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, 2001
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 3,422,175 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.
1
SHEFFIELD STEEL CORPORATION
FORM 10-Q
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets -
April 30, 2000 and January 31, 2001 3
Consolidated Condensed Statements of Operations
Three and nine month periods ended January 31, 2001 and 2000 4
Consolidated Condensed Statements of Cash Flows -
Nine months ended January 31, 2001 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 8-14
Item 3. Quantitative and Qualitative Disclosure about Market Risk 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signature 17
2
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(IN THOUSANDS)
January 31,
2001 April 30,
ASSETS (Unaudited) 2000
------- -------------- -------
Current assets:
Cash and cash equivalents $ 97 79
Accounts receivable, less allowance for doubtful accounts of $493
at January 31, 2001 and $541 at April 30, 2000 18,253 25,320
Inventories 46,063 49,333
Other current assets 5,295 4,727
-------- -------
Total current assets 69,708 79,459
Property, plant and equipment, net 65,430 66,245
Intangible assets, net 8,725 9,346
Other assets, net 3,416 3,560
Deferred income tax asset 1,843 1,843
-------- -------
$149,122 160,453
======== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Current portion of long-term debt $ 2,607 2,607
Accounts payable 14,250 20,722
Accrued interest payable 2,250 5,385
Accrued liabilities 6,054 6,701
-------- -------
Total current liabilities 25,161 35,415
Long-term debt, excluding current portion 142,647 130,135
Accrued post-retirement benefit costs 14,562 13,374
Other liabilities 2,524 742
-------- -------
Total liabilities 184,894 179,666
-------- -------
Stockholders' deficit:
Common stock 35 35
Additional paid-in capital - -
Accumulated deficit (34,683) (18,141)
-------- -------
(34,648) (18,106)
Loans to stockholders (1,124) (1,107)
-------- -------
Total stockholders' deficit (35,772) (19,213)
-------- -------
$149,122 160,453
======== =======
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,
------------------ -----------------
2001 2000 2001 2000
------- ------ ------- -------
Sales $29,112 39,545 120,654 124,997
Cost of sales 26,660 31,269 99,830 95,879
------- ------ ------- -------
Gross profit 2,452 8,276 20,824 29,118
Selling, general and administrative expense 3,703 3,811 11,471 11,728
Depreciation and amortization expense 2,115 2,086 6,327 6,245
Postretirement benefit expense other than pensions 646 496 1,938 1,788
Litigation settlement - - - (2,326)
------- ------ ------- -------
Operating income (loss) (4,012) 1,883 1,088 11,683
Other expense:
Interest expense, net 4,221 3,807 12,484 11,215
Other 4 5 8 153
------- ------ ------- -------
4,225 3,812 12,492 11,368
------- ------ ------- -------
Income (loss) from operations before
income taxes (8,237) (1,929) (11,404) 315
Income tax expense - - - -
------- ------ ------- -------
Net income (loss) $(8,237) (1,929) (11,404) 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,
------------------------------------
2001 2000
-------- ------
Cash flows from operating activities:
Net income (loss) $(11,404) 315
Adjustments to reconcile net income (loss) to net cash
(used in) provided by operating activities:
Depreciation and amortization 6,570 6,488
Loss (gain) on sale of assets held for sale - 118
Accrual of postretirement benefits other than pensions,
net of cash paid 1,188 885
Changes in assets and liabilities, net of effects from
acquisition of business 1,314 (7,653)
-------- ------
Net cash (used in) provided by operating activities (2,332) 153
-------- ------
Cash flows from investing activities:
Capital expenditures (5,024) (4,042)
Proceeds from sale of assets held for sale and equipment - 182
-------- ------
Net cash used in investing activities (5,024) (3,860)
-------- ------
Cash flows from financing activities:
Net increase in long-term debt 12,512 5,609
Dividends paid - (2,500)
Other (5,138) 581
-------- ------
Net cash provided by financing activities 7,374 3,690
-------- ------
Net increase in cash 18 (17)
Cash and cash equivalents at beginning of period 79 86
-------- ------
Cash and cash equivalents at end of period $ 97 69
======== ======
Supplemental disclosure of cash flow information
- ------------------------------------------------
Cash paid during the period for interest $ 15,376 14,189
======== ======
Cash paid during the period for income taxes $ - 138
======== ======
Noncash item:
Increase in loans to Shareholders 17 -
======== ======
See accompanying notes to consolidated condensed financial statements.
