22,711
Class C ................................. 1 1
------------ ------------
Total common stock ..................... 128,846 128,846
Paid-in capital ........................... 47,769,034 47,769,034
Retained earnings ......................... 21,592,492 22,429,697
------------ ------------
Total stockholders' equity ............. 69,490,372 70,327,577
------------ ------------
Total liabilities & common
stockholders' equity ................ $195,405,026 $199,271,685
============ ============
The accompanying notes are an integral part of these consolidated statements.
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BAYOU STEEL CORPORATION
CONSOLIDATED STATEMENT OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ ------------------------------
1997 1996 1997 1996
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES ............ $ 59,075,397 $ 58,874,583 $ 171,593,021 $ 152,182,577
COST OF SALES ........ 51,918,506 54,661,033 156,471,452 140,266,780
------------- ------------- ------------- -------------
GROSS PROFIT ......... 7,156,891 4,213,550 15,121,569 11,915,797
SG&A ................. 1,563,663 1,519,007 4,864,587 4,610,091
NON-PRODUCTION STRIKE
AND CORPORATE
CAMPAIGN EXPENSES . 1,196,834 402,239 2,443,954 1,073,332
------------- ------------- ------------- -------------
OPERATING INCOME ..... 4,396,394 2,292,304 7,813,028 6,232,374
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE)
Interest expense .. (2,299,669) (2,202,576) (6,816,624) (6,483,185)
Interest income ... 1,496 8,788 4,133 138,605
Miscellaneous ..... 15,075 123,911 112,197 530,561
------------- ------------- ------------- -------------
(2,283,098) (2,069,877) (6,700,294) (5,814,019)
------------- ------------- ------------- -------------
INCOME BEFORE TAXES .. 2,113,296 222,427 1,112,734 418,355
PROVISION FOR
INCOME TAXES ...... -- -- -- --
NET INCOME ........... 2,113,296 222,427 1,112,734 418,355
DIVIDENDS ACCRUED AND
ACCRETION ON
PREFERRED STOCK ... (649,980) (649,980) (1,949,939) (1,945,967)
------------- ------------- ------------- -------------
INCOME (LOSS)
APPLICABLE TO
COMMON AND COMMON
EQUIVALENT SHARES . $ 1,463,316 $ (427,553) $ (837,205) $ (1,527,612)
============= ============= ============= =============
AVERAGE NUMBER
OF COMMON AND
COMMON EQUIVALENT
SHARES OUTSTANDING 13,707,029 13,707,029 13,707,029 13,707,029
============= ============= ============= =============
INCOME (LOSS)
APPLICABLE TO
COMMON AND COMMON
EQUIVALENT SHARE .. $ .11 $ (.03) $ (.06) $ (.11)
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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BAYOU STEEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED
JUNE 30,
----------------------------
1997 1996
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income ...................................... $ 1,112,734 $ 418,355
Depreciation ................................ 4,533,970 4,630,367
Amortization ................................ 795,659 844,616
Provision for losses on accounts
receivable ................................ 175,199 56,610
Changes in working capital:
(Increase) in receivables ................. (2,909,934) (2,871,726)
Decrease(increase) in inventories ........ 3,943,460 (5,401,956)
(Increase) in prepaid expenses ............ (258,267) (375,716)
(Decrease) in accounts payable ............ (5,804,859) (2,927,777)
Increase in accrued liabilities .......... 1,537,813 1,888,225
------------ ------------
Net cash provided by (used in)
operations ............................ 3,125,775 (3,739,002)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Addition of property, plant
and equipment ............................. (3,157,437) (3,243,433)
------------ ------------
Net cash used by investing
activities ............................ (3,157,437) (3,243,433)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit ......... 2,300,000 --
Payments of long-term debt .................. (837,347) (570,562)
(Increase) in other assets .................. (4,599) (25,000)
Payments of dividends on preferred stock .... (2,175,000) (1,696,807)
Net cash (used in)
financing activities .................. (716,946) (2,292,369)
------------ ------------
NET (DECREASE) IN CASH AND
CASH EQUIVALENTS ............................ (748,608) (9,274,804)
CASH AND CASH EQUIVALENTS,
beginning balance ........................... 748,608 10,521,664
------------ ------------
CASH AND CASH EQUIVALENTS,
ending balance .............................. $ -- $ 1,246,860
============ ============
The accompanying notes are an integral part of these consolidated statements.
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BAYOU STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1997
(UNAUDITED)
1) BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Certain information and note disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to those
rules and regulations. Although Bayou Steel Corporation (the "Company") believes
that disclosures made are adequate to ensure that information presented is not
misleading, it is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report, Form 10-K, filed with the SEC on
December 18, 1996 under File Number 33-22603.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements present fairly the Company's financial position as of June
30, 1997 and September 30, 1996 and the results of its operations for the
three-month and nine-month periods ended June 30, 1997 and 1996 and the cash
flow statements for the nine-month periods ended June 30, 1997 and 1996.
The accompanying financial statements include the consolidated accounts of
Bayou Steel Corporation ("BSCL") and Bayou Steel Corporation (Tennessee)
("BSCT") (collectively referred to herein as the "Company") after elimination of
all significant intercompany accounts and transactions.
The results of operations for the nine-month periods ended June 30, 1997
and 1996 are not necessarily indicative of the results for the full year.
