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 January 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to __________
Commission file number: 33-67532
SHEFFIELD STEEL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 74-2191557
(State or other (I.R.S. Employer
jurisdiction of incorporation) identification No.)
220 North Jefferson Street
Sand Springs, OK 74063
(Address of principal executive offices)
(918) 245-1335
(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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
At the date of this filing, there were 3,573,940 shares of the Registrant's
$.01 par value Common Stock outstanding. The aggregate market value of voting
stock held by nonaffiliates is unknown as the Registrant's stock is not traded
on an established public trading market.
SHEFFIELD STEEL CORPORATION
FORM 10-Q
Index
Page
----
Part I. Financial Information
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
April 30, 1999 and January 31, 2000 3
Consolidated Condensed Statements of Operations -
Three and nine month periods ended January 31, 1999 and 2000 4
Consolidated Condensed Statements of Cash Flows -
Nine months ended January 31, 1999 and 2000 5
Notes to Consolidated Condensed Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-13
Part II. Other Information
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
2
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In thousands)
(Unaudited)
April 30, January 31,
Assets 1999 2000
------ ---- ----
Current assets:
Cash and cash equivalents $ 86 69
Accounts receivable,
less allowance for doubtful accounts of $658
at April 30, 1999 and $833 at January 31, 2000 19,943 20,940
Inventories 44,034 47,977
Other current assets 4,839 4,633
-------- -------
Total current assets 68,902 73,619
Property, plant and equipment, net 68,310 66,585
Intangible assets, net 10,011 9,558
Other assets, net 3,626 3,287
Deferred income tax asset 1,712 1,849
-------- -------
$152,561 154,898
======== =======
Liabilities and Stockholders' Deficit
-------------------------------------
Current liabilities:
Current portion of long-term debt $ 2,885 2,616
Accounts payable 14,878 14,113
Accrued interest payable 5,362 2,145
Accrued liabilities 6,455 7,788
-------- -------
Total current liabilities 29,580 26,662
Long-term debt, excluding current portion 122,710 128,588
Accrued post-retirement benefit costs 12,380 13,265
Other liabilities 1,088 956
-------- -------
Total liabilities 165,758 169,471
-------- -------
Stockholders' deficit:
Common stock 35 36
Additional paid-in capital 2,024 2,872
Accumulated deficit (14,202) (16,387)
-------- -------
Total stockholders' deficit (12,143) (13,479)
Less loans to stockholders 1,054 1,094
-------- -------
(13,197) (14,573)
-------- -------
$152,561 154,898
======== =======
See accompanying notes to consolidated condensed financial statements.
3
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(In thousands)
(Unaudited)
Three Months Ended Nine Months Ended
January 31, January 31,
----------------------- ------------------------
1999 2000 1999 2000
------- ------ ------- -------
Sales $34,720 39,545 118,389 124,997
Cost of sales 26,684 31,269 91,600 95,879
------- ------ ------- -------
Gross profit 8,036 8,276 26,789 29,118
Selling, general and administrative expense 3,624 3,811 11,062 11,728
Depreciation and amortization expense 1,989 2,086 5,743 6,245
Postretirement benefit expense other than pensions 594 496 2,054 1,788
Litigation settlement - - (2,200) (2,326)
------- ------ ------- -------
Operating income 1,829 1,883 10,130 11,683
Other expense:
Interest expense, net 3,731 3,807 10,869 11,215
Other (4) 5 26 153
------- ------ ------- -------
3,727 3,812 10,895 11,368
------- ------ ------- -------
Income (loss) from operations before
income taxes (1,898) (1,929) (765) 315
Income tax expense - - - -
------- ------ ------- -------
Net income (loss) $(1,898) (1,929) (765) 315
======= ====== ======= =======
See accompanying notes to consolidated condensed financial statements.
