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EX-31.1 - CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER - CALIFORNIA STEEL INDUSTRIES INCdex311.htm
EX-32.1 - CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER - CALIFORNIA STEEL INDUSTRIES INCdex321.htm
EX-32.2 - CERTIFICATION OF EXECUTIVE VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER - CALIFORNIA STEEL INDUSTRIES INCdex322.htm
EX-31.2 - CERTIFICATION OF EXECUTIVE VICE PRESIDENT, FINANCE AND CHIEF FINANCIAL OFFICER - CALIFORNIA STEEL INDUSTRIES INCdex312.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-K

 

 

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2009

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

Commission File Number 333-79587

 

 

CALIFORNIA STEEL INDUSTRIES, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   33-0051150

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

14000 San Bernardino Avenue

Fontana, California

  92335
(Address of principal executive offices)   (Zip Code)

(909) 350-6300

(Registrant’s telephone number including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:

 

Name of each exchange

on which registered:

None   None

Securities registered pursuant to Section 12(g) of the Act:

None

(Title of class)

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨


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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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 is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).:    Yes  ¨    No  x

As of March 11, 2010, the registrant had 4,000 shares of its common stock issued and outstanding.

 

 

 


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CAUTIONARY STATEMENT PURSUANT TO THE

PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), provided a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their companies. With the exception of historical information, the matters discussed in this Annual Report on Form 10-K are forward-looking statements and may be identified by the use of words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “project,” and other words and terms of similar meaning. Such statements reflect our current view with respect to future events and are subject to certain risks, uncertainties and assumptions. A variety of factors could cause our future results to differ materially from the anticipated results expressed in such forward-looking statements. Readers should review Item 1A, Risk Factors, of this Annual Report on Form 10-K for a description of important factors that could cause future results to differ materially from those contemplated by the forward-looking statements made in this Annual Report on Form 10-K.


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CALIFORNIA STEEL INDUSTRIES, INC.

TABLE OF CONTENTS TO ANNUAL REPORT ON FORM 10-K

For The Fiscal Year Ended December 31, 2009

 

          Page

PART I

     

Item 1.

   Business    5

Item 1A.

   Risk Factors    11

Item 1B.

   Unresolved Staff Comments    13

Item 2.

   Properties    13

Item 3.

   Legal Proceedings    13

Item 4.

   Reserved    13

PART II

     

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities    14

Item 6.

   Selected Financial Data    14

Item 7.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    15

Item 7A.

   Quantitative and Qualitative Disclosures about Market Risk    22

Item 8.

   Financial Statements and Supplementary Data    22

Item 9.

   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure    23

Item 9A.

   Controls and Procedures    23

Item 9B.

   Other Information    23

PART III

     

Item 10.

   Directors, Executive Officers and Corporate Governance    24

Item 11.

   Executive Compensation    26

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters    34

Item 13.

   Certain Relationships and Related Transactions, and Director Independence    34

Item 14.

   Principal Accountant Fees and Services    35

PART IV

     

Item 15.

   Exhibits and Financial Statement Schedules    36
Signatures   
Exhibit Index   
Exhibits   


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PART I

 

Item 1. Business

Description of Business

Unless the context otherwise requires, the use of the terms “California Steel,” “we,” “us,” and “our” in this Annual Report on Form 10-K refers to California Steel Industries, Inc. California Steel is the leading producer of flat rolled steel in the western United States based on tonnage billed. We produce the widest range of flat rolled steel products in the region, including hot rolled, cold rolled and galvanized coil and sheet. We also produce electric resistance welded (“ERW”) pipe. Unlike integrated steel mills and mini-mills, we do not manufacture steel. Rather, we process steel slab manufactured by third parties. Our principal market consists of the 11 states located west of the Rocky Mountains. We believe our slab-based business model, breadth of products, non-union work environment, southern California location and long-standing customer relationships provide us with significant advantages over our competition.

Industry Overview

The steel industry is cyclical in nature. It is influenced by a combination of factors including periods of economic growth or recession, strength or weakness of the U.S. dollar, worldwide production capacity, levels of steel imports and tariffs. Consolidation of the industry, through a series of mergers and acquisitions, has significantly reduced the number of steel producing companies throughout the world. However, steel, regardless of product type, responds to forces of supply and demand. Prices fluctuate in reaction to general and industry-specific economic conditions.

There are generally two types of steel producers: “integrated mills” and “mini-mills.” Steel manufacturing by an integrated producer includes iron making from raw materials which have been mined, such as iron ore and coal, followed by steelmaking, slab making, reheating and further processing into coil or other shapes. A mini-mill is a steel producer that uses an electric arc furnace to melt steel from ferrous scrap metal.

Unlike integrated steel mills and mini-mills, we do not manufacture steel. Rather, we process steel slab manufactured by third parties. As a result, we do not have the fixed costs associated with the manufacturing of steel. Historically, raw material costs ranged from 70% to 80% of our cost of goods sold. This year, raw material costs have decreased due to lower slab costs; hence, our raw materials costs were approximately 65% of our cost of goods sold, excluding the lower of cost or market adjustment. We believe we are one of the largest purchasers of steel slab in the world. Our purchasing power provides us with the ability to negotiate favorable terms and conditions for steel slab from low cost and high quality producers throughout the world. Generally, prices of our flat rolled steel products have experienced a correlation to the prices of steel slab. Although we remain subject to the cyclicality inherent in the steel industry, we believe this correlation, combined with our slab-based business model, has historically protected our operating margins when compared to other flat rolled steel producers.

