SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT FILED PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003
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)
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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
Indicate by check mark whether the registrant has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
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
--- ---
Aggregate market value of the voting and non voting common equity held by
non-affiliates of the registrant, computed by reference to the price at which
the common equity was last sold as of the last business day of the registrant's
most recently completed second fiscal quarter.
Not Applicable
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of January 31, 2004:
NEW CF&I, INC.
COMMON STOCK, $1 PAR VALUE 200
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(Title of Class) (Number of shares outstanding)
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy statement for Oregon Steel Mills, Inc. Annual Meeting of Stockholders to
be held April 29, 2004 is incorporated by reference into Part III of this
report.
NEW CF&I, INC.
CF&I STEEL, L.P.
TABLE OF CONTENTS
ITEM PAGE
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PART I
1. BUSINESS......................................................... 1
General...................................................... 1
Products..................................................... 2
Raw Materials ............................................... 3
Marketing and Customers...................................... 3
Competition and Other Market Factors......................... 4
Environmental Matters........................................ 5
Labor Matters................................................ 6
Employees.................................................... 7
Available Information........................................ 7
2. PROPERTIES....................................................... 7
3. LEGAL PROCEEDINGS................................................ 8
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 8
Executive Officers of the Registrant......................... 8
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.................................. 9
6. SELECTED FINANCIAL DATA.......................................... 9
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS................ 10
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT
MARKET RISK.................................................. 17
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 18
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE....................... 55
9A. CONTROLS AND PROCEDURES ......................................... 55
PART III
10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
and 11. AND EXECUTIVE COMPENSATION................................... 56
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS............... 58
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 58
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES........................... 59
PART IV
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND
REPORTS ON FORM 8-K.............................................. 60
SIGNATURES....................................................... 65
PART I
ITEM 1. BUSINESS
GENERAL
New CF&I, Inc. ("New CF&I") was incorporated in the State of Delaware on
May 5, 1992 as a wholly-owned subsidiary of Oregon Steel Mills, Inc. ("Oregon
Steel"). On March 3, 1993, New CF&I acquired a 95.2% interest in a newly formed
limited partnership, CF&I Steel, L.P. ("CF&I"), a Delaware limited partnership.
The remaining 4.8% interest was owned by the Pension Benefit Guaranty
Corporation ("PBGC"). In August of 1994, New CF&I sold a 10% equity interest in
New CF&I to a subsidiary of Nippon Steel Corporation ("Nippon"). In connection
with that sale, Nippon agreed to license to New CF&I a proprietary technology
for producing deep head-hardened ("DHH") rail products as well as to provide
certain production equipment to produce DHH rail. In November 1995, Oregon Steel
sold equity interests totaling 3% in New CF&I to two subsidiaries of the Nissho
Iwai Group ("Nissho Iwai"), a large Japanese trading company. Oregon Steel owns
the remaining 87% of New CF&I. In 1997, Oregon Steel purchased the 4.8% interest
in CF&I owned by the PBGC. In 1998, Oregon Steel sold a 0.5% interest in CF&I to
a subsidiary of Nippon.
New CF&I purchased the railroad business assets and CF&I purchased
substantially all of the steelmaking, fabricating, and metals assets of CF&I
Steel Corporation ("CF&I Steel"). These assets are located primarily in Pueblo,
Colorado ("Pueblo Mill"). The Pueblo Mill is a steel minimill which produces
long-length, standard and head-hardened steel rails, seamless tubular goods
("seamless pipe"), wire rod, and bar products. In January 1998, CF&I assumed the
trade name of Rocky Mountain Steel Mills ("RMSM").
Shortly after the acquisition of the Pueblo Mill in 1993, CF&I began a
series of major capital improvements designed to increase yields, improve
productivity and quality and expand CF&I's ability to offer specialty rail, rod
and bar products. The primary components of the capital improvements at the
Pueblo Mill are outlined below.
STEELMAKING. CF&I installed a ladle refining furnace and a vacuum
degassing facility and upgraded both continuous casters. During 1995, CF&I
eliminated ingot casting and replaced it with more efficient continuous casting
methods that allow CF&I to cast directly into blooms. These improvements
expanded the Pueblo Mill steelmaking capacity to 1.2 million tons.
ROD AND BAR MILL. At the time of its acquisition, the rod and bar mills
at the Pueblo Mill were relatively old and located in separate facilities, which
resulted in significant inefficiencies as CF&I shifted production between them
in response to market conditions. In 1995, CF&I commenced operation of a new
combination rod and bar mill with a new reheat furnace and a high-speed rod
train, capable of producing commodity and specialty grades of rod and bar
products. These improvements enable CF&I to produce a wider range of high margin
specialty products, such as high-carbon rod, merchant bar and other specialty
bar products, and larger rod coil sizes, which CF&I believes are preferred by
many of its customers.
RAIL MANUFACTURING. At the time of CF&I's acquisition of the Pueblo Mill,
rail was produced by ingot casting using energy-intensive processes with
significant yield losses as the ingots were reheated, reduced to blooms and then
rolled into rail. Continuous casting has increased rail yields and decreased
rail manufacturing costs. In 1996, CF&I invested in its railmaking capacity by
entering into the agreement with Nippon for the license of its proprietary
technology to produce DHH rail, and acquired the production equipment necessary
to produce the specialty rail. DHH rail is considered by the rail industry to be
longer lasting and of higher quality than rail produced using conventional
methods and, accordingly, the DHH rail usually has a corresponding higher
average selling price. CF&I believes it is able to meet the needs of a broad
array of rail customers with both traditional and DHH rail.
SEAMLESS PIPE. Seamless pipe produced at the Pueblo Mill consists of
seamless casing, coupling stock and standard and line pipe. Seamless pipe casing
is used as a structural retainer for the walls of oil or gas wells. Standard and
line pipe are used to transport liquids and gasses both above and underground.
CF&I's seamless pipe mill is equipped to produce the most widely used sizes of
seamless pipe (5" outside diameter through 10-3/4" outside diameter) in all
standard lengths. CF&I's production capability includes carbon and heat treated
tubular products. CF&I also sells semi-finished seamless pipe (referred to as
green tubes) for processing and finishing by others.
See Part I, Item 2, "Properties", for discussion of the operating
capacities of the Pueblo Mill.
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PRODUCTS
The following chart identifies CF&I's principal products and the primary
markets for those products.
Products Markets
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Rail Rail transportation
Rod and Bar products Construction
Durable goods
Capital equipment
Seamless pipe Oil and petroleum producers
The following table sets forth for the periods indicated the tonnage
shipped and CF&I's total shipments by product class.
TONS SHIPPED
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PRODUCT CLASS 2003 2002 2001
------------- ---- ---- ----
Rail 360,400 384,100 246,000
Rod and Bar 482,400 419,700 432,500
Seamless Pipe (FN1) 51,300 30,000 97,700
Semi-finished -- 2,700 4,700
------- ------- -------
Total 894,100 836,500 780,900
======= ======= =======
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(FN1) CF&I suspended operation at the seamless pipe mill from November 2001 to
April 2002, from mid-August 2002 to mid-September 2002, and from mid-November
2003 to date.
RAIL. CF&I produces standard carbon and high-strength head-hardened rail
at its Pueblo Mill. The Pueblo Mill is the sole manufacturer of rail west of the
Mississippi River and one of only three rail manufacturers in the Western
Hemisphere. Rails are manufactured in the six most popular rail weights (ranging
from 115 lb/yard through 141 lb/yard), in 39 and 80-foot lengths. The primary
customers for the Pueblo Mill's rail are the major western railroads, with an
increased share of the eastern railroad business in recent years. CF&I has also
developed a major presence in the Canadian and Mexican rail markets. Rail is
also sold directly to rail contractors, transit districts and short-line
railroads.
