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 December 31, 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 DECEMBER 31, 1998
- ------------------------------------ ---------------------------------------
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
==========
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BAYOU STEEL CORPORATION
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
Item 1. Financial Statements
Consolidated Balance Sheets --
December 31, 1998 and
September 30, 1998 3
Consolidated Statements of
Operations -- Three Months
Ended December 31, 1998
and 1997 5
Consolidated Statements of Cash
Flows -- Three Months Ended December
31, 1998 and 1997 6
Notes to Consolidated Financial
Statements 7
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 12
Results of Operations 12
Liquidity and Capital Resources 14
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K 17
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PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BAYOU STEEL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED) (AUDITED)
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------- -------------
CURRENT ASSETS:
Cash and temporary cash investments ..... $ 25,871,319 $ 34,028,855
Receivables, net of allowance for
doubtful accounts of $821,854
and $773,984, respectively ............ 21,414,993 27,194,660
Inventories ............................. 93,283,511 83,756,111
Deferred income taxes and other ......... 6,527,826 5,913,865
------------- -------------
Total current assets ................. 147,097,649 150,893,491
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land .................................... 3,790,399 3,790,399
Machinery and equipment ................. 117,934,968 114,165,843
Plant and office building ............... 22,867,334 22,867,334
------------- -------------
144,592,701 140,823,576
Less-Accumulated depreciation ........... (52,112,303) (50,707,711)
------------- -------------
Net property, plant and equipment .... 92,480,398 90,115,865
------------- -------------
DEFERRED INCOME TAXES ...................... 4,251,569 5,282,549
OTHER ASSETS ............................... 3,131,686 3,205,550
------------- -------------
Total assets ......................... $ 246,961,302 $ 249,497,455
============= =============
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)
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ ------------
CURRENT LIABILITIES:
Accounts payable ............................ $ 21,183,252 $ 24,862,440
Interest payable ............................ 1,488,333 4,116,667
Accrued liabilities ......................... 5,432,221 4,279,810
------------ ------------
Total current liabilities ................ 28,103,806 33,258,917
------------ ------------
LONG-TERM DEBT ................................. 118,927,413 118,898,853
------------ ------------
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 ........................... 52,005,953 49,415,555
------------ ------------
Total common stockholders' equity ........ 99,930,083 97,339,685
------------ ------------
Total liabilities and common
stockholders' equity .................. $246,961,302 $249,497,455
============ ============
The accompanying notes are an integral part of these consolidated statements.
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BAYOU STEEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
1998 1997
------------ ------------
NET SALES .................................. $ 47,414,662 $ 66,347,841
COST OF SALES .............................. 39,398,675 58,210,196
------------ ------------
GROSS PROFIT ............................... 8,015,987 8,137,645
SELLING, GENERAL AND ADMINISTRATIVE ........ 1,637,902 1,491,083
NON-PRODUCTION STRIKE AND
CORPORATE CAMPAIGN EXPENSE ................ -- 48,925
------------ ------------
OPERATING PROFIT ........................... 6,378,085 6,597,637
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense .......................... (2,794,270) (2,088,314)
Interest income ........................... 390,133 42,296
Miscellaneous ............................. 10,875 49,468
------------ ------------
(2,393,262) (1,996,550)
------------ ------------
INCOME BEFORE INCOME TAX ................... 3,984,823 4,601,087
PROVISION FOR INCOME TAX ................... 1,394,425 93,845
------------ ------------
NET INCOME ................................. 2,590,398 4,507,242
DIVIDENDS ACCRUED AND ACCRETION ON
PREFERRED STOCK ........................... -- (649,980)
------------ ------------
INCOME APPLICABLE TO COMMON
AND COMMON EQUIVALENT SHARES .............. $ 2,590,398 $ 3,857,262
============ ============
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic ................................ 12,890,607 12,884,607
Diluted .............................. 13,713,029 13,707,029
BASIC EARNINGS PER SHARE ................... $ .20 $ .30
============ ============
DILUTED EARNINGS PER SHARE ................. $ .19 $ .28
============ ============
The accompanying notes are an integral part of these consolidated statements.
