10-Q 1 d10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 2001 or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 1-5210 AmeriSteel Corporation Incorporated in State of Florida Employer Identification No. 59-0792436 5100 W. Lemon Street Tampa, Florida 33609 Mailing Address: P. O. Box 31328 Tampa, Florida 33631-3328 Telephone No. (813)286-8383 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ --- As of October 31, 2001 the registrant had 10,339,677 shares, $.01 par value, Common Stock outstanding. PART I -- FINANCIAL INFORMATION ------------------------------- ITEM I. FINANCIAL STATEMENTS AMERISTEEL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ($ in thousands)

See notes to consolidated financial statements 2 AMERISTEEL CORPORATION CONSOLIDATED STATEMENTS OF FINANCIAL POSITION -- continued ($ in thousands)

See notes to consolidated financial statements 3 AmeriSteel Corporation CONSOLIDATED STATEMENTS OF INCOME ($ in thousands except per share data)

See notes to consolidated financial statements 4 AMERISTEEL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in thousands)

See notes to consolidated financial statements 5 AmeriSteel Corporation & subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A -- BASIS OF PRESENTATION The consolidated financial statements include the accounts of AmeriSteel Corporation, a Florida corporation (the "Company") after elimination of all significant intercompany balances and transactions. On April 2, 2001, the Company acquired a majority of the outstanding common stock of American Bright Bar of Orrville, Ohio, a producer of cold drawn flat bar, and changed its name to AmeriSteel Bright Bar. The transaction was accounted for as a purchase. The Company is a majority owned subsidiary of FLS Holdings, Inc. (FLS), whose only business is to own common stock of the Company. FLS, which owned approximately 81% of the common stock of the Company as of September 30, 2001 is a wholly owned subsidiary of Brazilian steel manufacturer Gerdau S.A. (Gerdau) through one of Gerdau's subsidiaries. Gerdau acquired 88% of FLS in September 1999, resulting in a change of control, and the remaining 12% in September 2000, in each instance from Kyoei Steel Ltd. In February 2001, the Company sold 1,153,846 shares of common stock to a Gerdau subsidiary, of which 384,614 remained outstanding as of September 30, 2001. As a result, Gerdau indirectly owns approximately 88% of the outstanding shares of AmeriSteel's common stock. An institutional investor owns approximately 4% of the common stock of the Company. Executives and other employees own the remaining 8% of the Company's common stock. In March 2001, the Company sold 1,000,000 shares of Series A Preferred Stock to a Gerdau subsidiary. Series A Preferred Stock is non-voting with a dividend of $.475 per share every six months. Push down accounting has not been applied to the financial statements of the Company as a result of a change of control in September 1999, therefore, the historical cost basis of the Company's assets have not been changed. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all the information or footnotes necessary for a complete presentation of financial condition, results of operations and cash flows in conformity with generally accepted accounting principles. However all adjustments which, in the opinion of management, are necessary for a fair presentation have been included. Such adjustments consisted of only normally recurring items. These condensed financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K. The results of the three months and nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for future periods. In March 2000, the Board of Directors approved changing the fiscal year end of the Company from March 31 to December 31 effective for the period ending December 31, 2000. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Earnings per Common Share: Basic earnings per common share is based upon the ------------------------- weighted average number of common shares outstanding during the period and the diluted earnings per common share is based upon the weighted average number of common shares plus the dilutive common equivalent shares outstanding during the period. Anti-dilutive shares are not included in determining the common equivalent shares outstanding. The following is a reconciliation of the basic and diluted earnings per common share computations shown on the face of the accompanying consolidated statements of income (in thousands, except per share data): 6 AMERISTEEL CORPORATION & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)