As part of its capital improvement program, CF&I improved its rail
manufacturing facilities to include the production of in-line head-hardened
rail. In-line head-hardened rail is produced through a proprietary technology,
known as deep head-hardened or DHH technology, which is licensed from a third
party. In 2003, CF&I produced approximately 137,000 tons of head-hardened
product using the DHH technology. The in-line DHH technology allows CF&I to
produce head-hardened product up to the capacity of the rail facility. Rail
produced using the improved in-line technology is considered by many rail
customers to be longer lasting and of higher quality than rail produced with
traditional off-line techniques. In 2001, the Pueblo Mill also began producing
and marketing an improved head-hardened rail called High Carbon Pearlite. This
rail metallurgy was designed for heavy application situations such as heavy
tonnage curves.
ROD AND BAR PRODUCTS. CF&I's rod and bar mill located at the Pueblo Mill
is able to produce coils of up to 6,000 pounds. The improved steel quality and
finishing capabilities allow CF&I to manufacture rods up to 1" in diameter, and
to manufacture a variety of high-carbon rod products such as those used for
spring wire, wire rope and tire bead. CF&I produces several sizes of coiled
rebar in the most popular grades for the reinforcement of concrete products.
SEAMLESS PIPE. CF&I's seamless pipe mill at the Pueblo Mill produces
seamless casing and standard and line pipe. The primary use of these products is
in the transmission and recovery of oil and natural gas resources, through
either above ground or subterranean pipelines. The seamless mill produces both
carbon and heat-treated tubular products. CF&I also markets green tubes to other
tubular mills for processing and finishing. Due to market conditions, operation
at the seamless pipe mill was suspended from November 2001 to April 2002, from
mid-August 2002 to mid-September 2002, and from mid-November 2003 to date.
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RAW MATERIALS
CF&I's principal raw material is ferrous scrap metal derived from, among
other sources, junked automobiles, railroad cars and railroad track materials
and demolition scrap from obsolete structures, containers and machines. In
addition, direct-reduction iron, hot-briquetted iron and pig iron (collectively
"alternate metallics") can substitute for a limited portion of the scrap used in
steel production, although the sources and availability of alternate metallics
are substantially more limited than those of scrap. The purchase prices for
scrap and alternate metallics are subject to market forces largely beyond the
control of CF&I, and are impacted by demand from domestic and foreign steel
producers, freight costs, speculation by scrap brokers and other conditions. The
cost of scrap and alternate metallics to CF&I can vary significantly, and CF&I's
product prices often cannot be adjusted, especially in the short-term, to
recover the costs of increases in scrap and alternate metallics prices.
The long-term demand for steel scrap and its importance to the domestic
steel industry may increase as steelmakers continue to expand scrap-based
electric arc furnace capacity; however, CF&I believes that near-term supplies of
steel scrap will continue to be available in sufficient quantities at
competitive prices. In addition, while alternate metallics are not currently
cost competitive with steel scrap, a sustained increase in the price of steel
scrap could result in increased implementation of these alternative materials.
MARKETING AND CUSTOMERS
Steel products are sold by CF&I principally through its own sales
organizations located at the Pueblo Mill and, as appropriate, through foreign
sales agents. In addition to selling to customers who consume steel products
directly, CF&I also sells to intermediaries such as steel service centers,
distributors, processors and converters.
The sales force is organized by product line. CF&I has separate sales
forces for rod and bar, seamless pipe and rail products. Most of CF&I's sales
are initiated by contacts between sales representatives and customers.
Accordingly, CF&I does not incur substantial advertising or other promotional
expenses for the sale of its products. CF&I had significant sales contracts to
two rail customers, Burlington Northern Santa Fe Corporation, and Union Pacific
Railroad which accounted for nearly 14% and 14%, respectively, of its total
revenue in 2003 compared to 12% and 16%, respectively, of its total revenue in
2002. In addition, CF&I sold rod products to Davis Wire Corporation which
accounted for 11% of its total revenue in 2003. No single customer or group of
affiliated customers represented more than 10% of CF&I's sales revenue in 2001.
Orders placed with CF&I generally are cancelable by the customer prior to
production.
CF&I does not have a general policy permitting return of purchased steel
products except for product defects. CF&I does not routinely offer extended
payment terms to its customers.
The demand for a majority of CF&I's products is not generally subject to
significant seasonal trends. CF&I's rail products are impacted by seasonal
demand, as dictated by the major railroads' procurement schedules. Demand for
oil country tubular goods ("OCTG") can be subject to seasonal factors. Overall
demand for OCTG is subject to significant fluctuations due to the volatility of
oil and gas prices and North American drilling activity as well as other factors
including competition from imports. CF&I does not have material contracts with
the United States government and does not have any major supply contracts
subject to renegotiation.
RAIL. The primary customers for the Pueblo Mill's rail are the major
western railroads, with an increased share of the eastern railroad business in
recent years. CF&I has also developed a major presence in the Canadian and
Mexican rail markets. Rail is also sold directly to rail distributors, transit
districts and short-line railroads. CF&I believes its proximity to the North
American rail markets benefits CF&I's marketing efforts.
BAR PRODUCTS. CF&I sells its bar products, primarily reinforcing bar, to
fabricators and distributors. The majority of these customers are located in the
United States, west of the Mississippi River.
ROD PRODUCTS. CF&I's wire rod products are sold primarily to wire drawers
ranging in location from the Midwest to the West Coast. The demand for wire rod
is dependent upon a wide variety of markets, including agricultural,
construction, capital equipment and the durable goods segments. CF&I entered the
high carbon rod market during 1995 as a direct result of the investment in the
new rolling facility. Since that time, CF&I's participation in the higher
margin, high carbon rod market has steadily increased, to the point where it now
represents over two-thirds of total rod product shipments. Typical end uses of
high carbon rod include spring wire, wire rope and tire bead.
SEAMLESS PIPE. CF&I's seamless pipe is sold primarily through its
internal sales force to a large number of oil exploration and production
companies and directly to companies outside of the OCTG industry, such as
construction companies. The market for CF&I's seamless pipe is primarily
domestic. The demand for this product is determined in large part by the number
and drilling depths of the oil and gas drilling rigs working in the United
States.
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COMPETITION AND OTHER MARKET FACTORS
The steel industry is cyclical in nature, and high levels of steel
imports, worldwide production overcapacity and other factors have adversely
affected the domestic steel industry in recent years. New CF&I is also subject
to industry trends and conditions, such as the presence or absence of sustained
economic growth and construction activity, currency exchange rates and other
factors. CF&I is particularly sensitive to trends in the oil and gas,
construction, capital equipment, rail transportation and durable goods segments,
because these industries are significant markets for CF&I's products.
Competition within the steel industry is intense. CF&I competes primarily
on the basis of product quality, price and responsiveness to customer needs.
Many of CF&I's competitors are larger and have substantially greater capital
resources, more modern technology and lower labor and raw material costs than
CF&I. Moreover, U.S. steel producers have historically faced significant
competition from foreign producers. The highly competitive nature of the
industry, combined with excess production capacity in some products, results in
significant sales pricing pressure for certain of CF&I's products.
RAIL. The majority of current rail requirements in the United States are
replacement rails for existing rail lines. Imports have been a significant
factor in the domestic rail market in recent years. CF&I's capital expenditure
program at the Pueblo Mill provided the rail production facilities with
continuous cast steel capability and in-line head-hardening rail capabilities
necessary to compete with other producers. International Steel Group Inc. is the
only other qualified domestic rail producer at this time.
ROD AND BAR. The competition in bar products includes a group of
minimills that have a geographical location close to the markets in or around
the Rocky Mountains. CF&I's market for wire rod ranges from the Midwest to the
West Coast. Domestic rod competitors include North Star Steel, Cascade Steel
Rolling Mills, Keystone Steel and Wire for commodity grades and GS Industries,
Ivaco Rolling Mills and North Star Steel for high carbon rod products.
