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, 1998
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.
X
Yes ____ No _____
At the date of this filing, there were 3,410,925 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, 1998 and October 31, 1998 3
Consolidated Condensed Statements of Operations -
Three months and six months ended
October 31, 1997 and 1998 4
Consolidated Condensed Statements of Cash Flows -
Six months ended October 31, 1997 and 1998 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
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signature 16
2
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
October 31,
April 30, 1998
ASSETS 1998 Unaudited
--------- -------------
Current assets:
Cash and cash equivalents $ 2,590 364
Accounts receivable, less allowance for doubtful accounts of $658
and $808 at April 30, 1998 and October 31, 1998, respectively 20,994 21,429
Inventories 33,548 38,322
Other current assets 3,803 3,788
-------- -------
Total current assets 60,935 63,903
Property, plant and equipment, net 68,730 69,366
Intangible assets, net 8,672 10,564
Other assets 3,238 3,239
Deferred income tax asset, net 2,043 2,108
-------- -------
Total assets $143,618 149,180
======== =======
- ----------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
- ----------------------------------------------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,702 3,250
Accounts payable 19,745 10,766
Accrued interest payable 5,151 5,281
Accrued liabilities 6,375 6,840
-------- -------
Total current liabilities 32,973 26,137
Long-term debt, excluding current portion 112,682 123,899
Other liabilities 12,089 13,052
-------- -------
Total liabilities 157,744 163,088
-------- -------
Stockholders' deficit:
Common stock 36 34
Additional paid-in capital 2,536 1,650
Accumulated deficit (15,698) (14,565)
-------- -------
Total stockholders' deficit (13,126) (12,881)
Less loans to stockholders 1,000 1,027
-------- -------
(14,126) (13,908)
-------- -------
Total liabilities and stockholders' deficit $143,618 149,180
======== =======
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,
-------------------------- ---------------------------
1997 1998 1997 1998
------------ ------------- ------------ -------------
Sales $46,464 40,592 94,181 83,669
Cost of sales 37,073 31,068 75,382 64,916
------- ------ ------ ------
Gross profit 9,391 9,524 18,799 18,753
Selling, general and administrative expense 3,334 3,836 6,631 7,438
Depreciation and amortization expense 1,749 1,890 3,460 3,754
Postretirement benefit expense other than pensions 685 730 1,373 1,460
Litigation settlement - (2,200) - (2,200)
------- ------ ------ ------
Operating income 3,623 5,268 7,335 8,301
Other expense:
Interest expense, net 2,811 3,657 5,768 7,138
Other - 15 - 30
------- ------ ------ ------
Income from operations before income taxes 812 1,596 1,567 1,133
Income tax expense - - - -
------- ------ ------ ------
Net income $ 812 1,596 1,567 1,133
======= ====== ====== ======
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,
-----------------------------------
1997 1998
---- ----
Cash flows from operating activities:
Net income $ 1,567 1,133
Adjustments to reconcile net income to net cash provided
by (used in) operations:
Depreciation and amortization 3,593 3,917
Loss (gain) on retirement of assets 81 (2)
Accrual of postretirement benefits other than pensions,
net of cash paid 876 960
Changes in assets and liabilities, net of effects from
Acquisition of business 4,378 (13,479)
------- -------
Net cash provided by (used in) operations 10,495 (7,471)
------- -------
Cash flows from investing activities:
Capital expenditures (1,849) (3,641)
Acquisition of business, net of cash acquired (2,317) (2,635)
------- -------
Net cash used in investing activities (4,166) (6,276)
------- -------
Cash flows from financing activities:
Net (decrease) increase in long-term debt (5,603) 12,530
Other - (1,009)
------- -------
Net cash (used in) provided by financing activities (5,603) 11,521
------- -------
Net (decrease) increase in cash 726 (2,226)
Cash and cash equivalents at beginning of period 15 2,590
------- -------
Cash and cash equivalents at end of period $ 741 364
======= =======
Supplemental disclosure of cash flow information
- ------------------------------------------------
Cash paid during the period for interest $ 5,635 6,845
======= =======
See accompanying notes to consolidated condensed financial statements.