Other comprehensive income: Other comprehensive income represents the unrealized -------------------------- loss on marketable securities held for sale and the unrealized loss on hedging financial instruments. Recent accounting pronouncements: In July 2001, the Financial Accounting -------------------------------- Standards Board issued Statements of Financial Accounting Standards No. 141 (SFAS 141), "Business Combinations", and 142 (SFAS 142), "Goodwill and Other Intangible Assets." SFAS 141 addresses financial accounting and reporting for goodwill and other intangible assets acquired in a business combination at acquisition. SFAS 141 requires the purchase method of accounting to be used for all business combinations initiated after June 30, 2001; establishes specific criteria for the recognition of intangible assets separately from goodwill; and requires unallocated negative goodwill to be written off immediately as an extraordinary gain (instead of being deferred and amortized). SFAS 142 addresses financial accounting and reporting for intangible assets acquired individually or with a group of other assets (but not those acquired in a business combination) at acquisition. SFAS 142 also addresses financial accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. SFAS 142 provides that goodwill and intangible assets which have indefinite useful lives will not be amortized but rather will be tested at least annually for impairment. It also provides that intangible assets that have finite useful lives will continue to be amortized over their useful lives, but those lives will no longer be limited to forty years. SFAS 141 is effective for all business combinations initiated after June 30, 2001 and for all business combinations accounted for by the purchase method for which the date of acquisition is after June 30, 2001. The provisions of SFAS 142 are effective for fiscal years beginning after December 15, 2001. The Company will adopt SFAS 142 beginning January 1, 2002. The Company is considering the provisions of SFAS 141 and 142 and at present has not determined the impact of adopting SFAS 141 and SFAS 142. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143 (SFAS 143), "Accounting for Asset Retirement Obligations" that addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and associated costs. SFAS 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of the fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The provisions of SFAS 143 are effective for fiscal years beginning after June 15, 2002. The Company is considering the provisions of SFAS 143 and at present has not determined the impact of adopting SFAS 143. In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting for the Impairment or Disposal of Long-Lived Assets" that addresses financial accounting and reporting for the 7 AMERISTEEL CORPORATION & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) impairment or disposal of long-lived assets. SFAS 144 requires that one accounting model be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. The provisions of SFAS 144 are effective for fiscal years beginning after December 15, 2001. The Company is considering the provisions of SFAS 144 and at present has not determined the impact of adopting SFAS 144. Derivatives: The Company has adopted Statement of Financial Accounting Standards ------------ No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS 137 and SFAS 138 ("SFAS 133"). SFAS 133 establishes accounting and reporting standards for derivative financial instruments and requires that derivative instruments be recorded in the balance sheet as either an asset or liability measured at their fair value. SFAS 133 allows that changes in the derivative fair values that are designated, effective and qualify as cash flow hedges can be deferred and recorded as a component of accumulated other comprehensive income until the hedged transactions occur and are recognized in earnings. The ineffective portion of a hedging derivative's change in fair value will be immediately recognized in earnings. For derivative instruments that do not qualify as cash flow hedges, SFAS 133 requires that changes in the derivative fair values be recognized in earnings in the period of change. In order to reduce its exposure to interest rate fluctuations, the Company entered into interest rate swap agreements in August and September 2001 that are considered cash flow hedges. The interest rates swaps have a notional value of $55 million with the Company paying a fixed interest rate and receiving a variable interest rate based on three-month LIBOR. The underlying hedged instruments are specific tranches of LIBOR based revolving credit and term loan borrowings under the Company's Revolving Credit Agreement. The Company will test effectiveness of the swaps on a quarterly basis using the "change in fair value" method prescribed by SFAS 133. Each period, the fair value of the interest rate swap agreements will be recorded on the balance sheet. The effective portion of the swap agreements will be deferred in accumulated other comprehensive income until the hedged transaction occurs and is recognized in income. The ineffective portion of the swap agreements will be recognized in income immediately. Reclassifications: Certain amounts in the prior period financial statements ------------------ have been reclassified to conform to the current financial statement presentation. NOTE C -- INVENTORIES Inventories consist of the following: ($ in thousands) September 30, 2001 