Recent Industry Conditions

The depressed U.S. and world economies resulted in minimal demand for steel products. The erosion of the market resulted in significant destocking and price deterioration at both the distributor and manufacturer level through the first half of 2009. The second half of 2009 began with the end of destocking as supply matched demand and steel mills collected higher prices despite the industry operating at 50% of capacity. This trend continued through third quarter with tight credit markets and extreme price risk which made the short lead times of domestic steel mills a more attractive option. As businesses operated based on lean inventory models, none would speculate in regards to imports and extended lead times. The low capacity utilization rates resulted in exacerbated effects from seasonality, both in terms of pricing and volume. Steel consumers continue to take advantage of short lead times and lean inventory business models. The high level of unemployment and limited access to credit will continue to drag on the U.S. economy.

Operations

We initially began operations in 1984 utilizing certain purchased assets from the former Kaiser Steel Corporation. Based on a business model that depended on the purchase of semi-finished steel slab from third party vendors, we were the first company in the United States to operate steel rolling mills without a dedicated source of slab feedstock. Significant business success and market acceptance of our slab based business model encouraged us to consider a modernization program designed to increase production and improve our product mix.

We continued to make selective investments designed to keep our facilities competitive or reduce operating costs. Total capital spending in 2009 was $48.2 million on various upgrades to our production facilities as well as safety and environmental improvements. Of this amount, capital spending related to the construction of the second reheat furnace was $36.1 million which is expected to be completed during the first quarter of fiscal 2010. The second reheat furnace with state-

 

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of-the-art environmental technology will increase our capacity to produce an additional one million tons annually. This new reheat furnace will serve as a backup to our existing furnace and furthermore, we will be prepared for the next up turn in the market. The total cost of the project is estimated to be approximately $71.0 million.

Production efficiencies continue to be gained through improved operating and maintenance practices, targeted capital investments and enhanced production planning and quality control procedures. We believe the success of our modernization program contributes to our being a low cost producer of flat rolled steel products. In late 2007, we initiated a cost reduction program that continued through 2009 and is still continuing into fiscal 2010.

Hot Strip Rolling and Finishing Mills

We produce hot rolled coil from slab in our hot strip mill. A walking beam furnace reheats slab, directs it to a multi-stand rolling mill to reduce thickness and roll it into coil. Equipped with an automatic gauge control system and technologically advanced computer controls, the hot strip mill currently possesses a throughput capacity of approximately 2.2 million tons annually and can produce hot rolled coil in gauges from 0.053” to 0.625”.

The hot strip mill facility is primarily composed of the following:

 

   

A walking beam furnace with a capacity of approximately 7,000 tons of slab per day; and

 

   

An 86” mill which consists of five roughing stands, a scale breaker, six finishing stands and two down coilers.

In addition, the hot strip finishing lines are composed of the following:

 

   

An 80” coil slitter line that can trim product up to 0.375” in thickness and can be easily adjusted to meet a variety of customer-specified widths; and

 

   

3 skin pass lines used for surface and other coil improvements.

Continuous Pickle Line

We can further process hot rolled coil on the 62-inch continuous pickle line for direct sales to our customers or for our own cold rolling and galvanizing production. The continuous pickle line is a conventional horizontal design with a coil entry section, welder, hot water preheat tanks, acid tanks, water rinse, dryer, looper, side trimmer, coiler, oiling equipment and scale. The line can currently yield up to approximately 1.45 million tons per year.

Five Stand Cold Reduction Mill

Pickled and oiled material may be further processed through the five stand cold reduction mill, which reduces the pickled steel strip from a gauge range of 0.075” to 0.225” to a range of 0.0098” to 0.1384” in thickness, with a maximum width of 60”. In the cold reduction process, pickled and oiled coils pass through five stands, arranged in tandem, with a predetermined amount of reduction taken on each stand until the final thickness is achieved upon exiting the fifth stand. Reductions are taken in one pass. The capacity of the five stand cold reduction mill is 1.50 million tons per year. Most material is further processed through the cold sheet mill or galvanized mills.

Cold Sheet Mill

Cold rolled sheet is hot rolled steel that has been further processed through the continuous pickle line and five stand cold reduction mill and is then processed through an annealing furnace and temper mill, improving uniformity, ductility and formability. Cold rolling can also impart various surface finishes and textures. Cold rolled steel is used in applications that demand higher quality or finish.

The cold rolled facility, with a current annual finished capacity of approximately 360 thousand tons, includes the following:

 

   

An electrolytic cleaning line;

 

   

Twenty hydrogen annealing bases; and

 

   

A 60” temper mill.

After cold reduction at the five stand cold reduction mill, the coil may be cleaned in a 200-feet to 1,000-feet per minute electrolytic cleaning line and then annealed. Hydrogen annealing is a process that heats steel coils to annealing temperatures

 

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in a pure hydrogen atmosphere and controls the cooling to restore ductility to our steel products that is lost as a result of cold reduction rolling. The strip is then run through final production in a 60” temper mill, where the steel is tempered to specified finish, shape and gauge.

