0000779334-01-500078.txt : 20011030
0000779334-01-500078.hdr.sgml : 20011030
ACCESSION NUMBER: 0000779334-01-500078
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 1
CONFORMED PERIOD OF REPORT: 20010930
FILED AS OF DATE: 20011026
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: 1934 Act
SEC FILE NUMBER: 001-09820
FILM NUMBER: 1767282
BUSINESS ADDRESS:
STREET 1: 1000 URBAN CENTER DRIVE
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
qforsept01pm.txt
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,
2001
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: 31,350,312 Shares of Common
Stock of the registrant were outstanding at October 24, 2001.
Item 1 - Financial Statements (unaudited)
BIRMINGHAM STEEL CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, June 30,
2001 2001
--------------- ---------------
(Unaudited) (Audited)
ASSETS
Current assets:
Cash and cash equivalents $ 935 $ 935
Accounts receivable, net of allowance for doubtful accounts of
$2,236 at September 30, 2001 and $2,146 at June 30, 2001 78,554 72,820
Inventories 109,768 105,426
Other current assets 3,890 3,013
Net current assets of discontinued operations 13,280 14,669
--------------- ---------------
Total current assets 206,427 196,863
Property, plant and equipment:
Land and buildings 177,038 177,038
Machinery and equipment 469,137 465,470
Construction in progress 11,361 16,041
--------------- ---------------
657,536 658,549
Less accumulated depreciation (290,546) (281,151)
--------------- ---------------
Net property, plant and equipment 366,990 377,398
Excess of cost over net assets acquired 13,515 13,515
Other 18,190 17,514
Net non-current assets of discontinued operations 42,389 42,171
--------------- ---------------
Total assets $ 647,511 $ 647,461
=============== ===============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 49,392 $ 45,118
Accrued interest payable 4,623 3,365
Accrued payroll expenses 5,564 5,475
Accrued operating expenses 7,734 9,555
Other current liabilities 24,898 24,785
Current maturities of long-term debt 298,200 293,500
Reserve for operating losses of discontinued operations 12,812 10,137
--------------- ---------------
Total current liabilities 403,223 391,935
Deferred liabilities 8,284 8,030
Long-term debt, less current portion 253,546 254,000
Stockholders' equity:
Preferred stock, par value $.01; authorized: 5,000,000 shares - -
Common stock, par value $.01; authorized: 75,000,000 shares;
issued: 31,341,816 at September 30, 2001 and 31,142,113 at June 30, 2001 313 311
Additional paid-in capital 344,116 343,908
Unearned compensation (258) (317)
Retained deficiency (361,713) (350,406)
--------------- ---------------
Total stockholders' deficit (17,542) (6,504)
--------------- ---------------
Total liabilities and stockholders' equity $ 647,511 $ 647,461
=============== ===============
See accompanying notes.
BIRMINGHAM STEEL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data; unaudited)
Three Months Ended September 30,
--------------------------------
2001 2000
------------ ------------
(Restated)
Net sales $ 172,765 $ 192,895
Cost of sales:
Other than depreciation and amortization 143,339 166,972
Depreciation and amortization 9,787 10,652
------------ ------------
Gross profit 19,639 15,271
Start-up and restructuring costs and other unusual items - 400
Selling, general and administrative expense 8,335 8,921
------------ ------------
Operating income 11,304 5,950
Interest expense, including amortization of
debt issue costs 13,691 12,600
Other income (loss), net 89 (109)
(Loss) income from equity investments (9) 21
------------ ------------
Loss from continuing operations before income taxes (2,307) (6,738)
Provision for income taxes - 65
------------ ------------
Net loss from continuing operations (2,307) (6,803)
Discontinued operations:
Loss from discontinued operations, net of tax (9,000) (8,226)
------------ ------------
Net loss $ (11,307) $ (15,029)
============ ============
Weighted average shares outstanding 31,032 30,892
============ ============
Basic and diluted per share amounts:
Loss from continuing operations $ (0.07) $ (0.22)
Loss from discontinued operations (0.29) (0.27)
------------ ------------
Net loss per share $ (0.36) $ (0.49)
============ ============
See accompanying notes.
BIRMINGHAM STEEL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands; unaudited)
Three Months Ended
September 30,
-----------------------------------
2001 2000
------------- -------------
(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss from continuing operations $ (2,307) $ (6,803)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 9,787 10,652
Provision for doubtful accounts receivable 90 92
Loss (income) from equity investments 9 (21)
Other 2,014 1,757
Changes in operating assets and liabilities:
Accounts receivable (5,824) (6,174)
Inventories (4,342) 10,808
Other current assets (876) (952)
Accounts payable 4,274 (4,976)
Accrued liabilities (361) (2,583)
Deferred liabilities 313 (311)
------------- -------------
Net cash provided by operating activities of continuing operations 2,777 1,489
Net cash used in operating activities of discontinued operations (5,120) (9,674)
------------- -------------
Net cash used in operating activities (2,343) (8,185)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (789) (2,918)
Other non-current assets (327) (244)
------------- -------------
Net cash used in investing activities of continuing operations (1,116) (3,162)
Net cash used in investing activities of discontinued operations - (137)
------------- -------------
Net cash used in investing activities (1,116) (3,299)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility 450,847 457,663
Payments on revolving credit facility (446,601) (445,812)
Other, net (753) (333)
------------- -------------
Net cash provided by financing activities of continuing operations 3,493 11,518
Net cash used in financing activities of discontinued operations (34) (34)
------------- -------------
Net cash provided by financing activities 3,459 11,484
------------- -------------
Net increase (decrease) in cash and cash equivalents - -
Cash and cash equivalents at:
Beginning of period 935 935
------------- -------------
End of period $ 935 $ 935
============= =============
See accompanying notes.
