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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 September 30, 2002
 
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 333-79587
 
 
CALIFORNIA STEEL INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
  
33-0051150
(State or Other Jurisdiction of
Incorporation or Organization)
  
(I.R.S. Employer
Identification No.)
 
14000 San Bernardino Avenue
Fontana, California
  
92335
(Address of principal executive offices of Registrant)
  
(Zip Code)
 
(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 October 25, 2002, 1,000 shares of the Company’s common stock, no par value, were outstanding.
 

Table of Contents
 
CALIFORNIA STEEL INDUSTRIES, INC.
 
Table of Contents
 
         
Page
PART I     FINANCIAL INFORMATION
   
1
ITEM 1.
      
1
       
1
       
2
       
3
       
4
ITEM 2.
      
6
ITEM 3.
      
10
ITEM 4.
      
11
PART II     OTHER INFORMATION
   
12
ITEM 1.
      
12
ITEM 6.
      
13
  
15
  
16
  
18
 

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PART I    FINANCIAL INFORMATION
 
ITEM 1.    FINANCIAL STATEMENTS
 
CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY
 
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data)
 
    
As of
September 30, 2002
   
As of December 31, 2001
    
(Unaudited)
     
ASSETS
              
Current assets:
              
Cash and cash equivalents
   
$
5,570
   
$
8,752
Trade accounts receivable, less allowance for doubtful receivables of $1,400 at September 30, 2002 and $600 at December 31, 2001
   
 
63,473
   
 
51,537
Inventories
   
 
180,061
   
 
136,149
Deferred income taxes
   
 
2,158
   
 
2,158
Other receivables and prepaid expenses
   
 
2,124
   
 
7,106
    
  
Total current assets
   
 
253,386
   
 
205,702
    
  
Investment in affiliated company
   
 
35,979
   
 
37,182
Other assets
   
 
3,052
   
 
3,518
Property, plant and equipment, net
   
 
244,466
   
 
252,796
    
  
Total assets
   
$
536,883
   
$
499,198
    
  
LIABILITIES AND STOCKHOLDERS’ EQUITY
              
Current liabilities:
              
Accounts payable
   
$
78,227
   
$
30,478
Accrued interest expense
   
 
165
   
 
3,412
Accrued utilities
Income taxes payable
   
 
 
4,916
4,554
   
 
 
3,000
—  
Other accrued expenses
   
 
9,259
   
 
7,413
    
  
Total current liabilities
   
 
97,121
   
 
44,303
    
  
Long-term debt
   
 
150,000
   
 
179,000
Deferred income taxes
   
 
52,488
   
 
45,697
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
   
 
197,274
   
 
190,198
    
  
Total stockholders’ equity
   
 
237,274
   
 
230,198
Commitments and contingencies
   
 
—  
   
 
—  
    
  
Total liabilities and stockholders’ equity
   
$
536,883
   
$
499,198
    
  
 
See accompanying notes to consolidated financial statements.

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CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands)
 
    
Three months ended September 30,
     
Nine months ended September 30,
  
    
2002
     
2001
     
2002
     
2001
  
    
(Unaudited)
  
Net sales
   
$
195,812
 
   
$
168,291
 
   
$
541,878
 
   
$
489,119
 
Cost of sales
   
 
166,783
 
   
 
164,537
 
   
 
471,952
 
   
 
469,018
 
    
  
  
  
Gross profit
   
 
29,029
 
   
 
3,754
 
   
 
69,926
 
   
 
20,101
 
Selling, general and administrative expenses
   
 
6,730
 
   
 
5,900
 
   
 
18,162
 
   
 
17,434
 
    
  
  
  
Income from operations
   
 
22,299
 
   
 
(2,146
)
   
 
51,764
 
   
 
2,667
 
Other income (expense):
                                    
Equity in income (loss) of affiliate
   
 
127
 
   
 
(33
)
   
 
(819
)
   