Galvanizing Mills

Galvanized coil and sheet represent significant value added products, requiring the greatest degree of processing and quality controls. We produce galvanized sheet by taking cold rolled coils, and in some instances, hot rolled coils, heating it in an in-line annealing furnace and run the sheet steel, while still hot, through a pot of molten zinc. As the steel strip leaves the pot, coating controls ensure product specifications match customer requirements. The steel’s corrosion resistance makes it ideal for applications like air conditioning units, air ducts, metal ties, studs, siding, decking and roofing.

We currently operate two continuous galvanizing lines. The first continuous galvanizing line is horizontally configured and produces gauges from 0.016” to 0.173”, with a capacity of 482 thousand tons per year. The second continuous galvanizing line is vertically configured and produces gauges from 0.0105” to 0.057”, with a capacity of 372 thousand tons per year.

Electric Resistance Welded (ERW) Pipe Mill

We produce ERW pipe by roll forming hot rolled skelp into a pipe shape, welding the edges together with a high frequency welder, annealing the weld and cutting the finished product to length on a continuous line. The ERW pipe then undergoes additional hydrostatic testing, after which it receives rigorous ultrasonic and electromagnetic inspection.

We produce pipe with outside diameters ranging from 4.5” to 16” and wall thickness ranging from 0.156” to 0.406”, with lengths available up to 63 feet without mid-weld. Process coating is available through local coating applicators, one of whom leases space on our property. The ERW pipe mill has a current capacity of approximately 265 thousand tons per year.

Principal Products

Our principal product lines are hot rolled coil and sheet, cold rolled coil and sheet, galvanized coil and sheet and electric resistance welded (ERW) pipe. The following table sets forth our billed tons by product category as a percentage of total shipments for the periods indicated:

 

     Year Ended December 31,  
     2009     2008     2007     2006     2005  

Hot rolled coil and sheet

   34.3   36.0   38.1   40.3   41.1

Cold rolled coil and sheet

   13.5   10.1   9.8   8.7   10.3

Galvanized coil and sheet

   44.7   34.3   38.1   39.0   37.9

ERW pipe

   7.5   19.6   14.0   12.0   10.7
                              

Total

   100.0   100.0   100.0   100.0   100.0
                              

Total tons billed, excluding scrap (in thousands)

   800      1,443      1,728      1,930      1,814   
                              

Historically, hot rolled coil and sheet is one of our largest product categories as measured by tons billed per year. Our customers use hot rolled steel for a variety of manufacturing applications, including the production of spiral weld pipe, automobile wheels and rims, strapping, tubing and a variety of construction related products. In 2009, we directed approximately 33.5% of our hot rolled production to outside sales, and we further processed approximately 66.5% internally for our own higher-margin, value added product needs.

Cold rolled coil and sheet are used in exposed steel applications where high surface quality is important. Typically, cold rolled material is coated or painted. Applications for our cold rolled products include electronic cabinetry, tubing and a variety of construction related products. In 2009, we directed approximately 23.4% of our cold rolled reduction production to outside sales, and we further processed approximately 76.6% internally for our own higher-margin, value added product needs.

During the last couple of years, galvanized coil and sheet has been our largest product category as measured by tons billed per year. Galvanized coil and sheet is produced by adding a coating of zinc to cold rolled steel, and in some instances, to hot rolled steel, for additional corrosion resistance. We believe we offer the broadest range of thicknesses, widths and coatings of galvanized products in the western U.S. market. Applications for our galvanized coil product include a variety of construction related products such as roofing, decking, studs, tubing, and heating, venting and air conditioning equipment (HVAC).

 

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We supply ERW pipe with diameters ranging from 4.5” to 16.0”. The principal end-users of our ERW pipe production are oil and gas transmission lines. We also sell standard pipe to industrial accounts for load bearing and low-pressure applications.

Marketing and Customer Service

We believe that we provide a high level of customer service and product support in the western U.S. market. Our emphasis on customer service and product quality has enabled us to establish long-standing relationships with our customers. Our relationships with 90% of our top 30 customers extend beyond 10 years. We attribute this customer loyalty, in large part, to the successful execution of our marketing strategies to provide a broad range of products and our ability to provide consistent service, reliable product availability and ancillary value added services. We believe we offer our customers the lowest risk option for their steel requirements.

We are the only producer of flat rolled steel products located in the western United States who can supply hot rolled, cold rolled and galvanized coil and sheet. We also produce ERW pipe in diameters ranging from 4.5” to 16.0”. We believe that we are well equipped to provide “one-stop shopping” for our customers and we believe that this maximizes sales opportunities and increases the convenience and value of the service we provide to customers. We will continue to invest in the quality of our products across all product lines, allowing us to market ourselves as a full-service provider of flat rolled steel in the region.

Our location in southern California not only gives us a significant freight cost advantage over our competitors, but also allows us to provide a more customer service-oriented approach to the market. Our operating structure allows us to respond quickly to changes in the timing of customer requirements, adjust schedules, source stock inventory and meet specialized shipping needs. Our ability to deliver made-to-order products in a timely manner allows our customers to maximize their inventory turns and meet production targets. By maintaining a regional focus, we believe that we can most effectively service our customers and achieve our goal of increasing market share in higher margin value added products.

