-----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, E/jJaCMGHyZ/yCo75N+qC2q38Jx1OFj2iasdccEeU2ox1pWUxpikQTxzTBCOC5Nk a5L1tR7dy9slJX0qMqcI7A== 0000779334-98-000083.txt : 19981116 0000779334-98-000083.hdr.sgml : 19981116 ACCESSION NUMBER: 0000779334-98-000083 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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: 98746981 BUSINESS ADDRESS: STREET 1: 1000 URBAN CENTER PARKWAY STREET 2: SUITE 300 CITY: BIRMINGHAM STATE: AL ZIP: 35242 BUSINESS PHONE: 2059701200 MAIL ADDRESS: STREET 1: P.O. BOX 1208 CITY: BIRMINGHAM STATE: AL ZIP: 35201-1208 10-Q 1 10Q FOR 9/30/98 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 September 30, 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: 29,255,559 Shares of Common Stock, Par Value $.01 Outstanding at November 6, 1998. BIRMINGHAM STEEL CORPORATION Consolidated Balance Sheets (in thousands, except per share data) September 30, June 30, ASSETS 1998 1998 (Unaudited) (Audited) --------------- ------------- Current assets: Cash and cash equivalents $ 2,697 $ 902 Accounts receivable, net of allowance for doubtful accounts $1,670 at September 30, 1998 and $1,838 at June 30, 1998 122,471 121,854 Inventories 241,552 243,275 Other 27,264 27,967 --------------- ------------ Total current assets 393,984 393,998 Property, plant and equipment Land and buildings 263,601 258,905 Machinery and equipment 652,841 652,240 Construction in progress 99,687 67,401 --------------- ------------- 1,016,129 978,546 Less accumulated depreciation (234,906) (221,051) --------------- ------------- Net property, plant and 781,223 757,495 equipment Excess of cost over net assets 43,490 44,420 acquired Other 44,557 48,865 --------------- -------------- Total assets $ 1,263,254 $ 1,244,778 =============== ============== LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities: Notes payable and current portion of long-term debt $ 120 $ 10,119 Accounts payable 99,291 92,813 Accrued interest payable 6,968 1,761 Accrued payroll expenses 5,900 12,015 Accrued operating expenses 10,375 12,901 Other current liabilities 20,561 26,715 --------------- --------------- Total current liabilities 143,215 156,324 Deferred income taxes 45,417 47,922 Deferred liabilities 7,966 7,630 Long-term debt less current portion 597,748 558,820 Minority interest in subsidiary 12,722 13,475 Commitments and contingencies - - Stockholders' equity: Preferred stock, par value $.01; authorized: 5,000 shares - - Common stock, par value $.01; authorized: 75,000 shares; issued: 29,826 at September 30, 1998 and 29,780 at June 30, 1998 298 298 Additional paid-in capital 332,160 331,859 Treasury stock, 542 and 191 shares at September 30, 1998 and June 30, 1998, respectively, at cost (5,386) (2,929) Unearned compensation (1,247) (912) Retained earnings 130,361 132,291 ---------- ----------- Total stockholders' equity $ 456,186 $ 460,607 ---------- ----------- Total liabilities and stockholders' equity $ 1,263,254 $1,244,778 =========== =========== See accompanying notes. BIRMINGHAM STEEL CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data; unaudited) Three months ended September 30, ------------------------------------------ 1998 1997 (Unaudited) (Unaudited) --------------- ------------- Net sales $ 270,957 $ 287,547 Cost of sales: Other than depreciation and amortization 229,024 243,997 Depreciation and amortization 14,959 12,729 --------------- -------------- Gross profit 26,974 30,821 Pre-operating/start-up costs 10,865 2,502 Selling, general and administrative 11,489 11,020 ------------ ------------ Operating income 4,620 17,299 Interest (8,800) (6,069) Other income, net 6,873 1,174 Loss from equity investments (1,679) (646) Minority interest in loss of subsidiary 752 521 ------------ ------------ Income before income taxes 1,766 12,279 Provision for income taxes 742 5,034 ------------- ------------ Net income $ 1,024 $ 7,245 ============= ============= Weighted average shares outstanding 29,488 29,685 ============= ============= Basic and diluted earnings per share $ 0.03 $ 0.24 ============= ============= Dividends declared per share $ 0.10 $ 0.10 ============= ============= See accompanying notes. BIRMINGHAM STEEL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Three Months Ended September 30, ---------------------------------------- 1998 1997 (Unaudited) (Unaudited) ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 1,024 $ 7,245 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,959 12,790 Deferred income taxes (2,506) - Minority interest in loss of subsidiary (752) (521) Loss from equity investments 1,679 646 Other (718) 230 Changes in operating assets and liabilities: Accounts receivable (617) (601) Inventories 1,723 11,235 Prepaid expenses (781) (547) Other current assets 1,483 822 Accounts payable 6,478 (7,432) Income taxes payable 279 4,934 Other accrued liabilities (9,867) 8,515 Deferred compensation 336 287 --------- --------- Net cash provided by operating activities 12,720 37,603 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property, plant and equipment (37,583) (55,739) Proceeds from sale of property 2,232 - Equity investment in Laclede Steel Company - (14,953) Additions to other non-current assets (1,162) (1,020) Reductions in other non-current assets 2,347 4,260 ---------- ---------- Net cash used in investing activities (34,166) (67,452) CASH FLOWS FROM FINANCING ACTIVITIES: Net short-term borrowings and repayments (9,999) 10,000 Payments on long-term debt (29) - Borrowings under revolving credit facility 610,700 447,858 Payments on revolving credit facility (571,743) (425,308) Proceeds