December 31, 2000 (Unaudited) -------------- ------------ Finished goods $ 76,799 $ 87,484 Work-in-process 12,705 20,498 Raw materials and operating supplies 32,527 30,761 --------- --------- $ 122,031 $ 138,743 --------- --------- 8 AmeriSteel Corporation & subsidiary NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) NOTE D -- BORROWINGS Long-term borrowings consist of the following: ($ in thousands) September 30, 2001 December 31, 2000 (Unaudited) -------------- ------------- Term Loan $ 100,000 $ 100,000 Revolving Credit Agreement 25,500 96,000 Industrial Revenue Bonds 33,195 33,195 Subsidiary Debt 3,935 - TVA Loan 1,061 1,211 Capital Lease 150 220 ----------- ---------- Total Borrowings 163,841 230,626 Less Current Maturities 25,572 6,567 ----------- ---------- Total long-term borrowings $ 138,269 $ 224,059 ----------- ---------- The Company's primary financial obligation outstanding as of September 30, 2001 was a $285 million credit facility (the "Revolving Credit Agreement") that includes a $100 million term loan that amortizes at the rate of 25% per year beginning December 2001 and a $185 million revolving loan. It is collateralized by first priority security interests in substantially all accounts receivable and inventory of the Company as well as a lien on the Company's Charlotte Mill property, plant and equipment. Loans under the Revolving Credit Agreement bear interest at a per annum rate equal to one of several rate options (LIBOR, Fed Funds, or Prime Rate) based on the facility chosen at the time of borrowing plus an applicable margin determined by tests of performance from time to time. The rate options for the tranches being hedged are always the same. The effective interest rate on the Revolving Credit Agreement at September 30, 2001 was approximately 6.3%. Subsidiary Debt represents a bank loan of majority owned AmeriSteel Bright Bar secured by machinery and equipment. The loan matures in 2011 with amortization payments that began in July 2001. The loan currently bears interest at the rate of approximately 8.5% per year with the rate scheduled to reset June 2002 and every three years thereafter based on prime plus 1%. The Company is a guarantor of the loan. NOTE E -- ENVIRONMENTAL MATTERS As the Company is involved in the manufacture of steel, it produces and uses certain substances that may pose environmental hazards. The principal hazardous waste generated by current and past operations is EC dust, a residual from the production of steel in electric arc furnaces. Environmental legislation and regulation at both the federal and state level over EC dust is subject to change, which may change the cost of compliance. While EC dust is generated in current production processes, such EC dust is being collected, handled and disposed of in a manner that management believes meets all current federal and state environmental regulations. The costs of collection and disposal of EC dust are being expensed as operating costs when incurred. In addition, the Company has handled and disposed of EC dust in other manners in previous years, and is responsible for the remediation of certain sites where such EC dust was generated and/or disposed. In April 2001, the Company was notified by the United States Environmental Protection Agency (the "EPA") of an investigation that may identify the Company as a potential responsible party in a Superfund Site in Pelham, Georgia. The Pelham site was a fertilizer manufacturer in operation from 1910 through 1992, lastly operated by Stoller Chemical Company, a now bankrupt ___ corporation. ___ The Company objects to its inclusion in the investigation, as there is no record of shipments of EC dust to the site, nor other hazardous waste 9 AMERISTEEL CORPORATION & SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) under investigation. Consequently, the Company contests any liability for cleanup of the site and therefore has not recorded any liability. Should the EPA determine otherwise, the Company does not believe it will have a material adverse effect on the Company. In July 2001, a small amount of cesium, a radioactive source, was received from suppliers among scrap material and accidentally melted in the Company's Jacksonville mill furnace. Appropriate regulatory agencies were immediately notified and the contaminated material and equipment were confined. No injuries were reported and the environment was not put at risk due to alarms and procedures in place at the time. Melt shop activities at the Jacksonville mill were immediately halted pending cleanup of contaminated material and equipment. Melt shop operations resumed in early August and cleanup is largely completed. The Company is currently evaluating material disposal alternatives. The incident is an insured loss and therefore the Company does not anticipate a material impact to its financial position or results of operations. In general, the Company's estimate of remediation costs is based on its review of each site and the nature of the anticipated remediation activities to be undertaken. The Company's