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, 2004
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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
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NEW CF&I, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 02-20781 93-1086900
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(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Identification Number)
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)
CF&I STEEL, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 02-20779 93-1103440
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(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation or organization) Identification Number)
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
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Indicate by check mark whether the registrant (1) is an accelerated
filer (as defined in Rule 12b-2 of the Act)
Yes No X
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NEW CF&I, INC.
CF&I STEEL, L.P.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION.............................................2
Item 1. Financial Statements - New CF&I, Inc........................2
Notes to Consolidated Financial Statements..................5
Item 1. Financial Statements - CF&I Steel, L.P.....................11
Notes to Financial Statements..............................14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..............20
Item 3. Quantitative and Qualitative Disclosures
about Market Risk..........................................24
Item 4. Controls and Procedures....................................25
PART II.OTHER INFORMATION..................................................26
Item 1. Legal Proceedings..........................................26
Item 6. Exhibits and Reports on Form 8-K..........................26
SIGNATURES ...........................................................27
-1-
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS - NEW CF&I, INC.
NEW CF&I, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT FOR PER SHARE AND SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2004 2003
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ASSETS (UNAUDITED)
Current assets:
Cash and cash equivalents $ 1 $ 5
Trade accounts receivable, net of allowance for
doubtful accounts of $1,054 and $361 44,184 39,097
Inventories 36,808 35,028
Deferred income taxes 3,707 3,396
Other 1,625 1,754
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Total current assets 86,325 79,280
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Property, plant and equipment:
Land and improvements 3,225 3,225
Buildings 19,926 19,852
Machinery and equipment 274,458 270,772
Construction in progress 5,994 6,030
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303,603 299,879
Accumulated depreciation (146,507) (137,622)
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Net property, plant and equipment 157,096 162,257
--------- ---------
Intangibles, net 11,662 11,803
Deferred income taxes 47,651 37,766
Minority interest 8,179 6,969
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TOTAL ASSETS $ 310,913 $ 298,075
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 50,274 $ 38,923
Accrued expenses 25,719 21,363
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Total current liabilities 75,993 60,286
Long-term debt -- Oregon Steel Mills, Inc. 273,197 259,424
Environmental liability 23,811 24,885
Deferred employee benefits 26,981 27,659
Other liabilities 256 --
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Total liabilities 400,238 372,254
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Redeemable common stock, 26 shares 21,840 21,840
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Contingencies (Note 4)
STOCKHOLDERS' DEFICIT
Common stock, par value $1 per share, 1,000
shares authorized; 200 issued and outstanding 1 1
Additional paid-in capital 16,603 16,603
Accumulated deficit (123,569) (108,423)
Accumulated other comprehensive loss:
Minimum pension liability (4,200) (4,200)
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Total stockholders' deficit (111,165) (96,019)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 310,913 $ 298,075
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
-2-
NEW CF&I, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------- ---------------------------
2004 2003 2004 2003
------------- ------------ ------------ -------------
Sales:
Product Sales $ 120,882 $ 81,755 $ 223,871 $ 170,343
Freight 4,454 3,643 8,234 7,611
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125,336 85,398 232,105 177,954
Costs and expenses:
Cost of sales 99,237 82,849 194,748 166,723
Labor dispute settlement adjustment (Note 4) 31,868 -- 38,868 --
Fixed and other asset impairment charges (Note 7) -- 9,157 -- 9,157
Gain on sale of assets (22) (363) (282) (391)
Selling, general and administrative expenses 6,250 4,500 11,769 9,131
Incentive compensation 528 -- 1,089 --
--------- --------- --------- ---------
137,861 96,143 246,192 184,620
--------- --------- --------- ---------
Operating loss (12,525) (10,745) (14,087) (6,666)
Other income (expense):
Interest expense (5,861) (5,969) (11,988) (11,905)
Minority interests 829 831 1,210 947
Other income, net 62 55 125 122
--------- --------- --------- ---------
Loss before income taxes (17,495) (15,828) (24,740) (17,502)
Income tax benefit 6,059 2,248 9,594 2,795
--------- --------- --------- ---------
Net Loss $ (11,436) $ (13,580) $ (15,146) $ (14,707)
========= ========= ========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
-3-
NEW CF&I, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
------------------------------------
2004 2003
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Cash flows from operating activities:
Net loss $ (15,146) $ (14,707)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Fixed and other asset impairment charges (Note 7) -- 9,157
Depreciation and amortization 9,162 9,526
Deferred income taxes, net (10,196) (2,805)
Long-term environmental liability (1,074) --
Gain on sale of assets (282) (391)
Minority interests (1,210) (947)
Other, net (422) 480
Changes in current assets and liabilities:
Trade accounts receivable (5,087) 2,937
Inventories (1,780) 9,610
Accounts payable 11,351 (2,305)
Accrued expenses 4,356 (2,495)
Other, net 129 (1,472)
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Net cash provided (used) by operating activities (10,199) 6,588
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Cash flows from investing activities:
Additions to property, plant and equipment (3,958) (8,289)
Proceeds from disposal of property and equipment 104 549
Other, net 276 39
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Net cash used by investing activities (3,578) (7,701)
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Cash flows from financing activities:
Borrowings from Oregon Steel Mills, Inc. 131,505 67,523
Payments to Oregon Steel Mills, Inc. (117,732) (66,512)
Payment of long-term debt -- (68)
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Net cash provided by financing activities 13,773 943
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Net decrease in cash and cash equivalents (4) (170)
Cash and cash equivalents at the beginning of period 5 289
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Cash and cash equivalents at the end of period $ 1 $ 119
========= =========
Supplemental disclosures of cash flow information:
Cash paid for:
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Interest $ 12,490 $ --
The accompanying notes are an integral part of the consolidated
financial statements.
-4-
NEW CF&I, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
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The consolidated financial statements include the accounts of New CF&I,
Inc. and its subsidiaries ("New CF&I"). New CF&I owns a 95.2 percent interest in
CF&I Steel, L.P. ("CF&I"), which is one of New CF&I's principal subsidiaries.
Oregon Steel Mills, Inc. ("Oregon Steel") holds an 87 percent ownership interest
in New CF&I. Oregon Steel also owns directly an additional 4.3 percent interest
in CF&I. New CF&I also owns a 100 percent interest in the Colorado and Wyoming
Railway Company, which is a short-line railroad servicing CF&I. All significant
intercompany balances and transactions have been eliminated.
The unaudited financial statements include all adjustments, consisting of
normal recurring accruals and other charges, as described in Note 4
"CONTINGENCIES - LABOR MATTERS - CF&I LABOR DISPUTE SETTLEMENT - ACCOUNTING" and
in Note 7 "ASSET IMPAIRMENTS," which, in the opinion of management, are
necessary for a fair presentation of the interim periods. Results for an interim
period are not necessarily indicative of results for a full year. Reference
should be made to New CF&I's 2003 Annual Report on Form 10-K for additional
disclosures including a summary of significant accounting policies.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 132 (revised), "EMPLOYER'S DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS." SFAS No. 132 (revised) prescribes employers'
disclosures about pension plans and other postretirement benefit plans; it does
not change the measurement or recognition of those plans. SFAS No. 132 (revised)
retains and revises the disclosure requirement contained in the original SFAS
No. 132. It also requires additional disclosures about the assets, obligations,
cash flows, and net periodic benefit cost of defined benefit pension plans and
other postretirement benefit plans. SFAS No. 132 (revised) generally is
effective for fiscal years ending after December 15, 2003. New CF&I discloses
the requirements of SFAS No. 132 (revised) in Note 6, "EMPLOYEE BENEFIT PLANS."
RECLASSIFICATIONS
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 are stated at the lower of manufacturing cost or market value
with manufacturing cost determined under the average cost method. The components
of inventories are as follows:
JUNE 30, DECEMBER 31,
2004 2003
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(IN THOUSANDS)
Raw materials $14,929 $5,183
Semi-finished product 3,045 5,683
Finished product 6,410 12,916
Stores and operating supplies 12,424 11,246
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Total inventories $36,808 $35,028
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3. LONG-TERM DEBT
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Borrowing requirements for capital expenditures and working capital have
been provided through two revolving loans from Oregon Steel to CF&I. The loans
include interest on the daily amount outstanding, paid monthly, at the rate of
10.65% per annum. The principal is due on demand or, if no demand, on the due
date of the notes. The loans are classified as long-term, based upon the intent
of Oregon Steel to extend the maturity date of the loans.