SEAMLESS PIPE. CF&I's primary competitors in seamless pipe include a
number of domestic and foreign manufacturers. CF&I has the flexibility to
produce relatively small volumes of specified products on short notice in
response to customer requirements. Principal domestic competitors include U.S.
Steel Corporation and North Star Steel for seamless product. Lone Star Steel
competes with its welded ERW pipe in lieu of seamless, which is acceptable for
some applications.
ENVIRONMENTAL MATTERS
CF&I is subject to extensive United States and foreign, federal, state
and local environmental laws and regulations concerning, among other things,
wastewater, air emissions, toxic use reduction and hazardous materials disposal.
The Pueblo Mill is classified in the same manner as other similar steel mills in
the industry as generating hazardous waste materials because the melting
operation of the electric arc furnace produces dust that contains heavy metals.
This dust, which constitutes the largest waste stream generated at these
facilities, must be managed in accordance with applicable laws and regulations.
The Clean Air Act Amendments ("CAA") of 1990 imposed responsibilities on
many industrial sources of air emissions, including CF&I's plants. In addition,
the monitoring and reporting requirements of the law subject all companies with
significant air emissions to increased regulatory scrutiny. CF&I submitted
applications in 1995 to the Colorado Department of Public Health and Environment
("CDPHE") for a permit under Title V of the CAA. See below for a description of
CAA compliance issues relating to the Pueblo Mill. CF&I does not know the
ultimate cost of compliance with the CAA, which will depend on a number of
site-specific factors. Regardless of the outcome of the matters discussed below,
CF&I anticipates that it will be required to incur additional expenses and make
additional capital expenditures as a result of the CAA and future laws
regulating air emissions.
CF&I's future expenditures for installation of, and improvements to,
environmental control facilities, remediation of environmental conditions,
penalties for violations of environmental laws, and other similar matters are
difficult to predict accurately. It is likely that CF&I will be subject to
increasingly stringent environmental standards, including those relating to air
emissions, waste water and storm water discharge and hazardous materials use,
storage, handling and disposal. It is also likely that CF&I will be required to
make potentially significant expenditures relating to environmental matters,
including environmental remediation, on an ongoing basis. Although CF&I has
established reserves for the environmental matters described below, additional
measures may be required by environmental authorities or as a result of
additional environmental hazards, identified by such authorities, CF&I or others
each necessitating further expenditure. Accordingly, the costs of environmental
matters may exceed the amounts reserved. Expenditures of the nature described
below or liabilities resulting from hazardous substances located on CF&I's
currently or previously owned properties or used or generated in the conduct of
its business, or resulting from circumstances, actions, proceedings or claims
relating to environmental matters, may have a material adverse effect on New
CF&I's consolidated financial condition, results of operations, or cash flows.
In connection with the acquisition of the steelmaking and finishing
facilities located at the Pueblo Mill, CF&I accrued a liability of $36.7 million
for environmental remediation related to the prior owner's operations. CF&I
believed this amount was the best
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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 CDPHE finalized a
postclosure permit for hazardous waste units at the Pueblo Mill. As part of the
postclosure permit requirements, CF&I must conduct a corrective action program
for the 82 solid waste management units at the facility and continue to address
projects on a prioritized corrective action schedule which substantially
reflects a straight-line rate of expenditure over 30 years. The State of
Colorado mandated that the schedule for corrective action could be accelerated
if new data indicated a greater threat existed to the environment than was
presently believed to exist. At December 31, 2003, the accrued liability was
$28.8 million, of which $24.9 million was classified as non-current on the
consolidated balance sheet.
The CDPHE inspected the Pueblo Mill in 1999 for possible environmental
violations, and in the fourth quarter of 1999 issued a Compliance Advisory
indicating that air quality regulations had been violated, which was followed by
the filing of a judicial enforcement action ("Action") in the second quarter of
2000. In March 2002, CF&I and CDPHE reached a settlement of the Action, which
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. CF&I applied for the PSD permit
in April 2002 and the draft permit was issued for public comment on October 2,
2003.
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.
In response to the CDPHE settlement and the resolution of the EPA action,
CF&I expensed $2.8 million in 2001 for possible fines and non-capital related
expenditures. As of December 31, 2003, the accrued liability was approximately
$600,000.
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. This permit was modified in
April 2002 to incorporate the longer compliance schedule that is part of the
settlement with the CDPHE and the EPA. In September 2002, CF&I submitted a
request for a further extension of certain Title V compliance deadlines,
consistent with a joint petition by the State and CF&I for an extension of the
same deadlines in the State Consent Decree. This modification 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 lessor 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 Union filed suit in U.S. 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 what purports to be an agreement to
settle the labor dispute and all associated litigation, including that
referenced above. See "Labor Matters" for a description of the settlement. If,
for any reason, that settlement is not finalized, New CF&I does not believe the
suit will have a material adverse effect on its results of operations, however,
the result of litigation such as this is difficult to predict and an adverse
outcome with significant penalties is possible.
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
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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 December 31, 2003, approximately 819 Unreinstated Employees
have either returned to work or have declined CF&I's offer of equivalent work.
At December 31, 2003, approximately 131 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 131
Unreinstated Employees as of December 31, 2003. 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 supports 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.
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 shareholders 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 a new five-year collective bargaining agreement. The Settlement
includes the creation of a labor dispute settlement trust ("Trust") that will
hold assets to be contributed by either Oregon Steel or CF&I. Assets of the
Trust will include: (1) four million shares of Oregon Steel's common stock, (2)
a cash contribution of $2,500 for each beneficiary of the trust, estimated to be
in total $2.5 million, and (3) beginning on the effective date of the
Settlement, a ten year profit participation obligation consisting of 25% of CF&I
operating income, as defined, not to exceed $3 million per year for years one
through five and $4 million per year for years six through ten. The
beneficiaries of the Trust 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 benefits 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
-6-
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.
CF&I LABOR DISPUTE SETTLEMENT - ACCOUNTING
CF&I has recorded a charge of $31.1 million in the fourth quarter of
2003 related to the Settlement, the final amount of which is dependent upon the
price of Oregon Steel's common stock on the effective date of the Settlement.
The charge consisted of (1) $23.2 million for the value of 4 million shares of
Oregon Steel's common stock valued as of December 31, 2003, (2) the cash payment
of $2.5 million noted above, and (3) $5.4 million accrual for the LTD benefits
noted above. CF&I will adjust the amount of the common stock charge, either up
or down, for the change in the price of the common stock between December 31,
2003 and the effective date of the Settlement. The accrual for the LTD benefits
may also change, as better claims information becomes available. As employees
accept the early retirement benefits, CF&I will record an additional charge
totaling approximately $7.0 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.
EMPLOYEES
Approximately 560 employees of New CF&I work under collective bargaining
agreements with several unions, including the United Steelworkers of America. At
December 31, 2003, CF&I and the United Steelworkers of America had been unable
to agree on terms for a new labor agreement and are operating under the terms of
CF&I's last contract offer, which was implemented in 1998. See "BUSINESS-LABOR
MATTERS."
CF&I also has a profit participation plan, which permits eligible
employees to share in the pretax income of CF&I. CF&I may modify, amend or
terminate the plan, at any time, subject to the terms of various labor
agreements.
AVAILABLE INFORMATION
Information about New CF&I and CF&I can be found on Oregon Steel's
website at www.osm.com. New CF&I and CF&I make available free of charge, on or
-----------
through Oregon Steel's website, their annual, quarterly and current reports, and
any amendments to those reports, as soon as reasonably practicable after
electronically filing such reports with the Securities and Exchange Commission
("SEC"). Information contained on Oregon Steel's website is not part of this
report.