BIRMINGHAM STEEL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Going Concern
The accompanying unaudited Consolidated Financial Statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. Birmingham Steel
Corporation (the Company) has substantial debt maturities due April 1, 2002, and
those maturities are classified as current liabilities in the unaudited
Consolidated Balance Sheet at September 30, 2001. Based upon the current level
of the Company's operations and current industry conditions, the Company
anticipates it will have sufficient cash flow and liquidity to meet its
obligations as they become due in the ordinary course of business through March
31, 2002. However, there can be no assurance that the Company will be able to
refinance, restructure, extend or amend its obligations under the Revolving
Credit Facility, the Birmingham Southeast Credit Facility and Senior Notes (see
Note 4) on or prior to April 1, 2002. Although the financial and credit markets
have recently tightened, the Company continues to investigate the possibility of
refinancing its debt with new lenders. The Company also continues to pursue
alternatives to reduce the existing debt, including the sale of SBQ assets (see
Note 2) or other core assets, which management believes will make a refinance or
restructure more feasible. The Company also is continuing discussions with its
existing lenders to obtain an extension of the current maturities or otherwise
to restructure its debt. However, there can be no assurance that such
negotiations will be successful or that alternative financing can be obtained
from other sources.
Description of the Business
The Company owns and operates facilities in the mini-mill sector of the steel
industry. The Company's Rebar/Merchant segment produces a variety of steel
products including reinforcing bars and merchant products such as rounds, flats,
squares, strips, angles and channels. These products are sold primarily to
customers in the steel fabrication, manufacturing and construction industries.
The Company has regional warehouses and distribution facilities, which are used
to distribute its rebar and merchant products. The Company also owns an equity
interest in a scrap collection and processing operation.
In addition, the Company's Special Bar Quality (SBQ) segment, which is reported
in discontinued operations, produced high quality rod, bar and wire that was
sold primarily to customers in the automotive, agricultural, industrial
fastener, welding, appliance and aerospace industries in the United States and
Canada. These facilities are currently classified as assets held for disposal.
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements are prepared in
accordance with accounting principles generally accepted in the United States
(GAAP) for interim financial information and with the instructions to Form 10-Q
and Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements.
The Consolidated Balance Sheet at June 30, 2001 has been derived from the
audited financial statements at that date.
In addition, the unaudited Statements of Operations for the three months ended
September 30, 2000 have been restated to reflect the operating results of the
SBQ segment within discontinued operations. In prior periods, the Company
presented segment information in a note to the unaudited Consolidated Financial
Statements. Since the Company now operates in a single segment due to the
discontinuance of the SBQ segment, separate segment information is not
presented.
In the opinion of management, all material adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included in the accompanying unaudited financial statements. Operating results
for the interim periods reflected herein are not necessarily indicative of the
results that may be expected for full fiscal year periods. Therefore, these
unaudited Consolidated Financial Statements, and footnotes thereto, should be
read in conjunction with the Company's Annual Report on Form 10-K for the year
ended June 30, 2001.
Recent Accounting Pronouncements
EITF 00-10
The Company adopted the Financial Accounting Standards Board (FASB) Emerging
Issues Task Force (EITF) Issue No. 00-10, "Accounting for Shipping and Handling
Fees and Costs", in the fourth quarter of fiscal 2001. Application of this EITF
resulted in the restatement of prior period financial results to reflect
shipping and handling fees billed to customers as revenue. These amounts were
previously recorded in cost of sales. The effect of the restatement increased
net sales and cost of sales reported in the Company's Form 10-Q in the quarter
ended September 30, 2000 by $14.2 million. Operating results were not affected
by this reclassification.
SFAS No. 141
In June 2001, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 141, "Business Combinations" which requires that all business combinations
initiated after June 30, 2001 be accounted for under the purchase method. This
statement also provides new criteria for determining whether intangible assets
acquired in a business combination should be recognized separately from
goodwill. The Company adopted this statement in the first quarter of fiscal
2002. Application of SFAS No. 141 did not affect current or previously reported
operating results.
SFAS No.142
Also in June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". This pronouncement provides guidance on financial accounting and
reporting for acquired goodwill and other intangible assets. Under SFAS No. 142,
goodwill and indefinite-lived intangible assets will no longer be amortized but
will be reviewed annually for impairment. The provisions of this standard
require the completion of a transitional impairment test within six months of
adoption, with any impairment identified treated as a cumulative effect of a
change in accounting principle.
The Company adopted SFAS No. 142 in the first quarter of fiscal 2002. Under the
application of the non-amortization provisions of this pronouncement, goodwill
amortization was ceased effective July 1, 2001, which positively impacted
pre-tax earnings from continuing operations by approximately $532 thousand in
the quarter ended September 30, 2001. However, the Company is still assessing
the impact of SFAS No. 142 and, during the second quarter of fiscal 2002, the
Company will complete the required impairment tests of goodwill and
indefinite-lived intangible assets. The Company has not yet determined what
effect these tests will have on the earnings and the financial position of the
Company. However, given current conditions in the domestic steel industry, some
or all of the remaining carrying value of goodwill ($13.5 million) may be
impaired under the new approach to measuring impairment as required by SFAS No.
142. As provided by the statement, any impairment identified and existing at
July 1, 2001 will be recognized as the cumulative effect of an accounting
change.
SFAS No. 143
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", which addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets and the associated
asset retirement costs. SFAS No. 143 is required to be adopted for fiscal years
beginning after June 15, 2002. The Company has not yet determined what effect
this statement will have on its financial statements.
