UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON DC 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, 2002
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OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------------ ---------------------------
Commission File Number 1-9887
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OREGON STEEL MILLS, INC.
(Exact name of registrant as specified in its charter)
Delaware 94-0506370
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1000 S.W. Broadway, Suite 2200, Portland, Oregon 97205
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(Address of principal executive offices) (Zip Code)
(503) 223-9228
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Stock, $.01 Par Value 25,789,104
---------------------------- --------------------------------
Class Number of Shares Outstanding
(as of July 26, 2002)
OREGON STEEL MILLS, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2002 (unaudited) and December 31, 2001...... 2
Consolidated Statements of Income (unaudited)
Three months and six months ended
June 30, 2002 and 2001............................... 3
Consolidated Statements of Cash Flows (unaudited)
Six months ended June 30, 2002 and 2001.............. 4
Notes to Consolidated Financial Statements
(unaudited) .....................................5 - 15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............16 - 19
Item 3. Quantitative and Qualitative Disclosures about
Market Risk..........................................19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..................................... 20
Item 6. Exhibits and Reports on Form 8-K........................20
OREGON STEEL MILLS, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
JUNE 30, DECEMBER 31,
2002 2001
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,458 $ 12,278
Trade accounts receivable,
less allowance for doubtful accounts 88,460 89,132
Inventories 125,669 132,402
Deferred tax asset 17,998 17,998
Other 3,034 7,259
--------- ---------
Total current assets 242,619 259,069
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements 30,180 30,177
Buildings 52,679 52,463
Machinery and equipment 789,757 787,156
Construction in progress 14,685 9,644
--------- ---------
887,301 879,440
Accumulated depreciation (350,160) (328,386)
--------- ---------
Net property, plant and equipment 537,141 551,054
--------- ---------
Goodwill 520 32,384
Intangibles, net 1,166 1,227
Other assets 22,342 25,842
--------- ---------
$ 803,788 $ 869,576
========= =========
LIABILITIES
CURRENT LIABILITIES:
Current portion of long-term debt $ 9,914 $ 9,464
Short-term debt 23,262 61,638
Accounts payable 72,245 81,270
Accrued expenses 61,092 53,235
--------- ---------
Total current liabilities 166,513 $ 205,607
Long-term debt 228,775 233,542
Deferred employee benefits 22,417 24,077
Environmental liability 31,971 31,350
Deferred income taxes 22,291 29,102
--------- ---------
Total liabilities 471,967 523,678
--------- ---------
Minority interests 25,043 27,312
--------- ---------
Contingencies (Note 7)
STOCKHOLDERS' EQUITY
Common stock, par value $.01 per share 258 258
Additional paid-in capital 227,622 227,618
Retained earnings 92,331 105,218
--------- ---------
320,211 333,094
--------- ---------
Accumulated other comprehensive income:
Cumulative foreign currency translation adjustment (7,928) (9,003)
Minimum pension liability (5,505) (5,505)
--------- ---------
Total stockholders' equity 306,778 318,586
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 803,788 $ 869,576
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
-2-
OREGON STEEL MILLS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except tonnage and per share amounts)
(Unaudited)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
2002 2001 2002 2001
------------ --------- -------- ----------
SALES:
Product sales $ 217,774 $ 182,347 $ 405,675 $ 347,299
Freight 13,543 14,249 24,710 26,854
Electricity sales -- 7,665 -- 9,761
--------- --------- --------- ---------
231,317 204,261 430,385 383,914
COSTS AND EXPENSES:
Cost of sales 197,443 179,991 374,812 352,175
Selling, general and administrative
expenses 16,966 15,319 31,550 29,157
Loss (gain) on sale of assets (111) 2 (1,069) 29
--------- --------- --------- ---------
214,298 195,312 405,293 381,361
--------- --------- --------- ---------
Operating income 17,019 8,949 25,092 2,553
OTHER INCOME (EXPENSE):
Interest expense, net (8,288) (8,777) (16,840) (17,854)
Minority interests (232) 74 (364) (27)
Other, net 965 159 1,471 562
--------- --------- --------- ---------
Income (loss) before income taxes 9,464 405 9,259 (14,766)
INCOME TAX BENEFIT (EXPENSE) (4,263) (907) (4,179) 4,704
Income (loss) before cumulative effect of change
in accounting principle 5,201 (502) 5,080 (10,062)
Cumulative effect of change in accounting
principle, net of tax, net of minority interest - - (17,967) -
--------- --------- --------- ---------
NET INCOME (LOSS) $ 5,201 $ (502) $ (12,887) $ (10,062)
========= ========= ========= =========
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE
Income (loss) before cumulative effect
of change in accounting principle $ 0.20 $ (0.02) $ 0.19 $ (0.38)
Cumulative effect of change in
accounting principle -- -- (0.68) --
--------- --------- --------- ---------
Net income (loss) per share $ 0.20 $ (0.02) $ (0.49) $ (0.38)
========= ========= ========= =========
WEIGHTED AVERAGE COMMON SHARES AND
COMMON SHARE EQUIVALENTS OUTSTANDING
Basic 26,388 26,375 26,387 26,375
Diluted 26,660 26,375 26,639 26,375
The accompanying notes are an integral part of the consolidated financial statements.
-3-
OREGON STEEL MILLS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED JUNE 30,
--------------------------
2002 2001
---------- ----------
Cash flows from operating activities:
Net loss $ (12,887) $ (10,062)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Cumulative effect of change in accounting principle, net of tax,
net of minority interest 17,967 --
Depreciation and amortization 23,443 23,008
Deferred income tax provision 4,610 (4,774)
Loss (gain) on sale of assets and investments (1,069) 29
Minority interests' share of income 364 27
Changes in current assets and liabilities:
Trade accounts receivables 672 (14,207)
Inventories 6,733 2,463
Income taxes 154 151
Other, net 3,965 5,821
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 43,952 2,456
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (9,884) (5,736)
Proceeds from disposal of property, plant and equipment 1,205 5
Other, net 3,668 2,530
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (5,011) (3,201)
--------- ---------
Cash flows from financing activities:
Proceeds from bank debt 396,093 357,649
Payments on bank debt and long-term debt (441,238) (351,635)
Net borrowings (repayments) under Canadian bank revolving loan facility 305 (990)
Minority portion of subsidiary's distribution -- (1,276)
Issue common stock 4 --
--------- ---------
NET CASH PROVIDED BY (USED BY) FINANCING ACTIVITIES (44,836) 3,748
--------- ---------
Effects of foreign currency exchange rate changes on cash 1,075 (325)
--------- ---------
Net increase (decrease) in cash and cash equivalents (4,820) 2,678
Cash and cash equivalents at beginning of period 12,278 3,370
--------- ---------
Cash and cash equivalents at end of period $ 7,458 $ 6,048
========= =========
Supplemental disclosures of cash flow information:
Cash paid for:
-------------
Interest $ 13,244 $ 12,577
Income taxes $ 243 $ 273
Non-cash financing activities:
-----------------------------
Interest applied to loan balance $ 2,147 $ 3,715
The accompanying notes are an integral part of the consolidated financial statements.
