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, 1995
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, 1995
- ------------------------------------ ---------------------------------------
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
BAYOU STEEL CORPORATION
INDEX
PAGE
PART I. FINANCIAL INFORMATION NUMBER
------
Item 1. Financial Statements
Consolidated Balance Sheets --
December 31, 1995 and
September 30, 1995 ................................ 3
Consolidated Statements of Income
(Loss) -- Three Months Ended
December 31, 1995 and 1994 ........................ 5
Consolidated Statements of Cash
Flows -- Three Months Ended
December 31, 1995 and 1994 ........................ 6
Notes to Consolidated Financial
Statements ........................................ 7
Item 2. Management's Discussion and Analysis
Results of Operations .............................. 12
Liquidity and Capital Resources .................... 14
PART II. OTHER INFORMATION
Item 6. Exhibits and reports on Form 8-K ................... 17
2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BAYOU STEEL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED) (AUDITED)
DECEMBER 31, SEPTEMBER 30,
1995 1995
------------- -------------
CURRENT ASSETS:
Cash and temporary cash investments ........ $ 2,921,487 $ 10,521,664
Receivables, net of allowance for
doubtful accounts of $609,269 in 1996
and $567,970 in 1995 ...................... 16,332,252 21,921,347
Inventories ................................ 76,857,307 67,694,741
Prepaid expenses ........................... 894,712 257,405
------------- -------------
Total current assets ................ 97,005,758 100,395,157
------------- -------------
PROPERTY, PLANT AND EQUIPMENT:
Land ....................................... 3,790,398 3,790,398
Machinery and equipment .................... 103,514,254 102,582,968
Plant and office building .................. 18,930,926 18,929,288
126,235,578 125,302,654
Less-Accumulated depreciation .............. (35,211,541) (33,652,607)
------------- -------------
Net property, plant and equipment ... 91,024,037 91,650,047
------------- -------------
OTHER ASSETS ................................. 4,471,851 5,030,961
------------- -------------
Total assets ........................ $ 192,501,646 $ 197,076,165
============= =============
The accompanying notes are an integral part of these
consolidated statements.
3
BAYOU STEEL CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED) (AUDITED)
DECEMBER 31, SEPTEMBER 30,
1995 1995
------------ ------------
CURRENT LIABILITIES:
Current maturities of long-term debt ......... $ 541,309 $ 613,483
Accounts payable ............................. 16,104,431 22,188,484
Accrued liabilities .......................... 6,271,466 3,675,716
Accrued dividends on redeemable
preferred stock ............................. 616,249
Total current liabilities ............. 22,917,206 27,093,932
------------ ------------
LONG-TERM DEBT ................................. 85,104,402 85,137,665
------------ ------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK ..................... 12,345,402 12,239,173
------------ ------------
COMMON STOCKHOLDERS' EQUITY:
Common stock, $.01 par value -
Class A ............................... 106,134 106,134
Class B ............................... 22,711 22,711
Class C ............................... 1 1
------------ ------------
Total common stock .................... 128,846 128,846
Paid-in capital .............................. 47,769,034 47,769,034
Retained earnings ............................ 24,236,756 24,707,515
Total common stockholders' equity ..... 72,134,636 72,605,395
------------ ------------
Total liabilities & common
stockholders' equity ................ $192,501,646 $197,076,165
============ ============
The accompanying notes are an integral part of these
consolidated statements.
