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, 1998
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, 1998
- ------------------------------------ -----------------------------------
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, 1998 and
September 30, 1997 3
Consolidated Statements of
Operations -- Three Months and
Nine Months Ended June 30, 1998
and 1997 5
Consolidated Statements of Cash
Flows -- Nine Months Ended June
30, 1998 and 1997 6
Notes to Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 14
Results of Operations 14
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)
JUNE 30, SEPTEMBER 30,
1998 1997
------------- -------------
CURRENT ASSETS:
Cash and temporary cash investments ....... $ 18,219,607 $ 971,477
Receivables, net of allowance for
doubtful accounts of $622,159
and $500,459, respectively .............. 26,059,143 27,162,056
Inventories ............................... 75,630,731 75,022,554
Prepaid expenses .......................... 213,349 239,161
------------- -------------
Total current assets ................. 120,122,830 103,395,248
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land ...................................... 3,790,399 3,790,399
Machinery and equipment ................... 113,782,974 110,028,977
Plant and office building ................. 21,420,496 21,265,577
------------- -------------
138,993,869 135,084,953
Less-Accumulated depreciation ............. (49,272,916) (44,946,654)
------------- -------------
Net property, plant and equipment .... 89,720,953 90,138,299
------------- -------------
OTHER ASSETS ................................. 3,211,425 2,931,507
------------- -------------
Total assets ......................... $ 213,055,208 $ 196,465,054
============= =============
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)
JUNE 30, SEPTEMBER 30,
1998 1997
------------ -------------
CURRENT LIABILITIES:
Current maturities of long-term debt .......... $ -- $ 3,040,257
Accounts payable .............................. 23,275,360 23,749,765
Accrued liabilities ........................... 5,050,740 4,574,144
------------ ------------
Total current liabilities ................ 28,326,100 31,364,166
------------ ------------
LONG-TERM DEBT ................................... 108,955,709 80,500,073
------------ ------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK ....................... -- 13,089,010
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value -
Class A: 24,271,127 authorized and
10,613,380 outstanding shares .... 106,134 106,134
Class B: 4,302,347 authorized and
2,271,127 outstanding shares .... 22,711 22,711
Class C: 100 authorized and
outstanding shares .... 1 1
------------ ------------
Total common stock ....................... 128,846 128,846
Paid-in capital ............................... 47,769,034 47,769,034
Retained earnings ............................. 27,875,519 23,613,925
------------ ------------
Total common stockholders' equity ........ 75,773,399 71,511,805
------------ ------------
Total liabilities and common
stockholders' equity ................... $213,055,208 $196,465,054
============ ============
The accompanying notes are an integral part of these consolidated statements.
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BAYOU STEEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES .............................. $ 59,605,831 $ 59,075,397 $ 191,789,177 $ 171,593,021
COST OF SALES .......................... 50,156,816 51,918,506 165,772,916 156,471,452
------------- ------------- ------------- -------------
GROSS PROFIT ........................... 9,449,015 7,156,891 26,016,261 15,121,569
SELLING, GENERAL AND
ADMINISTRATIVE ...................... 1,659,135 1,563,663 4,775,229 4,864,587
NON-PRODUCTION STRIKE
AND CORPORATE
CAMPAIGN EXPENSES ................... -- 1,196,834 116,953 2,443,954
------------- ------------- ------------- -------------
OPERATING INCOME ....................... 7,789,880 4,396,394 21,124,079 7,813,028
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense .................... (2,299,705) (2,299,669) (6,432,782) (6,816,624)
Interest income ..................... 649,967 1,496 828,492 4,133
Miscellaneous ....................... (1,292,664) 15,075 (1,156,047) 112,197
------------- ------------- ------------- -------------
(2,942,402) (2,283,098) (6,760,337) (6,700,294)
------------- ------------- ------------- -------------
INCOME BEFORE TAXES &
EXTRAORDINARY ITEM .................. 4,847,478 2,113,296 14,363,742 1,112,734
PROVISION FOR
INCOME TAXES ........................ 100,511 -- 298,040 --
------------- ------------- ------------- -------------
