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, 1996
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 3,375,000 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 as of
October 31, 1996 and April 30, 1996 3
Consolidated Condensed Statements of Operations
for the three months and six months ended
October 31, 1996 and October 31, 1995 4
Consolidated Condensed Statements of Cash Flows
for the six months ended October 31, 1996 and
October 31, 1995 5
Notes to Consolidated Condensed Financial Statements 6-7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-13
Part II. Other Information
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 6. Exhibits and Reports on Form 8-K 14
Signature 15
2
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Balance Sheets
(In thousands)
October 31,
1996 April 30,
Assets Unaudited 1996
------ ----------- ----
Current assets:
Cash and equivalents $ 18 46
Accounts receivable, less allowance for
doubtful accounts of $808 and $658
at October 31, 1996 and April 30,
1996, respectively 18,381 21,607
Inventories 39,159 40,321
Other current assets 3,692 3,630
------- -------
Total current assets 61,250 65,604
Property, plant and equipment, net 67,075 68,461
Intangible assets, net 3,539 3,818
Other assets 3,600 3,509
Deferred income tax asset, net 1,927 1,790
------- -------
Total assets $137,391 143,182
======= =======
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Current portion of long-term debt $ 717 717
Accounts payable 16,641 20,495
Accrued interest payable 4,500 4,500
Accrued liabilities 6,018 6,328
------- -------
Total current liabilities 27,876 32,040
Long-term debt, excluding current portion,
less unamortized discount of $1,768
and $1,840 at October 31, 1996
and April 30, 1996, respectively 95,342 96,324
Other liabilities 10,150 8,433
------- -------
Total liabilities 133,368 136,797
------- -------
Stockholders' equity:
Common stock 34 34
Additional paid-in capital 2,536 3,591
Retained earnings 2,371 4,037
------- -------
Total stockholders' equity 4,941 7,662
Less loans to stockholders 918 1,277
------- -------
4,023 6,385
------- -------
Total liabilities and $137,391 143,182
stockholders' equity ======= =======
See accompanying notes to consolidated condensed financial statements.
3
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Consolidated Condensed Statements of Operations
(In thousands, except share data)
(Unaudited)
Three Months Ended Six Months Ended
October 31, October 31,
----------------------- ------------------------
1996 1995 1996 1995
---- ---- ---- ----
Sales $ 44,722 38,090 89,925 85,704
Cost of sales 36,791 31,077 74,338 70,569
---------- --------- --------- ---------
Gross profit 7,931 7,013 15,587 15,135
Selling, general and administrative 3,268 3,085 6,495 6,026
expense
Depreciation and amortization expense 1,731 1,594 3,427 3,243
Postretirement benefit expense 776 904 1,477 1,808
---------- --------- --------- ---------
Operating income 2,156 1,430 4,188 4,058
Interest expense (2,941) (2,901) (5,854) (5,738)
Other Income - 500 - 500
---------- --------- --------- ---------
Loss from operations before
income tax benefit (785) (971) (1,666) (1,180)
Income tax benefit - 378 - 460
---------- --------- --------- ---------
Net loss $ (785) (593) (1,666) (720)
========== ========= ========= =========
Net loss per common share $(.233) (.175) (.494) (.213)
========== ========= ========= =========
Dividends per common share $ - .172 - .517
========== ========= ========= =========
Common shares outstanding 3,375,000 3,375,000 3,375,000 3,375,000
========== ========= ========= =========
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,
------------------
1996 1995
--------- -------
Cash flows from operating activities:
Net loss $(1,666) (720)
Depreciation and amortization 3,499 3,378
Gain on sale of idle equipment - (500)
Accrual of postretirement benefits
other than pensions,
net of cash paid 1,002 1,488
Changes in assets and liabilities 377 (3,957)
------ ------
Net cash provided by (used in)
operations 3,212 (311)
------ ------
Cash flows from investing activities -
Capital expenditures (1,762) (2,690)
Proceeds from sale of idle equipment - 500
------ ------
Net cash used in investing (1,762) (2,190)
activities ------ ------
Cash flows from financing activities:
Net (decrease) increase in long-term
debt (1,054) 4,826
Repurchase of bond warrants - (94)
Payments in respect of stock
appreciation rights (424) (482)
Dividends paid - (1,749)
------ ------
Net cash (used in) provided by
financing activities (1,478) 2,501
------ ------
Net (decrease) increase in cash (28) -
Cash at beginning of period 46 26
------ ------
Cash at end of period $ 18 26
====== ======
Supplemental disclosure of cash flow information
- ------------------------------------------------
Cash paid during the period for:
Interest $ 5,854 5,738
====== ======
Income taxes $ - 175
====== ======
Noncash items related to stock repurchase:
Decrease in paid-in capital $ 1,055 -
====== ======
Increase in other liabilities $ 662 -
====== ======
Decrease in loans to stockholders $ 393 -
====== ======
See accompanying notes to consolidated condensed financial statements.