 
907
 
Interest expense, net
   
 
(3,459
)
   
 
(3,946
)
   
 
(10,596
)
   
 
(12,726
)
Other, net
   
 
885
 
   
 
25
 
   
 
1,331
 
   
 
1,554
 
    
  
  
  
Income (loss) before income tax expense (benefit)
   
 
19,852
 
   
 
(6,100
)
   
 
41,680
 
   
 
(7,598
)
Income tax expense (benefit)
   
 
7,975
 
   
 
(2,609
)
   
 
16,559
 
   
 
(3,801
)
    
  
  
  
Net income (loss)
   
$
11,877
 
   
$
(3,491
)
   
$
25,121
 
   
$
(3,797
)
    
  
  
  
 
See accompanying notes to consolidated financial statements.

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CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
  
    
Nine Months Ended September 30,
  
    
2002
     
2001
  
    
(Unaudited)
  
Cash flows from operating activities:
                  
Net income (loss)
   
$
25,121
 
   
$
(3,797
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                  
Depreciation and amortization
   
 
21,898
 
   
 
22,649
 
Loss (gain) on disposition and write-down of idle plant and equipment
   
 
(870
)
   
 
—  
 
Undistributed (earnings) losses of affiliate
   
 
819
 
   
 
(907
)
Dividends received from affiliate
   
 
384
 
   
 
243
 
Change in assets and liabilities:
                  
Trade accounts receivable, net
   
 
(11,936
)
   
 
(7,145
)
Inventories
   
 
(43,912
)
   
 
68,431
 
Other receivables and prepaid expenses
   
 
4,982
 
   
 
3,362
 
Accounts payable
   
 
47,749
 
   
 
(24,310
)
Income taxes payable
   
 
4,554
 
   
 
—  
 
Accrued interest expense
   
 
(3,247
)
   
 
(4,164
)
Deferred income taxes
   
 
6,791
 
   
 
—  
 
Accrued utilities and other accrued expenses
   
 
3,764
 
   
 
(2,414
)
    
  
Net cash provided by operating activities
   
 
56,097
 
   
 
51,948
 
    
  
Cash flows from investing activities:
                  
Additions to property, plant and equipment
   
 
(13,134
)
   
 
(13,292
)
Sale of property, plant and equipment, net
   
 
900
 
   
 
—  
 
    
  
Net cash used in investing activities
   
 
(12,234
)
   
 
(13,292
)
    
  
Cash flows from financing activities:
                  
Net repayments under line-of-credit agreement with banks
   
 
(29,000
)
   
 
(37,000
)
Dividends paid
   
 
(18,045
)
   
 
(3,000
)
    
  
Net cash used in financing activities
   
 
(47,045
)
   
 
(40,000
)
    
  
Net decrease in cash and cash equivalents
   
 
(3,182
)
   
 
(1,344
)
Cash and cash equivalents at beginning of period
   
 
8,752
 
   
 
2,542
 
    
  
Cash and cash equivalents at end of period
   
$
5,570
 
   
$
1,198
 
    
  
Supplemental disclosures of cash flow information:
                  
Cash paid during the period for:
                  
Interest (net of amount capitalized)
   
$
13,637
 
   
$
16,992
 
Income taxes
   
 
3,221
 
   
 
—  
 
    
  
 
See accompanying notes to consolidated financial statements.

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CALIFORNIA STEEL INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
 
1.    Basis of Presentation
 
The accompanying unaudited consolidated financial statements of California Steel Industries, Inc. and its subsidiary as of and for the three months and nine months ended September 30, 2002 and 2001 have been prepared in accordance with accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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 for the years ended December 31, 2001 and 2000 contained in California Steel Industries, Inc.’s Form 10-K for the year ended December 31, 2001. Results of operations for the three months and nine months ended September 30, 2002 are not necessarily indicative of results expected for the full year.
 