INCOME BEFORE
EXTRAORDINARY ITEM .................. 4,746,967 2,113,296 14,065,702 1,112,734
EXTRAORDINARY ITEM ..................... (5,506,885) -- (5,506,885) --
------------- ------------- ------------- -------------
NET INCOME (LOSS) ...................... (759,918) 2,113,296 8,558,817 1,112,734
LOSS ON REDEMPTION OF
PREFERRED STOCK ..................... (2,429,105) -- (2,429,105) --
DIVIDENDS ACCRUED AND
ACCRETION ON
PREFERRED STOCK ..................... (563,690) (649,980) (1,868,118) (1,949,939)
------------- ------------- ------------- -------------
INCOME (LOSS)
APPLICABLE TO
COMMON AND COMMON
EQUIVALENT SHARES ................... $ (3,752,713) $ 1,463,316 $ 4,261,594 $ (837,205)
============= ============= ============= =============
WEIGHTED AVERAGE
SHARES OUTSTANDING:
BASIC ............................. 12,884,607 12,884,607 12,884,607 12,884,607
============= ============= ============= =============
DILUTED ........................... 13,750,154 13,707,029 13,738,944 13,707,029
============= ============= ============= =============
EARNINGS (LOSS)
PER SHARE:
BASIC ............................. $ (.29) $ .11 $ .33 $ (.06)
============= ============= ============= =============
DILUTED ........................... $ (.29) $ .11 $ .31 $ (.06)
============= ============= ============= =============
</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,
1998 1997
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................ $ 8,558,817 $ 1,112,734
Extraordinary item ........................ 5,506,885 --
Depreciation .............................. 4,326,262 4,533,970
Amortization .............................. 604,231 795,659
Provision for losses on accounts
receivable .............................. 116,836 175,199
Changes in working capital:
(Increase) decrease in receivables ...... 986,077 (2,909,934)
(Increase) decrease in inventories ...... (608,177) 3,943,460
(Increase) decrease in prepaid expenses . 25,812 (258,267)
(Decrease) in accounts payable .......... (474,405) (5,804,859)
Increase in accrued liabilities ........ 476,596 1,537,813
------------- -------------
Net cash provided by operations ...... 19,518,934 3,125,775
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant
and equipment ........................... (3,908,916) (3,157,437)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit ....... -- 2,300,000
Payments of long-term debt and
early retirement cost ................... (86,678,456) (837,347)
Proceeds from issuance of long-term debt .. 108,952,800 --
Increase in other assets .................. (3,250,000) (4,599)
Payments of preferred stock, dividends
and early retirement cost ............... (17,386,232) (2,175,000)
------------- -------------
Net cash provided by (used in)
financing activities ............... 1,638,112 (716,946)
------------- -------------
NET INCREASE (DECREASE) IN CASH AND
TEMPORARY CASH INVESTMENTS ................ 17,248,130 (748,608)
CASH AND TEMPORARY CASH INVESTMENTS,
beginning balance ......................... 971,477 748,608
------------- -------------
CASH AND TEMPORARY CASH INVESTMENTS,
ending balance ............................ $ 18,219,607 $ --
============= =============
SUPPLEMENTAL CASH FLOW DISCLOSURE Cash paid
during the period for:
Interest (net of amount capitalized) .... $ 6,656,274 $ 4,604,848
Income taxes ............................ $ 16,899 $ --
The accompanying notes are an integral part of these consolidated statements.
Page 6
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BAYOU STEEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1998
(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. However, all adjustments, which, in the opinion of
management, are necessary for fair presentation have been included except
adjustments related to inventory. The inventory valuations as of June 30, 1998
are based on last-in, first-out ("LIFO") estimates of year-end levels and
prices. The actual LIFO inventories will not be known until year-end quantities
and indices are determined. 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 Annual Report on Form 10-K filed with
the SEC as of and for the year ended September 30, 1997.
The accompanying financial statements include the consolidated accounts
of Bayou Steel Corporation ("Louisiana Facility") and Bayou Steel Corporation
(Tennessee) ("Tennessee Facility") (collectively referred to herein as the
"Company") after elimination of all significant intercompany accounts and
transactions.
The results for the nine months ended June 30, 1998 are not necessarily
indicative of the results to be expected for the fiscal year ending
September 30,
1998.