-4-
OREGON STEEL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
---------------------
The consolidated financial statements include the accounts of Oregon
Steel Mills, Inc. and its subsidiaries ("Company"), which include
wholly-owned Camrose Pipe Corporation ("CPC"), which through ownership in
another corporation, holds a 60% interest in Camrose Pipe Company
("Camrose"); and 87% owned New CF&I, Inc. ("New CF&I") which owns a 95.2%
interest in CF&I Steel, L.P. ("CF&I"). The Company also directly owns an
additional 4.3% interest in CF&I. In January 1998, CF&I assumed the trade
name Rocky Mountain Steel Mills. All significant intercompany balances and
transactions have been eliminated.
The unaudited financial statements include all adjustments (consisting
of normal recurring accruals) which, in the opinion of management, are
necessary for a fair statement of the interim periods. Results for an
interim period are not necessarily indicative of results for a full year.
Reference should be made to the Company's 2001 Annual Report on Form 10-K
for additional disclosures including a summary of significant accounting
policies.
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "BUSINESS COMBINATIONS," and SFAS No. 142, "GOODWILL AND
OTHER INTANGIBLE ASSETS," collectively referred to as the "Standards." SFAS
No. 141 supersedes Accounting Principles Board Opinion (APB) No. 16,
"BUSINESS COMBINATIONS." The provisions of SFAS No. 141 (1) require that
the purchase method of accounting be used for all business combinations
initiated after June 30, 2001, and (2) provide specific criteria for the
initial recognition and measurement of intangible assets apart from
goodwill. SFAS No. 141 also requires that, upon adoption of SFAS No. 142,
the Company reclassify the carrying amounts of certain intangible assets
into or out of goodwill, based on certain criteria. SFAS No. 142 supersedes
APB 17, "INTANGIBLE ASSETS," and is effective for fiscal years beginning
after December 15, 2001. SFAS No. 142 primarily addresses the accounting
for goodwill and intangible assets subsequent to their initial recognition.
The provisions of SFAS No. 142 (1) prohibit the amortization of goodwill
and indefinite-lived intangible assets, (2) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and
in interim periods if certain events occur indicating that the carrying
value of goodwill and/or indefinite-lived intangible assets may be
impaired), (3) require that reporting units be identified for the purpose
of assessing potential future impairments of goodwill, and (4) remove the
forty-year limitation on the amortization period of intangible assets that
have finite lives. The Company adopted the provisions of SFAS No. 141 and
142 during its first quarter ended March 31, 2002. See Note 6 for further
information.
On October 3, 2001, the FASB issued SFAS No. 144, "ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS." SFAS No. 144 supersedes SFAS
No. 121, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED Of." SFAS No. 144 applies to all
long-lived assets (including discontinued operations) and consequently
amends Accounting Principles Board Opinion No. 30 (APB 30), "REPORTING
RESULTS OF OPERATIONS AND REPORTING THE EFFECTS OF DISPOSAL OF A SEGMENT OF
A BUSINESS." SFAS No. 144 develops one accounting model for long-lived
assets that are to be disposed of by sale. SFAS No. 144 requires that
long-lived assets that are to be disposed of by sale be measured at the
lower of book value or fair value, less cost to sell. Additionally, SFAS
No. 144 expands the scope of discontinued operations to include all
components of an entity with operations that (1) can be distinguished from
the rest of the entity and (2) will be eliminated from the ongoing
operations of the entity in a disposal transaction. SFAS No. 144 was
effective for the Company for the year beginning January 1, 2002. The
adoption of this standard did not have a material effect on the Company's
financial statements.
In May 2002, the FASB issued SFAS No. 145, "RECISSION OF FAS NOS. 4,
44, AND 64, AMENDMENT OF FAS 13, AND TECHNICAL CORRECTIONS." Among other
things, SFAS No. 145 rescinds various pronouncements regarding early
extinguishment of debt and allows extraordinary accounting treatment for
early extinguishment only when the provisions of Accounting Principles
Board Opinion No. 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" are met. SFAS No. 145
provisions regarding early extinguishment of debt are generally effective
for fiscal years beginning after May 15, 2002. The Company does not believe
that the adoption of this statement will have a material impact on its
consolidated financial statements.
-5-
In July of 2002, the FASB issued SFAS No. 146, "ACCOUNTING FOR THE
IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS AND FOR OBLIGATIONS ASSOCIATED WITH
DISPOSAL ACTIVITIES." SFAS No. 146 addresses the differences in accounting for
long-lived assets and operations (segments) to be disposed of under SFAS No. 121
and APB No. 30 and accounting for costs associated with those and other disposal
activities, including restructuring activities, under Emerging Issues Task Force
("EITF") Issue No. 94-3. SFAS No. 146 is effective for disposal activities after
December 31, 2002, with early application encouraged. The Company does not
believe that the adoption of this statement will have a material impact on its
consolidated financial statements.
Certain reclassifications have been made in prior periods to conform to the
current year presentation. Such reclassifications do not affect results of
operations as previously reported.
2. INVENTORIES
-----------
Inventories were as follows:
JUNE 30, DECEMBER 31,
2002 2001
-------- ------------
(In thousands)
Raw materials $ 7,449 $ 11,419
Semi-finished product 41,147 51,777
Finished product 44,257 41,201
Stores and operating supplies 32,816 28,005
-------- --------
Total inventory $125,669 $132,402
======== ========
-6-
3. NET INCOME (LOSS) PER SHARE
Basic and diluted net income (loss) per share was as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
2002 2001 2002 2001
--------- --------- ---------- ---------
(In thousands, except per share amounts)
Weighted average number of
common shares outstanding 25,790 25,777 25,789 25,777
Shares of common stock to be
issued March 2003 598 598 598 598
-------- -------- -------- --------
Basic weighted average 26,388 26,375 26,387 26,375
shares outstanding ======== ======== ======== ========
Dilutive effect of:
Employee stock options 272 -- 252 --
-------- -------- -------- --------
Weighted average number of shares outstanding:
Assuming dilution 26,660 26,375 26,639 26,375
======== ======== ======== ========
Net income (loss) before cumulative
effect of change in accounting principle $ 5,201 $ (502) $ 5,080 $(10,062)
Cumulative effect of change in
accounting principle, net of tax,
net of minority interest - - (17,967) -
-------- -------- -------- --------
Net income (loss) $ 5,201 $ (502) $(12,887) $(10,062)
======== ======== ======== ========
Basic income (loss) per share:
Before cumulative effect of change
in accounting principle $ 0.20 $ (0.02) $ 0.19 $ (0.38)
Cumulative effect of change in
accounting principle - - (0.68) -
-------- ------- ------- --------
$ 0.20 $ (0.02) $ (0.49) $ (0.38)
======== ======= ======= ========
Diluted income (loss) per share:
Before cumulative effect of change
in accounting principle $ 0.20 $ -- $ 0.19 $ --
Cumulative effect of change in
accounting principle - - (0.68) --
-------- ------- ------- --------
$ 0.20 $ -- $ (0.49) $ --
======== ======= ======= ========
Weighted average common shares outstanding, assuming dilution, includes the
incremental shares that would be issued upon the assumed exercise of stock
options for the period they were outstanding. For the three and six months ended
June 30, 2001 approximately 183,136 shares and 113,411 shares, respectively,
were excluded from the diluted earnings per share calculation, as to include
them would have been antidilutive. For the six months ended June 30, 2002,
approximately 251,961 shares were excluded from the cumulative effect of change
in accounting principle earnings per share calculation, as to include them would
have been antidilutive.