2.    New Accounting Pronouncements
 
In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations”, (SFAS No. 141) and SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS No. 142). SFAS No. 141 requires that the purchase method of accounting be used for all business combinations. SFAS No. 141 specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported separately from goodwill. SFAS No. 142 requires that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 121 and subsequently, SFAS No. 144 after its adoption.
 
The Company adopted the provisions of SFAS No. 141 as of July 1, 2001, the impact of which was not material. SFAS No. 142 became effective January 1, 2002. Goodwill and intangible assets determined to have an indefinite useful life acquired in a purchase business combination completed after June 30, 2001, but before SFAS No. 142 was adopted in full, are not amortized. Goodwill and intangible assets acquired in business combinations completed before July 1, 2001 continued to be amortized and tested for impairment prior to the full adoption of SFAS No. 142. The Company adopted the provisions of SFAS No. 142 as of January 1, 2002, which did not impact its consolidated financial position or consolidated results of operations.
 
In September 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (SFAS No. 143). SFAS No. 143 requires a company to record the fair value of an asset retirement obligation as a liability in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development and/or normal use of the assets. A company also records a corresponding asset which is depreciated over the life of the asset. Subsequent to the initial measurement of the asset retirement obligation, the obligation will be adjusted at

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the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation. The Company is required to adopt SFAS No. 143 on January 1, 2003. The adoption of SFAS No. 143 is not expected to have a material impact on the Company’s consolidated financial position or consolidated results of operations.
 
In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144). SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. SFAS No. 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. The Company adopted SFAS No. 144 on January 1, 2002, which superceded SFAS No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of”, the impact of which did not have any impact on its consolidated financial position or consolidated results of operations.
 
In April 2002, the FASB issued SFAS No. 145 “Rescission of FASB Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (SFAS No. 145). This statement eliminates the automatic classification of gain or loss on extinguishment of debt as an extraordinary item of income and requires that such gain or loss be evaluated for extraordinary classification under the criteria of Accounting Principles Board No. 30 “ Reporting Results of Operations.” This statement also requires sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions, and makes various other technical corrections to existing pronouncements. The Company is required to adopt SFAS No. 145 for the year ending December 31, 2003. The adoption of this statement is not expected to have a material effect on the Company’s results of operations or financial position.
 
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146). SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 is effective prospectively for exit and disposal activities initiated after December 31, 2002. As the provisions of SFAS 146 are to be applied prospectively after adoption date, the Company cannot determine the potential effects that the adoption of SFAS 146 will have on its consolidated financial statements.

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3.    Inventories
 
Inventories are stated at the lower of cost (determined under the first-in, first-out method of accounting) or market value.
 
      
September 30, 2002
     
December 31, 2001
      
(In thousands)
Finished goods
     
$
14,178
     
$
29,839
Work-in-process
     
 
16,480
     
 
23,055
Raw materials
     
 
143,759
     
 
76,860
Supplies
     
 
5,644
     
 
6,395
      
    
Total
     
$
180,061
     
$
136,149
      
    
 
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 regarding 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,” “could”, “should”, “would” 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 the following:
 
 
•
 
our substantial indebtedness, interest expense and principal repayment obligations under our bank facility, when drawn upon, 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 consists of four members and 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,
 
 
•
 
fluctuations in commodity prices for our electricity and natural gas requirements,
 
 
•
 
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.

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Results of Operations
 
    
Tons Billed
Three months ended
September 30,
   
Tons Billed
Nine months ended
September 30,
    
2002
   
2001
   
2002
   
2001
Hot Rolled
   
235,691
   
218,561
   
727,551
   
616,404
Cold Rolled
   
53,523
   
66,710
   
166,163
   
199,807
Galvanized
   
182,837
   
168,170
   
543,344
   
464,384
ERW Pipe
   
36,333
   
35,244
   
83,325
   
97,681
    
  
  
  
Total
   
508,384
   
488,685
   
1,520,383
   
1,378,276
    
  
  