4
BAYOU STEEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
FIRST QUARTER ENDED
DECEMBER 31,
-----------------------------
1995 1994
------------ ------------
NET SALES .................................... $ 41,162,993 $ 43,851,785
COST OF SALES ................................ 37,107,904 37,223,071
------------ ------------
GROSS PROFIT ................................. 4,055,089 6,628,714
SELLING, GENERAL & ADMINISTRATIVE EXPENSES ... 1,547,080 1,170,135
NON-PRODUCTION STRIKE EXPENSES ............... 344,661 259,017
------------ ------------
OPERATING INCOME ............................. 2,163,348 5,199,562
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense ............................ (2,133,238) (1,917,360)
Interest income ............................. 106,680 119,601
Miscellaneous ............................... 38,458 54,727
------------ ------------
(1,988,100) (1,743,032)
------------ ------------
INCOME BEFORE TAXES .......................... 175,248 3,456,530
PROVISION FOR INCOME TAXES ................... 34,565
NET INCOME ................................... 175,248 3,421,965
DIVIDENDS ACCRUED AND ACCRETION ON
PREFERRED STOCK ............................. (646,007)
INCOME (LOSS) APPLICABLE TO COMMON
AND COMMON EQUIVALENT SHARES ................ $ (470,759) $ 3,421,965
============ ============
AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING ............... 13,707,029 12,884,607
============ ============
INCOME (LOSS) APPLICABLE TO COMMON
AND COMMON EQUIVALENT SHARES ................ $ (.03) $ .27
============ ============
The accompanying notes are an integral part of these
consolidated statements.
5
BAYOU STEEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FIRST QUARTER ENDED
DECEMBER 31,
----------------------------
1995 1994
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income ...................................... $ 175,248 $ 3,421,965
Depreciation ................................ 1,558,934 1,296,862
Amortization ................................ 281,539 161,935
Provision for losses on accounts
receivable ................................. 41,299 44,469
Changes in working capital:
Decrease (increase) in receivables ........ 5,547,796 (175,715)
(Increase) in inventories ................. (9,162,566) (3,722,060)
(Increase) in prepaid expenses ............ (637,307) (672,828)
(Decrease) in accounts payable ............ (6,084,053) (1,108,960)
Increase in accrued liabilities ........... 2,595,750 2,684,321
------------ -----------
Net cash (used in) provided
by operations ....................... (5,683,360) 1,929,989
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Addition of property, plant
and equipment ............................. (932,924) (1,427,739)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt .................. (105,437) (83,902)
Decrease (increase) in other assets ......... 277,571 (1,512)
Payments of dividends on preferred stock .... (1,156,027)
------------ -----------
Net cash used in financing
activities .......................... (983,893) (85,414)
------------ -----------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS ............................. (7,600,177) 416,836
CASH AND CASH EQUIVALENTS,
beginning balance ........................... 10,521,664 8,903,413
------------ -----------
CASH AND CASH EQUIVALENTS,
ending balance .............................. $ 2,921,487 $ 9,320,249
============ ===========
The accompanying notes are an integral part of these
consolidated statements.
6
BAYOU STEEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
(UNAUDITED)
1) BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Certain information and note disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to those
rules and regulations. Although Bayou Steel Corporation (the "Company") believes
that disclosures made are adequate to ensure that information presented is not
misleading, it is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report, Form 10-K, filed with the SEC on
December 14, 1995 under File Number 33-22603.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements present fairly the Company's financial position as of
December 31, 1995 and September 30, 1995 and the results of its operations for
the three-month periods ended December 31, 1995 and 1994 and the cash flow
statements for the three-month periods ended December 31, 1995 and 1994.
The accompanying financial statements include the consolidated accounts
of Bayou Steel Corporation ("BSC") and Bayou Steel Corporation (Tennessee)
("BSCT") (collectively referred to herein as the "Company") after elimination of
all significant intercompany accounts and transactions.
The results of operations for the three-month periods ended December
31, 1995 and 1994 are not necessarily indicative of the results for the full
year.
2) INVENTORIES
Inventories as of December 31, 1995 and September 30, 1995 consisted of
the following:
(UNAUDITED) (AUDITED)
DECEMBER 31, SEPTEMBER 30,
1995 1995
------------ ------------
Scrap steel ........................ $ 5,334,141 $ 4,964,364
Billets ............................ 6,543,072 6,357,640
Finished product ................... 49,914,322 42,541,400
LIFO adjustments ................... (3,556,461) (4,741,268)
------------ ------------
$ 58,235,074 $ 49,122,136
Mill rolls, operating
supplies and other ............... 18,622,233 18,572,605
------------ ------------
$ 76,857,307 $ 67,694,741
============ ============
The inventory valuations are based on LIFO estimates of year-end levels
and prices. The actual LIFO inventories will not be known until year-end
quantities and indices are determined.