process for estimating such remediation costs includes determining for each site the expected remediation methods, and the estimated cost for each step of the remediation. In all such determinations, the Company employs outside consultants and providers of such remedial services to assist in making such determinations. Although the ultimate costs associated with the remediation are not known precisely, the Company estimated the total remaining costs to be approximately $2.0 million with these costs recorded as a liability at September 30, 2001, of which the Company expects to pay approximately $1.4 million within one year. Based on past use of certain technologies and remediation methods by third parties, evaluation of those technologies and methods by the Company's consultants and third-party estimates of costs of remediation-related services provided to the Company or which the Company and its consultants are aware, the Company and its consultants believe that the Company's cost estimates are reasonable. Considering the uncertainties inherent in determining the costs associated with the clean-up of such contamination, including the time periods over which such costs must be paid, the extent of contribution by parties which are jointly and severally liable, and the nature and timing of payments to be made under cost sharing arrangements, there can be no assurance the ultimate costs of remediation may not be greater or less than the estimated remediation costs. NOTE F - SUBSEQUENT EVENTS On October 22, 2001, the International Trade Commission, pursuant to President Bush's initiated Section 201 Trade Case, in a unanimous vote, found that steel imports of merchant and rebar products have damaged the domestic steel industry. The ITC will propose remedies to the President by December 19, 2001 after which the President may act to impose those remedies, impose alternative actions, or not take any action. The Company is party to the Section 201 Trade Case. On October 16, 2001, the Company repurchased at fair value the remaining shares of common stock (384,614 shares) and preferred stock (1,000,000 shares) that had been issued to a Gerdau subsidiary earlier in the year. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION Factors That May Affect Operating Results ----------------------------------------- This report contains certain forward-looking statements that are based on the beliefs of the Company's management, as well as assumptions made by, and information currently available to, the Company's management. Such statements include, among others, (i) the highly cyclical nature and seasonality of the steel industry, (ii) the fluctuations in the cost and availability of raw materials, (iii) the possibility of excess production capacity, (iv) the potential costs of environmental compliance, (v) the risks associated with potential acquisitions, (vi) further opportunities for industry consolidation, (vii) the impact of inflation and (viii) the fluctuations in the cost of electricity. Because such statements involve risks and uncertainties, actual actions and strategies and the timing and expected results thereof may differ materially from those expressed or implied by such forward-looking statements. The following presentation of management's discussion and analysis of the Company's financial condition and results of operations should be read in conjunction with the Company's Annual Report on Form 10-K as filed with the Securities and Exchange Commission. General The results of operations of the Company are largely dependent on the level of construction and general economic activity in the U.S. The Company's sales are seasonal with sales in the June and September quarters generally stronger than the rest of the year. The Company's cost of sales includes the cost of its primary raw material, steel scrap, the cost of converting scrap to finished steel products, the cost of warehousing and handling finished steel products and freight costs. The following table sets forth information regarding recent results of operations. 11

12 Net Sales: For the three and nine month periods ended September 30, 2001 shipped --------- tons volumes remained relatively flat compared to the same prior year periods. Due to market demand, product mix did change in the three months ended September 30, 2001 compared with the same prior year period as declines in rebar shipments were offset by increased merchant bar shipments. For the nine months ended September 30, 2001, average selling prices were down in all products compared to the same prior year period, however these were offset due to lower scrap costs. For the three months ended September 30, 2001, rebar price increases were largely offset by declines in merchant bar pricing from the same prior year period. However, subsequent to September 30, 2001, rebar prices have softened as imports of rebar continue to flood the market. The Company is participating in and supports recent efforts to control the importation of steel at unfair subsidized pricing. These efforts include seeking relief