2) INVENTORIES
Inventories consisted of the following:
JUNE 30, SEPTEMBER 30,
1998 1997
------------ ------------
Scrap steel ........................ $ 2,914,325 $ 5,623,964
Billets ............................ 8,245,345 4,799,025
Finished product ................... 45,095,580 46,717,869
LIFO adjustments ................... (119,917) (2,497,697)
------------ ------------
56,135,333 54,643,161
Mill rolls, operating
supplies and other ............... 19,495,398 20,379,393
------------ ------------
$ 75,630,731 $ 75,022,554
============ ============
Page 7
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3) 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 which are amortized over the lives of the related
transactions. During the third fiscal quarter, the Company completed a
refinancing transaction and amended and restated its line of credit resulting in
the write-off of $2,369,000 of other assets related to its previously existing
deferred financing costs. This charge is included as a component of the
extraordinary loss on early retirement of debt. In connection with this
transaction, the Company capitalized $3,250,000 of new deferred financing costs.
4) LONG-TERM DEBT
Long-term debt included the following:
JUNE 30, SEPTEMBER 30,
1998 1997
------------ -------------
First Mortgage Notes ................. $108,955,709 $ 75,000,000
Term Loan ............................ -- 8,500,000
Other notes payables ................. -- 40,330
------------ ------------
108,955,709 83,540,330
Less-current maturities .............. -- 3,040,257
$108,955,709 $ 80,500,073
============ ============
On May 22, 1998, the Company issued $110 million of 9.5% First Mortgage
Notes ("9.5% Notes") due 2008 the proceeds of which were used to repay its
previously existing first mortgage notes, term loan and preferred stock and for
working capital purposes. The 9.5% Notes are presented in the accompanying
balance sheets net of the original issue discount of $1,044,291 which is being
amortized over the life of the notes using the straight line method which does
not materially differ from the interest method. In connection with the
refinancing transaction, the Company paid certain prepayment penalties, interest
during the defeasment period and wrote-off deferred financing costs the results
of which are reflected as an extraordinary loss in the accompanying statements
of operations for the three and nine-month periods ended June 30, 1998. No
income tax benefit has been provided against the extraordinary loss.
The 9.5% Notes are senior obligations of the Company, secured by a first
priority lien, subject to certain exceptions, on existing and future real
property, plant and equipment, and most additions or improvements thereto at the
Louisiana Facility.
The 9.5% Notes bear interest at the nominal rate of 9.5% per annum
(9.65% effective rate) payable semi-annually on May 15 and November 15 of each
year, commencing on November 15, 1998. Subject to certain exceptions, the
Company may not redeem the 9.5% Notes prior to May 15, 2003. On and after such
date, the Company may, at its option, redeem the 9.5% Notes, in whole or in
part, initially at 104.75% of the principal amount, plus accrued interest to the
date of redemption, and declining ratably to par on May 15, 2006.
Page 8
<PAGE>
Subsequent to June 30, 1998, the Company issued an additional $10
million of indebtedness under the add-on provisions of the 9.5% Notes. The
additional indebtedness has been incorporated into the existing 9.5% Notes and
accordingly, bears identical terms and covenants.
Bayou Steel Corporation (Tennessee) and River Road Realty Corporation
(collectively the "guarantor subsidiaries"), which are wholly owned by and which
comprise all of the direct and indirect subsidiaries of the Company, fully and
unconditionally guarantee the 9.5% Notes on a joint and several basis. The
following is summarized combined financial information of the guarantor
subsidiaries. Separate full financial statements and other disclosures
concerning each guarantor subsidiary have not been presented because, in the
opinion of management, such information is not deemed material to investors. The
indenture governing the 9.5% Notes provides certain restrictions on the ability
of the guarantor subsidiaries to make distributions to the Company.
