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 OCTOBER 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 3,408,675 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 -
October 31, 2001 and April 30, 2001 3
Consolidated Condensed Statements of Operations -
Three and six month periods ended October 31, 2001 and 2000 4
Consolidated Condensed Statements of Cash Flows -
Six months ended October 31, 2001 and 2000 5
Notes to Consolidated Condensed Financial Statements 6-8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-16
Item 3. Quantitative and Qualitative Disclosure about Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signature 19
Statements regarding the Company's ability to complete its bankruptcy
reorganization proceedings timely, the outcome of the reorganization plan, the
Company's ability to sustain current operations during the pendency of the
reorganization including its ability to maintain normal relationships with
customers, the ability of the company to establish normal terms and conditions
with suppliers and vendors, costs of the reorganization process, the adequacy of
financing arrangements during the reorganization period, future market prices,
operating results, synergies, future operating efficiencies, future governmental
actions and the results of such actions, cost savings and other statements which
are not historical facts contained in this Quarterly Report on Form 10-Q are
forward-looking statements. The words "expect", "project", "estimate",
"believe", "anticipate", "plan", "intend", "could", "should", "may", "predict"
and similar expressions are also intended to identify forward-looking
statements. Such statements involve risks, uncertainties and assumptions,
including, without limitation, the results of the bankruptcy proceedings, court
decisions and actions, the negotiating positions of various constituencies, the
results of negotiations, market factors, the effect of weather and economic
conditions, the ability of the Company to realize planned cost savings, the
available supply of steel and other factors detailed in this and other Company
filings with the Securities and Exchange Commission. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual outcomes may vary materially from those indicated.
2
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
October 31,
2001 April 30,
ASSETS (Unaudited) 2001
------ -------------- ----------
Current assets:
Cash and cash equivalents $ 64 181
Accounts receivable, less allowance for doubtful accounts of $552
at October 31, 2001 and $541 at April 30, 2001 19,773 22,531
Inventories 37,882 39,910
Other current assets 1,374 1,144
-------- -------
Total current assets 59,093 63,766
Property, plant and equipment, net 61,235 64,296
Intangible assets, net 8,079 8,790
Receivable from parent, less valuation allowance of $2,205 500 500
Other assets, net 473 886
-------- -------
$129,380 138,238
======== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
-------------------------------------
Current liabilities:
Current portion of long-term debt $138,795 34,886
Accounts payable 11,652 12,538
Accrued interest payable 10,783 5,444
Accrued liabilities 6,943 6,374
-------- -------
Total current liabilities 168,173 59,242
Long-term debt, excluding current portion 824 111,384
Accrued post-retirement benefit costs 15,242 14,426
Other liabilities 3,350 2,375
-------- -------
Total liabilities 187,589 187,427
-------- -------
Stockholders' deficit:
Common stock 34 34
Accumulated deficit (57,102) (48,093)
-------- -------
(57,068) (48,059)
Loans to stockholders (1,141) (1,130)
-------- -------
Total stockholders' deficit (58,209) (49,189)
-------- -------
$129,380 138,238
======== =======
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 Six Months Ended
October 31, October 31,
----------------------- -----------------------
2001 2000 2001 2000
------- ------- ------ ------
Sales $37,963 45,769 77,184 91,544
Cost of sales 31,672 36,952 63,847 73,175
------- ------- ------ ------
Gross profit 6,291 8,817 13,337 18,369
Selling, general and administrative expense 3,456 4,080 7,068 7,768
Depreciation and amortization expense 2,002 2,108 4,149 4,212
Postretirement benefit expense other than pensions 804 646 1,608 1,292
Restructuring Expense 657 - 1,314 -
------- ------- ------ ------
Operating income (loss) (628) 1,983 (802) 5,097
Other (income)expense:
Interest expense, net 4,049 4,148 8,220 8,261
Other (income)expense (16) 4 (5) 4
------- ------- ------ ------
4,033 4,152 8,215 8,265
------- ------- ------ ------
Loss from operations before
Income taxes (4,661) (2,169) (9,017) (3,168)
Income tax expense - - - -
------- ------- ------ ------
Net Loss $(4,661) $(2,169) (9,017) (3,168)
======= ======= ====== ======
See accompanying notes to consolidated condensed financial statements.
