UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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.)
138 Highway 3217, 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 March 31, 1999
- ------------------------------------ -----------------------------------
Class A Common Stock, $.01 par value 10,619,380
Class B Common Stock, $.01 par value 2,271,127
Class C Common Stock, $.01 par value 100
-----------
12,890,607
==========
<PAGE>
BAYOU STEEL CORPORATION
INDEX
Page
PART I. FINANCIAL INFORMATION Number
Item 1. Financial Statements
Consolidated Balance Sheets -- March 31, 1999 and
September 30, 1998 3
Consolidated Statements of Operations -- Three Months
and Six Months Ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows -- Six Months
Ended March 31, 1999 and 1998 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations 10
Liquidity and Capital Resources 12
PART II. OTHER INFORMATION
Item 4. Submission of matters to a vote of security holders 14
Item 6. Exhibits and reports on Form 8-K 15
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BAYOU STEEL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
(Unaudited) (Audited)
March 31, September 30,
1999 1998
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and temporary cash investments $ 26,190,115 $ 34,028,855
Receivables, net of allowance for doubtful
accounts of $873,009 and $773,948, respectively 21,462,659 27,194,660
Inventories 86,299,481 83,756,111
Deferred income taxes and other 6,216,486 5,913,865
------------- -------------
Total current assets 140,168,741 150,893,491
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land 3,790,399 3,790,399
Machinery and equipment 123,135,500 114,165,843
Plant and office building 22,890,159 22,867,334
------------- -------------
149,816,058 140,823,576
Less-Accumulated depreciation (53,354,725) (50,707,711)
------------- -------------
Net property, plant and equipment 96,461,333 90,115,865
------------- -------------
DEFERRED INCOME TAXES 4,085,024 5,282,549
OTHER ASSETS 3,047,912 3,205,550
------------- -------------
Total assets $ 243,763,010 $ 249,497,455
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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<PAGE>
BAYOU STEEL CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Unaudited) (Audited)
March 31, September 30,
1999 1998
------------ ------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 13,339,642 $ 20,298,386
Interest payable 4,338,333 4,116,667
Accrued liabilities 6,165,701 8,843,864
------------ ------------
Total current liabilities 23,843,676 33,258,917
------------ ------------
LONG-TERM DEBT 118,955,973 118,898,853
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value -
Class A: 24,271,127 authorized and 10,619,380
outstanding shares 106,194 106,194
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 128,906 128,906
Paid-in capital 47,795,224 47,795,224
Retained earnings 53,039,231 49,415,555
------------ ------------
Total common stockholders' equity 100,963,361 97,339,685
------------ ------------
Total liabilities and common stockholders' equity $243,763,010 $249,497,455
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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<PAGE>
BAYOU STEEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ 49,888,361 $ 65,835,504 $ 97,303,022 $ 132,183,347
COST OF SALES 43,969,635 57,405,906 83,368,310 115,616,100
------------- ------------- ------------- -------------
GROSS PROFIT 5,918,726 8,429,598 13,934,712 16,567,247
SELLING, GENERAL AND
ADMINISTRATIVE 1,909,654 1,693,037 3,547,556 3,233,046
------------- ------------- ------------- -------------
OPERATING INCOME 4,009,072 6,736,561 10,387,156 13,334,201
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest expense (2,768,300) (2,044,761) (5,562,570) (4,133,076)
Interest income 360,211 136,229 750,345 178,525
Miscellaneous (10,918) 87,146 (43) 136,616
------------- ------------- ------------- -------------
(2,419,007) (1,821,386) (4,812,268) (3,817,935)
------------- ------------- ------------- -------------
INCOME BEFORE
INCOME TAXES 1,590,065 4,915,175 5,574,888 9,516,266
PROVISION FOR
INCOME TAXES 556,787 103,685 1,951,212 197,530
------------- ------------- ------------- -------------
NET INCOME 1,033,278 4,811,490 3,623,676 9,318,736
DIVIDENDS ACCRUED AND
ACCRETION ON
PREFERRED STOCK -- (654,448) -- (1,304,428)
------------- ------------- ------------- -------------
INCOME APPLICABLE TO
COMMON AND COMMON
EQUIVALENT SHARES $ 1,033,278 $ 4,157,042 $ 3,623,676 $ 8,014,308
============= ============= ============= =============
WEIGHTED AVERAGE
COMMON SHARES
OUTSTANDING:
Basic 12,890,607 12,884,607 12,890,607 12,884,607
============= ============= ============= =============
Diluted 13,713,029 13,738,175 13,713,029 13,731,917
============= ============= ============= =============
INCOME PER COMMON SHARE:
Basic $ .08 $ .32 $ 0.28 $ .62
============= ============= ============= =============
Diluted $ .08 $ .30 $ 0.26 $ .58
============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of theseconsolidated statements.