from issuance of common stock - 111 Purchase of treasury stock (2,734) - Cash dividends paid (2,954) (2,969) ----------- --------- Net cash provided by financing activities 23,241 29,692 ----------- ---------- Net increase (decrease) in cash and cash equivalents 1,795 (157) Cash and cash equivalents at: Beginning of period 902 959 ---------- ---------- End of period $ 2,697 $ 802 ========== ========== Supplemental cash flow disclosures: Cash paid during the period for: Interest (net of amounts capitalized) $ 3,500 $ 1,087 Income taxes 312 38 See accompanying notes. BIRMINGHAM STEEL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 SBQ (special bar 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. Basis of Presentation 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. All such adjustments are of a normal recurring nature only. All significant intercompany accounts and transactions have been eliminated. When necessary, prior year amounts have been reclassified to conform to the current year's presentation. 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. Earnings per share In the second quarter of fiscal 1998, the Company adopted FASB 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. The adoption of Statement No. 128 had no effect on earnings per share in the prior year period reflected herein. 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. Accounting Pronouncements In June 1997, the FASB issued Statement No. 131 "Disclosures about Segments of an Enterprise and Related Information" effective for fiscal years beginning after December 15, 1997. The Company will adopt Statement No. 131 in its annual financial statements for the fiscal year ending June 30, 1999. The statement requires companies to report certain financial information based on operating segments of the business. Management is currently considering the impact, if any, Statement No. 131 will have on the Company's financial reporting. 2. INVENTORIES Inventories were valued at the lower of cost (first-in, first-out) or market as summarized in the following table (in thousands): September 30, June 30, 1998 1998 --------- --------- Raw materials and mill supplies $ 54,925 $ 60,960 Work-in-progress 91,912 84,325 Finished goods 94,715 97,990 ------- ------- $ 241,552 $ 243,275 ======= ======= 3. 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 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. 4. OTHER INCOME In the first quarter of fiscal 1999, the Company sold real estate in Cleveland, Ohio and recognized a gain of $2,232,000. Gains on sales of property, plant and equipment are included in "other income, net" in the Consolidated Statements of Operations. In the first quarter of fiscal 1999, the Company recorded settlements from electrode suppliers of $2,915,000 which were included in "other income, net" in the Consolidated Statements of Operations. 5. PRE-OPERATING/START-UP COSTS Pre-operating/start-up costs in the accompanying financial statements consists of the following (in thousands): Three Months Ended September 30, ------------------------------------------- 1998 1997 ------ -------- Pre-operating/start-up expenses: Memphis $ 9,502 $ 2,214 Cartersville 1,134 288 Other 229 - ------ ------- $ 10,865 $ 2,502 ====== ======= 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 first quarter of fiscal 1999, the Company reported a profit of $1,024,000, or $.03 per share, basic and diluted, compared with earnings of $7,245,000, or $.24 per share in the first quarter of fiscal 1998. Net Sales The Company reported net sales of $270,957,000 in the first quarter of fiscal 1999, a decrease of 5.8 percent from $287,547,000 reported in the first period of fiscal 1998. In the first quarter, the Company achieved steel shipments of 799,002 tons, down 4.6 percent from 837,217 tons reported in the first quarter of fiscal 1998. Cost of Sales As a percentage of net sales, cost of sales (other than depreciation and amortization) was 84.5% in the current period compared with 84.9% in the first quarter last year. The decline resulted primarily from a decrease in the market purchase price of scrap from $131 per ton in the first quarter of 1997 to $122 per ton in the same quarter of 1998. The decline in scrap price was partially offset by higher average billet costs at the Company's SBQ facilities, and, to a lesser extent slightly higher rebar conversion costs. These increased costs were primarily related to mix issues and reduced production levels for some products. Depreciation and amortization was $2.2 million higher in the first quarter of fiscal 1999, compared with the prior year period. The increase was attributable to the recognition of depreciation expense on assets placed into service since last year at the Memphis melt shop and other locations. Pre-operating/Start-up Costs Pre-operating/start-up costs were $10,865,000 in the first quarter of fiscal 1999, compared with $2,502,000 last year. The increased charges related primarily to start-up costs at the Memphis, Tennessee melt shop which began operations in November, 1997 and pre-operating costs associated with the Cartersville, Georgia rolling mill project. The charges for the same period a year ago related primarily to pre-operating expenses incurred during the construction of the Memphis, Tennessee melt shop. The Company believes that the Memphis facility will be able to produce billets at costs equal to the market price of billets upon attainment of a production level of 75% of capacity. The operation is currently producing at a rate in excess of 50% of capacity. The Company believes that Memphis could attain a 75% run