4
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Six Months Ended
October 31,
-------------------------
2001 2000
------- ------
Cash flows from operating activities:
Net loss $(9,017) (3,168)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,311 4,344
Accrual of postretirement benefits other than pensions,
net of cash paid 816 792
Changes in assets and liabilities 11,324 (460)
------- ------
Net cash provided by operating activities 7,434 1,508
------- ------
Cash flows from investing activities:
Capital expenditures (769) (3,968)
------- ------
Net cash (used in) investing activities (769) (3,968)
------- ------
Cash flows from financing activities:
Net increase (decrease) in long-term debt (6,651) 5,818
Other (131) (3,289)
------- ------
Net cash provided by (used in) financing activities (6,782) 2,529
------- ------
Net increase (decrease) in cash (117) 69
Cash and cash equivalents at beginning of period 181 79
------- ------
Cash and cash equivalents at end of period $ 64 148
======= ======
Supplemental disclosure of cash flow information
- ------------------------------------------------
Cash paid during the period for interest $ 313 8,087
======= ======
Cash paid during the period for income taxes $ - -
======= ======
Noncash item:
Increase in loans to Shareholders 11 1,139
======= ======
See accompanying notes to consolidated condensed financial statements.
5
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
OCTOBER 31, 2001 AND 2000
(IN THOUSANDS)
(UNAUDITED)
1) NATURE OF OPERATIONS, ORGANIZATIONS AND OTHER RELATED INFORMATION
Sheffield Steel is a mini-mill producer of SBQ and MBQ hot-rolled bar products,
concrete reinforcing bar and fabricated products including fabricated rebar,
steel fence posts and railroad track spikes. The Company's headquarters and
largest manufacturing facility is located in Sand Springs, Oklahoma where it has
an annual billet making capacity of 600,000 tons. It also has a rolling mill in
Joliet, Illinois and two fabrication shops in the Kansas City area.
On December 7, 2001 (the Petition Date), Sheffield Steel Corporation and its
subsidiaries, Waddell's Rebar Fabricators, Inc. and Wellington Industries, Inc.
(collectively, the Debtors), filed a voluntary petition for reorganization under
Chapter 11 of the United States Bankruptcy Code. The petition requesting an
order for relief was filed in United States Bankruptcy Court, Northern District
of Okalahoma (the Bankruptcy Court), where the case is now pending before The
Honorable Dana L. Rasure (Case No. 01-05508-R; 01-05509-R; and 01-05510).
Sheffield Steel intends to continue normal operations and does not currently
foresee any significant interruption in the shipment of product to our customers
in the near term. The Company is managing its business subsequent to the
Petition Date as debtor-in-possession subject to Bankruptcy Court approval and
oversight. The Company attributed the need to reorganize to market conditions
in the U.S. steel industry resulting from significant pressure from imported
steel products, low product pricing and high energy costs. These factors,
coupled with the reduced demand, have adversely affected the Company over the
past 18 months.
Under Chapter 11 proceedings, actions by creditors to collect claims in
existence at the filing date ("prepetition") are stayed ("deferred"), absent
specific Bankruptcy Court authorization to pay such claims, while the Company
continues to manage the business as a debtor-in-possession. The rights of and
ultimate payments by the Company to prepetition creditors and to equity
investors may be substantially altered. This could result in claims being
liquidated in the Chapter 11 proceedings at less (and possibly substantially
less) than 100% of their face value and the equity of the Company's equity
investors being diluted or cancelled. The Company's prepetition creditors and
its equity investors will each have votes in the plan of reorganization. The
Company has not yet proposed a plan of reorganization. Due to material
uncertainties, it is not possible to determine the additional amount of claims
that may arise or ultimately be filed, or to predict the length of time the
Company will operate under the protection of Chapter 11, the outcome of the
Chapter 11 proceedings in general, whether the Company will continue to operate
under its current organizational structure, or the effect of the proceedings on
the business of the Company or its subsidiaries or on the interests of the
various creditors and security holders.