7
Shapes, billets, scrap steel, and certain production supplies are
pledged as collateral against the Company's line of credit.
3) PROPERTY, PLANT AND EQUIPMENT
Capital expenditures for normal operations totaled $.9 million and $1.4
million during the three-month periods ended December 31, 1995 and 1994,
respectively. As of December 31, 1995, the estimated costs to complete
authorized projects under construction or contract amounted to $1.1 million.
Betterments, improvements, and additions on property, plant and
equipment are capitalized at cost. Interest during construction of significant
additions is capitalized. There was no interest capitalized for the three-month
period ended December 31, 1995. Interest of $30,000 was capitalized during the
three-month period ended December 31, 1994. Interest of $394,000 was capitalized
during the fiscal year ended September 30, 1995.
4) OTHER ASSETS
Other assets consist of financing costs associated with the issuance of
long-term debt, redeemable preferred stock and warrants, and the Company's
revolving line of credit (see Notes 5, 6 and 8) which are being amortized over
the lives of the related transaction. Amortization expense was $282,000 and
$162,000 for the three-month periods ended December 31, 1995 and 1994.
Amortization expense was $893,000 for the fiscal year ended September 30, 1995.
5) LONG-TERM DEBT
Long-term debt of the Company as of December 31, 1995 and September 30,
1995 included the following:
DECEMBER 31, SEPTEMBER 30,
1995 1995
------------ ------------
First Mortgage Notes ................. $ 75,000,000 $ 75,000,000
(see below)
Term Loan (see below) ................ 10,000,000 10,000,000
Other notes payable .................. 645,711 751,148
------------ ------------
Less-current maturities .............. (541,309) (613,483)
------------ ------------
$ 85,104,402 $ 85,137,665
On June 20, 1995, the Company entered into a five-year term loan
agreement of $10 million for the Company's wholly owned subsidiary, BSCT. The
term loan, partially secured by the Company's accounts receivable, bears
interest on a sliding scale based on the quarterly leverage ratio which is
defined indebtedness divided by earnings before interest, taxes, depreciation
and amortization ("EBITDA"). Based on the first quarter leverage ratio, BSCT
will accrue at LIBOR plus 2% or approximately 8% at current rates. As of
December 31, 1995, BSCT accrued interest at a rate of 7.8542%. Term loan
interest is payable quarterly. Principal payments are due quarterly beginning
June 30, 1997.
On March 3, 1994, the Company issued $75 million of the 10.25% Notes.
The principal is due on March 1, 2001. As of December 31, 1995 and 1994, the
Company accrued interest at a rate of 10.25%.
6) SHORT-TERM DEBT
On June 20, 1995, the Company entered into an amendment and restatement
of its revolving line of credit agreement which will be used for general
corporate purposes. The terms of the amended and restated agreement call for
available borrowings up to $45 million, including outstanding letters of credit
using a borrowing base of receivables and inventory. Based on these criteria,
the amount
8
available as of December 31, 1995 was $30.8 million, net of $1.8 million
outstanding letters of credit. The agreement is secured by inventory and
accounts receivable at interest rates on a sliding scale based on the quarterly
leverage ratio which is defined indebtedness divided by EBITDA. Based on the
first quarter leverage ratio, the Company will accrue at LIBOR plus 2% or
approximately 8% at current rates.
There were no outstanding borrowings under the line of credit as of
December 31, 1995 and 1994.
7) TAXES
As of September 30, 1995, for tax purposes, the Company had net
operating loss carryforwards ("NOLs") of approximately $316.1 million and $289.6
million available to offset against regular tax and alternative minimum tax,
respectively.