ITEM 2. PROPERTIES
The Pueblo Mill is located in Pueblo, Colorado on approximately 570
acres. The operating facilities principally consist of two electric arc
furnaces, a ladle refining furnace and vacuum degassing system, two 6-strand
continuous round casters for producing semi-finished steel (one of which has not
operated since 1998 and for accounting purposes is considered an impaired
asset), and three finishing mills (a rail mill, a seamless pipe mill, and a rod
and bar mill). Due to market conditions, operations at the seamless pipe mill
were suspended from November 2001 to April 2002, from mid-August 2002 to
mid-September 2002, and from mid-November 2003 to date.
At December 31, 2003, CF&I had the following nominal capacities, which
are affected by product mix:
PRODUCTION 2003
CAPACITY PRODUCTION
---------- ----------
(IN TONS)
Melting 1,200,000 876,500
Finishing Mills (FN1) 1,200,000 894,300
- -------------
(FN1)Includes the production capacity and production in 2003 of 150,000 tons and
46,600 tons, respectively, of the seamless pipe mill.
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%. New CF&I and CF&I (collectively "Guarantors") guarantee the obligations of
the 10% Notes,
-7-
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
receivables and inventory. See disclosure regarding Guarantees in Note 11 of
Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
See Part I, Item 1, "Business - Environmental Matters", for discussion of
(a) the lawsuit initiated by the Union alleging violations of the CAA and (b)
the negotiations with CDPHE and EPA regarding environmental issues at CF&I.
See Part I, Item 1, "Business - Labor Matters", for the status of the
labor dispute at CF&I.
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 such
insurance coverage. There is no assurance that the insurance coverage currently
carried by New CF&I will be available in the future at reasonable rates, if at
all.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were voted upon during the fourth quarter of the year ended
December 31, 2003.
EXECUTIVE OFFICERS OF THE REGISTRANT
Officers are elected by the Board of Directors of New CF&I to serve for a
period ending with the next succeeding annual meeting of the Board of Directors
held immediately after the annual meeting of stockholders. CF&I has no
independent executive officers.
The name of each executive officer of New CF&I, age as of February 1,
2004, and position(s) and office(s) and all other positions and offices held by
each executive officer are as follows:
ASSUMED PRESENT
EXECUTIVE AGE POSITION(S) EXECUTIVE POSITION(S)
- --------------------- --- -------------------------------- ---------------------
James E. Declusin 61 Chairman of the Board, President August 2003
and Chief Executive Officer
L. Ray Adams 53 Vice President - Finance, Chief April 1994
Financial Officer and Treasurer
Robert A. Simon 42 Vice President and General September 2000
Manager
Jeff S. Stewart 42 Corporate Controller April 2000
New CF&I or Oregon Steel has employed each of the executive officers
named above, except James E. Declusin, in an executive or managerial role for at
least five years. James E. Declusin retired from California Steel Industries
("CSI") as Executive Vice President and Chief Operating Officer in 2000. Prior
to joining CSI, Mr. Declusin spent seventeen years with Kaiser Steel
Corporation. Mr. Declusin has been a director of Oregon Steel Mills since 2000.
-8-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Neither New CF&I's common stock nor CF&I's partnership interests are
publicly traded. At December 31, 2003, the number of New CF&I's stockholders of
record was four. No dividends have been paid on the common stock.
ITEM 6. SELECTED FINANCIAL DATA
The following information is for New CF&I:
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT TONNAGE AND PER TON AMOUNTS)
INCOME STATEMENT DATA:
Sales (FN1) $ 355,932 $ 329,707 $ 310,789 $ 281,614 $ 263,637
Cost of sales 335,815 275,378 278,130 245,800 246,312
Fixed and other asset impairment charges 9,157 -- -- -- --
Labor dispute settlement charges 31,089 -- -- -- --
Settlement of litigation -- -- (2,190) -- (4,539)
Gain on sale of assets (2,155) (1,108) (19) (2,970) --
Selling, general and administrative
expenses 17,490 20,404 28,447 17,740 19,462
Profit participation -- 1,561 -- 127 --
--------- --------- --------- --------- ---------
Operating income (loss) (35,464) 33,472 6,421 20,917 2,402
Interest expense (24,087) (25,393) (28,470) (26,755) (26,092)
Minority interests 2,567 (392) 1,193 628 1,200
Other income, net (52) 862 368 391 520
--------- --------- --------- --------- ---------
Income (loss) before tax (57,036) 8,549 (20,488) (4,819) (21,970)
Income tax benefit (expense) 3,821 (4,117) 5,525 1,688 8,718
--------- --------- --------- --------- ---------
Income (loss) before accounting change (53,215) 4,432 (14,963) (3,131) (13,252)
Cumulative effect of change in accounting
principle, net of tax, net of
minority interest -- (19,070) -- -- --
--------- --------- --------- --------- ---------
Net loss $ (53,215) $ (14,638) $ (14,963) $ (3,131) $ (13,252)
========= ========= ========= ========= =========
BALANCE SHEET DATA (AT DECEMBER 31):
Working capital $ 18,994 $ 23,841 $ 9,831 $ 25,668 $ 9,156
Total assets 295,911 314,117 342,932 360,617 337,781
Current liabilities 58,122 60,596 70,884 72,040 58,412
Long-term debt 259,424 228,208 235,330 236,010 224,252
Total stockholders' deficit (96,019) (42,095) (25,486) (9,003) (5,872)
OTHER DATA:
Depreciation and amortization $ 18,689 $ 18,631 $ 17,670 $ 18,495 $ 18,635
Capital expenditures $ 11,648 $ 8,562 $ 7,899 $ 6,900 $ 6,810
Total tonnage sold 894,100 836,500 780,900 757,000 734,900
(FN1) Includes freight revenues of $15.3 million, $14.3 million, $16.6 million and
$11.3 million, in 2003, 2002, 2001, and 2000, respectively, and sale of
electricity of $2.2 million and $0.8 million in 2001 and 2000, respectively.
-9-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The following information contains forward-looking statements, which are
subject to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Statements made in this report that are not statements of
historical fact are forward-looking statements. Forward-looking statements made
in this report can be identified by forward-looking words such as, but not
limited to, "expect," "anticipate," "believe," "intend," "plan," "seek,"
"estimate," "continue," "may," "will," "would," "could," and similar
expressions. These forward-looking statements are subject to risks and
uncertainties and actual results could differ materially from those projected.
These risks and uncertainties include, but are not limited to, general business
and economic conditions; competitive products and pricing, as well as
fluctuations in demand; the supply of imported steel and subsidies provided by
foreign governments to support steel companies domiciled in their countries;
changes in U.S. or foreign trade policies affecting steel imports or exports;
potential equipment malfunction; work stoppages; plant construction and repair
delays; reduction in electricity supplies and the related increased costs and
possible interruptions of supply; changes in the availability and costs of raw
materials and supplies used by New CF&I; costs of environmental compliance and
the impact of governmental regulations; risks related to the outcome of the
pending union dispute; and failure of New CF&I to predict the impact of lost
revenues associated with interruption of New CF&I's, its customers' or
suppliers' operations.
OVERVIEW
The consolidated financial statements include the accounts of New CF&I
and its subsidiaries, which include the wholly owned Colorado and Wyoming
Railway Company ("C&W") and a 95.2% interest in CF&I. All significant
intercompany balances and transactions have been eliminated. For the years ended
December 31, 2003, 2002, and 2001, total sales of CF&I were 98.0%, 97.7%, and
97.9%, respectively, of the consolidated sales of New CF&I. For the years ended
December 31, 2003, 2002, and 2001, cost of sales and freight of CF&I were 98.5%,
98.1%, and 98.2%, respectively, of the consolidated cost of sales and freight of
New CF&I.