-5-
At June 30, 2004 principal payments on long-term debt were due as follows
(in thousands):
2005 and beyond $273,197
Oregon Steel is not required to provide financing to CF&I and, although the
demand for repayment of the obligation in full is not expected during 2004,
Oregon Steel may demand repayment of the loan at any time. If Oregon Steel were
to demand repayment of the loan, it is not likely that CF&I would be able to
obtain the external financing necessary to repay the loan or to fund its capital
expenditures and other cash needs and, if available, that such financing would
be on terms satisfactory to CF&I.
4. CONTINGENCIES
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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.
In connection with the acquisition of the steelmaking and finishing
facilities located at Pueblo, Colorado ("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 currently believed to exist. At June 30, 2004, the accrued
liability was $27.5 million, of which $23.8 million was classified as
non-current on New CF&I's 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
was approved by the court (the "State Consent Decree"). The State Consent Decree
provided 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 is
also required to make certain capital improvements expected to cost
approximately $25 million, including converting to the new single New Source
Performance Standards Subpart AAa ("NSPS AAa") compliant furnace discussed
below. The State Consent Decree provides that the two existing furnaces will be
permanently shut down approximately 16 months after the issuance of a Prevention
of Significant Deterioration ("PSD") air permit. The PSD permit was issued June
21, 2004.
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. The issue has been resolved by entry of a Consent
Decree on November 26, 2003, and the Tenth Circuit dismissed the appeal on
December 10, 2003. In that Consent Decree and overlapping with the commitments
made to the CDPHE described above, CF&I committed to the conversion to the new
NSPS AAa compliant furnace (demonstrating full compliance 21 months after permit
approval and expected to cost, with all related emission control improvements,
approximately $25 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. Under this
settlement and the settlement with the CDPHE, CF&I is subject to certain
stipulated penalties if it fails to comply with the terms of the settlement. In
March 2004, the CDPHE notified CF&I of alleged violations of the State Consent
Decree relating to opacity. In June 2004, the CDPHE assessed stipulated
penalties of $270,000. On July 26, 2004, CF&I sought review of the
determination. As a result, CF&I has incurred, and may in the future incur,
additional penalties related to these matters. To date, such penalties (which
relate to alleged violations of opacity standards) have not been material to the
CF&I's results of operations and cash flows; however, CF&I cannot be assured
that future penalties will not be material.
In response to the CDPHE settlement and subsequent alleged violations and
the resolution of the EPA action, CF&I expensed $2.8 million in 2001 and
$132,000 in the second quarter of 2004 for possible fines and non-capital
related expenditures. As of June 30, 2004, the remaining accrued liability for
these matters was approximately $306,000.
-6-
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. The Title V permit has been
modified several times and gives CF&I adequate time (at least 15 1/2 months
after CDPHE issues the PSD permit) 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 to a much lesser degree, if necessary,
purchasing semi-finished steel ("billets") for conversion into rod products at
spot market prices. Pricing and availability of billets is subject to
significant volatility.
In a related matter, in April 2000, the United Steelworkers of America
("Union") filed suit in the United States District Court in Denver, Colorado,
asserting that New CF&I and CF&I had violated the CAA at the Pueblo mill for a
period extending over five years. The Union sought declaratory judgement
regarding the applicability of certain emission standards, injunctive relief,
civil penalties and attorney's fees. On July 6, 2001, the presiding judge
dismissed the suit. The 10th Circuit Court of Appeals on March 3, 2003 reversed
the District Court's dismissal of the case and remanded the case for further
hearing to the District Court. The parties to the above-referenced litigation
have negotiated a tentative settlement of the labor dispute and all associated
litigation, including this Union suit. See "Labor Matters" for a description of
the tentative settlement.
LABOR MATTERS
CF&I LABOR DISPUTE AND RESULTANT LITIGATION
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, 2004, approximately 827 Unreinstated Employees have
either returned to work or have declined CF&I's offer of equivalent work. At
June 30, 2004, approximately 123 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, CF&I has been returning unreinstated strikers to
jobs, as positions became open. As noted above, there were approximately 123
Unreinstated Employees as of June 30, 2004. On August 2, 2000, CF&I filed an
appeal with the NLRB in Washington, D.C. A separate hearing concluded in
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.
In the event there is an adverse determination on 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 Employees and sentiment
of the Union towards CF&I, 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.
-7-
CF&I LABOR DISPUTE SETTLEMENT
On January 15, 2004, CF&I announced a tentative agreement to settle the
labor dispute between the Union and CF&I ("Settlement"). The Settlement is
conditioned on, among other things, (1) its approval by stockholders of New
CF&I, (2) ratification of a new collective bargaining agreement being executed
between CF&I and the Union, (3) approval of the Settlement by the NLRB and the
dismissal of cases pending before the NLRB related to the labor dispute and (4)
various pending legal actions between New CF&I and CF&I and the Union being
dismissed. The Settlement, if approved, will provide remedies for all
outstanding unfair labor practices between CF&I and the Union and sets the stage
for the ratification of new five-year collective bargaining agreements. The
Settlement includes the creation of a labor dispute settlement trust ("Trust")
that will hold four million shares of Oregon Steel's registered common stock
after issuance by Oregon Steel. As part of the Settlement, Oregon Steel will
agree to give the Trust certain piggy back and demand registration rights. The
Settlement also includes payment by CF&I of: (1) a cash contribution of $2,500
for each beneficiary, estimated to be in total $2.5 million and (2) beginning on
the effective date of the Settlement, a ten-year profit participation obligation
consisting of 25% of CF&I's quarterly profit, as defined, for years 2004 and
2007 through 2013, and 30% for years 2005 and 2006, not to exceed $3 million per
year for 2004 through 2008 and $4 million per year for 2009 through 2013. The
beneficiaries are those individuals who (1) as of October 3, 1997 were employees
of CF&I and represented by the Union, (2) as of December 31, 1997 had not
separated, as defined, from CF&I and (3) are entitled to an allocation as
defined in the Trust. The Settlement, certain elements of which will be effected
through the new five-year collective bargaining agreement, also includes: (1)
early retirement with immediate enhanced pension benefit where CF&I will offer
bargaining unit employees an early retirement opportunity based on seniority
until a maximum of 200 employees have accepted the offer, the benefit will
include immediate and unreduced pension benefits for all years of service
(including the period of the labor dispute) and for each year of service prior
to March 3, 1993 (including service with predecessor companies) an additional
monthly pension of $10, (2) pension credit for the period of the labor dispute
whereby CF&I employees who went on strike will be given pension credit for both
eligibility and pension benefit determination purposes for the period beginning
October 3, 1997 and ending on the latest of said employees actual return to
work, termination of employment, retirement or death, (3) pension credit for
service with predecessor companies whereby for retirements after January 1,
2004, effective January 2, 2006 for each year of service prior to March 3, 1978
(including service with predecessor companies), CF&I will provide an additional
monthly benefit to employees of $12.50, and for retirements after January 1,
2006, effective January 2, 2008 for each year of service between March 3, 1978
and March 3, 1993 (including service with predecessor companies), CF&I will
provide an additional monthly benefit of $12.50, and (4) individuals who are
members of the bargaining units as of October 3, 1997 will be immediately
eligible to apply for and receive qualified long-term disability ("LTD")
benefits on a go-forward basis, notwithstanding the date of the injury or
illness, service requirements or any filing deadlines. The Settlement also
includes Oregon Steel's agreement to nominate a director designated by the Union
on its Board of Directors, and to a broad-based neutrality clause for certain of
Oregon Steel's facilities in the future.
On March 12, 2004, the Union membership at CF&I voted to accept the
proposed Settlement and a new five-year collective bargaining agreement. The
Settlement is still conditioned on the approval of the Settlement by the NLRB
and the dismissal of cases pending before the NLRB related to the labor dispute,
and the dismissal of various pending legal actions between New CF&I and CF&I and
the Union.
CF&I LABOR DISPUTE SETTLEMENT - ACCOUNTING
CF&I recorded charges of $31.1 million in the fourth quarter of 2003, $7
million in the first quarter of 2004, and an additional charge of $31.9 million
in the second quarter of 2004, of which $23.2 million, $7 million, and $28.7
million, respectively, related to the tentative agreement to issue four million
shares of Oregon Steel's common stock to the Trust as part of the Settlement.