  
 
Net sales.    Net sales increased $27,521,000 or 16.4% from $168,291,000 for the three months ended September 30, 2001 to $195,812,000 for the three months ended September 30, 2002. Our year-to-date net sales increased $52,759,000 or 10.8% from $489,119,000 for the nine months ended September 30, 2001 to $541,878,000 for the same period in 2002. Our net tons billed increased 19,699 or 4.0% from 488,685 for the three months ended September 30, 2001 to 508,384 for the same period in 2002. Our year-to-date net tons billed also increased 142,107 or 10.3% from 1,378,276 for nine months ended September 30, 2001 to 1,520,383 for the nine months ended September 30, 2002. We sold 17,130 tons more hot rolled and 14,667 tons more galvanized material in the three months ended September 30, 2002 and 111,147 tons more hot rolled and 78,960 tons more galvanized in the nine months ended September 30, 2002 compared to the same period of 2001. The increase in tonnage sold was due in part to the absence of imported steel in our regional marketplace due to the imposition of tariffs under Section 201. Our average unit prices on sales of our products increased approximately $39 per ton for three months ended September 30, 2002 compared to the three month period ended September 30, 2001 and our average year-to-date unit prices on sales of our products increased less than $1 per ton for the nine month period ended September 30, 2002, compared to the same period of 2001.
 
Gross profit.    Gross profit increased $25,275,000 or 673.3% from $3,754,000 for the three months ended September 30, 2001 to $29,029,000 for the three months ended September 30, 2002 and $49,825,000 or 247.9% from $20,101,000 for the nine months ended September 30, 2001 to $69,926,000 for the same period in 2002. Gross profit as a percentage of net sales also increased from 2.2% for the three months ended September 30, 2001 to 14.8% for the same period in 2002 and from 4.1% for the nine months ended September 30, 2001 to 12.9% for the same period in 2002. Our gross profit for the three months ended September 30, 2002 compared to the same period of 2001 increased as a result of an increase in our sales volume, increase in our average sales price, decrease in our utility costs, partially offset by an increase in our average slab per ton consumption cost. Our gross profit for the nine months ended September 30, 2002 compared to the same period last year increased as a result of an increase in our sales volume, slight increase in our average sales price, decrease in our utility costs and decrease in our average slab consumption costs.
 
Selling, general and administrative expenses (SG&A).    Selling, general and administrative expenses increased $830,000 or 14.1% from $5,900,000 for three months ended September 30, 2001 to $6,730,000 for the three months ended September 30, 2002. Our SG&A expenses also increased $728,000 or 4.2% from $17,434,000 for the nine months ended September 30, 2001 to $18,162,000 for the nine months ended September 30, 2002. This increase in both periods was mainly due to an increase in profit sharing distribution to all our eligible employees as a result of our strong quarterly and year-to-date results offset by an increase in our doubtful account reserve.
 
Equity in income(loss) of affiliate.    We maintain a 1.5% ownership interest in Companhia Siderurgica de Tubarão, which is based on our ownership of 4.0% of its common stock. Our investment in Companhia Siderurgica de Tubarão is accounted for under the equity method of accounting. For the

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three months ended September 30, 2002 we recognized income of $127,000 and a loss of $33,000 for the same period in 2001 and a loss of $819,000 for the nine months ended September 30, 2002 compared to the income of $907,000 for the same period in 2001.
 
Interest expense.    Net interest expense decreased $487,000 or 12.3% from $3,946,000 for the three months ended September 30, 2001 to $3,459,000 for the same period in 2002 and decreased $2,130,000 or 16.7% from $12,726,000 for the nine months ended September 30, 2001 to $10,596,000 for the same period in 2002. Our average outstanding debt decreased during the first nine months of 2002 compared to the same period of 2001, and our effective interest rates during the first nine months of 2002 increased compared to the same period of 2001, resulting in a net decrease of our net interest expense. Interest expense figures are net of interest income and capitalized interest of $52,000 and $272,000 for the three and nine months ended September 30, 2001, respectively, and $184,000 and $667,000 for the same period in 2002.
 