JUNE 30, SEPTEMBER 30,
1998 1997
----------- -------------
Current Assets ..................................... $28,183,000 $22,370,000
Noncurrent assets .................................. 21,252,000 21,648,000
Current liabilities ................................ 25,693,000 23,844,100
Noncurrent liabilities ............................. 35,120,000 32,922,000
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
Net sales ...........$ 12,757,000 $ 11,967,000 $ 39,413,000 $ 32,439,000
Gross profit ........ 833,000 40,000 2,009,000 (1,037,000)
Net income .......... 488,000 (550,000) 1,075,000 (2,814,000)
5) SHORT-TERM DEBT
Concurrent with the refinancing transaction, 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 calls for available borrowings up to $50 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, 1998
was $48.2 million. The agreement is secured by inventory and accounts receivable
and bears interest on a sliding scale based on the quarterly leverage ratio, as
defined. The terms of the agreement contain several operating and financial
performance measurement covenants including a maximum debt to capitalization
ratio, a minimum interest coverage ratio, minimum tangible net worth
requirements and limits on the incurrence of certain other indebtedness. As of
June 30, 1998 and September 30, 1997, there were no borrowings under either
revolving line of credit facility.
6) TAXES
As of June 30, 1998, for tax purposes, the Company had net operating
loss carryforwards ("NOLs") of approximately $280 million and $262 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 $151.2 million, expires
by fiscal 2000. For financial reporting purposes, a full valuation allowance has
been provided against the Company's NOL deferred tax assets.
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7) PREFERRED STOCK AND WARRANTS
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. In connection with the refinancing transaction in
the third fiscal quarter, the preferred stock was redeemed but the warrants
remain outstanding.
8) EARNINGS PER SHARE
In fiscal 1998, the Company adopted Financial Accounting Standards Board
Statement No. 128, "Earnings per Share" ("FAS 128"). The provisions of FAS 128
require restatement of reported earnings per share ("EPS") for the three and
nine months ended June 30, 1997. However, there was no significant effect of
this accounting change on previously reported EPS for those periods.
Basic earnings per share was computed by deducting dividends accrued and
accretion on preferred stock from net income then dividing this amount by the
weighted average number of outstanding common shares of 12,884,607 during the
nine months ended June 30, 1998 and 1997. In connection with the issuance of
redeemable preferred stock discussed in Note 7, 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. In addition, the Company maintains an
incentive stock award plan under which stock options to purchase 115,000 shares
of its Class A Common Stock at an exercise price of $4.375 per share have been
granted to certain key employees. Diluted earnings per share amounts were
determined by assuming that the outstanding warrants and stock options were
exercised and considered as additional common stock equivalents outstanding
computed under the treasury stock method. Additional common stock equivalents
computed for purposes of the diluted earnings per share computation were 854,337
and 822,422 for the nine-month periods ended June 30, 1998 and 1997,
respectively.
The effect of the extraordinary item and loss on preferred stock is as
follows:
BASIC DILUTED
NINE MONTHS ENDED JUNE 30, 1998
EPS excluding extraordinary item ............................. $1.09 $1.02
Extraordinary item ........................................... (.43) (.40)
Redemption of and dividends
on preferred stock .......................................... (.33) (.31)
----- -----
EPS applicable to common
and common equivalent shares ............................... $ .33 $ .31
===== =====
THIRD QUARTER ENDED JUNE 30, 1998
EPS excluding extraordinary item ............................. $ .37 $ .37
Extraordinary item ........................................... (.43) (.43)
Redemption of and dividends
on preferred stock .......................................... (.23) (.23)
----- -----
EPS applicable to common
and common equivalent shares ............................... $(.29) $(.29)
===== =====
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9) MISCELLANEOUS
Miscellaneous for the nine months ended June 30, 1998 and 1997 included
the following:
1998 1997
----------- -----------
Discounts earned ..................... $ 194,304 $ 144,126
Provision for bad debts .............. (116,836) (175,199)
Other ................................ (1,233,515) 143,270
----------- -----------
$(1,156,047) $ 112,197
=========== ===========
In February 1998, the Company entered into a letter of intent to
purchase all of the outstanding shares of Northwestern Steel and Wire Company
("Northwestern"), a major minimill producer of structural steel, rod and wire
products. In April 1998, the Company announced that it would not proceed with
its plan to purchase the outstanding shares of Northwestern. Included in
miscellaneous expense for the three and nine-month periods ended June 30, 1998
is an unusual, non-recurring charge of approximately $1.3 million related to
this unconsummated transaction.