SFAS No. 144
Also in August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which supersedes FASB Statement
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". This new statement also supersedes certain aspects of
APB 30, "Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions", with regard to reporting the effects of a
disposal of a segment of a business and will require expected future operating
losses from discontinued operations to be reported in discontinued operations in
the period incurred (rather than as of the measurement date as presently
required by APB 30). In addition, more dispositions may qualify for discontinued
operations treatment. The provisions of this statement are required to be
applied for fiscal years beginning after December 15, 2001 and interim periods
within those fiscal years. The Company has not yet determined what effect this
statement will have on its financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform with the fiscal
2002 presentation.
2. DISCONTINUED OPERATIONS
The following table sets forth events that have occurred in connection with the
disposal of the SBQ segment and the related recording and reversal of
discontinued operations accounting treatment. See further discussion of each
event below:
-------------- -------------------------------------------- ------------------
Reported in
Date Event Financial
Statements Dated
-------------- -------------------------------------------- ------------------
August 1999 o Prior Board of Directors adopts plan of Fiscal year
disposal for SBQ segment ended
o SBQ segment presented as discontinued June 30, 1999
operations
-------------- -------------------------------------------- ------------------
January 2000 o Reconstituted Board of Directors elects to Fiscal quarter
re-establish SBQ segment ended
o Discontinued operations accounting December 31, 1999
treatment recorded in June 1999 reversed
o Remaining reserves for loss previously
estimated on disposal reversed
o Memphis facility shut-down - reserve for
impairment established
-------------- -------------------------------------------- ------------------
February 2001 o Board of Directors authorizes sale of SBQ Fiscal quarter
assets (Cleveland and Memphis) to North ended
American Metals (NAM) December 31, 2000
o Discontinued operations accounting
treatment re-established, $89.9 million
reserve for loss on disposal established
-------------- ------------------------------------------- ------------------
March 2001 o Definitive agreement with NAM for the sale Fiscal quarter
of SBQ assets is terminated because NAM ended
is unable to secure financing for the March 31, 2001
purchase by March 23, 2001 deadline
-------------- -------------------------------------------- ------------------
April 2001 o Management announces decision to close the Fiscal quarter
Cleveland, Ohio plant unless the facility ended
is sold by June 22, 2001 March 31, 2001
o Estimated loss on SBQ segment is increased
by $12.3 million to reflect extension of
disposal period
-------------- -------------------------------------------- ------------------
September 2001 o Management announces intent to sell Fiscal quarter
Cleveland facility to Sidenor, S.A. ended
o Estimated loss on sale of SBQ segment is June 30, 2001
increased by $36.1 million to reflect
additional loss on sale, disposal period
losses and adjustment to previous reserve
for loss on purchase commitment.
-------------- -------------------------------------------- ------------------
September 2001 o Reserve for disposal period losses is Fiscal quarter
increased by $9 million to reflect longer ended
anticipated disposal period for Memphis September 30, 2001
facility.
-------------- -------------------------------------------- ------------------
Fiscal 1999
In fiscal 1999, prior to the conclusion of a proxy contest and subsequent change
in management, the Company announced plans to sell its SBQ segment, which
included rod, bar and wire facilities in Cleveland, Ohio; a high quality melt
shop in Memphis, Tennessee; and the Company's 50% interest in American Iron
Reduction, L.L.C. (AIR), a facility in Louisiana which produced direct reduced
iron (DRI). Accordingly, the operating results of the SBQ segment were reflected
as discontinued operations in the Company's annual Consolidated Financial
Statements for fiscal 1999 and in the first quarter of fiscal 2000.
Fiscal 2000
On January 31, 2000, subsequent to a change in management which occurred after a
proxy contest, new management decided to re-establish its Cleveland-based
American Steel & Wire (AS&W) SBQ operations. Management's decision to continue
operating the AS&W facilities was based on the following considerations:
o The Company's attempts to sell the facility had not been successful and, at
that time, management believed that a sale in the near term would not
generate sufficient proceeds to pay down a meaningful amount of the
Company's long-term debt.
o New management believed there was a viable long-term market for AS&W's
high-quality rod, bar and wire products.
o The Company had identified several potential sources of high-quality
billets for the AS&W operations to replace the Memphis melt shop (which was
shut-down in early January 2000) as the primary supply source.
Management also concluded that a sale of the entire SBQ segment by the end of
fiscal 2000, as had been previously anticipated by former management, was no
longer likely based upon the results of selling efforts at that time and the
then prevalent market conditions. In accordance with EITF 90-16, "Accounting for
Discontinued Operations Subsequently Retained", the results of operations of the
SBQ segment were reported within continuing operations from the second quarter
of fiscal 2000 through the first fiscal quarter of 2001. Consequently, in the
quarter ended December 31, 1999, the operating results of the SBQ segment for
all periods prior to October 1, 1999 were reclassified from discontinued
operations to continuing operations. In addition, as a result of unwinding the
discontinued operations accounting treatment of the SBQ segment, the Company
reversed the remaining balance of the reserves for loss on disposal and
operating losses, and their related income tax effects. The reversal of
previously established reserves (net of tax) increased net income in fiscal 2000
by $173.2 million ($5.82 per share).