Income taxes.    As a result of higher income before income taxes of $25,952,000 for the three month period ending September 30, 2002 from a loss of $6,100,000 for the three month period ending September 30, 2001, to income of $19,852,000 for the same period of 2002, income tax expense increased $10,854,000, from a $2,609,000 tax benefit to a $7,975,000 income tax expense for the three-month period ended September 30, 2002 compared to the same period of 2001. As a result of higher income before income taxes of $49,278,000 for the nine month period ending September 30, 2002, from a loss of $7,598,000 for the nine month period ending September 30, 2001, to income of $41,680,000 for the same period of 2002, we recorded income tax expense of $16,559,000 compared to an income tax benefit in the previous year of $3,801,000. Our effective tax rate was 40.2% for three months ended September 30, 2002, compared to a 42.8% tax benefit for three months ended September 30, 2001. Our effective tax rate for the nine month period ending September 30, 2002 was 39.7% compared to the effective tax benefit rate of rate of 50.0% for the nine month period ending September 30, 2001. The difference in the effective tax rate was due to a larger State Manufacturers’ Investment Tax Credit (MIC) in proportion to the loss recorded in the three and nine month periods ending September 30, 2001 compared to the income recorded in the same periods in 2002.
 
Net income (loss).    Net income for the three months ended September 30, 2002 was $11,877,000 compared to a net loss of $3,491,000 for the three months ended September 30, 2001, an increase of $15,368,000 in net income. Our net income for the nine months ended September 30, 2002 was $25,121,000 compared to a net loss of $3,797,000 for the nine months ended September 30, 2001, an increase of $28,918,000 of net income.
 
Liquidity and Capital Resources
 
At September 30, 2002, we had $5,570,000 in cash and cash equivalents and over $110,000,000 in financing available under our credit facilities. During the nine months ended September 30, 2002, cash flow from operations generated $56,097,000, which consisted of $25,121,000 in net income, $21,898,000 in depreciation and amortization expense and a net cash flow increase of $8,745,000 due to changes in assets and liabilities. The majority of the net cash flow changes in assets and liabilities were attributable to a $11,936,000 increase in trade accounts receivable, a $43,912,000 increase in inventories, a $4,982,000 decrease in other receivables and prepaid expenses, a $47,749,000 increase in payables, a $4,554,000 increase in income taxes payable and a $6,791,000 increase in deferred income taxes. Cash flow from investing activities during the nine months ended September 30, 2002 consisted of $13,134,000 of capital expenditures. Cash flows from financing activities during the nine months ended September 30, 2002 consisted of net repayments under our credit facilities of $29,000,000 and payment of $18,045,000 of dividends. During the nine month period ended September 30, 2002, we also paid $12,750,000, representing two payments of six month semi-annual interest on our 8.5% senior notes.
 
In March 1999, we entered into a $130,000,000 five-year bank facility. The bank facility is collateralized by cash, accounts receivable, inventory and other assets and the available credit under the facility varies in proportion to these assets. Accordingly, our financing available under this credit facility was

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approximately $110,000,000 at September 30, 2002, based on available inventories and accounts receivable balances. There was no outstanding balance under this facility as of September 30, 2002. Subject to the satisfaction of customary conditions and a borrowing base, advances under the bank facility may be made at any time prior to the bank facility termination date, which is the earlier to occur of March 10, 2004 or the date which is 60 days prior to the maturity of the 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.
 
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 fiscal 2002. The Company was in compliance with all the bank covenants at the end of September 30, 2002.
 