2) INVENTORIES
Inventories as of June 30, 1997 and September 30, 1996 consisted of the
following:
(UNAUDITED) (AUDITED)
JUNE 30, SEPTEMBER 30,
1997 1996
------------ ------------
Scrap steel ...................... $ 4,362,583 $ 6,567,308
Billets .......................... 8,154,095 7,778,092
Finished product ................. 44,193,023 47,943,429
LIFO adjustments ................. (1,262,437) (3,255,589)
------------ ------------
$ 55,447,264 $ 59,033,240
Mill rolls, operating
supplies and other ............. 20,465,338 20,822,822
------------ ------------
$ 75,912,602 $ 79,856,062
============ ============
The inventory valuations are based on LIFO estimates of year-end levels
and prices. The actual LIFO inventories will not be known until year-end
quantities and indices are determined.
Shapes, billets, scrap steel, and certain production supplies are pledged
as collateral against the Company's line of credit.
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3) PROPERTY, PLANT AND EQUIPMENT
Capital expenditures for normal operations totaled $3.2 million and $3.2
million during the nine-month periods ended June 30, 1997 and 1996,
respectively. As of June 30, 1997, the estimated costs to complete authorized
projects under construction or contract amounted to $1.7 million.
Betterments, improvements, and additions on property, plant and equipment
are capitalized at cost. Interest during construction of significant additions
is capitalized. Interest of $38,000 was capitalized during the nine-month period
ended June 30, 1997. There was no interest capitalized for the nine-month period
ended June 30, 1996. Interest of $18,000 was capitalized during the fiscal year
ended September 30, 1996.
4) OTHER ASSETS
Other assets consist of financing costs associated with the issuance of
long-term debt, redeemable preferred stock and warrants, and the Company's
revolving line of credit (see Notes 5, 6 and 8) which are being amortized over
the lives of the related transaction. Amortization expense was $796,000 and
$845,000 for the nine-month periods ended June 30, 1997 and 1996. Amortization
expense was $1,164,000 for the fiscal year ended September 30, 1996.
5) LONG-TERM DEBT
Long-term debt of the Company as of June 30, 1997 and September 30, 1996
included the following:
(UNAUDITED) (AUDITED)
JUNE 30, SEPTEMBER 30,
1997 1996
------------ ------------
First Mortgage Notes (see below) ....... $ 75,000,000 $ 75,000,000
Term Loan (see below) .................. 9,250,000 10,000,000
Other notes payables ................... 54,835 142,182
------------ ------------
84,304,835 85,142,182
Less-current maturities ................ 3,054,761 1,601,851
------------ ------------
$ 81,250,074 $ 83,540,331
============ ============
On June 20, 1995, the Company entered into a five-year term loan agreement
of $10 million for the Company's wholly owned subsidiary, BSCT. Based on the
third quarter leverage ratio, BSCT will accrue at LIBOR plus 2.50% or
approximately 8% at current rates. As of June 30, 1997, BSCT accrued interest at
a rate of 8.7%. A principal payment of $750,000 was paid on June 30, 1997.
Principal payments are due every quarter beginning June 30, 1997 through March
31, 2000. As of June 30, 1997, $3.0 million was classified as a current
liability.
On March 3, 1994, the Company issued $75 million of the 10.25% Notes. The
principal is due on March 1, 2001. As of June 30, 1997 and 1996, the Company
accrued interest at a rate of 10.25%.
6) SHORT-TERM DEBT
On June 20, 1995, the Company entered into an amendment and restatement of
its revolving line of credit agreement which will be used for general corporate
purposes. The terms of the amended and restated agreement call for available
borrowings up to $45 million, including outstanding letters of credit using a
borrowing base of receivables and inventory. Based on these criteria, the net
amount available as of June 30, 1997 was $26.7 million. The agreement is secured
by inventory and accounts receivable at interest rates on a sliding scale based
on the quarterly leverage ratio, as defined in the agreement. Based on the third
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quarter leverage ratio, the Company will accrue at LIBOR plus 2.50% or
approximately 8% at current rates. The terms of the loan agreement impose
certain restrictions on the Company, the most significant of which require the
Company to maintain a minimum interest coverage ratio and limit the incurrence
of certain indebtedness.
The Company had an outstanding balance of $5.3 million under the line of
credit as of June 30, 1997. The maximum amount outstanding during the nine-month
period ended June 30, 1997 was $13.4 million. The average borrowings were $7.2
million and $6.5 million for the three-month and nine-month periods ended June
30, 1997, respectively. The weighted average interest rate was 8.95% and 8.73%
for the third fiscal quarter and nine-month period ended June 30, 1997,
respectively.
7) TAXES
As of September 30, 1996, for tax purposes, the Company had net operating
loss carryforwards ("NOLs") of approximately $328.7 million and $301.5 million
available to offset against regular tax and alternative minimum tax,
respectively.
The NOLs will expire in varying amounts through fiscal 2011. A substantial
portion of the available NOLs, approximately $200 million, expires by fiscal
2000, including $49.1 million expiring on September 30, 1997. In addition, the
Company has $1.35 million of net future tax deductions attributable to its tax
benefit lease which expired in 1997 and which may, to the extent of taxable
income in the year such tax benefit is produced, be utilized prior to the NOLs.