On December 12, 2001, the Bankruptcy Court approved an Interim Order authorizing
the use of cash collateral (the Collateral Agreement) to continue to operate on
a going concern basis. Under the Collateral Agreement, which was consented to
by Bank of America, all cash generated from operations subsequent to the
Petition Date can be used by the Company to pay wages and generally conduct its
business affairs so as to avoid immediate and irreparable harm to the Company
and the going concern value of its assets.
6
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
Although the Company has entered into the Collateral Agreement, the Company may
need to obtain additional financing to meet its cash flow requirements.
Oversight by the Bankruptcy Court limits the Company's ability to incur
additional indebtedness or sell assets (most of which are pledged), and may
otherwise limit the operational and financial flexibility of the Company.
The accompanying consolidated financial statements have been prepared on a going
concern basis of accounting and do not reflect any adjustments that might result
if the Company is unable to continue as a going concern. The Company's recurring
losses and negative cash flows from operations, current liabilities in excess of
current assets and the subsequent Chapter 11 cases raise substantial doubt about
the Company's ability to continue as a going concern. As discussed above,
management intends to submit a plan for reorganization to the Bankruptcy Court.
The ability of the Company to continue as a going concern and appropriateness of
using the going concern basis is dependent upon, among other things, (i) the
Company's ability to comply with debtor-in-possession financing agreements, (ii)
submission and confirmation of a plan of reorganization under the Bankruptcy
Code, (iii) the Company's ability to achieve profitable operations after such
confirmation, and (iv) the Company's ability to generate sufficient cash from
operations to meet its obligations.
Management believes that a plan of reorganization, as it is being developed and
subject to approval of the Bankruptcy Court, and the Collateral Agreement, will
provide sufficient liquidity to allow the Company to continue as a going
concern; however, there can be no assurance that the sources of liquidity will
be available or sufficient to meet the Company's needs. The consolidated
financial statements do not include any adjustments relating to recoverability
and classification of recorded asset amounts or the amount and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
Prior to the Company's filing for bankruptcy protection, the Company was in
default of certain restrictive covenants under its revolving credit agreements
and entered into a forbearance agreement with Bank of America. In addition, the
Company did not make its scheduled semi-annual interest payments due June 1, and
December 1, 2001, under the First Mortgage Notes due 2005 as required. All such
borrowings are classified as current in the accompanying consolidated balance
sheet. See Note 4.
2) 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) and Sand Springs Railway Company (the Railway).
HMK Enterprises, Inc. (HMK) owns approximately 95% 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.
7
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
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, 2001.
Operating results for the quarter and six months ended October 31, 2001 are not
necessarily indicative of the results that we expect for the year ending April
30, 2002.
3) INVENTORIES
The components of inventories are as follows:
October 31,
2001 April 30,
(Unaudited) 2001
------------- -------------
Raw materials and storeroom materials $ 8,480 9,652
Work in process 8,820 11,838
Finished goods 20,582 18,420
------- ------
$37,882 39,910
======= ======
4) LONG-TERM DEBT
Long-term debt is comprised of the following:
October 31,
2001 April 30,
(Unaudited) 2001
------------- -------------
First mortgage notes $110,000 110,000
Revolving credit agreement 25,225 30,811
Railway term loan 1,500 1,500
Railway revolving credit agreement 707 718
Equipment notes 1,943 2,503
Notes payable 244 738
-------- -------
139,619 146,270
Less current portion 138,795 34,886
-------- -------
$ 824 111,384
======== =======
As a result of the Chapter 11 filing, Events of Default, as defined in the
related debt agreements, have occurred with respect to all of the Company's
secured and unsecured debt. Subsequent to the Petition Date, the secured debt
will be classified as a current liability and the unsecured debt will be
classified as liabilities subject to compromise.
8
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.
LIQUIDITY
On December 7, 2001 (the Petition Date), Sheffield Steel Corporation and its
subsidiaries, Waddell's Rebar Fabricators, Inc. and Wellington Industries, Inc.