The common-stock portion of the charge in the second quarter of 2004 is a result
of adjusting the previously recorded value at March 31, 2004 of the four million
shares of Oregon Steel's common stock ($30.2 million at $7.56 per share) to
market at June 30, 2004. The closing price of Oregon Steel's common stock on the
New York Stock Exchange at June 30, 2004 was $14.74 per share, resulting in an
additional labor dispute settlement charge of $28.7 million for the second
quarter of 2004. CF&I will continue to adjust the common stock charge portion of
the Settlement at the end of each quarter either up or down for the change in
the price of Oregon Steel's common stock through the effective date of the
Settlement. In addition, as part of the Settlement, CF&I agreed, under certain
circumstances, to pay on behalf of the Trust, certain expenses that would
otherwise be incurred by the Trust related to the issuance of the four million
shares. Accordingly, CF&I recorded an additional charge in the second quarter of
2004 of approximately $3.2 million as part of the cost of Settlement related to
the issuance of the shares to the Trust. The accrual for the LTD benefits ($5.3
million at June 30, 2004) may also change, as better claims information becomes
available. As employees accept the early retirement benefits, CF&I expects to
record an additional charge during 2004 estimated at approximately $6.8 million
related to these benefits. The enhancements to pension and post-retirement
medical benefits for non-early retirees will be accounted for prospectively on
the date at which plan amendments occur pursuant to the new five-year collective
bargaining agreement in accordance with SFAS No. 87 and SFAS No. 106. In
addition to these charges, CF&I recorded $1.4 million, and $3.0 million, for the
three and six months ended June 30, 2004, for selling, general and
administrative expenses incurred under the profit participation component of the
Settlement.
-8-
PURCHASE COMMITMENTS
Effective February 2, 1993, CF&I entered into an agreement, which was
subsequently amended on August 4, 1994, to purchase a base amount of oxygen
produced at a facility located at the Pueblo Mill. The agreement specifies that
CF&I will pay a base monthly charge that is adjusted annually based upon a
percentage change in the Producer Price Index. The monthly base charge at June
30, 2004 was $119,000.
GUARANTEES AND FINANCING ARRANGEMENTS
On July 15, 2002, Oregon Steel issued $305 million of 10% First Mortgage
Notes due 2009 ("10% Notes") 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 10% Notes
are secured by a lien on substantially all of the property, plant and equipment,
and certain other assets of Oregon Steel, excluding accounts receivable,
inventory, and certain other assets. As of June 30, 2004, Oregon Steel had
outstanding $305 million of principal amount under the 10% Notes. The Indenture
under which the Notes were issued contains restrictions on new indebtedness and
various types of disbursements, including dividends, based on the cumulative
amount of Oregon Steel's net income, as defined. Under these restrictions, there
was no amount available for cash dividends at June 30, 2004. New CF&I and CF&I
(collectively "Guarantors") guarantee the obligations of the 10% Notes, and
those guarantees are secured by a lien on substantially all of the property,
plant and equipment and certain assets of the Guarantors, excluding accounts
receivable, inventory, and certain other assets.
As of June 30, 2004, Oregon Steel, New CF&I, CF&I, and Colorado and Wyoming
Railway Company ("Borrowers") maintained a $65 million revolving credit
agreement ("Credit Agreement"), which will expire on June 30, 2005. At June 30,
2004, $5.0 million was restricted under the Credit Agreement, $15.4 million was
restricted under outstanding letters of credit, and $44.6 million was available
for use. Amounts under the Credit Agreement bear interest based on either (1)
the prime rate plus a margin ranging from 0.25% to 1.00%, or (2) the adjusted
LIBO rate plus a margin ranging from 2.50% to 3.25%. Unused commitment fees
range from 0.25% to 0.75%. During the quarter ended June 30, 2004, there was a
total of $11.5 million of short-term borrowings under the Credit Agreement with
an average daily balance of $0.3 million. As of June 30, 2004, there was no
outstanding balance due under the Credit Agreement. Had there been an
outstanding balance, the average interest rate for the Credit Agreement would
have been 5.0%. The unused commitment fees were 0.75% for the quarter ended June
30, 2004. The margins and unused commitment fees will be subject to adjustment
within the ranges discussed above based on a quarterly leverage ratio. The
Credit Agreement contains various restrictive covenants including minimum
consolidated tangible net worth amount, a minimum earnings before interest,
taxes, depreciation and amortization amount, a minimum fixed charge coverage
ratio, limitations on maximum annual capital and environmental expenditures, a
borrowing availability limitation relating to inventory, limitations on
stockholder dividends and limitations on incurring new or additional debt
obligations other than as allowed by the Credit Agreement. Oregon Steel cannot
pay cash dividends without prior approval from the lenders.
OTHER CONTINGENCIES
New CF&I 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 would not have a
material adverse effect on the consolidated financial condition of New CF&I, its
results of operations, and liquidity.
5. INCOME TAXES
------------
The effective income tax benefit rates were 34.6% and 38.8% for the three
and six months ended June 30, 2004, as compared to tax benefit rates of 14.2%
and 16.0% in the corresponding periods in 2003. The effective income tax rate
for the three and six months ended June 30, 2004 varied from the combined state
and federal statutory rate principally because Oregon Steel reversed a portion
of the valuation allowance, established in 2003, for certain federal and state
net operating loss carry-forwards, state tax credits, and alternative minimum
tax credits that were allocated to New CF&I as noted below.
Oregon Steel files its income tax return as part of a consolidated group,
for which a formal tax allocation agreement exists. As a subsidiary of Oregon
Steel, New CF&I is included in the consolidated group and thus does not file a
separate tax return. Under the terms of the tax allocation agreement, New CF&I
is required to compute a separate tax liability as if it had filed a separate
tax return and shall pay such amount to Oregon Steel. Also, New CF&I will be
compensated by Oregon Steel to the extent that tax benefits generated by New
CF&I provide a benefit on a consolidated basis. On this basis, New CF&I computes
its stand alone tax assets and liabilities, and reflects such balances in its
consolidated balance sheets.
SFAS No. 109, "ACCOUNTING FOR INCOME TAXES," requires that tax benefits for
federal and state net operating loss carry-forwards, state tax credits, and
alternative minimum tax credits each be recorded as an asset to the extent that
management assesses the utilization of such assets to be "more likely than not";
otherwise, a valuation allowance is required to be recorded. Based on this
guidance, Oregon Steel reduced the valuation allowance in the three and six
months ended June 30, 2004 due to less uncertainty regarding the realization of
deferred tax assets. New CF&I has been allocated $3.6 million and $4.5 million,
-9-
respectively, of this valuation allowance reduction for the three and six months
ended June 30, 2004. At June 30, 2004, the valuation allowance for deferred tax
assets was $22.3 million.
Oregon Steel will continue to evaluate the need for valuation allowances in
the future. Changes in estimated future taxable income and other underlying
factors may lead to adjustments to the valuation allowances.
6. EMPLOYEE BENEFIT PLANS
----------------------
New CF&I has noncontributory defined benefit retirement plans, certain
health care and life insurance benefits, and qualified Thrift (401(k)) plans
covering all of its eligible domestic employees.
Components of net periodic benefit cost related to the defined benefit and
certain health care and life insurance benefit plans were as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ----------------------------
2004 2003 2004 2003
-------- -------- -------- --------
(In thousands, except per share amounts)
Service cost $ 586 $ 577 $ 1,172 $ 1,154
Interest cost 759 698 1,518 1,396
Expected return on plan assets (442) (393) (884) (786)
Recognized net loss 231 196 462 392
Amortization of prior service cost 18 18 36 36
------- ------- ------- -------
Total net periodic benefit cost $ 1,152 $ 1,096 $ 2,304 $ 2,192
======= ======= ======= =======
7. ASSET IMPAIRMENTS
-----------------
As discussed in Note 4, "CONTINGENCIES" above, part of the settlement with
the CDPHE and the EPA requires CF&I to install one new electric arc furnace, and
thus the two existing furnaces with a combined melting and casting capacity of
approximately 1.2 million tons through two continuous casters will be shut down.