Fiscal 2001
In a press release dated September 28, 2000, the Company reported it had signed
a definitive agreement with North American Metals, Ltd. (NAM) to sell the
Cleveland and Memphis facilities of the SBQ segment with March 23, 2001 as the
targeted closing date. On February 12, 2001, the Board of Directors authorized
management of the Company to proceed with the sale. Accordingly, as required by
APB Opinion 30 (as interpreted by EITF 95-18), the operating results of the SBQ
segment for the second quarter of fiscal 2001 and prior periods were restated
and reported in discontinued operations in the unaudited Consolidated Financial
Statements for the period ended December 31, 2000.
In the second quarter of fiscal 2001, the Company recorded an $89.9 million
estimated loss ($2.90 per share) on disposal of the SBQ segment, which included
a $12.3 million provision (pre-tax) for estimated operating losses during the
expected disposal period. The proceeds expected to be realized on the sale of
the SBQ segment, and the expected operating losses during the disposal period,
were based on management's estimates of the most likely outcome based on the
terms of the definitive agreement between the Company and NAM at that time.
In a press release dated March 26, 2001, management reported that the definitive
agreement with NAM for the sale of the SBQ assets had been terminated because
NAM was unable to complete financing arrangements by the March 23, 2001
deadline. As the Company continued to pursue discussions with other interested
parties, an additional $12.3 million was provided for disposal period losses in
the quarter ended March 31, 2001. Due to a general economic slowdown in the U.S.
steel industry, which impacted demand for all steel products, including SBQ
products, shipments for the Cleveland facility fell precipitously in the third
fiscal quarter of 2001. Subsequently, in a press release dated April 24, 2001,
management reported that operations at the Cleveland facility would be
indefinitely suspended unless the facility was sold by June 22, 2001. Operations
were subsequently suspended in June 2001.
On September 17, 2001, the Company announced that a letter of intent had been
signed to sell the idled Cleveland facility to Corporacion Sidenor, S.A.
(Sidenor), an SBQ producer headquartered in Bilbao, Spain. Proposed terms of the
sale are $20 million for the operating assets plus selected inventory. In
addition, after the sale is completed, the Company is required to pay retention
incentives of $1.2 million to certain key people employed at the facility after
the shutdown. Sidenor has agreed to reimburse the Company for the costs of
rehiring these key employees through the close of the sale. Based on the terms
of the letter of intent, in the quarter ended June 30, 2001, the Company
established an additional $61.2 million reserve for loss on sale. In addition,
the Company recorded additional reserves for estimated losses through the
anticipated disposal period of $10.1 million.
Fiscal 2002
In the quarter ended September 30, 2001, management increased the reserve for
disposal period losses by $9 million to reflect a longer anticipated disposal
period for the Memphis facility. On an accrual basis, these losses are expected
to be approximately $1 million per month. The expected loss on sale and disposal
period losses are based on management's estimates of the most likely outcome
based on the carrying costs of the SBQ assets and anticipated costs to complete
the sale of the facilities. Additionally, the Company continues to discuss the
disposition of the Memphis facility with interested parties.
The Company will continually assess the adequacy of the remaining $149.6 million
reserves ($136.8 reserve for loss on disposal and $12.8 million for expected
operating losses). As with all estimates of future events and circumstances, the
actual loss on disposal of the SBQ segment, including operating losses and
carrying costs through the disposal period, will most likely be different from
the estimates reflected in these unaudited Consolidated Financial Statements and
the difference could be material. To the extent actual proceeds from the
eventual sale of the remaining assets of the SBQ segment and operating losses
during the disposal period differ from the estimates reflected in these
unaudited Consolidated Financial Statements, the variance will be reported
within discontinued operations in future periods.
As of September 30, 2001, the Company has a $12.8 million reserve for estimated
(pre-tax) disposal period losses. Such amount excludes corporate overhead but
includes approximately $ 3.4 million of direct and allocated interest expense.
Operating results of the discontinued SBQ operations were as follows (in
thousands):
Three Months Ended September 30,
--------------------------------
2001 2000
---------- ----------
Net sales $ 645 $ 28,735
Costs of sales 4,173 33,116
---------- ----------
Gross loss (3,528) (4,381)
Selling, general and administrative expense 1,332 1,383
Interest expense 1,482 2,940
Other income (17) (478)
---------- ----------
Loss before use of reserve, net of tax (6,325) (8,226)
Change in reserve for operating loss on
discontinued operations (2,675) -
---------- ----------
Loss from discontinued operations, net of tax $ (9,000) $ (8,226)
========== ==========
Interest expense attributable to discontinued operations includes interest on
industrial revenue bonds and other debt specifically associated with the assets
to be sold plus an allocation of interest on general corporate credit
facilities. Interest on borrowings under the Company's general credit facilities
is allocated to discontinued operations based on, and limited to, the
anticipated reduction in interest expense that will occur upon sale of the SBQ
assets utilizing sale proceeds to repay debt.
Assets and liabilities of the discontinued SBQ segment have been reflected in
the unaudited Consolidated Balance Sheets as current or non-current based on the
original classification of the accounts, except that current liabilities are
netted against current assets and non-current liabilities are netted against
non-current assets. Net non-current assets at September 30, 2001, reflect a
valuation allowance of $136.8 million to recognize the estimated loss on
disposal. The following is a summary of assets and liabilities of discontinued
operations (in thousands):
September 30, 2001 June 30, 2001
------------------ -------------
Current assets:
Accounts receivable, net $ 2,700 $ 7,043
Inventories 14,610 15,496
Other 1,588 1,136
Current liabilities:
Accounts payable (1,054) (1,089)
Other accrued expenses (4,564) (7,917)
------------------ -------------
Net current assets of discontinued
operations $ 13,280 $ 14,669
================== =============
Non-current assets:
Property, plant and equipment, net of
accumulated depreciation $ 223,523 $ 223,140
Other non-current assets 729 744
Provision for estimated loss on disposal
of discontinued operations (136,836) (136,836)
Non-current liabilities:
Long-term debt (41,952) (41,987)
Deferred rent (3,075) (2,890)
------------------ -------------
Net non-current assets of discontinued
operations $ 42,389 $ 42,171
================== =============
There are no known material contingent liabilities related to discontinued
operations, such as product or environmental liabilities or litigation, that are
expected to remain with the Company after the disposal of the SBQ segment other
than remaining reserves for claims under the Company's workers' compensation and
health insurance plans and contingencies associated with AIR.
