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, 1996
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, 1996
- ------------------------------------ ---------------------------------------
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, 1996 and
September 30, 1996 3
Consolidated Statements of Income
(Loss) -- Three Months Ended
December 31, 1996 and 1995 5
Consolidated Statements of Cash
Flow -- Three Months Ended
December 31, 1996 and 1995 6
Notes to Financial Statements 7
Item 2. Management's Discussion and Analysis
Results of Operations 13
Liquidity and Capital Resources 16
PART II. OTHER INFORMATION
-----------------
Item 6. Exhibits and reports on Form 8-K 19
Page 2
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BAYOU STEEL CORPORATION
CONSOLIDATED BALANCE SHEETS
ASSETS
(UNAUDITED) (AUDITED)
DECEMBER 31, SEPTEMBER 30,
1996 1996
-------------- ---------
CURRENT ASSETS:
Cash and temporary cash investments $ -- $ 748,608
Receivables, net of allowance for
doubtful accounts of $408,997 in 1997
and $352,965 in 1996 21,101,722 24,107,566
Inventories 78,564,264 79,856,062
Prepaid expenses 840,739 292,458
------------ ------------
Total current assets 100,506,725 105,004,694
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land 3,790,398 3,790,398
Machinery and equipment 105,389,638 104,683,209
Plant and office building 21,032,248 20,975,997
------------ ------------
130,212,284 129,449,604
Less-Accumulated depreciation (40,537,362) (39,115,207)
------------ ------------
Net property, plant and equipment 89,674,922 90,334,397
OTHER ASSETS 3,648,913 3,932,594
------------ ------------
Total assets $193,830,560 $199,271,685
============ ============
The accompanying notes are an integral part of these consolidated statements.
Page 3
BAYOU STEEL CORPORATION
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED) (AUDITED)
DECEMBER 31, SEPTEMBER 30,
1996 1996
------------ ------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 2,333,784 $ 1,601,851
Borrowings under line of credit 6,300,000 3,000,000
Accounts payable 18,397,952 24,281,494
Accrued liabilities 5,002,779 3,856,341
Accrued dividends on redeemable
preferred stock -- 2,175,000
Total current liabilities 32,034,515 34,914,686
------------ ------------
LONG-TERM DEBT 82,781,989 83,540,331
------------ ------------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK 11,139,071 10,489,091
------------ ------------
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 19,977,105 22,429,697
------------ ------------
Total common stockholders' equity 67,874,985 70,327,577
Total liabilities & common
stockholders' equity $193,830,560 $199,271,685
============ ============
The accompanying notes are an integral part of these consolidated statements.
Page 4
BAYOU STEEL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
FIRST QUARTER ENDED
DECEMBER 31,
1996 1995
------------ ------------
NET SALES $ 54,864,911 $ 41,162,993
COST OF SALES 52,052,301 37,107,904
------------ ------------
GROSS PROFIT 2,812,610 4,055,089
SELLING, GENERAL & ADMINISTRATIVE
EXPENSES 1,616,083 1,547,080
NON-PRODUCTION STRIKE AND
CORPORATE CAMPAIGN EXPENSES 794,153 344,661
------------ ------------
OPERATING INCOME 402,374 2,163,348
------------ ------------
OTHER INCOME (EXPENSE):
Interest expense (2,219,683) (2,133,238)
Interest income 2,417 106,680
Miscellaneous 12,280 38,458
------------ ------------
(2,204,986) (1,988,100)
INCOME (LOSS) BEFORE TAXES (1,802,612) 175,248
PROVISION FOR INCOME TAXES - --
NET INCOME (LOSS) (1,802,612) 175,248
DIVIDENDS ACCRUED AND ACCRETION ON
PREFERRED STOCK (649,980) (646,007)
------------ ------------
INCOME (LOSS) APPLICABLE TO COMMON
AND COMMON EQUIVALENT SHARES $ (2,452,592) $ (470,759)
============ ============
AVERAGE NUMBER OF COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 13,707,029 13,707,029
============ ============
INCOME (LOSS) APPLICABLE TO COMMON
AND COMMON EQUIVALENT SHARES $ (.18) $ (.03)
============ ============
The accompanying notes are an integral part of these consolidated statements.