The NOLs will expire in varying amounts through fiscal 2009. A
substantial portion of the available NOLs, approximately $200 million, expires
by fiscal 2000. In addition, the Company has $12.4 million of future tax
benefits attributable to its tax benefit lease which expires in 1997 and which
may, to the extent of taxable income in the year such tax benefit is produced,
be utilized prior to the NOLs.
8) PREFERRED STOCK AND WARRANTS
On June 20, 1995, the Company completed the issuance and sale of
preferred stock and warrants to purchase common stock for $15 million. The
Company issued 15,000 shares of its redeemable preferred stock and warrants to
purchase six percent of the Company's Common Stock (or 822,422 Class A shares)
at a nominal amount. The Company valued the 15,000 shares of preferred stock
sold at $12,121,520, after deducting $2,878,480 for the market value of the
warrants issued.
The holders of the preferred stock are entitled to receive quarterly
dividends at a rate of 14.5% per annum. As of December 31, 1995, the Company
accrued dividends at a rate of 14.5%. The carrying amount of the preferred stock
will increase by periodic accretion of the difference between the fair value of
the stock at the date of issuance and the redemption value from 1995 through the
mandatory redemption date based on the interest method. The terms of the stock
purchase agreement impose certain financial covenants which are generally
related to covenants in the revolving line of credit or the 10.25% Notes.
9) COMMON STOCKHOLDERS' EQUITY
Common and common equivalent shares as of December 31, 1995 consisted
of:
CLASS A CLASS B CLASS C
---------- --------- -------
Authorized .......................... 24,271,127 4,302,347 100
Outstanding, at end of quarter ...... 13,707,030 2,271,127 100
Average outstanding for quarter ..... 13,707,030 2,271,127 100
10) EARNINGS PER SHARE
Earnings per common and common equivalent share are calculated based
upon the weighted average number of common and common equivalent shares
outstanding during the three-month periods ended December 31, 1995 and 1994. In
connection with the issuance of redeemable preferred stock on June 20, 1995 as
discussed in
9
note 8, the Company reserved 822,422 shares of its Class A Common Stock for
issuance upon exercise of the outstanding warrants at a nominal exercise price.
These warrants are considered common stock equivalents in calculating earnings
per common and common equivalent share for the three-month period ended December
31, 1995. The actual shares, including equivalents, outstanding for the quarter
ended December 31, 1995 were 13,707,030. Actual common shares outstanding for
the quarter ended December 31, 1994 were 12,884,607.
11) MISCELLANEOUS
Miscellaneous for the three-month periods ended December 31, 1995 and
1994 included the following:
DECEMBER 1995 DECEMBER 1994
------------- -------------
Discounts earned ......................... $ 55,949 $ 42,927
Provision for bad debts .................. (41,299) (44,469)
Other .................................... 23,808 56,269
-------- --------
$ 38,458 $ 54,727
======== ========
12) COMMITMENTS AND CONTINGENCIES
STRIKE
On March 21, 1993, the United Steelworkers of America Local 9121 (the
"Union") initiated a strike against the Company. The strike is ongoing. After
nearly 18 months of no formal negotiations on a new contract, the Union
requested formal negotiating sessions in November 1995. Differences have thus
far precluded an agreement. The Company cannot predict the impact that a new
collective bargaining contract will have on the Company's results. However, the
Company believes a new contract will not have a negative material effect on the
Company's results.
The Union has filed charges with the National Labor Relations Board
(the "NLRB") alleging that the Company has violated the National Labor Relations
Act (the "NLRA") relating to its bargaining conduct. The Company believes it has
meritorious defenses to these charges, has responded timely to all charges, and
believes that it has negotiated in good faith with the Union. An unfavorable
decision by the NLRB, however, should not materially affect the Company.
In conjunction with the acquisition of the assets of TVSC, the Union
filed a charge with the NLRB alleging that the Company has violated the NLRA
relating to its refusal to hire certain individuals, who were former employees
of TVSC, at BSCT. The Company believes it has meritorious defenses to these
charges.
