10-Q 1 0001.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _____________________ FORM 10-Q _____________________ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934S For the transition period from ________________ to ______________ Commission File Number 333-79587 CALIFORNIA STEEL INDUSTRIES, INC. (Exact name of registrant as specified in its charter)
Delaware 33-0051150 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 14000 San Bernardino Avenue 92335 Fontana, California (Zip Code) (Address of principal executive offices of Registrant)
(909) 350-6200 (Registrant's telephone number including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No As of July 19, 2000, 1,000 shares of the Company's common stock, no par value, were outstanding. CALIFORNIA STEEL INDUSTRIES, INC. Table of Contents -----------------
Page ---- PART I FINANCIAL INFORMATION.............................................................. 1 ITEM 1. FINANCIAL STATEMENTS............................................................... 1 Consolidated Condensed Balance Sheets as of June 30, 2000 (unaudited) and December 31, 1999............................................... 1 Consolidated Condensed Statements of Income for the three months and six months ended June 30, 2000 and June 30, 1999 (unaudited)......................................................... 2 Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2000 and June 30, 1999 (unaudited)........................................ 3 Notes to Consolidated Condensed Financial Statements (unaudited)................... 4 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................ 5 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK......................... 7 PART II OTHER INFORMATION.................................................................. 7 ITEM 1. LEGAL PROCEEDINGS.................................................................. 7 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................... 8 SIGNATURE.................................................................................... 9 INDEX TO EXHIBITS............................................................................ 10
i PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY Consolidated Condensed Balance Sheets (In thousands, except share and per share amounts)
As of June 30, As of December Assets 2000 31, 1999 ----------------------------------------------------------------------------- -------------- --------------- (Unaudited) Current assets: Cash and cash equivalents................................................. $ 3,752 $ 7,899 Trade accounts receivable, less allowance for doubtful receivables of $600,000 at June 30, 2000 and $300,000 at December 31, 1999.............. 69,354 68,866 Inventories............................................................... 188,639 166,570 Deferred income taxes..................................................... 2,382 2,382 Other receivables and prepaid expenses.................................... 3,581 4,832 ---------- ----------- Total current assets................................................... 267,708 250,549 ---------- ----------- Investment in affiliated company............................................ 34,992 34,801 Other assets................................................................ 4,449 4,759 Property, plant and equipment, net.......................................... 261,782 262,696 ---------- ----------- Total assets........................................................... $568,931 $552,805 ========== =========== Liabilities and Stockholders' Equity ------------------------------------ Current liabilities: Accounts payable.......................................................... $ 48,337 $ 54,707 Accrued interest expense.................................................. 4,132 4,064 Income tax payable........................................................ 8,370 -- Other accrued expenses.................................................... 9,675 13,757 ---------- ----------- Total current liabilities.............................................. 70,514 72,528 ---------- ----------- Long-term debt, excluding current installments............................ 229,000 230,000 Deferred income taxes..................................................... 33,198 33,198 Stockholders' equity: Class C preferred stock, $10,000 par value per share. Authorized 3,000 shares; issued and outstanding 3,000 shares.............................. 30,000 30,000 Common stock, no par value. Authorized 2,000 shares; issued and outstanding 1,000 shares................................................. 10,000 10,000 Retained earnings......................................................... 196,219 177,079 ---------- ----------- Total stockholders' equity............................................. 236,219 217,079 Commitments and contingencies............................................. -- -- ---------- ----------- Total liabilities and stockholders' equity............................. $568,931 $552,805 ========== ===========
See accompanying notes to consolidated condensed financial statements. 1 CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY Consolidated Condensed Statements of Income (In thousands)
