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, 1999
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 3,461,550 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 January 31, 1999 3
Consolidated Condensed Statements of Operations -
Three months and nine months ended
January 31, 1998 and 1999 4
Consolidated Condensed Statements of Cash Flows -
Nine months ended January 31, 1998 and 1999 5
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-13
Part II. Other Information
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
2
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In thousands)
January 31,
April 30, 1999
Assets 1998 Unaudited
- ------ -------------- -------------
Current assets:
Cash and cash equivalents $ 2,590 74
Accounts receivable, less allowance for doubtful accounts of $658
and $883 at April 30, 1998 and January 31, 1999, respectively 20,994 17,599
Inventories 33,548 42,777
Other current assets 3,803 4,185
-------- -------
Total current assets 60,935 64,635
Property, plant and equipment, net 68,730 68,685
Intangible assets, net 8,672 10,245
Other assets 3,238 3,281
Deferred income tax asset, net 2,043 2,043
-------- -------
Total assets $143,618 148,889
======== =======
Liabilities and Stockholders' Deficit
Current liabilities:
Current portion of long-term debt $ 1,702 3,019
Accounts payable 19,745 11,029
Accrued interest payable 5,151 2,155
Accrued liabilities 6,375 6,778
-------- -------
Total current liabilities 32,973 22,981
Long-term debt, excluding current portion 112,682 127,987
Accrued post-retirement benefit costs 10,988 12,429
Other liabilities 1,101 936
-------- -------
Total liabilities 157,744 164,333
-------- -------
Stockholders' deficit:
Common stock 36 35
Additional paid-in capital 2,536 2,024
Accumulated deficit (15,698) (16,463)
-------- -------
Total stockholders' deficit (13,126) (14,404)
Less loans to stockholders 1,000 1,040
-------- -------
(14,126) (15,444)
-------- -------
Total liabilities and stockholders' deficit $143,618 148,889
======== =======
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,
---------------------------- ----------------------------
1998 1999 1998 1999
---------- ------------- ------------- -------------
Sales $42,413 34,720 136,594 118,389
Cost of sales 34,046 26,684 109,428 91,600
------- ------ ------- -------
Gross profit 8,367 8,036 27,166 26,789
Selling, general and administrative expense 3,461 3,624 10,092 11,062
Depreciation and amortization expense 1,860 1,989 5,320 5,743
Postretirement benefit expense other than pensions 639 594 2,012 2,054
Litigation settlement - - - (2,200)
------- ------ ------- -------
Operating income 2,407 1,829 9,742 10,130
Other expense (income):
Interest expense, net 2,955 3,731 8,723 10,869
Other 76 (4) 76 26
------- ------ ------- -------
3,031 3,727 8,799 10,895
------- ------ ------- -------
Income (loss) from operations before
extraordinary item (624) (1,898) 943 (765)
Extraordinary item - loss on retirement of debt (8,023) - (8,023) -
------- ------ ------- -------
Net income (loss) $(8,647) (1,898) (7,080) (765)
======= ====== ======= =======
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,
-----------------------------------
1998 1999
-------------- --------------
Cash flows from operating activities:
Net loss $ (7,080) (765)
Adjustments to reconcile net income to net cash provided
by (used in) operations:
Depreciation and amortization 5,481 5,987
Loss (gain) on retirement of assets 81 (23)
Accrual of postretirement benefits other than pensions,
Net of cash paid 1,314 1,441
Non-cash portion of extraordinary item 2,995 -
Changes in assets and liabilities, net of effects from
Acquisition of business 59 (17,584)
-------- -------
Net cash provided by (used in) operations 2,850 (10,944)
-------- -------
Cash flows from investing activities:
Capital expenditures (4,271) (4,805)
Proceeds from sales of equipment - 34
Acquisition of business, net of cash acquired (2,414) (2,635)
-------- -------
Net cash used in investing activities (6,685) (7,406)
-------- -------
Cash flows from financing activities:
Net increase in long-term debt 20,784 16,387
Other (15,888) (553)
-------- -------
Net cash (used in) provided by financing activities (4,896) 15,830
-------- -------
Net (decrease) increase in cash 1,061 (2,516)
Cash and cash equivalents at beginning of period 15 2,590
-------- -------
Cash and cash equivalents at end of period $ 1,076 74
======== =======
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 11,881 13,621
======== =======
See accompanying notes to consolidated condensed financial statements.