The Union's corporate campaign against the Company continues on many
different fronts. The Union recently appealed to the states of Louisiana and
Tennessee to take away tax exemptions/grants from the Company; neither attempt
was successful. The Union also attempted to disrupt the Company's activities to
secure permanent financing for the acquisition of the assets of TVSC and the
10.25% Notes. The Company expects similar activities to continue.
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
10
a release. In the past, the Company's operations in some respects have not met
all of the applicable standards promulgated pursuant to such laws and
regulations. At this time, the Company believes that it is in compliance in all
material respects with applicable environmental requirements and that the cost
of such continuing compliance will not have a material adverse effect on the
Company's competitive position, operations or financial condition, or cause a
material increase in currently anticipated capital expenditures. The Company
currently has no mandated expenditures at its Louisiana facility to address
previously contaminated sites. Also, the Company is not designated as a
Potential Responsible Party ("PRP") under the Superfund legislation. At December
31, 1995, the Company has accrued a loss contingency for environmental matters.
TVSC had entered into a Consent Agreement and Order (the "Voluntary
Consent Order") under the Tennessee Department of Environmental and
Conservation's voluntary clean-up program. The Company, in acquiring the assets
of TVSC, has entered into a similar Voluntary Consent Order. Estimates indicate
that the cost for remediating the affected areas ranges from $350,000 for the
lowest cost remedy to $1,800,000 for higher cost remedies. The 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
remediation under the Voluntary Consent Order ( with an additional $1.0 million
to be held in escrow for one year for such costs and other costs resulting from
a breach of TVSC's representation and warranties in the agreement). If during
the remedial investigation significantly more extensive or more toxic
contamination is found, then costs could be greater than those estimated, and to
the extent these costs exceeded funds escrowed by TVSC, the Company would be
liable.
OTHER
The Company does not provide any post-employment or post-retirement
benefits to its employees.
There are various claims and legal proceedings arising in the ordinary
course of business pending against or involving the Company wherein monetary
damages are sought. It is management's opinion that the Company's liability, if
any, under such claims or proceedings would not materially effect its financial
position.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
RESULTS OF OPERATION
The Company earned $0.2 million before dividends and accretion on
preferred stock in the first quarter of fiscal 1996 compared to a net income of
$3.4 million for the comparable period of fiscal 1995. The $3.2 million
reduction in the Company's results was due to three significant factors. First,
conversion costs (the cost of converting raw materials into shapes) increased
10.6% at the Louisiana facility ("BSCL")("Louisiana"). Second, Bayou Steel
Corporation (Tennessee) ("Tennessee") ("BSCT") had a loss of $1.7 million.
Third, shape shipments were 3.3% lower than the first quarter of last year.
The following table sets forth shipment and sales data for the periods
indicated.
THREE MONTHS ENDED
DECEMBER 31,
-------------------------
1995 1994
-------- --------
Net Sales (in thousands) ..................... $ 41,163 $ 43,852
Shape Shipment Tons .......................... 112,993 116,855
Shape Selling Price Per Ton .................. $ 353 $ 352
Billet Shipment Tons ......................... 1,709 9,112
Billet Selling Price Per Ton ................. $ 250 $ 237
A. SALES
Net sales decreased in the first quarter of fiscal 1996 by 6.1% or $2.7
million compared to the same period of fiscal 1995. The decrease was the result
of a decrease in shape and billet shipments.
SHAPES - The 3.3% decrease in shape shipments in the first quarter of
fiscal 1996 compared to the same period of fiscal 1995 is attributable to a
slowing economy and the severe weather conditions which affected the Company's
ability to ship. Shipments from the Tennessee facility in the first fiscal
quarter of 1996 were minimal. The backlog of orders at December 31, 1995 for the
Company is 27% less than a year earlier and 8% higher than the prior quarter.
The decrease in backlog is directly related to steel service centers (the
Company's primary customers) lowering inventory levels from a year ago. With
mill stocks being more readily available and pricing instability, service
centers are buying on an as needed basis to maintain lower levels of inventory,
minimize their risk with a potential declining market, and still satisfy their
customers. Shipments are expected to increase in the second quarter of fiscal
1996 compared to the first quarter of fiscal 1996 due to anticipated seasonal
adjustments to the steel service centers inventory level, improving weather
conditions, and the additional product line from the Tennessee facility.