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 2000 1999 2000 1999 ------------ -------------- ---------- -------------- (Unaudited) Net sales............................................ $196,483 $170,264 $384,192 $331,258 Cost of sales........................................ 159,054 139,270 306,776 280,851 -------- -------- -------- -------- Gross profit.................................... 37,429 30,994 77,416 50,407 Selling, general and administrative expenses......... 7,167 7,762 17,245 15,083 -------- -------- -------- -------- Income from operations.......................... 30,262 23,232 60,171 35,324 Other income (expense): Equity in income of affiliate...................... 692 88 610 88 Interest expense, net.............................. (4,502) (4,312) (8,799) (8,086) Other, net......................................... 207 652 642 713 -------- -------- ------- ------- Income before income taxes...................... 26,659 19,660 52,624 28,039 Income taxes......................................... 10,943 7,704 21,470 10,987 -------- -------- ------- ------- Net income...................................... $ 15,716 $ 11,956 31,154 17,052 ======== ======== ======= =======
See accompanying notes to consolidated condensed financial statements. 2 CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY Consolidated Condensed Statements of Cash Flows (In thousands)
Six Months Ended June 30, ------------------------- 2000 1999 ------------ ----------- (Unaudited) Cash flows from operating activities: Net income................................................................ $ 31,154 $ 17,052 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............................................ 13,983 12,285 Loss on disposition and write-down of idle plant and equipment...................................................... (3) (11) Undistributed earnings of affiliate...................................... (610) (88) Dividends received from affiliate........................................ 419 -- Change in assets and liabilities: Trade accounts receivable, net........................................... (488) (7,551) Inventories.............................................................. (22,069) 28,648 Other receivables and prepaid expenses................................... 1,251 (4,214) Other assets............................................................. -- (4,758) Accounts payable......................................................... (6,370) 1,711 Accrued interest expense................................................. 68 2,404 Income tax payable....................................................... 8,370 10,624 Other accrued expenses................................................... (4,082) (6,120) --------- ---------- Net cash provided by operating activities.............................. 21,623 49,982 --------- ---------- Cash flows from investing activities: Additions to property, plant and equipment................................ (12,791) (18,827) Proceeds from sale of property, plant and equipment....................... 35 20 --------- ---------- Net cash used in investing activities.................................. (12,756) (18,807) --------- ---------- Cash flows from financing activities: Net repayments under line of credit agreement with banks.................. -- (103,700) Repayments of notes payable to banks...................................... (1,000) (140,000) Proceeds from issuance of long-term debt.................................. -- 220,000 Dividends paid............................................................ (12,014) (8,630) --------- ---------- Net cash used in financing activities.................................. (13,014) (32,330) --------- ---------- Net decrease in cash and cash equivalents.............................. (4,147) (1,155) --------- ---------- Cash and cash equivalents at beginning of period.......................... 7,899 11,962 --------- ---------- Cash and cash equivalents at end of period................................ $ 3,752 $ 10,807 ======== ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (net of amount capitalized)..................................... $ 8,993 $ 6,079 Income taxes............................................................. 13,100 5,235 ======== =========
See accompanying notes to consolidated condensed financial statements. 3 CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY Notes To Consolidated Condensed Financial Statements (Unaudited) 1. Basis of Presentation --------------------- The accompanying unaudited consolidated condensed financial statements of California Steel Industries, Inc. and its subsidiary as of and for the three months and six months ended June 30, 2000 and 1999 have been prepared in accordance with generally accepted accounting principles for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. However, the information reflects all adjustments (consisting only of normal recurring adjustments) that, in the opinion of our management, are necessary to present fairly the financial position and results of operations for the periods indicated. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 1999 contained in California Steel Industries, Inc.'s December 31, 1999 Form 10-K. Results of operations for the three and six months ended June 30, 2000 are not necessarily indicative of results expected for the full year. 2. New Accounting Pronouncements ----------------------------- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative instruments, including derivative instruments embedded in other contracts, and hedging activities. SFAS 133, as amended by SFAS 137 and SFAS 138, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. We have not determined whether the impact of SFAS 133 will have a material impact on our financial position, results of operations or liquidity. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101 ("SAB 101") "Revenue Recognition in Financial Statements." This Staff Accounting Bulletin summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. We do not expect the adoption of SAB 101 to have a material impact on our consolidated results of operations. 3. Inventories ----------- Inventories are stated at the lower of cost (determined under the first-in, first-out method of accounting) or market value.