5
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
OCTOBER 31, 1997 AND 1998
(IN THOUSANDS)
(UNAUDITED)
1) BASIS OF PRESENTATION AND SUMMARY OF ACCOUNTING POLICIES
The consolidated financial statements of Sheffield Steel Corporation (the
Company) 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) since
October 28, 1997, Wellington Industries, Inc. (Wellington) since October 6, 1998
and Sand Springs Railway Company (the Railway). HMK Enterprises, Inc. (HMK)
owns approximately 95% of the currently issued and outstanding common stock.
All material intercompany transactions and balances have been eliminated in
consolidation. The Company's primary business is the production of concrete
reinforcing bar, fence posts, and a range of hot rolled bar products including
rounds, flats, and squares. The Company's products are sold throughout the
continental United States.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the financial
statements contained in the Company's Form 10-K, for the year ended April 30,
1998. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the quarter and six months ended October 31,
1998 are not necessarily indicative of the results that may be expected for the
year ending April 30, 1999.
2) INVENTORIES
The components of inventories are as follows:
October 31,
April 30, 1998
1998 (Unaudited)
---- ---------
Raw materials and storeroom supplies $10,673 12,445
Work in process 11,721 9,729
Finished goods 11,154 16,148
------- ------
$33,548 38,322
======= ======
3) LITIGATION SETTLEMENT
The Company is party to a lawsuit with several other steel manufacturers against
certain manufacturers of carbon electrodes related to price fixing within the
electrode industry. The Company uses carbon electrodes in its manufacturing
process. During the second quarter, the Company recognized approximately $2.2
million related to settlements reached to date with certain of the defendants.
6
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS, CONTINUED
4) ACQUISITION
On October 6, 1998, the Company acquired all of the outstanding capital stock
of Wellington Industries, Inc. (Wellington). The acquisition price consisted
of $1,500,000 in cash, subject to performance related contingency payments, and
unsecured, subordinated promissory notes in an aggregate principal amount of
$1,464,000. The notes mature annually over three years and bear interest at
the NationsBank prime rate. Wellington fabricates railroad track spikes from
steel supplied by the Company.
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 the
Consolidated Condensed Financial Statements of the Company and the notes
thereto elsewhere in this Form 10-Q.
This Quarterly Report on Form 10-Q may contain forward-looking statements
as that term is defined in the Private Securities Litigation Reform Act of
1995. Such statements are based on management's current expectations and are
subject to a number of factors and uncertainties which could cause results to
differ materially from those described in the forward-looking statements.
There can be no assurance that actual results or business conditions will not
differ materially from those anticipated or suggested in such forward-looking
statements as a result of various factors, including, but not limited to, the
following: the size and timing of significant orders, as well as deferral of
orders, over which the Company has no control; the variation in the Company's
sales cycles from customer to customer; increased competition posed by other
mini-mill producers; changes in pricing policies by the Company and its
competitors; the need to secure or build manufacturing capacity in order to
meet demand for the Company's products; the Company's success in expanding its
sales programs and its ability to gain increased market acceptance for its
existing product lines; the ability to scale up and successfully produce its
products; the potential for significant quarterly variations in the mix of
sales among the Company's products; the gain or loss of significant customers;
shortages in the availability of raw materials from the Company's suppliers;
fluctuations in energy costs; the costs of environmental compliance and the
impact of government regulations; the Company's relationship with its work
force; the restrictive covenants and tests contained in the Company's debt
instruments, which could limit the Company's operating and financial
flexibility; and general economic conditions.