4
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
Nine Months Ended
January 31,
------------------------------------
1999 2000
---- ----
Cash flows from operating activities:
Net income (loss) $ (765) 315
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 5,987 6,488
Loss (gain) on sale of assets held for sale (23) 118
Accrual of postretirement benefits other than pensions,
net of cash paid 1,441 885
Changes in assets and liabilities, net of effects from
acquisition of business (17,584) (7,653)
-------- ------
Net cash (used in) provided by operating activities (10,944) 153
-------- ------
Cash flows from investing activities:
Capital expenditures (4,805) (4,042)
Acquisition of business, net of cash acquired (2,635) -
Proceeds from sale of assets held for sale and equipment 34 182
-------- ------
Net cash used in investing activities (7,406) (3,860)
-------- ------
Cash flows from financing activities:
Net increase in long-term debt 16,387 5,609
Dividends paid - (2,500)
Other (553) 581
-------- ------
Net cash provided by financing activities 15,834 3,690
-------- ------
Net decrease in cash (2,516) (17)
Cash and cash equivalents at beginning of period 2,590 86
-------- ------
Cash and cash equivalents at end of period $ 74 69
======== ======
Supplemental disclosure of cash flow information
- ------------------------------------------------
Cash paid during the period for interest $ 13,621 14,189
======== ======
Cash paid during the period for income taxes $ - 138
======== ======
See accompanying notes to consolidated condensed financial statements.
5
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
January 31, 1999 and 2000
(In thousands)
(Unaudited)
1) Basis of Presentation and Summary of Accounting Policies
The consolidated financial statements of Sheffield Steel Corporation (the
Company, which may be referred to as we, us or our) include the accounts of its
divisions, Sheffield Steel-Sand Springs (Sand Springs), Sheffield Steel-Kansas
City (Kansas City), and Sheffield Steel-Joliet (Joliet) and its wholly owned
subsidiaries, Sheffield Steel Corporation-Oklahoma City (Oklahoma City),
Waddell's Rebar Fabricators, Inc. (Waddell), Wellington Industries, Inc.
(Wellington) since October 7, 1998 and Sand Springs Railway Company (the
Railway). HMK Enterprises, Inc. (HMK) owns approximately 90% of our currently
issued and outstanding common stock. All material intercompany transactions and
balances have been eliminated in consolidation. Our primary business is the
production of concrete reinforcing bar, fence posts, and a range of hot rolled
bar products including rounds, flats and squares. Our products are sold
throughout the continental United States. We operate in a single operating
segment providing steel products and services to the steel manufacturing and
fabricating industry.
These consolidated condensed interim financial statements have been prepared by
us without audit, according to the rules and regulations of the Securities and
Exchange Commission and reflect all adjustments that we believe were necessary
for a fair statement of the results for the interim periods. All adjustments
made were normal recurring accruals. We suggest that these interim financial
statements are read in conjunction with the consolidated financial statements
and notes contained in our Form 10-K for the year ended April 30, 1999.
Operating results for the quarter and nine months ended January 31, 2000 are not
necessarily indicative of the results that we expect for the year ending April
30, 2000.
2) Inventories
The components of inventories are as follows:
April 30, January 31,
1999 2000
---- ----
Raw materials and storeroom supplies $ 12,408 10,501
Work in process 13,390 15,911
Finished goods 18,236 21,565
-------- -------
$ 44,034 47,977
======== =======
6
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
3) Long-term Debt
Long-term debt is comprised of the following:
April 30, January 31,
1999 2000
---- ----
First mortgage notes $ 110,000 110,000
Revolving credit agreement 6,285 13,421
Railway term loan 1,000 2,000
Railway revolving credit agreement 620 7
Equipment notes 4,931 3,916
Notes payable 2,759 1,860
--------- --------
125,595 131,204
Less current portion 2,885 2,616
--------- --------
$ 122,710 128,588
========= ========
On January 5, 2000, we renewed our Railway Credit Agreement with a bank. The
Agreement is comprised of two notes; a $2.0 million term loan with $0.5 million
principal payments due annually with the final payment due February 1, 2004, and
a $1.0 million line of credit maturing February 1, 2002. The notes are secured
by the assets and capital stock of the Railway. Interest is computed at prime
plus 3/4% and is payable quarterly.
4) Litigation Settlement
We were party to a lawsuit with several other steel manufacturers against
certain manufacturers of graphite electrodes related to price fixing within the
electrode industry. We recognized approximately $2.3 million related to
settlements reached this fiscal year ($2.2 million in fiscal '99) with certain
of the defendents. With respect to the current fiscal year settlement, we have
received approximately $1.3 million in cash and the remainder is secured by a
letter of credit and included in accounts receivable.
7
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
ITEM 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations
---------------------------------------------
The following discussion should be read in conjunction with our
Consolidated Condensed Financial Statements and notes included in this Form
10-Q.
Results of Operations
The results of operations are dependent on the level of construction,
infrastructure spending, oil and gas, agribusiness, and general economic
activity in the U.S. Our sales are seasonal with the third fiscal quarter
generally being weaker than the rest of the year. The major cost components of
our products are steel scrap and other raw materials, energy, labor, warehousing
and handling, and freight costs.