5
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
January 31, 2000 and 2001
(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, 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 94% 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, 2000.
Operating results for the quarter and nine months ended January 31, 2001 are not
necessarily indicative of the results that we expect for the year ending April
30, 2001.
2) INVENTORIES
The components of inventories are as follows:
January 31,
2001 April 30,
(Unaudited) 2000
------------- ----
Raw materials and storeroom supplies $11,004 11,419
Work in process 13,948 16,357
Finished goods 21,111 21,557
------- ------
$46,063 49,333
======= ======
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: January 31,
2001 April 30,
(Unaudited) 2000
---------- -------
First mortgage notes $110,000 110,000
Revolving credit agreement 28,969 15,380
Railway term loan 2,000 2,000
Railway revolving credit agreement 513 92
Equipment notes 2,783 3,543
Notes payable 989 1,727
-------- -------
145,254 132,742
Less current portion 2,607 2,607
-------- -------
$142,647 130,135
======== =======
On February 28, 2001, we amended our revolving credit agreement. The amendment
eliminates certain covenants if we maintain availability of above $2,000,000
from February 1, 2001 through April 30, 2001, and $5,000,000 at any time
thereafter and in the event that availability falls below the minimum
availability it limits capital expenditures and acquisitions and increases our
interest rate 0.5%.
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 in the first
quarter of fiscal 2000 related to settlements reached with certain of the
defendants.
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.
The following table provides information regarding the historical results of
operations (in thousands) for the quarters ended January 31, 2001 and 2000:
THREE MONTHS ENDED JANUARY 31,
---------------------------------------------------------------------
2001 2000
-------------------------------- -------------------------------
Operating Results: Net Sales % of Sales Net Sales % of Sales
---------------- -------------- -------------- --------------
Sales $29,112 100.0% 39,545 100.0%
Cost of sales 26,660 91.6% 31,269 79.1%
------- ------
Gross Profit 2,452 8.4% 8,276 20.9%
Selling and administrative 3,703 12.7% 3,811 9.6%
Depreciation and amortization 2,115 7.3% 2,086 5.3%
Postretirement benefit expense 646 2.2% 496 1.3%
Litigation settlement - - - -
------- ------
Operating income (loss) (4,012) (13.8%) 1,883 4.8%
Interest expense, net 4,221 14.5% 3,807 9.6%
Other 4 0.0% 5 0.0%
------- ------
Loss from operations before
income taxes (8,237) (28.3%) (1,929) (4.9%)
Income tax expense - - - -
------- ------
Net loss $(8,237) (28.3%) (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,
----------------------------------------
2001 2000
------ -------
Tons shipped:
Hot Rolled Bars 32,748 40,726
Rebar 28,801 42,768
Fabricated Products 12,235 17,080
------ -------
Total finished products 73,784 100,574
Billets 7,542 6,621
------ -------
Total tons shipped 81,326 107,195
====== =======
Average price per ton shipped 358 369
Average production cost per ton 328 292
THREE MONTHS ENDED JANUARY 31, 2001 AS COMPARED TO THREE MONTHS ENDED
JANUARY 31, 2000
SALES. Sales for the third quarter of fiscal 2001 were $29.1 million.
Shipments decreased in comparison to the same quarter in the prior year, while
pricing generally decreased as summarized below:
o Steel market conditions were abnormally weak in the third fiscal quarter 2001
due to widespread weaker demand for steel products, the continuing influx of
steel imports, and adverse weather conditions. In comparison to the third
quarter of fiscal 2000, shipments of our hot rolled bar products out of Sand
Springs increased 7%. Joliet shipments decreased 35% due to market conditions
in the world and domestic steel business and notable weakness in the
agricultural equipment industry. Pricing of hot rolled bar products decreased
approximately 5%.
o In comparison to the third quarter of fiscal 2000, rebar shipments decreased
33% and pricing decreased 3%. Shipments decreased due to heavy rainfall in
November and record breaking snow fall in December. Rebar shipments are very
sensitive to rainy or cold weather conditions. The weak shipments do not
reflect shipments lost, but shipments delayed.
o In comparison to the third quarter of fiscal 2000, fabricated product
shipments decreased 28% and the lower shipments were due to adverse weather
conditions in November and December. Pricing decreased 1%, primarily due to
sales mix.
o In comparison to the third quarter of Fiscal 2000, billet shipments increased
by 14%. Pricing decreased 7% because billet pricing is related to scrap raw
material costs, which are currently very low.