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BAYOU STEEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
1998 1997
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .................................. $ 2,590,398 $ 4,507,242
Depreciation ................................ 1,404,592 1,416,279
Amortization ................................ 102,424 216,114
Provision for losses on accounts
receivable ................................ 47,904 67,341
Deferred income taxes ....................... 1,030,980 --
Changes in working capital:
Decrease (increase) in receivables ........ 5,731,763 (3,562,040)
(Increase) decrease in inventories ........ (9,527,400) 4,778,732
(Increase) in prepaid expenses ............ (613,961) (141,739)
(Decrease) in accounts payable ............ (3,679,188) (4,834,895)
(Decrease) increase in interest payable
and accrued liabilities .................. (1,475,923) 2,364,461
------------ ------------
Net cash (used in) provided
by operations ........................... (4,388,411) 4,811,495
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant
and equipment ............................. (3,769,125) (1,073,684)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt .................. -- (764,822)
Payments of dividends on preferred stock .... -- (543,751)
------------ ------------
Net cash used in financing activities .... -- (1,308,573)
------------ ------------
NET (DECREASE) INCREASE IN CASH AND
TEMPORARY CASH INVESTMENTS .................. (8,157,536) 2,429,238
CASH AND TEMPORARY CASH INVESTMENTS,
beginning balance ........................... 34,028,855 971,477
------------ ------------
CASH AND TEMPORARY CASH INVESTMENTS,
ending balance .............................. $ 25,871,319 $ 3,400,715
============ ============
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the period for:
Interest (net of amount capitalized) ...... $ 5,419,718 $ 180,121
Income taxes .............................. $ 363,445 $ 40,394
The accompanying notes are an integral part of these consolidated statements.
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BAYOU STEEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 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 December 31,
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, 1998.
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.
In fiscal 1993, the United Steelworkers of America Local 9121 (the
"Union") initiated a strike and, subsequently, a corporate campaign designed to
bring pressure on the Company from individuals and institutions with financial
or other interests in the Company. In fiscal 1996, the Company and Union entered
into a settlement agreement which, among other issues, resulted in a new labor
contract, ending the strike. In fiscal 1998, the Company and Union reached an
agreement on the corporate campaign issues the effect of which was not material
to the financial position or results of operations of the Company.
Non-production strike and corporate campaign expenses include legal and other
charges incurred by the Company related to these matters.
The results for the three months ended December 31, 1998 are not
necessarily indicative of the results to be expected for the fiscal year ending
September 30, 1999.
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2) INVENTORIES
Inventories consist of the following:
(UNAUDITED) (AUDITED)
DECEMBER 31, SEPTEMBER 30,
1998 1998
----------- -----------
Scrap steel ............................ $ 2,286,462 $ 3,131,848
Billets ................................ 9,084,424 12,001,153
Finished product ....................... 53,744,163 45,339,376
LIFO adjustments ....................... 6,129,356 2,074,726
----------- -----------
71,244,405 62,547,103
Mill rolls, operating
supplies and other ................... 22,039,106 21,209,008
----------- -----------
$93,283,511 $83,756,111
=========== ===========
3) LONG-TERM DEBT
The Company has $120 million of 9.5% 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 balance of the
notes was $118,927,413 and $118,898,853 as of December 31, 1998 and September
30, 1998, respectively.
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.
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 note 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 note provides certain restrictions on the ability of the guarantor
subsidiaries to make distributions to the Company.
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(UNAUDITED) (AUDITED)
DECEMBER 31, SEPTEMBER 30,
1998 1998
------------ -----------
Current assets .......... $34,221,000 $29,992,000
Noncurrent assets ....... 21,604,000 21,502,000
Current liabilities ..... 30,496,000 26,489,000
Noncurrent liabilities .. 34,973,000 34,973,000
(UNAUDITED)
THREE MONTHS ENDED
DECEMBER 31,
1998 1997
------------ -----------
Net sales ............... $10,378,000 $12,646,000
Gross profit ............ 934,000 366,000
Net income .............. 324,000 54,000
4) SHORT-TERM DEBT
The Company has a revolving line of credit agreement which is used for
general corporate purposes. The terms of the agreement call 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 December 31, 1998 was $48.2 million. As of December 31,
1998 and September 30, 1998, there were no borrowings under the revolving line
of credit facility.
5) TAXES
As of December 31, 1998, for tax purposes, the Company had net operating
loss carryforwards ("NOLs") of approximately $220 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 $1.4 million was recognized in the first quarter of
fiscal 1999 reflecting the utilization of a portion of the Company's available
NOL's to cover estimated taxable income.
6) 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 a refinancing transaction in
the third quarter of fiscal 1998, the preferred stock was redeemed but the
warrants remain outstanding.
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7) 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
three months ended December 31, 1998 and 12,884,607 shares during the three
months ended December 31, 1997. In connection with the issuance of redeemable
preferred stock discussed in Note 6, 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 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
for the three-month periods ended December 31, 1998 and 1997, respectively.