Our collective bargaining agreement with the United Steelworkers of America
(the Union), which covers approximately 300 hourly-paid production and
maintenance employees in Sand Springs, expired on March 1, 2000. We reached a
tentative agreement with the Union effective March 2, 2000, through March 1,
2004, which was ratified by the union on March 1, 2000. The Union agreement
provides for an increase in hourly wages of $1.35 over four years and minor
changes to certain benefits.
The following table provides information regarding the historical results
of operations (in thousands) for the quarters ended January 31, 1999 and 2000:
Three Months Ended January 31,
----------------------------------------------
1999 2000
---------------------- ----------------------
Operating Results: Net Sales % of Sales Net Sales % of Sales
---------- ---------- --------- ----------
Sales $ 34,720 100.0% 39,545 100.0%
Cost of sales 26,684 76.9% 31,269 79.1%
------ ------
Gross Profit 8,036 23.1% 8,276 20.9%
Selling and administrative 3,624 10.4% 3,811 9.6%
Depreciation and amortization 1,989 5.7% 2,086 5.3%
Postretirement benefit expense 594 1.7% 496 1.3%
Litigation settlement - - - -
------ ------
Operating income 1,829 5.3% 1,883 4.8%
Interest expense, net 3,731 10.7% 3,807 9.6%
Other (4) 0.0% 5 0.0%
------ ------
Loss from operations before
income taxes (1,898) (5.5%) (1,929) (4.9%)
Income tax expense - - - -
------ ------
Net loss $ (1,898) (5.5%) (1,929) (4.9%)
====== =====
8
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
The following table provides information regarding the historical shipment
levels and average selling prices per ton:
Three Months Ended January 31,
------------------------------
1999 2000
------- -------
Tons shipped:
Hot Rolled Bars 32,035 40,726
Rebar 34,565 42,768
Fabricated Products 15,981 17,080
------- -------
Total finished products 82,581 100,574
Billets 3,393 6,621
------- -------
Total tons shipped 85,974 107,195
======= =======
Price per ton:
Hot Rolled Bars $ 475 429
Rebar 298 285
Fabricated Products 498 471
Billets 192 205
Average price per ton shipped 404 369
Average production cost per ton 310 292
Three Months Ended January 31, 2000 As Compared To Three Months Ended January
31, 1999
Sales. Sales for the third quarter of fiscal 2000 were $39.5 million.
Shipments increased in comparison to the same quarter in the prior year, while
pricing generally decreased as summarized below:
. In comparison to the third quarter of fiscal 1999, pricing of our hot
rolled bar products in Joliet has been impacted by market conditions with prices
decreasing approximately 5%. Hot rolled bar shipments from Sand Springs
increased 92% over the same period in the prior year, but pricing decreased
approximately 10%. The increase in shipments was due to improved sales of
products that support certain industries such as oil field equipment,
transportation and consumer products. In addition, in the same period in the
prior year, our sales were impacted by service centers and original equipment
manufacturers reducing inventories due to market uncertainties.
. In comparison to the third quarter of fiscal 1999, rebar shipments
increased 24% while pricing decreased 5%. Shipments increased due to strong
construction markets, infrastructure spending, favorable weather conditions and
our improved inventory position.
. Finished goods prices are down in comparison to this quarter in fiscal 1999
in part due to competitive market conditions and reductions in steel scrap raw
material costs. However, during the second quarter of fiscal 2000, our scrap raw
material costs began to increase and this has had an adverse effect on cost of
sales in the third fiscal quarter. Moderate price increases have been announced
and in some cases implemented for certain products; however, in the short-term,
we do
9
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
not expect to be able to increase sales prices by an amount sufficient to offset
the cost increases and our margins will be adversely affected.
. Billet shipments increased 95% over the same quarter in the prior year in
response to stronger market conditions. The average selling price of billets
increased 6.6% because billet pricing is related to scrap raw material costs.
Cost of Sales and Expenses. Average product cost per ton decreased to $292 in
the third quarter of fiscal 2000 from $310 in the third quarter of fiscal 1999
primarily due to decreases in steel scrap raw material costs. This decrease was
partially offset by higher costs associated with finished goods product mix and
higher operating costs. We also produced a higher percentage of hot rolled bar
product in the Sand Springs rolling mill this quarter in comparison to the same
quarter in the prior year.