Page 5
BAYOU STEEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FIRST QUARTER ENDED
DECEMBER 31,
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income (loss) $ (1,802,612) $ 175,248
Depreciation 1,422,155 1,558,934
Amortization 288,280 281,539
Provision for losses on accounts
receivable 56,033 41,299
Changes in working capital:
Decrease in receivables 2,949,811 5,547,796
Decrease (increase) in inventories 1,291,798 (9,162,566)
(Increase) in prepaid expenses (548,281) (637,307)
(Decrease) in accounts payable (5,883,542) (6,084,053)
Increase in accrued liabilities 1,146,438 2,595,750
------------ ------------
Net cash used in
operations (1,079,920) (5,683,360)
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Addition of property, plant
and equipment (762,680) (932,924)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit 3,300,000 --
Payments of long-term debt (26,409) (105,437)
(Increase) decrease in other assets (4,599) 277,571
Payments of dividends on preferred stock (2,175,000) (1,156,027)
Net cash provided by (used in)
financing activities 1,093,992 (983,893)
------------ ------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (748,608) (7,600,177)
CASH AND CASH EQUIVALENTS,
beginning balance 748,608 10,521,664
------------ ------------
CASH AND CASH EQUIVALENTS,
ending balance $ -- $ 2,921,487
============ ============
The accompanying notes are an integral part of these consolidated statements.
Page 6
BAYOU STEEL CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(UNAUDITED)
1) BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (SEC). Certain information and note disclosures normally
included in annual financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to those
rules and regulations. Although Bayou Steel Corporation (the "Company") believes
that disclosures made are adequate to ensure that information presented is not
misleading, it is suggested that these consolidated financial statements be read
in conjunction with the consolidated financial statements and notes thereto
included in the Company's latest annual report, Form 10-K, filed with the SEC on
December 18, 1996 under File Number 33-22603.
In the opinion of the Company, the accompanying unaudited consolidated
financial statements present fairly the Company's financial position as of
December 31, 1996 and September 30, 1996 and the results of its operations for
the three-month periods ended December 31, 1996 and 1995 and the cash flow
statements for the three-month periods ended December 31, 1996 and 1995.
The accompanying financial statements include the consolidated accounts of
Bayou Steel Corporation ("BSCL") and Bayou Steel Corporation (Tennessee)
("BSCT") (collectively referred to herein as the "Company") after elimination of
all significant intercompany accounts and transactions.
The results of operations for the three-month periods ended December 31,
1996 and 1995 are not necessarily indicative of the results for the full year.
2) INVENTORIES
Inventories as of December 31, 1996 and September 30, 1996 consisted of
the following:
(UNAUDITED) (AUDITED)
DECEMBER 31, SEPTEMBER 30,
1996 1996
------------- ------------
Scrap steel $ 6,044,966 $ 6,567,308
Billets 8,151,316 7,778,092
Finished product 44,774,686 47,943,429
LIFO adjustments (2,502,396) (3,255,589)
------------- ------------
$ 56,468,572 $ 59,033,240
Mill rolls, operating
supplies and other 22,095,692 20,822,822
------------- ------------
$ 78,564,264 $ 79,856,062
============= ============
The inventory valuations are based on LIFO estimates of year-end levels
and prices. The actual LIFO inventories will not be known until year-end
quantities and indices are determined.
Shapes, billets, scrap steel, and certain production supplies are pledged
as collateral against the Company's line of credit.
Page 7
3) PROPERTY, PLANT AND EQUIPMENT
Capital expenditures for normal operations totaled $0.8 million and $0.9
million during the three-month periods ended December 31, 1996 and 1995,
respectively. As of December 31, 1996, the estimated costs to complete
authorized projects under construction or contract amounted to $1.8 million.
Betterments, improvements, and additions on property, plant and equipment
are capitalized at cost. Interest during construction of significant additions
is capitalized. Interest of $11,000 was capitalized during the three-month
period ended December 31, 1996. There was no interest capitalized for the
three-month period ended December 31, 1995. Interest of $18,000 was capitalized
during the fiscal year ended September 30, 1996.
4) OTHER ASSETS
Other assets consist of financing costs associated with the issuance of
long-term debt, redeemable preferred stock and warrants, and the Company's
revolving line of credit (see Notes 5, 6 and 8) which are being amortized over
the lives of the related transaction. Amortization expense was $288,000 and
$282,000 for the three-month periods ended December 31, 1996 and 1995.
