-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N/eNDiHUiR9vPAHvGJRJKpjk3Sz7wc5BgiQnxhpceFhsaOSbBMqUgMmpgth1TRVm U8yM+jnhaqB9u5cCiNb5yw== 0000779334-98-000019.txt : 19980515 0000779334-98-000019.hdr.sgml : 19980515 ACCESSION NUMBER: 0000779334-98-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980514 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BIRMINGHAM STEEL CORP CENTRAL INDEX KEY: 0000779334 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 133213634 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09820 FILM NUMBER: 98620344 BUSINESS ADDRESS: STREET 1: 1000 URBAN CENTER PARKWAY STREET 2: SUITE 300 CITY: BIRMINGHAM STATE: AL ZIP: 35242 BUSINESS PHONE: 2059701255 MAIL ADDRESS: STREET 1: P.O. BOX 1208 CITY: BIRMINGHAM STATE: AL ZIP: 35201-1208 10-Q 1 CURRENT REPORT ON FORM 10Q 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 March 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 No. 1-9820 BIRMINGHAM STEEL CORPORATION DELAWARE 13-3213634 (State of Incorporation) (I.R.S. Employer Identification No.) 1000 Urban Center Parkway, Suite 300 Birmingham, Alabama 35242 (205) 970-1200 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 and 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 ( ) . Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: 29,779,976 Shares of Common Stock, Par Value $.01 Outstanding at March 8, 1998.
Birmingham Steel Corporation Consolidated Balance Sheets (in thousands, except number of shares) March 31, 1998 June 30, 1997 (Unaudited) (Audited) -------------- -------------- ASSETS Current assets: Cash and cash equivalents $ 4,243 $ 959 Accounts receivable, net of allowance for doubtful accounts of $1,975 at March 31, 1998 and $1,797 at June 30, 1997 133,567 129,476 Inventories 198,799 208,595 Other 36,922 27,834 ----------- ----------- Total current assets 373,531 366,864 Property, plant and equipment Land and buildings 257,761 199,363 Machinery and equipment 649,201 572,802 Construction in progress 55,366 162,957 ----------- ----------- 962,328 935,122 Less accumulated depreciation (209,235) (173,554) ----------- ----------- Net property, plant and equipment 753,093 761,568 Excess of cost over net assets acquired 45,351 50,089 Other assets 64,804 32,468 ----------- ----------- Total assets $ 1,236,779 $ 1,210,989 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Notes payable $ 15,000 $ - Accounts payable 87,739 94,273 Accrued interest payable 7,121 2,068 Accrued operating expenses 10,845 7,503 Accrued payroll expenses 8,145 7,387 Income taxes payable 169 170 Other current liabilities 25,915 26,581 Current portion of long-term debt 88 - ----------- ----------- Total current liabilities 155,022 137,982 Deferred income taxes 57,561 54,352 Deferred compensation and rent 7,357 5,933 Long-term debt less current portion 534,316 526,056 Minority interest in subsidiary 13,875 15,118 Commitments and contingencies - - Stockholders' equity: Preferred stock, par value $.01; authorized 5,000,000 shares - - Common stock, par value $.01; authorized: 75,000,000 shares; issued and outstanding: 29,760,476 at March 31, 1998 and 29,735,815 at June 30, 1997 298 297 Additional paid-in capital 331,585 331,139 Treasury stock, 103,749 and 55,342 shares at March 31, 1998 and June 30, 1997, respectively, at cost (1,710) (996) Unearned compensation (1,027) (1,425) Retained earnings 139,502 142,533 ----------- ----------- Total stockholders' equity 468,648 471,548 ----------- ----------- Total liabilities and stockholders' equity $ 1,236,779 $ 1,210,989 =========== =========== See accompanying notes.
Birmingham Steel Corporation Consolidated Statements of Operations (in thousands, except per share data; unaudited) Three months ended Nine months ended March 31, March 31, ---------------------- -------------------- 1998 1997 1998 1997 --------- --------- -------- --------- Net sales $ 298,199 $ 257,858 $853,199 $701,420 Cost of sales: Other than depreciation and amortization 254,893 223,675 728,007 601,295 Depreciation and amortization 14,778 12,155 40,393 33,743 --------- --------- -------- -------- Gross profit 28,528 22,028 84,799 66,382 Pre-operating/start-up costs 14,648 6,557 23,753 9,091 Selling, general and administrative 12,168 10,490 34,063 26,852 Interest 8,160 5,677 20,740 14,310 --------- --------- -------- -------- (6,448) (696) 6,243 16,129 Other income (expense), net (1,072) 664 2,555 4,511 Minority interest in loss of subsidiary 430 1,039 1,243 1,160 --------- --------- -------- -------- Income (loss) before income taxes (7,090) 1,007 10,041 21,800 Provision for (benefit from) income taxes (2,942) 413 4,167 8,938 --------- --------- -------- -------- Net income (loss) $ (4,148) $ 594 $ 5,874 $ 12,862 ========= ========= ======== ======== Weighted average shares outstanding 29,654 29,423 29,683 28,896 ========= ========= ======== ======== Earnings (loss) per share, basic and diluted $ (0.14) $ 0.02 $ 0.20 $ 0.45 ========= ========= ======== ======== Dividends declared per share $ 0.10 $ 0.10 $ 0.30 $ 0.30 ========= ========= ======== ======== See accompanying notes.