8) PREFERRED STOCK AND WARRANTS
On June 20, 1995, the Company completed the issuance and sale of preferred
stock and warrants to purchase common stock for $15 million. The Company issued
15,000 shares of its redeemable preferred stock and warrants to purchase six
percent of the Company's Common Stock (or 822,422 Class A shares) at a nominal
amount. The Company valued the 15,000 shares of preferred stock sold at
$12,121,520, after deducting $2,878,480 for the market value of the warrants
issued.
The holders of the preferred stock are entitled to receive quarterly
dividends at a rate of 14.5% per annum. The Company intends to declare and pay
quarterly dividends on the preferred stock unless prohibited by covenants in the
revolving line of credit and the 10.25% Notes. If a quarterly dividend payment
is not made by the end of a quarter, the rate will increase by 3%. In addition,
the holders have a right to additional warrants in the event that any two
consecutive quarterly dividend payments are missed or other defined events take
place. Based on the September 30, 1996 results, the Company would have been
unable to make the December 31, 1996 dividend payment or any other dividend
payment until an interest coverage ratio test, as defined in the Indenture
pursuant to which the 10.25% Notes were issued, is again met. As of June 30,
1997, the Company has not met the appropriate interest ratio test. Prior to
September 30, 1996, the Company declared the regular dividends for fiscal 1997.
Subsequent to fiscal year end, the Company paid these dividends. This eliminated
the additional dividend rate and additional warrants that would have otherwise
been payable in fiscal 1997. The dividend prepayment has been recorded as a
reduction in the balance of the preferred stock in the accompanying balance
sheet, as the Company would be able to apply any remaining amount against the
principal balance in the event of an early redemption of the preferred stock.
Depending on the Company's future results, the Company may not be able to
declare and pay the dividend. As of June 30, 1997, the Company accrued dividends
at a rate of 14.5%.
The carrying amount of the preferred stock will increase as the accrued
dividends are charged to retained earnings during fiscal 1997 and by periodic
accretion of the difference between the recorded value of the stock at the date
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of issuance and the redemption value from 1995 through the mandatory redemption
date of June 20, 2002, based on the interest method as well as by the normal
amortization of the prepaid dividends, discussed above. The terms of the stock
purchase agreement impose certain financial covenants which are generally
related to covenants in the revolving line of credit or the 10.25% Notes.
9) COMMON STOCKHOLDERS' EQUITY
Common stock and common stock equivalents as of June 30, 1997 consisted
of:
CLASS A CLASS B CLASS C
----------- ----------- -------
Authorized ................... 24,271,127 4,302,347 100
Outstanding, at end of
quarter .................... 11,435,802 2,271,127 100
Average outstanding for
quarter .................... 11,435,802 2,271,127 100
10) EARNINGS PER SHARE
Earnings per common and common equivalent share are calculated based upon
the weighted average number of common and common equivalent shares outstanding
during the three-month and nine-month periods ended June 30, 1997 and 1996. In
connection with the issuance of redeemable preferred stock on June 20, 1995 as
discussed in Note 8, the Company reserved 822,422 shares of its Class A Common
Stock for issuance upon exercise of the outstanding warrants at a nominal
exercise price. These warrants are considered common stock equivalents in
calculating earnings per common and common equivalent share for the third
quarter and the nine-month period ended June 30, 1997 and 1996. The actual
shares, including equivalents, outstanding for the quarter and nine-month period
ended June 30, 1997 and 1996 were 13,707,029.
11) MISCELLANEOUS
Miscellaneous for the nine-month periods ended June 30, 1997 and 1996
included the following:
(UNAUDITED) (UNAUDITED)
JUNE 1997 JUNE 1996
------------ ------------
Discounts earned ......................... $ 144,126 $ 173,524
Provision for bad debts .................. (175,199) (56,610)
Other .................................... 143,270 413,647
------------ ------------
$ 112,197 $ 530,561
============ ============
12) COMMITMENTS AND CONTINGENCIES
STRIKE
On March 21, 1993, the United Steelworkers of America Local 9121 (the
"Union") initiated a strike after the parties failed to reach agreement on a new
labor contract due to differences on economic issues. On September 23, 1996, the
Company and Union entered into a settlement agreement which, among other issues,
resulted in a new labor contract, ending the strike.
In August 1993, the Union announced a corporate campaign designed to bring
pressure on the Company from individuals and institutions with direct financial
or other interests in the Company. The impact of the corporate campaign has been
significant. In June 1995, the Company filed a lawsuit in federal court in
Delaware under the Racketeer Influenced Corrupt Organizations Act (RICO) against
the Union for their conduct in connection with this campaign. The Company seeks
both an end to the illegal activities used in the corporate campaign and the
recovery of damages. These legal expenses will continue, even though the strike
has been resolved, until the case has been resolved.
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In conjunction with the acquisition of the assets of TVSC, the Union filed
a charge with the National Labor Relations Board (the "NLRB") alleging that the
Company has violated the National Labor Relations Act relating to its refusal to
hire at BSCT certain individuals, who were former employees of TVSC. On August
16, 1996, the Company reached a settlement with the Union which was approved by
the NLRB and resolved the issue. The Company agreed to recognize the Union as
the bargaining agent for the employees and pay 135 former employees, who applied
for work but were not employed, a settlement amount of 25% of lost wages, less
interim earnings. Until interim earnings for 1996 are known for each applicant,
the liability cannot be determined. Based on assumptions of earnings, the
Company estimated that the settlement could range from $136,000 to $500,000. As
of June 30, 1997, the Company accrued $136,000 for the settlement.