-7-
4. COMPREHENSIVE INCOME (LOSS)
---------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
------------------------------ ---------------------------------
2002 2001 2002 2001
-------- --------- ------------ ---------
(In thousands) (In thousands)
Net income (loss) $ 5,201 $ (502) $(12,887) $(10,062)
Foreign currency translation
adjustment 1,133 935 1,075 (325)
-------- -------- -------- --------
Comprehensive income (loss) $ 6,334 $ 433 $(11,812) $(10,387)
======== ======== ======== ========
5. DEBT, FINANCING ARRANGEMENTS, AND LIQUIDITY
-------------------------------------------
Debt balances were as follows:
JUNE 30, DECEMBER 31,
2002 2001
--------- ------------
(In thousands)
11% First Mortgage Notes ("Notes") $228,250 $228,250
Revolving credit facility 23,262 61,638
CF&I acquisition term loan 9,914 14,536
Camrose revolving bank loan 525 220
-------- --------
Total debt 261,951 304,644
Less short-term debt and current
portion of long-term debt 33,176 71,102
-------- --------
Non-current portion of long-term debt $228,775 $233,542
======== ========
As of June 30, 2002, the Company had outstanding $228.3 million principal
amount of 11% First Mortgage Notes ("Notes"), due 2003. The Indenture under
which the Notes were issued contained restrictions on new indebtedness and
various types of disbursements, including dividends, based on the Company's net
income in relation to its fixed charges, as defined. Under these restrictions,
there was no amount available for cash dividends at June 30, 2002. See Note 8
for discussion of Subsequent Events after June 30, 2002 regarding the redemption
of the Notes.
As of June 30, 2002, the Company maintained a $75 million revolving credit
facility ("Credit Agreement"), which was to expire on September 30, 2002. As of
June 30, 2002, approximately $45 million was available for use. The Credit
Agreement contained various restrictive covenants including minimum consolidated
tangible net worth, minimum earnings before interest, taxes, depreciation and
amortization ("EBITDA") coverage ratio, maximum annual capital expenditures,
limitations on stockholder dividends and limitations on incurring new or
additional debt obligations other than provided by the Credit Agreement. The
Company cannot pay cash dividends without prior approval from the lenders. The
Company was in compliance with such covenants at June 30, 2002. See Note 8 for
discussion of Subsequent Events after June 30, 2002 regarding a new credit
facility.
CF&I incurred $67.5 million in term debt in 1993 as part of the purchase
price of certain assets, principally the Pueblo, Colorado steelmaking and
finishing facilities ("Pueblo Mill"), from CF&I Steel Corporation. This debt is
unsecured and is payable over ten years, bearing interest at 9.5%. As of June
30, 2002, the outstanding balance on the debt was $9.9 million, all of which
was classified as short-term.
-8-
Camrose maintains a (CDN) $15 million revolving credit facility with a
Canadian bank, the proceeds of which may be used for working capital and general
business purposes by Camrose. The facility is collateralized by substantially
all of the assets of Camrose, and borrowings under this facility are limited to
an amount equal to the sum of the product of specified advance rates and
Camrose's eligible trade accounts receivable and inventories. This facility
expires in September 2003. At June 30, 2002, the outstanding balance under the
credit facility was $525,000.
As of June 30, 2002, principal payments on debt are due as follows (in
thousands):
2002 $ 28,104
2003 233,847
--------
$261,951
========
The Company is able to draw up to $15 million of the borrowings available
under the Credit Agreement to support issuance of letters of credit and similar
contracts. At June 30, 2002, $6.7 million was restricted under outstanding
letters of credit.
Despite the unfavorable net results for the six months ended June 30,
2002, the Company has been able to satisfy its needs for working capital and
capital expenditures, due in part on its ability to secure adequate financing
arrangements. The Company expects that operations will continue, with the
realization of assets, and discharge of liabilities in the ordinary course of
business. The Company believes that its anticipated needs for working capital
and capital expenditures for the next twelve months will be met from funds
generated from operations. See Note 8 for discussion of Subsequent Events after
June 30, 2002 regarding the Company's new credit facility.
6. GOODWILL AND INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No.142, "GOODWILL AND
OTHER INTANGIBLE ASSETS." As part of this adoption, the Company ceased
amortizing all goodwill and assessed goodwill for possible impairment. As an
initial step, the Company tested goodwill impairment within its two business
units - the Oregon Steel Division and the Rocky Mountain Steel Mills ("RMSM")
Division. These two business units qualify as reporting units in that they are
one level below the Company's single reportable segment (as defined in SFAS No.
131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION"). The
aggregation of these reporting units, under SFAS No. 131, is appropriate given
that both business units operate in a single reportable segment, the steel
industry. Reference should be made to the Company's 2001 Annual Report on Form
10-K for additional disclosure on segment reporting.
As required under the transitional accounting provisions of SFAS No. 142,
the Company completed the steps required to identify and measure goodwill
impairment at each reporting unit. The reporting units were measured for
impairment by comparing implied fair value of the reporting units' goodwill with
the carrying amount of the goodwill. As a result, the entire goodwill at the
RMSM Division was written off in the amount of $31.9 million, and a net charge
of $18.0 million (after tax and minority interest) was recognized as a
cumulative effect of a change in accounting principle during the first quarter
of 2002. Historical earnings and applying an earnings multiple resulted in the
identification of an impairment that was recognized at the reporting units. The
implementation of SFAS No. 142 required the use of judgements, estimates and
assumptions in the determination of fair value and impairment amounts related to
the required testing. Prior to adoption of SFAS No. 142, the Company had
historically evaluated goodwill for impairment by comparing the entity level
unamortized balance of goodwill to projected undiscounted cash flows, which did
not result in an indicated impairment.
Additionally, pursuant to SFAS No. 142, the Company completed its
reassessment of finite intangible asset lives, which consists of proprietary
technology at the RMSM Division. Based on this reassessment, no adjustment was
needed on the proprietary technology. The Company does not have any other
acquired intangible assets, whether finite or indefinite lived assets.
-9-
Listed below are schedules describing the goodwill and intangibles
of the Company. Also included is a pro-forma report of what adjusted earnings
per share would have been if amortization had not taken place for the three
and six months ended June 30, 2002 and for the years ended December 31, 2001,
2000, and 1999.
GOODWILL
The changes in the carrying amount of goodwill for the six months ended
June 30, 2002 are as follows:
RMSM OREGON STEEL
DIVISION DIVISION TOTAL
--------- ------------ --------
BALANCE AS OF JANUARY 1, 2002 $ 31,863 $520 $ 32,383
-------- ---- --------
Goodwill written off related to
adoption of SFAS No. 142 (31,863) - (31,863)
-------- ---- --------
BALANCE AS OF JUNE 30, 2002 $ - $520 $ 520
======== ==== ========
ACQUIRED INTANGIBLE ASSETS
AS OF JUNE 30, 2002
------------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION
-------------- ------------
(IN THOUSANDS)
AMORTIZED INTANGIBLE ASSETS: (FN1)
--------------------------------
Proprietary technology $1,892 $ (726)
AGGREGATE AMORTIZATION EXPENSE:
-------------------------------
For the three months ended 6/30/02 $31
For the six months ended 6/30/02 $61
For the year ended 12/31/99 $122
For the year ended 12/31/00 $122
For the year ended 12/31/01 $122
ESTIMATED AMORTIZATION EXPENSE:
-------------------------------
For the year ended 12/31/02 $122
For the year ended 12/31/03 $122
For the year ended 12/31/04 $122
For the year ended 12/31/05 $122
For the year ended 12/31/06 $122
(FN1) Weighted average amortization period is 16 years.