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BAYOU STEEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3,623,676 $ 9,318,736
Depreciation 2,647,014 2,897,558
Amortization 214,758 429,864
Provision for losses on accounts receivable 99,061 54,129
Deferred income taxes 1,587,767 --
Changes in working capital:
Decrease (increase) in receivables 5,632,940 (1,476,488)
(Increase) decrease in inventories (2,543,370) 3,422,452
(Increase) in prepaid expenses (692,863) (187,920)
(Decrease) increase in accounts payable (6,958,744) 1,360,126
(Decrease) in interest payable and accrued liabilities (2,456,497) 2,035,054
------------ ------------
Net cash provided by operations 1,153,742 17,853,511
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (8,992,482) (2,387,015)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt -- (1,529,971)
Debt issue and other costs -- (876,936)
Payments of dividends on preferred stock -- (1,091,969)
------------ ------------
Net cash used in financing activities -- (3,498,876)
------------ ------------
NET (DECREASE) INCREASE IN CASH AND
TEMPORARY CASH INVESTMENTS (7,838,740) 11,967,620
CASH AND TEMPORARY CASH INVESTMENTS,
beginning balance 34,028,855 971,477
------------ ------------
CASH AND TEMPORARY CASH INVESTMENTS,
ending balance $ 26,190,115 $ 12,939,097
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Cash paid during the period for:
Interest (net of amount capitalized) $ 5,340,904 $ 4,189,222
Income taxes $ 363,445 $ 40,394
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
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<PAGE>
BAYOU STEEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
(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 March 31, 1999
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, 1998.
The accompanying financial statements include the consolidated accounts of
Bayou Steel Corporation ("Louisiana Facility"), Bayou Steel Corporation
(Tennessee) ("Tennessee Facility"), and River Road Realty Corporation
(collectively referred to herein as the "Company") after elimination of all
significant intercompany accounts and transactions. The results for the six
months ended March 31, 1999 are not necessarily indicative of the results to be
expected for the fiscal year ending September 30, 1999.
Certain reclassifications have been made in the prior period financial
statements to conform to the classifications used in the current year.
2) INVENTORIES
Inventories consist of the following:
(Unaudited) (Audited)
March 31, September 30,
1999 1998
----------- ------------
Scrap steel $ 3,127,808 $ 3,131,848
Billets 6,664,695 12,001,153
Finished product 48,661,323 45,339,376
LIFO adjustments 7,085,515 2,074,726
----------- -----------
$65,539,341 $62,547,103
Mill rolls, operating supplies and other 20,760,140 21,209,008
----------- -----------
$86,299,481 $83,756,111
=========== ===========
3) LONG-TERM DEBT
The Company has $120 million of first mortgage notes bearing interest at
9.5% (9.65% effective rate) due 2008 with semi-annual interest payments due May
15 and November 15 of each year. The notes were issued at a discount which is
being amortized over the life of the notes using the straight line method which
does not materially differ from the interest method. The notes are a senior
obligation 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.
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<PAGE>
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 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 notes provide certain restrictions on the ability of the guarantor
subsidiaries to make distributions to the Company.
(Unaudited) (Audited)
March 31, September 30,
1999 1998
------------ -------------
Current assets $32,474,000 $29,992,000
Noncurrent assets 21,333,000 21,503,000
Current liabilities 28,463,000 26,489,000
Noncurrent liabilities 34,973,000 34,973,000
(Unaudited) (Unaudited)
Three Months Ended Six Months Ended
March 31, March 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
Net sales $11,207,000 $14,010,000 $21,585,000 $26,656,000
Gross profit 493,000 810,000 1,428,000 1,176,000
Net income 16,000 533,000 339,000 587,000
4) INCOME TAXES
As of March 31, 1999, for tax purposes, the Company had net operating loss
carryforwards ("NOLs") of approximately $217 million available to utilize
against regular taxable income. The NOLs will expire in varying amounts through
fiscal 2010. A substantial portion of the available NOLs, approximately $124
million, expire by fiscal 2001. During fiscal 1998, the Company reversed a
portion of its valuation allowance associated with the NOLs. Deferred tax
expense of approximately $0.6 million and $2.0 million was recognized in the
second quarter and the first six months of fiscal 1999, respectively, reflecting
the utilization of a portion of the Company's available NOL's to cover estimated
taxable income.