Shape prices remained stable in the first quarter of fiscal 1996
compared to the same period of fiscal 1995. In the first quarter of fiscal 1995,
the selling price reflected an improving market. During the remainder of fiscal
1995, the market peaked and began a slight decline.
BILLETS - Shipments of billets, the Company's semi-finished product,
decreased 7,403 tons in the first quarter period of fiscal 1996 compared to the
same period of fiscal 1995 due to lack of availability of billets for sale. The
Company began supplying billets to its newly acquired rolling mill in Tennessee
late in fiscal 1995 thereby reducing the availability of billets to sell in the
open market. In addition, the Company has been purchasing billets on the open
market at competitive prices for the remaining needs of the Tennessee rolling
mill. The Company will continue to supply all of its Louisiana's rolling mill
12
billet requirements. Depending on market conditions, the Company may sell
billets on an occasional and selective basis to domestic and export customers
while purchasing additional billets for Tennessee.
B. COST OF GOODS SOLD
Cost of goods sold was 90.0% of sales for the first quarter of fiscal
1996 compared to 84.9% of sales for the same period of fiscal 1995. The increase
was due to the high production cost associated with beginning operations at
Tennessee, increased cost of AAF, and increases in conversion costs (the cost to
convert raw materials into shapes). Cost of goods sold for the first quarter of
fiscal 1995 was favorably impacted by approximately $0.25 million per quarter
due to a contract with the State of Louisiana to abate state sales tax.
This agreement expired at the end of the second fiscal quarter of 1995.
The major component of cost of goods sold is scrap. Scrap cost in the
first quarter of fiscal 1996 decreased $3 per ton compared to the same period
last year. The Company's scrap inventory levels recently dropped due to weather
conditions which has caused delays in delivery of scrap. This has resulted in
the utilization of more costly scrap types and the purchase of more costly scrap
which can be delivered promptly.
In order to achieve better control over scrap cost and availability,
the Company opened Mississippi River Recycling ("MRR") which operates an
automobile shredder. MRR produces shredded scrap metal which is one of the scrap
types used in steelmaking. MRR experienced unusual mechanical problems during
the first quarter of fiscal 1996 which resulted in lower production and higher
conversion cost than anticipated.
Another component of cost of goods sold is AAF. AAF cost increased by
20% in the first quarter of fiscal 1996 compared to the same period of fiscal
1995 due to price. AAF prices have increased significantly due to the reduced
product available which was caused by an anti-dumping suit against foreign
producers utilized by the Company and its competitors. This resulted in high
duties on imported AAF. Also contributing to the higher prices is the increase
in domestic demand due to high steel-making capacity utilization. This general
market condition affects the Company and its competition. The Company expects
prices to further increase in certain types of AAF.
Another significant portion of cost of goods sold is conversion cost,
which include labor, energy, maintenance materials and supplies used to convert
raw materials into billets and billets into shapes. Conversion cost per ton for
the Louisiana facility in the first quarter of fiscal 1996 compared to the same
period of fiscal 1995 increased by 10.6%. The melt shop had high costs
associated with the start-up and running of the second furnace and the learning
curve with the recently installed eccentric bottom tapping ("EBT") furnace. Due
to the impact of the second furnace learning curve and the recent favorable
change in billet availability in the market place, the Company returned to a one
furnace operation during the first fiscal quarter of 1996. The other furnace
serves as a back-up for expected and unexpected outages. The one-furnace
operation should increase productivity and reduce consumption of energy and
materials due to improved efficiencies and capital improvements within a few
quarters. The increase in conversion cost was also due to the increased per ton
fixed costs resulting from fewer tons produced in the rolling mill primarily due
to the mix of products rolled. Variable cost increased due to the increases in
the price of power and natural gas.