-10-
FOR THE THREE MONTHS ENDED JUNE 30, FOR THE SIX MONTHS ENDED JUNE 30,
----------------------------------- ---------------------------------
2002 2001 2002 2001
------------- ---------- ---------- ---------
Goodwill amortization $ -- $ (259) $ -- $ (518)
========= ========= ========= =======
Net income (loss) 5,201 (502) (12,887) (10,062)
Add back: Goodwill amortization,
net of tax, net of minority interest - 145 -- 290
--------- --------- --------- -------
Adjusted net income (loss) $ 5,201 $ (357) $ (12,887) $(9,772)
========= ========= ========= =======
Basic income (loss) per share $ 0.20 $ (0.02) $ (0.49) $ (0.38)
Add back: Goodwill amortization,
net of tax, net of minority interest $ -- $ 0.01 $ -- $ 0.01
--------- --------- --------- -------
Adjusted basic income (loss) per share $ 0.20 $ (0.01) $ (0.49) (0.37)
========= ========= ========= =======
Diluted income (loss) per share $ 0.20 $ (0.02) $ (0.49) $ (0.38)
Add back: Goodwill amortization,
net of tax, net of minority interest $ -- $ 0.01 $ -- $ 0.01
--------- --------- --------- -------
Adjusted diluted income (loss) per share $ 0.20 $ (0.01) $ (0.49) $ (0.37)
========= ========= ========= =======
YEARS ENDED DECEMBER 31,
--------------------------------------------
1999 2000 2001
----------- ----------- --------
Goodwill amortization $ (1,037) $ (1,037) $(1,037)
---------- ---------- -------
Net income (loss) 19,914 (18,265) (5,928)
Add back: Goodwill amortization, net of tax, net of minority interest 561 558 558
---------- ---------- -------
Adjusted net income (loss) $ 20,475 $ (17,707) $(5,370)
Basic income (loss) per share $0.76 $(0.69) $(0.22)
Add back: Goodwill amortization, net of tax, net of minority interest $0.02 $ 0.02 $ 0.02
Adjusted basic income (loss) per share $0.78 $(0.67) $(0.20)
Diluted income (loss) per share $0.76 $(0.69) $(0.22)
Add back: Goodwill amortization, net of tax, net of minority interest $0.02 $ 0.02 $ 0.02
Adjusted diluted income (loss) per share $0.78 $(0.67) $(0.20)
7. CONTINGENCIES
ENVIRONMENTAL MATTERS
All material environmental remediation liabilities for non-capital
expenditures, which are probable and estimable, are recorded in the financial
statements based on current technologies and current environmental standards at
the time of evaluation. Adjustments are made when additional information is
available that suggests different remediation methods or periods may be required
and affect the total cost. The best estimate of the probable cost within a range
is recorded; however, if there is no best estimate, the low end of the range is
recorded and the range is disclosed.
OSM DIVISION
In May 2000, the Company entered into a Voluntary Clean-up Agreement
with the Oregon Department of Environmental Quality ("DEQ") committing the
Company to conduct an investigation of whether, and to what extent, past or
present operations at the Portland Mill may have affected sediment quality in
the Willamette River. Based on preliminary findings, the DEQ has requested the
Company to begin a full remedial investigation ("RI"), including areas of
investigation throughout the Portland Mill, and implement source control as
required. The Company estimates that costs of the RI study
-11-
could range from $732,000 to $1,872,000 over the next two years. Based on a best
estimate, the Company has accrued a liability of $1,017,000 as of June 30, 2002.
The Company has also recorded a $1,017,000 receivable for insurance proceeds
that are expected to cover these RI costs because the Company's insurer is
defending this matter, subject to a standard reservation of rights, and is
paying these RI costs as incurred. Based upon the results of the RI, the DEQ may
require the Company to incur costs associated with additional phases of
investigation, remedial action or implementation of source controls, which could
have a material adverse effect on the Company's results of operations because it
may cause costs to exceed available insurance or because insurance may not cover
those particular costs. The Company is unable at this time to determine if the
likelihood of an unfavorable outcome or loss is either probable or remote, or to
estimate a dollar amount range for a potential loss.
In a related manner, in December 2000 the Company received a general
notice letter from the U.S. Environmental Protection Agency ("EPA"), identifying
it, along with 68 other entities, as a potentially responsible party ("PRP")
under the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") with respect to contamination in a portion of the Willamette River
that has been designated as the "Portland Harbor Superfund Site." The letter
advised the Company that it may be liable for costs of remedial investigation
and remedial action at the site (which liability, under CERCLA, is joint and
several with other PRPs) as well as for natural resource damages that may be
associated with any releases of contaminants (principally at the Portland Mill
site) for which the Company has liability. At this time, nine private and public
entities have signed an Administrative Order on Consent ("AOC") to perform a
remedial investigation/feasibility study ("RI/FS") of the Portland Harbor
Superfund Site under EPA oversight. The RI/FS is expected to take three to five
years to complete. The Company is a member of the Lower Willamette Group, which
is funding that investigation, and will become a signatory to the AOC. The
Company's budgeted assessment for costs associated with the RI/FS for 2002 is
approximately $200,000; all of which has been covered by the Company's insurer.
As a best estimate of the RI/FS costs for years after 2002, the Company has
accrued $600,000 as of June 30, 2002. The Company has also recorded a $600,000
receivable for insurance proceeds that are expected to cover these RI/FS costs
because the Company's insurer is defending this matter, subject to a standard
reservation of rights, and is paying these RI/FS costs as incurred. Although the
EPA has not yet defined the boundaries of the Portland Harbor Superfund Site,
the AOC requires the RI/FS to focus on an "initial study area" that does not now
include the portion of the Willamette River adjacent to the Portland Mill. The
study area, however, may be expanded. At the conclusion of the RI/FS, the EPA
will issue a Record of Decision setting forth any remedial action that it
requires to be implemented by the PRPs. A determination that the Company is a
PRP could cause the Company to incur costs associated with remedial action,
natural resource damage and natural resource restoration, the costs of which may
exceed available insurance or which may not be covered by insurance, which
therefore could have a material adverse effect on the Company's results of
operations. The Company is unable to estimate a dollar amount range for any
related remedial action that may be implemented by the EPA.
On April 18, 2001, the United Steelworkers of America (the "Union"),
along with two other groups, filed suit against the Company under the citizen
suit provisions of the CAA in U.S. District Court in Portland, Oregon. The suit
alleges that the Company has violated various air emission limits and conditions
of its operating permits at the Portland Mill approximately 100 times since
1995. The suit seeks injunctive relief and unspecified civil penalties. On July
17, 2002, the federal magistrate recommended dismissing the majority of the
plaintiffs' claims and limiting the type of relief the plaintiffs could receive
if they succeeded in proving the remaining allegations. The magistrate's
recommendations, if objected to by either party, will be subject to review by a
federal district court judge. If trial were to occur, it is expected to be
scheduled for late 2002 or early 2003. The Company believes it has factual and
legal defenses to the allegations and intends to defend the matter vigorously.
Although the Company believes it will prevail, it is not presently possible to
estimate the liability if there is ultimately an adverse determination.