Birmingham Steel Corporation Consolidated Statements of Cash Flows (In thousands) Nine Months Ended March 31, -------------------------- 1998 1997 (Unaudited) (Unaudited) ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 5,874 $ 12,862 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 40,393 33,743 Provision for doubtful accounts receivable - 15 Deferred income taxes 3,209 (780) Gain on sale of 50% equity in scrap subsidiary - (1,746) Minority interest in loss of subsidiary (1,243) (1,160) Loss from equity investments 4,881 - Other 639 824 Changes in operating assets and liabilities, net of effects from business acquisitions: Accounts receivable (4,091) (20,456) Inventories 9,796 9,865 Prepaid expenses (2,340) (371) Other current assets (7,010) (4,606) Accounts payable (4,471) (24,392) Income taxes payable - (369) Other accrued liabilities 9,448 (17,666) Deferred compensation 924 152 ----------- --------- Net cash provided by (used in) operating activities 56,009 (14,085) CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (including expenditures reimburseable under lease agreement) (122,679) (144,581) Proceeds from lease agreement 75,000 - Payment for business acquisition - (43,309) Proceeds from disposal of property, plant and equipment 17,357 108 Proceeds from sale of 50% equity in scrap subsidiaries 65 5,372 Investment in scrap subsidiary - (9,250) Equity investment in Laclede Steel Company (15,003) - Equity investment in American Iron Reduction, LLC (20,000) - Additions to other non-current assets (5,201) (21,530) Reductions in other non-current assets 4,220 662 ----------- --------- Net cash used in investing activities (66,241) (212,528) CASH FLOWS FROM FINANCING ACTIVITIES: Net short-term borrowings and repayments 15,000 - Proceeds from issuance of long-term debt 1,500 26,000 Borrowings under revolving credit facility 1,597,246 266,505 Payments on revolving credit facility (1,590,398) (81,536) Proceeds from issuance of common stock 126 19,498 Purchase of treasury stock (1,053) - Cash dividends paid (8,905) (8,694) ----------- --------- Net cash provided by financing activities 13,516 221,773 ----------- --------- Net increase (decrease) in cash and cash equivalents 3,284 (4,840) Cash and cash equivalents at: Beginning of period 959 6,663 ----------- --------- End of period $ 4,243 $ 1,823 =========== ========= Supplemental cash flow disclosures: Cash paid during the period for: Interest (net of amounts capitalized) $ 15,770 $ 9,868 Income taxes 6,347 8,209 See accompanying notes.
BIRMINGHAM STEEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1998 and 1997 1. Description of the Business and Significant Accounting Policies Description of the Business Birmingham Steel Corporation (the Company) operates steel mini-mills in the United States producing steel reinforcing bar, merchant products and special quality bar, rod and wire. The Company operates in one industry segment and sells to third parties primarily in the construction and automotive industries throughout the United States and Canada. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly-owned and majority-owned subsidiaries. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and such adjustments are of a normal and recurring nature. All significant intercompany accounts and transactions have been eliminated. Inventories Inventories are stated at the lower of cost or market value. The cost of inventories is determined using the first-in, first-out method. Pre-Operating/Start-up Costs Pre-operating/start-up costs consist of non-capitalized costs incurred prior to a facility reaching commercial production levels. Earnings Per Share In the second quarter of fiscal 1998, the Company adopted Financial Accounting Standards Board Statement No. 128, "Earnings per Share". Basic earnings per share is computed using the weighted average number of outstanding common shares for the period. Diluted earnings per share is computed using the weighted average number of outstanding common shares and any dilutive equivalents. Prior year earnings per share amounts have been recalculated in conformance with the current year presentation with no effect on prior years. Use of Estimates The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 2. Business Acquisitions and Joint Ventures On September 26, 1997, Midwest Holdings Inc., a wholly owned subsidiary of the Company, purchased 24.9% of the outstanding common shares and 44.0% of the outstanding non-voting convertible preferred shares of Laclede Steel Company (Laclede) for a purchase price of approximately $14,953,000, bringing the Company's total investment in Laclede to 25.4% when combined with shares previously owned. The investment in Laclede, a manufacturer of carbon and alloy steel products including pipe, hot rolled and wire products and welded chain, may ultimately provide the Company with an opportunity to participate in new product markets. The investment in Laclede is accounted for in accordance with the equity method. On November 15, 1996, the Company entered into a Contribution Agreement with Atlantic Steel Industries, Inc. (Atlantic) and