On October 6, 1998, the Company acquired all of the outstanding capital
stock of Wellington Industries, Inc. (Wellington). The acquisition price
consisted of $1,500,000 in cash, subject to performance related contingency
payments, and unsecured, subordinated promissory notes in an aggregate
principal amount of $1,464,000. The notes mature annually over three years and
bear interest at the NationsBank prime rate. Wellington is a railroad track
spike fabricator located in Sand Springs, Oklahoma. Management believes that
the acquisition of Wellington will secure tonnage in a down stream market that
integrates with the Company's existing hot rolled bar product line.
RESULTS OF OPERATIONS
THREE MONTHS ENDED OCTOBER 31, 1998 AS COMPARED TO THREE MONTHS ENDED OCTOBER
31, 1997
SALES. Sales for the Company for the three month period ended October 31,
1998 were approximately $40.6 million as compared to sales of approximately
$46.5 million for the three month period ended October 31, 1997, a decrease of
approximately $5.9 million or 12.6%. Shipping levels decreased 16.5% to
101,795 tons from 121,859 tons and the average price per ton shipped increased
to $399 from $381. The decrease in tons shipped was due to the low inventory
position at the Sand Springs Facility that continued from the first quarter
into the beginning of the second quarter. The low inventory position was a
result of the Sand Springs Facility rolling mill outage in the fourth quarter
of fiscal 1998 to install the new shear line. In addition, during the quarter
ended October 31, 1998, the Sand Springs Facility melt shop experienced
shutdowns during peak periods of power usage due to the high
8
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
cost of electricity and unscheduled maintenance that impacted production at the
Sand Springs and Joliet rolling mills.
Hot Rolled Bar Products. Shipments for the three month period ended
October 31, 1998 were 38,943 tons compared to 48,774 tons for the three month
period ended October 31, 1997, a decrease of 9,831 tons or 20.2%. The Company
produced less hot rolled bar and more rebar during this quarter due to
immediate customer needs and the lack of rebar inventory during the first
fiscal quarter. Sales of hot rolled bar products from the Joliet Facility
decreased due to weaker market conditions. The average price per ton of hot
rolled bar products for the three month period ended October 31, 1998 increased
to $470 from $459, reflecting an increase in sales prices at the Sand Springs
Facility.
Rebar. Rebar shipments for the three month period ended October 31, 1998
were 47,372 tons compared to 55,571 tons for the three month period ended
October 31, 1997, a decrease of 8,199 or 14.8%. The decrease was primarily due
to the low inventory position at the beginning of the quarter. The average
price per ton of rebar for the three month period ended October 31, 1998
increased to $306 from $296 mainly due to improved rebar product mix.
Fabricated Products. Shipments of fabricated products for the three month
period ended October 31, 1998 were 12,511 tons compared to 13,086 tons for the
three month period ended October 31, 1997, a decrease of 575 tons or 4.4%. The
decrease in shipments was primarily due a slight decrease in shipments from the
Sand Springs fence post shop. The average price per ton for the three month
period ended October 31, 1998 increased to $522 from $454. The increase in
average price per ton was primarily due to the acquisition of Waddell as well
as improved product mix and pricing at the Kansas City Facility.
Billets. Shipments of billets to third parties for the three month period
ended October 31, 1998 were 2,969 tons compared to 4,428 tons for the three
month period ended October 31, 1997, a decrease of 1,459 tons or 32.9%. This
decrease resulted from a curtailment of billet sales to third parties due to
the maintenance problems and power outages in the Sand Springs Facility melt
shop. The average price per ton for the three month period ended October 31,
1998 decreased to $214 from $227 as a result of reduced scrap raw material
prices to which billet pricing is related.
COST OF SALES. The cost of sales for the three months ended October 31,
1998 were approximately $31.1 million as compared to approximately $37.1
million for the three months ended October 31, 1997. On an average per ton
basis, cost of sales increased to $305 per ton for the three months ended
October 31, 1998 from $304 per ton for the three months ended October 31, 1997.
Cost of sales was consistent for the three months ended October 31, 1998 and
1997.