Commitment and Contingencies
 
The following table represents a list of the Company’s contractual obligations and commitments as of September 30, 2002:
 
    
Payments Due by Period
    
Total
   
2002
   
2003
   
2004
   
2005
   
2006
   
Thereafter
    
(amounts in thousands)
Long Term Debt
   
$
150,000
                                      
$
150,000
Contractual Commitments
   
$
75,117
   
$
75,117
                                   
    
  
  
  
  
  
  
Contractual Cash Obligation
   
$
225,117
   
$
75,117
   
$
 —
   
$
 —
   
$
 —
   
$
 —
   
$
150,000
    
  
  
  
  
  
  
 
There was no other material change in the Company’s contractual obligations and commitments for operating leases compared to December 31, 2001.
 
The Company is addressing environmental concerns caused by the former occupant at the Company’s Fontana site and is currently in the remedial investigation stage. The Company is unable to reasonably estimate the range of liability until completion of a remedial feasibility study. The site investigation is expected to be completed in late 2002. At September 30, 2002, the Company has accrued $290,000 which represents management’s best estimate of the costs to complete the remedial feasibility study.
 
Although the level of future expenditures for environmental remediation matters cannot be reasonably estimated and there is no guarantee that unforeseen conditions or expenditures will not arise, based on the facts presently known to management, it does not believe that the costs will have a material effect on the Company’s financial position, results of operations, or liquidity.
 
Critical Accounting Policies
 
In December 2001, the Securities and Exchange Commission (“SEC”) requested that all registrants list their most “critical accounting policies” in Management’s Discussion and Analysis of Financial Condition and Results of Operations. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of the Company’s financial condition and results of operations and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. We believe that the following represent our critical accounting policies:

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Allowances for Doubtful Accounts: We have reserved for expected credit losses based on our past experiences with similar accounts receivable and believe our reserves to be adequate. It is possible, however, that the accuracy of our estimation process could be materially impacted as the composition of this pool of accounts receivable changes over time. We continually review and refine the estimation process to make it as reactive to these changes as possible; however, we cannot guarantee that we will be able to accurately estimate credit losses on these accounts receivable.
 
Environmental Reserve: Currently we are conducting an investigation of potential soil contamination at approximately 28 areas of concern at our facility in Fontana, California. We are unable to reasonably estimate the range of liability until completion of a remedial feasibility study. The site investigation and remedial feasibility study is expected to be completed sometime in late 2002.
 
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 when balances are outstanding on the facility. We do not currently use interest rate swaps or other types of derivative financial instruments.
 
For fixed rate debt instruments such as our 8.5% senior notes, changes in interest rates generally affect the fair value of such debt instruments. For variable rate debt (when outstanding) such as our bank facility, changes in interest rates generally do not affect the fair value of such debt, but do affect earnings and cash flow. 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, which was approximately $150,000,000 at September 30, 2002. The carrying value of the floating rate bank facility approximates fair value as the interest rate is variable and resets frequently. The bank facility (when outstanding) bears interest at the Eurodollar rate plus margin, which in total was approximately 2.91% at September 30, 2002, however, no amounts were outstanding on the facility at September 30, 2002. We estimate that the average amount of debt outstanding under the facility for fiscal year 2002 will be approximately $15.0 million. Therefore, a one-percentage point increase in interest rates would result in an increase in interest expense of $150,000 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.
 
Historically, we have been exposed to market risks related to the volatility of natural gas prices. We generally purchase natural gas on an annual contract basis from a physical supplier active in the California market. The price we normally pay for natural gas is based on the New York Mercantile Exchange (NYMEX) natural gas commodity index, which is a commonly referenced index in the industry for natural gas purchases, and an additional delivery cost to the California border commonly known as the basis cost.
 
During 2000 and continuing through much of the second quarter of 2001, rising and volatile natural gas prices negatively affected our profitability. In February, May and September of 2001, we entered into natural gas purchase agreements to reduce our exposure to natural gas price volatility derived from the NYMEX natural gas commodity index.
 