In July 1995, Tennessee started operating its rolling mill. As
expected, the learning curve associated with new and refurbished equipment
combined with an inexperienced work force caused the production tons to be low
and the conversion cost per ton to be high. Consequently, production costs
exceeded sales by $1.2 million. As experience is gained with the workforce and
as the new equipment is fully commissioned, conversion cost per ton and gross
margins will improve. However, the Company expects Tennessee to report a loss in
the second quarter of fiscal 1996.
13
C. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses increased in the first
quarter of fiscal 1996 compared to the same period of the last fiscal year by
$377,000 due to additional administrative and amortization of financing expenses
related to the acquisition of the Tennessee facility.
D. NON-PRODUCTION STRIKE EXPENSES
Strike-related expenses were $345,000 for the first quarter of fiscal
1996 compared to $259,000 for the same period last year. Strike expenses were
primarily for security coverage and legal advice on both strike issues and the
United Steelworkers of America local 9121's (the "Union") on-going corporate
campaign. For the first quarter of fiscal 1996, the Company's strike-related
expenses averaged approximately $115,000 per month mainly due to increases in
legal services related to the Racketeer Influenced Corrupt Organization Act suit
the Company filed against the Union. Future strike expenses should approximate
$100,000 per month.
E. OTHER INCOME (EXPENSE)
Interest expense increased in the first quarter of fiscal 1996 compared
to the same period of fiscal 1995 due to the $10 million Term Loan for the
financing of the Tennessee facility. Interest income was approximately the same
for the comparable first fiscal quarter periods. Interest income is expected to
be minimal for the second fiscal quarter of fiscal 1996 due to lower cash
balances available to invest. Miscellaneous expenses were approximately the same
in both quarters.
F. NET INCOME
The Company's results before dividends and accretion on preferred stock
were $3.2 million less in the first fiscal quarter of 1996 compared to the same
period of fiscal 1995. The primary reasons for the reductions in earnings are
increased conversion costs, start-up expenses of the Tennessee facility, and
fewer shipments.
LIQUIDITY AND CAPITAL RESOURCES
A. CASH AND WORKING CAPITAL
The Company ended the first fiscal quarter with $2.9 million in cash
and temporary cash investments and with current assets exceeding current
liabilities by a ratio of 4.23 to 1.00. Working capital increased by $0.8
million to $74.1 million during the three months ended December 31, 1995.
In the first three months of fiscal 1996, cash used by operations was
$5.7 million. Accounts payable decreased by $6.1 million as purchasing of scrap
decreased towards the end of the quarter and capital project spending decreased.
Inventories also increased by $9.1 million as most of Tennessee's production
went into inventory, as Louisiana's operation built billet inventory for
Tennessee, and Louisiana's finished goods increased as a result of high
productivity levels and lower sales. Offsetting these uses of cash were
decreased accounts receivable caused by decreases in sales and increased
collection activity.
B. CAPITAL EXPENDITURES
Capital expenditures amounted to $0.9 million in the first quarter of
fiscal 1996. All of the projects were completed for the $10 million capital
expenditure program to reduce operating cost and increase melt shop and rolling
capacity. The Company does not expect to make substantial investments in capital
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during the second fiscal quarter of 1996. However, depending on market
conditions, the Company expects to spend approximately $12 million on various
capital projects to reduce cost and increase productivity, to enhance safety and
environmental programs, and to maintain the plants over the next 12 months.
C. FINANCING
On June 20, 1995, the Company completed the issuance and sale of 15,000
shares of redeemable preferred stock, par value $0.01 per share ("Preferred
Stock"), and warrants to purchase, at a nominal exercise price, six percent of
the Company's Common Stock for $15 million. The Preferred Stock is mandatorily
redeemable by the Company seven years after issuance and requires the payment of
quarterly dividends, at a rate of 14.5% per annum or $2.2 million per year. The
Company intends to declare and pay quarterly dividends on the Preferred Stock
unless prohibited by covenants in the revolving line of credit and the 10.25%
Notes. In addition, upon certain adverse events encountered by the Company, such
holders will have the right to additional warrants. Cash used in financing
activities of $1.0 million was primarily for the payment of the dividends on the
preferred stock during the first quarter of fiscal 1996.