5) PREFERRED STOCK AND WARRANTS
The Company issued 15,000 shares of redeemable preferred stock and warrants
to purchase six percent of its Class A Common Stock (or 822,422 shares) at a
nominal amount. In connection with a refinancing transaction in the third
quarter of fiscal 1998, the preferred stock was redeemed but the warrants remain
outstanding.
6) EARNINGS PER SHARE
The Company presents earnings per share in accordance with the provisions
of Financial Accounting Standards Board Statement No. 128, "Earnings per Share".
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 12,890,607 during the
six months ended March 31, 1999 and 12,884,607 shares during the six months
ended March 31, 1998. In connection with the issuance of redeemable preferred
stock discussed in Note 5, 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
for certain key employees under which stock options to purchase 115,000 and
85,000 shares of its Class A Common Stock at an exercise price of $4.375 and
$4.75 per share, respectively. Diluted earnings per share amounts were
determined by assuming that the outstanding warrants and stock options were
exercised and considered as additional common stock
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equivalents outstanding computed under the treasury stock method. Additional
common stock equivalents computed for purposes of the diluted earnings per share
computation were 822,422 and 847,310 for the six-month period ended March 31,
1999 and 1998, respectively.
7) COMMITMENTS AND CONTINGENCIES
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 solid 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 certain limited
circumstances have been challenged with respect to some 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.
Subsequent to quarter-end, the Company and USPIRG reached an agreement in
principal subject to court approval, the results of which were not material to
the financial position or the results of operations of the Company. The Company
believes that it is in compliance, in all material respects, with applicable
environmental requirements and that the cost of such continuing compliance is
not expected to 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"
under the federal Superfund legislation. As of March 31, 1999 and September 30,
1998, the Company had accrued loss contingencies for certain environmental
matters and believes that it is presently in material compliance with all
environmental laws.
Tennessee Valley Steel Corporation ("TVSC"), the prior owners of the
Tennessee Facility, 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, entered into a Voluntary 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 certain funds to be
applied to costs incurred by the Company for activities pursuant to the TVSC
Consent Order. As of March 31, 1999, investigative, remedial, and risk
assessment activities have resulted in expenses of approximately $1.3 million
with approximately $0.6 million remaining to complete the remediation. At this
time the Company does not expect the cost of resolution of the TVSC Consent
Order to exceed funds previously provided.
Environmental Laws have been enacted, and may in the future be enacted, to
create liability for past actions that were lawful at the time taken, but that
have been found to affect adversely the environment and to create rights of
action for environmental conditions and activities. Under some federal
legislation (sometimes referred to as "Superfund" legislation) a company that
has sent waste to a third party disposal site or elsewhere could be held liable
for some portion or all the cost of remediating such site regardless of fault or
the lawfulness of the original disposal activity and also for related damages to
natural resources. Many states, including Georgia, have enacted similar
legislation. The Company has been advised by the Georgia Department of Natural
Resources that it is a responsible party to a site where clean up costs have
been and are being expended. The Company has never used the site. It is alleged
that the predecessor corporation to TVSC generated materials that were
reportedly disposed at the site. The Company believes it has meritorious
defenses to these charges.
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<PAGE>
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 or results of operations.
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, 1998.
RESULTS OF OPERATIONS
The Company reported $1.6 million of income before taxes in the second
quarter of fiscal 1999 (ended March 31, 1999) compared to $4.9 million in the
comparable period of fiscal 1998. The $3.3 million reduction in earnings was due
to several factors: fewer tons shipped; increased conversion cost at the
Louisiana Facility; reduced metal margin (the difference between the selling
price and the net scrap cost); and an increase in net interest expense.