In May 2003, CF&I determined that the new single furnace operation (as
referenced in Note 11 to the Consolidated Financial Statements) 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. CF&I
recorded a pre-tax charge to earnings of approximately $9.1 million in the
second quarter of 2003 related to this asset impairment. For a discussion of
impairments, see "IMPAIRMENT CHARGES" section below.
On January 15, 2004 CF&I announced a tentative agreement to settle the
labor dispute between the Union and CF&I. CF&I has recorded a charge of $31.1
million in the fourth quarter of 2003 related to the tentative settlement. See
"Labor Dispute Settlement Charges" section below for further discussion of this
tentative agreement.
OPERATIONS
The following table sets forth, for the periods indicated, the
percentages of sales represented by selected income statement items and
information regarding selected balance sheet data:
YEAR ENDED DECEMBER 31,
------------------------------
2003 2002 2001
---- ---- ----
INCOME STATEMENT DATA:
Total sales 100.0% 100.0% 100.0%
Cost of sales 94.3 83.5 89.5
Fixed and other asset impairment charges 2.6 -- --
Labor dispute settlement charges 8.7 -- --
Settlement of litigation -- -- (0.7)
Gain on sale of assets (0.6) (0.3) --
Selling, general and administrative expenses 4.9 6.2 9.2
Incentive compensation -- 0.5 --
----- ----- -----
Operating income (loss) (9.9) 10.1 2.0
Interest expense (6.8) (7.7) (9.2)
Minority interests 0.6 (0.1) 0.4
Other income, net 0.1 0.3 0.1
----- ----- -----
Net income (loss) before taxes (16.0) 2.6 (6.7)
Income tax benefit (expense) 1.1 (1.2) 1.8
----- ----- -----
Net income (loss) before accounting change (14.9) 1.4 (4.9)
Cumulative effect of change in accounting
principle, net of tax, net of minority interest -- (5.8) --
----- ----- -----
Net loss (14.9)% (4.4)% (4.9)%
===== ===== =====
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BALANCE SHEET DATA:
Current ratio 1.3:1 1.4:1 1.1:1
Total debt as a percentage of capitalization (FN1) 158.8% 122.6% 130.6%
(FN1) Calculation of debt as a percentage of capitalization is equal to total debt (short and long-term)
divided by the sum of adjusted stockholders' equity (total equity less net goodwill) and total debt.
The following table sets forth, for the periods indicated, tonnage sold,
revenues and average selling price per ton:
YEAR ENDED DECEMBER 31,
---------------------------------
2003 2002 2001
---- ---- ----
TONNAGE SOLD:
Rail 360,400 384,100 246,000
Rod and Bar 482,400 419,700 432,500
Seamless Pipe (FN1) 51,300 30,000 97,700
Semi-finished -- 2,700 4,700
-------- ------- -------
Total 894,100 836,500 780,900
======= ======= =======
REVENUES:
Product sales (in thousands) (FN2) $340,658 $315,448 $291,993
Average selling price per ton sold (FN2) $ 381 $ 377 $ 374
- -----------------
(FN1) Due to market conditions, operation at the seamless pipe mill was
suspended from November 2001 to April 2002, from mid-August 2002 to
mid-September 2002, and from mid-November 2003 to date.
(FN2) Product sales and average selling price per ton sold exclude freight
revenues of $15.3 million, $14.3 million, and $16.6 million, in 2003,
2002, and 2001, respectively, and sale of electricity of $2.2 million in
2001.
New CF&I's operating results were adversely affected in 2003 by reduced
shipments of rail and higher raw material and energy costs, which were partially
offset by increased demand and pricing for rod and bar products. Operating
income was further reduced by the recognition of impairment to fixed assets of
$9.1 million and by the $31.1 million charge for the tentative settlement of the
labor dispute. In addition, New CF&I believes that high fixed costs motivate
steel producers to maintain high output levels even in the face of falling
prices, thereby increasing further downward pressures on selling prices. The
domestic steel industry and New CF&I's business are highly cyclical in nature.
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 China, a weak United
States dollar, and an increase in ocean freight costs. New CF&I anticipates that
market conditions will remain unsettled until demand in China stabilizes. 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
New CF&I's discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with Generally Accepted Accounting
Principles ("GAAP"). The preparation of these financial statements requires New
CF&I to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, New CF&I evaluates its estimates. New
CF&I bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances. This
provides a basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions, and these
differences may be material.
New CF&I believes the following critical accounting policies affect
its more significant judgments and estimates used in the preparation of its
consolidated financial statements.
EMPLOYEE BENEFITS PLANS AND OTHER POST-RETIREMENT BENEFITS. Annual
pension and other post-retirement benefits ("OPRB") expenses are calculated by
third party actuaries using standard actuarial methodologies. The actuaries
assist New CF&I in making estimates based on both historical and current
information and estimates about future events and circumstances. Significant
assumptions used in the valuation of pension and OPRB include expected return on
plan assets, discount rate, rate of increase in compensation levels
-11-
and the health care cost trend rate. New CF&I accounts for the defined benefit
pension plans using Statement of Financial Accounting Standards No. 87,
"EMPLOYER'S ACCOUNTING FOR PENSIONS". As a result of continuing declines in
interest rates, partially offset by favorable investment returns of New CF&I's
defined benefit pension plans' assets, New CF&I increased the minimum pension
liability at December 31, 2003 by $0.7 million after tax effect. This adjustment
did not impact current earnings. For further details regarding New CF&I's
benefits and post-retirement plans, see Note 9 to the Consolidated Financial
Statements.
ENVIRONMENTAL LIABILITIES. All material environmental remediation
liabilities for non-capital expenditures, which are both 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 when estimated time periods are changed, thereby affecting 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. Even though New CF&I has established certain reserves
for environmental remediation, environmental authorities may require additional
remedial measures, and additional environmental hazards, necessitating further
remedial expenditures, may be asserted by these authorities or by private
parties. Accordingly, the costs of remedial measures may exceed the amounts
reserved.
DEFERRED TAXES. Deferred income taxes reflect the differences between the
financial reporting and tax bases of assets and liabilities at year-end based on
enacted tax laws and statutory tax rates. Tax credits are recognized as a
reduction of income tax expense in the year the credit arises. A valuation
allowance is established when necessary to reduce deferred tax assets to the
amount more likely than not to be realized.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. New CF&I maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. As of December 31, 2003, the allowance of
doubtful accounts was approximately $361,000. In establishing a proper allowance
for doubtful accounts, New CF&I evaluates the collectibility of its accounts
receivable based on a combination of factors. In cases where management is aware
of the circumstances that may impair a specific customer's ability to meet its
financial obligations, New CF&I records a specific allowance against amounts due
from customers, and thereby reduces the net recognized receivable amount New
CF&I reasonably believes will be collected. For all other customers, New CF&I
evaluates the allowance for doubtful accounts based on the length of time the
receivables are past due, historical collection experience, customer
credit-worthiness and economic trends.
LONG-LIVED ASSET IMPAIRMENTS. Long-lived asset impairments are recognized
when the carrying value of those productive assets exceeds their aggregate
projected undiscounted cash flows. These undiscounted cash flows are based on
New CF&I's long range estimates of market conditions, with due consideration to
historical, cyclical, operating cash flows and the overall performance
associated with the individual asset. If future demand and market conditions are
less favorable than those projected by New CF&I, or if the probability of
disposition of the assets differs from that previously estimated by New CF&I,
additional asset write-downs may be required.
CONTINGENCIES. New CF&I is subject to the possibility of loss
contingencies arising in the normal course of business. New CF&I considers the
likelihood of loss or impairment of an asset or the incurrence of a liability,
as well as its ability to reasonably estimate the amount of loss in determining
loss contingencies. An estimated loss is accrued when it is probable that an
asset has been impaired or a liability has been incurred and the amount can be
reasonably estimated. New CF&I regularly evaluates current information available
to determine whether such accruals should be adjusted. See Note 11 to the
Consolidated Financial Statements for a discussion of contingencies.