3. INVENTORIES
Inventories of continuing operations are valued at the lower of cost (first-in,
first-out) or market, as summarized in the following table (in thousands):
September 30, June 30,
2001 2001
--------------- -------------
Raw Materials and Mill Supplies $ 30,768 $ 31,213
Work-in-Process 6,159 8,247
Finished Goods 72,841 65,966
--------------- -------------
$ 109,768 $ 105,426
=============== =============
4. LONG-TERM DEBT
On February 20, 2001, the Company and its lenders executed amendments to its
principal debt and letter of credit agreements to provide for the continuation
of the Company's borrowing arrangements on a long-term basis. These amendments
modified or supplemented previous amendments executed in May 2000.
Among other things, the February 2001 amendments changed the financial covenants
and extended the maturity dates for principal payments previously due before
March 31, 2002 without modifying the interest rates or spreads previously in
effect for the Company's debt. The amendments also limited the borrowings under
the Company's Revolving Credit Facility and Birmingham Southeast (BSE) Credit
Facility to $290 million and $10 million, respectively. In addition, the lenders
maintained a security interest in substantially all assets of the Company.
Based upon the current level of the Company's operations and current industry
conditions, the Company anticipates it will have sufficient resources to make
all required interest and principal payments under the Revolving Credit
Facility, the BSE Credit Facility and Senior Notes through March 31, 2002.
However, the Company is required to make significant principal repayments on
April 1, 2002, and, accordingly, will be required to refinance, restructure or
amend its obligations under the Revolving Credit Facility and Senior Notes on or
prior to such date. Although the financial and credit markets have recently
tightened, the Company continues to investigate the possibility of refinancing
its debt with new lenders. The Company continues discussions with its lenders to
obtain an extension of its debt. However, there can be no assurance that such
negotiations will be successful. The Company also continues to pursue
alternatives to reduce its existing debt, including the sale of SBQ assets or
other core assets, which management believes will make a refinance or
restructure more feasible
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, substantially all
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.
The Company has been named as a defendant in a number of lawsuits arising out of
an accident that occurred on March 15, 1999 involving an Amtrak passenger train
and a truck carrying steel reinforcing bar produced by the Company's Kankakee
plant. There were approximately 122 injuries and 11 deaths in the accident. The
plaintiffs in these lawsuits claim that at the time of the accident, the driver
of the truck was acting as an employee or agent of the Company; that the Company
was negligent in loading the trailer; that the load placed on the trailer
exceeded the weight limit allowed by statute; and that the Company negligently
allowed some rail cars to be parked on a side track near the intersection. The
Company is being defended in all of the cases by counsel provided by its
liability insurance carrier. The Company denies all liability and is vigorously
defending all of these cases. At this time, however, the cases remain in their
early stages and discovery is incomplete. Although the Company believes its
defenses should prevail in these actions, the Company cannot predict the
ultimate outcome of these cases or the probability of recovery from insurance
with certainty. However, no amount of loss is considered probable at this time,
and accordingly no reserve has been provided for these actions.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
In July 1999, The United Company Shareholder Group (the United Group), a
dissident shareholder group, initiated a proxy contest to replace the Company's
Chief Executive Officer and Board of Directors and certain members of
management. On December 2, 1999, the Company and the United Group reached a
settlement appointing John D. Correnti as Chairman and Chief Executive Officer
and reconstituting the Board of Directors to include a total of twelve
directors, nine of which were appointed by the United Group and three of which
were appointed by previous management. Since the conclusion of the proxy contest
in December 1999, new management has accomplished a number of significant
achievements, which it believes improved the overall financial condition of the
Company and positioned the Company for improved financial results in the future.
These accomplishments have been achieved notwithstanding the fact that, in the
opinion of management, the past 22 months represent the worst business
conditions in the U.S. steel industry in nearly 30 years. During this period, 20
steel companies have filed for bankruptcy under either Chapter 11 or Chapter 7
of the United States Bankruptcy Code.
The actions of the new management team have essentially returned the Company to
the proven and profitable business platforms of its core operations under which
the Company was previously successful. Significant measures implemented by the
Correnti management team during the past 22 months include the following:
o Shutdown of operations at the Memphis melt shop, resulting in cash savings
of approximately $2 million per month (January 2000);
o Completion of necessary capital expenditures and completion of start-up
operations at the Cartersville rolling mill (July 2000);
o Shutdown of operations at Cleveland, which will result in cash savings of
$2 million to $3 million per month (completed July 2001);
o Shutdown of operations of the Convent, Louisiana DRI facility (AIR),
resulting in cash savings of approximately $1 million per month (October
2000);
o Sale of the Company's interest in the California scrap processing joint
venture, which eliminated $34 million in contingent liabilities (June
2000);
o Reduction of corporate headquarters personnel by more than 31%, resulting
in annual savings of approximately $2 million per year (December 1999 to
September 2001);
o Hiring of seven highly experienced steel operations and sales individuals
from other steel companies to join the Correnti management team;
o Reduction in inventories by $75 million (from December 1999 to September
2001); and
o Reduction in trade accounts payable by $49 million (from December 1999 to
September 2001), and significant improvement in vendor relationships, which
had been impaired under prior management.