Amortization expense was $1,164,000 for the fiscal year ended September 30,
1996.
5) LONG-TERM DEBT
Long-term debt of the Company as of December 31, 1996 and September 30,
1996 included the following:
(UNAUDITED) (AUDITED)
DECEMBER 31, SEPTEMBER 30,
1996 1996
------------- ------------
First Mortgage Notes $ 75,000,000 $ 75,000,000
(see below)
Term Loan (see below) 10,000,000 10,000,000
Other notes payables 115,773 142,182
------------- ------------
85,115,773 85,142,182
Less-current maturities 2,333,784 1,601,851
------------- ------------
$ 82,781,989 $ 83,540,331
============= ============
On June 20, 1995, the Company entered into a five-year term loan agreement
of $10 million for the Company's wholly owned subsidiary, BSCT. Based on the
first quarter leverage ratio, BSCT will accrue at LIBOR plus 3.00% or
approximately 8.5% at current rates. As of December 31, 1996, BSCT accrued
interest at a rate of 7.97%. Principal payments are due quarterly beginning June
30, 1997. As of December 31, 1996, $2.2 million was classified as a current
liability.
On March 3, 1994, the Company issued $75 million of the 10.25% Notes. The
principal is due on March 1, 2001. As of December 31, 1996 and 1995, the Company
accrued interest at a rate of 10.25%.
6) SHORT-TERM DEBT
On June 20, 1995, the Company entered into an amendment and restatement of
its revolving line of credit agreement which will be used for general corporate
purposes. The terms of the amended and restated agreement call for available
borrowings up to $45 million, including outstanding letters of credit using a
borrowing base of receivables and inventory. Based on these criteria, the net
amount available as of December 31, 1996 was $24.5 million. The agreement is
secured by inventory and accounts receivable at interest rates on a sliding
scale
Page 8
based on the quarterly leverage ratio, as defined in the agreement. Based on the
first quarter leverage ratio, the Company will accrue at LIBOR plus 3.00% or
approximately 8.5% at current rates. The terms of the loan agreement impose
certain restrictions on the Company, the most significant of which require the
Company to maintain a minimum interest coverage ratio and limit the incurrence
of certain indebtedness.
As of December 31, 1996, the Company had an outstanding balance of $6.3
million under the line of credit. There were no borrowings under the line of
credit as of December 31, 1995. The maximum amount outstanding during the
three-month period ended December 31, 1996 was $7.1 million. The average
borrowings were $4.4 million for the three-month period ended December 31, 1996.
The weighted average interest rate was 8.5% for the first fiscal quarter ended
December 31, 1996.
7) TAXES
As of September 30, 1996, for tax purposes, the Company had net operating
loss carryforwards ("NOLs") of approximately $328.7 million and $301.5 million
available to offset against regular tax and alternative minimum tax,
respectively.
The NOLs will expire in varying amounts through fiscal 2011. A substantial
portion of the available NOLs, approximately $200 million, expires by fiscal
2000. In addition, the Company has $1.35 million of net future tax deductions
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. The Company intends to declare and pay
quarterly dividends on the preferred stock unless prohibited by covenants in the
revolving line of credit and the 10.25% Notes. If a quarterly dividend payment
is not made by the end of a quarter, the rate will increase by 3%. In addition,
the holders have a right to additional warrants in the event that any two
consecutive quarterly payments are missed or other defined events take place.
Based on the September 30, 1996 results, the Company would be unable to make the
December 31, 1996 dividend payment or any other dividend payment until an
interest coverage ratio test, as defined in the Indenture pursuant to which the
10.25% Notes were issued, is again met. The Company also did not make the ratio
test for the quarter ended December 31, 1996. Prior to September 30, 1996, the
Company declared the regular dividends for fiscal 1997. Subsequent to fiscal
year end, the Company paid these dividends. This eliminates the additional
dividend rate and additional warrants that would have otherwise been payable in
fiscal 1997. The dividend prepayment has been recorded as a reduction in the
balance of the preferred stock in the accompanying balance sheet, as the Company
would be able to apply any remaining amount against the principal balance in the
event of an early redemption of the preferred stock. Depending on the Company's
future results, the Company may not be able to declare and pay the dividend. As
of December 31, 1996, the Company accrued dividends at a rate of 14.5%.