Nine Months Ended January 31, 2000 As Compared To Nine Months Ended January 31,
1999
The following table provides information regarding the historical results of
operations (in thousands) for the nine months ended January 31, 1999 and 2000:
Nine Months Ended January 31,
--------------------------------------------
1999 2000
--------------------- ---------------------
Operating Results: Net Sales % of Sales Net Sales % of Sales
--------- ---------- --------- ----------
Sales $ 118,389 100.0% 124,997 100.0%
Cost of sales 91,600 77.4% 95,879 76.7%
--------- --------
Gross Profit 26,789 22.6% 29,118 23.3%
Selling and administrative 11,062 9.3% 11,728 9.4%
Depreciation and amortization 5,743 4.9% 6,245 5.0%
Postretirement benefit expense 2,054 1.7% 1,788 1.4%
Litigation settlement (2,200) (1.9%) (2,326) (1.9%)
--------- --------
Operating income 10,130 8.6% 11,683 9.3%
Interest expense, net 10,869 9.2% 11,215 9.0%
Other 26 0.0% 153 0.1%
--------- --------
Income (loss) from operations
before income taxes (765) (0.6%) 315 0.3%
Income tax expense - - - -
--------- --------
Net income (loss) $ (765) (0.6%) 315 0.3%
========= ========
10
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
The following table provides information regarding the historical shipment
levels and average selling prices per ton:
Nine Months Ended January 31,
-----------------------------
1999 2000
-------- -------
Tons shipped:
Hot Rolled Bars 115,642 117,826
Rebar 123,606 141,461
Fabricated Products 43,030 51,759
-------- --------
Total finished products 282,278 311,046
Billets 15,809 29,632
-------- --------
Total tons shipped 298,087 340,678
======== ========
Price per ton:
Hot Rolled Bars $ 465 439
Rebar 302 287
Fabricated Products 504 490
Billets 215 186
Average price per ton shipped 397 367
Average production cost per ton 307 281
Sales. Sales for the nine months ended January 31, 2000 were $125.0 million.
Shipments increased in comparison to the same period in the prior year, while
pricing generally decreased as summarized below:
. In comparison to the nine months ended January 31, 1999, shipments and
pricing of our hot rolled bar products in Joliet have been impacted by market
conditions with shipments decreasing approximately 5% and pricing decreasing 4%.
Hot rolled bar shipments from Sand Springs increased 53% over the same period in
the prior year excluding sales to Wellington, which was acquired in October
1998, from the prior year number. We have seen some improvement in hot rolled
bar sales that support certain industries such oil field equipment; however,
agricultural equipment sales continue to lag.
. Rebar shipments rebounded due to our favorable inventory position in
comparison to the nine months ended January 31, 1999. In the prior year, we had
very low inventories due to the rolling mill outage at the Sand Springs Facility
related to the Shear Line Project completed in the fourth quarter of fiscal
1998.
. Finished goods prices are down in comparison to the nine month period ended
January 31, 1999, in part due to reductions in steel scrap raw material costs.
During the second quarter of fiscal 2000, our scrap raw material costs began to
increase which is having an adverse effect on cost of sales. Moderate price
increases have been announced and in some cases implemented for certain
products; however, in the short-term, we do not expect to be able to increase
sales prices by an amount sufficient to offset the cost increases and our
margins will be adversely affected.
11
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
. In October 1998, we purchased Wellington, a railroad track spike
manufacturer, which increased our sales of fabricated products and improved
overall average selling prices.
Cost of Sales and Expenses. Average product cost per ton decreased to $281 in
the nine month period ended January 31, 2000 from $307 in the same period in the
prior year primarily due to decreases in steel scrap raw material costs. This
decrease was partially offset by higher costs associated with finished goods
product mix and higher operating costs.
Selling, general and administrative expenses increased approximately $0.7
million or 6% over the first nine months of fiscal 1999, primarily due to
employment costs as well as the acquisition of Wellington in October 1998.
During fiscal 1999, we were parties in a lawsuit with several other steel
manufacturers against certain graphite electrodes manufacturers related to price
fixing within the electrode industry. During the second quarter of fiscal 1999,
we recorded approximately $2.2 million related to this lawsuit. In the first
quarter of fiscal 2000, we recorded an additional $2.3 million from different
defendants, of which $1.3 million was received during the first quarter of
fiscal 2000.