IVACO, Inc., the parent of Atlantic, pursuant to which the Company and Atlantic formed Birmingham Southeast, LLC (Birmingham Southeast), a limited liability company owned 85 percent by Birmingham East Coast Holdings, a wholly owned subsidiary of the Company, and 15 percent by a subsidiary of IVACO, Inc. On December 2, 1996, pursuant to the Contribution Agreement the Company contributed the assets of its Jackson, Mississippi facility to Birmingham Southeast which had no impact on the accompanying consolidated financial statements. Birmingham Southeast then purchased the operating assets of Atlantic located in Cartersville, Georgia for $43,309,000 in cash and assumed liabilities approximating $44,257,000. The purchase price has been allocated to the assets and liabilities of the Company as follows (in thousands): Current assets $31,667 Property, plant and equipment 63,400 Other non-current assets, primarily goodwill 9,964 -------- Total assets acquired 105,031 Fair value of liabilities assumed (44,257) Minority interest (17,465) -------- Total purchase price $ 43,309 ======== The non-cash financing and investing activities related to the purchase of the Cartersville, Georgia assets have been excluded from the statement of cash flows. Pro forma results for fiscal 1997 would not be materially different from the amounts reported in the Company's consolidated statements of operations if the acquisition had occurred as of the beginning of the period. On September 18, 1996, the Company entered into an agreement with Raw Materials Development Co., Ltd., an affiliate of Mitsui & Co., Ltd. forming Pacific Coast Recycling, LLC (Pacific Coast), a 50/50 joint venture established to operate in southern California as a collector, processor and seller of scrap. The Company made equity investments in Pacific Coast of approximately $7,500,000 on December 27, 1996 and $1,750,000 on January 23, 1997. Pacific Coast is accounted for using the equity method. On December 27, 1996, Pacific Coast purchased certain assets from the estate of Hiuka America Corporation and its affiliates with a minimum annual scrap processing capacity of approximately 600,000 tons. Pacific Coast is utilizing the facility at the Port of Long Beach to export scrap. At March 31, 1998, the Company had current and non-current loans outstanding to Pacific Coast in the amount of $10,300,000 and $10,000,000 respectively. On August 30, 1996, the Company entered into an Equity Contribution Agreement with American Iron Reduction, L.L.C. (AIR), a 50 percent owned subsidiary of the Company, for the purpose of constructing a direct reduced iron (DRI) facility in Louisiana. Under the Equity Contribution Agreement, the Company is required to make an equity contribution to AIR of not less than $20,000,000 and not more than $27,500,000. In the second and third quarters of fiscal 1998, the Company made equity contributions totaling approximately $20,000,000 to AIR. The Company also entered into a DRI Purchase Agreement with AIR on August 30, 1996, whereby the Company will purchase a minimum of 600,000 metric tons of DRI annually. The DRI purchased will be utilized primarily at the Memphis melt shop as a substitute for premium, low-residual scrap. The DRI facility began operations in January, 1998. 3. Inventories Inventories were valued as summarized in the following table (in thousands): March 31, June 30, 1998 1997 -------- -------- At lower of cost (first-in, first-out) or market: Raw materials and mill supplies $ 52,687 $ 51,832 Work-in-progress 58,162 71,693 Finished goods 87,950 85,070 -------- -------- $198,799 $208,595 ======== ======== 4. Borrowing Arrangements The Company has a five year, unsecured revolving credit agreement whereby the Company may borrow up to $300,000,000 with interest at market rates mutually agreed upon by the Company and the lender or at other contractual borrowing rates. Approximately $100,595,000 was available under this credit facility at March 31, 1998. Under two line of credit arrangements for short-term borrowings, the Company may borrow up to $35,000,000 with interest at market rates mutually agreed upon by the Company and the lender. At March 31, 1998, $20,000,000 was available under these credit facilities. 5. Contingencies Environmental The Company is subject to federal, state and local environmental laws and regulations concerning, among other matters, waste water effluents, air emissions and furnace dust management and disposal. The Company believes that it is currently in compliance with all known material and applicable environmental regulations. Legal Proceedings The Company is involved in litigation relating to claims arising out of its operations in the normal course of business. Such claims are generally covered by various forms of insurance. In the opinion of management, any uninsured or unindemnified liability resulting from existing litigation would not have a material effect on the Company's business, its financial position, liquidity or results of operations. 