5
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
January 31, 1998 and 1999
(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 93% 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 condensed consolidated interim financial statements of the Company included
herein have been prepared by the Company without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission and reflect all
adjustments that are, in the opinion of management, necessary for a fair
statement of the results for the interim periods. All adjustments made were
normal recurring accruals. These interim financial statements should be read in
conjunction with the financial statements and notes thereto contained in the
Company's Form 10-K for the year ended April 30, 1998. Operating results for
the quarter and nine months ended January 31, 1999 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:
January 31,
April 30, 1999
1998 (Unaudited)
--------- -----------
Raw materials and storeroom supplies $10,673 10,769
Work in process 11,721 13,477
Finished goods 11,154 18,531
------- ------
$33,548 42,777
======= ======
3) Litigation Settlement
The Company is party to a lawsuit with several other steel manufacturers against
certain manufacturers of graphite electrodes related to price fixing within the
electrode industry. The Company uses graphite electrodes in its manufacturing
process. During the w second quarter of fiscal 1999, the Company recognized
income of approximately $2.2 million related to settlements reached to date with
certain of the defendants. The funds were subsequently received during the third
quarter of fiscal 1999.
6
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; Year 2000 readiness; Year 2000 impact from third parties; and
general economic conditions.
Results of Operations
Three Months Ended January 31, 1999 As Compared To Three Months Ended January
31, 1998
Sales. Sales for the Company for the three month period ended January 31,
1999 were approximately $34.7 million as compared to sales of approximately
$42.4 million for the three month period ended January 31, 1998, a decrease of
approximately $7.7 million or 18.1%. A decrease in shipping levels of 21.2% to
85,974 tons from 109,119 tons was partially offset by an increase in the
average price per ton shipped to $404 from $389. The Company believes the
decrease in tons shipped was due to steel consumers generally reducing their
inventories due to unsettled market conditions caused by the Asian economic
crisis.
Hot Rolled Bar Products. Shipments for the three month period ended
January 31, 1999 were 32,035 tons compared to 44,657 tons for the three month
period ended January 31, 1998, a decrease of 12,622 tons or 28.3%. The
decrease in tons shipped is due to lower sales of hot rolled bars that support
certain industries such as oil field and agricultural equipment manufacturers.
These industries have been negatively impacted by the Asian economic crisis,
depressed oil prices, and by market uncertainties that may have prompted
inventory reductions among service centers and certain original equipment
manufacturers. The average price per ton of hot rolled bar products for the
three month period ended January 31, 1999 increased to $475 from $463,
reflecting increased pricing of certain hot rolled bar products at the Sand
Springs Facility despite decreased prices due to general market conditions
affecting the Joliet Facility.
7
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Rebar. Rebar shipments for the three month period ended January 31, 1999
were 34,565 tons compared to 46,931 tons for the three month period ended
January 31, 1998, a decrease of 12,366 or 26.3%. The decrease in tons shipped
was a result of lower shipments of no-grade rebar because of low priced imports
and lower shipments of graded rebar due to weather related delays. The Company
continues to rebuild its rebar business that was lost due to inventory outages
in the first and second fiscal quarters of 1999. The average price per ton of
rebar for the three month period ended January 31, 1999 increased to $298 from
$297 mainly due rebar product mix.
Fabricated Products. Shipments of fabricated products for the three month
period ended January 31, 1999 were 15,981 tons compared to 12,772 tons for the
three month period ended January 31, 1998, an increase of 3,209 tons or 25.1%.
The increase in shipments was primarily due to the purchase of Wellington, a
manufacturer of railroad track spikes. The average price per ton for the three
month period ended January 31, 1999 increased to $498 from $466. The increase
in average price per ton was primarily due to the acquisition of Wellington and
improved pricing at the Kansas City Facility.
Billets. Shipments of billets to third parties for the three month period
ended January 31, 1999 were 3,393 tons compared to 4,759 tons for the three
month period ended January 31, 1998, a decrease of 1,366 tons or 28.7%. The
decrease was due to customers reducing inventories. The average price per ton
for the three month period ended January 31, 1999 decreased to $192 from $236
as a result of reduced ferrous scrap raw material prices to which billet
pricing is related.
Cost of Sales. The cost of sales for the three months ended January 31,
1999 were approximately $26.7 million as compared to approximately $34.0
million for the three months ended January 31, 1998. On an average per ton
basis, cost of sales decreased to $310 per ton for the three months ended
January 31, 1999 from $312 per ton for the three months ended January 31, 1998.
The decrease in cost per ton was mainly due to lower ferrous scrap raw material
costs partially offset by a higher proportion of sales of fabricated products.