GROSS PROFIT. Gross profit for the Company for the three months ended
October 31, 1998 was approximately $9.5 million as compared to gross profit of
approximately $9.4 million for the three months ended October 31, 1998, an
increase of approximately $0.1 million or 1.4%. Gross profit for the Company
as a percentage of sales for the three months ended October 31, 1998 was 23.5%
as compared to 20.2% for the three months ended October 31, 1997. The increase
is a result of higher average selling prices primarily for hot rolled bar and
fabricated products.
9
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense for the Company for the three months ended October 31,
1998 was approximately $3.8 million compared to $3.3 million for the three
months ended October 31, 1997. The increase of approximately $0.5 million is a
result of additional environmental compliance expenditures, higher property
taxes, and the addition of Waddell in October, 1997.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the
three months ended October 31, 1998 was approximately $1.9 million compared to
$1.7 million for the three months ended October 31, 1997. The increase in
amortization is due to increased intangible assets associated with the
acquisition of Waddell. Depreciation expense increased at the Sand Springs
Facility due to capital expenditures.
POSTRETIREMENT BENEFIT EXPENSE. Postretirement benefit expense remained
approximately the same for the three month period ended October 31, 1998, as
compared to the three months ended October 31, 1997.
OPERATING INCOME. Operating income for the Company for the three months
ended October 31, 1998 was approximately $5.3 million as compared to
approximately $3.6 million for the three months ended October 31, 1997, an
increase of approximately $1.6 million or 45.4%. Operating income for the
Company as a percentage of sales for the three months ended October 31, 1998
was 13.0% as compared to 7.8% for the three months ended October 31, 1997. The
increase was due to the carbon electrode settlement offset by increases in
selling, general and administrative expense and depreciation and amortization
expense.
INTEREST EXPENSE. Interest expense for the Company for the three months
ended October 31, 1998 was approximately $3.7 million as compared to
approximately $2.8 million for the three months ended October 31, 1997. The
increase was due to the increase in outstanding debt during the period.
SIX MONTHS ENDED OCTOBER 31, 1998 AS COMPARED TO SIX MONTHS ENDED OCTOBER 31,
1997
SALES. Sales for the Company for the six month period ended October 31,
1998 were approximately $83.7 million as compared to sales of approximately
$94.2 million for the six month period ended October 31, 1997, a decrease of
approximately $10.5 million or 11.2%. Shipping levels decreased 16.7% to
212,113 tons from 254,656 tons. The decrease in tons shipped is due to the low
inventory position at the beginning of the year resulting from the rolling mill
outage at the Sand Springs Facility in the fourth quarter of fiscal 1998. The
outage was due to installation of the new shear line that improved the
efficiency of the cooling bed and increased the capacity of the shear line.
The average price per ton shipped for the six month period ended October 31,
1998 increased to $394 from $370 for the six month period ended October 31,
1997. The average selling price per ton increased in all product lines except
billets and the mix of products was weighted toward higher priced products in
comparison to the same period in the prior year.
Hot Rolled Bar Products. Shipments for the six month period ended October
31, 1998 were 83,607 tons compared to 93,828 tons for the six month period
ended October 31, 1997, a decrease of 10,221 tons or 10.9%. Shipments from the
Sand Springs Facility for the six month period ended October 31, 1998 decreased
20.0% over the same period in the previous year because the Company needed to
rebuild its rebar inventory to fulfill specific customer's orders during the
second fiscal quarter. Shipments of hot rolled bar products from the Joliet
Facility also decreased reflecting
10
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
weaker market conditions. The average price per ton of hot rolled bar products
for the six month period ended October 31, 1998 increased to $470 per ton
compared to $459 per ton for the six month period ended October 31, 1997,
reflecting improved selling prices at the Sand Springs Facility.
Rebar. Rebar shipments for the six month period ended October 31, 1998
were 89,041 tons compared to 112,122 tons for the six month period ended
October 31, 1997, a decrease of 23,081 tons or 20.1%. This decrease was
primarily a result of the low inventory position at the beginning of the fiscal
year. The average price per ton of rebar for the six month period ended
October 31, 1998 increased to $304 from $296. The increase in average price
per ton is attributable to improved rebar product mix.