As part of our strategy to provide superior customer service, upon request of our current and prospective customers, we offer ancillary services such as engineering and metallurgical services to assist customers with specific product needs. Substantial portions of our customers are small to medium-sized businesses. As a result, many do not have the resources to employ a sophisticated metallurgical engineering staff. Our metallurgical engineers work with our customers on a daily basis, often on site, providing advisory services focused on overall production efficiency. These services are provided at no charge and no revenues are generated for such services.

Semi-Finished Steel Slab and Suppliers

Steel slab is a semi-finished steel raw material in rectangular form and is generally the first form taken by molten steel after it solidifies. The principal users of steel slab are steel producers or processors that roll slab into finished products like plate or coil.

Historically, raw material costs ranged from 70% to 80% of our cost of goods sold. This year, raw materials costs have decreased due to lower slab costs; hence, our raw materials costs were approximately 65% of our cost of goods sold, excluding the lower of cost or market adjustment. We believe we are one of the largest importers and one of the largest purchasers of slab in the world. We purchase slab from a diverse group of foreign suppliers to obtain high quality steel at competitive cost through reliable sources. Our main foreign vendors are located in Brazil, Mexico, Australia, Japan and Russia.

We believe that our integrated slab procurement system allows us to manage our slab inventory levels and improve tonnage levels as well as the slab quality necessary to meet our customers’ order specifications. We typically make our slab purchases on a quarterly basis. As of December 31, 2009 we were committed, in the form of open purchase orders, to purchase approximately $105.7 million in steel slabs, none of which are from related parties. We negotiate slab procurement for longer periods when our purchasing power combined with market conditions provide us with the opportunity to negotiate on terms which we believe are favorable to us. Steel slab consumption costs include the FOB value of steel slab, quality extras, ocean transportation, rail freight, duties, unloading, insurance and handling costs. Due to low demand for slabs in international markets, average slab consumption cost in 2009 was approximately 44% lower than 2008’s average slab consumption cost.

We are not reliant on any one single slab vendor. In 2009, we purchased our slab from Arcelor Mittal Tubarão (formerly Companhia Siderurgica de Tubarão of Brazil (“CST-Arcelor Mittal”)); Arcelor Mittal Steel Lazaro Cardenas of Mexico; Bluescope Steel of Australia; Gerdau-Acominas of Brazil, and US Steel of the United States.

 

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We negotiate with a variety of shipping companies to deliver our slab directly to the Port of Los Angeles. The vessels are loaded following a specific stowage plan that we developed. The plan is designed to provide high productivity rates at both the loading and unloading sites. Our agents are on site for the loading of each shipment. After unloading, the slab is transported to our facility by rail using the services of Burlington Northern Santa Fe Railroad. Our current contract with Burlington Northern Santa Fe Railroad is effective through December 2013. This agreement provides us with transportation services at fixed rates and ensures us a dedicated level of rail availability through the term of the agreement. Additionally, Burlington Northern Santa Fe Railroad utilizes rail cars designed specifically to transport steel slab. We believe this improves the efficiency and safety of steel slab transportation through our community.

Working Capital

We fund our business operations through a combination of available cash and cash equivalents and cash flows generated from operations. In addition, our credit facility is available for additional working capital or investment opportunities.

Customers

The western U.S. steel market is comprised of many consumers typically requiring small order sizes with a wide variety of metallurgical qualities and specifications. In contrast, the majority of other U.S. steel markets primarily depend on heavy-tonnage steel consumers like the automotive and durable goods manufacturing industries. We believe that the western United States’ smaller and more diverse customer base helps balance pricing power between the consumer and the supplier. Instead of competing solely on price, we believe we benefit from having customers that place greater value on our competitive strengths, including integrated service, flexibility, timeliness of delivery and ability to meet unique customer needs. We further believe that we benefit from our strategic location in Fontana, California.

Our customers include service and processing centers, construction and building material companies, steel framing and decking manufacturers, tubing manufacturers, oil and gas producers and distributors, aftermarket automotive manufacturers, as well as various customers in other industries.

We do not actively pursue sales in foreign markets, and we make foreign sales only when they are economically advantageous to us. In 2009, exports represented less than 1% of our total 2009 tons billed.

Backlog

As of December 2009, we had what we believed to be firm commitments to sell approximately 134 thousand tons. Based on our average sales price at that time, the sales value was approximately $88.6 million. As of December 2008, we had what we believed to be firm commitments to sell approximately 34 thousand tons. Based on our average sales price at that time, the sales value was approximately $46.8 million.

Competition

We have two main competitors located in the western United States. Steel products are also supplied to the western United States via imports from foreign companies and from domestic suppliers located outside the western United States. We compete with domestic and foreign steel producers on the basis of customer service, product quality and price. We believe that the competitive landscape within the steel industry will continue to evolve, especially as mergers and acquisitions continue worldwide. We believe that our slab-based business model, breadth of products, non-union work environment, southern California location and long-standing customer relationships, collectively make us well positioned to meet competitive threats. However, some of our competitors are larger and may have substantially greater capital resources, more modern technology and lower production costs than us, as well as, excess production capacity in some products which could exert downward pressure on prices for some of our products particularly during slow economic periods.