CF&I has determined that the new single furnace operation will not have the
capacity to support a two-caster operation and therefore CF&I has determined
that one caster and other related assets have no future service potential.
Accordingly, in the second quarter of 2003, New CF&I recorded a pre-tax
impairment charge to earnings of $9.1 million. Of this impairment charge
recognized, $8.1 million represented impairment of fixed assets and $1.0 million
pertained to reduction of related stores items to net realizable value. Because
it is believed the caster has no salvage value following the impairment charge,
the carrying value of the fixed assets was zero after the effect of the
impairment charge.
-10-
ITEM 1. FINANCIAL STATEMENTS - CF&I STEEL, L.P.
CF&I STEEL, L.P.
BALANCE SHEETS
(IN THOUSANDS)
JUNE 30, DECEMBER 31,
2004 2003
----------- --------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ -- $ --
Trade accounts receivable, net of allowance for
doubtful accounts of $1,054 and $361 42,566 37,708
Inventories 36,475 34,729
Other 1,290 1,511
--------- ---------
Total current assets 80,331 73,948
--------- ---------
Property, plant and equipment:
Land and improvements 3,219 3,219
Buildings 18,533 18,459
Machinery and equipment 271,864 268,112
Construction in progress 5,994 6,030
--------- ---------
299,610 295,820
Accumulated depreciation (144,214) (135,394)
--------- ---------
Net property, plant and equipment 155,396 160,426
--------- ---------
Intangibles, net 11,662 11,803
--------- ---------
TOTAL ASSETS $ 247,389 $ 246,177
========= =========
LIABILITIES
Current liabilities:
Accounts payable $ 58,837 $ 46,049
Accrued expenses 25,285 20,877
--------- ---------
Total current liabilities 84,122 66,926
Long-term debt -- Oregon Steel Mills, Inc. 273,197 259,424
Long-term debt -- New CF&I, Inc. 21,756 21,756
Environmental liability 23,811 24,885
Deferred employee benefits 26,981 27,659
--------- ---------
Total liabilities 429,867 400,650
--------- ---------
Contingencies (Note 4)
PARTNERS' DEFICIT
General partner (174,299) (147,059)
Limited partners (8,179) (7,414)
--------- ---------
Total partners' deficit (182,478) (154,473)
--------- ---------
TOTAL LIABILITIES AND PARTNERS' DEFICIT $ 247,389 $ 246,177
========= =========
The accompanying notes are an integral part of the
financial statements.
-11-
CF&I STEEL, L.P.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -----------------------------
2004 2003 2004 2003
-------------- ------------- ---------- ----------
Sales:
Product Sales $ 118,866 $ 79,936 $ 219,792 $ 166,757
Freight 4,454 3,643 8,235 7,611
--------- --------- --------- ---------
123,320 83,579 228,027 174,368
Costs and expenses:
Cost of sales 97,974 81,448 192,361 164,011
Labor dispute settlement adjustment (Note 4) 31,868 -- 38,868 --
Fixed and other asset impairment charges (Note 6) -- 9,157 -- 9,157
Gain on sale of assets (13) (363) (245) (402)
Selling, general and administrative 6,101 4,441 11,574 8,967
Incentive compensation 528 -- 1,089 --
--------- --------- --------- ---------
136,458 94,683 243,647 181,733
--------- --------- --------- ---------
Operating loss (13,138) (11,104) (15,620) (7,365)
Other income (expense):
Interest expense (6,127) (6,257) (12,510) (12,492)
Other income, net 63 55 125 122
--------- --------- --------- ---------
Net Loss $ (19,202) $ (17,306) $ (28,005) $ (19,735)
========= ========= ========= =========
The accompanying notes are an integral part of the
financial statements.
-12-
CF&I STEEL, L.P.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-----------------------------------
2004 2003
------------ ------------
Cash flows from operating activities:
Net loss $ (28,005) $ (19,735)
Adjustments to reconcile net loss to net cash
provided (used) by operating activities:
Fixed and other asset impairment charges (Note 6) -- 9,157
Depreciation and amortization 9,044 9,390
Long-term environmental liability (1,074) --
Gain on sale of assets (245) (402)
Other, net (678) 362
Changes in current assets and liabilities:
Trade accounts receivable (4,858) 2,656
Inventories (1,746) 9,645
Accounts payable 12,788 (3,811)
Accrued expenses 4,408 772
Other, net 221 (1,330)
--------- ---------
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES (10,145) 6,704
--------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (3,958) (8,235)
Proceeds from disposal of property and equipment 54 549
Other, net 276 39
--------- ---------
NET CASH USED BY INVESTING ACTIVITIES (3,628) (7,647)
--------- ---------
Cash flows from financing activities:
Borrowings from related parties 131,505 67,523
Payments to related parties (117,732) (66,512)
Payment of long-term debt -- (68)
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,773 943
--------- ---------
Net increase (decrease) in cash and cash equivalents -- --
Cash and cash equivalents at the beginning of the quarter -- --
--------- ---------
Cash and cash equivalents at the end of the quarter $ -- $ --
========= =========
Supplemental disclosures of cash flow information:
Cash paid for:
- -------------
Interest $ 12,490 $ --
The accompanying notes are an integral part of the
financial statements.
-13-
CF&I STEEL, L.P.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
---------------------
The financial statements include the accounts of CF&I Steel, L.P. ("CF&I").
Oregon Steel Mills, Inc. ("Oregon Steel") owns an 87 percent interest in New
CF&I, Inc. ("New CF&I") which owns a 95.2 percent interest in CF&I. Oregon Steel
also owns directly an additional 4.3 percent interest in CF&I. In January 1998,
CF&I assumed the trade name of Rocky Mountain Steel Mills.
The unaudited financial statements include all adjustments, consisting of
normal recurring accruals and other charges, as described in Note 4
"CONTINGENCIES - LABOR MATTERS - CF&I LABOR DISPUTE SETTLEMENT - ACCOUNTING" and
in Note 6 "ASSET IMPAIRMENTS," which, in the opinion of management, are
necessary for a fair presentation of the interim periods. Results for an interim
period are not necessarily indicative of results for a full year. Reference
should be made to CF&I's 2003 Annual Report on Form 10-K for additional
disclosures including a summary of significant accounting policies.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 132 (revised), "EMPLOYER'S DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS." SFAS No. 132 (revised) prescribes employers'
disclosures about pension plans and other postretirement benefit plans; it does
not change the measurement or recognition of those plans. SFAS No. 132 (revised)
retains and revises the disclosure requirement contained in the original SFAS
No. 132. It also requires additional disclosures about the assets, obligations,
cash flows, and net periodic benefit cost of defined benefit pension plans and
other postretirement benefit plans. SFAS No. 132 (revised) generally is
effective for fiscal years ending after December 15, 2003. CF&I discloses the
requirements of SFAS No. 132 (revised) in Note 5, "EMPLOYEE BENEFIT PLANS."
.
RECLASSIFICATIONS
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 are stated at the lower of manufacturing cost or market value
with manufacturing cost determined under the average cost method. The components
of inventories are as follows:
JUNE 30, DECEMBER 31,
2004 2003
---------- ------------
(IN THOUSANDS)
Raw materials $14,930 $5,183
Semi-finished product 3,045 5,683
Finished product 6,410 12,916
Stores and operating supplies 12,090 10,947
------- -------
Total inventories $36,475 $34,729
======= =======
3. LONG-TERM DEBT
--------------
Borrowing requirements for capital expenditures and working capital have
been provided through two revolving loans from Oregon Steel to CF&I. The loans
include interest on the daily amount outstanding, paid monthly, at the rate of
10.65% per annum. The principal is due on demand or, if no demand, on the due
date of the notes. The loans are classified as long-term, based upon the intent
of Oregon Steel to extend the maturity date of the loans.
-14-
At June 30, 2004 principal payments on long-term debt were due as follows
(in thousands):
2005 and beyond $273,197
Oregon Steel is not required to provide financing to CF&I and, although the
demand for repayment of the obligation in full is not expected during 2004,
Oregon Steel may demand repayment of the loan at any time. If Oregon Steel were
to demand repayment of the loan, it is not likely that CF&I would be able to
obtain the external financing necessary to repay the loan or to fund its capital
expenditures and other cash needs and, if available, that such financing would
be on terms satisfactory to CF&I.