Page 9
The carrying amount of the preferred stock will increase as the accrued
dividends are charged to retained earnings during fiscal 1997 and by periodic
accretion of the difference between the recorded value of the stock at the date
of issuance and the redemption value from 1995 through the mandatory redemption
date of June 20, 2002, based on the interest method as well as by the normal
amortization of the prepaid dividends, discussed above. The terms of the stock
purchase agreement impose certain financial covenants which are generally
related to covenants in the revolving line of credit or the 10.25% Notes.
9) COMMON STOCKHOLDERS' EQUITY
Common stock and common stock equivalents as of December 31, 1996
consisted of:
CLASS A CLASS B CLASS C
---------- --------- -------
Authorized 24,271,127 4,302,347 100
Outstanding, at end of
quarter 11,435,802 2,271,127 100
Average outstanding for
quarter 11,435,802 2,271,127 100
10) EARNINGS PER SHARE
Earnings per common and common equivalent share are calculated based upon
the weighted average number of common and common equivalent shares outstanding
during the three-month periods ended December 31, 1996 and 1995. In connection
with the issuance of redeemable preferred stock on June 20, 1995 as discussed in
Note 8, the Company reserved 822,422 shares of its Class A Common Stock for
issuance upon exercise of the outstanding warrants at a nominal exercise price.
These warrants are considered common stock equivalents in calculating earnings
per common and common equivalent share for the quarter ended December 31, 1996.
The actual shares, including equivalents, outstanding for the quarter ended
December 31, 1996 and 1995 were 13,707,029.
11) MISCELLANEOUS
Miscellaneous for the three-month periods ended December 31, 1996 and 1995
included the following:
(UNAUDITED) (AUDITED)
DECEMBER 1996 DECEMBER 1995
------------- -------------
Discounts earned $ 40,143 $ 55,949
Provision for bad debts (56,032) (41,299)
Other 28,169 23,808
--------- ---------
$ 12,280 $ 38,458
========= =========
12) COMMITMENTS AND CONTINGENCIES
STRIKE
On March 21, 1993, the United Steelworkers of America Local 9121 (the
"Union") initiated a strike after the parties failed to reach agreement on a new
labor contract due to differences on economic issues. On September 23, 1996, the
Company and Union entered into a settlement agreement which, among other issues,
resulted in a new labor contract, ending the strike.
The settlement had a short-term adverse impact upon the Company. The
Company incurred one-time expenditures of $0.5 million in the first quarter of
fiscal 1997. Additionally, the Company anticipates additional expenses and a
temporary negative impact in productivity during the second quarter of fiscal
1997.
Page 10
In August 1993, the Union announced a corporate campaign designed to bring
pressure on the Company from individuals and institutions with direct financial
or other interests in the Company. The impact of the corporate campaign has been
significant. The Company has filed a lawsuit in federal court in Delaware under
the Racketeer Influenced Corrupt Organizations Act (RICO) against the Union for
their conduct in connection with this campaign. The Company seeks both an end to
the illegal activities used in the corporate campaign and the recovery of
damages. These legal expenses will continue even though the strike has been
resolved.
In conjunction with the acquisition of the assets of TVSC, the Union filed
a charge with the National Labor Relations Board (the "NLRB") alleging that the
Company has violated the National Labor Relations Act relating to its refusal to
hire at BSCT certain individuals, who were former employees of TVSC. On August
16, 1996, the Company reached a settlement with the Union which was approved by
the NLRB and resolved the issue. The Company agreed to recognize the Union as
the bargaining agent for the employees and pay 135 former employees, who applied
for work but were not employed, a settlement amount of 25% of lost wages, less
interim earnings. Until interim earnings for 1996 are known for each applicant,
the liability cannot be determined. Based on assumptions of earnings, the
Company estimated that the settlement could range from $136,000 to $500,000. As
of December 31, 1996, the Company accrued $136,000 for the settlement.