Fabricated Products. Shipments of fabricated products for the six month
period ended October 31, 1998 were 27,049 tons compared to 27,911 tons for the
six month period ended October 31, 1997, a decrease of 862 tons or 3.1%. The
average price per ton for fabricated products for the six months ended October
31, 1998 increased to $508 from $456. The decrease in shipments is due to less
shipments of fence post from the Sand Springs fence post shop. The increase in
average selling prices is attributable to the acquisition of Waddell as well as
improved product mix and pricing at the Kansas City Facility.
Billets. Shipments of billets to third parties for the six month period
ended October 31, 1998 were 12,416 tons compared to 20,795 tons for the six
month period ended October 31, 1997, a decrease of 8,379 or 40.3%. This
decrease resulted from a curtailment of billet sales to third parties due to
the maintenance problems and power outages in the Sand Springs Facility melt
shop and increased internal billet usage by the Sand Springs rolling mill. The
average price per ton for billets for the six month period ended October 31,
1998 decreased to $221 from $227 per ton for the six month period ended October
31, 1997 as a result of reduced scrap raw material prices.
COST OF SALES. The cost of sales for the six month period ended October
31, 1998 were approximately $64.9 million as compared to approximately $75.4
million for the six month period ended October 31, 1997. On an average per ton
basis, cost of sales increased to $306 per ton for the six months ended October
31, 1998 from $296 per ton for the six months ended October 31, 1997. The
increase in cost of sales per ton is due to higher conversion costs per ton in
the melt shop due to maintenance expenditures and power outages that caused
decreased production. The higher conversion costs were offset by lower scrap
raw material costs.
Gross Profit. Gross profit for the Company for the six month periods
ended October 31, 1998 and 1997 was approximately $18.8 million. Gross profit
for the Company as a percentage of sales for the six month period ended October
31, 1998 was 22.4% as compared to 20.0% for the six month period ended October
31, 1997. The increase is a result of higher average selling prices due
primarily to a more favorable product mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expense for the Company for the six month period ended October
31, 1998 was approximately $7.4 million as compared to approximately $6.6
million for the six months ended October 31, 1997. The increase is a result
of the acquisition of Waddell, additional environmental expenditures and an
increase in property taxes.
11
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the six
months ended October 31, 1998 was approximately $3.8 million compared to $3.5
million for the six months ended October 31, 1997. The increase in amortization
is due to increased intangible assets associated with the acquisition of
Waddell. Depreciation expense increased at the Sand Springs Facility due to
capital expenditures.
POSTRETIREMENT BENEFIT EXPENSE. Postretirement benefit expense remained
approximately the same for the six month period ended October 31, 1998 as
compared to the six month period ended October 31, 1997.
OPERATING INCOME. Operating income for the Company for the six month
period ended October 31, 1998 was approximately $8.3 million as compared to
approximately $7.3 million for six month period ended October 31, 1997, an
increase of approximately $1.0 million or 13.2%. Operating income for the
Company as a percentage of sales for the six months ended October 31, 1998 was
9.9% as compared to 7.8% for the six months ended October 31, 1997. The
increase was primarily due to the carbon electrode settlement offset by
increased selling, general and administrative expense and depreciation and
amortization expense.
INTEREST EXPENSE. Interest expense for the Company for the six months
ended October 31, 1998 was approximately $7.1 million as compared to
approximately $5.8 million for the six months ended October 31, 1997. The
increase was due to the increase in outstanding debt during the period.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1998, the Company's long-term indebtedness, including
current portion, was approximately $127 million. The Company had approximately
$24 million of borrowing availability at October 31, 1998 under its revolving
credit agreements.