6. Disposition of Idle Facilities In the second quarter of fiscal 1998, the Company completed the sale of idle properties located in Norfolk, Virginia and Emeryville, California. The Company entered into an agreement with a third party whereby the third party assumed environmental liability for the cleanup and sale of the Norfolk, Virginia property. Under the terms of the contract, the Company placed an amount into escrow which approximates the environmental reserve for cleanup of the property. The Emeryville, California property was sold for approximately $13,608,000. Disposal of the two properties resulted in a pre-tax gain of approximately $2,129,000. On October 15, 1997, the Company sold its idle rolling mill in Cartersville, Georgia, acquired in December 1996, for $1,600,000 and recognized a pre-tax gain of approximately $1,239,000. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The statements contained in this report that are not purely historical or which might be considered an opinion or projection concerning the Company or its business, whether express or implied, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include the Company's expectations, hopes, anticipations, intentions, plans and strategies regarding the future. Forward-looking statements include, but are not limited to: expectations about environmental remediation costs, assessments of expected impact of litigation and adequacy of insurance coverage for litigation, expectations regarding the costs of new projects, expectations regarding future earnings, expectations concerning the anticipated performance of new ventures, and expectations regarding the date when facilities under construction will be operational and the future performance and capabilities of those facilities. Moreover, when making forward-looking statements, management must make certain assumptions that are based on management's collective opinion concerning future events, and blend these assumptions with information available to management when such assumptions are made. Whether these assumptions are valid will depend not only on management's skill, but also on a variety of volatile and highly unpredictable risk factors. Some, but not all, of these risk factors are described below under the heading "Risk Factors That May Affect Future Operating Results". The Company's actual results could differ materially from those described or implied by any forward-looking statements herein. Any forward-looking statements contained in this document speak only as of the date hereof, and the Company disclaims any intent or obligation to update such forward-looking statements. Comparisons of results for current and prior periods are not necessarily indicative of future performance, and should not be relied on for any purpose other than as historical data. For the third quarter of fiscal 1998, the Company reported a loss of $4,148,000, or $.14 per share, basic and diluted, compared with earnings of $594,000, or $.02 per share in the third quarter of fiscal 1997. For the nine months ended March 31, 1998, the Company reported earnings of $5,874,000, compared with $12,862,000 in the prior year comparable period. Earnings per share, basic and diluted, for the nine month period of fiscal 1998 were $.20, compared with $.45 in the prior year period. Net Sales The Company reported net sales of $298,199,000 in the third quarter of fiscal 1998, up 16 percent from $257,858,000 reported in the third period of fiscal 1997. In the third quarter, the Company achieved record steel shipments of 860,000 tons, up 15 percent from 747,000 tons reported in the third quarter of fiscal 1997. For the nine months ended March 31, 1998, the Company reported net sales of $853,199,000, up 22 percent from $701,420,000 in the same period of the prior year. Total shipments for the nine month period of the current year were 2,499,000 tons, up 23 percent from 2,025,000 tons in the same period last year. Cost of Sales As a percentage of net sales, cost of sales (other than depreciation and amortization) declined to 85.5% compared with 86.7% in the third quarter last year. The decline resulted from increased shipment volumes and improved conversion costs. For the nine months ended March 31, 1998, cost of sales as a percentage of net sales was 85.3%, compared with 85.7% in the same period last year. Average billet costs (yielded) at the Company's SBQ facilities in Cleveland were $350 per ton in the third quarter this year, compared with $367 in the same period last year. The lower billet costs are primarily attributable to increased purchases of lower priced industrial quality billets from affiliates. Rebar/merchant conversion costs were $122 per ton for the third quarter of fiscal 1998, down from $125 per ton in the immediately preceding quarter and $130 per ton in the third quarter of fiscal 1997. Conversion costs at the Company's SBQ facility fell to $57 per ton, compared with $70 per ton in the second quarter and $71 per ton in the prior year third quarter. The Company set melting and rolling production records during the third quarter of fiscal 1998, contributing to the decline in conversion costs. Depreciation and