June 30, 2000 December 31, 1999 --------------------- ------------------- (In thousands) (Unaudited) Finished goods...................................................... $ 34,999 $ 39,526 Work-in-process..................................................... 33,909 18,723 Raw materials....................................................... 114,610 103,399 Other............................................................... 5,121 4,922 --------------------- ------------------- Total............................................................. $188,639 $166,570 ===================== ===================
4 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements -------------------------- Certain statements contained in this Form 10-Q regard matters that are not historical facts and are forward-looking statements (as such term is defined in the rules promulgated pursuant to the Securities Act of 1933, as amended). Such forward-looking statements include any statement that may predict, forecast, indicate or imply future results, performance or achievements, and may contain the words "anticipate," "believe," "estimate," "expect," "project," "imply," "intend," "foresee," "will be," "will continue," "will likely result," and similar words and expressions. Such forward-looking statements reflect our current views about future events, but are not guarantees of future performance and are subject to risk, uncertainties and assumptions. Such risks, uncertainties and assumptions include those specifically identified in this Form 10-Q and include, but are not limited to, the following: . our substantial indebtedness, interest expense and principal repayment obligations under our bank facility and 8.5% senior notes, which could limit our ability to use operating cash flow in our business other than for debt-servicing obligations, obtain additional financing and react to changing market and general economic conditions, and which increase our vulnerability to interest rate increases, . because our board of directors is elected by our two stockholders, each of whom holds 50% of our stock, there is a possibility of deadlocks among our board of directors that could result in costly delays in making important business decisions and put us at a competitive disadvantage, . competitive factors and pricing pressures, . our ability to control costs and maintain quality, . future expenditures for capital projects, and . industry-wide market factors and general economic and business conditions. Results of Operations ---------------------
Tons Billed Tons Billed Three months ended June 30, Six months ended June 30, ------------------------------- ----------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ (Unaudited) (Unaudited) Hot Rolled......................... . 192,979 216,690 391,090 442,112 Cold Rolled.......................... 77,073 78,501 154,500 144,317 Galvanized........................... 162,597 129,208 317,707 244,498 ERW Pipe............................. 38,031 32,877 68,760 55,293 ________ _______ _______ _______ Total................................... 470,680 457,276 932,057 886,220 ======== ======= ======= =======
Net sales. In the second quarter of 2000, cold rolled and galvanized billed tonnage represented 50.9% of all products sold, compared to 45.4% in the second quarter of 1999. Average sales prices for all products sold during the second quarter of 2000 were 12.5% greater than those for the second quarter of 1999. Net sales increased $26,219,000, or 15.4%, from $170,264,000 for the three months ended June 30, 1999 to $196,483,000 for the three months ended June 30, 2000. Year-to-date net sales increased $52,934,000, or 16.0%, from $331,258,000 for the six months ended June 30, 1999 to $384,192,000 for the same period in 2000. Net billed tons increased 13,404, or 2.9%, for the three months ended June 30, 2000 compared to the three months ended June 30, 1999 and year- to-date net billed tons increased 45,837, or 5.2%, from 886,220 for the six months ended June 30, 1999 to 932,057 for the six months ended June 30, 2000. Net sales for both the three and six month periods ended June 30, 2000 increased compared to the same periods in 1999, due to higher sales volumes, a shift in our product mix to a higher proportion of cold rolled and galvanized products and higher sales prices. 5 Gross profit. Gross profit increased $6,435,000, or 20.8%, from $30,994,000 for the three months ended June 30, 1999 to $37,429,000 for the three months ended June 30, 2000. Year-to-date gross profit increased $27,009,000, or 53.6%, from $50,407,000 for the six months ended June 30, 1999 to $77,416,000 for the six months ended June 30, 2000. Gross profit as a percentage of net sales increased from 18.2% for the three months ended June 30, 1999 to 19.1% for the same period in 2000. Our year-to-date gross profit as a percentage of net sales increased from 15.2% for the six months ended June 30, 1999 to 20.2% for the six months ended June 30, 2000. Despite an increase in our average raw material costs, our gross profit increased as a result of an increase in our average sales price, a shift in our product mix to a greater proportion of higher value-added products and an increase in sales volume. Selling, general and administrative expenses. Selling, general and administrative expenses decreased $595,000, or 7.7%, from $7,762,000 for the three months ended June 30, 1999 to $7,167,000 for the three months ended June 30, 2000. Our year-to-date expenses increased $2,162,000, or 14.3%, from $15,083,000 for the six months ended June 30, 1999 to $17,245,000 for the same period in year 2000, primarily as a result of an increase in management performance compensation in the first quarter of 2000. Interest expense. Interest expense increased $190,000, or 4.4%, from $4,312,000 for the three months ended June 30, 1999 to $4,502,000 for the same period in 2000. Year-to-date interest expense