4. 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.
In connection with the acquisition of the steelmaking and finishing
facilities located at Pueblo, Colorado ("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 currently believed to exist. At June 30, 2004, the accrued
liability was $27.5 million, of which $23.8 million was classified as
non-current on New CF&I's 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
was approved by the court (the "State Consent Decree"). The State Consent Decree
provided 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 is
also required to make certain capital improvements expected to cost
approximately $25 million, including converting to the new single New Source
Performance Standards Subpart AAa ("NSPS AAa") compliant furnace discussed
below. The State Consent Decree provides that the two existing furnaces will be
permanently shut down approximately 16 months after the issuance of a Prevention
of Significant Deterioration ("PSD") air permit. The PSD permit was issued June
21, 2004.
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. The issue has been resolved by entry of a Consent
Decree on November 26, 2003, and the Tenth Circuit dismissed the appeal on
December 10, 2003. In that Consent Decree and overlapping with the commitments
made to the CDPHE described above, CF&I committed to the conversion to the new
NSPS AAa compliant furnace (demonstrating full compliance 21 months after permit
approval and expected to cost, with all related emission control improvements,
approximately $25 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. Under this
settlement and the settlement with the CDPHE, CF&I is subject to certain
stipulated penalties if it fails to comply with the terms of the settlement. In
March 2004, the CDPHE notified CF&I of alleged violations of the State Consent
Decree relating to opacity. In June 2004, the CDPHE assessed stipulated
penalties of $270,000. On July 26, 2004, CF&I sought review of the
determination. As a result, CF&I has incurred, and may in the future incur,
additional penalties related to these matters. To date, such penalties (which
relate to alleged violations of opacity standards) have not been material to the
CF&I's results of operations and cash flows; however, CF&I cannot be assured
that future penalties will not be material.
In response to the CDPHE settlement and subsequent alleged violations and
the resolution of the EPA action, CF&I expensed $2.8 million in 2001 and
$132,000 in the second quarter of 2004 for possible fines and non-capital
related expenditures. As of June 30, 2004, the remaining accrued liability for
these matters was approximately $306,000.
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. The Title V permit has been
modified several
-15-
times and gives CF&I adequate time (at least 15 1/2 months after CDPHE issues
the PSD permit) 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
to a much lesser degree, if necessary, purchasing semi-finished steel
("billets") for conversion into rod products at spot market prices. Pricing and
availability of billets is subject to significant volatility.
In a related matter, in April 2000, the United Steelworkers of America
("Union") filed suit in the United States District Court in Denver, Colorado,
asserting that New CF&I and CF&I had violated the CAA at the Pueblo mill for a
period extending over five years. The Union sought declaratory judgement
regarding the applicability of certain emission standards, injunctive relief,
civil penalties and attorney's fees. On July 6, 2001, the presiding judge
dismissed the suit. The 10th Circuit Court of Appeals on March 3, 2003 reversed
the District Court's dismissal of the case and remanded the case for further
hearing to the District Court. The parties to the above-referenced litigation
have negotiated a tentative settlement of the labor dispute and all associated
litigation, including this Union suit. See "Labor Matters" for a description of
the tentative settlement.
LABOR MATTERS
CF&I LABOR DISPUTE AND RESULTANT LITIGATION
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, 2004, approximately 827 Unreinstated Employees have
either returned to work or have declined CF&I's offer of equivalent work. At
June 30, 2004, approximately 123 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, CF&I has been returning unreinstated strikers to
jobs, as positions became open. As noted above, there were approximately 123
Unreinstated Employees as of June 30, 2004. On August 2, 2000, CF&I filed an
appeal with the NLRB in Washington, D.C. A separate hearing concluded in
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.
In the event there is an adverse determination on 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 Employees and sentiment
of the Union towards CF&I, 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.
-16-
CF&I LABOR DISPUTE SETTLEMENT
On January 15, 2004 CF&I announced a tentative agreement to settle the
labor dispute between the Union and CF&I ("Settlement"). The Settlement is
conditioned on, among other things, (1) its approval by stockholders of New
CF&I, (2) ratification of a new collective bargaining agreement being executed
between CF&I and the Union, (3) approval of the Settlement by the NLRB and the
dismissal of cases pending before the NLRB related to the labor dispute and (4)
various pending legal actions between New CF&I and CF&I and the Union being
dismissed. The Settlement, if approved, will provide remedies for all
outstanding unfair labor practices between CF&I and the Union and sets the stage
for the ratification of new five-year collective bargaining agreements. The
Settlement includes the creation of a labor dispute settlement trust ("Trust")
that will hold four million shares of Oregon Steel's registered common stock
after issuance by Oregon Steel. As part of the Settlement, Oregon Steel will
agree to give the Trust certain piggy back and demand registration rights. The
Settlement also includes payment by CF&I of: (1) a cash contribution of $2,500
for each beneficiary, estimated to be in total $2.5 million and (2) beginning on
the effective date of the Settlement, a ten-year profit participation obligation
consisting of 25% of CF&I's quarterly profit, as defined, for years 2004 and
2007 through 2013, and 30% for years 2005 and 2006, not to exceed $3 million per
year for 2004 through 2008 and $4 million per year for 2009 through 2013. The
beneficiaries are those individuals who (1) as of October 3, 1997 were employees
of CF&I and represented by the Union, (2) as of December 31, 1997 had not
separated, as defined, from CF&I and (3) are entitled to an allocation as
defined in the Trust. The Settlement, certain elements of which will be effected
through the new five-year collective bargaining agreement, also includes: (1)
early retirement with immediate enhanced pension benefit where CF&I will offer
bargaining unit employees an early retirement opportunity based on seniority
until a maximum of 200 employees have accepted the offer, the benefit will
include immediate and unreduced pension benefits for all years of service
(including the period of the labor dispute) and for each year of service prior
to March 3, 1993 (including service with predecessor companies) an additional
monthly pension of $10, (2) pension credit for the period of the labor dispute
whereby CF&I employees who went on strike will be given pension credit for both
eligibility and pension benefit determination purposes for the period beginning
October 3, 1997 and ending on the latest of said employees actual return to
work, termination of employment, retirement or death, (3) pension credit for
service with predecessor companies whereby for retirements after January 1,
2004, effective January 2, 2006 for each year of service prior to March 3, 1978
(including service with predecessor companies), CF&I will provide an additional
monthly benefit to employees of $12.50, and for retirements after January 1,
2006, effective January 2, 2008 for each year of service between March 3, 1978
and March 3, 1993 (including service with predecessor companies), CF&I will
provide an additional monthly benefit of $12.50, and (4) individuals who are
members of the bargaining units as of October 3, 1997 will be immediately
eligible to apply for and receive qualified long-term disability ("LTD")
benefits on a go-forward basis, notwithstanding the date of the injury or
illness, service requirements or any filing deadlines. The Settlement also
includes Oregon Steel's agreement to nominate a director designated by the Union
on its Board of Directors, and to a broad-based neutrality clause for certain of
Oregon Steel's facilities in the future.
On March 12, 2004, the Union membership at CF&I voted to accept the
proposed Settlement and a new five-year collective bargaining agreement. The
Settlement is still conditioned on the approval of the Settlement by the NLRB
and the dismissal of cases pending before the NLRB related to the labor dispute,
and the dismissal of various pending legal actions between New CF&I and CF&I and
the Union.
CF&I LABOR DISPUTE SETTLEMENT - ACCOUNTING
CF&I recorded charges of $31.1 million in the fourth quarter of 2003, $7
million in the first quarter of 2004, and an additional charge of $31.9 million
in the second quarter of 2004, of which $23.2 million, $7 million, and $28.7
million, respectively, related to the tentative agreement to issue four million
shares of Oregon Steel's common stock to the Trust as part of the Settlement.