10) COMMITMENTS AND CONTINGENCIES
NON-PRODUCTION STRIKE AND CORPORATE CAMPAIGN EXPENSES
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 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. Nonproduction strike and corporate campaign expenses include legal and
other charges incurred by the Company in connection with its suit against the
Union. In the first quarter of fiscal 1998, the Company reached an agreement
with the Union the effect of which was not material to the financial position or
result of operations of the Company.
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. During fiscal 1997, the United States Public Interest Research
Group ("USPIRG") filed a lawsuit in Louisiana against the Company for alleged
violations of air quality regulations. USPIRG is asking the court to award its
appropriate legal fees and to assess appropriate penalties against the Company.
The Company believes that its has meritorious defenses to these charges. The
Page 11
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Company believes that it is in compliance, in all material respects, with
applicable environmental requirements and that the cost of such continuing
compliance (including the ultimate resolution of the USPIRG matter discussed
above) 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 and is not designated as a Potential Responsible Party
("PRP") under the Superfund legislation. As of June 30, 1998 and September 30,
1997, the Company has accrued loss contingencies for environmental matters.
Tennessee Valley Steel Corporation ("TVSC"), the prior owners of the
Tennessee Facility, had entered into a Consent Agreement and Order (the "TVSC
Consent Order") with the Tennessee Department of Environment and Conservation
under its voluntary clean-up program. The Company, in acquiring the assets of
TVSC, has entered into a Consent Agreement and Order (the "Bayou Steel Consent
Order") with the Tennessee Department of Environment and Conservation. The Bayou
Steel Consent Order is supplemental to the previous TVSC Consent Order and does
not affect the continuing validity of the TVSC Consent 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, and assessment process. 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 TVSC 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). As of June 30, 1998,
investigative, remedial, and risk assessment activities have resulted in
expenses of approximately $1.3 million. At this time the Company does not expect
the costs of resolution of the TVSC Consent Order to exceed funds provided by
the escrow agreement. In July 1997, TVSC's former bank lenders and certain other
parties filed an adversary proceeding against the Company in the United States
Bankruptcy Court. The banks are contesting certain of the Company's
reimbursement claims, aggregating approximately $1.1 million, in connection with
remediation work performed by the Company, alleging that much of the remediation
work was not performed prior to the first anniversary of the closing date of the
acquisition and that the work performed exceeded the scope of the remediation
work required under the TVSC Consent Order. If the banks are successful in their
claims, the Company may incur costs for remediation work that will not be
reimbursed from the escrow fund. Except for the foregoing consent orders, the
Company believes that it is in material compliance with all environmental laws.
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.
11) NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activity," ("FAS 133") which establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
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sheet as either an asset or liability measured at its fair value. FAS 133
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a company
must formally document, designate and assess the effectiveness of transactions
that receive hedge accounting. FAS 133 is effective for fiscal years beginning
after June 15, 1999 with earlier application permitted beginning as early as
July 1, 1998. The Company does not currently have any derivative instruments and
does not believe adoption of this standard would have any impact on its
financial statements, financial positions or results of operations.
Page 13
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Management's Discussion and Analysis of Financial Condition and Results of
Operations included as part of the Company's Annual Report on Form 10-K as of
and for the year ended September 30, 1997.
RESULTS OF OPERATIONS
The Company reported income of $4.7 million before extraordinary loss
and dividends, accretion and losses on preferred stock in the third quarter of
fiscal 1998 (ended June 30, 1998) compared to a net income of $2.1 million for
the comparable period of fiscal 1997. The $2.6 million improvement was primarily
a result of a strong market for the Company's products which resulted in better
selling prices. Additionally, the Company has experienced a decrease in scrap
prices over the third quarter of fiscal 1997 which contributed to a 10% increase
in the metal margin (the difference between the selling price and the net scrap
cost).
On May 22, 1998, the Company completed a refinancing transaction whereby
it issued, at a price of 99.048%, $110 million of 9.5% First Mortgage Notes
("9.5% Notes") due 2008 to repay its previously existing first mortgage notes,
term loan and preferred stock. In connection with this transaction, the Company
paid prepayment penalties, interest during the defeasment period and wrote-off
deferred financing costs associated with the transaction. This resulted in a
$7.9 million charge made up of a $5.5 million extraordinary loss and a $2.4
million loss on redemption of preferred stock for the three and nine-month
periods ended June 30, 1998.