rate in the third quarter of fiscal 1999; however, market factors could limit production requirements at Memphis in the near term. Selling, General and Administrative Expenses ("SG&A") SG&A expense was $11,488,000 in the first quarter compared with $11,020,000 in the first quarter last year. As a percent of sales, SG&A was 4.2 percent in the first quarter, up from 3.8 percent in the same quarter a year ago. The increased percentage was primarily the result of increased information technology expenses (including "Year 2000" initiatives) and lower sales volumes. Interest Expense Interest expense increased to $8,800,000 in the first quarter of fiscal 1999 from $6,069,000 reported last year. The increase was the result of additional borrowings under the Company's long-term credit facility and a reduction in capitalized interest because of the start-up of the Memphis project. It is anticipated that the Company will begin reducing total debt in the fourth quarter of fiscal 1999 upon completion of the Cartersville mid-section rolling mill project. Income Taxes Effective income tax rates for the three months ended September 30, 1998 were 42.0% essentially unchanged from 41.0% in the same period last year. Liquidity and Capital Resources Operating Activities: For the three months ended September 30, 1998, net cash provided by operating activities was $12.7 million, compared with $37.6 million in the first quarter a year ago. The difference of $24.9 million was primarily caused by reduced net income ($6.2 million), and increases in inventories ($9.5 million), and other accrued liabilities ($18.4 million). Inventory levels increased because of changing market conditions and reduced shipments. These were partially offset by a favorable change in accounts payable ($13.9 million). Investing Activities: Net cash used in investing activities was $34.2 million at September 30, 1998, compared with $67.5 million last year. During the period ending September 30, 1997, the Company purchased an interest in Laclede Steel Company (LCLD) for approximately $15 million and continued capital expenditures on such major projects as the Memphis melt shop and the Cartersville project. During the current period the level of capital expenditures has decreased, due in part to the completion of construction at Memphis. The Company also sold real estate in the first quarter of fiscal 1999, generating cash of $2.2 million. Through September 30, 1998, the Company had made equity investments of $20,000,000 in American Iron Reduction, L.L.C. (AIR), a 50 percent owned subsidiary of the Company, that operates a direct reduced iron (DRI) facility in Louisiana. Pursuant to the Equity Contribution Agreement, the Company may be obligated to make additional equity investments in AIR of not more than $7,500,000. The Company has agreed to purchase one-half of the annual output of the facility (approximately 600,000 metric tons per year) at prices which are equivalent to AIR's total cost excluding depreciation and amortization, but including debt service payments. In the first quarter of fiscal 1999, the Company purchased approximately $12,579,000 of DRI from AIR. For financial reporting purposes, AIR is accounted for as an equity method investee. Because AIR is a captive supplier of raw materials, the Company recognizes its share of operating profits or losses of AIR as a component of cost of sales. Financing Activities: Net cash provided by financing activities was $23.2 million in the first three months of fiscal 1999, compared with $29.7 million in the same three month period last year. In March, 1997 the Company completed a five year, $300 million unsecured revolving credit agreement. Net borrowings on the revolving credit facility amounted to $39.0 million for the three months ended September 30, 1998. Net short-term borrowings for the current year period amounted to $10.0 million. In July, 1998 the Company's Board of Directors authorized a stock buyback program until July 13, 1999 pursuant to which the Company is authorized to purchase up to 1,000,000 shares of its common stock in the open market at a purchase price not to exceed $20 per share. During the first three months of fiscal 1999 the Company purchased 366,900 of its common shares in the open market for a purchase price of approximately $2.7 million. The Company is currently in compliance with the restrictive debt covenants governing its loan agreements and does not anticipate any covenant violations in the foreseeable future. However, should factors described under "Risk factors" adversely affect fiscal 1999 operating results, the Company could violate one or more of it's restrictive covenants within the next twelve months. The Company has evaluated its alternatives in the event that it is unable to comply with its restrictive covenants in the near term, including refinancing the Company's outstanding obligations. Based upon recent discussions with its lenders, the Company expects to amend its $300 million revolving credit facility and $280 million private debt agreements in order to provide additional flexability for a temporary period with respect to restrictive debt covenants. The impact of such measures is not expected to have a significant impact on future results of operations. Working Capital: Working capital at the end of the first quarter was $250.8 million, compared with $202.3 million at the end of September, 1997. The change was primarily attributable due primarily to an increase in inventories of $44.2 million. Other Comments On October 12, 1998, the Company announced a temporary reduction in it's dividend from $.10 per share to $.025 (two and one-half cents) per share payable November 3, 1998 to shareholders of record on October 23, 1998. The reduction was implemented in response to changing economic conditions in the global steel industry and to conserve cash. The Company stated that it expected to return to the previous dividend level once conditions improve. Year 2000 Issues The following Year 2000 discussion is provided in response to the Securities and Exchange Commission's recent interpretive statement expressing it's view that public companies should include detailed discussion of Year 2000 issues in their 10Q submission of the MD&A. The Company is pursuing an organized program to assure the Company's information technology systems and related infrastructure will be Year 2000 compliant. The Company has divided it's Year 2000 issues into five areas including; (1)business systems at corporate headquarters, (2)business systems at the Cleveland, Ohio operation, (3)infrastructure systems at all locations, (4) manufacturing systems at all locations, and (5) facility and support systems at all locations. The Company includes certain systems which might not be considered as IT systems, such as phone switches and certain safety systems, in the facility and support systems area of the Year 2000 project. The Company's Year 2000 program includes three phases: (1) an audit and assessment phase designed to identify Year 2000 issues; a modification phase designed to correct Year 2000 issues ( this phase includes testing of individual modifications as they are installed); and (3) a testing phase to test entire systems for Year 2000 compliance after individual modifications have been installed and tested. A dedicated Year 2000 project manager has been assigned to this project for over one year. Project teams have been assembled for each area, specific responsibilities have been identified and specific time lines have been prepared for the activities to take place within each area of the project. Senior management receives monthly updates on the progress against the time lines for each strategic area. The Company has completed the audit and assessment phase for both the business systems at the corporate headquarters and at the Cleveland, Ohio operation and for infrastructure at all locations. The Company currently expects that the audit and assessment phase will be completed for the remaining areas prior to December 31, 1998. The Company is currently performing the second phase of it's program involving modifications and testing of the individual modifications, on it's business systems at both the corporate headquarters and the Cleveland, Ohio operation. The Company expects to complete the second phase of it's program for these business systems by December 31, 1998. This schedule allows for six months of contingency time prior to the July 1, 1999 deadline (the beginning of the Company's fiscal Year 2000) for completion of these upgrades. The Company expects to conduct the third phase test of it's business systems in January of 1999. The Company currently expects to complete the second phase of it's program (modifications and testing) for it's infrastructure systems, manufacturing systems, facility and support systems by June 30, 1999 leaving six months of contingency time before the December 31, 1999 deadline for completion of Year 2000 modifications of these systems. Appropriate systems testing will be conducted after June 30, 1999 and problems which are identified will then be corrected. Management believes based on available information that the costs for correction of the Year 2000 issues, including any software and hardware changes (but excluding any hardware systems that would have been replaced in any event) and the cost involved in working on this project will be less than $3 million. The Company estimates that 40% of the costs have been spent to date. The Year 2000 upgrades are being funded out of the normal operating funds, and account for less than 25% of the Company's IT budget. The Year 2000 compliance effort is a priority project for the Company's IT department. Other IT projects, however, including upgrades of certain existing systems and design and installation of new systems, continue while the Year 2000 effort is being accomplished. The Company's Year 2000 program also includes investigation of major vendors' and customers' Year 2000 readiness. The Company is using questionnaires, letters and protocols to examine it's vendors' and customers' Year 2000 readiness. The Company is contacting, for example, energy and scrap vendors and it's phone and data line service vendors to determine their Year 2000 compliance status. If any such vendors indicate that they will not be Year 2000 compliant, the Company will develop contingency plans to address the issue, which may include changing vendors. In addition, the Company is contacting significant customers to determine their progress towards Year 2000 compliance and to identify issues, if any, which might develop because of customers failure to be prepared for Year 2000 issues. In the event issues are identified, the Company expects to try to develop procedures to permit the Company to continue to supply the customer involved despite the Year 2000 issues. The Company has been assured by its key financial institutions that they are already Year 2000 compliant of will be Year 2000 compliant in early 1999. At the present time, the Company does not have a contingency plan to operate in the event that its business systems are not Year 2000 compliant. If testing scheduled for the first calendar quarter of 1999 suggests that there is a significant