The actions above indicate the aggressive steps the Correnti management team is
taking to complete a profitable turnaround of the Company, and demonstrate
management's ability to implement changes as needed. Also, during the extremely
challenging business conditions, which have prevailed in the U.S. steel industry
during the past 22 months, the Company has reduced costs, improved margins,
reduced debt, improved vendor relations and improved availability under its
revolving credit facility. Deteriorating conditions in the domestic steel
industry, a surge in steel imports and a general decline in U.S. economic
conditions have offset the positive financial impact of management's actions.
In January 2000, one month after joining the Company, new management publicly
articulated a strategy for returning to profitability and providing a platform
for the Company to refinance its debt. The refinancing of debt remains an
important element of management's turnaround plan, because the Company is
over-leveraged and the maturity dates of its debt are not aligned with the
Company's cash flow capabilities. In addition, the existing financial structure
is highly complex and involves approximately 55 lenders.
The Company has never had a monetary default on any interest or principal
payment and is currently generating sufficient cash flow to service its debt.
The current lender group has indicated support for the new management team and,
during the past 22 months, has accommodated the Company's requests to relax
certain covenants, extend certain maturity dates and provide adequate liquidity
for management to implement its turnaround plan.
The Correnti management team has implemented numerous measures to reduce costs,
enhance margins, improve cash flow and reduce debt. Management's goal is to
position the Company to be a leader in the consolidation of the U.S. steel
industry, which a broad consensus of industry experts agree must occur in order
for the domestic industry to remain viable. Experts expect that a wave of
consolidation will occur over the next three to five years as the U.S. steel
industry wrestles with the impact of a global economy. In fact, consolidation
activity is already underway in Europe, and, in management's view, consolidation
of the U.S. industry is inevitable if the U.S. industry is to compete on a
worldwide basis. Furthermore, the drastic decline in steel company market
capitalization over the past two years is indicative of the prevailing view of
the financial and investment communities that industry consolidation is
inevitable.
According to available industry data, total demand for all steel products in the
U.S. is approximately 130 million tons per year. Currently, domestic steel
producers have the capacity to produce approximately 100 million tons per year,
which mandates the necessity for at least 30 million tons of annual steel
imports. However, during the past year, import levels reached a record 45
million tons.
The domestic steel industry is highly fragmented with a number of high-cost,
inefficient operations. The industry is divided into two segments: integrated
steel and mini-mill steel companies. Today, there are approximately ten domestic
integrated steel producers and twenty-five mini-mill companies. Along with many
others, management believes the eventual consolidation activity will ultimately
result in three to four domestic integrated producers and ten to eleven
mini-mill companies. As is the usual case in consolidation, the survivors will
be the efficient, low-cost producers.
With the exception of the Cartersville operation, which completed start-up
operations in July 2000, the Company's core operations are low-cost, highly
efficient, state-of-the-art facilities. Management believes that Cartersville,
upon a return of more favorable market conditions and the attainment of
consistent normalized capacity levels, will be also be a low-cost and efficient
operation.
According to published industry reports, the Company is also recognized as
having one of the most experienced and capable management teams in the industry.
Since December 1999, the Company has attracted seven experienced sales and
operations managers from other steel companies to join the Birmingham Steel
management team. Because of the quality of its core assets and management team,
management believes the Company is viewed as a key participant in the
prospective consolidation of the domestic industry. Other mini-mill companies
have strong asset bases, viewed desirable for consolidation, but many lack the
management and operational bench strength to effectively lead the industry
consolidation.
In order to participate in the pending industry consolidation, the primary
obstacle the Company must overcome is its large debt level. Management is
currently investigating ways to address its debt in order to enable the Company
to proactively participate in consolidation activity. In addition to improving
financial performance and operating cash flow, management is aggressively
pursuing the sale of its non-core assets as a means of obtaining proceeds to
reduce debt. The Company is also exploring debt financing/restructure
alternatives, which could include the sale of one or more of its core
facilities, in order to allow the Company to re-capitalize its balance sheet and
reduce debt. Depending on the assets sold, such transactions could result in
material gains or losses in future periods.
Alternatives for refinancing the Company's debt with new lenders are limited
because of softness in the current financial markets. Therefore, the Company is
currently in discussions with its existing lender group regarding an overall
debt restructure or extension of maturity dates under existing financing
arrangements. As the Company's financial performance continues to improve and
the general financial markets recover, management believes additional
opportunities to improve the debt structure will become available. The Company
does not anticipate any defaults or breach of financial covenants under its
existing financing arrangements; however, a major portion of the Company's debt
(approximately $295 million) is currently scheduled to mature on April 1, 2002.
On September 17, 2001, the Company announced it had signed a letter of intent to
sell the Cleveland operation to Corporacion Sidenor, S.A. The transaction is
expected to close in December 2001. Management believes more favorable extension
or refinancing terms can be obtained once the Cleveland operation is sold,
provided the Company's core operations continue the recent positive trend in
financial results.
The key elements of management's turnaround strategy as set forth by new
management upon assuming office in December 1999 were as follows:
o Completing start-up operations at Cartersville;
o Rationalization of the Cleveland and Memphis operations;
o Sale of the Company's interest in the California scrap joint venture;
o Reducing and limiting the Company's liability with respect to the Louisiana
DRI joint venture;
o Reducing overall spending;
o Reducing selling, general and administrative expenses and headcount at the
corporate headquarters;
o Strengthening and reorganizing of the Company's sales and marketing
functions; and
o Stabilizing the Company's management and workforce.