Gross Profit. Gross profit for the Company for the three months ended
January 31, 1999 was approximately $8.0 million as compared to gross profit of
approximately $8.4 million for the three months ended January 31, 1999, a
decrease of approximately $0.3 million or 4.0%. Gross profit for the Company
as a percentage of sales for the three months ended January 31, 1999 was 23.2%
as compared to 19.7% for the three months ended January 31, 1998. The increase
is a result of higher average selling prices primarily for hot rolled bar and
fabricated products and lower ferrous scrap raw material costs.
Selling, General and Administrative Expense. Selling, general and
administrative expense for the Company for the three months ended January 31,
1999 was approximately $3.6 million compared to $3.5 million for the three
months ended January 31, 1998. The increase of approximately $0.2 million is a
result of additional environmental compliance expenditures, higher property
taxes, and the addition of Wellington in October, 1998.
Depreciation and Amortization. Depreciation and amortization for the
three months ended January 31, 1999 was approximately $2.0 million compared to
$1.9 million for the three months ended January 31, 1998. Depreciation expense
increased at the Sand Springs Facility due to capital expenditures.
8
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Postretirement Benefit Expense. Postretirement benefit expense was
relatively unchanged for the three month period ended January 31, 1999, as
compared to the three months ended January 31, 1998.
Operating Income. Operating income for the Company for the three months
ended January 31, 1999 was approximately $1.8 million as compared to
approximately $2.4 million for the three months ended January 31, 1998, a
decrease of approximately $0.6 million or 24.0%. Operating income for the
Company as a percentage of sales for the three months ended January 31, 1999
was 5.3% as compared to 5.7% for the three months ended January 31, 1998. The
decrease was due to reduced shipments that caused decreased gross profit, and
increases in selling, general and administrative expense and depreciation
expense.
Interest Expense. Interest expense for the Company for the three months
ended January 31, 1999 was approximately $3.7 million as compared to
approximately $3.0 million for the three months ended January 31, 1998. The
increase was due to the increase in outstanding debt during the period.
Nine Months Ended January 31, 1999 As Compared To Nine Months Ended January 31,
1998
Sales. Sales for the Company for the nine month period ended January 31,
1999 were approximately $118.4 million as compared to sales of approximately
$136.6 million for the nine month period ended January 31, 1998, a decrease of
approximately $18.2 million or 13.3%. Shipping levels decreased 18.1% to
298,087 tons from 363,775 tons. The decrease in tons shipped was 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 is expected to
improve the efficiency of the cooling bed and increase the capacity of the
shear line. In addition, in the third fiscal quarter, sales decreased due to
unsettled market conditions caused by the Asian economic crisis. The average
price per ton shipped for the nine month period ended January 31, 1999
increased to $397 from $375 for the nine month period ended January 31, 1998.
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 nine month period ended
January 31, 1999 were 115,642 tons compared to 138,485 tons for the nine month
period ended January 31, 1998, a decrease of 22,843 tons or 16.5%. Shipments
decreased because of market conditions and in the case of the Sand Springs
Facility, because the Company needed to produce more rebar in order to fulfill
specific customer's orders during the second fiscal quarter. The average price
per ton of hot rolled bar products for the nine month period ended January 31,
1999 increased to $465 per ton compared to $454 per ton for the nine month
period ended January 31, 1998. The increase was due to improved product mix at
the Sand Springs Facility offset by price reductions due to market conditions.
Rebar. Rebar shipments for the nine month period ended January 31, 1999
were 123,606 tons compared to 159,053 tons for the nine month period ended
January 31, 1998, a decrease of 35,447 tons or 22.3%. This decrease was
primarily a result of the low inventory position at the beginning of the fiscal
year and low shipments of no-grade rebar. The average price per ton of rebar
for the nine month period ended January 31, 1999 increased to $302 from $296
which attributable to product mix.
9
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Fabricated Products. Shipments of fabricated products for the nine month
period ended January 31, 1999 were 43,030 tons compared to 40,683 tons for the
nine month period ended January 31, 1998, an increase of 2,347 tons or 5.8%.
The average price per ton for fabricated products for the nine months ended
January 31, 1999 increased to $504 from $459. The increase in shipments is due
primarily to the acquisition of Wellington. The increase in average selling
prices is attributable to the acquisition of Wellington as well as product mix
and pricing at the Kansas City Facility.
Billets. Shipments of billets to third parties for the nine month period
ended January 31, 1999 were 15,809 tons compared to 25,554 tons for the nine
month period ended January 31, 1998, a decrease of 9,745 or 38.1%. This
decrease resulted from a curtailment of billet sales to third parties due to
the maintenance problems and summer power outages at the Sand Springs Facility
melt shop. The average price per ton for billets for the nine month period
ended January 31, 1999 decreased to $215 from $228 per ton for the nine month
period ended January 31, 1998 as a result of reduced ferrous scrap raw material
prices.