The Company has received a letter from a private party asserting that
it may be a potentially responsible party under CERCLA for a site allegedly
contaminated in part from a commodity by-product that was sent by the Company to
a prior site owner. The Company denies any liability because the material was
not a waste, but rather was a useful product exempt from liability under CERCLA.
In addition, the Company understands that its by-product material was a very
small fraction of the total amount of material processed at the site. The
Company does not have any information on the nature of the contamination, the
estimated costs of remediation or how either relates to the material supplied by
the Company and consequently is unable to assess the likelihood or amount of any
potential liability.
-12-
RMSM DIVISION
In connection with the acquisition of the Pueblo Mill, CF&I accrued a
liability of $36.7 million for environmental remediation related to the prior
owner's operations. CF&I believed this amount was the best estimate of costs
from a range of $23.1 million to $43.6 million. CF&I's estimate of this
liability was based on two remediation investigations conducted by environmental
engineering consultants, and included costs for the Resource Conservation and
Recovery Act facility investigation, a corrective measures study, remedial
action, and operation and maintenance associated with the proposed remedial
actions. In October 1995, CF&I and the Colorado Department of Public Health and
Environment ("CDPHE") finalized a postclosure permit for hazardous waste units
at the Pueblo Mill. As part of the postclosure permit requirements, CF&I must
conduct a corrective action program for the 82 solid waste management units at
the facility and continue to address projects on a prioritized corrective action
schedule which substantially reflects a straight-line rate of expenditure over
30 years. The State of Colorado mandated that the schedule for corrective action
could be accelerated if new data indicated a greater threat existed to the
environment than was presently believed to exist. At June 30, 2002, the accrued
liability was $30.5 million, of which $26.6 million was classified as
non-current on the consolidated balance sheet.
The CDPHE inspected the Pueblo Mill in 1999 for possible environmental
violations, and in the fourth quarter of 1999 issued a Compliance Advisory
indicating that air quality regulations had been violated, which was followed by
the filing of a judicial enforcement action ("Action") in the second quarter of
2000. In March 2002, CF&I and CDPHE reached a settlement of the Action, which
has been approved by the presiding judge. The settlement provides for CF&I to
pay $300,000 in penalties, fund $1.5 million of community projects, and to pay
approximately $400,000 for consulting services. CF&I will also be required to
make certain capital improvements expected to cost approximately $20 million,
including converting to the new single New Source Performance Standards Subpart
AAa ("NSPS AAa") compliant furnace discussed below. The settlement provides that
the two existing furnaces will be permanently shut down approximately 18 months
after the issuance of a Prevention of Significant Deterioration ("PSD") air
permit. It is expected the PSD air permit will be issued on or before September
30, 2002.
In May 2000, the EPA issued a final determination that one of the two
electric arc furnaces at the Pueblo Mill was subject to federal NSPS AA. This
determination was contrary to an earlier "grandfather" determination first made
in 1996 by CDPHE. CF&I appealed the EPA determination in the federal Tenth
Circuit Court of Appeals, and that appeal is pending. CF&I has negotiated a
settlement in principal of this matter with EPA. Under that agreement and
overlapping with the commitments made to the CDPHE described below, CF&I will
commit to the conversion to the new NSPS AAa compliant furnace (to be completed
approximately two years after permit approval and expected to cost, with all
related emission control improvements, approximately $20 million), and to pay
approximately $450,000 in penalties and fund certain supplemental environmental
projects valued at approximately $1.1 million, including the installation of
certain pollution control equipment at the Pueblo Mill. The above mentioned
expenditures for supplemental environmental projects will be both capital and
non-capital expenditures. Once the settlement agreement is finalized, the EPA
will file two proposed Consent Decrees, and if approved by the courts, will
fully resolve all NSPS and PSD issues. At that time CF&I will dismiss its appeal
against the EPA. If the proposed settlement with the EPA is not finalized, which
appears unlikely, it would not be possible to estimate the liability if there
were ultimately an adverse determination of this matter.
In response to the CDPHE settlement and the resolution of the EPA
action, CF&I has accrued $2.6 million as of June 30, 2002 for possible fines and
non-capital related expenditures.
In December 2001, the State of Colorado issued a Title V air emission
permit to CF&I under the CAA requiring that the furnace subject to the EPA
action operate in compliance with NSPS AA standards. This permit was modified in
April 2002 to incorporate the longer compliance schedule that is part of the
settlement with the CDPHE and is part of the negotiations with the EPA. This
modification gives CF&I adequate time to convert to a single NSPS AAa compliant
furnace. Any decrease in steelmaking production during the furnace conversion
period when both furnaces are expected to be shut down will be offset by
increasing production prior to the conversion period by building up
semi-finished steel inventory and, if necessary, purchasing semi-finished steel
("billets") for conversion into rod products at spot market prices at costs
comparable to internally generated billets. Pricing and availability of billets
is subject to significant volatility. However, the Company believes that near
term supplies of billets will continue to be available in sufficient quantities
at favorable prices.
-13-
In a related matter, in April 2000 the Union filed suit in U.S.
District Court in Denver, Colorado, asserting that the Company and CF&I had
violated the CAA at the Pueblo Mill for a period extending over five years. On
July 6, 2001, the presiding judge dismissed the suit. The Union has appealed the
decision. The Company intends to defend this matter vigorously. While the
Company does not believe the suit will have a material adverse effect on its
results of operations, the result of litigation, such as this, is difficult to
predict and an adverse outcome with significant penalties is possible. It is not
presently possible to estimate the liability if there is ultimately an adverse
determination on appeal.
LABOR DISPUTE
-------------
The labor contract at CF&I expired on September 30, 1997. After a brief
contract extension intended to help facilitate a possible agreement, on October
3, 1997, the Union initiated a strike at CF&I for approximately 1,000 bargaining
unit employees. The parties, however, failed to reach final agreement on a new
labor contract due to differences on economic issues. As a result of contingency
planning, CF&I was able to avoid complete suspension of operations at the Pueblo
Mill by utilizing a combination of new hires, striking employees who returned to
work, contractors and salaried employees.
On December 30, 1997, the Union called off the strike and made an
unconditional offer on behalf of its members to return to work. At the time of
this offer, because CF&I had permanently replaced the striking employees, only a
few vacancies existed at the Pueblo Mill. Since that time, vacancies have
occurred and have been filled by formerly striking employees ("Unreinstated
Employees"). As of June 30, 2002, approximately 708 Unreinstated Employees have
either returned to work or have declined CF&I's offer of equivalent work. At
June 30, 2002, approximately 222 Unreinstated Employees remain unreinstated.
On February 27, 1998, the Regional Director of the National Labor
Relations Board ("NLRB") Denver office issued a complaint against CF&I, alleging
violations of several provisions of the National Labor Relations Act ("NLRA").
On August 17, 1998, a hearing on these allegations commenced before an
Administrative Law Judge ("Judge"). Testimony and other evidence were presented
at various sessions in the latter part of 1998 and early 1999, concluding on
February 25, 1999. On May 17, 2000, the Judge rendered a decision which, among
other things, found CF&I liable for certain unfair labor practices and ordered
as remedy the reinstatement of all 1,000 Unreinstated Employees, effective as of
December 30, 1997, with back pay and benefits, plus interest, less interim
earnings. Since January 1998, the Company has been returning unreinstated
strikers to jobs as positions became open. As noted above, there were
approximately 222 unreinstated strikers as of June 30, 2002. On August 2, 2000,
CF&I filed an appeal with the NLRB in Washington, D.C. A separate hearing
concluded on February 2000, with the judge for that hearing rendering a decision
on August 7, 2000, that certain of the Union's actions undertaken since the
beginning of the strike did constitute misconduct and violations of certain
provisions of the NLRA. The Union has appealed this determination to the NLRB.