As a result of electricity shortages occurring during the calendar year 2001, the state of California has directly participated in the supply of electric power to local consumers. Concurrently, the State of California dramatically increased the price consumers pay for electricity supplied through the State’s major regulated utilities. In our case, utility supplied power rates increased by more than 100% in 2001 when compared to similar periods in 2000. In order to mitigate the effects of the State’s intervention, we

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are participating in the Direct Access program whereby electricity customers can contract directly with energy service providers, thereby bypassing the state of California procurement system. Our agreement, as amended, resulted in lower electricity costs beginning in September 2001. This agreement has now been extended through December 2003. The Public Utilities Commission of the State of California (PUC) issued an order on September 20, 2001, suspending the ability of parties to enter into new Direct Access contracts as of that date. Said order indicated that the PUC was considering several future actions regarding Direct Access, including potential exit fees. On July 17, 2002, the PUC imposed exit fees on Direct Access customers in the form of a Historical Procurement Charge of 2.7 cents per kilowatt hour to reimburse Southern California Edison for procurement cost under-collections arising out of the 2001 power crisis. This charge went into effect approximately August 1, 2002, and will remain in effect until the under-collections have been recouped. The charge is expected to result in an increase in our electricity costs based on current usage levels of $9,000,000 per year. The PUC is currently considering the imposition of additional exit fees or further restrictions on the Direct Access program which could result in additional increases in the cost of our electric service. However, we believe that continued participation in the Direct Access program will continue to provide cost savings when compared to purchasing electricity from Southern California Edison.
 
We currently do not have backup generators or alternate sources of power in the event of a blackout, and our current insurance does not provide coverage for any damages we or our customers may suffer as a result of any interruption in our power supply. Any such interruption in our ability to continue operations at our facilities could harm our ability to retain existing customers and to obtain new customers, and could result in lost revenue, any of which could substantially harm our business and results of operations, profitability and liquidity.
 
ITEM
 
4.    CONTROLS AND PROCEDURES
 
For the period ending September 30, 2002 (the “Evaluation Date”), we carried out an evaluation, under the supervision and with the participation of our management, including our President and Chief Executive Officer and our Executive Vice President of Finance (the principal finance and accounting officer), of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-14 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based upon this evaluation, our President and Chief Executive Officer and our Executive Vice President of Finance concluded that, as of September 30, 2002, our disclosure controls and procedures were adequate to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, and summarized and reported within the time periods specified in the SEC’s rules and forms.
 
Additionally, our President and Chief Executive Officer and Executive Vice President of Finance determined, as of September 30, 2002, that there were no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of their evaluation.

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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.

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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
   
Certificate of Amendment to the Certificate of Incorporation filed July 27, 1999, with the Delaware Secretary of State.(2)
  3.3
   
Bylaws of the Registrant, as amended on July 16, 1999.(2)
  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 A note (included in Exhibit 4.1).(1)
10.1
   
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.(3)
10.2
   
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.(3)
10.3
   
Amendment to Supplemental Executive Retirement Plan, dated October 10, 2000, between the Registrant and James E. Declusin.(4)
10.4
   
Supplemental Executive Retirement Plan, dated as of September 19, 2000, between the Registrant and Brett J. Guge.(4)
10.5
   
The Burlington Northern and Santa Fe Railway Company BNSFC 302606—Amendment 1 Regulated Transportation Contract, dated as of January 15, 2001, by and between the Registrant and The Burlington Northern and Santa Fe Railway Company.(5)
10.6
   
Second Amendment, dated as of March 12, 2001, 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.(6)
 

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10.7
   
Fifth Amendment, dated as of March 22, 2002, 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.(7)
(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.
(2)
 
Incorporated by reference to the Registrant’s Annual Report on Form 10-K, for the year ended December 31, 2001, as filed with the Securities and Exchange Commission on March 28, 2002.
(3)
 
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, for the period ended June 30, 2000, as filed with the Securities and Exchange Commission on August 4, 2000.
(4)
 
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, for the period ended September 30, 2000, as filed with the Securities and Exchange Commission on October 27, 2000.
(5)
 
Incorporated by reference to the Registrant’s Annual Report on Form 10-K, for the year ended December 31, 2000, as filed with the Securities and Exchange Commission on March 29, 2001.
(6)
 
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, for the period ended September 30, 2001, as filed with the Securities and Exchange Commission on November 9, 2001.
(7)
 
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, for the period ended March 31, 2002, as filed with the Securities and Exchange Commission on April 29, 2002.
 