During the past 22 months, the Company has successfully completed each of the
key elements of its turnaround strategy which has resulted in the best financial
performance from continuing operations since the first quarter of fiscal 2000.
Unfortunately, the benefits of these accomplishments have been overshadowed by a
drastic deterioration of economic conditions in the U.S. steel industry, which
began in 1998 and was further impacted by the September 11, 2001 terrorists'
attack on the U.S. Management believes business conditions will remain difficult
through the remainder of fiscal 2002.
Results from Continuing Operations
Sales
The following table compares shipments and average selling prices per ton for
continuing operations:
Three months ended Three months ended
September 30, 2001 September 30, 2000
----------------------- -------------------------
Tons Average Tons Average
Product Shipped Sales Price Shipped Sales Price
--------------------------------------------- -------------------------
Rebar Products 344,415 $266 368,283 $262
Merchant Products 223,528 280 241,239 300
Billets/Other 62,437 186 43,156 230
----------------------- -------------------------
Totals 630,380 $263 652,678 $274
----------------------- -------------------------
Sales from continuing operations for the first quarter of fiscal 2002 were
$172.8 million, down 10.4% compared to the first quarter of fiscal 2001 sales of
$192.9 million. The decrease was due to a 3.4% decrease in tons shipped and an
average decrease in selling price of $20 per ton in merchant products offset by
a $4 per ton increase for rebar products.
Shipments and selling prices have declined in the quarter ended September 30,
2001 primarily because of continuing pressure of steel imports and uncertainty
in United States economic conditions. While the Company announced various price
increases in the peak summer seasonal period in fiscal 2001, continued industry
pressure has kept prices relatively flat. Economic conditions have generally
slowed in calendar 2001 and the tragic events of September 11, 2001 could cause
this trend to continue until consumer confidence is restored.
Cost of Sales
As a percentage of net sales, cost of sales for continuing operations (other
than depreciation and amortization) decreased to 83.0% in the first quarter of
fiscal 2002 compared to 86.6% in the first quarter of fiscal 2001. The
improvement in cost of sales as a percentage of sales is due to lower average
scrap costs and lower production costs, which resulted primarily from the
Cartersville facility completing the start-up phase of operations and further
expanding its product offerings along with the positive impact of indefinitely
suspending operations at the Joliet rolling mill.
Selling, General and Administrative (SG&A)
SG&A expenses for continuing operations were $8.3 million in the first quarter
of fiscal 2002 compared to $8.9 million in the first quarter of fiscal 2001,
down 6.6% from the same period last year. The decrease in current year SG&A
expenses is the result of decreased overall spending levels as a result of the
Company's turnaround efforts, including an 11% reduction in the corporate office
headcount.
Interest Expense
Interest expense for continuing operations increased to $13.7 million in the
first quarter of fiscal 2002 from $12.6 million in the same period last year.
The increase in interest expense in fiscal 2002 compared to fiscal 2001 is
primarily due to higher debt cost amortization and a provision for deferred
interest expense, which will be paid when sale of SBQ assets is completed. The
Company's average borrowing rate was 7.69% in the first quarter of fiscal 2002
compared to 9.02% in the same period last year.
Results from Discontinued Operations
As of June 30, 2001, all SBQ facilities have either been idled or shut-down. The
Company reported net loss from discontinued operations of $9.0 million or $0.29
per share, basic and diluted, in the first quarter of fiscal 2002 compared to a
loss of $8.2 million, or $0.27 per share, basic and diluted in the same period
last year. The current quarter loss reflects adjustment of the reserves for
disposal period losses on the SBQ facilities.
Actual losses from discontinued operations of $6.3 million for the first quarter
of fiscal 2002 were charged to the reserve for disposal period losses and did
not impact current period results. Operating losses for the first quarter of
fiscal 2002 reflect further liquidation of inventories at the Cleveland facility
at below market selling prices. In addition, the results for the first quarter
of fiscal 2002 reflect carrying costs for the Memphis facility and shut-down and
carrying costs of the Cleveland facility, which was shut-down in June 2001.
Management expects to incur approximately $1.5 million per month to maintain the
Cleveland and Memphis facilities and service outstanding lease and debt
obligations until the facilities are sold or disposed of otherwise. The Company
currently is not incurring any costs associated with the AIR facility.
There are no known material contingent liabilities related to discontinued
operations, such as product or environmental liabilities or litigation, that are
expected to remain with the Company after the disposal of the SBQ segment other
than remaining reserves for claims under the Company's workers' compensation and
health insurance plans and contingencies associated with AIR.
Liquidity and Capital Resources
Operating Activities
Net cash provided by operating activities of continuing operations was $2.8
million for the three months ended September 30, 2001 compared to $1.5 million
in the same period last year. The increase in cash provided from operating
activities was the result of a $3.9 million improvement, in the quarter ended
September 30, 2001, in net income adjusted for non-cash items offset by changes
in operating assets, which used $6.8 million in the three months ended September
30, 2001 compared to $4.2 million in same period of the prior year. The use of
cash in operating assets in the quarter ended September 30, 2001 is due to a
seasonal increase in accounts receivable and a temporary build up of inventory
and accounts receivable in September 2001 as a result of slowed shipments and
collections in the weeks immediately following the September 11, 2001 tragedy.
Management believes there is uncertainty in the U.S. economy which could impact
the demand for steel products and, as a result, the Company will manage
production and inventory levels to meet product demand in the coming months.