In both cases, the non-prevailing party in the NLRB's decision will be entitled
to appeal to the appropriate U.S. Circuit Court of Appeals. CF&I believes both
the facts and the law fully support its position that the strike was economic in
nature and that it was not obligated to displace the properly hired replacement
employees. The Company does not believe that final judicial action on the strike
issues is likely for at least two to three years.
In the event there is an adverse determination of these issues,
Unreinstated Employees could be entitled to back pay, including benefits, plus
interest, from the date of the Union's unconditional offer to return to work
through the date of their reinstatement or a date deemed appropriate by the NLRB
or an appellate court. The number of Unreinstated Employees entitled to back pay
may be limited to the number of past and present replacement workers; however,
the Union might assert that all Unreinstated Employees should be entitled to
back pay. Back pay is generally determined by the quarterly earnings of those
working less interim wages earned elsewhere by the Unreinstated Employees. In
addition to other considerations, each Unreinstated Employee has a duty to take
reasonable steps to mitigate the liability for back pay by seeking employment
elsewhere that has comparable working conditions and compensation. Any estimate
of the potential liability for back pay will depend significantly on the ability
to assess the amount of interim wages earned by these employees since the
beginning of the strike, as noted above. Due to the lack of accurate information
on interim earnings for both reinstated and unreinstated workers and sentiment
of the Union towards the Company, it is not currently possible to obtain the
necessary data to calculate possible back pay. In addition, the NLRB's findings
of misconduct by the Union may mitigate any back pay award with respect to any
Unreinstated Employees proven to have taken part or participated in acts of
misconduct during and after the strike. Thus, it is not presently possible to
estimate the liability if there is ultimately an adverse determination against
CF&I. An ultimate adverse determination against CF&I on these issues may have a
material adverse effect on the Company's consolidated financial condition,
results of operations, or cash flows. CF&I does not intend to agree to any
settlement of this matter that will have a material adverse effect on the
Company. In connection with the ongoing labor dispute, the Union has
-14-
undertaken certain activities designed to exert public pressure on CF&I.
Although such activities have generated some publicity in news media, CF&I
believes that they have had little or no material impact on its operations.
During the strike by the Union at CF&I, certain bargaining unit
employees of the Colorado & Wyoming Railway Company ("C&W"), a wholly-owned
subsidiary of New CF&I, refused to report to work for an extended period of
time, claiming that concerns for their safety prevented them from crossing the
picket line. The bargaining unit employees of C&W were not on strike, and
because the other C&W employees reported to work without incident, C&W
considered those employees to have quit their employment and, accordingly, C&W
declined to allow those individuals to return to work. The various unions
representing those individuals filed claims with C&W asserting that C&W had
violated certain provisions of the applicable collective bargaining agreement,
the Federal Railroad Safety Act ("FRSA"), or the Railway Labor Act. In all of
the claims, the unions demand reinstatement of the former employees with their
seniority intact, back pay and benefits.
The United Transportation Union, representing thirty of those former
employees, asserted that their members were protected under the FRSA and pursued
their claim before the Public Law Board ("PLB"). A hearing was held in November
1999, and the PLB, with one member dissenting, rendered an award on January 8,
2001 against C&W, ordering the reinstatement of those claimants who intend to
return to work for C&W, at their prior seniority, with back pay and benefits,
net of interim wages and benefits received elsewhere. On February 6, 2001, C&W
filed a petition for review of that award in the District Court for the District
of Colorado. The District Court has issued an order upholding the PLB award and
is now considering possible back pay and benefits. On May 23, 2002 C&W filed an
appeal of the District Court's order in the United States Court of Appeals.
Given the inability to determine the number of former employees who intend to
return to work at C&W and the extent to which the adverse and mitigating factors
discussed above will impact the liability for back pay and benefits, it is not
presently possible to estimate the liability if there is ultimately an adverse
determination against C&W.
The Transportation-Communications International Union, Brotherhood
Railway Carmen Division, representing six of those former C&W employees,
asserted that their members were protected under the terms of the collective
bargaining agreement and pursued their claim before a separate PLB. A hearing
was held in January 2001, and that PLB, with one member dissenting, rendered an
award on March 14, 2001 against C&W, ordering the reinstatement of those
claimants who intend to return to work for C&W, at their prior seniority, with
back pay and benefits, net of interim wages earned elsewhere. As of June 30,
2002, two of the six former employees have accepted a settlement from C&W. The
remaining four do not agree with the award amount from the court. The Company
does not believe an adverse determination against C&W would have a material
adverse effect on the Company's results of operations.
8. SUBSEQUENT EVENTS
On July 15, 2002 the Company issued $305 million of 10% First Mortgage
Notes due 2009 in a private offering at a discount of 98.772% and an interest
rate of 10%. Interest is payable on January 15 and July 15 of each year. The
proceeds of this issuance were used to redeem the Company's 11% First Mortgage
Notes due 2003 (including interest accrued from June 16, 2002 until the
redemption date of August 14, 2002), refinance its existing credit agreement,
and for working capital and general corporate purposes. The existing credit
agreement was replaced with a new $75 million credit facility that will expire
on June 30, 2005. As of July 31, 2002, $6.7 million was restricted under
outstanding letters of credit.
Below is a principal payment schedule of long-term debt under the new debt
structure:
2002 $ 4,842
2003 5,072
2004-2008 0
2009 305,000
--------
$314,914
========
-15-
OREGON STEEL MILLS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
-------
The following information contains forward-looking statements, which are
subject to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Statements made in this report that are not statements of
historical fact are forward-looking statements. Forward-looking statements made
in this report can be identified by forward-looking words such as, but not
limited to, "expect," "anticipate," "believe," "intend," "plan," "seek,"
"estimate," "continue," "may," "will," "would," "could," and similar
expressions. These forward-looking statements are subject to risks and
uncertainties and actual results could differ materially from those projected.
These risks and uncertainties include, but are not limited to, general business
and economic conditions; competitive products and pricing, as well as
fluctuations in demand; the supply of imported steel and subsidies provided by
foreign governments to support steel companies domiciled in their countries;
changes in U.S. or foreign trade policies affecting steel imports or exports;
potential equipment malfunction; work stoppages; plant construction and repair
delays; reduction in electricity supplies and the related increased costs and
possible interruptions of supply; changes in the availability and costs of raw
materials and supplies used by the Company; costs of environmental compliance
and the impact of governmental regulations; risks related to the outcome of the
pending union dispute; and failure of the Company to predict the impact of lost
revenues associated with interruption of the Company's, its customers' or
suppliers' operations.
The Company is organized into two business units known as the Oregon Steel
Division and the Rocky Mountain Steel Mills ("RMSM") Division. The Oregon Steel
Division is centered on the Company's steel plate minimill in Portland, Oregon
("Portland Mill"). In addition to the Portland Mill, the Oregon Steel Division
includes the Company's large diameter pipe finishing facility in Napa,
California and the large diameter and electric resistance welded pipe facility
in Camrose, Alberta. The RMSM Division consists of the steelmaking and finishing
facilities of CF&I Steel, L.P. ("CF&I") located in Pueblo, Colorado, as well as
certain related operations.