(collectively, the Debtors), filed a voluntary petition for reorganization under
Chapter 11 of the United States Bankruptcy Code. The petition requesting an
order for relief was filed in United States Bankruptcy Court, Northern District
of Okalahoma (the Bankruptcy Court), where the case is now pending before The
Honorable Dana L. Rasure (Case No. 01-05508-R; 01-05509-R; and 01-05510). See
footnote 1 to the accompanying financial statements.
Although the Company has obtained an interim cash collateral agreement,
liquidity will be impacted by the uncertainty of the bankruptcy proceedings,
including restructuring and settlement of prepetition obligations, the Company's
failure to attain projected operating results and the ability to obtain other
financing. As a result of these uncertainties, there can be no assurance
existing or future sources of liquidity will be adequate. The Company's failure
to achieve its cost reduction initiatives or improve operating performance could
also have a material adverse effect on the financial results or liquidity of the
Company in the future. In addition, external factors affect the Company's market
and related production costs. Unfavorable price movements for outside purchases
of scrap, and energy, among other things, could also have a material adverse
effect on the financial results or liquidity of the Company.
Management has restricted capital spending to maintenance levels and is
working on several initiatives to improve operating cash flow. This statement
must be qualified by general steel economic conditions and our ability to
realize operating efficiencies. We are into our weakest shipping season, which
generally begins in November and extends through February. Our new reheat
furnace allows certain opportunities for production efficiencies, lower costs,
and selected growth, but these must be attained and we are dependent on general
steel conditions to sell additional production.
Management believes that a plan of reorganization, as it is being developed
and subject to approval of the Bankruptcy Court, and the Collateral Agreement,
will provide sufficient liquidity to allow the Company to continue as a going
concern; however, there can be no assurance that the sources of liquidity will
be available or sufficient to meet the Company's needs. The consolidated
financial statements do not include any adjustments relating to recoverability
and classification of recorded asset amounts or the amount and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
9
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
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 October 31, 2001 and 2000:
THREE MONTHS ENDED OCTOBER 31,
------------------------------------------------------------------
2001 2000
--------------------------------- ------------------------------
OPERATING RESULTS: Net Sales % of Sales Net Sales % of Sales
---------------- -------------- -------------- -------------
Sales $37,963 100.0% 45,769 100.0%
Cost of sales 31,672 83.4% 36,952 80.7%
------- -------
Gross Profit 6,291 16.6% 8,817 19.3%
Selling and administrative 3,456 9.1% 4,080 8.9%
Depreciation and amortization 2,002 5.3% 2,108 4.6%
Postretirement benefit expense 804 2.1% 646 1.4%
Restructuring Expense 657 1.7% - 0.0%
------- -------
Operating income (628) (1.7%) 1,983 4.3%
Interest expense, net 4,049 10.7% 4,148 9.1%
Other (income) expense (16) 0.0% 4 0.0%
------- -------
Loss from operations before
income taxes (4,661) (12.3%) (2,169) (4.7%)
Income tax expense - - - -
------- -------
Net loss $(4,661) (12.3%) $(2,169) (4.7%)
======= =======
10
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
The following table provides information regarding the historical shipment
levels and average selling prices per ton:
THREE MONTHS ENDED OCTOBER 31,
-----------------------------
2001 2000
-------- --------
Tons shipped:
Hot Rolled Bars 36,126 43,072
Rebar 52,801 53,054
Fabricated Products 16,757 17,668
-------- --------
Total finished products 105,684 113,794
Billets 4,994 14,171
-------- --------
Total tons shipped 110,678 127,965
======== ========
Average price per ton shipped $ 343 $ 358
Average production cost per ton $ 286 $ 289
THREE MONTHS ENDED OCTOBER 31, 2001 AS COMPARED TO THREE MONTHS ENDED OCTOBER
31, 2000
SALES. Sales for the second quarter of Fiscal Year 2002 were $38.0 million.