In February 1998, the Company entered into a letter of intent to
purchase all of the outstanding shares of Northwestern Steel and Wire Company
("Northwestern"), a major minimill producer of structural steel, rod and wire
products. In April 1998, the Company announced that it would not proceed with
its plan to purchase the outstanding shares of Northwestern. Included in
miscellaneous expense for the three and nine-month periods ended June 30, 1998
is an unusual, non-recurring charge of approximately $1.3 million related to
this unconsummated transaction.
The Company reported income of $14.1 million before extraordinary loss
and dividends, accretion and losses on preferred stock during the first nine
months of fiscal 1998 compared to net income of $1.1 million for the comparable
period of fiscal 1997. The $13.0 million improvement in the Company's results
was primarily due to two factors. First, the Tennessee Facility recorded net
income of $1.0 million, an improvement of $3.9 million over the same period in
the prior year. Second, shape shipment tons and the average selling price
increased 5% and 6%, respectively.
Page 14
<PAGE>
The following table sets forth shipment and sales data.
THREE MONTHS ENDED
JUNE 30,
1998 1997
-------- --------
Net Sales (in thousands) ...................... $ 59,606 $ 59,075
Shape Shipment Tons ........................... 157,836 165,204
Shape Selling Price Per Ton ................... $ 370 $ 352
NINE MONTHS ENDED
JUNE 30,
1998 1997
-------- --------
Net Sales (in thousands) ..................... $191,789 $171,593
Shape Shipment Tons .......................... 520,545 493,883
Shape Selling Price Per Ton .................. $ 363 $ 342
A. SALES
Net sales for the third quarter of fiscal 1998 increased 1% despite the
fact that tons shipped decreased by 4%. The increased revenue on fewer shipments
is a result of marketing decisions to improve the gross margin per ton
shipped.
Gross margin on shipments improved 32% and the average sales price improved $18
per ton or 5% over the same period last year. Net sales for the first nine
months of fiscal 1998 increased by $20 million or 12% compared to the same
period of fiscal 1997 as a result of shipment increases of 26,662 tons or 5% and
a $21 per ton or 6% increase in the average selling price.
Shipments for the third quarter of fiscal 1998 were less than the same
period of last year. Shipments for the nine months ended June 30, 1998 increased
5% compared to the same period of fiscal 1997. Shipments from the Louisiana
Facility were less than the prior year comparable quarter. This decline is
partially due to the Company's position on pricing whereby shipments that
include sales discounts have been evaluated in light of customer past shipments
and future commitments. Shipments for the first nine months from the Louisiana
Facility were better than the comparable period. The Tennessee Facility's
shipments in the third fiscal quarter were consistent with the prior year
quarter. In the first nine months of fiscal 1998, the Tennessee Facility showed
an improvement of 13,147 tons over the comparable period last year. The improved
reliability of production at the Tennessee Facility and market acceptance of its
products together with a strong economy are the primary factors for these
positive gains. The Company has maintained its focus on increasing shipments to
the original equipment manufacturer/fabricator ("OEM/FAB") market. In the
current quarter, competition from import products has been noted in some of the
Tennessee Facility's product line. To date, this competition has not adversely
affected pricing and has had a marginal impact on shipments.
Overall selling price increased approximately $18 per ton or 5% in the
third quarter of fiscal 1998 and $21 per ton or 6% during the first nine months
of fiscal 1998 compared to the same period of fiscal 1997. The Tennessee
Facility benefitted from an overall improved market as well as consistent
production and availability of products. Additionally, the Tennessee Facility
benefitted from a selling price increase of $24 per ton for the nine-month
period and $13 per ton for the quarter ended June 30, 1998. The Louisiana
Facility
Page 15
<PAGE>
experienced an increase in selling price of $20 per ton for the three and nine-
month periods ended June 30, 1998. The improvement in price realization is due
to the strong demand for the Company's products.
Due to the high productivity of the Company's rolling mills, no billets
were sold on the open market during the first nine months of 1998 and only 241
tons of billets were sold during this period in 1997. The Tennessee Facility's
demand for billets has been primarily satisfied by the purchase of billets on
the open market at competitive prices while the Company supplied substantially
all of the Louisiana Facility's rolling mill requirements. Depending on market
conditions and its own rolling mill requirements, the Company may sell billets
on an occasional and selective basis to domestic and export customers while
purchasing additional billets when required.