Liquidity and Capital Resources
As of January 31, 2000, we had long-term indebtedness of $131.2 million and
approximately $25 million of additional borrowing availability under our
revolving credit agreements. We continue to comply with all of our loan
covenants. Borrowings under our revolving credit agreements bear interest at a
floating rate. To the extent that interest rates and amounts outstanding under
the revolving credit agreements increase, there will be corresponding increases
in expenses. In addition to borrowings under the revolving credit agreements, we
have historically used cash flow from operations and equipment financing
agreements to fund our investing activities, including capital expenditures.
Cash flow provided by operating activities was approximately $0.2 million
for the nine month period ended January 31, 2000, as compared with cash flow
used in operating activities of approximately $10.9 million for the nine month
period ended January 31, 1999. Improvement in cash flow from operating
activities is a result of our improved operating performance. Cash used in
operating activities in the prior year also included amounts to re-build
inventory after the completion of the Shear Line Project. Cash used in investing
activities in the nine months ended January 31, 2000 was approximately $3.7
million, consisting of capital expenditures partially offset by the sale of
assets held for sale. Capital expenditures consisted of normal capital projects
to sustain and improve existing operations. For the nine month period ended
January 31, 2000, cash provided by financing activities consisted of increased
borrowings under the revolving credit agreement and the Railway Credit Agreement
offset by dividends paid and other financing activities.
12
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
We have entered into a $10 million operating lease for a new reheat furnace
for the Sand Springs rolling mill. The lease term is five years and contains an
option to purchase the equipment at fair market value at the end of the lease
term.
Earnings before interest, taxes, depreciation, amortization, and the
non-cash portion of the post-retirement expense (EBITDA) was approximately $4.1
million for the quarter ended January 31, 2000, compared to approximately $4.3
million for the same quarter in the prior year. For the nine months ended
January 31, 2000, EBITDA was $16.5 million compared to $15.1 million in nine
months ended January 31, 1999. We have excluded the electrode litigation
settlement in all EBITDA calculations. We believe that EBITDA is a valuable
measure of our operating cash flow and we consider it an indicator of our
ability to meet interest payments and fund capital expenditures. EBITDA does not
represent and should not be considered as an alternative to net income or cash
flow from operations as determined by generally accepted accounting principles
and EBITDA does not necessarily indicate whether cash flow will be sufficient
for cash requirements.
Our cash flow from operating activities and borrowings under our revolving
credit facilities are expected to be sufficient to fund capital improvements and
meet any near-term working capital requirements. We estimate that our annual
amount of necessary maintenance capital expenditures is approximately $3
million. On a long-term basis, we have significant debt service obligations. Our
ability to satisfy these obligations and to secure adequate capital resources in
the future will be dependent on our ability to generate adequate operating cash
flow. We expect that our cash flow from operations and borrowing availability
under the revolving credit facilities will be sufficient to service the First
Mortgage Notes and other investing activities. This will be dependent on our
overall operating performance and is subject to general business, financial and
other factors affecting us and others in the steel industry, as well as
prevailing economic conditions, certain of which are beyond our control. The
leveraged position we are in and the restrictive covenants we have in our bond
Indenture and the revolving credit facilities could significantly limit our
ability to withstand competitive pressures or adverse economic conditions.
Year 2000 Compliance
We recognized the Year 2000 (Y2K) Information Technology issue in 1986 and
began to address the problem with the re-design of our internal information
systems. In early 1998, we created a formal Y2K Task Force with executive
oversight to examine Y2K issues as they pertained to areas outside internal
information systems including information systems infrastructure, desktop
applications, manufacturing and distribution, product compliance and supply
chain. To date, we have experienced no significant problems and we do not
anticipate any significant problems related to the Y2K issue.
13
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to any significant pending legal proceedings other than
litigation incidental to our business that we believe will not materially
affect our financial position or results of operations. Such claims against us
are ordinarily covered by insurance. We can give no assurance, however, that
insurance will be available in the future at reasonable rates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. Exhibits
See exhibit index.
B. Reports on Form 8-K
No reports on Form 8-K were filed during the third quarter ended January 31,
2000.
14
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
SHEFFIELD STEEL CORPORATION
Date: March 9, 2000 /s/ Robert W. Ackerman
------------- ----------------------
Robert W. Ackerman, Chairman
and Chief Executive Officer
Date: March 9, 2000 /s/ Stephen R. Johnson
------------- -----------------------
Stephen R. Johnson, Vice President
and Chief Financial Officer
15
Exhibit Index
Exhibit No. Description Page No.
- ----------- ----------- --------
10.38 Second Restated Credit Agreement, dated January 5,
2000 between Sand Springs Railway Company and Bank
of Oklahoma, N.A. 17
27 Financial Data Schedule