8) MISCELLANEOUS
Miscellaneous for the three months ended December 31 consist of the
following:
(UNAUDITED) (UNAUDITED)
1998 1997
-------- --------
Discounts earned ......................... $ 45,771 $ 50,198
Provision for bad debts .................. (47,905) (67,341)
Other .................................... 13,009 66,611
-------- --------
$ 10,875 $ 49,468
======== ========
9) 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.
USPIRG is asking
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the court to award its appropriate legal fees and to assess appropriate
penalties against the Company. The Company believes that it has meritorious
defenses to these charges. The 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) 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 Superfund legislation. As of December 31, 1998 and September 30, 1998,
the Company has accrued loss contingencies for certain environmental matters and
believes that it is presently in material compliance with all environmental
laws.
VOLUNTARY CONSENT ORDER
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 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 December 31,
1998, investigative, remedial, and risk assessment activities have resulted in
costs of approximately $1.3 million, which are included in current assets in the
accompanying consolidated balance sheets. At this time the Company does not
expect the costs of resolution of the TVSC Consent Order to exceed funds to be
reimbursed to the Company through the escrow agreement.
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.
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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, 1998.
RESULTS OF OPERATIONS
The Company reported $4.0 million of income before taxes in the first
quarter of fiscal 1999 (ended December 31, 1998) compared to $4.6 million in the
comparable period of fiscal 1998. The $0.6 million reduction in earnings was
primarily a result of fewer tons shipped which was largely offset by improved
metal margin, resulting in a higher gross profit on each ton shipped.
The following table sets forth shipment and sales data.
THREE MONTHS ENDED
DECEMBER 31,
1998 1997
--------- --------
Net Sales (in thousands) ................. $ 47,415 $ 66,348
Shape Shipment Tons ...................... 135,543 183,261
Average Shape Selling Price Per Ton ...... $ 342 $ 356
A. SALES
Net sales for the first quarter of fiscal 1999 decreased 29% resulting
from a 26% reduction in shipments and a 4% reduction in the average selling
price compared to the same period of last fiscal year. During the first quarter
of fiscal 1999, the average selling price decreased $14 per ton compared to the
same quarter last year. Subsequent to quarter-end, a major competitor announced
an additional $30 per ton price decrease impacting substantially all of the
Company's products. Other competitors then announced various price reductions.
The future impact to the Company as a result of these market price declines is
difficult to determine, however the Company's margins could experience near term
reductions in the range of $15 to $20 per ton.
During the latter part of the first quarter, the Company began to
experience direct competition from imports within its product range. This direct
competition along with the competition created by imports in fiscal 1998 that
were outside of the Company's product range has adversely affected shipments and
prices. Steel service centers, the Company's principal customers, reacted to the
supply of domestic and foreign steel on the market and record high inventory
levels by reducing orders from domestic mills. In efforts to stimulate shipments
and to compete with the imports, the domestic mills reduced prices during the
quarter and subsequent to quarter-end. The demand for the Company's product is
steady at the end-user level, 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 the steel service centers to
reduce inventories and
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for mill orders to reflect this demand. Supply could be affected by a competitor
who is commissioning a mill capable of producing many of the same products as
the Company.
B. COST OF GOODS SOLD
Cost of goods sold was 83% of sales for the first quarter of fiscal 1999
compared to 88% for the same period of fiscal 1998. The positive variance was
primarily the result of the cost of scrap metal (a major component of cost of
goods sold) decreasing significantly over the prior quarter resulting in higher
gross profit on each ton shipped.
Scrap metal is used in the melting operations at the Louisiana Facility.
Scrap cost in the first quarter of fiscal 1999 was 32% lower than the same
period of fiscal 1998. The market for scrap metal has softened significantly in
the last two fiscal quarters as the export demand for scrap decreased sharply
allowing for a greater domestic supply and lower prices. 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. When compared with the cost of shredded scrap available
to the Company on the open market, the Company has realized a 4% per ton savings
on shredded scrap through this operation.
Conversion cost include labor, energy, maintenance material and supplies
used to convert raw materials into billets and billets into shapes. Conversion
cost per ton for the Louisiana Facility increased by 3% in the first quarter of
fiscal 1999 compared to the same period of last year as a result of slightly
higher maintenance spending and somewhat lower production both of which are the
target of capital programs in the second quarter. The impact of this increase
was offset by improvements in operations of the Tennessee Facility where tons
produced increased by 23% and conversion cost decreased by 20%. These
improvements are due to improved productivity and cost containment. The
Tennessee Facility took a two week shutdown at the end of the first quarter and
beginning of the second quarter. The primary purpose was to avoid building
additional inventories since mill orders were significantly reduced.
C. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expense in the first quarter of fiscal
1999 had increased compared to the same period of last year due to an increase
in employment costs.