increased $713,000, or 8.8%, from $8,086,000 for the six months ended June 30, 1999 to $8,799,000 for the same period in 2000. Interest expense increased as a result of higher effective interest rates, which were partially offset by a decrease in our average outstanding debt. Interest expense figures are net of interest income and capitalized interest of $324,000 for the three months ended June 30, 1999 and $195,000 for the three months ended June 30, 2000. On a year-to-date basis, interest income and capitalized interest was $529,000 for the first six months of 1999 and $394,000 for the first six months of 2000. Income taxes. We have recognized higher income tax expense in 2000 as a result of both higher income before tax and slightly higher effective tax rates for both the second quarter and year-to-date periods. For the three-month period ended June 30, 2000, we recognized $10,943,000 in income tax expense, using a combined state and federal rate of 41.1%. For the same period last year we used a combined rate of 39.2%. On a year-to-date basis we have recognized $21,470,000 in income tax expense in 2000, using a combined state and federal tax rate of 40.8%. For the same period last year we used a combined rate of 39.2%. The difference in rates between 1999 and 2000 is attributable to the state Manufacturers' Investment Credit. Net income. Net income increase $3,760,000, or 31.5%, from $11,956,000 for the three months ended June 30, 1999 to $15,716,000 for the same period in 2000. Year-to-date net income increased $14,102,000, or 82.7%, from $17,052,000 for the six months ended June 30, 1999 to $31,154,000 for the same period in 2000. Liquidity and Capital Resources ------------------------------- At June 30, 2000, we had $3,752,000 in cash and cash equivalents and approximately $38,000,000 in financing available under our credit facility. During the six months ended June 30, 2000, cash flow from operations generated $21,623,000, which consisted of $31,154,000 in net income, $13,983,000 in depreciation and amortization expense and a net cash flow decrease of $23,320,000 due to changes in assets and liabilities. The majority of the net cash flow decrease was due to a $22,069,000 increase in inventories and a $6,370,000 decrease in accounts payable, offset by a $8,370,000 increase in income tax payable. Cash flow from investing activities during the six months ended June 30, 2000 consisted predominately of $12,791,000 of capital expenditures. Cash flow from financing activities during the six months ended June 30, 2000 consisted of net repayments to lenders of notes payable of $1,000,000 and a dividend payment to shareholders of $12,014,000. During the six months ended June 30, 2000, we also paid $8,993,000 in interest, net of capitalized interest, and $13,100,000 in income taxes. In March 1999, we entered into a $130,000,000 five-year bank facility. Approximately $79,000,000 was outstanding under this facility as of June 30, 2000. The bank facility is collateralized by cash, accounts receivable, inventory and other assets. Subject to the satisfaction of customary conditions and a borrowing base, advances under our bank facility may be made at any time prior to the facility termination date, which is the earlier to occur of March 10, 2004 or the date that is 60 days prior to the maturity of our 8.5% senior notes. Advances under this facility may be used for working capital, capital expenditures and other lawful corporate purposes, including the refinancing of existing debt. 6 We anticipate that our primary liquidity requirements will be for working capital, capital expenditures, debt service and the payment of dividends. We believe that cash generated from operations and available borrowings under our bank facility will be sufficient to enable us to meet our liquidity requirements for the next twelve months. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks related to fluctuations in interest rates on our $130,000,000 floating interest rate bank facility. We do not currently use interest rate swaps or other types of derivative financial instruments. For fixed rate debt like our 8.5% senior notes, changes in interest rates generally affect the fair value of the debt instrument. For variable rate debt like our bank facility, changes in interest rates generally do not affect the fair value of the debt, but do affect earnings and cash flows. We do not have an obligation to repay our 8.5% senior notes prior to maturity in 2009 and, as a result, interest rate risk and changes in fair value should not have a significant impact on us. We believe that the interest rate on our 8.5% senior notes approximates the current rates available for similar types of financing and as a result the carrying amount of the 8.5% senior notes approximates fair value. The carrying value of the floating rate bank facility approximates fair value as the interest rate is variable and resets frequently. The bank facility bears interest at the Eurodollar rate, which was approximately 6.69% at June 30, 2000. We estimate that the average amount of debt outstanding under the facility for fiscal year 2000 will be approximately $80.0 million. Therefore, a one percentage point increase in interest rates would result in an increase in interest expense of $800,000 for the year. We do not believe that the future market rate risk related to our 8.5% senior notes and floating rate bank facility will have a material impact on our financial position, results of operations or liquidity. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are from time to time in the ordinary course of business, subject to various pending or threatened legal actions. We believe that any ultimate liability arising from pending or threatened legal actions should not have a material adverse effect on our financial position, results of operations or liquidity. 7 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits.