9
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
COST OF SALES AND EXPENSES. Average production cost per ton increased to $328
in the third quarter of fiscal 2001 from $292 in the third quarter of fiscal
2000 primarily due to increases in energy costs, and reduced operations due to
weak shipments and our efforts to reduce inventories along with a one week
outage in the Sand Springs mill and two weeks in the Joliet rolling mill.
Reduced production means we have fewer tons of production to spread fixed or
semi-fixed costs, increasing costs per ton. Hot rolled bar and rebar shipments
were 21,945 tons lower in the third quarter of fiscal 2001 compared to the same
quarter in fiscal 2000. Because our energy costs continue to increase, we
expect our gas and electric utility costs to be higher for the foreseeable
future partially offset by efficiencies related to the new reheat furnace
installed in December 2000.
Selling, general and administrative expenses decreased approximately $0.1
million over the third quarter of fiscal year 2001.
Interest expense increased in comparison to the third quarter of fiscal
2000 due to higher interest rates on your revolving credit agreement and the
higher level of outstanding debt during the quarter. In the past year,
additions to debt were due to working capital requirements, capital
expenditures, and purchases of common stock.
NINE MONTHS ENDED JANUARY 31, 2001 AS COMPARED TO NINE MONTHS ENDED
JANUARY 31, 2000
The following table provides information regarding the historical results of
operations (in thousands) for the nine months ended January 31, 2001 and 2000:
NINE MONTHS ENDED JANUARY 31,
---------------------------------------------------------------------
2001 2000
-------- -------
Operating Results: Net Sales % of Sales Net Sales % of Sales
---------------- -------------- -------------- ---------------
Sales $120,654 100.0% 124,997 100.0%
Cost of sales 99,830 82.7% 95,879 76.7%
-------- -------
Gross Profit 20,824 17.3% 29,118 23.3%
Selling and administrative 11,471 9.5% 11,728 9.4%
Depreciation and amortization 6,327 5.2% 6,245 5.0%
Postretirement benefit expense 1,938 1.6% 1,788 1.4%
Litigation settlement - 0.0% (2,326) (1.9%)
-------- -------
Operating income 1,088 .9% 11,683 9.3%
Interest expense, net 12,484 10.3% 11,215 9.0%
Other 8 0.0% 153 0.1%
-------- -------
Income (loss) from
operations before income
taxes (11,404) (9.5%) 315 0.3%
Income tax expense - - - -
-------- -------
Net income (loss) $(11,404) (9.5%) 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,
----------------------------------------
2001 2000
------- -------
Tons shipped:
Hot Rolled Bars 120,898 117,826
Rebar 130,242 141,461
Fabricated Products 48,844 51,759
------- -------
Total finished products 299,984 311,046
Billets 33,806 29,632
------- -------
Total tons shipped 333,790 340,678
======= =======
Average price per ton shipped 362 367
Average production cost per ton 311 281
SALES. Sales for the nine months ended January 31, 2001 were $121.0 million.
Shipments decreased in comparison to the same period in the prior year, while
pricing generally decreased as summarized below:
o In comparison to the nine months ended January 31, 2000, shipments of our hot
rolled bar products out of Sand Springs increased 39%. The Sand Springs Rolling
Mill's productivity rates remained consistent with prior year. Joliet shipments
decreased 15% due to market conditions in the world and domestic steel business
and notable weakness in the agricultural equipment industry. Pricing of hot
rolled bar products decreased approximately 3% due primarily to product mix,
particularly the increase in Sand Springs shipments and the decrease in Joliet
shipments. Certain competitive pressures also influenced pricing.
o Rebar shipments decreased in comparison to the nine months ended January 31,
2000 due to heavy rainfall in November and recording breaking snowfall in
December. Pricing decreased 2% due to the continued impact of imports and over
capacity in the industry.
o Fabricated shipments decreased 6% in comparison to the nine months ended
January 31, 2000 due to bad weather. Prices are consistent with the nine month
period ended January 31, 2000.
o Billet shipments were higher compared to the nine months ended January 31,
2000.