The common-stock portion of the charge in the second quarter of 2004 is a result
of adjusting the previously recorded value at March 31, 2004 of the four million
shares of Oregon Steel's common stock ($30.2 million at $7.56 per share) to
market at June 30, 2004. The closing price of Oregon Steel's common stock on the
New York Stock Exchange at June 30, 2004 was $14.74 per share, resulting in an
additional labor dispute settlement charge of $28.7 million for the second
quarter of 2004. CF&I will continue to adjust the common stock charge portion of
the Settlement at the end of each quarter either up or down for the change in
the price of Oregon Steel's common stock through the effective date of the
Settlement. In addition, as part of the Settlement, CF&I agreed, under certain
circumstances, to pay on behalf of the Trust, certain expenses that would
otherwise be incurred by the Trust related to the issuance of the four million
shares. Accordingly, CF&I recorded an additional charge in the second quarter of
2004 of approximately $3.2 million as part of the cost of Settlement related to
the issuance of the shares to the Trust. The accrual for the LTD benefits ($5.3
million at June 30, 2004) may also change, as better claims information becomes
available. As employees accept the early retirement benefits, CF&I expects to
record an additional charge during 2004 estimated at approximately $6.8 million
related to these benefits. The enhancements to pension and post-retirement
medical benefits for non-early retirees will be accounted for prospectively on
the date at which plan amendments occur pursuant to the new five-year collective
bargaining agreement in accordance with SFAS No. 87 and SFAS No. 106. In
addition to these charges, CF&I recorded $1.4 million, and $3.0 million, for the
three and six months ended June 30, 2004, for selling, general and
administrative expenses incurred under the profit participation component of the
Settlement.
PURCHASE COMMITMENTS
Effective February 2, 1993, CF&I entered into an agreement, which was
subsequently amended on August 4, 1994, to purchase a base amount of oxygen
produced at a facility located at the Pueblo Mill. The agreement specifies that
CF&I will pay a
-17-
base monthly charge that is adjusted annually based upon a percentage change in
the Producer Price Index. The monthly base charge at June 30, 2004 was $119,000.
GUARANTEES AND FINANCING ARRANGEMENTS
On July 15, 2002, Oregon Steel issued $305 million of 10% First Mortgage
Notes due 2009 ("10% Notes") 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 10% Notes
are secured by a lien on substantially all of the property, plant and equipment,
and certain other assets of Oregon Steel, excluding accounts receivable,
inventory, and certain other assets. As of June 30, 2004, Oregon Steel had
outstanding $305 million of principal amount under the 10% Notes. The Indenture
under which the Notes were issued contains restrictions on new indebtedness and
various types of disbursements, including dividends, based on the cumulative
amount of Oregon Steel's net income, as defined. Under these restrictions, there
was no amount available for cash dividends at June 30, 2004. New CF&I and CF&I
(collectively "Guarantors") guarantee the obligations of the 10% Notes, and
those guarantees are secured by a lien on substantially all of the property,
plant and equipment and certain assets of the Guarantors, excluding accounts
receivable, inventory, and certain other assets.
As of June 30, 2004, Oregon Steel, New CF&I, CF&I, and Colorado and Wyoming
Railway Company ("Borrowers") maintained a $65 million revolving credit
agreement ("Credit Agreement"), which will expire on June 30, 2005. At June 30,
2004, $5.0 million was restricted under the Credit Agreement, $15.4 million was
restricted under outstanding letters of credit, and $44.6 million was available
for use. Amounts under the Credit Agreement bear interest based on either (1)
the prime rate plus a margin ranging from 0.25% to 1.00%, or (2) the adjusted
LIBO rate plus a margin ranging from 2.50% to 3.25%. Unused commitment fees
range from 0.25% to 0.75%. During the quarter ended June 30, 2004, there was a
total of $11.5 million of short-term borrowings under the Credit Agreement with
an average daily balance of $0.3 million. As of June 30, 2004, there was no
outstanding balance due under the Credit Agreement. Had there been an
outstanding balance, the average interest rate for the Credit Agreement would
have been 5.0%. The unused commitment fees were 0.75% for the quarter ended June
30, 2004. The margins and unused commitment fees will be subject to adjustment
within the ranges discussed above based on a quarterly leverage ratio. The
Credit Agreement contains various restrictive covenants including minimum
consolidated tangible net worth amount, a minimum earnings before interest,
taxes, depreciation and amortization amount, a minimum fixed charge coverage
ratio, limitations on maximum annual capital and environmental expenditures, a
borrowing availability limitation relating to inventory, limitations on
stockholder dividends and limitations on incurring new or additional debt
obligations other than as allowed by the Credit Agreement. Oregon Steel cannot
pay cash dividends without prior approval from the lenders.
OTHER CONTINGENCIES
CF&I 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 would not have a material
adverse effect on the financial condition of CF&I.
5. EMPLOYEE BENEFIT PLANS
----------------------
CF&I has noncontributory defined benefit retirement plans, certain health
care and life insurance benefits, and qualified Thrift (401(k)) plans covering
all of its eligible domestic employees.
Components of net periodic benefit cost related to the defined benefit and
certain health care and life insurance benefit plans were as follows:
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
----------------------------- -------------------------
2004 2003 2004 2003
-------- ---------- -------- --------
(In thousands)
Service cost $ 586 $ 577 $ 1,172 $ 1,154
Interest cost 759 698 1,518 1,396
Expected return on plan assets (442) (393) (884) (786)
Recognized net loss 231 196 462 392
Amortization of prior service cost 18 18 36 36
------- ------- ------- -------
Total net periodic benefit cost $ 1,152 $ 1,096 $ 2,304 $ 2,192
======= ======= ======= =======
6. ASSET IMPAIRMENTS
-----------------
As discussed in Note 4, "CONTINGENCIES" above, part of the settlement with
the CDPHE and the EPA requires CF&I to install one new electric arc furnace, and
thus the two existing furnaces with a combined melting and casting capacity of
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approximately 1.2 million tons through two continuous casters will be shut down.
CF&I has determined that the new single furnace operation will not have the
capacity to support a two-caster operation and therefore CF&I has determined
that one caster and other related assets have no future service potential.
Accordingly, in the second quarter of 2003, CF&I recorded an impairment charge
to earnings of $9.1 million. Of this impairment charge recognized, $8.1 million
represented impairment of fixed assets and $1.0 million pertained to reduction
of related stores items to net realizable value. Because it is believed the
caster has no salvage value following the impairment charge, the carrying value
of the fixed assets was zero after the effect of the impairment charge.
-19-
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," "likely" 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:
[BULLET] changes in market supply and demand for steel, including the effect of
changes in general economic conditions and imports;
[BULLET] changes in the availability and costs of steel scrap, steel scrap
substitute materials, billets and other raw materials or supplies used
by New CF&I, as well as the availability and cost of electricity and
other utilities;
[BULLET] downturns in the industries New CF&I serves, including the rail
transportation, construction, capital equipment, oil and gas, and
durable goods segments;
[BULLET] increased levels of steel imports;
[BULLET] New CF&I's substantial indebtedness, debt service requirements, and
liquidity constraints;
[BULLET] New CF&I's highly leveraged capital structure and the effect of
restrictive covenants in New CF&I's debt instruments on New CF&I's
operating and financial flexibility;
[BULLET] availability and adequacy of New CF&I's cash flow to meet New CF&I's
requirements;
[BULLET] actions by New CF&I's domestic and foreign competitors;
[BULLET] unplanned equipment failures and plant outages;
[BULLET] costs of environmental compliance and the impact of governmental
regulations;
[BULLET] risks related to pending environmental matters, including the risk
that costs associated with such matters may exceed New CF&I's
expectations or available insurance coverage, if any, and the risk
that New CF&I may not be able to resolve any matter as expected;
[BULLET] risks relating to New CF&I's relationship with its current unionized
employees;
[BULLET] changes in New CF&I's relationship with its workforce;
[BULLET] changes in United States or foreign trade policies affecting steel
imports or exports, and
[BULLET] risks related to the outcome of the pending Union dispute.
OVERVIEW
- --------
The New CF&I consolidated financial statements include the accounts of
CF&I, a 95.2% owned subsidiary, and the Colorado and Wyoming Railway Company, a
wholly-owned short-line railroad, serving principally the steel mill in Pueblo,
Colorado ("Pueblo Mill"). Sales of CF&I were 98.4% and 98.2% for the three and
six months ended June 30, 2004, respectively, compared to 97.9% and 98.0% for
the three and six months ended June 30, 2003, respectively, of the consolidated
sales of New CF&I. Cost of sales of CF&I was 98.7% and 98.8% for the three and
six months ended June 30, 2004, compared to 98.3% and 98.4% for the three and
six months ended June 30, 2003, respectively, of the consolidated cost of sales
of New CF&I.