amortization was $14,778,000 in the third quarter of fiscal 1998, compared with $12,155,000 in the prior year period. For the nine month period of fiscal 1998, depreciation and amortization totaled $40,393,000, up from $33,743,000 reported for the same period last year. The increase is primarily attributable to the recognition of depreciation expense on assets placed into service during the last quarter of fiscal 1997 and in the first three quarters of fiscal 1998. Pre-operating/Start-up Costs Pre-operating/start-up costs amounted to $14,648,000 for the third quarter, compared with $6,557,000 in the third quarter of last year. The current quarter charges relate primarily to pre-operating/start-up costs at the Memphis, Tennessee melt shop which began operations in November, 1997 and start-up costs associated with the Company's direct reduced iron (DRI) joint venture in Louisiana which began operations in January, 1998. The charges for the same period a year ago relate primarily to pre-operating/start-up costs following the acquisition of the Cartersville, Georgia facility in December, 1996 and non-capitalized charges incurred during the construction of the Memphis, Tennessee melt shop. For the nine months ended March 31, 1998, pre-operating/start-up costs amounted to $23,753,000 compared with $9,091,000 for the same period a year ago. The current year charges primarily relate to the Memphis melt shop and DRI joint venture discussed above. The prior year charges relate to pre-operating costs at the Memphis, Tennessee facility and start-up expenses incurred at the Cartersville, Georgia facility and the bar mill in Cleveland, Ohio which began operations in July, 1996. Selling, General and Administrative Expenses ("SG&A") SG&A amounted to $12,168,000 in the third quarter compared with $10,490,000 in the third quarter last year. As a percent of sales, SG&A was 4.1 percent in the third quarter, unchanged from the prior year period. For the nine months ended March 31, 1998, SG&A amounted to $34,063,000 compared with $26,852,000 in the same period last year. As a percent of sales, year-to-date SG&A were 4.0 percent, compared with 3.8 percent last year. The change in SG&A is primarily attributable to increased salaries and benefits and various SG&A expenses at the Cartersville, Georgia facility of Birmingham Southeast, LLC, which was acquired in December 1996, the Memphis, Tennessee facility which began operations in November 1997 and new administrative personnel hired to support increased sales volumes and information technology systems and programs. Interest Expense Interest expense increased to $8,160,000 in the third quarter of the current year compared with $5,677,000 reported last year, due to increased borrowings on the Company's long-term credit facility in the current quarter and a decline in capitalized interest. In the third quarter of fiscal 1998, the Company capitalized approximately $592,000 in interest related to construction projects, compared with approximately $2,113,000 in the same period last year. For the nine months ended March 31, 1998, interest expense increased to $20,740,000, compared with $14,310,000 in the prior year due to interest associated with increased borrowings on the long-term credit facility completed in March, 1997 and the $26 million industrial revenue bond completed in October, 1996. The Company capitalized approximately $5,624,000 in interest related to construction projects in the nine month period ended March 31, 1998, compared with approximately $5,648,000 in the same period a year ago. Income Taxes Effective income tax rates for the nine months ended March 31, 1998 and 1997 were 41.5% and 41.0% respectively. Liquidity and Capital Resources Operating Activities: For the nine months ended March 31, 1998, net cash provided by operating activities was $56.0 million, compared with net cash used in operating activities of $14.1 million in the third quarter a year ago. The favorable increase in cash flow was due to an increase in deferred income taxes and changes in operating assets and liabilities, primarily accounts receivable, accounts payable and other accrued liabilities. Investing Activities: Net cash used in investing activities was $66.2 million at March 31, 1998, compared with $212.5 million last year. On November 10, 1997, the Company completed a 15 year operating lease agreement and received $75 million in cash for equipment located at the Company's Memphis, Tennessee melt shop which was previously reflected in construction in progress. In the second quarter of fiscal 1998, the Company completed the sale of idle properties located in Norfolk, Virginia and Emeryville, California. The Company entered into an agreement with a third party whereby the third party assumed environmental liability for the cleanup and sale of the Norfolk, Virginia property. Under the terms of the contract, the Company placed an amount into escrow which approximates the environmental reserve for cleanup of the property. The Emeryville, California property was sold for approximately $13.6 million. Disposal of the two