The Company expects to ship approximately 1.9 million tons of product
during 2002. The Oregon Steel Division anticipates that it will ship more than
506,000 tons of welded pipe and approximately 541,000 tons of plate and coil
products during 2002. The increase in anticipated welded pipe shipments in 2002
over 2001 is due primarily to the Kern River Expansion Project, which will
require production of more than 370,000 tons. The Company expects that this
order will be completed and shipped by the end of 2002. The RMSM Division
anticipates that it will ship approximately 366,000 tons of rail, approximately
437,000 tons of rod and bar and approximately 45,000 tons of other products.
Accordingly, the Company believes it is well positioned for an upturn in the
steel cycle and expects revenue and cash flow growth in 2002.
-16-
Results of Operations
---------------------
The following table sets forth by division tonnage sold, sales and average
selling price per ton:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- --------------------------
2002 2001 2002 2001
----------- ---------- --------- -----------
Total tonnage sold:
Oregon Steel Division:
Plate and Coil 138,000 121,400 254,200 271,700
Welded Pipe 110,200 95,800 211,400 153,100
-------- -------- -------- --------
Total Oregon Steel Division 248,200 217,200 465,600 424,800
-------- -------- -------- --------
RMSM Division:
Rail 101,200 55,500 199,900 110,600
Rod and Bar 109,300 100,000 220,200 206,100
Seamless Pipe (FN1) 7,000 37,900 9,300 67,100
Semi-finished 2,500 1,500 2,600 4,200
-------- -------- -------- --------
Total RMSM Division 220,000 194,900 432,000 388,000
-------- -------- -------- --------
Total Company 468,200 412,100 897,600 812,800
======== ======== ======== ========
Product sales (in thousands): (FN2)
Oregon Steel Division $134,827 $104,970 $244,848 $199,344
RMSM Division 82,947 77,377 160,827 147,955
-------- -------- -------- --------
Total Company $217,774 $182,347 $405,675 $347,299
======== ======== ======== ========
Average selling price per ton: (FN2)
Oregon Steel Division $ 543 $ 483 $ 526 $ 469
RMSM Division $ 377 $ 397 $ 372 $ 381
Company Average $ 465 $ 442 $ 452 $ 427
(FN1)The Company suspended operation of the seamless pipe mill in November of 2001, operations of the mill resumed
in April 2002.
(FN2)Product sales and average selling price per ton exclude freight revenues in the three and six months ended June 30, 2002
and 2001, and the sale of electricity in the three and six months ended June 30, 2001.
SALES. Consolidated sales increased $27.1 million, or 13.2%, to $231.3
million, and $46.5 million, or 12.1%, to $430.4 million for the three and six
months ended June 30, 2002, respectively, over the same periods in 2001.
Included in the consolidated sales is $13.5 million and $24.7 million in freight
revenue for the three and six months ended June 30, 2002, compared to $14.2
million and $26.9 million in the consolidated sales of 2001. The Company did not
have any sales of electricity in 2002, compared to $7.7 million and $9.8
million in the three and six months ended June 30, 2001 respectively. Shipments
for the three and six months ended June 30, 2002 were up 13.6% at 468,200 tons
with an average selling price of $465 per ton and 10.4 % at 897,600 tons with an
average selling price of $452 per ton, respectively. This is compared to 412,100
tons with an average selling price of $442 per ton and 812,800 tons with an
average selling price of $427 per ton, during the corresponding 2001 periods.
The increase in average selling prices was due primarily to the shift of product
mix to welded pipe and rail products. Freight revenue decreased from the second
quarter of 2001 in response to product mix and customer preference on shipping.
OREGON STEEL DIVISION. The Division's product sales of $134.8 million and
$244.8 million increased 28.4% and 22.8% for the three and six months ended
June 30, 2002, compared to $105.0 million and $199.3 million for the same
periods in 2001. For the three and six months ended June 30, 2002, the Division
shipped 248,200 tons and 465,600 tons of plate, coil and welded pipe products at
an average selling price of $543 and $526 per ton, compared to 217,300 tons and
424,800 tons of product at an average selling price of $483 and $469 per ton for
the same periods in 2001. The increase in both product sales and average selling
prices were in large part due to a greater mix of higher priced welded pipe
products attributable to the increased pipe orders at the Napa Pipe Mill. The
Company anticipates that the sale of welded pipe will continue to account for a
substantial portion of the Division's product sales throughout 2002.
-17-
RMSM DIVISION. The Division's product sales of $82.9 million and $160.8
million increased 7.2% and 8.7% for the three and six months ended June 30,
2002, compared to $77.4 million and $148.0 million for the same periods in 2001.
For the three and six months ended June 30, 2002, the Division shipped 220,000
tons and 432,000 tons of rail, rod and bar, seamless pipe and semi-finished
products at an average selling price of $377 and $372 per ton, respectively,
compared to 194,900 tons and 388,000 tons of product at an average selling price
of $397 and $381 per ton for the same periods in 2001. The increase in shipments
is a result of an increase in rail and rod product shipments, partially offset
by a decrease in seamless pipe and semi-finished shipments. The decrease in
average selling price is a result of the shift in product mix from seamless pipe
to the Company's rail and rod and bar products. Average selling prices for rail
and rod and bar products increased, as compared to the same quarters in 2001;
however, a decrease in average selling price still occurred due to significantly
reduced seamless pipe sales, the highest average selling price of the Division's
products.
GROSS PROFITS. Gross profit was $33.9 million and $55.6 million for the
three and six months ended June 30, 2002, respectively, or 14.6% and 12.9%,
compared to $24.3 million and $31.7 million, or 11.9% and 8.3%, for the same
periods in 2001. The increase of $9.6 million and $23.8 million, respectively,
in gross profit was primarily related to the increased sales of welded pipe and
rail products, as well as improved pricing on rod and bar products, and offset
in part by a decrease in electricity sales.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses ("SG&A") of $17.0 million and $31.6 million for the three and six
months ended June 30, 2002, respectively, increased by 10.8% and 8.2%, from
$15.3 million and $29.2 million for the corresponding periods of 2001. The
increase from 2001 was primarily due to increased accruals for incentive pay
programs associated with higher profitability in 2002. SG&A expenses decreased
as a percentage of total sales to 7.3% for the three and six months ended June
30, 2002 from 7.5% and 7.6% in the corresponding periods of 2001.
INTEREST EXPENSE. Total interest expense decreased $.5 million and $.9
million for the three and six months ended June 30, 2002, respectively, as
compared to corresponding periods in 2001. The decreases were due to lower
average borrowing levels from the Company's credit facility in 2002.
INCOME TAX EXPENSE. The effective income tax expense rate was 45.1 % for
the six months ended June 30, 2002, as compared to a tax benefit of 31.9% in the
corresponding period in 2001. The effective income tax rate for the six months
ended June 30, 2002 varied principally from the combined state and federal
statutory rate due to an increase in the valuation allowance for state tax
credit carry-forwards and non-deductible fines and penalties.
Liquidity and Capital Resources
-------------------------------
At June 30, 2002, the Company's liquidity, comprised of cash, cash
equivalents, and funds available under its revolving credit agreement ("Credit
Agreement"), totaled approximately $52.5 million, compared to $46.3 million at
December 31, 2001.
Cash flow provided by operations for the six months ended June 30, 2002
was $44.0 million compared to $2.5 million for the corresponding period of 2001.