Simultaneously with the sale of the Preferred Stock and warrants, the
Company entered into a five-year term loan agreement of $10 million for the
Company's wholly owned subsidiary, BSCT. The proceeds received from the term
loan were used to repay the loan outstanding under the Company's revolving
credit facility which had been incurred to acquire substantially all of the
assets of TVSC. The term loan is partially secured by the Company's accounts
receivable and inventory. The term loan agreement calls for quarterly principal
payments beginning on June 30, 1997. The term loan bears interest on a sliding
scale based on the quarterly leverage ratio which is defined as indebtedness
divided by earnings before interest, taxes, depreciation, and amortization
("EBITDA"). Based on the first quarter leverage ratio, the Company will accrue
at LIBOR plus 2% or approximately 8% at current rates.
On June 20, 1995, the Company amended and restated its revolving line
of credit agreement which will be used for general corporate purposes. The terms
call for available borrowings up to $45 million, including outstanding letters
of credit using a borrowing base of BSCL's receivables and inventory. Based on
these criteria, the amount available as of December 31, 1995, was $30.8 million.
The five year revolving line of credit bears interest on a sliding scale based
on the quarterly leverage ratio which is defined as indebtedness divided by
EBITDA. The terms of the loan agreement impose certain restrictions on the
Company, the most significant of which require the Company to maintain a minimum
interest coverage ratio and limit the incurrence of certain indebtedness. There
were no outstanding borrowings under the line of credit as of December 31, 1995.
The Company expects to borrow under its line of credit in the second fiscal
quarter of fiscal 1996 mainly due to the expected increase in inventory and the
payment of interest on the First Mortgage Notes ("10.25% Notes"). The Company
does not anticipate any difficulties in obtaining another secured line of credit
upon the expiration of the current line of credit in fiscal 2000.
All of the $75 million 10.25% Notes are classified as long-term debt.
There are no principal payments due on the 10.25% Notes until maturity in 2001.
The Company intends to refinance the 10.25% Notes on or before the maturity date
in 2001. The Indenture under which the Notes are issued ("the Indenture")
contains a covenant which restricts the Company's ability to incur additional
indebtedness. Under the Indenture, the Company may not incur additional
indebtedness unless its Interest Expense Coverage Ratio for the trailing 12
months, would be greater than 2.00 to 1.00 after giving effect to such
incurrence. As of December 31, 1995, the Interest Expense Coverage Ratio was
2.73 to 1.00.
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The Company believes that current cash balances, internally generated
funds, the credit facility, and additional purchase money mortgages are adequate
to meet the foreseeable short-term and long-term liquidity needs. If additional
funds are required to accomplish long-term expansion of its production facility
or significant acquisitions, the Company believes funding can be obtained from a
secondary equity offering or additional indebtedness.
There are no financial obligations with respect to post-employment or
post-retirement benefits.
OTHER COMMENTS
STRIKE
See "Notes to the Financial Statements" for a description of the
Strike.
ENVIRONMENTAL AND SAFETY
See "Notes to the Financial Statements" for a description of the
Company's environmental and safety issues.
OTHER
There are various claims and legal proceedings arising in the ordinary
course of business pending against or involving the Company wherein monetary
damages are sought. It is management's opinion that the Company's liability, if
any, under such claims or proceedings would not materially affect its financial
position.
INFLATION
The Company is subject to increases in the cost of energy, supplies,
salaries and benefits, additives, alloy and scrap due to inflation. Shape prices
are influenced by supply, which varies with steel mill capacity and utilization,
and market demand.
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PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None were filed during the first quarter of fiscal year 1996.
(b) Reports on Form 8-K
None were filed during the first quarter of fiscal year 1996.
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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, Treasurer,
Chief Financial Officer, and Secretary
Date: February 8, 1996
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