The Company reported $5.6 million of income before taxes for the first six
months of fiscal 1999 compared to $9.5 million for the comparable period of
fiscal 1998. The $3.9 million decrease in earnings was due primarily to a
decrease in tons shipped and an increase in net interest expense. These
unfavorable trends were offset by an increase in the metal margin over the prior
year first six months resulting in higher gross profit on each ton shipped.
The following table sets forth shipment and sales data.
Three Months Ended
March 31,
1999 1998
---------- ----------
Net Sales (in thousands) $ 49,888 $ 65,836
Shape Shipment Tons 156,853 179,448
Average Shape Selling Price Per Ton $ 315 $ 363
Six Months Ended
March 31,
1999 1998
----------- ----------
Net Sales (in thousands) $ 97,303 $ 132,183
Shape Shipment Tons 292,396 362,706
Average Shape Selling Price Per Ton $ 328 $ 359
A. Sales
Net sales for the quarter decreased by 24% resulting from a 13% reduction
in shipments and average selling price compared to the prior year period. For
the first six months of fiscal 1999, net sales decreased by 26% on a 19%
decrease in tons shipped and a 9% decrease in the average selling price compared
to the same period of fiscal 1998.
The decrease in shipments and the average selling price for both periods
was the result of direct competition from imports within the Company's product
range. The negative impact of imports on the Company's shipments started in the
latter part of the first quarter and continued throughout the second. Steel
service centers, the principal customers of the Company, reacted to the
increased supply of domestic and foreign steel as well as their own record high
inventory
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levels by reducing orders from domestic mills. In efforts to stimulate shipments
and to compete with the imports, the domestic mills reduced prices throughout
the first six months of this year. The lack of shipments caused the Company's
inventories to approach its storage capacity. To relieve some of its physical
constraint problems as well as operating cash flow pressures associated with
high inventory levels, the Company reduced operations at its Tennessee rolling
mill during the quarter and, subsequently, at its Louisiana rolling mill.
The demand for the Company's products at the end-user level is steady, but
it is not expected to match the record shipment levels of the prior year. A
further slowdown in the economy or additional imports in the Company's product
range could further affect shipments or operations. It may take several months
for steel service centers to reduce inventories to acceptable levels and for
mill orders to reflect the underlying demand. Supply could be further impacted
by a competitor who is commissioning a mill capable of producing many of the
same products as the Company.
Subsequent to quarter-end, one of the plants of a major competitor
announced a $15 per ton price increase that would impact much of the Company's
product line. The price increase is effective for shipments after June 1, 1999
and is expected to be matched by most other competitors.
B. Cost of Goods Sold
Cost of goods sold was 88% of sales for the quarter compared to 87% of
sales for the prior year period. Although the selling price decrease was the
single largest contributor to this change, it was minimized by a decrease in the
cost of scrap metal (a major component of cost of goods sold). For the six-month
period comparison, cost of goods sold was 86% of sales in fiscal 1999 compared
to 87% for the same period of fiscal 1998. The combination of the change in the
average selling price and scrap costs accounts for the majority of this change.
Scrap is used in the melting operations at the Louisiana Facility and is a
significant component of the cost of billets purchased for the Tennessee
Facility. Scrap cost in the second quarter and the first six months of fiscal
1999 decreased 33% and 32%, respectively, compared to the same periods of last
year. The market for scrap metal has softened significantly since June of last
year when export demand decreased sharply allowing for a greater domestic supply
and lower prices.
Conversion cost 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 increased by 5% in the second quarter
and 4% for the first six months of fiscal 1999. The increase is primarily a
result of a planned two week shutdown to perform major maintenance and major
capital projects. However, the shutdown caused a decrease in production when
compared to the prior year increasing the cost per ton. The impact of this
increase was offset by improvements at the Tennessee Facility where conversion
cost per ton decreased by 7% in the second quarter and 13% for the first six
months of fiscal 1999. These improvements are due to improved productivity and
cost containment and, in March of this year, a new record productivity was
established as measured in tons produced per hour.
The Company is currently in the installation and start-up phase of a
significant capital item, a Ladle Metallurgical Facility (LMF). The LMF is an
integral component of the long-term capital program, and is expected to add
40,000 tons to the annual melting capacity. Due to the learning curve associated
with the start-up of such a significant piece of equipment, the Company may
experience increase per ton costs in the near term.