We are also subject to general economic trends and conditions, such as the presence or absence of sustained economic growth and currency exchange rates. We are particularly sensitive to trends in the construction, oil and gas transmission industries because these industries are significant markets for our steel products. A downturn in one or more of these industries could have an adverse affect on our sales volume, prices, profitability and liquidity.

U.S. Competition

High transportation costs have historically deterred mid-western and eastern steel producers from routinely accessing the western United States market. Severe reductions in operating capacity to less than 50% have not been sufficient to balance mid-western and eastern supply and demand, thereby causing exportation of products into the western United States. Continuing competition from these mills at any significant level can negatively impact sales tonnage and average sales prices with the western market.

 

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In hot rolled products, our principal domestic competition comes from a number of producers located in the Midwestern and Eastern United States; however, this is cyclical in nature, based on economic conditions in the mid-western and eastern markets. Some hot rolled products are produced by Evraz Oregon Steel Mills, located in Portland, Oregon, although Evraz Oregon Steel Mills typically ships to customers located in the northwestern United States. USS-POSCO Industries (UPI), located in Pittsburg, California is our principal competitor in galvanized and cold rolled products. We also compete in the galvanized market with Steelscape, Inc., which operates facilities located in Kalama, Washington and Rancho Cucamonga, California. Additionally, we face increasing competition from producers of materials such as aluminum, composites, plastics and concrete that compete with steel in many markets.

Foreign Competition

Historically, foreign steel producers have competed in the western United States in all of our product categories. Although imported steel has relatively long lead times to reach the western United States markets, economic and currency dislocations in foreign markets may encourage importers to target the United States with excess capacity at aggressive prices. Some foreign producers benefit from low labor costs, weak local currencies and government subsidies. Imported steel shipped in the western United States will always be an important factor as the production levels for steel in the western United States do not meet the demand requirements during normal economic conditions. Imported steel has a negative impact when volume levels surge or when product is sold substantially lower than the market price.

Environmental Matters

Compliance with environmental laws and regulations is a significant factor in our business. We are subject to various federal, state and local environmental laws and regulations concerning, among other things, air emissions, waste water discharges and hazardous materials handling and waste disposal. We own property and conduct or have conducted operations at properties that are contaminated with hazardous materials and will require investigation and remediation according to federal, state or local environmental laws and regulations. Expenditures on environmental matters, including expenditures on pollution control equipment and remediation activities, totaled approximately $1.0 million in 2009, $1.3 million in 2008 and $1.3 million in 2007. We plan to spend approximately $1.2 million in 2010.

In 1996, we entered into an Expedited Remedial Action Voluntary Enforceable Agreement with the California Environmental Protection Agency, Department of Toxic Substances Control (“DTSC”). This agreement superseded a Voluntary and Enforceable Agreement and Imminent and/or Substantial Endangerment Order issued by the Department in 1992 and amended in 1994. According to the agreement, we engaged an environmental consultant to conduct a remedial investigation and develop a remediation plan and remediation cost projections based upon that plan. Utilizing the remediation plan developed by the environmental consultant, we developed an estimate for future costs of the remediation plan. The total aggregate cost of remediation was estimated to be approximately $1.8 million, which was accrued in 2002 and is included in other liabilities in 2009 and 2008 financial statements. The DTSC has not yet completed its review and approval of our remediation plan; however, preliminary discussions with the DTSC have not indicated the need for any significant changes to the remediation plan or to our estimate of related costs. The estimate of costs could change as a result of changes to the remediation plan required by the DTSC or unforeseen circumstances, including without limitations, unknown site conditions, changes to applicable regulations or increased enforcement requirements by the regulators existing at the site.

Employee Relations

At December 31, 2009, we had 870 full-time employees. We believe we have one of the largest non-union workforces located at any one steel facility in the United States. We provide competitive wages and benefits, both when compared to our industry and to other business near our location. We offer training and growth opportunities to our employees. The safety of employees is a priority to everyone who works here, and, as such, we believe we have one of the best safety records in our industry. Our officers routinely discuss our business plan with all employees, part of a comprehensive communications and employee relations strategy. With these elements in place, we believe we have a very good relationship with our employees, which supports our goal to remain union-free.

Available Information

We are subject to the reporting requirements of the Exchange Act and its rules and regulations. The Exchange Act requires us to file reports and other information with the U.S. Securities and Exchange Commission (“SEC”). Copies of these reports and other information can be read and copied at the SEC’s Public Reference Room at 100 F Street, NE., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC also maintains a Web site that contains reports, proxy statements and other information regarding issuers that file electronically with the SEC. These materials may be obtained electronically by accessing the SEC’s Web site at www.sec.gov.

 

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We make available, free of charge on our Web site, the Code of Ethics for Directors (“Board”) and Executive Officers and our Business Conduct and Ethics adopted by our Board. These documents are posted on our Web site at www.californiasteel.com – select the “CSI Executive” link and then the “Corporate Governance” link.

 

Item 1A. Risk Factors

Described below are certain risks that our management believes are applicable to our business and the industry in which we operate. There may be additional risks that are not presently material or known. You should carefully consider each of the following risks and all other information set forth in this Annual Report on Form 10-K.