properties resulted in a pre-tax gain of approximately $2.1 million. On October 15, 1997, the Company sold its idle rolling mill in Cartersville, Georgia, acquired in December 1996, for $1.6 million and recognized a pre-tax gain of approximately $1.2 million. On September 26, 1997, Midwest Holdings Inc., a wholly owned subsidiary of the Company, purchased 24.9% of the outstanding common shares and 44.0% of the outstanding non-voting convertible preferred shares of Laclede Steel Company (Laclede) for a purchase price of approximately $15.0 million, bringing the Company's total investment in Laclede to 25.4% when combined with shares previously owned. The investment in Laclede, a manufacturer of carbon and alloy steel products including pipe, hot rolled and wire products and welded chain, may ultimately provide the Company with an opportunity to participate in new product markets. The investment in Laclede is accounted for in accordance with the equity method. On August 30, 1996, the Company entered into an Equity Contribution Agreement with American Iron Reduction, L.L.C. (AIR), a 50 percent owned subsidiary of the Company, for the purpose of constructing a direct reduced iron (DRI) facility in Louisiana. Pursuant to the Equity Contribution Agreement, the Company is required to make an equity contribution to AIR of not less than $20.0 million and not more than $27.5 million. During the second and third quarters of the current year, the Company made equity contributions of approximately $11.4 million and $8.6 million, respectively, to AIR. The Company also entered into a DRI Purchase Agreement with AIR on August 30, 1996, whereby the Company will purchase a minimum of 600,000 metric tons of DRI annually. The DRI purchased by the Company will be utilized primarily as feedstock at the new Memphis melt shop. The DRI facility began start-up operations in January, 1998. On November 15, 1996, the Company entered into a Contribution Agreement with Atlantic Steel Industries, Inc. (Atlantic) and IVACO, Inc., the parent of Atlantic, pursuant to which the Company and Atlantic formed Birmingham Southeast, LLC (Birmingham Southeast), a limited liability company owned 85 percent by Birmingham East Coast Holdings, a wholly owned subsidiary of the Company, and 15 percent by a subsidiary of IVACO, Inc. On December 2, 1996, pursuant to the Contribution Agreement, the Company contributed the assets of its Jackson, Mississippi facility to Birmingham Southeast and Birmingham Southeast purchased the assets of Atlantic located in Cartersville, Georgia for $43.3 million in cash and assumed approximately $39.9 million in liabilities (See Note 2 to Consolidated Financial Statements). During the second and third quarters of fiscal 1997, the Company made equity investments of $7.5 million and $1.8 million, respectively, in Pacific Coast Recycling, LLC, a joint venture owned 50 percent by the Company and 50 percent by Raw Materials Development Co., Ltd., an affiliate of Mitsui & Co., Ltd. On December 26, 1996, Pacific Coast completed the purchase of certain assets from the estate of Hiuka America Corporation and its affiliates with a capacity to collect and process 1 million tons of scrap annually. Pacific Coast is utilizing the facility at the Port of Long Beach to export scrap (See Note 2 to Consolidated Financial Statements). On December 20, 1996, Birmingham Recycling Investment Co., a wholly owned subsidiary of the Company, sold 50 percent of the stock of Richmond Steel Recycling Limited to SIMSMETAL Canada, Ltd. and recognized a pre-tax gain of approximately $1.7 million. Financing Activities: Net cash provided by financing activities was $13.5 million in the first nine months of fiscal 1998, compared with $221.8 million in the same nine month period last year. During the prior year period the Company completed a $26 million, 30 year tax-free bond financing at Memphis, the proceeds of which were used to finance certain portions of the Memphis melt shop. In March 1997 the Company completed a five year, $300 million unsecured revolving credit agreement. Net borrowings on the revolving credit facility amounted to $185.0 million for the nine months ended March 31, 1997, $182.0 million of which was drawn to repay borrowings under the Company's prior short-term borrowing arrangement. For the nine months ended March 31, 1998, net borrowings under the revolving credit facility amounted to $6.8 million. Net short-term borrowings for the current year period amounted to $15.0 million. During the first six months of fiscal 1998 the Company purchased 68,700 of its common shares in the open market for a purchase price of approximately $1.0 million. The shares were purchased pursuant to a previous Board resolution. In February 1998 the Board extended the stock buyback program until June 30, 1998. Under the extension, the Company is authorized to purchase up to 200,000 shares of its common stock in the open market at a purchase price not to exceed $20 per share. On January 15, 1997, the Company issued 1,000,000 additional shares of common stock from treasury in a public