On January 15, 2004, CF&I announced a tentative agreement to settle the
labor dispute between the Union and CF&I. CF&I recorded a charge of $31.1
million in the fourth quarter of 2003, an additional charge of $7.0 million in
the first quarter of 2004, and an additional charge of $31.9 million in the
second quarter of 2004 related to the tentative Settlement. See Note 4 to the
New CF&I Consolidated Financial Statements - "CONTINGENCIES - LABOR MATTERS -
CF&I LABOR DISPUTE SETTLEMENT - ACCOUNTING" for a discussion of the accounting
for the tentative agreement.
On December 4, 2003, President Bush lifted the tariffs on imports of steel
that were imposed March 5, 2002. The tariffs were designed to give the U.S.
steel industry time to restructure and become competitive in the global steel
market. Since the lifting of the tariffs, the steel industry has seen a dramatic
increase in both the cost of raw materials and the selling price of most steel
products. New CF&I believes that current market conditions are the result of the
combination of a strong steel demand in Asia, a weak United States dollar, and
an increase in ocean freight costs. New CF&I anticipates that market conditions
will remain unsettled into the foreseeable future. During this period of time,
New CF&I believes that it will continue to incur increased costs for raw
materials and achieve increased selling prices to offset these higher costs.
CF&I determined in the second quarter of 2003 that the new single furnace
operation will not have the capacity to support a two-caster operation and
therefore CF&I has determined that one caster and other related assets have no
future service potential.
-20-
New CF&I recorded a pre-tax charge to earnings of approximately $9.1 million in
the second quarter of 2003 related to these asset impairments. See Note 7 to the
New CF&I Consolidated Financial Statements, "ASSET IMPAIRMENTS."
2004 OUTLOOK
- ------------
For 2004, New CF&I expects to ship approximately 362,000 tons of rail and
500,000 tons of rod and bar products. At these shipment levels the rail and rod
and bar mills would be at 90 percent and 100 percent, respectively, of their
practical capacities. Seamless pipe shipments will be dependent on market
conditions in the drilling industry. At the present time New CF&I's seamless
mill is not operating.
-21-
DISCUSSION AND ANALYSIS OF INCOME
(Information in tables in thousands except tons, per ton, and percentages)
During the second quarter of 2004, tons sold of 226,900 tons were up 4
percent from the second quarter of 2003. Sales were $125.3 million for the
second quarter of 2004, up 47 percent from the second quarter of 2003.
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
--------------------------------------- ----------------------------------------
% %
2004 2003 CHANGE CHANGE 2004 2003 CHANGE CHANGE
---- ---- ------ ------ ---- ---- ------ ------
Sales $125,336 $85,398 $39,938 46.8% $232,105 $177,954 $54,151 30.4%
- ----- ======== ======= ======= ====== ======== ======== ======= =====
Tons sold
- ---------
Rail
93,200 86,800 6,400 7.4% 193,900 199,700 (5,800) (2.9%)
Rod and Bar 133,200 117,400 15,800 13.5% 263,300 232,900 30,400 13.1%
Seamless Pipe 500 13,300 (12,800) (96.2%) 3,300 24,200 (20,900) (86.4%)
-------- -------- ------- ------ -------- ------- ------- ------
Total 226,900 217,500 9,400 4.3% 460,500 456,800 3,700 0.8%
======== ======== ======= ====== ======== ======= ======= ======
Sales price per ton $552 $393 $159 40.5% $504 $390 $114 29.2%
- -------------------- ==== ==== ==== ===== ==== ==== ==== ======
SALES. The increase in product sales and average product sales price
for the three and six months ended June 30, 2004 over the same periods ended
June 30, 2003 is primarily due to higher average selling prices for rod and bar
products and to a lesser extent, rail. Increased selling prices are the result
of a combination of factors including strong demand for steel products in Asia,
a weak United States dollar and increased ocean freight costs, all of which make
the United States market less attractive to foreign producers.
The increase in tonnage shipments for the three months ended June 30,
2004 compared to the same period in 2003 was primarily due to increased rod and
bar shipments and rail shipments, partially offset by decreased seamless pipe
shipments. The increase in tonnage shipments for the six months ended June 30,
2004 compared to the same period in 2003 was primarily due to increased rod and
bar shipments, partially offset by decreased seamless pipe and rail shipments.
GROSS PROFIT
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
---------------------------------------- ------------------------------------------
2004 2003 CHANGE % CHANGE 2004 2003 CHANGE % CHANGE
---- ---- ------ -------- ---- ---- ------ --------
Gross Profit $26,099 $2,549 $23,550 923.9% $37,357 $11,231 $26,126 232.6%
The increase in gross profit for the three and six months ended June
30, 2004 over the same periods ended June 30, 2003 was primarily a result of
increased volume in rod and bar products and higher average sales prices
discussed above, partially offset by higher scrap cost and the inability of CF&I
to fully recover its cost of raw material for rail products.
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
---------------------------------------- -----------------------------------------
2004 2003 CHANGE % CHANGE 2004 2003 CHANGE % CHANGE
---- ---- ------ -------- ---- ---- ------ --------
Selling, General and Administrative $6,250 $4,500 $1,750 38.9% $11,769 $9,131 $2,638 28.9%
The increase in selling, general and administrative expenses for the three
and six months ended June 30, 2004 over the same periods ended June 30, 2003 was
primarily the result of a $1.7 million and $3.0 million, respectively, charge
due to the 10-year profit participation obligation resulting from the
Settlement. See Note 4 to the New CF&I Consolidated Financial Statements,
"CONTINGENCIES - LABOR MATTERS - CF&I LABOR DISPUTE SETTLEMENT - ACCOUNTING."
-22-
INCENTIVE COMPENSATION
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
--------------------------------------- ------------------------------------------
2004 2003 CHANGE % CHANGE 2004 2003 CHANGE % CHANGE
---- ---- ------ -------- ---- ---- ------ --------
Incentive Compensation $528 $ - $528 100% $1,089 $ - $1,089 100%
The increase in incentive compensation for the three and six months ended
June 30, 2004 over the same periods ended June 30, 2003 was the result of
increased operating income before consideration of the labor dispute settlement
adjustment.
INTEREST EXPENSE
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
---------------------------------------- ------------------------------------------
2004 2003 CHANGE % CHANGE 2004 2003 CHANGE % CHANGE
---- ---- ------ -------- ---- ---- ------ --------
Interest Expense $5,861 $5,969 ($108) (1.8%) $11,988 $11,905 $83 0.7%
Interest expense for the comparative three and six month time periods are
primarily the same due to similar calculated borrowing levels and interest rate
charged by Oregon Steel.
INCOME TAX BENEFIT
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
--------------------------------------- -----------------------------------------
2004 2003 CHANGE % CHANGE 2004 2003 CHANGE % CHANGE
---- ---- ------ -------- ---- ---- ------ --------
Income Tax Benefit $6,059 $2,248 $3,811 169.5% $9,594 $2,795 $6,799 243.3%
The effective income tax benefit rates were 34.6% and 38.8% for the three
and six months ended June 30, 2004, respectively, as compared to tax benefit
rates of 14.2% and 16.0% in the corresponding periods in 2003. The effective
income tax rate for the three and six months ended June 30, 2004 varied from the
combined state and federal statutory rate principally because Oregon Steel
reversed a portion of the valuation allowance, established in 2003, for certain
federal and state net operating loss carry-forwards, state tax credits, and
alternative minimum tax credits that were allocated to New CF&I.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash used by operating activities was $10.2 million for the first six
months of 2004 compared to $6.6 million provided by operations in the same
period of 2003. The items primarily affecting the $16.8 million decrease in cash
flows were the non-cash fixed and other asset impairment charges of $9.1 million
in 2003, and an increase of $7.4 million in deferred tax asset related to the
reversal of the valuation allowance in the six months ended June 30, 2004, as
discussed in Note 5 to the New CF&I Consolidated Financial Statements, "INCOME
TAXES."
Net cash used by investing activities in the first six months of 2004
totaled $3.6 million compared to $7.7 million in the same period of 2003. The
decrease was primarily due to a $4.3 million decrease in additions to property,
plant and equipment.