If any of the events described below occur, our business, financial condition, results of operations, or liquidity could be materially adversely affected. The following risks could cause our actual results to differ materially from our historical experience and from results predicted by forward-looking statements made by us or on our behalf related to conditions or events that we anticipate may occur in the future. All forward-looking statements made by us or on our behalf are qualified by the risks described below.

Our industry is cyclical and prolonged economic declines could have a material adverse affect on our business.

Demand for our product is cyclical in nature and sensitive to general economic conditions. Our business supports cyclical industries such as the commercial construction, energy, appliance and automotive industries. As a result, downturns in the United States economy or any of these industries could materially adversely affect our results of operations and cash flows. Since steel producers generally have high fixed costs, reduced volumes result in operating inefficiencies. Future economic downturns or a prolonged stagnant economy could materially adversely affect our business, results of operations, financial condition and cash flows.

Overcapacity in the global steel industry could increase the level of steel imports, which may negatively affect our business, results of operations and cash flows.

Global steel-making capacity exceeds global consumption of steel products. This excess capacity results in manufacturers in certain countries exporting significant amounts of steel and steel products at prices below their costs of production. These imports, which are also affected by demand in the domestic market, international currency conversion rates and domestic and international government actions, can result in downward pressure on steel prices, which could materially adversely affect our business, results of operations, financial condition and cash flows.

Overcapacity in China, the world’s largest producer and consumer of steel, has the potential to result in a further increase in imports of low-priced, unfairly traded steel and steel products to the United States. In recent years, capacity growth in China has significantly exceeded the growth in Chinese market demand. A continuation of this unbalanced growth trend or a significant decrease in China’s rate of economic expansion could result in China increasing steel exports.

The results of our operations are sensitive to volatility in steel prices and changes in the costs of raw materials.

We rely upon outside vendors to supply us with raw materials that are critical to the manufacturing of our products. We acquire our primary raw material, steel slabs, from numerous sources around the globe. Although, we believe the supply of steel slabs is adequate to operate our facilities, purchase prices of these critical raw materials are subject to volatility and growing demand of global competitors. At any given time, we may be unable to obtain an adequate supply of these critical raw materials with price and other terms acceptable to us.

If our suppliers increase the prices of our critical raw materials, we may not have alternative sources of supply. In addition, to the extent that we have quoted prices to our customers and accepted customer orders for our products prior to purchasing necessary raw materials, we may be unable to raise the price of our products to cover all or part of the increased cost of raw materials. Also, if we are unable to obtain adequate and timely deliveries of our required raw materials, we may be unable to timely manufacture sufficient quantities of our products. This could cause us to lose sales, incur additional costs and suffer harm to our reputation.

Changes in the availability and cost of electricity and natural gas are subject to volatile market conditions that could adversely affect our business.

Our steel mills are large consumers of electricity and natural gas. We rely upon third parties for our supply of energy resources consumed in the manufacturing of our products. The prices for and availability of electricity, natural gas oil and other energy resources are subject to volatile market conditions. These market conditions often are affected by weather and political and economic factors beyond our control. Disruptions in the supply of our energy resources could temporarily impair our ability to manufacture our products for our customers. Increases in our energy costs could materially adversely affect our business, results of operations, financial condition and cash flows.

 

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Environmental compliance and remediation could result in increased capital requirements and operating costs.

We are subject to numerous federal, state, and local laws and regulations relating to the protection of the environment. These laws continue to evolve and are becoming increasingly stringent. The ultimate impact of complying with such laws and regulations is not always clearly known or determinable because regulations under some of these laws have not yet been promulgated or are undergoing revision. Environmental laws and regulations could result in substantially increased capital, operating and compliance costs. To the extent that competitors, particularly foreign steel producers and manufacturers of competitive steel products, are not required to incur equivalent costs, our competitive position could be materially adversely affected.

Competition from other materials may materially adversely affect our business.

In many applications, steel competes with other materials, such as aluminum, cement, composites, glass, plastic and wood. Increased use of these materials in substitution for steel products could materially adversely affect prices and demand for our steel products.

Our operations are subject to business interruptions.

Our steel production depends on the operation of critical pieces of equipment, such as our various rolling, galvanizing and finishing mills and our continuous pickle line. It is possible that we could experience prolonged periods of reduced production due to equipment failure at our facility. It is also possible that operations may be disrupted due to other unforeseen circumstances such as power outages, explosions, fires, other accidents, inclement weather and transportation interruptions. Availability of raw materials and delivery of products to customers could be affected by logistical disruptions such as shortages of ocean vessels, rail cars or truck or unavailability of rail lines. To the extent of loss production and depending on the length of the outage, our sales and unit production costs could be adversely affected.

Our business requires substantial capital investment and maintenance expenditures, and our capital resources may not be adequate to provide for all of our cash requirements.

Our operations are capital intensive. For the five-year period ended December 31, 2009, our total capital expenditures were approximately $220.0 million. Our business also requires substantial expenditures for routine maintenance. Although we expect requirements for our business needs, including the funding of capital expenditures, debt service for financing and any contingencies to be financed by internally generated funds or from borrowing under our $110.0 million credit facility, we cannot assure you that this will be the case.

The terms of our indebtedness contain provisions that may limit our flexibility.