offering. The proceeds of $19,188,000 from the offering were used to offset certain payments made by the Company pursuant to the acquisition of the assets of Atlantic Steel Industries, Inc. located in Cartersville, Georgia (See Note 2 to Consolidated Financial Statements). Working Capital: Working capital at the end of the third quarter amounted to $218.5 million, compared with $228.9 million at the end of fiscal 1997. The decline in working capital was essentially due to a decline in inventories offset by increased borrowings on the Company's short-term lines of credit and a decrease in accounts payable. Other Comments On April 14, 1998, the Company declared a regular quarterly cash dividend of $.10 (ten cents) per share payable May 5, 1998 to shareholders of record on April 24, 1998. Year 2000 Issues Historically, certain computer programs have been written using two digits rather than four digits to define the applicable year, which could result in computers recognizing a date using "00" as the year 1900 rather than the year 2000. This could result in major system failures or miscalculations, and is generally referred to as the "Year 2000" or "Y2K" problem or issue. The Company has determined that it will need to modify significant portions of its software, and replace other software and hardware, so that its computer systems will function properly with respect to dates in the year 2000 and beyond. The Company has also initiated discussions with its external service organizations, significant suppliers, large customers and financial institutions to better understand and evaluate how their respective Year 2000 issues may affect the Company's operations. The Company's comprehensive Year 2000 initiative is being managed by a team of internal staff and outside consultants, with the intention of minimizing any adverse effects on the Company's business operations. With respect to its core business operations, the Company is well under way with these efforts, which are scheduled to be completed by July 1999. While the Company believes its planning efforts are adequate to address its Year 2000 concerns, there can be no guarantee that these efforts will be successful, or that the systems of other companies on which the Company's systems and operations rely will be converted on a timely basis and will not have a material effect on the Company. Risk Factors That May Affect Future Operating Results The Company's actual results could differ materially from those described or implied in any forward-looking statements contained in this document. Among the factors that could cause actual results to differ materially are the factors detailed below. In addition, readers should consider the risk factors described from time to time in other Company reports filed with the Securities and Exchange Commission. The Company operates in the steel industry, an industry that is vulnerable to unpredictable economic cycles. A downturn in the economy or in the Company's markets could have an adverse effect on the Company's performance. The Company has attempted to spread its sales across the reinforcing bar, merchant product and special bar quality markets to reduce the Company's vulnerability to an economic downturn in any one product market. The Company's performance, however, can still be materially affected by changes in demand for any one of its products and by changes in the economic condition of the construction, manufacturing or automobile industries. The cost of scrap is the largest element in the cost of the Company's finished rebar and merchant products. The Company purchases most of its scrap on a short-term basis. Changes in the price of scrap, therefore, can significantly affect the Company's profitability. Changes in other raw material prices can also influence the Company's profitability. Prices for some of the Company's products are positively affected by the influence of trade sanctions imposed on the Company's foreign competitors. Changes in these sanctions or their enforcement could adversely affect the Company's results. Energy costs are also a significant factor influencing the Company's results. Current reforms in the electric utility industry at the state and federal level are expected to lower energy costs in the long run. However, numerous utilities and political groups are fighting these reforms and states are approaching the reforms in different fashions. The possibility exists, therefore, that the Company could be exposed to energy costs which are less favorable than those available to its competitors. Such a situation could materially affect the Company's performance. In the past, the Company's SBQ division purchased substantially all of its steel billets from third parties. The cost of these steel billets is the largest element in the cost of the SBQ division's finished products. With the new Memphis melt shop, which began start-up operations in November 1997, the SBQ division will begin supplying substantially all of its billet requirements from Memphis. Until Memphis replaces third party suppliers, the performance of this division, and