through the International Trade Commission through Section 201of the Trade Act of 1974. Cost of Sales: Yielded scrap costs, which comprise approximately 33% of the ------------- Company's cost of sales, averaged $90 per ton and $94 per ton in the nine months and three months ended September 30, 2001, respectively. Scrap prices have risen in the three months ended September 30, 2001 from the immediately preceding quarter, however are still down 7% from the three months ended September 30, 2000. The low prices reflect a combination of factors, including a strong dollar that restricts exporting scrap and low steel prices in the U.S. In the three months ended September 30, 2001, mill conversion costs declined from $131 per ton to $128 per ton compared to the same period last year due primarily to lower energy costs and lower outside maintenance expenses. Selling and Administrative: Selling and administrative expenses for the three -------------------------- months ended September 30, 2001 were approximately $375 thousand higher than the same period last year due primarily to payroll incentives and outside professional fees. For the nine months ended September 30, 2001, selling and administrative expenses were approximately $1.0 million lower than the same period last year due primarily to lower payroll incentives. Other Operating (Income) Expense: Other operating expense in the quarter ended -------------------------------- September 30, 2001 relates to the insurance deductible associated with the cesium melt at the Jacksonville mill in July 2001. Other operating income for the nine months ended September 30, 2001 relates to prior years tax refunds less the insurance deductible. Other operating expense in the nine months ended September 30, 2000 relates to startup costs relating to the Knoxville meltshop partially offset by receipts from settlements with electrode suppliers for price fixing violations. Interest Expense: Interest expense decreased in the three and nine months ended ---------------- September 30, 2001 from the same period in the prior year due to lower interest rates and lower outstanding debt. Liquidity and Capital Resources ------------------------------- Net cash provided by operating activities for the nine months ended September 30, 2001 was $75.0 million compared to $14.0 million for the same period in the prior year due to lower inventories and improved working capital management. Inventories have declined to more historical levels relative to sales after peaking in the middle of calendar year 2000 when sales demand was relatively weak. In the nine months ended September 30, 2001, the Company spent a combined $26.1 million related to capital projects, compared to $35.3 million in the same prior year period. In February 2001, the Company sold approximately $15 million of common stock and in March 2001, sold approximately $10 million of newly authorized Series A preferred stock, in each case to a subsidiary of Gerdau. The funds received were used for working capital purposes, for the reduction of debt, and for the acquisition of American Bright Bar. The Company bought back at fair value $5 million in June 2001 and $5 million in July 2001 of the common stock sold in February 2001. In October 2001, the Company bought back at fair value the remaining shares issued in February and March 2001. 13 The Company believes that amounts available from operating cash flows and funds available through its Revolving Credit Agreement will be sufficient to meet its expected cash needs and planned capital expenditures for the foreseeable future. The Company continues to comply with all of the covenants of its loan agreements. ITEM 3. QUANTITATIVE & QUALITATIVE DISCLOSURES ABOUT MARKET RISK The interest rates charged on the Company's debt are predominantly variable, the majority of which is based on LIBOR (London Interbank Offered Rate). The Company recently hedged $55 million of its debt via interest rate swaps that in effect result in a fixed interest rate on $55 million for a period of four to five years. As a result, the Company has reduced its exposure to fluctuations in interest rates with the result being that approximately 66% of the Company's debt is subject to changes in interest expense due to fluctuations of interest rates in the markets. PART II -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following documents are filed as exhibits to this Quarterly Report on Form 10-Q: Exhibit 10.1 -- Fourth Amendment to AmeriSteel Strategic Value Added Executive Short-Term Incentive Plan (b) Reports on Form 8-K: None. 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. AmeriSteel Corporation Date: November 5, 2001 /s/ Phillip E. Casey ------------------------------------------------------- Phillip E. Casey, President and Chief Executive Officer Date: November 5, 2001 /s/ Tom J. Landa ------------------------------------------------------- Tom J. Landa, Vice President, Chief Financial Officer and Secretary (Principal Financial Officer and Principal Accounting Officer); Director 14

AMERISTEEL CORP 10-Q