ENVIRONMENTAL
The Company is subject to various federal, state, and local laws and
regulations concerning the discharge of contaminants which may be emitted into
the air, discharged into waterways, and the disposal of solids and/or hazardous
wastes such as electric arc furnace dust. In addition, in the event of a release
of a hazardous substance generated by the Company, the Company could be
potentially responsible for the remediation of contamination associated with
such a release. In the past, the Company's operations in some respects have not
met all of the applicable standards promulgated pursuant to such laws and
regulations. At this time, the Company believes that it is in compliance, in all
material respects, with applicable environmental requirements and that the cost
of such continuing compliance will not have a material adverse effect on the
Company's competitive position, operations or financial condition, or cause a
material increase in currently anticipated capital expenditures. The Company
currently has no mandated expenditures at its Louisiana facility to address
previously contaminated sites. Also, the Company is not designated as a
Potential Responsible Party ("PRP") under the Superfund legislation. At June 30,
1997, the Company has accrued a loss contingency for environmental matters.
TVSC, the prior owners of the BSCT facility, had entered into a Consent
Agreement and Order (the "Voluntary Consent Order") under the Tennessee
Department of Environment and Conservation's voluntary clean up program. The
Company, in acquiring the assets of TVSC, has entered into a similar order. The
ultimate remedy and clean-up goals will be dictated by the results of human
health and ecological risk assessments which are components of a required,
structured investigative, remedial process. As of June 30, 1997, investigative,
remedial and risk assessment activities have resulted in expenses of
approximately $1.2 million. Estimates indicate that the future cost for
remediating the affected areas ranges from $500,000 for the lowest cost remedy
to $1,500,000 for higher cost remedies. The definitive asset purchase agreement
between the Company and TVSC provided for $2.0 million of the purchase price to
be held in escrow and applied to costs incurred by the Company for activities
pursuant to the Voluntary Consent Order (with an additional $1.0 million to be
held for one year for such costs and other costs resulting from a breach of
TVSC's representations and warranties in the agreement). At this time, the
Company does not expect the costs of resolution of the Voluntary Consent Order
to exceed funds provided by the escrow fund. If during the remedial
investigation significantly more extensive or more toxic contamination is found,
then costs could be greater than those estimated, and to the extent these costs
exceeded the escrow funds, the Company would be liable.
The U.S. Public Interest Research Group ("USPIRG") filed a lawsuit in
Louisiana against the Company for alleged violations of air quality regulations.
USPIRG is asking the courts to award them their appropriate legal fees and
assess appropriate penalties against the Company. USPIRG is also seeking
injunctive relief requiring the company to meet standards that, in order to
reach, the Company may be required to make capital expenditures. The novelty of
USPIRG's
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claim and new developments in the law make it virtually impossible for the
Company to estimate potential damages, if any, at this time. The Company
believes it has meritorious defenses to these charges and has asked the court to
dismiss USPIRG's lawsuit on various grounds.
OTHER
The Company does not provide any post-employment or post-retirement
benefits to its employees.
There are various claims and legal proceedings arising in the ordinary
course of business pending against or involving the Company wherein monetary
damages are sought. It is management's opinion that the Company's liability, if
any, under such claims or proceedings would not materially effect its financial
position.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
RESULTS OF OPERATION
The Company reported net income of $2.1 million before dividends and
accretion on preferred stock in the third quarter of fiscal 1997 (ended June 30,
1997) compared to net income of $0.2 million for the comparable period of fiscal
1996. The $1.9 million improvement in the Company's results was due to three
significant factors. First, Bayou Steel Corporation's (Tennessee) ("Tennessee")
("BSCT") loss of $0.5 million was $0.8 million lower than the third quarter of
last year. Second, BSCL's metal margin (the difference between the selling price
and the net scrap cost) increased 8.2%. Third, energy cost decreased $2.33 per
ton produced at the Louisiana facility ("BSCL") ("Louisiana"). Offsetting some
of the improvements were increased non-production strike and corporate campaign
expenses of $0.8 million.
The Company reported net income of $1.1 million before dividends and
accretion on preferred stock during the first nine months of fiscal 1997 (ended
June 30, 1997) compared to net income of $0.4 million for the comparable period
of fiscal 1996. The $0.7 million improvement in the Company's results was due to
three factors. First, Bayou Steel Corporation's (Tennessee) loss of $2.8 million
was $2.2 million lower than the first nine months of last year. Second, BSCL's
metal margin increased 2.8%. Third, tons shipped increased 14.8%. Offsetting
some of the improvements in the Company's results were increased non- production
strike and corporate campaign expenses of $1.4 million and two major outages at
the Louisiana facility.
The following table sets forth shipment and sales data for the periods
indicated.