in turn, the performance of the Company, can be materially affected by changes in the price of the steel billets it buys from third parties. Start-up production issues associated with the new Memphis melt shop or the DRI project in Louisiana could materially adversely affect the Company's future results. These projects, like other start-up projects, can be affected or delayed by factors such as equipment performance, design issues, workforce training issues and management issues. The Company is constantly engaged in the process of evaluating new opportunities to strengthen its long-term business and financial prospects. From time to time, this process may lead the Company to make strategic investments, such as acquisitions and joint ventures, which have the potential to improve the Company's position in the markets in which it currently competes, as well as new markets it may choose to enter. In connection with these investments, the Company may incur, either directly or indirectly, start-up expenses, losses and other charges that may have a material affect on the Company's financial performance. Further, there can be no assurance that these strategic investments will in fact be profitable, and the Company could incur significant losses as a result of one or more of these investments. The Company believes its labor relations are generally good. The Company's work force is substantially non-union and the Company has never suffered a strike or other labor related work stoppage. If this situation changes, however, the Company's performance could suffer material adverse effects. The Company operates in an industry subject to numerous environmental regulations. Changes in environmental regulations or in the interpretation or manner of enforcement of environmental regulations could materially affect the Company's performance. Further, the Company is in the process of effecting certain environmental remediations. Unforeseen costs or undiscovered conditions requiring unplanned expenditures in connection with such remediations could materially affect the Company's results. The Company's economic performance, like most manufacturing companies, is vulnerable to a catastrophe that disables one or more of its manufacturing facilities and to major equipment failure. Depending upon the nature of the catastrophe or equipment failure, available insurance may or may not cover a loss resulting from such a catastrophe or equipment failure and the loss resulting from such a catastrophe or equipment failure could materially affect the Company's earnings. The Company anticipates that it will continue to borrow funds in the future. Increases in interest rates or changes in the Company's ability to borrow funds could materially affect the Company's performance. Recent declines in the demand for steel products in the Pacific Rim region have caused steel manufacturers in these countries to reduce their production of steel products. Pacific Coast Recycling, LLC, the venture jointly owned by the Company and Raw Materials Development Corporation, an affiliate of Mitsui and Company, Ltd. (see Investing Activities above), is heavily involved in the export of scrap products to Pacific Rim markets. Further significant erosion in the demand for scrap products occasioned by the reduced demand for steel products in these countries could have a material adverse effect on Pacific Coast Recycling, LLC, and in turn, on the value of the Company's investment in the joint venture. PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is involved in litigation relating to claims arising out of its operations in the normal course of business. Some of these claims against the Company are covered by insurance, although the insurance policies do include deductible amounts. It is the opinion of management that any uninsured or unindemnified liability resulting from existing litigation would not have a material adverse effect on the Company's business or financial position. There can be no assurance that insurance, including product liability insurance, will be available in the future at reasonable rates. Item 4. Submission of Matters to a Vote of Security Holders None. Item 6. Exhibits and Reports on Form 8-K No exhibits are required to be filed with this report. During the quarter ended March 31, 1998, no reports on Form 8-K were required to be filed. Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Birmingham Steel Corporation May 14, 1998 /s/J. Daniel Garrett -------------------------------------- J. Daniel Garrett Vice President-Finance EX-27 2 FDS
5 This schedule contains summary financial information extracted from the March 31, 1998 Consolidated Balance Sheets and Consolidated Statements of Operations of Birmingham Steel Corporation and is qualified in its entirety by reference to such. 1,000 3-Mos Jun-30-1998 Mar-31-1998 4,243 0 133,567 1,975 198,799 373,531 962,328 209,235 1,236,779 155,022 53,500 0 0 298 468,350 1,236,779 298,199 298,199 269,671 269,671 0 14,648 8,160 (7,090) (2,942) (4,148) 0 0 0 (4,148) (.14) (.14)
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