Exhibit Number Description ------- ----------------------------------------------------------------------------------------------------- 3.1 Certificate of Incorporation of the Registrant as amended by Amendment to the Certificate of Incorporation filed June 6, 1984, with Delaware Secretary of State, as amended by the Certificate of Amendment to the Certificate of Incorporation filed August 2, 1984, with the Delaware Secretary of State, as amended by the Certificate of Amendment to the Certificate of Incorporation, filed January 12, 1988, with the Delaware Secretary of State, and, as amended by the Certificate of Ownership merging CSI Tubular Products, Inc. into the Registrant, filed with the Delaware Secretary of State on December 20, 1993.(1) 3.2 Bylaws of the Registrant.(1) 4.1 Indenture dated as of April 6, 1999 between the Registrant and State Street Bank Trust Company of California, N.A., Trustee, relating to the Registrant's 8 1/2% Senior Notes due April 6, 2009.(1) 4.2 Specimen Series B note (included in Exhibit 4.1).(1) 4.3 Shareholders' Agreement, dated June 27, 1995, by and among Rio Doce Limited, Companhia Vale do Rio Doce, Kawasaki Steel Holdings (USA), Inc. and Kawasaki Steel Corporation.(1) 10.15 Addendum No. 39, dated May 31, 2000, to Contract, dated August 20, 1990, by and between the Registrant and Seamar Shipping Corporation of Monrovia, Liberia. 10.16 First Amendment, dated as of April 28, 2000, to Revolving Credit Agreement, dated as of March 10, 1999, among the Registrant, the Banks named therein, Fleet National Bank (f/k/a BankBoston, N.A.), as loan and collateral agent for the Banks, and Bank of America National Trust and Savings Association , as documentation and letter of credit agent for the Banks. 27.1 Financial Data Schedule
(1) Incorporated by reference to the Registrant's Registration Statement on Form S-4, File No. 333-79587, as filed with the Securities and Exchange Commission on May 28, 1999, as amended. (b) Reports on Form 8-K. -------------------- None. 8 SIGNATURE 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. August 2, 2000 CALIFORNIA STEEL INDUSTRIES, INC. By: /s/ Vicente B. Wright --------------------- Vicente B. Wright, Executive Vice President, Finance (Principal Financial and Accounting Officer) 9 INDEX TO EXHIBITS
Exhibit Number Description --------- -------------------------------------------------------------------------------------------------- 3.1 Certificate of Incorporation of the Registrant as amended by Amendment to the Certificate of Incorporation filed June 6, 1984, with Delaware Secretary of State, as amended by the Certificate of Amendment to the Certificate of Incorporation filed August 2, 1984, with the Delaware Secretary of State, as amended by the Certificate of Amendment to the Certificate of Incorporation, filed January 12, 1988, with the Delaware Secretary of State, and, as amended by the Certificate of Ownership merging CSI Tubular Products, Inc. into the Registrant, filed with the Delaware Secretary of State on December 20, 1993.(1) 3.2 Bylaws of the Registrant.(1) 4.1 Indenture dated as of April 6, 1999 between the Registrant and State Street Bank Trust Company of California, N.A., Trustee, relating to the Registrant's 8 1/2% Senior Notes due April 6, 2009.(1) 4.2 Specimen Series B note (included in Exhibit 4.1).(1) 4.3 Shareholders' Agreement, dated June 27, 1995, by and among Rio Doce Limited, Companhia Vale do Rio Doce, Kawasaki Steel Holdings (USA), Inc. and Kawasaki Steel Corporation.(1) 10.15 Addendum No. 39, dated May 31, 2000, to Contract, dated August 20, 1990, by and between the Registrant and Seamar Shipping Corporation of Monrovia, Liberia. 10.16 First Amendment, dated as of April 28, 2000, to Revolving Credit Agreement, dated as of March 10, 1999, among the Registrant, the Banks named therein, Fleet National Bank (f/k/a BankBoston, N.A.), as loan and collateral agent for the Banks, and Bank of America National Trust and Savings Association , as documentation and letter of credit agent for the Banks. 27.1 Financial Data Schedule
(1) Incorporated by reference to the Registrant's Registration Statement on Form S-4, File No. 333-79587, as filed with the Securities and Exchange Commission on May 28, 1999, as amended. 10