Investing Activities
Net cash used in investing activities of continuing operations was $1.1 million
for the three months ended September 30, 2001 compared to $3.2 million in the
same period last year. The change was primarily attributable to reduced capital
spending for major projects in the current fiscal year. The Company's
expenditures related to capital projects of continuing operations in the first
quarter of fiscal 2002 were minimal compared to $2.9 million in the first
quarter of fiscal 2001. Debt covenants in the Company's financing agreements
restrict capital expenditures to $25 million in fiscal 2002; however, the
Company may carryover unused capital expenditures to succeeding fiscal years.
The Company believes the level of capital expenditures allowed in the financing
agreements is adequate to support management's plans for ongoing operations.
Financing Activities
Net cash provided by financing activities of continuing operations was $3.5
million for the three months ended September 30, 2001 compared to $11.5 million
in the same period last year. Net outstanding borrowings on the Company's
revolving credit facility increased $4.2 million during the first three months
of fiscal 2002 as a result of seasonal increases and slowed collections in
September in accounts receivable and cash needed to fund cash outlays for
discontinued operations.
The Company is currently in compliance with the restrictive debt covenants
governing its loan agreements, which were amended on February 20, 2001. Among
other things, the February 2001 amendments changed the financial covenants and
extended the maturity dates for principal payments previously due before March
31, 2002. The agreements maintain the interest rates or spreads previously in
effect for the Company's debt. The amendments also limited the borrowings under
the Company's Revolving Credit Facility and Birmingham Southeast (BSE) Credit
Facility to $290 million and $10 million, respectively.
The Company has substantial debt maturities due April 1, 2002, and those
maturities are classified as current liabilities in the unaudited Consolidated
Balance Sheet at September 30, 2001. Based upon the current level of the
Company's operations and current industry conditions, the Company anticipates it
will have sufficient cash flow and liquidity to meet its obligations as they
become due in the ordinary course of business through March 31, 2002. However,
there can be no assurance that the Company will be able to refinance,
restructure, extend or amend its obligations under the Revolving Credit
Facility, the Birmingham Southeast Credit Facility and Senior Notes on or prior
to April 1, 2002. Although the financial and credit markets have recently
tightened, the Company continues to investigate the possibility of refinancing
its debt with new lenders. The Company also continues to pursue alternatives to
reduce the existing debt, including the sale of SBQ assets or other core assets,
which management believes will make a refinance or restructure more feasible.
The Company also is continuing discussions with its existing lenders to obtain
an extension of the current maturities or otherwise to restructure its debt.
However, there can be no assurance that such negotiations will be successful or
that alternative financing can be obtained from other sources.
Market Risk Sensitive Instruments
There have been no material changes in the Company's inherent market risks since
the disclosures made as of June 30, 2001, in the Company's annual report on Form
10-K.
Risk Factors That May Affect Future Results; Forward Looking Statements
Certain statements contained in this report are forward-looking statements based
on the Company's current expectations and projections about future events. The
words "believe," "expect," "anticipate" and similar expressions identify
forward-looking statements. These forward-looking statements include statements
concerning market conditions, financial performance, potential growth, future
cash sources and requirements, competition, production costs, strategic plans
(including asset sales and potential acquisitions), environmental matters, labor
relations and other matters.
These forward-looking statements are subject to a number of risks and
uncertainties, which could cause the Company's actual results to differ
materially from those expected results described in the forward-looking
statements. Due to such risks and uncertainties, readers are urged not to place
undue reliance on forward-looking statements.
All forward-looking statements included in this document are based upon
information available to the Company on the date hereof, and the Company
undertakes no obligation to publicly update or revise any forward-looking
statement. Moreover, new risk factors emerge from time to time and it is not
possible for the Company to predict all such risk factors, nor can the Company
assess the impact of all such risk factors on its business or the extent to
which any factor, or combination of factors, may cause actual results to differ
materially from those described or implied in any forward-looking statement. All
forward-looking statements contained in this report are made pursuant to the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995.
Risks that could cause actual results to differ materially from expected results
include, but are not limited to, the following:
o Changes in market supply and demand for steel, including the effect of
changes in general economic conditions;
o Changes in U.S. or foreign trade policies affecting steel imports or
exports;
o Changes in the availability and costs of steel scrap, steel scrap
substitute materials, steel billets and other raw materials or supplies
used by the Company, as well as the availability and cost of electricity
and other utilities;
o Unplanned equipment failures and plant outages;
o Actions by the Company's domestic and foreign competitors;
o Excess production capacity at the Company or within the steel industry;
o Costs of environmental compliance and the impact of governmental
regulations;
o Changes in the Company's relationship with its workforce;
o The Company's highly leveraged capital structure and the effect of
restrictive covenants in the Company's debt instruments on the Company's
operating and financial flexibility;
o Changes in interest rates or other borrowing costs, or the availability of
credit;
o Uncertainties associated with refinancing or extending the Company's debt
obligations due on April 1, 2002 under its revolving credit facility and
senior notes;
o Changes in the Company's business strategies or development plans, and any
difficulty or inability to successfully consummate or implement as planned
any projects, acquisitions, dispositions, joint ventures or strategic
alliances;
o The effect of unanticipated delays or cost overruns on the Company's
ability to complete or start-up a project when expected, or to operate it
as anticipated; and
o The effect of existing and possible future litigation filed by or against
the Company.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Refer to the information in MANAGEMENT'S DICUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS under the caption MARKET RISK SENSITIVE
INSTRUMENTS
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed with this report:
None
(b) Reports on Form 8-K
None
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
October 26, 2001
/s/ J. Daniel Garrett
-------------------------------
J. Daniel Garrett
Chief Financial Officer and
Vice President Finance