Cost of Sales. The cost of sales for the nine month period ended January
31, 1999 were approximately $91.6 million as compared to approximately $109.4
million for the nine month period ended January 31, 1998. On an average per
ton basis, cost of sales increased to $307 per ton for the nine months ended
January 31, 1999 from $301 per ton for the nine months ended January 31, 1998.
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 summer power outages
resulting in decreased production in the first two fiscal quarters. The higher
conversion costs were partially offset by lower ferrous scrap raw material
costs.
Gross Profit. Gross profit for the Company for the nine month period
ended January 31, 1999 was approximately $26.8 million as compared to
approximately $27.2 million for the nine month period ended January 31, 1998.
Gross profit for the Company as a percentage of sales for the nine month period
ended January 31, 1999 was 22.6% as compared to 19.9% for the nine month period
ended January 31, 1998. The increase is a result of both higher average
selling prices due primarily to a more favorable product mix and lower scrap
raw material costs partially offset by higher manufacturing costs.
Selling, General and Administrative Expense. Selling, general and
administrative expense for the Company for the nine month period ended January
31, 1999 was approximately $11.1 million as compared to approximately $10.1
million for the nine months ended January 31, 1998. The increase is a result
of the acquisition of Wellington, additional environmental expenditures and an
increase in property taxes.
Depreciation and Amortization. Depreciation and amortization for the nine
months ended January 31, 1999 was approximately $5.7 million compared to $5.3
million for the nine months ended January 31, 1998. The increase in
amortization is due to increased intangible assets associated with the
acquisition of Wellington and Waddell. Depreciation expense increased at the
Sand Springs Facility due to capital expenditures.
Postretirement Benefit Expense. Postretirement benefit expense was
relatively unchanged for the nine month period ended January 31, 1999 as
compared to the nine month period ended January 31, 1998.
10
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Operating Income. Operating income for the Company for the nine month
period ended January 31, 1999 was approximately $10.1 million as compared to
approximately $9.7 million for nine month period ended January 31, 1998, an
increase of approximately $0.4 million or 4.0%. Operating income for the
Company as a percentage of sales for the nine months ended January 31, 1999 was
8.6% as compared to 7.1% for the nine months ended January 31, 1998. The
increase was primarily due to the graphite electrode litigation settlement
offset by increased selling, general and administrative expense and
depreciation and amortization expense.
Interest Expense. Interest expense for the Company for the nine months
ended January 31, 1999 was approximately $10.9 million as compared to
approximately $8.7 million for the nine months ended January 31, 1998. The
increase was due to the increase in outstanding debt during the period.
Liquidity and Capital Resources
As of January 31, 1999, the Company's long-term indebtedness, including
current portion, was approximately $131 million. The Company had approximately
$24 million of borrowing availability at January 31, 1999 under its revolving
credit agreements.
Cash flow used in operations was approximately $10.6 million for the nine
month period ended January 31, 1999, as compared with cash flow provided by
operations of approximately $2.9 million for the nine month period ended
January 31, 1998. The decrease in cash provided by operations was primarily
due to replenishing inventories after the completion of the Shear Line Project
and decreases in accounts payable reflecting payments on the Shear Line
Project. Cash used in investing activities in the nine months ended January
31, 1999 was approximately $7.4 million, consisting of required replacement of
plant equipment, final payments on the shear line project and the purchase of
Wellington. For the nine month period ended January 31, 1999, 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 budgeted 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 industry, as
well as prevailing economic conditions, certain of which are beyond the control
of the Company.
Capital Expenditures
Capital expenditures for the nine month period ended January 31, 1999 were
approximately $4.8 million. Primarily all of the expenditures consisted of
normal capital projects required or justified economically, 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
11
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
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 is 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 IV of a four-phase project.
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
October 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 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 been
represented to the Company as Y2K compliant, with the exception of certain
upgrades that the Company will have installed by September 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 utilities. The Company has received
responses from approximately 60% 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.
12
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
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 impact the
Company's consolidated results of operations.
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 segment reporting.
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 not
expected to have a significant effect on the Company's consolidated results of
operations, financial position, or cash flows.
In February 1998, the FASB issued Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits", which is
required to be implemented for fiscal years beginning after December 15, 1997.
Statement No. 132 revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans.
13
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
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,
1999.
14
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
SHEFFIELD STEEL CORPORATION
Date: March 12, 1999 /s/ Robert W. Ackerman
------------------ -----------------------
Robert W. Ackerman, President
and Chief Executive Officer
Date: March 12, 1999 /s/ Stephen R. Johnson
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Stephen R. Johnson, Vice President
and Chief Financial Officer
15