Shipments decreased in comparison to the same quarter in the prior year, while
pricing generally decreased as summarized below:
o Steel market conditions continued to be weak in the second quarter of Fiscal
Year 2002 due to widespread weaker demand for steel products and the continuing
influx of steel imports. In comparison to the second quarter of Fiscal Year
2001, shipments of our hot rolled bar products out of Sand Springs decreased 13%
and Joliet shipments decreased 18%. Pricing of hot rolled bar products
decreased approximately 8%.
o In comparison to the second quarter of Fiscal Year 2001, rebar shipments
decreased less than 1% and pricing decreased 6%. Rebar demand continues to be
strong, however pricing is down in comparison to prior year due to the continued
impact of imports.
o In comparison to the second quarter of Fiscal Year 2001, fabricated product
shipments decreased 5% the lower shipments were due primarily to weaker markets
for our fabricated rebar and fence posts, but volumes were also slightly lower
for railroad spikes. Pricing decreased 5%, primarily due to weak fabricated
rebar pricing.
o In comparison to the second quarter of Fiscal Year 2001, billet shipments
decreased by 65%. Shipments of billets decreased as we limited melt shop
operations to avoid periods of high electricity costs during August and
September. Pricing decreased 1% because billet pricing is related to scrap raw
material costs, which are currently very low.
11
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
COST OF SALES AND EXPENSES. Average production cost per ton decreased to
$286 in the second quarter of Fiscal Year 2002 from $289 in the second quarter
of Fiscal Year 2001 primarily due to decrease in steel scrap raw material costs
and despite a more expensive product mix (9,177 ton reduction in billet sales,
our lowest cost product). Hot rolled bar and rebar shipments were 7,199 tons
lower in the second quarter of Fiscal Year 2002 compared to the same quarter in
Fiscal Year 2001. Energy costs were lower during the second quarter of Fiscal
Year 2002 as compared to second quarter of Fiscal Year 2001. We have seen gas
costs moderate recently and we have seen electric costs moderate towards the end
of the second quarter of Fiscal Year 2002 as well.
Selling, general and administrative expenses decreased approximately $624
thousand over the second quarter of Fiscal Year 2002 because of tight spending
controls throughout the company.
Interest expense decreased in comparison to the first quarter of Fiscal Year
2001 due to lower balances on our revolving credit agreement. In the past year,
any additions to debt were due to working capital requirements, capital
expenditures, and purchases of common stock.
SIX MONTHS ENDED OCTOBER 31, 2001 AS COMPARED TO SIX MONTHS ENDED OCTOBER 31,
2000
The following table provides information regarding the historical results of
operations (in thousands) for the six months ended October 31, 2001 and 2000:
SIX MONTHS ENDED OCTOBER 31,
------------------------------------------------------------------
2001 2000
--------------------------------- ------------------------------
OPERATING RESULTS: Net Sales % of Sales Net Sales % of Sales
---------------- -------------- -------------- -------------
Sales $77,184 100.0% $91,544 100.0%
Cost of sales 63,847 82.7% 73,175 79.9%
------- -------
Gross Profit 13,337 17.3% 18,369 20.1%
Selling and administrative 7,068 9.2% 7,768 8.5%
Depreciation and amortization 4,149 5.4% 4,212 4.6%
Postretirement benefit expense 1,608 2.1% 1,292 1.4%
Restructuring Expense 1,314 1.7% - -
------- -------
Operating income (802) 0.1% 5,097 5.6%
Interest expense, net 8,220 10.7% 8,261 9.0%
Other (income) expense (5) 0.0% 4 0.0%
------- -------
Income (loss) from
operations before income (9,017) (11.7%) (3,168) (3.5%)
taxes
Income tax expense - - - -
------- -------
Net income (loss) $(9,017) (11.7%) $(3,168) (3.5%)
======= =======
12
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
The following table provides information regarding the historical shipment
levels and average selling prices per ton:
Six Months Ended October 31,
-----------------------------
2001 2000
-------- --------
Tons shipped:
Hot Rolled Bars 68,130 88,150
Rebar 115,302 101,441
Fabricated Products 32,887 36,609
-------- --------
Total finished products 216,319 226,200
Billets 12,181 26,264
-------- --------
Total tons shipped 228,500 252,464
======== ========
Average price per ton shipped $ 338 $ 363
Average production cost per ton $ 279 $ 290
SALES. Sales for the six months ended October 31, 2002 were $77.2 million.