risk that the business systems might not be Year 2000 compliant, a contingency plan will be developed. Notice: various statements in this discussion of Year 2000 are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements include statements of the Company's expectations, statements with regard to schedules and expected completion dates and statements regarding expected Year 2000 compliance. These forward-looking statements are subject to various risk factors which may materially affect the Company's efforts to achieve Year 2000 compliance. These risk factors include the inability of the Company to complete the plans and modification that it has identified, the failure of software vendors to deliver the upgrades and repairs to which they have committed, the wide variety of information technology systems and components, both hardware and software, that must be evaluated and the large number of vendors and customers with which the Company interacts. The Company's assessment of the effects of Year 2000 on the Company are based, in part, upon information received from third parties upon which the Company reasonably relied must be considered as a risk factor that might affect the Company's Year 2000 efforts. The Company is attempting to reduce the risks by utilizing an organized approach, extensive testing, and allowance of ample contingency time to address issues identified by tests. Market Risk Sensitive Instruments The market risk inherent in the Company's financial instruments represents the potential loss arising from adverse changes in interest rates (principally U.S. Treasury and prime bank rates). In order to manage this risk, the Company attempts to maintain certain ratios of fixed to variable rate debt. However, the Company does not currently use derivative financial instruments. At September 30, 1998, the Company had fixed rate long-term debt with a carrying value of $281.5 million and variable rate borrowings of $316.4 million outstanding. Assuming a hypothetical 10% adverse change in interest rates, the fair value of the Company's fixed rate debt would decrease by $9.8 million and the Company would incur an additional $2.1 million of annual interest expense on variable rate borrowings. These amounts are determined by considering the impact of the hypothetical change in interest rates on the Company's cost of borrowing. The analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in the Company's financial structure. 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, including the Company's fiscal 1998 Annual Report filed on Form 10K. The Company's results are currently being impacted by disturbed economic conditions in other countries creating a dramatic increase in steel imports in the U.S. Until such time as the U.S. government intervenes with trade sanctions or the foreign economic situation improves, the Company's performance will continue to be adversely impacted by the import situation. As a result of a number of factors primarily related to management and workforce turnover the Company's new melt shop in Memphis, Tennessee continues to operate at less than a commercially viable production level. Continued delays or other start-up issues in this project could materially adversely affect the Company's future results. While in start-up operations, the facility can experience "learning curve" problems which would prevent the Company from realizing the timing of certain plans that it has made for the future. Until the Memphis melt shop begins producing at commercially viable levels and costs, the Company's SBQ Division will continue to incur start-up losses. The Company expects to begin start-up operations of a new mid section rolling mill at its Cartersville facility in the second half of fiscal 1999. Results in fiscal 1999 will continue to reflect pre-operating and start-up losses associated with this project. Unexpected increases in the amount of pre-operating and start-up losses could negatively impact the Company's financial performance. The Company is committed to purchase one half (approximately 600,000 metric tons) of DRI production from AIR. Currently the price paid to AIR for its DRI production exceeds the cost of alternative raw materials sources (i.e. scrap). This condition is expected to continue until the end of calendar 1999. 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., 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. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Refer to the information in MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS under the caption MARKET RISK SENSITIVE INSTRUMENTS PART II - OTHER INFORMATION Item 1. Legal Proceedings Not Applicable 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 September 30, 1998, the Company filed a current report on Form 8-K (Item 5) on July 16, 1998 to report on Amendments to the Bylaws, and a current report on Form 8-K (Item 5) on September 2, 1998 to report on certain press releases made concerning the Laclede Steel investment and the 1998 fourth quarter earnings. 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 November 13, 1998 /s/ Kevin E. Walsh ------------------------------- Kevin E. Walsh Executive Vice President and Chief Financial Officer EX-27 2 FDS --
5 This schedule contains summary financial information extracted from the September 30, 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-30-1999 Sep-30-1998 2,697 0 122,471 1,670 241,552 393,984 1,016,129 234,906 1,263,254 143,215 53,500 0 0 298 455,888 1,263,254 270,957 270,957 243,983 243,983 0 10,865 8,800 1,766 742 1,024 0 0 0 1,024 .03 .03
-----END PRIVACY-ENHANCED MESSAGE-----