ENVIRONMENTAL
The Company is subject to various federal, state, and local laws and
regulations concerning the discharge of contaminants which may be emitted into
the air, discharged into waterways, and the disposal of solids and/or hazardous
wastes such as electric arc furnace dust. In addition, in the event of a release
of a hazardous substance generated by the Company, the Company could be
potentially responsible for the remediation of contamination associated with
such a release. In the past, the Company's operations in some respects have not
met all of the applicable standards promulgated pursuant to such laws and
regulations. At this time, the Company believes that it is in compliance, in all
material respects, with applicable environmental requirements and that the cost
of such continuing compliance will not have a material adverse effect on the
Company's competitive position, operations or financial condition, or cause a
material increase in currently anticipated capital expenditures. The Company
currently has no mandated expenditures at its Louisiana facility to address
previously contaminated sites. Also, the Company is not designated as a
Potential Responsible Party ("PRP") under the Superfund legislation. At December
31, 1996, the Company has accrued a loss contingency for environmental matters.
TVSC, the prior owners of the BSCT facility, had entered into a Consent
Agreement and Order (the "Voluntary Consent Order") under the Tennessee
Department of Environment and Conservation's voluntary clean up program. The
Company, in acquiring the assets of TVSC, has entered into a similar order. The
ultimate remedy and clean-up goals will be dictated by the results of human
health and ecological risk assessments which are components of a required,
structured investigative, remedial process. As of September 30, 1996,
investigative, remedial and risk assessment activities have resulted in expenses
of approximately $1.0 million. Estimates indicate that the future cost for
remediating the affected areas ranges from $500,000 for the lowest cost remedy
to $1,500,000 for higher cost remedies. The definitive asset purchase agreement
between the Company and TVSC provided for $2.0 million of the purchase price to
be held in escrow and applied to costs incurred by the Company for activities
pursuant to the Voluntary Consent Order (with an additional $1.0 million to be
held for one year for such costs and other costs resulting from a breach of
TVSC's representations and warranties in the agreement). At this time, the
Company does not expect the costs of resolution of the Voluntary Consent Order
to exceed funds provided by the escrow fund. If during the remedial
investigation significantly more extensive or more toxic contamination is found,
then costs could be greater than those estimated, and to the extent these costs
exceeded the escrow funds, the Company would be liable.
Page 11
The U.S. Public Interest Research Group ("USPIRG") filed a lawsuit in
Louisiana against the Company for alleged violations of air quality regulations.
The Company believes it has meritorious defenses to these charges and has asked
the court to dismiss USPIRG's lawsuit on various grounds.
OTHER
The Company does not provide any post-employment or post-retirement
benefits to its employees.
There are various claims and legal proceedings arising in the ordinary
course of business pending against or involving the Company wherein monetary
damages are sought. It is management's opinion that the Company's liability, if
any, under such claims or proceedings would not materially effect its financial
position.
Page 12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
RESULTS OF OPERATION
The Company reported a net loss of $1.8 million before dividends and
accretion on preferred stock in the first quarter of fiscal 1997 (ended December
31, 1996) compared to a net income of $0.2 million for the comparable period of
fiscal 1996. The $2.0 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 3.4% at the Louisiana facility ("BSCL")
("Louisiana"). Second, BSCL's metal margin (the difference between the selling
price and the raw material cost) decreased 4.8% in the first fiscal quarter of
fiscal 1997 compared to the same period of last year. Third, non-production
strike and corporate campaign expenses increased by $0.4 million. Bayou Steel
Corporation's (Tennessee) ("Tennessee") ("BSCT") loss of $1.3 million was $0.4
million 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,
1996 1995
-------- --------
Net Sales (in thousands) $ 54,865 $ 41,163
Shape Shipment Tons 160,474 112,993
Shape Selling Price Per Ton $ 336 $ 353
Billet Shipment Tons -0- 1,709
Billet Selling Price Per Ton $ -0- $ 250
A. SALES
Net sales increased in the first quarter of fiscal 1997 by 33.3% or $13.7
million compared to the same period of fiscal 1996. The increase was the result
of an increase in shape shipments. Shipments increased out of BSCL and BSCT by
23,007 tons and 24,474 tons, respectively. This was the second best first
quarter in the history of BSCL. Partially offsetting some of the increase in
shipments was a $17 per ton decrease in selling price.