DISCUSSION AND ANALYSIS OF INCOME
COMPARISON OF 2003 TO 2002
(In thousands except tons, per ton, and percentages)
YEAR ENDED DECEMBER 31,
------------------------------------------------
2003 2002 CHANGE % CHANGE
-------- -------- -------- --------
Product Sales $340,658 $315,448 $ 25,210 8.0%
Tons shipped
Rail 360,400 384,100 (23,700) (6.2)%
Rod and Bar 482,400 419,700 62,700 14.9%
Seamless Pipe 51,300 30,000 21,300 71.0%
Semi-finished -- 2,700 (2,700) (100.0)%
-------- -------- -------- ---------
Total 894,100 836,500 57,600 6.9%
======== ======== ======== =========
Sales price per ton $ 381 $ 377 $ 4 1.1%
-12-
SALES. The increase in consolidated product sales and average sales price
was primarily due to higher shipments of rod and bar products as a result of
higher rod production. A reduction in North American rod capacity over the past
several years has led to a reduction in supply and resultant higher selling
prices.
GROSS PROFIT
2003 2002 CHANGE % CHANGE
---- ---- ------ --------
Gross Profit $20,117 $54,329 $(34,212) (62.97)%
The decrease in gross profit was a result of reduced volume of
high-margin rail sales and increased raw material and energy costs. During much
of the year, New CF&I was unable to pass these costs to customers in the form of
higher selling prices because of market conditions and fixed-price rail
contracts.
SELLING, GENERAL AND ADMINISTRATIVE, AND OTHER
2003 2002 CHANGE % CHANGE
---- ---- -------- --------
Selling, General and Administrative $17,490 $20,404 $(2,914) (14.3)%
Incentive Compensation $ -- $ 1,561 $(1,561) (100.0)%
Gain on Sale of Assets $ 2,155 $ 1,108 $ 1,047 94.5%
The decrease in selling, general and administrative expenses ("SG&A") for
2003 was the result of a decrease of $0.7 million in expenses for information
technology support and equipment, and a decrease of $2.2 million in legal
expense.
INTEREST EXPENSE
2003 2002 CHANGE % CHANGE
---- ---- ------ --------
Interest Expense $24,087 $25,393 $(1,306) (5.1)%
The decrease in interest expense was primarily due to a decreased
borrowing rate during 2003, which was partially offset by increased average
borrowings in 2003.
INCOME TAX BENEFIT (EXPENSE)
2003 2002 CHANGE % CHANGE
---- ---- ------ --------
Income Tax Benefit (Expense) $3,821 $(4,117) $7,938 192.8%
The effective income tax benefit rate was 6.7% in 2003, compared to the
tax expense rate of 48.2% in 2002. The effective income tax rate for 2003 varied
from the combined state and federal statutory rate principally because New CF&I
established a valuation allowance for certain federal and state net operating
loss carry-forwards, state tax credits, and alternative minimum tax credits.
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 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, New CF&I maintained a valuation allowance of $26.8 million as of
December 31, 2003 due to uncertainties regarding the realization of these
deferred tax assets. New CF&I will continue to evaluate the need for valuation
allowances in the future. As part of its realizability analysis, New CF&I
factors in the tax situation of the entire Oregon Steel Consolidated Group.
Changes in estimated future taxable income and other underlying factors may lead
to adjustments to the valuation allowance.
-13-
COMPARISON OF 2002 TO 2001
(In thousands except tons, per ton, and percentages)
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2002 2001 CHANGE % CHANGE
Product Sales $ 315,448 $ 291,993 $ 23,455 8.0%
Tons shipped
Rail 384,100 246,000 138,100 56.1%
Rod and Bar 419,700 432,500 (12,800) (3.0)%
Seamless Pipe 30,000 97,700 (67,700) (69.3)%
Semi-finished 2,700 4,700 (2,000) (42.6)%
--------- --------- --------- -------
Total 836,500 780,900 55,600 7.1%
========= ========= ========= =======
Sales price per ton $ 377 $ 374 $ 3 0.8%
SALES. Growth in both product sales and related average selling prices
were due primarily to higher shipments of rail products in 2002 following the
sharp reduction in capital spending by the major railroads in 2001. Seamless
pipe market conditions in the drilling industry deteriorated and the seamless
mill was shut-down from November 2001 to April 2002, and from mid-August 2002 to
mid-September 2002.
GROSS PROFIT
2002 2001 CHANGE % CHANGE
---- ---- ------ --------
Gross Profit $54,329 $32,659 $21,670 66.4%
The increase in gross profit was primarily the result of increased prices
and shipments of rail products and an increase in rod and bar prices, offset by
reduced seamless pipe shipments and unit price. A reduction in North American
rod capacity in 2002 led to a reduction in supply and resultant higher selling
prices.
SELLING, GENERAL AND ADMINISTRATIVE
2002 2001 CHANGE % CHANGE
---- ---- ------ --------
Selling, General and Administrative $20,404 $28,447 $(8,043) (28.3)%
The decrease in SG&A for 2002 was due in part to $3.1 million in
non-recurring seamless pipe commission fees for 2001, environmental fines of
$2.2 million accrued in 2001, a decrease in shipping costs of $1.2 million and a
reduction in bad debt expense of $1.0 million.
INTEREST EXPENSE
2002 2001 CHANGE % CHANGE
---- ---- ------ --------
Interest Expense $25,393 $28,470 $(3,077) (10.8)%
The decrease in interest expense from 2001 is due to a lower interest
rate and decreased average borrowings from Oregon Steel.
INCOME TAX BENEFIT (EXPENSE)
2002 2001 CHANGE % CHANGE
---- ---- ------ --------
Income Tax Benefit (Expense) $(4,117) $5,525 $(9,642) (174.5)%
-14-
The effective income tax (expense) or benefit rate was (48.2)% and 26.9%
for 2002 and 2001, respectively. The effective income tax rate for 2002 varied
principally from the combined state and federal statutory rate due to the
adjustments created by changes in New CF&I's valuation allowance for certain
state tax credits, and changes in non-deductible fines and penalties.
IMPAIRMENT CHARGES
As part of the settlement with the CDPHE and the EPA, CF&I is required 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, CF&I recorded a pre-tax
impairment charge to earnings of $9.1 million in the quarter ended June 30,
2003. Of the 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,
the carrying value of the fixed assets was zero after the effect of the
impairment charge.
LABOR DISPUTE SETTLEMENT CHARGES
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 shareholders 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 a new five-year collective bargaining agreement. The Settlement
includes the creation of a labor dispute settlement trust ("Trust") that will
hold assets to be contributed by either Oregon Steel or CF&I. Assets of the
Trust will include: (1) four million shares of Oregon Steel's common stock, (2)
a cash contribution of $2,500 for each beneficiary of the trust, estimated to be
in total $2.5 million, and (3) beginning on the effective date of the
Settlement, a ten year profit participation obligation consisting of 25% of CF&I
operating income, as defined, not to exceed $3 million per year for years one
through five and $4 million per year for years six through ten. The
beneficiaries of the Trust 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.
CF&I LABOR DISPUTE SETTLEMENT - ACCOUNTING
CF&I has recorded a charge of $31.1 million in the fourth quarter of
2003 related to the Settlement, the final amount of which is dependent upon the
price of Oregon Steel's common stock on the effective date of the Settlement.
The charge consisted of (1) $23.2 million for the value of 4 million shares of
Oregon Steel's common stock valued as of December 31, 2003, (2) the cash payment
of $2.5 million noted above, and (3) $5.4 million accrual for the LTD benefits
noted above. CF&I will adjust the amount of the common stock charge, either up
or down, for the change in the price of the common stock between December 31,
2003 and the effective date of the Settlement. The accrual for the LTD benefits
may also change, as better claims information becomes available. As employees
accept the early retirement benefits, CF&I will record an additional charge
totaling approximately $7.0 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.