11
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
COST OF SALES AND EXPENSES. Average product cost per ton increased to $299 in
the nine month period ended January 31, 2001 from $281 in the same period in the
prior year primarily due to increases in energy costs and reduced operations due
to weak shipments and our efforts to reduce inventories, along with a one week
outage in the Sand Springs mill and two weeks in the Joliet rolling mill.
Reduced production means we have fewer tons of production to spread fixed or
semi-fixed costs, increasing costs per ton. Hot rolled bar and rebar shipments
were 8,147 tons lower in the nine month period ended January 31, 2001 compared
to the same nine months in fiscal year 2000. Energy costs continue to be high
but lower scrap costs should offset this added expense.
Selling, general and administrative expenses decreased approximately $0.3
million or 2% for the nine month period ended January 31, 2001 compared to the
same period in the prior year, primarily due to lower organizational costs.
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. In the first quarter of fiscal 2000, we
recorded an additional $2.3 million from different defendants.
Interest expense increased 3.2% in comparison to the first nine months of the
prior year due to higher interest rates on our revolving credit agreement and
the higher level of outstanding dept during the quarter. In the past year,
additions to debt were due to working capital requirements, capital
expenditures, and purchases of common stock.
LIQUIDITY AND CAPITAL RESOURCES
As of January 31, 2001, we had long-term indebtedness of $142.6 million and
approximately $8.6 million of additional borrowing availability under our
revolving credit agreements. We have executed an eleventh amendment from Bank
of America dated February 28, 2001 that waives certain loan covenants and
reduces the availability holdback from $10 million to $2 million until April 30,
2001. On May 1, 2001 the holdback increases to $5 million. 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.
Management believes our cash situation is challenging but manageable through
working capital management, restricting capital spending to maintenance levels,
and improving operating cash flow. This statement must be qualified by general
steel economic conditions and our ability to realize operating efficiencies. We
are getting into our best shipping season, which generally begins in March and
extends through October. Our new reheat furnace allows certain opportunities
for production efficiencies, lower costs, and selected growth, but these must be
attained and we are dependant on general steel conditions to sell existing
additional production.
12
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Cash flow used in operating activities was approximately $2.3 million for the
nine month period ended January 31, 2001, as compared with cash flow provided in
operating activities of approximately $0.2 million for the nine month period
ended January 31, 2000. Improvement in cash flow from inventory management were
offset by operating losses. Cash used in investing activities in the nine months
ended January 31, 2001 was approximately $5 million, consisting of capital
expenditures. Capital expenditures consisted of projects to sustain and improve
existing operations. For the nine month period ended January 31, 2001, cash
provided by financing activities was $7.4 million consisting of increased
borrowings under the revolving credit agreement and other financing activities.
Earnings before interest, taxes, depreciation, amortization, and the non-cash
portion of the post-retirement expense (EBITDA) was approximately $(1.5) million
for the quarter ended January 31, 2001, compared to approximately $4.1 million
for the same quarter in the prior year. For the nine months ended January 31,
2001, EBITDA was $9.4 million compared to $16.5 million in nine months ended
January 31, 2000. Adverse weather conditions, a weak steel economy, imports,
reduced operations and depressed steel prices contributed to the significant
decrease in EBITDA. 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 a maintenance level of
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. Our ability to service the First
Mortgage Notes and other investing activities, will be dependent on our overall
operating performance and is subject to general business, financial and other
factors affecting others and us in the steel industry, as well as prevailing
economic conditions, certain of which are beyond our control. This will depend
on cash flows from operations and borrowing availability under the revolving
credit facilities. 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.