SHAPES - The 42.0% increase in shape shipments in the first quarter of
fiscal 1997 compared to the same period of fiscal 1996 is attributable to the
increase in shipments out of the Louisiana and Tennessee facilities. The higher
shipments out of the BSCL were mainly due to increased shipments to original
equipment fabricator market. Due to the Tennessee facility being in a start-up
mode of operations during the first quarter of fiscal 1996, shipments from BSCT
were minimal. The backlog of orders at December 31, 1996 for the Company is 78%
higher than a year earlier and 23% higher than the prior quarter. The increase
in backlog is directly related to a steady economy and the increasing acceptance
of the Tennessee products in the market. Shipments are expected to increase in
the second quarter of fiscal 1997 compared to the first quarter of fiscal 1997
due to anticipated seasonal adjustments to the Steel Service Centers inventory
level and the increasing customer acceptance of the Tennessee product line.
Overall selling prices decreased by $17 per ton or 4.8% from the first
quarter of fiscal 1996 to the first quarter of fiscal 1997. There were several
market conditions causing the decrease. Additional capacity was shifted into the
Company's product line from mills previously producing for the special bar
quality ("SBQ") market during fiscal 1996. This unanticipated shift was due to
the extreme softness of the SBQ market. In addition, excess inventory at certain
minimills and imports in the Southwest from Mexican mills contributed to the
decrease in selling price. The prices for the merchant bar product line from the
Page 13
Tennessee facility carry a lower selling price compared to the structural
products from the Louisiana facility. Consequently, the mix of selling more
merchant bar products from the Tennessee facility in fiscal 1996 accounted for
$6 per ton of the lower selling price. The Company also expanded it's market
area for merchant bar resulting in lower selling prices. Prices are expected to
remain stable during the early part of the second quarter of fiscal 1997 and may
increase by the end of the second quarter of fiscal 1997 due to strong demand
for the Company's product.
BILLETS - Shipments of billets, the Company's semi-finished product, were
minimal in both fiscal quarters due to lack of availability of billets for sale.
The Company supplied billets to the rolling mill in Tennessee during the first
quarter of fiscal 1996 and fiscal 1997 thereby depleting 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 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 94.9% of sales for the first quarter of fiscal 1997
compared to 90.0% of sales for the same period of fiscal 1996. The increase in
the first quarter of fiscal 1997 compared to the same period of fiscal 1996 was
due to the shape selling price decreasing more than the scrap prices, the
increase in conversion cost (the cost to convert raw materials into shapes) at
the Louisiana facility, and shipping more Tennessee products which carry a lower
margin than the Louisiana products.
The major component of cost of goods sold is scrap. Scrap cost in the
first quarter of fiscal 1997 decreased $3 per ton compared to the same period
last year. In first fiscal quarter 1996, the price of scrap was influenced by
the effects of poor weather conditions, causing delays in delivery and the
necessary utilization of more expensive types of scrap. The Company's scrap
prices temporarily dropped in the first quarter of fiscal 1997 due to increased
availability, lack of an export market, and less demand. The Company will
further benefit from the lower price in the second fiscal quarter of fiscal
1997.
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 (the cost to convert car bodies and other raw material into shredded scrap)
than anticipated. In the first quarter of fiscal 1997, MRR is operating at the
anticipated capacity and conversion cost. The production tons improved by 54%
while the conversion cost decreased by 13% in the first quarter of fiscal 1997
compared to the same period of fiscal 1996. The shredder currently supplies
approximately 12% of the melt shop's raw material requirements.
Another component of cost of goods sold is additive, alloys and flux
("AAF"). AAF cost increased by 4.7% in the first quarter of fiscal 1997 compared
to the same period of fiscal 1996 mainly due to consumption. The increase in
consumption was the result of producing a richer mix of grades and a change in
melting practices to reduce secondary production.
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 1997 compared to the same
period of fiscal 1996 increased by 3.4%. In the first quarter of fiscal 1997,
costs were impacted by two unusual equipment outages which affected production
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and resulted in increased maintenance costs, and by the increased costs of power
and certain supply items which increased cost by over $3 per ton. Productivity,
particularly in the rolling mill and shipping, were affected as returning
workers become re-acquainted with the equipment or learn new jobs. Additional
staffing was also maintained during the transition although the Company is now
back to normal staffing levels. The Company anticipates that productivity may
again be affected in the second quarter.
In July 1995, Tennessee started operating its rolling mill. As expected
during the first quarter of fiscal 1996, the learning curve associated with new
and refurbished equipment combined with an inexperienced work force caused the
production tons to be low and the conversion cost per ton to be high.