Shipments decreased in comparison to the period in the prior year, while pricing
was slightly decreased as summarized below:
o In comparison to the six months ending October 31, 2001, shipments of our hot
rolled bar products out of Sand Springs decreased 19%. Joliet shipments
decreased 26% due to market conditions in the domestic steel business and
notable weakness in the agricultural equipment industry. Pricing of hot
rolled bar products decreased approximately 8% due primarily to product mix
and certain competitive pressures also influenced pricing.
o Rebar shipments increased 14% due to improved market conditions compared to
the six months ended October 31, 2001. Rebar demand continues to be strong,
however pricing is down in comparison to the prior year due to the continued
impact of imports. Pricing was off 6% from the same period in the prior
year.
o Fabricated product shipments decreased 10% due primarily to lower volume of
fence posts and to a lesser extent, fabricated rebar and railroad spikes.
Pricing decreased 4% when compared with same period in the prior year.
o Billet shipments were 54% lower compared to the first six months of last
year. Due to limited availability of production time as we limited melt shop
operations to avoid periods of high electricity costs during August and
July.
COST OF SALES AND EXPENSES. Average product costs decreased to $279 in the
first six months of fiscal 2002 from $290 in the first six months of fiscal 2001
due to decreases in energy costs and lower scrap costs associated with finished
goods product mix. Hot rolled bar and rebar shipments were 6,152 tons lower in
the first six months of fiscal 2002 compared to the same six months in fiscal
2001.
13
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Selling, general and administrative expenses decreased approximately $700
thousand over the first six months of fiscal 2001 due to tight spending controls
throughout the company.
Interest expense decreased slightly in comparison to the first six months of
the prior year due to lower balances on our revolving credit agreement and the
level of outstanding debt during the quarter. In the past year, any additions
to debt were due to working capital requirements, capital expenditures, and
purchases of common stock.
CASH FLOW ANALYSIS
Cash flow provided in operating activities was approximately $7.4 million for
the six-month period ended October 31, 2001, as compared with cash flow used in
operating activities of approximately $1.5 million for the six month period
ended October 31, 2000. Cash flow from operations improved over the prior year
primarily as a result of a reduction in inventory and accounts receivable and
non-payment of the interest expense on the First Mortgage Notes due 2005. Cash
used in investing activities in the six months ended October 31, 2001 was
approximately $769 thousand, consisting of capital expenditures for projects to
sustain existing operations. For the six month period ended October 31, 2001,
cash used by financing activities was $6.8 million consisting of decreased
borrowings under the revolving credit agreement and other payments toward
equipments notes and other notes payable.
Earnings before interest, taxes, depreciation, amortization, and the non-cash
portion of the post-retirement expense (EBITDA) was approximately $1.9 million
and would have been $2.4 million without the restructuring costs for the quarter
ended October 31, 2001, compared to approximately $4.5 million for the same
quarter in the prior year. A weak steel economy, recession, imports, 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.
14
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
RECENT ACCOUNTING PRONOUNCEMENTS
On May 1, 2001, The Company adopted the provisions of Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("Statement 133"). Statement 133 establishes new accounting and
reporting standards for derivative financial instruments and for hedging
activities. Statement 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 affect
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 on 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. Statement 133 was amended by Statement of
Financial Accounting Standards No. 138 ("Statement 138") in June 2000 that
amended the accounting and reporting standards of statement 133 for certain
derivative instruments and certain hedging activities. Statement 138 also
amended Statement 133 for decisions made by the Financial Accounting Standards
Board (FASB) relating to the Derivatives Implementation Group process.