Cash flow used in operations was approximately $7.5 million for the six
month period ended October 31, 1998, as compared with cash flow provided by
operations of approximately $10.5 million for the six month period ended
October 31, 1997. The decrease in cash provided by operations was primarily
due to increases in inventories and decreases in accounts payable. Cash used
in investing activities in the six months ended October 31, 1998 was
approximately $6.3 million, consisting of required replacement of plant
equipment, final payments on the shear line project and the purchase of
Wellington. For the six month period ended October 31, 1998, cash provided by
financing activities consisted primarily of draws on the Revolving Credit
Facility and on the equipment financing agreement.
The Company's cash flow from operations and borrowings under the Revolving
Credit Facility and the Railway Credit Facility are expected to be sufficient
to fund budgetted capital improvements and meet near-term working capital
requirements.
On a long term basis, the Company has significant future debt service
obligations. The Company's ability to satisfy these obligations is dependent
on its ability to generate adequate cash flow from operations. The Company
expects that its cash flow from operations and available borrowings under its
revolving credit facilities and equipment financing agreements will be
sufficient to fund the repayment of the long term debt and other investing
activities. The Company's future operating results are dependent on its
overall operating performance and are subject to general business, financial
and other factors affecting the Company and the domestic steel
12
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
industry, as well as prevailing economic conditions, certain of which are
beyond the control of the Company.
CAPITAL EXPENDITURES
Capital expenditures for the six month period ended October 31, 1998 were
approximately $3.6 million. Primarily all of the expenditures consisted of
normal capital projects required or deemed economically feasible, and included
approximately $0.8 million in final payments on the shear line project. The
Company's cash flow from operations and borrowings under its revolving credit
facilities and equipment financing agreements are expected to be sufficient to
meet any near-term working capital requirements the Company may have and to
fund anticipated capital improvements.
YEAR 2000 COMPLIANCE
The Company's State of Readiness. The company recognized the Year 2000
(Y2K) Information Technology issues in 1986 and began to address the problem
with the re-design of the Company's information systems. The Company
instituted a comprehensive Year 2000 strategy in 1997 and created a formal Y2K
Task Force in early 1998 with executive oversight to examine Y2K issues as they
pertain to areas outside internal information systems including the following:
Information Systems Infrastructure. Hardware, networks and operating systems
that support the Company's software.
Desktop Applications. Private user spreadsheets and data collection that may
have Y2K issues.
Facilities. Basic infrastructure items as well as backup power, fire control
systems, security systems, scales and phones.
Manufacturing/Distribution. Process control equipment and software and other
manufacturing operations that have personal computers, board level computers,
or PLC's (Programmable Logic Controllers) interfaced to them.
Product Compliance. Primarily testing equipment. Spectrometers, personal
computers interfaced to testing equipment, meters and gauges used by the
quality assurance department.
Supply Chain. Supply vendors, transportation and utilities, third party
support organizations, banking and finance.
The Task Force was responsible for taking an inventory of all systems
software and equipment to identify potential Y2K issues and for developing
remediation plans for problems identified. To date, the majority of the
financial and commercial systems have been converted to full Y2K compliance.
The payroll system and the accounts receivable systems are currently not Y2K
compliant. However, the payroll system is in Phase III of a four-phase project
to convert it to an outside vendor. The accounts receivable system is
currently in Phase I of a three-phase conversion. Both projects are on
schedule and expected to be completed by May 1, 1999. In addition, the
accounts payable system has a minor Y2K problem but testing has confirmed that
it does not pose a service interruption risk.
Outside the areas of noted above, only minor problems were identified with
electronic equipment and third party software. The Company's rolling mill and
shear line at the Sand Springs Facility were both installed in the last four
years. The rolling mill relies on a third party system that has represented to
the Company that it is Y2K compliant, with the exception of certain upgrades
that the Company will have installed by May of 1999. All remaining third party
software has been examined and has been represented by the vendor as being Y2K
compliant. The Task Force has surveyed all vendors with invoices that total
over $10,000 in the previous calendar year in an attempt to ascertain the
potential risks within the supply chain, specifically in the areas of raw
materials and
13
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
utilities. The Company has received responses from approximately
47% of the vendors surveyed and the Task Force has recommended additional
follow up for vendors failing to respond to the survey. To date, the Company
has not received any unfavorable responses from significant vendors. It is
anticipated that the vendor survey process will be completed by the spring of
1999. Although others in the steel industry will be required to spend
significant amounts to become Y2K compliant, the Company identified problem
areas early and upgraded equipment and systems in the normal course of
business. The historical and estimated future costs related to Y2K issues have
not been and are not expected to be a material cost to the Company.