Consequently, production costs exceeded sales by $1.2 million in the first
quarter of fiscal 1996. As the workforce gained experience, conversion cost per
ton and gross margins improved. Comparing the first quarter of fiscal 1997 to
the same period of fiscal 1996, conversion cost improved by 29%, tons produced
more than doubled, yield improved by 8.6%, and tons produced per hour improved
110%. The book selling price has fallen $40 per ton since the acquisition. As a
result, the break-even production and shipment rate has increased from
approximately 32,000 tons per quarter to nearly 45,000 tons per quarter. In the
first quarter of fiscal 1997, BSCT produced 35,000 tons or 16% improvement over
the prior quarter. The Company expects improvements to continue toward the
break-even production level over the next few quarters. The Company has incurred
losses at BSCT ranging from $2.2 million to $1.3 million per quarter over the
past five quarters. The Company does not intend to continue the losses
associated with the Tennessee facility to date and is monitoring the operations
on a regular basis to insure that improvement towards profitability is met in a
reasonable time period.
C. SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Selling, general and administrative expenses in the first quarter of
fiscal 1997 compared to the same period of the last fiscal year were
approximately the same.
D. NON-PRODUCTION STRIKE EXPENSES
Non-production strike-related expenses were $794,000 for the first quarter
of fiscal 1997 compared to $345,000 for the same period last year. Strike
expenses in fiscal 1997 were primarily for legal expenses and other expenses
related to returning the strikers back to work. The Company also incurred legal
expenses related to the Racketeering Influenced Corrupt Organization Act
("RICO") suit which the Company filed against the Union. These type of legal
expenses will continue in fiscal 1997. However, overall strike expenses should
decrease after the second quarter of fiscal 1997 as issues with the returning
strikers are fully resolved.
E. OTHER INCOME (EXPENSE)
Interest expense for the first quarter of fiscal 1997 compared to the same
period of fiscal 1996 was approximately the same. Interest income decreased in
fiscal 1997 compared to fiscal 1996 due to relatively small amount of cash
available to invest in the first quarter of fiscal 1997 compared to fiscal 1996.
Interest income is expected to be minimal for the second fiscal quarter of
fiscal 1997 due to low 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 $2.0 million less in the first fiscal quarter of 1997 compared to the same
period of fiscal 1996. The primary reasons for the reductions in earnings were
increased conversion costs, decreased metal margins, and increased
non-production strike and corporate campaign expenses.
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LIQUIDITY AND CAPITAL RESOURCES
A. CASH AND WORKING CAPITAL
The Company ended the first fiscal quarter with short-term borrowings of
$6.3 million. Current assets exceeded current liabilities by a ratio of 3.09 to
1.00. Working capital decreased by $2.2 million to $67.9 million during the
three months ended December 31, 1996. Working capital decreased mainly due to
the current portion of the term loan being reclassified from a long-term
liability to a short-term liability.
In the first three months of fiscal 1997, cash used by operations was $1.1
million. Accounts payable decreased by $6.0 million as purchasing of scrap
decreased towards the end of the quarter. Offsetting some of the decreases in
cash was a decrease in receivables and inventories.
B. CAPITAL EXPENDITURES
Capital expenditures amounted to $0.8 million in the first quarter of
fiscal 1997. These capital projects were for cost reduction and productivity
increases. The Company does not expect to make substantial investments in
capital during the second fiscal quarter of 1997. However, depending on market
conditions, the Company expects to spend approximately $9 million on various
capital projects to reduce cost and increase productivity, to enhance safety and
environmental programs, and to maintain the plants in fiscal 1997.
C. FINANCING
All of the $75 million 10.25% Notes are classified as long-term debt.
There are no principal payments due on the 10.25% Notes until maturity in 2001.
The Company currently intends to refinance the 10.25% Notes on or before the
maturity date in 2001. The Indenture under which the Notes are issued ("the
Indenture") contains a covenant which restricts the Company's ability to incur
additional indebtedness, make dividend payments, or place liens on the assets
acquired with the indebtedness. Under the Indenture, the Company may not incur
additional indebtedness or make dividend payments 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, 1996, the Interest
Expense Coverage Ratio was 1.66 to 1.00.