-15-
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operations for 2003 was $0.5 million compared to
$24.0 million of cash provided by operations in 2002. The items primarily
affecting the $23.5 million decrease in operating cash flows were an increase of
$38.6 million in net loss including non-cash transactions of (1) the write-off
of $31.9 million of goodwill during the first quarter of 2002 resulting in a
cumulative effect of change in accounting principle of $19.1 million (net of a
$11.3 million tax effect and $1.5 million of minority interest); (2) estimated
settlement costs of $31.1 million related to the tentative agreement with the
Union in the fourth quarter of 2003, (3) an impairment of fixed and other assets
of $9.1 million related to the caster at the Pueblo Mill in the second quarter
of 2003; and (4) changes in deferred income taxes of $(3.5) million in 2003
versus $2.1 million in 2002; and net cash transactions resulting from changes in
assets and liabilities of $6.7 million.
Net working capital at December 31, 2003 decreased $4.8 million compared
to December 31, 2002, reflecting a $7.3 million decrease in current assets and a
$2.5 million decrease in current liabilities. The decrease in current assets was
primarily due to a decrease in deferred taxes of $1.4 million and an increase in
accounts receivable of $4.5, and a decrease in inventories of $11.1 million. The
accounts receivable turnover for the year ended December 31, 2003, as measured
in average daily sales outstanding, decreased to 30 days, as compared to 37 days
for the year ended December 31, 2002. The decrease was attributable to a faster
turnover of product receivables from customers paying earlier in order to
utilize cash discounts, and an increased effort on collections of receivables.
The following table summarizes New CF&I's contractual obligations at
December 31, 2003, and the effect such obligations are expected to have on
liquidity and cash flow in future periods.
PAYMENTS DUE BY PERIOD
---------------------------------------------------------
LESS THAN MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
----------------------- ----- ------ --------- --------- -------
(in thousands)
Long-term debt (FN1) $ 259,424 $ -- $259,424 $ -- $ --
Capital lease obligations
814 315 499 -- --
Operating lease obligations
13,719 2,203 4,404 4,397 2,715
Purchase obligations (FN2) 12,059 1,392 2,784 2,784 5,099
Electric arc furnace improvements(FN3) 22,632 8,615 14,017 -- --
Pension obligations (FN6) 31 (FN4) (FN4) (FN4)
Other post-retirement benefits (FN5) (FN6) 574 574 574 (FN5)
- ---------------------------
(FN1) Principal payments on loans from Oregon Steel. (See below)
(FN2) Oxygen supply contract where the future amount is estimated based on
current prices. See Note 11 to the Consolidated Financial Statements.
(FN3) Amounts required to satisfy the CDPHE settlement and the EPA action.
These amounts are to be expended over a 16 month period after approval
of the PSD air permit.
(FN4) New CF&I's obligation is limited to the next year's minimum current ERISA
obligation. It is not possible to determine the future ERISA minimum
required contributions beyond 2004.
(FN5) New CF&I has estimated the future obligations based upon the recent
history of benefits paid. Amounts in excess of 5 years cannot be reliably
estimated.
(FN6) Totals cannot be determined because future obligations cannot be
determined.
Borrowing requirements for capital expenditures and other cash needs,
both short-term and long-term, are provided through two loans from Oregon Steel.
As of December 31, 2003, $259.4 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%. The
principal on the two loans is due on demand or, if no demand is made, $220
million is due on December 31, 2004, and $39.4 million is due on December 31,
2005. Oregon Steel does not expect to demand repayment of the obligation 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, due in part to the 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 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 New 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 as favorable to
-16-
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 December 31, 2003, New CF&I, CF&I, and C&W are borrowers under the
Oregon Steel Credit Agreement, which will expire on June 30, 2005. At December
31, 2003, $5.0 million was restricted under the Credit Agreement, $16.0 million
was restricted under the outstanding letters of credit, and $43.8 million was
available for use. The Credit Agreement is secured primarily by the borrowers'
accounts receivable and inventory in addition to certain equity and intercompany
interests of the borrowers. 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 0.50%. During the year, short-term
borrowings ranged from zero to $17 million, at an interest rate of approximately
5%. As of December 31, 2003, 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 line fees were
0.75%. 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 Oregon Steel Credit Agreement, New CF&I,
CF&I and C&W generally borrow directly from Oregon Steel as discussed above.
During 2003, New CF&I expended (exclusive of capital interest)
approximately $11.6 million on capital projects. Despite the unfavorable results
for 2003, caused principally by a $31.1 million recognition of labor dispute
settlement charges and impairment of fixed and other assets of $9.1 million, New
CF&I has been able to satisfy its needs for working capital and capital
expenditures through operating income and in part through its ability to secure
adequate financing arrangements with Oregon Steel. New CF&I believes that its
anticipated needs for working capital and capital expenditures for the next
twelve months will be met from funds generated from operations, and if
necessary, from the available credit facility with Oregon Steel.
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 likely have a material adverse effect on New CF&I. In addition,
New CF&I faces potential costs and liabilities associated with environmental
compliance and remediation issues and the labor dispute at the Pueblo Mill. See
"Business-Environmental Matters" and "Business-Labor Matters" for a description
of those matters. Any costs or liabilities in excess of those expected by New
CF&I could have a material adverse effect on New CF&I.
CF&I anticipates that it will ship approximately 370,000 tons of rail,
and approximately 470,000 tons of rod and bar products. Seamless pipe shipments
will be dependent on market conditions in the drilling industry. CF&I
anticipates that product category average selling prices in 2004 will be higher
than those of 2003, although higher raw material and energy costs are expected
to somewhat reduce the positive impact of higher selling prices on the operating
income for New CF&I. Accordingly, New CF&I expects consolidated operating income
to be higher in 2004 versus 2003. New CF&I expects liquidity to remain adequate
through 2004 unless there is a substantial negative change in overall economic
markets.
NEW ACCOUNTING PRONOUNCEMENTS
See Part II, Item 8, "Financial Statements and Supplementary Data - Notes
to Consolidated Financial Statements" for New CF&I and "Notes to Financial
Statements for CF&I".
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discussion of market risks necessarily includes
forward-looking statements. Actual changes in market conditions may cause actual
results to differ materially, including, but not limited to: changes in income
or cash flows requiring significant changes in the use of debt instruments or
the cash flows associated with them, or changes in commodity market conditions
affecting availability of materials in ways not predicted by New CF&I.
-17-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
New CF&I, Inc.:
We have audited the accompanying consolidated balance sheet of New CF&I, Inc. (a
Delaware corporation) and subsidiaries as of December 31, 2003, and the related
consolidated statements of income, changes in stockholders' deficit, and cash
flows for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2003 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of New CF&I,
Inc. and subsidiaries as of December 31, 2003, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
Portland, Oregon
March 5, 2004
-18-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of New CF&I, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(ii) present fairly, in all material respects, the
financial position of New CF&I, Inc. and its subsidiaries at December 31, 2002
and 2001, and the results of their operations and their cash flows for each of
the two years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(v) on page 51 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related financial statements. These financial statements and financial statement
schedule are the responsibility of New CF&I's management; our responsibility is
to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Notes 2 and 5 to the financial statements, New CF&I changed its
method of accounting for goodwill in 2002.