C. Selling, General and Administrative Expense
Selling, general and administrative expense in the second quarter and first
six months of fiscal 1999 compared to the same periods of the last year
increased by $217,000 and $315,000, respectively. The change is primarily due to
an increase in legal and consulting activities in the current year.
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D. Other Income (Expense)
Interest expense increased $0.7 million and $1.4 million for the three and
six months ended March 31, 1999 compared to the same periods last year due to a
refinancing transaction completed in May 1998 in which the Company extinguished
its existing debt and preferred stock and issued one instrument with a greater
face value but lower interest rate and less restrictive covenants. Excess cash
generated from operations, in addition to the proceeds from the refinancing
transaction, yielded liquidity that the Company was able to invest, resulting in
increased interest income in fiscal 1999.
E. Income Taxes
As a result of the Company's improved profitability, a steady long-term
economic outlook, expiration of certain tax benefits derived from a tax-favored
lease agreement and its internal projections for the near future, the Company
reversed approximately $16.5 million of a deferred tax valuation allowance in
the fourth fiscal quarter of 1998. Accordingly, the Company has provided for
income taxes at statutory rates approximating 35%. The net affect of this item
on earnings was $0.5 million and $1.8 million for the three and six months ended
March 31, 1999, respectively, the impact of which was substantially non-cash. In
the prior year, the Company provided for income taxes at the alternative minimum
tax rate of 2% which is approximately the cash tax expended.
F. Net Income
Net income decreased $3.8 million and $5.7 million in the second quarter
and first six months of fiscal 1999, respectively, compared to fiscal 1998 due
primarily to the recognition of income tax expense, shipment and average selling
price decreases noted above.
LIQUIDITY AND CAPITAL RESOURCES
A. Cash and Working Capital
The Company ended the second fiscal quarter with $26.2 million in cash and
temporary cash investments. In the first six months of fiscal 1999, cash
provided by operations was $1.2 million compared to $17.9 million last year.
Contributing to the change was an increase in inventories of $2.5 million due to
depressed shipments in the current year and $9.4 million used by changes in
payables and accrued liabilities.
At March 31, 1999 current assets exceeded current liabilities by a ratio of
5.88 to 1.00. Working capital decreased by $1.3 million to $116.3 million during
the six month period.
B. Capital Expenditures
Capital expenditures amounted to $9.0 million in the first six months of
fiscal 1999. The increased activity is directed towards cost reduction,
productivity enhancements, plant maintenance and safety and environmental
programs. Depending on market conditions, the Company expects to spend
approximately $27 million on various capital projects during the next twelve
months and, depending on market conditions, may commit and spend an additional
$28 million over the next several years to substantially increase its melting
capacity and reduce operating cost. This project is divided into several phases
whereby work will be performed in independently beneficial phases requiring the
commitment of funds on an incremental basis. Meanwhile, the Company is
evaluating technology alternatives which could significantly reduce the $28
million long-term capital outlay while accomplishing most of the intended
benefits.
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C. Financing
During fiscal 1998, the Company completed a refinancing transaction whereby
it issued $120 million of first mortgage notes due in 2008. The proceeds were
used to repay its previously existing first mortgage notes and term loan and
redeem its preferred stock and for working capital purposes.
OTHER COMMENTS
Year 2000
The Company has completed the implementation and testing phase of its
organized program to assure that its electronic data processing, automated
operating systems and other information systems will be year 2000 compliant. The
program commenced in June 1997 and is complete. The program was divided into
four major areas including: (1) business systems, (2) commercial systems, (3)
process control or manufacturing systems, and (4) facility support systems. Each
system was throughly audited by the Company's management information systems
department and a detailed plan for year 2000 compliance was developed, executed
and tested. The Company believes that it has completed its internal year 2000
readiness program and has performed the necessary testing via various routines
including simulation. Management believes that costs previously incurred and any
future cost for correction of the year 2000 issues will total less than $1.5
million. Such expenditures previously incurred and future expenditures, if any,
are not considered material to the financial position of the Company or the
results of its operations.
The Company's year 2000 program also included investigation of major
vendors' and customers' year 2000 readiness. The Company used questionnaires and
inquiries to determine their readiness in addition to contacting, for example,
the energy provider and its phone and data line service vendors to determine
their status. If any such vendors indicated that they will not be compliant,
contingency plans were developed to address the issue, which may include
changing vendors. The Company has also contacted all electronic data interchange
customers to determine their status and to identify issues and alternatives, if
required. The Company has been assured by its key financial institutions that
they are year 2000 compliant or will be compliant in the first half of 1999.