On November 23, 1999, we entered into a project lease agreement with TA Steel
I, LLC, an affiliate of Transamerica Equipment Financial Services Corporation
("Transamerica"). This project lease agreement is an operating lease for a
reheat furnace for the rolling mill at our Sand Springs facility. At January
31, 2001, we were not in compliance with our fixed charge coverage ratio that
required that our ratio of fixed charges to EBITDA not less than 0.90:1.00.
Accordingly, we are currently in default under the project lease agreement.
However, Sheffield Steel and Transamerica are currently in negotiations to waive
the default and possibly amend the project lease agreement.
13
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
NEW ACCOUNTING PRONOUNCEMENTS
In March 2000, the FASB issued Interpretation No. 44, ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION: AN INTERPRETATION OF APB OPINION NO.
25. Among other issues, Interpretation No. 44 clarifies the application of
Accounting Principles Board Opinion No. 25 (APB No. 25) regarding (a) the
definition of employee for purposes of applying APB No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
options in a business combination. The provisions of Interpretation No. 44
affecting us have been applied on a prospective basis effective July 1, 2000.
There was no impact from the adoption of this interpretation in the six-month
period ended October 31, 2000.
SEC Staff Accounting Bulletin No. 101, Revenue Recognition and Staff
Accounting Bulletin No. 101A. This guidance adds new Topic 13, Revenue
Recognition, to the SEC Codification of Staff Accounting Bulletins. We
understand that the SEC staff is preparing a document to address significant
implementation issues related to SAB 101. To the extent that SAB 101 ultimately
changes revenue recognition practices, we will adopt SAB 101 no later than the
fourth quarter of fiscal 2001 through a cumulative effect adjustment. We do not
anticipate that the adoption of this Bulletin, as amended, will have a material
impact on our financial position and results of operations.
In June 1998, Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
instruments and hedging Activities". SFAS 133 establishes new accounting and
reporting standards for derivative financial instruments and for hedging
activities. SFAS 133 requires an entity to measure all derivatives at fair
value and to recognize them in the balance sheet as an asset or liability,
depending on the entity's rights or obligations under the applicable derivative
contract. The recognition of changes in fair value of a derivative that effect
the income statement will depend on the intended use of the derivative. If the
derivative does not qualify as a hedging instrument, the gain or loss on the
derivative will be recognized currently in earnings. If the derivative
qualifies for special hedge accounting, the gain or loss in the derivative will
either 1) be recognized in income along with an offsetting adjustment to the
basis of the item being hedged or 2) be deferred in other comprehensive income
and reclassified to earnings in the same period or periods during which the
hedged transaction affects earnings. SFAS 133 was amended by Statement of
Financial Accounting Standards no. 138 in June 2000 that amended the accounting
and reporting standards of SFAS 133 for certain derivative instruments and
certain hedging activities. SFAS 138 also amended SFAS 133 for decisions made
by the FASB relating to the Derivatives implementation Group process. The
Company does not expect adoption as of May 1, 2001 to have a material effect on
the financial position of the Company.
14
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our earnings are affected by changes in interest rates (primarily the prime
rate). At January 31, 2001, we had approximately $35.3 million of long-term
debt with variable rates. Therefore, we may have changes in interest expense
due to fluctuations of interest rates in the markets. Interest risk can be
estimated by measuring the impact of a 10% increase in interest rates. We would
incur an additional $335 thousand of interest expense per year on our variable
rate borrowing if our debt levels remained approximately the same as at January
31, 2001. Because we experience changes in our debt levels due to operating
requirements or changes in the general economic environment that we are unable
to predict, this estimate assumes no changes in our financial structure. The
fair value of our First Mortgage Notes at January 31, 2001, based on the
currently offered market price was $38.5 million versus a carrying value of
approximately $110 million.
15
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,
2001.
16
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 15, 2001 /s/ James P. Nolan
------------------ -------------------
James P. Nolan, President,
and Chief Operating Officer
Date: March 15, 2001 /s/ Stephen R. Johnson
------------------ -----------------------
Stephen R. Johnson, Vice President
and Chief Financial Officer
17
EXHIBIT INDEX
Exhibit No. Description Page No.
- ------------- ----------- --------
10.40 Eleventh Amendment and Waiver to Receivable and
Inventory financing Agreement, 19 dated February 28,
2001 between Sheffield Steel Corporation and Bank of
America N.A.
18