PRICEWATERHOUSECOOPERS LLP
Portland, Oregon
March , 2004
-19-
NEW CF&I, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT FOR PER SHARE AND SHARE AMOUNTS)
DECEMBER 31,
------------------------------------------
2003 2002 2001
---------- ---------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 5 $ 289 $ 3
Trade accounts receivable, less allowance for
doubtful accounts of $361, $1,811, and $1,972 36,933 32,458 40,383
Inventories 35,028 46,104 36,058
Deferred tax asset 3,396 4,841 3,965
Other 1,754 745 306
--------- --------- ---------
Total current assets 88,614 84,437 80,715
--------- --------- ---------
Property, plant and equipment:
Land and improvements 3,225 3,454 3,503
Buildings 19,852 19,886 19,959
Machinery and equipment 270,772 260,791 254,316
Construction in progress 6,030 5,151 3,178
--------- --------- ---------
299,879 289,282 280,956
Accumulated depreciation (137,622) (111,469) (93,019)
--------- --------- ---------
Net property, plant and equipment 162,257 177,813 187,937
Cost in excess of assets acquired, net -- -- 31,863
Intangibles, net 11,803 12,377 12,662
Noncurrent deferred tax asset 37,766 32,786 24,349
Minority interests (6,969) (4,402) (3,099)
Other assets -- 2,302 2,307
--------- --------- ---------
$ 295,911 $ 314,117 $ 342,932
========= ========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ -- $ -- $ 9,464
Accounts payable 38,923 39,701 36,942
Accrued expenses 19,199 20,895 24,478
--------- --------- ---------
Total current liabilities 58,122 60,596 70,884
Long-term debt -- -- 5,072
Long-term debt -- Oregon Steel Mills, Inc. 259,424 228,208 230,258
Environmental liability 24,885 27,488 28,465
Deferred employee benefits 27,659 18,080 11,899
--------- --------- ---------
Total liabilities 370,090 334,372 346,578
--------- --------- ---------
Redeemable common stock, 26 shares
issued and outstanding (Note 10) 21,840 21,840 21,840
--------- --------- ---------
Commitments and contingencies (Note 11)
STOCKHOLDERS' DEFICIT
Common stock, par value $1 per share, 1,000 shares
authorized; 200 issued and outstanding 1 1 1
Additional paid-in capital 16,603 16,603 16,603
Accumulated deficit (108,423) (55,208) (40,570)
Accumulated other comprehensive loss:
Minimum pension liability (4,200) (3,491) (1,520)
--------- --------- ---------
Total stockholders' deficit (96,019) (42,095) (25,486)
--------- --------- ---------
$ 295,911 $ 314,117 $ 342,932
========= ========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
-20-
NEW CF&I, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2003 2002 2001
---------- ---------- --------------
SALES:
Product sales $ 340,658 $ 315,448 $ 291,993
Freight 15,274 14,259 16,646
Electricity sales -- -- 2,150
--------- --------- ---------
355,932 329,707 310,789
COSTS AND EXPENSES:
Cost of sales 335,815 275,378 278,130
Fixed and other asset impairment charges 9,157 -- --
Labor dispute settlement charges 31,089 -- --
Settlement of litigation -- -- (2,190)
Gain on sale of assets (2,155) (1,108) (19)
Selling, general and administrative 17,490 20,404 28,447
Incentive compensation -- 1,561 --
--------- --------- ---------
391,396 296,235 304,368
--------- --------- ---------
Operating income (loss) (35,464) 33,472 6,421
OTHER INCOME (EXPENSE):
Interest expense (24,087) (25,393) (28,470)
Minority interests 2,567 (392) 1,193
Other income, net (52) 862 368
--------- --------- ---------
Income (loss) before income taxes (57,036) 8,549 (20,488)
INCOME TAX BENEFIT (EXPENSE) 3,821 (4,117) 5,525
--------- --------- ---------
Net income (loss) before accounting change (53,215) 4,432 (14,963)
Cumulative effect of change in accounting
principle, net of tax, net of minority interest -- (19,070) --
--------- --------- ---------
NET LOSS $ (53,215) $ (14,638) $ (14,963)
========= ========= =========
The accompanying notes are an integral part of the consolidated
financial statements.
-21-
NEW CF&I, INC.
CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS' DEFICIT
(IN THOUSANDS EXCEPT FOR PER SHARE AND SHARE AMOUNTS)
ACCUMULATED
ADDITIONAL OTHER
COMMON STOCK PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL DEFICIT LOSS TOTAL
------- ------ ----------- ------------- ------------ ---------
Balances, December 31, 2000 200 $ 1 $ 16,603 $(25,607) $ - $ (9,003)
Net loss - - - (14,963) - (14,963)
Minimum pension
liability adjustment - - - - (1,520) (1,520)
------ --- -------- -------- ------- --------
BALANCES, DECEMBER 31, 2001 200 1 16,603 (40,570) (1,520) (25,486)
Net loss - - - (14,638) - (14,638)
Minimum pension
liability adjustment - - - - (1,971) (1,971)
------ --- -------- -------- ------- --------
BALANCES, DECEMBER 31, 2002 200 1 16,603 (55,208) (3,491) (42,095)
Net loss - - - (53,215) - (53,215)
Minimum pension
liability adjustment - - - - (709) (709)
------ --- -------- --------- ------- --------
BALANCES, DECEMBER 31, 2003 200 $ 1 $ 16,603 $(108,423) $(4,200) $(96,019)
====== === ======== ========= ======= ========
The accompanying notes are an integral part of the consolidated
financial statements.
-22-
NEW CF&I, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------------------
2003 2002 2001
----------- ----------- -----------
Cash flows from operating activities:
Net loss $ (53,215) $ (14,638) $ (14,963)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Fixed and other asset impairment charges 9,157 -- --
Labor dispute settlement charges 31,089 -- --
Depreciation and amortization 18,689 18,631 17,670
Cumulative effect of change in accounting principle,
net of tax and minority interest -- 19,070 --
Deferred income taxes, net (3,535) 2,070 (7,056)
Minority interests' share of income (2,567) 392 (1,270)
Gain on sale of assets and investments (2,155) (1,108) (19)
Other, net (3,628) (1,247) (3,905)
Changes in assets and liabilities:
Trade accounts receivable (3,025) 8,086 5,102
Inventories 10,142 (10,046) 12,571
Accounts payable (778) 2,759 (5,740)
Accrued expenses & employee benefits 34 2,598 6,762
Other 342 (2,535) (1,621)
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 550 24,032 7,531
--------- --------- ---------
Cash flows from investing activities:
Additions to property, plant and equipment (11,648) (8,562) (7,899)
Proceeds from disposal of property and equipment 1,932 1,112 164
Other, net 906 290 43
--------- --------- ---------
NET CASH USED BY INVESTING ACTIVITIES (8,810) (7,160) (7,692)
--------- --------- ---------
Cash flows from financing activities:
Borrowings from Oregon Steel Mills, Inc. 148,792 137,163 141,434
Payments to Oregon Steel Mills, Inc. (140,748) (139,213) (132,650)
Payment of long-term debt (68) (14,536) (8,625)
--------- --------- ---------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES 7,976 (16,586) 159
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (284) 286 (2)
Cash and cash equivalents at the beginning of year 289 3 5
--------- --------- ---------
Cash and cash equivalents at the end of year $ 5 $ 289 $ 3
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid for:
- -------------
Interest $ 24,478 $ 26,085 $ 28,812
The accompanying notes are an integral part of the consolidated financial
statements.
-23-
NEW CF&I, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
New CF&I, Inc. and subsidiaries ("New CF&I") manufacture various
specialty and commodity steel products in Pueblo, Colorado. Principal markets
are steel service centers, steel fabricators, railroads, oil and gas producers
and distributors, and other industrial concerns, primarily in the United States
west of the Mississippi River.
New CF&I was incorporated in the State of Delaware on May 5, 1992, as a
wholly owned subsidiary of Oregon Steel Mills, Inc. ("Oregon Steel").
On March 3, 1993, New CF&I (1) issued 100 shares of