Because there is no generally accepted definition of "Year 2000 Compliant"
and the ability of any organization's systems to operate reliably after midnight
on December 31, 1999 is dependent upon factors that may be outside the control
of, or unknown to, that organization, no "certification" of compliance is
possible by any business. For example, in Securities and Exchange Commission
(SEC) Staff Legal Bulletin No. 5, the SEC opined that, "It is not, and will not,
be possible for any single entity or collective enterprise to represent that it
has achieved complete year 2000 compliance and thus to guarantee its remediation
efforts. The problem is simply too complex for such a claim to have legitimacy.
Efforts to solve year 2000 problems are best described as 'risk mitigation'."
Consequently, the Company cannot so "certify" either.
Although management does not believe that it will be necessary, a
contingency plan has been developed whereby the Company's disaster recovery plan
will be implemented for any systems that fail to meet year 2000 compliance. This
contingency plan relies on manual processes and low technology to operate the
Company's facilities until the damaged systems can be repaired.
The foregoing assessment of the impact of the year 2000 issues on the
Company is based on management's estimates at the present time. The assessment
is based upon assumptions of future events and there can be no assurance that
these estimates and assumptions will prove accurate, and the actual results
could differ materially. To the extent that year 2000 issues cause significant
delays in production or limitation of sales, the Company's results of operations
and financial position would be materially adversely affected.
Page 13
<PAGE>
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, or purchased billets; changes in
the selling price of the Company's finished products or the purchase price of
scrap; changes in demand due to imports or a general economic downturn; cost
overruns or start-up problems with capital expenditures; weather conditions in
the market area of the finished product distribution; unplanned equipment
outages; internal or external year 2000 compliance matters; and 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.
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Shareholders of the Company was held on March 3,
1999, at which the following matters were brought before and voted upon by the
shareholders:
1. The election of three (3) Class A and four (4) Class B Directors, each
to serve until the next annual meeting of stockholders. The following
Class A (total number of shares outstanding 10,619,380) and Class B
(total number of shares outstanding 2,271,127) Director nominees
received the following number of votes cast:
Class A For Withheld
------- --- --------
Lawrence E. Golub 9,280,064 158,296
Jeffrey P. Sangalis 9,280,114 158,246
Stanley S. Shuman 9,280,114 158,246
Class B For Withheld
------- --- --------
Melvyn N. Klein 2,271,127 0
Albert P. Lospinoso 2,271,127 0
Howard M. Meyers 2,271,127 0
Jerry M. Pitts 2,271,127 0
Page 14
<PAGE>
2. Ratification of the appointment of Arthur Andersen LLP as auditors of
the Company for the fiscal year ending September 30, 1999. The total
Class A and Class B shares outstanding were 12,890,607. The detail for
the vote is as follows:
For Against Abstain
--- ------- -------
11,593,177 100,971 15,335
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None were filed during the second quarter of fiscal year 1999.
(b) Reports on Form 8-K
None were filed during the second quarter of fiscal year 1999.
Page 15
<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: April 30, 1999
Page 16
<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-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 26,190,115
<SECURITIES> 0
<RECEIVABLES> 22,335,668
<ALLOWANCES> 873,009
<INVENTORY> 86,299,481
<CURRENT-ASSETS> 140,168,741
<PP&E> 149,816,058
<DEPRECIATION> 53,354,725
<TOTAL-ASSETS> 243,763,010
<CURRENT-LIABILITIES> 23,843,675
<BONDS> 118,955,973
<COMMON> 128,906
0
0
<OTHER-SE> 100,963,361
<TOTAL-LIABILITY-AND-EQUITY> 243,763,010
<SALES> 49,888,361
<TOTAL-REVENUES> 49,888,361
<CGS> 43,969,635
<TOTAL-COSTS> 45,879,289
<OTHER-EXPENSES> (40,239)
<LOSS-PROVISION> 51,157
<INTEREST-EXPENSE> 2,768,300
<INCOME-PRETAX> 1,590,065
<INCOME-TAX> 556,787
<INCOME-CONTINUING> 1,033,278
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,033,278
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