(b)  Reports on Form 8-K.
 
None.

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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.
 
CALIFORNIA STEEL INDUSTRIES, INC.
By:
  
/s/    VICENTE B. WRIGHT        
   
Vicente B. Wright,
Executive Vice President, Finance
(Principal Financial and
Accounting Officer)
October 25, 2002

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CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, C. Lourenco Goncalves, certify that:
 
1.    I have reviewed this quarterly report on Form 10-Q of California Steel Industries, Inc. (the “Registrant”);
 
2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;
 
4.    The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
 
(a)  designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
(b)  evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
(c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5.    The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent function):
 
(a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and
 
b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls; and
 
6.    The Registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
Date:    October 25, 2002
        
           
By:
  
/s/    C. LOURENCO GONCALVES         
               
C. Lourenco Goncalves,
President and Chief Executive Officer

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CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
 
I, Vicente B. Wright, certify that:
 
1.    I have reviewed this quarterly report on Form 10-Q of California Steel Industries, Inc. (the “Registrant”);
 
2.    Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
3.    Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;
 
4.    The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:
 
(a)  designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
 
(b)  evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
(c)  presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
5.    The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and the audit committee of Registrant’s board of directors (or persons performing the equivalent function):
 
(a)  all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and
 
b)  any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls; and
 
6.    The Registrant’s other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
Date:    October 25, 2002
        
           
By:
  
/s/    VICENTE B. WRIGHT         
               
Vicente B. Wright,
Executive Vice President, Finance
(Principal Financial and Accounting Officer)

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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
   
Certificate of Amendment to the Certificate of Incorporation filed July 27, 1999, with the Delaware Secretary of State.(2)
3.3
   
Bylaws of the Registrant, as amended on July 16, 1999. (2)
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 A note (included in Exhibit 4.1).(1)
10.1
   
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.(3)
10.2
   
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.(3)
10.3
   
Amendment to Supplemental Executive Retirement Plan, dated October 10, 2000, between the Registrant and James E. Declusin.(4)
10.4
   
Supplemental Executive Retirement Plan, dated as of September 19, 2000, between the Registrant and Brett J. Guge.(4)
10.5
   
The Burlington Northern and Santa Fe Railway Company BNSFC 302606—Amendment 1 Regulated Transportation Contract, dated as of January 15, 2001, by and between the Registrant and The Burlington Northern and Santa Fe Railway Company. (5)
10.6
   
Second Amendment, dated as of March 12, 2001, 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 (6)
 

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10.7
   
Fifth Amendment, dated as of March 22, 2002, 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. (7)
(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.
(2)
 
Incorporated by reference to the Registrant’s Annual Report on Form 10-K, for the year ended December 31, 2001, as filed with the Securities and Exchange Commission on March 28, 2002.
(3)
 
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, for the period ended June 30, 2000, as filed with the Securities and Exchange Commission on August 4, 2000.
(4)
 
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, for the period ended September 30, 2000, as filed with the Securities and Exchange Commission on October 27, 2000.
(5)
 
Incorporated by reference to the Registrant’s Annual Report on Form 10-K, for the year ended December 31, 2000, as filed with the Securities and Exchange Commission on March 29, 2001.
(6)
 
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, for the period ended September 30, 2001, as filed with the Securities and Exchange Commission on November 9, 2001.
(7)
 
Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, for the period ended March 31, 2002, as filed with the Securities and Exchange Commission on April 29, 2002.

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