5
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements
October 31, 1996 and 1995
(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), 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, merchant and special bar quality steel products, specialty
steel products, and fence posts. 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, 1996. 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, 1996 are not necessarily
indicative of the results that may be expected for the year ending
April 30, 1997.
2) Net Loss Per Share of Common Stock
Loss per share of common stock is computed by dividing net loss applicable
to common stock by the weighted average number of common shares and
dilutive common stock equivalents outstanding each period. All options and
warrants were excluded from per-share computations since their effect on
loss per common share was anti-dilutive.
3) Inventories
The components of inventories are as follows:
October 31,
1996 April 30,
Unaudited 1996
----------- ---------
Raw materials and storeroom supplies $11,579 10,823
Work in process 13,328 15,640
Finished goods 14,252 13,858
------- ------
$39,159 40,321
======= ======
6
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Condensed Financial Statements, Continued
4) Related Party Transactions
On September 30, 1996, the Company finalized the terms of an agreement to
repurchase shares of the Company's common stock from two minority
shareholders who formally were officers of the Company. The stock repurchase
is pursuant to the Amended and Restated Stockholder's Agreement dated
September 15, 1993. Certain payments, including those for treasury stock,
are currently not permitted under the terms of the Company's Indenture. As a
result of this transaction, $393 of notes receivable from the former
shareholders was satisfied, the Company recorded a note payable in the
amount of $662 and decreased paid-in capital by $1,055. The note payable
will accrue simple interest at 6.02% and will be repaid in five annual
installments beginning when, and only when, the purchase of the shares is
permitted under the Indenture.
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.
RESULTS OF OPERATIONS
Three month period ended October 31, 1996
-----------------------------------------
SALES. Net sales for the Company for the second quarter were
approximately $44.7 million as compared to net sales of approximately $38.1
million in the second quarter of fiscal 1996, an increase of approximately $6.6
million or 17%. Shipping levels in the second quarter increased 29% to 126,005
tons from 97,756 tons in the second quarter of fiscal 1996, reflecting good
rebar and MBQ product demand as well as increased billet shipments. However,
sales increases were partially offset by a decrease in average selling prices
from $390 per ton in the second quarter of fiscal 1996 to $355 per ton in the
second quarter of fiscal 1997. Prices decreased in comparison to the same
period in the prior year partially due to product sales mix and partially due
to market conditions.
8
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
Shipments of rebar for the second quarter increased 16% as compared to the
same quarter in the prior year primarily due to increased market demand and
increased production of rebar products. Shipments of MBQ products from Sand
Springs increased 118% from the same period in the prior year due primarily to
increased production of MBQ products while Joliet shipments of MBQ products
remained consistent with the same quarter in the prior year. Shipments of
semi-finished steel for the second quarter increased 233% due primarily to two
opportunities to sell billets to customers. Both orders were of a spot or
infrequent nature and are not likely to be routine or ongoing to the business.
COST OF SALES. The cost of sales for the second quarter increased to
approximately $36.8 million as compared to approximately $31.1 million for the
same quarter in the prior year. As a percentage of sales, cost of sales
remained consistent with second quarter in the prior year. On an average per-
ton basis, cost of sales decreased from $318 per ton for the second quarter of
fiscal 1996 to $292 per ton for the second quarter fiscal 1997. The decrease
in cost of sales per ton is due to product mix, improved production rates, and
a decrease in scrap raw material costs of $4 per ton from this quarter in the
prior year. The decrease is partially offset by slightly higher conversion
costs per ton in both the melt shop and rolling mill primarily due to higher
energy costs in comparison to the same quarter in the prior year.