Our existing agreements impose and future financing agreements are likely to impose operating and financial restriction on our activities. These restrictions require us to comply with or maintain certain financial tests and ratios, including minimum tangible net worth, minimum fixed charge coverage ratio and minimum interest charge coverage ratio, and limit or prohibit our ability to, among other things:

 

   

incur additional debt and issue preferred stock;

 

   

create liens;

 

   

redeem and/or prepay certain debt;

 

   

pay dividends on our stock, repurchase stock or make other distributions;

 

   

make certain investments;

 

   

make certain capital expenditures;

 

   

enter new lines of business; and

 

   

engage in consolidations, mergers and acquisitions.

A breach of any of the restrictions or covenants could cause a default under our senior notes and other debt. A significant portion of our indebtedness then may become immediately due and payable.

 

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There is a possibility of deadlocks among our board of directors.

Our board of directors currently consists of four members as elected by our two stockholders, each of whom holds 50% of our stock. Important business decisions could be delayed due to a deadlock among our board of directors which could result in a competitive disadvantage. Any deadlocks could materially adversely affect our business.

 

Item 1B Unresolved Staff Comments

None.

 

Item 2. Properties

We are located on approximately 443 acres in Fontana, California. Our facilities are situated on approximately 115 acres of this space. The property includes a 22 mile railroad system serviced by Burlington Northern Santa Fe and Union Pacific rail lines.

 

Item 3. Legal Proceedings

California Steel is subject to lawsuits, administrative proceedings and claims that arise in the ordinary course of our business. We believe that the final disposition of such lawsuits, proceedings and claims will not have a material adverse effect on our financial position, results of operations or liquidity. It is possible, however, that our future results of operations for a particular quarter or fiscal year could be impacted by changes in circumstances relating to lawsuits, proceedings or claims.

 

Item 4. Reserved

None.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters

Not applicable.

 

Item 6. Selected Consolidated Financial Data

The following table represents our selected consolidated financial data. The table should be read in conjunction with Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

 

     Year Ended December 31,  
     2009     2008     2007     2006     2005  
     (dollars in thousands)  

Statement of Income Data:

          

Net sales

   $ 551,808      $ 1,510,613      $ 1,282,967      $ 1,358,762      $ 1,234,386   

Cost of sales

     561,120        1,455,739        1,260,373        1,151,740        1,127,648   

Gross (loss) profit

     (9,312     54,874        22,594        207,022        106,738   

Selling, general and administrative expenses

     17,481        22,779        20,601        20,901        20,289   

Loss (gain) on disposition of property, plant and equipment

     485        3,256        1,005        1,293        (2,071

(Loss) income from operations

     (27,278     28,839        988        184,828        88,520   

Interest expense, net

     8,159        8,823        10,528        5,156        11,299   

(Loss) income before income tax (benefit) expense

     (26,945     19,607        (4,270     179,521        80,529   

Net (loss) income

   $ (13,101   $ 13,275      $ (906   $ 108,985      $ 43,365   

Other Data:

          

Operating margin

     -4.9     1.9     0.1     13.6     7.2

Cash flows provided by operating activities

   $ 102,458      $ 62,594      $ 45,278      $ 17,669      $ 172,536   

Cash flows used in investing activities

     (46,667     (51,919     (42,526     (37,284     (8,563

Cash flows (used in) provided by financing activities

     (5,000     (13,425     5,317        (79,118     (60,480

Capital expenditures

     48,231        48,974        41,062        36,345        44,923   

Common share cash dividend declared and paid (1)

     —          26,925        21,183        74,011        13,370   

Total tons billed, excluding scrap (in thousands)

     800        1,443        1,728        1,930        1,814   

Number of employees at end of period

     870        911        933        931        938   

Man hours per ton produced

     2.02        1.35        1.15        1.09        1.13   

EBITDA, as adjusted (2)

          

Net (loss) income

   $ (13,101   $ 13,275      $ (906   $ 108,985      $ 43,365   

Income tax (benefit) expense

     (13,844     6,332        (3,364     70,536        37,164   

Interest expense, net

     8,159        8,823        10,528        5,156        11,299   

Depreciation

     32,458        32,660        31,270        29,143        26,972   

EBITDA

     13,672        61,090        37,528        213,820        118,800   

Inventory write down for LCM adjustment

     44,500        135,000        957        —          —     

EBITDA, as adjusted

   $ 58,172      $ 196,090      $ 38,485      $ 213,820      $ 118,800   

EBITDA, as adjusted, margin (3)

     10.5     13.0     3.0     15.7     9.6

 

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     Year Ended December 31,
     2009    2008    2007    2006    2005
     (dollars in thousands)

Balance Sheet Data:

              

Cash and cash equivalents

   $ 61,671    $ 10,880    $ 13,630    $ 5,561    $ 104,294

Property, plant and equipment, net

     276,593      261,027      247,064      245,441      241,774

Total assets

     585,447      640,829      623,418      660,594      654,801

Total long-term debt including current portion and notes payable to banks

     185,000      190,000      176,500      150,000      150,000

Redeemable preferred stock

     —        —        —        —        30,000

Total stockholders’ equity

     300,671      313,772      327,422      349,846      289,979

 

(1) Common share cash dividends are distributed to the holders of the shares of our common stock at the time the dividends are declared. See Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
(2) EBITDA is defined as net income, plus income taxes, net interest expense and depreciation and amortization. In our presentation of EBITDA, as adjusted, we also included the writing down of inventory to market value as our inventory values are carried at the lower of cost or market (LCM) of $44.5 million, $135.0 million and $957 thousand in 2009, 2008 and 2007, respectively. EBITDA, as adjusted, is not intended to represent cash flows from operations, cash flows from investing or cash flows from financing activities as defined by accounting principles generally accepted in the United States of America and should not be considered as an alternative to cash flow or a measure of liquidity or as an alternative to net earnings (loss) as indicative of operating performance. EBITDA, as adjusted, is included because we believe that investors find it a useful tool for measuring our ability to service our debt.