THREE MONTHS ENDED JUNE 30,
-------------------------------
1997 1996
------------ ------------
Net Sales (in thousands) ................. $ 59,075 $ 58,875
Shape Shipment Tons ...................... 165,204 165,390
Shape Selling Price Per Ton .............. $ 352 $ 335
Billet Shipment Tons ..................... 241 11,132
Billet Selling Price Per Ton ............. $ 260 $ 228
NINE MONTHS ENDED JUNE 30,
-------------------------------
1997 1996
------------ ------------
Net Sales (in thousands) ................. $ 171,593 $ 152,183
Shape Shipment Tons ...................... 493,883 430,041
Shape Selling Price Per Ton .............. $ 342 $ 341
Billet Shipment Tons ..................... 241 13,040
Billet Selling Price Per Ton ............. $ 260 $ 231
A. SALES
Net sales for the third quarter of fiscal 1997 were approximately the same
compared to the same period of fiscal 1996. Shipments out of the Tennessee
facility increased by 5,889 tons while shipments out of the Louisiana facility
decreased by 6,075 tons. Net sales for the first nine months of fiscal 1997
increased by 12.8% or $19.4 million compared to the same period of fiscal 1996.
Shipments increased out of BSCL and BSCT by 15,643 tons and 48,199 tons,
respectively. Sales were also affected by the increase in selling prices both at
the Louisiana and Tennessee facilities in the third quarter of fiscal 1997
compared to the same period of fiscal 1996. In the third quarter and first nine
months of fiscal 1996, the Company shipped 11,132 tons and 13,040 tons,
respectively, of billets while in fiscal 1997 billet shipments were minimal.
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SHAPES - Shipments for the third quarter of fiscal 1997 were approximately
the same compared to the same period of last year. Shipments for the first nine
months of fiscal 1997 increased 15% compared to the same periods of fiscal 1996.
Shipments out of BSCT more than doubled in the first nine months of fiscal 1997
compared to the same period of last year mainly due to increased market
acceptance, improved reliability of the operation, and a strong economy. Due to
the Tennessee facility being in a start-up mode of operations during part of
fiscal 1996, shipments from BSCT were minimal. Shipments out of BSCL increased
by 4.1% in the first nine months of fiscal 1997 compared to the same period of
fiscal 1996 due to a strong economy and continued focus on the original
equipment manufacturer/fabricator ("OEM/FAB") market. The backlog of orders at
June 30, 1997 for the Company is 56% higher than a year earlier and 19% higher
than the prior quarter. The increase in backlog is directly related to the
increasing acceptance of the Tennessee products in the market and a strong
economy.
The selling price of the structural shapes shipped out of the Louisiana
facility increased in the third quarter of fiscal 1997 and first nine months of
fiscal 1997 by $13 and $1 per ton, respectively, compared to the same periods of
fiscal 1996. The selling price of the merchant bar shapes shipped out of the
Tennessee facility increased in the third quarter and first nine months of
fiscal 1997 by approximately $35 and $16 per ton, respectively, compared to the
same periods of fiscal 1996. The Tennessee facility benefitted from a better mix
of products sold, the increased acceptance of its products, and an overall
improved market. The Louisiana facility benefitted from a strong market in the
third quarter of fiscal 1997. Consolidated selling price increased by $17 per
ton for the third quarter of fiscal 1997 compared to the same period of last
year. Consolidated selling prices were approximately the same for the first nine
months of fiscal 1997 compared to the same period of fiscal 1996 due to the mix
of selling proportionately more Tennessee products which carry, at this time, a
lower overall selling price. Also during most of fiscal 1996 and the first nine
months of fiscal 1997, there were several market conditions causing the decrease
in the structural shape selling price out of the Louisiana facility. Additional
capacity was shifted into the Company's product line from mills previously
producing for the special bar quality ("SBQ") market during fiscal 1996. This
unanticipated shift was due to the extreme softness of the SBQ market. In
addition, excess inventory at certain minimills and imports in the Southwest
from Mexican mills also contributed to the decrease in selling price in 1996.
BILLETS - Shipments of billets, the Company's semi-finished product, were
minimal in fiscal 1997 due to lack of availability of billets for sale.
Shipments of billets were 11,132 tons and 13,040 tons, respectively, in the
third quarter and first nine months of fiscal 1996 mainly due to an export
shipment. The Company supplied billets to the rolling mill in Tennessee during
the first nine months of fiscal 1997 and 1996, thereby depleting most of the
availability of billets to sell in the open market. In addition, the Company has
been purchasing billets on the open market at competitive prices for the
remaining needs of the Tennessee rolling mill. The Company will continue to
supply all of Louisiana's rolling mill billet requirements and some of
Tennessee's rolling mill billet requirements. Depending on market conditions,
the Company may sell billets on an occasional and selective basis to domestic
and export customers while purchasing additional billets for Tennessee.
B. COST OF GOODS SOLD
Cost of goods sold was 87.9% of sales for the third quarter of fiscal 1997
compared to 92.8% of sales for the same period of fiscal 1996. The decrease, as
a percentage of sales, was due to the selling price of finished products
increasing while the cost of scrap metal (the major component of cost of goods
sold) decreased slightly.
Cost of goods sold was 91.2% of sales for the first nine months of fiscal
1997 compared to 92.1% the same period of fiscal 1996. The decrease, as a
percentage of sales, was due to the selling price of finished products
increasing while the cost of scrap metal decreased slightly and due to an
improvement in
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<PAGE>
conversion cost (the cost to convert a billet into finished product) at the
Tennessee facility. The improvement was partially offset by outages in the
melting facility, the return of the striking workers subsequent to the September
23, 1996 settlement in Louisiana, and mechanical problems at the Tennessee
facility.