On June 20, 1995, the Company completed the issuance and sale of 15,000
shares of redeemable preferred stock, par value $0.01 per share ("Preferred
Stock"), and warrants to purchase, at a nominal exercise price, six percent of
the Company's common stock for $15 million. The Preferred Stock is mandatorily
redeemable by the Company seven years after issuance and requires the payment of
quarterly dividends, at a rate of 14.5% per annum or $2.2 million per year. The
Company intends to declare and pay quarterly dividends on the Preferred Stock
unless prohibited by covenants in the revolving line of credit and the 10.25%
Notes. If a quarterly dividend payment were not made by the end of the quarter,
the dividend rate will increase by 3% or $112,000 per quarter. In addition, the
holders of Preferred Stock have a right to additional warrants, approximately
77,000 shares, for each two consecutive quarterly payments missed. Based on the
September 30, 1996 results, the Company would be unable to make the December 31,
1996 dividend payment. The Company also did not make the ratio test for the
quarter ended December 31, 1996. Prior to September 30, 1996, the Company
declared the regular dividends for fiscal 1997. Subsequent to fiscal year end,
the Company paid these dividends. This eliminates the additional dividend rate
and additional warrants that would have otherwise been payable in fiscal 1997.
Depending on the Company's future results, the Company may not be able to
declare and pay dividends.
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Simultaneously with the sale of the Preferred Stock and warrants, the
Company entered into a five-year term loan agreement of $10 million for the
Company's wholly owned subsidiary, BSCT. The proceeds received from the term
loan were used to repay the loan outstanding under the Company's revolving
credit facility which had been incurred to acquire substantially all of the
assets at Tennessee. The term loan is partially secured by the Company's
accounts receivable and inventory. The term loan agreement calls for quarterly
principal payments of $750,000 beginning on June 30, 1997 and bears interest on
a sliding scale based on quarterly leverage ratio which is defined as
indebtedness divided by earnings before interest, taxes, depreciation, and
amortization ("EBITDA"). Based on the first quarter leverage ratio, the Company
will accrue at LIBOR plus 3.0% or approximately 8.5% at current rates.
On June 20, 1995, the Company entered into an amended and restatement of
its revolving line of credit agreement which will be used for general corporate
purposes. The terms of the amended and restated agreement call for available
borrowings up to $45 million, including outstanding letters of credit using a
borrowing base of BSCL's receivables and inventory. The five year revolving line
of credit bears interest on a sliding scale based on the quarterly leverage
ratio which is defined as indebtedness divided by EBITDA. The terms of the loan
agreement impose certain restrictions on the Company, the most significant of
which require the Company to maintain a minimum interest coverage ratio and
limit the incurrence of certain indebtedness. Borrowings against the line of
credit as of December 31, 1996 was $6.3 million. The amount available to borrow
as of December 31, 1996 was $25 million. As of January 21, 1997, the Company's
outstanding borrowings were $6.4 million. The Company does not anticipate any
difficulties in obtaining another secured line of credit upon the expiration of
the current line of credit in fiscal 2000.
The Company believes that current cash balances, internally generated
funds, the credit facility, and additional purchase money mortgages are adequate
to meet the foreseeable short-term and long-term liquidity needs. If additional
funds are required to accomplish long-term expansion of its production facility
or significant acquisitions, the Company believes funding can be obtained from a
secondary equity offering.
There are no financial obligations with respect to post-employment or
post-retirement benefits.
OTHER COMMENTS
FORWARD-LOOKING INFORMATION
This document contains various "forward-looking" statements which
represent the Company's expectation or belief concerning future events. The
Company cautions that a number of important factors could, individually or in
the aggregate, cause actual results to differ materially from those included in
the forward-looking statements including, without limitation, the following:
changes in the price of supplies, power, natural gas, purchased billets; changes
in the selling price of the Company's finished products or the purchase price of
steel scrap; weather conditions in the market area of the finished product
distribution; unplanned equipment outages; prolonged productivity impact from
returning strikers; and changing laws affecting labor, employee benefits cost
and or environmental regulations.
STRIKE
See "Notes to the Financial Statements" for a description of the Strike.
ENVIRONMENTAL AND SAFETY
See "Notes to the Financial Statements" for a description of the Company's
environmental and safety issues.
Page 17
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 1997.
(b) Reports on Form 8-K
None were filed during the first quarter of fiscal year 1997.
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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, Chief Financial Officer,
Treasurer, and Secretary
Date: February 7, 1997
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