GROSS PROFIT. Gross profit for the Company for the second quarter was
approximately $7.9 million as compared to a gross profit of approximately $7.0
million for the same quarter in the prior year, an increase of approximately
$0.9 million or 13%. Gross profit for the Company as a percentage of sales was
17.7% for the second quarter as compared to 18.4% for the same quarter in the
prior year. The decrease in gross profit as a percentage of sales is a result
of lower average selling prices partially offset by improved cost of sales per
ton as discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expenses for the Company for the second quarter were
approximately $3.3 million as compared to approximately $3.1 million for the
second quarter of fiscal 1996, an increase of approximately $0.2 million or 6%.
The primary reason for the increase is higher property tax expenses as a result
of the addition of the new mill as well as selling expenses related to
additional MBQ product sales.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased in
the second quarter approximately $0.1 million to $1.7 million, up from $1.6
million for the second quarter in the prior year due to depreciation on capital
expenditures incurred in the prior year.
OPERATING INCOME. Operating income for the second quarter was
approximately $2.1 million as compared to approximately $1.4 million for same
quarter in the prior year, an increase of approximately $0.7 million or 50%.
Operating income for the Company as a percentage of sales for the second
quarter was 4.8% as compared to 3.8% for the same quarter in the prior year.
The dollar increase was primarily due to increased sales
9
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
and gross profit offset by the additional selling, general and administrative
expenses as discussed above.
INTEREST EXPENSE. Interest expense increased $0.04 million to approximately
$2.94 million compared to the second quarter in the prior year. This increase
was due to increased average monthly borrowings under the Company's revolving
credit facility to support a slightly higher investment in working capital in
comparison to the same period in the prior year.
INCOME TAX. The Company has not recorded a benefit for income taxes as a
result of the net loss. A valuation allowance is required when it is more
likely than not that all or a portion of the deferred tax assets will not be
realized. Accordingly, a valuation allowance has been recorded for a portion
of the deferred tax asset at October 31, 1996. The amount of the deferred tax
assets considered realizable, however, could change if estimates of future
taxable income change.
Six month period ended October 31, 1996
---------------------------------------
SALES. Net sales for the six months ended October 31, 1996 were
approximately $89.9 million as compared to net sales of approximately $85.7
million for the six month period ended October 31, 1995, an increase of
approximately $4.2 million or 5%. Shipping levels for the six month period of
1996 increased 11% to 258,395 tons from 232,214 tons for the same period in the
prior year, reflecting good rebar and MBQ product demand. However, shipping
increases were partially offset by a decrease in average selling prices from
$369 per ton for the six month period ending October 31, 1995 to $348 per ton
for the same period in 1996. The decrease in average selling prices is
attributable partially to product mix and partially to market conditions.
Shipments of rebar for the six month period ending October 31, 1996
increased 26% as compared to the same period in the prior year primarily due to
increased market demand and increased production of rebar products. Shipments
of MBQ Products from Sand Springs increased 108% from the same period in the
prior year due to increased production of MBQ products while Joliet shipments
of MBQ products decreased 9% due to weaker market demand compared to the same
period in the prior year. Shipments of semi-finished steel and fabricated
products for the six month period ending October 31, 1996 did not fluctuate
materially as compared to the same period in the prior year.
COST OF SALES. The cost of sales for the six month period ended October
31, 1996 increased to approximately $74.3 million as compared to approximately
$70.6 million for the same period in the prior year. Cost of sales increased
as a percentage of sales to 82.7% compared with 82.3% for the same period in
the prior year. On an average per-ton basis, cost of sales decreased from $304
per ton for the six month period ending October 31, 1995 to $288 per ton for
the six month period ending October 31, 1996. The decrease in cost of sales
per ton was less than the decrease in average selling prices resulting in an
increase in cost of sales as a percentage of sales. The decrease in cost of
sales per ton is due
10
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
to improved production rates and a decrease in scrap raw material costs of $11
per ton compared to the same period in the prior year. However, the decrease
in cost of sales per ton
is partially offset by higher conversion costs per ton in the melt shop because
of higher energy costs in comparison to the same period in the prior year.
GROSS PROFIT. Gross profit for the Company for the six month period
ending October 31, 1996 was approximately $15.6 million as compared to a gross
profit of approximately $15.1 million for same period in the prior year, an
increase of approximately $0.5 million or 3%. Gross profit for the Company as
a percentage of sales was 17.3% as compared to 17.7% for the same period in the
prior year. The decrease in gross profit as a percentage of sales is a result
of lower average selling prices partially offset by lower cost of sales per ton
as discussed above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE. Selling, general and
administrative expenses for the Company for the six month period ending October
31, 1996 were approximately $6.5 million as compared to approximately $6.0
million for the same period in the prior year, an increase of approximately
$0.5 million or 8%. The primary reason for the increase is higher property tax
expenses as a result of the addition of the new mill as well as selling
expenses related to additional MBQ product sales.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the six
month period ending October 31, 1996 increased approximately $0.2 million to
approximately $3.4 million, up from approximately $3.2 million for the same
period in the prior year due to depreciation on capital expenditures incurred
in the prior year.