In order to achieve better control over scrap cost and availability, the
Company opened Mississippi River Recycling ("MRR") in late 1995 which currently
operates an automobile shredder. MRR produces shredded scrap metal which is one
of the scrap types used in steelmaking. MRR experienced start-up mechanical
problems during fiscal 1996. MRR is now operating at the anticipated capacity
and conversion cost. The production tons improved by 21% and 32% while the
conversion cost decreased by 26% and 22% in the third quarter and first nine
months of fiscal 1997 compared to the same period of fiscal 1996, respectively.
Production during the third quarter of fiscal 1997 was hampered by poor weather
conditions which affected the delivery of raw material. The shredder currently
supplies approximately 12% of the melt shop's raw material requirements. MRR may
expand by processing additional scrap types.
The major component of cost of goods sold is scrap which is used at the
Louisiana melting facility. Scrap cost in the third quarter of fiscal 1997 and
the first nine months of fiscal 1997 decreased 2.6% and 3.6%, respectively
compared to the same periods of fiscal 1996. MRR contributed 1.2% and 0.8% of
the decrease in scrap cost for the third quarter and first nine months of fiscal
1997, respectively. In the first fiscal quarter of 1996, the price of scrap was
influenced by the effects of poor weather conditions, causing delays in delivery
and the necessary utilization of more expensive types of scrap. The Company's
scrap prices dropped in the second quarter and the first nine months of fiscal
1997 due to increased availability and lack of an export market. The market over
the next several months is expected to respond to a stronger export market and
increasing domestic demand.
Another component of cost of goods sold is additive, alloys and flux
("AAF"). AAF cost decreased by 1.9% and 3.8% in the third quarter and first nine
months of fiscal 1997 compared to the same periods of fiscal 1996, respectively,
due to price. Offsetting the reductions in price was increased consumption. The
increased consumption was the result of producing a richer mix of grades and a
change in melting practices which significantly reduced secondary production and
overall cost.
The Tennessee rolling mill facility's principal raw material is billets
which is produced at the Louisiana facility or purchased on the open market.
Billet cost in the third quarter of fiscal 1997 increased by 1.9% and decreased
by 2.1% the first nine months of fiscal 1997 compared to the same periods of
fiscal 1996, respectively. The price of billets purchased on the open market
normally follows the scrap market. Also, the billet market has been soft.
Currently, the Company purchases billet at competitive prices and believes that
the supply of billets is adequate.
Another significant portion of cost of goods sold is conversion cost,
which includes labor, energy, maintenance materials and supplies used to convert
raw materials into billets and billets into shapes. Conversion cost per ton for
the Louisiana facility in the third quarter of fiscal 1997 compared to the same
period of fiscal 1996 decreased by 1.0%. Production in the third quarter of
fiscal 1997 improved in the melt shop by 0.9% and in the rolling mill by 8.0%,
thereby reducing fixed conversion cost per ton. Also contributing to the
improvement in conversion cost were decreases in the price of energy by $2.33
per ton produced. Offsetting some of the improvements were increases in the
price of certain key operating supply items. For the first nine months of fiscal
1997 compared to the same period of last year, conversion cost was approximately
the same. During the first nine months of fiscal 1997, costs were impacted by
two unusual equipment outages which affected production and resulted in
increased maintenance costs. Also costs of energy and certain key supply items
increased
Page 15
<PAGE>
by $1.66 per ton of shape produced. Productivity, particularly in the rolling
mill and shipping, was affected as returning workers became re-acquainted with
the equipment or learned new jobs. Additional staffing was maintained during the
transition; although, during the second quarter of fiscal 1997, staffing
returned to normal levels. The Company has implemented a production incentive
plan which has had a positive impact on productivity and cost.
In July 1995, Tennessee started operating its rolling mill. As expected
during the first nine months of fiscal 1996, the learning curve associated with
new and refurbished equipment combined with an inexperienced work force caused
the production tons to be low and the conversion cost per ton to be high.
Consequently, production costs exceeded sales in the third quarter and first
nine months of fiscal 1996 by $1.3 million and $5.1 million, respectively. As
the workforce gained experience, conversion cost per ton and gross margins
improved. Comparing first nine months of fiscal 1997 to the same period of
fiscal 1996, conversion cost improved by 19%, tons produced by 62%, yield by
5.1%, and tons produced per hour by 63%. In the third quarter of fiscal 1997,
the Tennessee rolling mill had major mechanical problems which affected cost and
productivity. Comparing the third quarters of this year to last, conversion cost
increased by 13%. The mill was shutdown for one week in June for annual
maintenance and to address the mechanical problems. In spite of these problems,
the operating results of the Tennessee facility improved by $0.8 million and
$2.2 million, respectively, in the third quarter and first six months of fiscal
1997 compared to the same periods of last year. Also during the third quarter of
fiscal 1997, the Tennessee operation posted it's first month where a profit was
achieved. The Company expects improvements to continue towards the break-even
production and shipment level. The Company has incurred losses at BSCT ranging
from $0.5 million to $2.2 million per quarter over the past seven quarters. The
Company does not intend to continue the loss associated with the Tennessee
facility and is monitoring the operations on a regular basis to insure
improvement towards profitability is met within a reasonable time period.
C. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses in the third quarter and
first nine months of fiscal 1997 compared to the same periods of the last fiscal
year were approximately the same.
D. NON-PRODUCTION STRIKE AND CORPORATE CAMPAIGN EXPENSES
Non-production strike and corporate campaign expenses ("strike expenses")
were $1.2 million and $2.4 million for the third quarter and first nine months
of fiscal 1997 compared to $0.4 million and $1.1 million for the same period
last year, respectively. Strike expenses in fiscal 1997 were primarily for
legal, security, and other expenses related to returning the strikers back to
work. During the third quarter and first nine months of fiscal 1997, the Company
has incurred legal and other expenses to arbitrate the termination of certain
strikers who were involved in misconduct during the strike. All strike expenses
should be significantly reduced by the end of the fiscal year. The Company also
incurred legal expenses related to the Racketeering Influenced Corrupt
Organization Act ("RICO") suit which the Company filed against the United
Steelworkers of America. RICO legal expenses will continue into the early part
of fiscal 1998 and could increase as trial activity increases.
E. OTHER INCOME (EXPENSE)
Interest expense increased for the third quarter and first nine months of
fiscal 1997 compared to the same period of fiscal 1996 due to more short-term
borrowings under the line of credit. Interest income was minimal in fiscal 1997
due to a relatively small amount of cash available to invest. Miscellaneous
expenses were approximately the same in both quarters and nine month periods.
Page 16
<PAGE>
F. NET INCOME
The Company's results before dividends and accretion on preferred stock
improved by $1.9 million in the third fiscal quarter of 1997 compared to the
same period of fiscal 1996. The primary reasons for the improvement in earnings
were due to an improvement in BSCT's performance, increased metal margin, and
decreased conversion cost. Increased strike expenses offset some of the
improvement in earnings.
The Company's results before dividends and accretion on preferred stock
increased by $0.7 million in the first nine months of 1997 compared to the same
period of fiscal 1996. The primary reasons for the increase in earnings were
improvements in metal margin and in BSCT's performance. Increases in non-
production strike and corporate campaign expenses offset some of the improvement
in earnings.
LIQUIDITY AND CAPITAL RESOURCES
A. CASH AND WORKING CAPITAL
The Company ended the third fiscal quarter with short-term borrowings of
$5.3 million which is a reduction of $5.5 million in the third quarter. Current
assets exceeded current liabilities by a ratio of approximately 3.2 to 1.0.
Working capital increased by $1.0 million to $71.1 million during the nine
months ended June 30, 1997.
In the first nine months of fiscal 1997, cash provided by operations was
$3.1 million. Accounts payable decreased by $5.8 million as the purchases of
scrap, billets and other supplies decreased towards the end of the quarter.
Accounts receivable increased by $2.7 million due to the increased sales toward
the end of the third quarter. These reductions in cash were offset by the
Company's results, depreciation and amortization, and decreases in inventory.
B. CAPITAL EXPENDITURES
Capital expenditures amounted to $3.2 million in the first nine months of
fiscal 1997. These capital projects were for cost reduction, productivity
increases, plant maintenance and environmental programs. The Company does not
expect to make substantial investments in capital during the fourth fiscal
quarter of 1997. However, depending on market conditions, the Company expects to
spend approximately $11 million on various capital projects to reduce cost and
increase productivity, to enhance safety and environmental programs, and to
maintain the plants within the next 12 months.
C. FINANCING
All of the $75 million 10.25% Notes are classified as long-term debt.
There are no principal payments due on the 10.25% Notes until maturity in 2001.
The Company currently intends to refinance the 10.25% Notes on or before the
maturity date in 2001. The Indenture under which the Notes are issued ("the
Indenture") contains a covenant which restricts the Company's ability to incur
additional indebtedness, make dividend payments, or place liens on the assets
acquired with the additional indebtedness. Under the Indenture, the Company may
not incur additional indebtedness or make dividend payments unless its Interest
Expense Coverage Ratio for the trailing four quarters, would be greater than
2.00 to 1.00 after giving effect to such incurrence. As of June 30, 1997, the
Interest Expense Coverage Ratio was 1.91 to 1.00.
On June 20, 1995, the Company completed the issuance and sale of 15,000
shares of redeemable preferred stock, par value $0.01 per share ("Preferred
Stock"), and warrants to purchase, at a nominal exercise price, six percent of
the Company's common stock for $15 million. The Preferred Stock is mandatorily
redeemable by the Company seven years after issuance and requires the payment of
quarterly dividends, at a rate of 14.5% per annum or $2.2 million per year. The
Page 17
<PAGE>
Company intends to declare and pay quarterly dividends on the Preferred Stock
unless prohibited by covenants in the revolving line of credit and the 10.25%
Notes. If a quarterly dividend payment were not made by the end of the quarter,
the dividend rate will increase by 3% or $112,000 per quarter. In addition, the
holders of Preferred Stock have a right to additional warrants, approximately
77,000 shares, for each two consecutive quarterly payments missed. Based on the
September 30, 1996 results, the Company would be unable to make the December 31,
1996 dividend payment. Prior to September 30, 1996, the Company declared the
regular dividends for fiscal 1997. Subsequent to fiscal year end, the Company
paid these dividends. This eliminates the additional dividend rate and
additional warrants that would have otherwise been payable in fiscal 1997. The
next scheduled dividend payment is on December 31, 1997. Depending on the
Company's future results, the Company may or may not be able to declare and pay
dividends.