The items primarily affecting the $41.5 million increase in cash flow for the
six months ended June 30, 2002 include a non-cash provision for deferred income
taxes ($9.4 million), a decrease of $.7 million in net accounts receivable in
2002 versus an increase of $14.2 million in 2001 and net income before the
cumulative effect of change in accounting principle of $5.1 million in the first
six months of 2002, versus a net loss of $10.1 million in the first six months
of 2001. A non-cash transaction during the first quarter of 2002 relating to the
write-off of $31.9 million worth of goodwill resulted in a cumulative effect of
change in accounting principle of $18.0 million (net of a $11.3 million tax
effect and a $2.6 million minority interest impact).
Net working capital at June 30, 2002 increased $22.6 million compared to
December 31, 2001, reflecting a $16.5 million decrease in current assets and
$39.1 million decrease in current liabilities. The decrease in current assets
was primarily due to decreased cash, inventories, and other current assets ($4.8
million, $6.7 million, and $4.2 million, respectively). In addition, net
accounts receivable decreased $.7 million. The accounts receivable for the six
months ended June 30, 2002, as measured in average daily sales outstanding,
decreased to 36 days, as compared to 43 days for the corresponding period in
2001. The decrease is attributed to a faster turnover of welded pipe receivables
from customers paying earlier in order to utilize cash discounts, and an
increased effort on collections of receivables. The decrease in current
liabilities was primarily due to a $38.4 million decrease in short-term debt.
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As of June 30, 2002, the Company had outstanding $228.3 million principal
amount of Notes, which bear interest at 11%. The two subsidiaries of the
Company, New CF&I, Inc., and CF&I, L.P. (the "Guarantors") guaranteed the Notes.
The Notes and the guarantees were secured by a lien on substantially all the
property, plant and equipment and certain other assets of the Company (exclusive
of Camrose) and the Guarantors. The collateral did not include, among other
things, accounts receivable and inventory. The Indenture under which the Notes
were issued contained restrictions on new indebtedness and various types of
disbursements, including dividends, based on the Company's net income in
relation to its fixed charges, as defined. Under these restrictions, there was
no amount available for cash dividends at June 30, 2002. See discussion below of
subsequent events after June 30, 2002 regarding the redemption of the Notes.
As of June 30, 2002, the Company maintained the Credit Agreement, which
was to expire on September 30, 2002, and was guaranteed by the Guarantors. At
June 30, 2002, the amount available was the lesser of $75 million or the sum of
the product of the Company's eligible domestic accounts receivable and inventory
balances and specified advance rates. The Credit Agreement and guarantees were
secured by these assets in addition to a shared security interest in certain
equity and intercompany interests of the Company. Interest on the Credit
Agreement was based on the prime rate plus a margin of 1.75%. As of June 30,
2002, the average interest rate for the Credit Agreement was 6.5%. The unused
line fees were 0.38%. The Credit Agreement contained various restrictive
covenants including minimum consolidated tangible net worth, minimum earnings
before interest, taxes, depreciation and amortization coverage ratio, maximum
annual capital expenditures, limitations on stockholder dividends and
limitations on incurring new or additional debt obligations other than provided
by the Credit Agreement. The Company could not pay cash dividends without prior
approval from the lenders. At June 30, 2002, the outstanding balance on the
Credit Agreement was approximately $23.3 million and approximately $45 million
was available under the Credit Agreement at that time. See discussion below of
subsequent events after June 30, 2002 regarding a new credit facility.
The Company was able to draw up to $15 million of the borrowings available
under the Credit Agreement to support issuance of letters of credit and similar
contracts. At June 30, 2002, $6.7 million was restricted under outstanding
letters of credit.
CF&I incurred $67.5 million in term debt in 1993 as part of the purchase
price of certain assets, principally the Pueblo, Colorado steelmaking and
finishing facilities, from CF&I Steel Corporation. This debt is unsecured and is
payable over ten years, bearing interest at 9.5%. As of June 30, 2002, the
outstanding balance on the debt was $9.9 million, which was classified as
short-term.
Camrose maintains a (CDN) $15 million revolving credit facility with a
Canadian bank, the proceeds of which may be used for working capital and general
business purposes by Camrose. The facility is collateralized by substantially
all of the assets of Camrose, and borrowings under this facility are limited to
an amount equal to the sum of the product of specified advance rates and
Camrose's eligible trade accounts receivable and inventories. This facility
expires in September 2003. At the Company's election, interest is payable based
on either the bank's Canadian dollar prime rate, the bank's U.S. dollar prime
rate, or LIBOR. As of June 30, 2002, the interest rate of this facility was
4.3%. Annual commitment fees are 0.25% of the unused portion of the credit line.
At June 30, 2002, the outstanding balance under the credit facility was
$525,000.
During the first six months of 2002 the Company expended (exclusive of
capital interest) approximately $6.1 million and $3.8 million on capital
projects at the Oregon Steel Division and the RMSM Division, respectively.
Despite the unfavorable net results for the six months ended June 30, 2002, the
Company has been able to satisfy its needs for working capital and capital
expenditures, due in part on its ability to secure adequate financing
arrangements. The Company expects that operations will continue, with the
realization of assets and discharge of liabilities in the ordinary course of
business. The Company believes that its anticipated needs for working capital
and capital expenditures for the next twelve months will be met from funds
generated from operations. On July 15, 2002 the Company issued $305 million of
10% First Mortgage Notes due 2009 in a private offering at a discount of 98.772%
and an interest rate of 10%. Interest is payable on January 15 and July 15 of
each year. The proceeds of this issuance were used to redeem the Company's 11%
First Mortgage Notes due 2003 (including interest accrued from June 16, 2002
until the redemption date of August 14, 2002), refinance its existing credit
agreement, and for working capital and general corporate purposes. The existing
credit agreement, which was to expire on September 30, 2002, was replaced with a
new $75 million credit facility that will expire on June 30, 2005.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes.
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OREGON STEEL MILLS, INC.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part 1, Item 1, "Notes to Consolidated Financial Statements - Note 7,
Contingencies" for discussion of status of (a) the lawsuits initiated by the
Union alleging violations of the CAA, (b) the negotiations with CDPHE and EPA
regarding environmental issues at RMSM, and (c) the status of the labor dispute
at RMSM.
The Company is party to various other claims, disputes, legal actions and
other proceedings involving contracts, employment and various other matters. In
the opinion of management, the outcome of these matters should not have a
material adverse effect on the consolidated financial condition of the Company.
The Company maintains insurance against various risks, including certain
types of tort liability arising from the sale of its products. The Company does
not maintain insurance against liability arising out of waste disposal, on-site
remediation of environmental contamination or earthquake damage to its Napa Mill
and related properties because of the high cost of that coverage. There is no
assurance that the insurance coverage carried by the Company will be available
in the future at reasonable rates, if at all.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
On June 26, 2002 and July 11, 2002, Forms 8-K were filed by the Company
in relation to press releases that described the July 15, 2002 issuance of the
Company's 10% First Mortgage Notes due 2009 and subsequent redemption of its
existing 11% First Mortgage Notes due 2003.
SIGNATURES
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.
OREGON STEEL MILLS, INC.
Date: August 13, 2002 /s/ Jeff S. Stewart
----------------------------------
Jeff S. Stewart
Corporate Controller
(Principal Accounting Officer)
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