OPERATING INCOME. Operating income for the six month period ending
October 31, 1996 was approximately $4.2 million as compared to approximately
$4.1 million for same period in the prior year, an increase of approximately
$0.1 million or 3%. Operating income for the Company as a percentage of sales
remained consistent with the same period in the prior year at 4.7%. The
increase in operating income was primarily due to increased sales and gross
profit offset by the additional selling, general and administrative expenses as
discussed above.
INTEREST EXPENSE. Interest expense for the six month period ending
October 31, 1996 increased approximately $0.1 million to approximately $5.9
million compared to the same period in the prior year. This increase was due
to increased borrowings under the Company's revolving credit facility in
comparison to the same period in the prior year.
INCOME TAX. The Company has not recorded a benefit for income taxes as a
result of the net loss. A valuation allowance is required when it is more
likely than not that all or a portion of the deferred tax assets will not be
realized. Accordingly, a valuation allowance has been recorded for a portion
of the deferred tax asset at October 31, 1996, and July 31, 1996. The amount
of the deferred tax assets considered realizable, however, could change if
estimates of future taxable income change.
11
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1996, the Company's long-term indebtedness was
approximately $95.3 million, excluding current portion, after giving effect to
an unamortized discount attributable to detachable stock warrants of
approximately $1.8 million. The Company had approximately $12.7 million of
borrowing availability at October 31, 1996 under its revolving credit
agreements.
Cash flow provided by operations was approximately $3.2 million for the
six month period ended October 31, 1996, as compared with cash flow used in
operations of approximately $0.3 million for the six month period ended October
31, 1995. Cash used in investing activities in the three months ended October
31, 1996 was approximately $1.8 million, consisting principally of required
replacement of plant equipment. For the six month period ended October 31,
1996, cash used for financing activities consisted of contractual payments to
retired executives of the Company in respect of their stock appreciation rights
and payments on the revolving credit facility.
The Company's cash flow from operations and borrowings under the Revolving
Credit Facility and Railway Credit Facility are expected to be sufficient to
fund the budget for capital improvements, and meet near-term working capital
requirements.
On a longer 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 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 six month period ended October 31, 1996 were
approximately $1.8 million, consisting primarily of normal capital projects
required or deemed economically feasible, throughout the Company. The
Company's cash flow from operations and borrowings under its revolving credit
facilities are expected to be sufficient to meet any near-term working capital
requirements the Company may have and to fund anticipated capital improvements.
12
SHEFFIELD STEEL CORPORATION AND SUBSIDIARIES
OTHER COMMENTS
The Company's collective bargaining agreement with the United Steelworkers
of America, which covers approximately 320 hourly-paid production and
maintenance employees at the Sand Springs facility, approximately 75% of the
Sand Springs work force, expires on March 1, 1997. There can be no assurance
that future collective bargaining agreements will contain terms comparable to
the terms contained in the existing collective bargaining agreements.
OUTLOOK
Scrap prices declined in October and November, 1996, which should begin to
affect cost of sales in the latter part of the third fiscal quarter. However,
energy prices (natural gas and electric power), have been rising as winter
approaches. The decline in scrap prices has been of a greater magnitude than
the increase in energy costs. Demand for rebar and fence post is generally
weaker in the winter months as compared to the rest of the year. Sales of
semi-finished steel have decreased in recent months and are not expected to
increase in the near future.
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
At the Annual Meeting of Stockholders held on September 4, 1996, 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
No exhibits.
B. Reports on Form 8-K
No reports on Form 8-K were filed during the second quarter ended October 31,
1996.
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: Dec. 11, 1996 /s/ Robert W. Ackerman
----------------- ----------------------------------
Robert W. Ackerman, President
and Chief Executive Officer
Date: Dec. 11, 1996 /s/ Stephen R. Johnson
----------------- ----------------------------------
Stephen R. Johnson, Vice President
and Chief Financial Officer
15