D. OTHER INCOME (EXPENSE)
Interest expense increased $0.8 million in the first quarter of fiscal
1999 compared to the same period of fiscal 1998 due primarily to the refinancing
transaction 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. During the first quarter of fiscal 1998,
the Company incurred $0.6 million in mandatory dividends and accretion on its
preferred stock.
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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 the first quarter of 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 deferred tax valuation allowance in
fiscal 1998. Accordingly, in the first quarter of fiscal 1999 the Company
provided for income taxes in its statement of operations at statutory rates of
approximately 35%. The net impact of this item on earnings in the current
quarter was approximately $1.4 million and was substantially a non-cash impact.
In the prior year, the Company provided for income taxes at the alternative
minimum tax rate of 2%.
F. NET INCOME
The Company's earnings before income taxes decreased $0.6 million in the
first quarter of fiscal 1999 compared to the same period of fiscal 1998
primarily due to the decrease in shipments, that was partially offset by an
improved metal margin, and the direct and indirect impact of foreign steel
imported to the domestic market. Net income applicable to common shareholders
decreased $1.3 million in the first quarter of fiscal 1999 compared to the same
period of fiscal 1998 primarily due to the recognition of deferred income taxes
from the utilization of available tax net operating loss carryforwards in the
first quarter of fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
A. CASH AND WORKING CAPITAL
The Company ended the first fiscal quarter of 1999 with $26 million in
cash and temporary cash investments and no short-term borrowings. Cash decreased
from year-end levels by $8 million primarily as a result of an increase in
inventories, a decrease in receivables and expenditures under the Company's
capital program. The Company is considering various commercial and operational
options to reduce inventories. As of December 31, 1998, current assets exceeded
current liabilities by a ratio of 5.23 to 1.0 and working capital of $119
million was consistent with year-end and the same quarter of the prior year.
B. CAPITAL EXPENDITURES
Capital expenditures amounted to $3.8 million in the first quarter of
fiscal 1999. These capital projects were directed towards cost reduction,
productivity enhancements, plant maintenance, safety and environmental programs.
Depending on market conditions, the Company expects to commit approximately $12
million on various capital projects during the next twelve months. The Company
may commit and spend $33 million over the next two years to substantially
increase its melting capacity and reduce operating cost. The project is divided
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into several phases whereby work will be performed in independently beneficial
phases that will require the Company to commit funds on an incremental basis.
The Company has committed approximately $7 million for two phases in fiscal
1999. This flexibility will allow the Company to benefit from each phase of the
upgrade and provide flexibility in the event of additional changes in economic
conditions.
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.
D. YEAR 2000
The Company is completing the implementation phase of an organized program
to assure that the Company's electronic data processing, automated operating
systems and other information systems will be year 2000 compliant. The program
commenced in June 1997 and is scheduled for completion by the end of the second
quarter of fiscal 1999. The program has been 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 has been
throughly audited by the Company's management information systems department and
a detailed plan for year 2000 compliance has been developed, executed and
tested. The Company believes that it has substantially 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 includes investigation of major
vendors' and customers' year 2000 readiness. The Company is using 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 indicate that they will not be
compliant, contingency plans will be developed to address this issue, which may
include changing vendors. The Company is also contacting 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 early
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
Page 15
<PAGE>
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.
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, 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.
Page 16
<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 first quarter of fiscal year 1999.
Page 17
<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: January 29, 1999
Page 18
<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> DEC-31-1998
<CASH> 25,871,319
<SECURITIES> 0
<RECEIVABLES> 22,236,847
<ALLOWANCES> 821,854
<INVENTORY> 93,283,511
<CURRENT-ASSETS> 147,097,649
<PP&E> 144,592,701
<DEPRECIATION> 52,112,303
<TOTAL-ASSETS> 246,961,302
<CURRENT-LIABILITIES> 28,103,806
<BONDS> 118,927,413
<COMMON> 128,906
0
0
<OTHER-SE> 99,930,083
<TOTAL-LIABILITY-AND-EQUITY> 246,961,302
<SALES> 47,414,662
<TOTAL-REVENUES> 47,414,662
<CGS> 39,398,675
<TOTAL-COSTS> 41,036,577
<OTHER-EXPENSES> (58,779)
<LOSS-PROVISION> 47,904
<INTEREST-EXPENSE> 2,794,270
<INCOME-PRETAX> 3,984,823
<INCOME-TAX> 1,394,425
<INCOME-CONTINUING> 2,590,398
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,590,398
<EPS-PRIMARY> .20
<EPS-DILUTED> .19
</TABLE>