The Risks of the Company's Year 2000 Issues and Contingency Plans. While
the Company believes it has taken the necessary steps to identify and remediate
its Y2K issues, the failure to do so prior to January 1, 2000 could result in
system/equipment failures causing disruption in routine business activities
including the production of goods. The Company views the greatest risk of Y2K
issues to be related to its third party suppliers and customers. The failure
of third parties upon whom the Company relies to timely remediate their Y2K
issues could result in disruption in the Company's daily operations including
the production of steel products. As a result of the Company's reliance on
third parties to resolve their own Y2K issues, the overall risks associated
with the year 2000 remain difficult to accurately describe and quantify. There
can be no assurance that the Y2K issues will not have a material adverse impact
on the Company and its operations. The Company is in the process of developing
contingency plans in areas where the risk of Y2K failures appears to be
possible.
ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("Statement") No. 130
"Reporting Comprehensive Income". Statement No. 130 establishes standards for
reporting and display of comprehensive income and its components in the
financial statements. Statement No. 130 is effective for fiscal years
beginning after December 15, 1997. Reclassification of financial statements
for earlier periods provided for comparative purposes is required. The Company
adopted Statement No. 130 in the quarter ended July 31, 1998. The adoption did
not have an impact on the Company's consolidated results of operations,
financial position or cash flow.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information". Statement No. 131,
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. Statement No. 131 is effective for
financial statements for fiscal years beginning after December 15, 1997.
Financial statement disclosures for prior periods are required to be restated.
The Company plans to adopt Statement No. 131 for the year ended April 30, 1999.
The adoption of Statement No. 131 is not expected to have a material impact on
the Company's consolidated results of operations, financial position or cash
flows.
Currently, the Company has no significant derivative instruments and
accordingly, the adoption of Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities issued by the FASB on June 15, 1998, is
expected to have no significant effect on the Company's consolidated results of
operations, financial position, or cash flows.
14
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not a party to any significant pending legal proceedings
other than litigation incidental to its business which the Company believes
will not materially affect its financial position, results of operations or
liquidity. Such claims against the Company are ordinarily covered by
insurance. There can be no assurance, however, that insurance will be
available in the future at reasonable rates.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLERS
At the Annual Meeting of Stockholders held on September 3, 1998, for which
proxies for the meeting were solicited pursuant to Regulation 14A of the
Securities Exchange Act of 1934, the stockholders of the Company unanimously
elected Steven E. Karol, Robert W. Ackerman, Dale S. Okonow, Howard H.
Stevenson, John D. Lefler and Jane M. Karol to serve as members of the Board of
Directors for a period of one year.
At the Annual Meeting of Stockholders, the stockholders also unanimously
approved the reappointment of KPMG Peat Marwick LLP as independent auditors.
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 second quarter ended October 31,
1998.
15
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: Dec. 11, 1998 /s/ Robert W. Ackerman
----------------- -----------------------
Robert W. Ackerman, President
and Chief Executive Officer
Date: Dec. 11, 1998 /s/ Stephen R. Johnson
----------------- -----------------------
Stephen R. Johnson, Vice President
and Chief Financial Officer
16
EXHIBIT INDEX
Exhibit No. Description Page No.
----------- ----------- --------
10.36 Stock Purchase Agreement between Sheffield Steel Corporation, Wellington 18
Industries, Inc. and the Stockholders of Wellington Industries, Inc. dated
October 6, 1998.