Adoption of Statement 133, as of May 1, 2001, did not have a material effect
on results of operations or financial position of the Company, because the
Company does not have any free standing derivatives or embedded derivatives that
would be required to be separated from the host contract and accounted for under
SFAS 133.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations" (Statement 141), Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (Statement 142), and
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" (Statement 143). Statement 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. Statement 142 will require that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instated tested
for impairment at least annually in accordance with the provisions of Statement
142. The Company is required to adopt the provision of Statement 141
immediately and Statement 142 effective May 1, 2002. Goodwill acquired in
business combinations completed before July 1, 2001 will continue to be
amortized prior to the adoption of Statement 142.
In connection with the Company's adoption of Statement 142, the Company will
be required to perform an assessment of whether there is an indication that
goodwill, including equity-method goodwill, is impaired as of the date of
adoption. Any transitional impairment loss will be recognized as the cumulative
effect of a change in accounting principle in the Company's statement of
earnings.
15
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
As of October 31, 2001, the Company has unamortized goodwill in the amount of
$5.6 million, which will be subject to the transition provisions of Statement
142. Amortization expense related to goodwill was $150 thousand and $38
thousand for the year ended April 30, 2001 and the six months ended October 31,
2001 respectively. Because of the extensive effort needed to comply with
adopting Statements 141 and 142, no estimate is available of the impact of
adopting these Statements. The Company will discontinue amortization of goodwill
effective May 1, 2002 with the adoption of Statement 142.
In August 2001, the FASB issued Statement of Financial Accounting Standard No.
143, "Accounting for Asset Retirement Obligations". Statement No. 143 requires a
Company to record the fair value of an asset retirement obligation as a
liability in the period in which it incurs a legal obligation associated with
the retirement of a tangible long-lived asset. Statement No. 143 also requires
the Company to record the contra to the initial obligation as an increase to the
carrying amount of the related long-lived asset (i.e., the associated asset
retirement costs) and to depreciate that cost over the remaining useful life of
the asset. The liability is changed at the end of each period to reflect the
passage of time (i.e., accretion expense) and changes in the estimated future
cash flows underlying the initial fair value measurement. The Company plans to
adopt Statement No. 143 beginning May 1, 2002. It is too early to determine
whether or not adoption of this statement will have a material impact on the
Company's consolidated financial statements.
In October, 2001 the FASB issued Statement of Financial Accounting Standards
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
(Statement 144). Statement 144 is effective for fiscal years beginning after
December 15, 2001, and for interim periods within those fiscal years. The
Company is currently assessing the impact of Statement 144 on its financial
condition and results of operations.
16
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 October 31, 2001, we had approximately $29.6 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 $268 thousand of interest expense per year on our variable
rate borrowing if our debt levels remained approximately the same as at October
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 due 2005 at October 31, 2001, based on
the currently offered market price was $22 million versus a carrying value of
approximately $110 million.
17
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 3. DEFAULTS UPON SENIOR SECURITIES
Prior to the Company's filing for protection under Chapter 11 of the U. S.
Bankruptcy Code on December 7, 2001, the Company was in default with certain
financial covenants of its senior debt agreements and did not make its
scheduled semi-annual interest payment of $6.3m due June 1, and $6.3m due
December 1, 2001 due under the First Mortgage Notes due 2005 as required. The
total arrearage of interest payments is $12.6m.
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
The Company filed a current report under Item 3 on Form 8-K dated December
12, 2001, related to the Company's filing of voluntary petition for
reorganization under Chapter 11 of the United States Bankruptcy Code in the
Northern District of Oklahoma.
18
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: December 21, 2001 /s/ James P. Nolan
--------------------- ----------------------------------
James P. Nolan, President,
and Chief Operating Officer
Date: December 21, 2001 /s/ Stephen R. Johnson
--------------------- ----------------------------------
Stephen R. Johnson, Vice President
and Chief Financial Officer
19
EXHIBIT INDEX
Exhibit No. Description Page No.
- ------------- ----------- --------
10.45 Second Amended and Restated Forbearance Agreement, dated November 1, 2001 21
Between Sheffield Steel Corporation and Bank of America, N.A.
10.46 Third Amended and Restated Forbearance Agreement, dated November 27, 2001 29
Between Sheffield Steel Corporation and Bank of America, N.A.