Net cash provided by financing activities in the first six months of 2004
totaled $13.8 million compared to $0.9 million in the same period of 2003. This
increase is due to increased borrowing to cover cash used by operating
activities and amounts owed to Oregon Steel related to the Settlement. See Note
4 to the New CF&I Consolidated Financial Statements, "CONTINGENCIES - LABOR
MATTERS - CF&I LABOR DISPUTE SETTLEMENT - ACCOUNTING."
Net working capital at June 30, 2004 decreased by $8.7 million compared to
December 31, 2003 due primarily to an increase in accounts payable of $11.4
million partially offset by an increase in accounts receivable of $5.1 million.
Accounts payable increased because of increased scrap and freight costs, timing
differences in payments and the accrual of $3.2 million as part of the cost of
the Settlement related to the issuance of the shares of Oregon Steel common
stock to the Trust. The increase in accounts receivable was primarily due to
increased sales and sales prices for rod and bar products.
-23-
Borrowing requirements for capital expenditures and other cash needs, both
short-term and long-term, are provided through two loans from Oregon Steel to
CF&I. As of June 30, 2004, $273.2 million of aggregate principal amount of the
loans was outstanding, all of which was classified as long-term, based upon the
intent of Oregon Steel to extend the maturity date of the loans. The loans
include interest on the daily amount outstanding at the rate of 10.65% per
annum. The principal on the two loans is due on demand or, if no demand is made,
$220.0 million is due on December 31, 2004, and $53.2 million is due on December
31, 2005. Oregon Steel does not expect to demand repayment of the obligations
during 2004. Interest on the principal amount of the loans is payable monthly.
Because the loans from Oregon Steel are due on demand, the applicable interest
rate is effectively subject to renegotiation at any time, and there is no
assurance the interest rate will not be materially increased in the future.
New CF&I has been able to fulfill its needs for working capital and
capital expenditures from operations and its financing arrangement with Oregon
Steel. New CF&I expects that operations will continue for 2004, with the
realization of assets, and discharge of liabilities in the ordinary course of
business. New CF&I believes that its prospective needs for working capital and
capital expenditures will be met from cash flows generated by operations and
borrowings pursuant to the financing arrangement with Oregon Steel. If
operations are not consistent with management's plans, there is no assurance
that the amounts from these sources will be sufficient for such purposes. Oregon
Steel is not required to provide financing to New CF&I and, although the demand
for repayment of the obligations in full is not expected during 2004, Oregon
Steel may demand repayment of the loans at any time. If Oregon Steel were to
demand repayment of the loans, it is not likely that New CF&I would be able to
obtain the external financing necessary to repay the loans or to fund its
capital expenditures and other cash needs, and if available, that such financing
would be on terms as favorable to New CF&I as that provided by Oregon Steel. The
failure of either New CF&I or Oregon Steel to maintain their current financing
arrangements would likely have a material adverse impact on New CF&I and CF&I.
As of June 30, 2004, Oregon Steel, New CF&I, CF&I and Colorado and Wyoming
Railway Company ("Borrowers") maintained a $65 million revolving credit
agreement ("Credit Agreement"), which will expire on June 30, 2005. At June 30,
2004, $5.0 million was restricted under the Credit Agreement, $15.4 million was
restricted under outstanding letters of credit, and $44.6 million was available
for use. Amounts under the Credit Agreement bear interest based on either (1)
the prime rate plus a margin ranging from 0.25% to 1.00%, or (2) the adjusted
LIBO rate plus a margin ranging from 2.50% to 3.25%. Unused commitment fees
range from 0.25% to 0.75%. During the quarter ended June 30, 2004, there was a
total of $11.5 million of short-term borrowings under the Credit Agreement with
an average daily balance of $0.3 million. As of June 30, 2004, there was no
outstanding balance due under the Credit Agreement. Had there been an
outstanding balance, the average interest rate for the Credit Agreement would
have been 5.0%. The unused commitment fees were 0.75% for the quarter ended June
30, 2004. The margins and unused commitment fees will be subject to adjustment
within the ranges discussed above based on a quarterly leverage ratio. The
Credit Agreement contains various restrictive covenants including minimum
consolidated tangible net worth amount, a minimum earnings before interest,
taxes, depreciation and amortization amount, a minimum fixed charge coverage
ratio, limitations on maximum annual capital and environmental expenditures, a
borrowing availability limitation relating to inventory, limitations on
stockholder dividends and limitations on incurring new or additional debt
obligations other than as allowed by the Credit Agreement. Although New CF&I,
CF&I and C&W are borrowers under the Credit Agreement, New CF&I, CF&I and C&W
borrow directly from Oregon Steel as discussed above.
New CF&I's level of indebtedness presents other risks to investors,
including the possibility that New CF&I and its subsidiaries may be unable to
generate cash sufficient to pay the principal of and interest on their
indebtedness when due. In that event, the holders of the indebtedness may be
able to declare all indebtedness owing to them to be due and payable
immediately, and to proceed against their collateral, if applicable. These
actions would have a material adverse effect on New CF&I. In addition, CF&I
faces potential costs and liabilities associated with environmental compliance
and remediation issues and the labor dispute at the Pueblo Mill. See Note 4 to
the New CF&I Consolidated Financial Statements, "CONTINGENCIES" for a
description of those matters. Any costs or liabilities in excess of those
expected by CF&I could have a material adverse effect on New CF&I.
OFF-BALANCE SHEET ARRANGEMENTS
Information on New CF&I's off-balance sheet arrangements is disclosed in
the contractual obligations table of New CF&I's 2003 Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes.
-24-
ITEM 4. CONTROLS AND PROCEDURES
As of June 30, 2004, New CF&I and CF&I carried out an evaluation, under
the supervision and with the participation of New CF&I's and CF&I's management,
including New CF&I's and CF&I's Chief Executive Officer and New CF&I's and
CF&I's Chief Financial Officer, of the effectiveness of the design and operation
of New CF&I's and CF&I's disclosure controls and procedures. Based on the
evaluation, New CF&I's and CF&I's Chief Executive Officer and Chief Financial
Officer have concluded that New CF&I's and CF&I's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
New CF&I and CF&I in the reports they file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in Securities and Exchange Commission rules and forms.
There were no significant changes in New CF&I's and CF&I's internal controls or
in other factors that could significantly affect these controls including any
corrective actions with regard to significant deficiencies and material
weaknesses subsequent to the date New CF&I and CF&I completed their evaluation.
-25-
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Note 4 to the New CF&I Consolidated Financial Statements,
"CONTINGENCIES" for a discussion of the status of (a) the environmental issues,
and (b) the status of the labor dispute.
New CF&I 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 New CF&I.
New CF&I maintains insurance against various risks, including certain
types of tort liability arising from the sale of its products. New CF&I does not
maintain insurance against liability arising out of waste disposal or on-site
remediation of environmental contamination because of the high cost of that
coverage. In addition, our per claim deductible for workers' compensation claims
is $1 million due to the high cost of maintaining such insurance with a lower
deductible. There is no assurance that the insurance coverage carried by New
CF&I will be available in the future at reasonable rates, if at all.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1 Certification of Chief Executive Officer required
by Rules 13a-14(a) and 15d-14(a) as promulgated by the
Securities and Exchange Commission and pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer required
by Rules 13a-14(a) and 15d-14(a) as promulgated by the
Securities and Exchange Commission and pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.0 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
No reports on Form 8-K were filed by the Registrants during the
quarter ended June 30, 2004.
-26-
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.
NEW CF&I, INC.
Date: August 12, 2004 /s/ Jeff S. Stewart
---------------------------------
Jeff S. Stewart
Corporate Controller
CF&I STEEL, L.P.
BY: NEW CF&I, INC.
GENERAL PARTNER
Date: August 12, 2004 /s/ Jeff S. Stewart
---------------------------------
Jeff S. Stewart
Corporate Controller
New CF&I, Inc.
-27-
NEW CF&I, INC.
CF&I STEEL, L.P.
EXHIBIT INDEX
LIST OF EXHIBITS FILED WITH FORM 10-Q FOR THE PERIOD
ENDED JUNE 30, 2004
31.1 Certification of Chief Executive Officer required by Rules
13a-14(a) and 15d-14(a) as promulgated by the Securities and
Exchange Commission and pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer required by Rules
13a-14(a) and 15d-14(a) as promulgated by the Securities and
Exchange Commission and pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.0 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
-28-