Simultaneously with the sale of the Preferred Stock and warrants, the
Company entered into a five-year term loan agreement of $10 million for the
Company's wholly owned subsidiary, BSCT. The proceeds received from the term
loan were used to repay the loan outstanding under the Company's revolving
credit facility which had been incurred to acquire substantially all of the
assets at Tennessee. The term loan is partially secured by the Company's
accounts receivable and inventory. The term loan agreement calls for quarterly
principal payments of $750,000 beginning on June 30, 1997 and bears interest on
a sliding scale based on quarterly leverage ratio which is defined as
indebtedness divided by earnings before interest, taxes, depreciation, and
amortization ("EBITDA"). Based on the third quarter leverage ratio, the Company
will accrue at LIBOR plus 2.5% or approximately 8.0% at current rates.
On June 20, 1995, the Company entered into an amended and restatement of
its revolving line of credit agreement which will be used for general corporate
purposes. The terms of the amended and restated agreement call for available
borrowings up to $45 million, including outstanding letters of credit using a
borrowing base of BSCL's receivables and inventory. The five year revolving line
of credit bears interest on a sliding scale based on the quarterly leverage
ratio which is defined as indebtedness divided by EBITDA. The terms of the loan
agreement impose certain restrictions on the Company, the most significant of
which require the Company to maintain a minimum interest coverage ratio and
limit the incurrence of certain indebtedness. Borrowings against the line of
credit as of June 30, 1997 was $5.3 million. The remaining amount available to
borrow as of June 30, 1997 was approximately $26.7 million. As of July 21, 1997,
the Company's outstanding borrowings were $3.7 million. The Company does not
anticipate any difficulties in obtaining another secured line of credit upon the
expiration of the current line of credit in fiscal 2000.
The Company believes that current cash balances, internally generated
funds, the credit facility, and additional purchase money mortgages are adequate
to meet the foreseeable short-term and long-term liquidity needs. If additional
funds are required to accomplish long-term expansion of its production facility
or significant acquisitions, the Company believes funding can be obtained from a
secondary equity offering or from refinancing the 10.25% Notes.
There are no financial obligations with respect to post-employment or
post-retirement benefits.
OTHER COMMENTS
FORWARD-LOOKING INFORMATION
This document contains various "forward-looking" statements which
represent the Company's expectation or belief concerning future events. The
Company cautions that a number of important factors could, individually or in
the aggregate, cause actual results to differ materially from those included in
the forward-looking statements including, without limitation, the following:
changes in the price of supplies, power, natural gas, purchased billets; changes
in the selling price of the Company's finished products or the purchase price of
steel
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<PAGE>
scrap; weather conditions in the market area of the finished product
distribution; unplanned equipment outages; prolonged productivity impact from
returning strikers; and changing laws affecting labor, employee benefits cost
and or environmental regulations.
STRIKE
See "Notes to the Financial Statements" for a description of the strike.
ENVIRONMENTAL AND SAFETY
See "Notes to the Financial Statements" for a description of the Company's
environmental and safety issues.
OTHER
There are various claims and legal proceedings arising in the ordinary
course of business pending against or involving the Company wherein monetary
damages are sought. It is management's opinion that the Company's liability, if
any, under such claims or proceedings would not materially affect its financial
position.
INFLATION
The Company is subject to increases in the cost of energy, supplies,
salaries and benefits, additives, alloy and scrap due to inflation. Shape prices
are influenced by supply, which varies with steel mill capacity and utilization,
and market demand.
Page 19
<PAGE>
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K
None were filed during the third quarter of fiscal year 1997.
Page 20
<PAGE>
SIGNATURE
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.
BAYOU STEEL CORPORATION
By /S/ RICHARD J. GONZALEZ
Richard J. Gonzalez
Vice President, Chief Financial Officer,
Treasurer, and Secretary
Date: August 4, 1997
Page 21
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM BAYOU STEEL CORPORATION CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED
STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 27,374,557
<ALLOWANCES> 532,256
<INVENTORY> 75,912,602
<CURRENT-ASSETS> 103,305,628
<PP&E> 132,484,774
<DEPRECIATION> 43,526,911
<TOTAL-ASSETS> 195,405,026
<CURRENT-LIABILITIES> 32,225,550
<BONDS> 81,250,074
12,439,030
0
<COMMON> 128,846
<OTHER-SE> 69,361,526
<TOTAL-LIABILITY-AND-EQUITY> 195,405,026
<SALES> 171,593,021
<TOTAL-REVENUES> 171,593,021
<CGS> 156,471,452
<TOTAL-COSTS> 156,471,452
<OTHER-EXPENSES> 7,192,211
<LOSS-PROVISION> 175,199
<INTEREST-EXPENSE> 6,816,624
<INCOME-PRETAX> (837,205)
<INCOME-TAX> 0
<INCOME-CONTINUING> (837,205)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (837,205)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