B. COST OF GOODS SOLD
Cost of goods sold was 84% of sales for the third quarter of fiscal 1998
compared to 88% for the same period of fiscal 1997. The positive variance was
primarily the result of the selling price of finished products increasing while
the cost of scrap metal (a major component of cost of goods sold) decreased
slightly.
Cost of goods sold was 86% of sales for the first nine months of fiscal
1998 compared to 91% for the same period of fiscal 1997. The improvement was
attributable to the items noted above and certain nonrecurring charges recorded
in fiscal 1997 related to a transformer failure in the melting facility and the
return of the previously striking workers.
Scrap metal is used in the melting operations at the Louisiana Facility.
Scrap cost in the third quarter of fiscal 1998 decreased by 3% offsetting the 1%
increase for the first nine months of fiscal 1998. The market for scrap metal
has softened in the third fiscal quarter and is expected to remain this way
through the fourth fiscal quarter as exports of scrap to Asia have decreased
significantly. Additionally, the Company has been able to control the
availability and the cost of scrap to some degree by producing its own shredded
scrap through an automobile shredding division of the Company, Mississippi River
Recycling. When compared with the cost of shredded scrap available to the
Company on the open market, the Company has realized a 5% per ton savings
through this operation.
Another significant component 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 Tennessee Facility in the third quarter and first nine months of fiscal 1998
compared to the same periods of fiscal 1997 improved by $7 per ton and $14 per
ton, respectively. These improvements are due to cost containment, increased
production and rolling mill yield. Conversion cost at the Louisiana Facility
remained relatively consistent with the third quarter and first nine months of
the prior year.
Page 16
<PAGE>
C. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses in the third quarter have
increased as the Company incurred and will continue to incur legal expenses in
its defense of the USPIRG lawsuit. For the first nine months of fiscal 1998
selling, general and administrative expenses were relatively consistent with the
same periods of the prior year.
D. NON-PRODUCTION STRIKE AND CORPORATE CAMPAIGN EXPENSES
Non-production strike and corporate campaign expenses have decreased
significantly since the settlement of the RICO lawsuit and post-strike issues at
the end of 1997. No such costs were incurred in the third quarter of fiscal 1998
nor are any such expenses expected; they were $2.3 million less in the first
nine months of fiscal 1998 when compared to the same periods of fiscal 1997.
E. OTHER INCOME (EXPENSE)
Interest expense remained consistent with the prior year in the third
quarter and showed a slight decrease in the first nine months of fiscal 1998 due
to decreased short-term borrowings. The refinancing transaction had no
significant effect on interest expense as the transaction occurred late in the
third quarter. Interest income increased in the third quarter and the first nine
months of fiscal 1998 due to investing excess cash generated from operations.
Included in miscellaneous expense for the three and nine-month periods
ended June 30, 1998 is approximately $1.3 million of costs related to the
terminated merger with Northwestern discussed above.
F. NET INCOME
The Company's results before extraordinary loss and dividends, accretion
and loss on preferred stock improved by $2.6 million in the third fiscal quarter
and $13.0 million during the first nine months of fiscal 1998 compared to the
same periods of fiscal 1997. The primary reasons for the improvement in earnings
were higher selling prices, increased metal margins, decreased conversion cost
at the Tennessee Facility, and decreased non-production strike and corporate
campaign expenses. Additionally, the Tennessee Facility reported its fourth
consecutive quarterly profit in the third quarter of fiscal 1998.
LIQUIDITY AND CAPITAL RESOURCES
A. CASH AND WORKING CAPITAL
The Company ended the third fiscal quarter with $18.2 million in cash
and temporary cash investments and no short-term borrowings. Subsequent to
June 30,
1998, the Company issued an additional $10 million of indebtedness under the
add-on provisions of the 9.5% Notes. As of June 30, 1998, current assets
exceeded current liabilities by a ratio of 4.2 to 1.0. Working capital increased
by $20 million to $92 million during the nine months ended June 30, 1998.
In the first nine months of fiscal 1998, cash provided by operations was
$19.5 million, an increase of $16.4 million over the first nine months of fiscal
1997. Contributing to the significant improvement was an increase in income
before extraordinary items caused by strong demand for the Company's products.
Page 17
<PAGE>
B. CAPITAL EXPENDITURES
Capital expenditures amounted to $3.9 million in the first nine months
of fiscal 1998. These capital projects were directed towards cost reduction,
productivity enhancements, plant maintenance, safety and environmental programs.
Depending on market conditions, the Company may commit approximately $14 million
on various capital projects to reduce cost and increase productivity, to enhance
safety and environmental programs, and to maintain the plants during the next
twelve months. In addition, The Company is evaluating a major capital project
for approximately $30 million to expand its melting capacity.
C. FINANCING
As a result of favorable market conditions, the Company completed a
refinancing transaction whereby it issued, at a price of 99.048%, $110 million
of 9.5% First Mortgage Notes due 2008. The proceeds were used to repay its
previously existing first mortgage notes, term loan and preferred stock and for
working capital purposes. The 9.5% Notes are senior obligations of the Company,
secured by a first priority lien, subject to certain exceptions, on existing and
future real property, plant and equipment and most additions or improvements
thereto at the Louisiana Facility. Interest accrues at a face rate of 9.5% and
is payable semi-annually on May 15 and November 15 of each year, commencing on
November 15, 1998. Subject to certain exceptions, the Company may not redeem the
9.5% Notes prior to May 15, 2003. On and after such date, the Company may, at
its option, redeem the 9.5% Notes, in whole or in part, initially at 104.75% of
the principal amount, plus accrued interest to the date of redemption, and
declining ratably to par on May 15, 2006.
Subsequent to June 30, 1998, the Company issued an additional $10
million of indebtedness under the add-on provisions of the 9.5% Notes. The
additional indebtedness has been incorporated into the existing 9.5% Notes and
accordingly, bears identical terms and covenants.
Concurrent with the refinancing transaction, 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 calls for available borrowings up to $50 million, including
outstanding letters of credit, using a borrowing base of receivables and
inventory. The agreement is secured by inventory and accounts receivable and
bears interest on a sliding scale based on the quarterly leverage ratio, as
defined. The terms of the agreement contain several operating and financial
performance measurement covenants including a maximum debt to capitalization
ratio, a minimum interest coverage ratio, minimum tangible net worth
requirements and limits on the incurrence of certain other indebtedness. As of
June 30, 1998, there were no borrowings under the revolving line of credit
facility.
D. YEAR 2000
The Company is prepared for the impact that the year 2000 is expected to
have on electronic data processing and other information systems relevant to its
business. A detail plan has been outlined and implemented. The year 2000 should
not significantly impact the Company's results of operations, financial position
or cash flows.
Page 18
<PAGE>
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 scrap; weather conditions in the market area of the finished product
distribution; unplanned equipment outages; changing laws affecting labor,
employee benefit costs and environmental and other governmental regulations.
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
1998.
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 5, 1998
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> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 18,219,607
<SECURITIES> 0
<RECEIVABLES> 26,681,302
<ALLOWANCES> 622,159
<INVENTORY> 75,630,731
<CURRENT-ASSETS> 120,122,830
<PP&E> 138,993,869
<DEPRECIATION> 49,272,916
<TOTAL-ASSETS> 213,055,208
<CURRENT-LIABILITIES> 28,326,100
<BONDS> 108,955,709
<COMMON> 128,846
0
0
<OTHER-SE> 75,773,399
<TOTAL-LIABILITY-AND-EQUITY> 213,055,208
<SALES> 59,605,831
<TOTAL-REVENUES> 59,605,831
<CGS> 50,156,816
<TOTAL-COSTS> 51,815,951
<OTHER-EXPENSES> 1,175,828
<LOSS-PROVISION> 116,836
<INTEREST-EXPENSE> 2,299,705
<INCOME-PRETAX> 4,847,478
<INCOME-TAX> 100,511
<INCOME-CONTINUING> 4,746,967
<DISCONTINUED> 0
<EXTRAORDINARY> (5,506,885)
<CHANGES> 0
<NET-INCOME> (759,918)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