EBITDA, as adjusted, is reconciled to cash flows provided by operating activities, the most comparable measure under generally accepted accounting principles as follows (in thousands):

 

     Year Ended December 31,  
     2009     2008     2007     2006     2005  

Net cash provided by (used in):

          

Operating activities

   $ 102,458      $ 62,594      $ 45,278      $ 17,669      $ 172,536   

Interest expense, net

     8,159        8,823        10,528        5,156        11,299   

Provision for income taxes

     (13,844     6,332        (3,364     70,536        37,164   

Changes in other operating assets and liabilities

     (44,789     122,905        (5,485     117,943        (108,740

Deferred income taxes

     6,588        (955     (7,113     4,162        4,989   

Write-down of inventory

     (44,500     (135,000     (957     —          —     

Other, net

     (400     (3,609     (1,359     (1,646     1,552   
                                        

EBITDA

   $ 13,672      $ 61,090      $ 37,528      $ 213,820      $ 118,800   

Write-down of inventory

     44,500        135,000        957        —          —     
                                        

EBITDA, as adjusted

   $ 58,172      $ 196,090      $ 38,485      $ 213,820      $ 118,800   
                                        

 

(3) EBITDA, as adjusted, margin represents EBITDA, as adjusted, per (2) above divided by net sales.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

We believe transparency and clarity are the primary goals of successful financial reporting. We remain committed to increasing the transparency of our financial reporting, providing our shareholders with informative financial disclosures and presenting an accurate view of our financial position and operating results.

Management’s Discussion and Analysis of Financial Conditions and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the prospective of our management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Our MD&A is presented in six sections:

 

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Overview

 

   

Results of Operations

 

   

Liquidity and Capital Resources

 

   

Contractual Obligations and Commitments

 

   

Critical Accounting Policies

 

   

Recent Accounting Pronouncements

Our MD&A should be read in conjunction with the Financial Statements and related Notes included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Overview

California Steel is the leading producer of flat rolled steel in the western United States based on tonnage billed. We produce the widest range of flat rolled steel products in the region, including hot rolled, cold rolled and galvanized coil and sheet. We also produce electric resistance welded (referred to herein as ERW) pipe. We service a broad range of customers with applications that include pipe and tubing, heating, ventilating and air conditioning, strapping, drums, steel wheels and a variety of construction related products with a current annual shipment capability of approximately 2.0 million tons. Unlike integrated steel mills and mini-mills, we do not manufacture steel. Rather, we process steel slab manufactured by third parties. Our principal market consists of the 11 states located west of the Rocky Mountains. We believe our slab-based business model, breadth of products, non-union work environment, southern California location and long-standing customer relationships provide us with significant advantages over our competition.

Results of Operations

Financial Results

The following table represents selected financial data for each of the past three fiscal years ($ in thousands):

 

     Year Ended December 31,  
     2009     2008     2007  

Net sales

   $ 551,808      $ 1,510,613      $ 1,282,967   

Net sales (loss) gain %

     -63     18     -6

Gross (loss) profit as % of net sales

     -1.7     3.6     1.8

SG&A as % of net sales

     3.2     1.5     1.6

Operating (loss) income

   $ (27,278   $ 28,839      $ 988   

Operating (loss) income as % of net sales

     -4.9     1.9     0.1

Net (loss) income

   $ (13,101   $ 13,275      $ (906

The following table represents sales volume by product line (excluding scrap) for each of the past three fiscal years:

 

     Tons Billed Year Ended December 31,
     2009    2008    2007

Hot rolled

   274,619    519,155    658,389

Cold rolled

   108,048    145,958    170,316

Galvanized

   357,817    495,323    657,774

ERW pipe

   59,891    282,401    241,451
              

Total (excluding scrap)

   800,375    1,442,837    1,727,930
              

Fiscal 2009 Results Compared With Fiscal 2008

Net sales. Net sales in fiscal year 2009 decreased 63% to $551.8 million compared to $1.5 billion in fiscal 2008. The decrease resulted from a decrease in sales volume and a lower average selling price. Sales volume decreased 45% and the average selling price decreased 34% compared to fiscal 2008. The lower sales volume decreased net sales approximately $656.8 million and the lower average selling price decreased net sales approximately $248.2 million. The remaining decrease in net sales was primarily from lower freight revenue compared to fiscal 2008.

Gross (loss) profit. Our gross profit rate in fiscal 2009 decreased 5.3% of net sales to a negative 1.7% of net sales. The decrease was due to lower sales volume and lower average selling price. This decrease was partially offset by a decrease in the average slab costs of 44% compared to fiscal 2008. The write-down of inventory to the lower of cost or market of $44.5 million represents approximately 8% of net sales.

 

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Selling, general and administrative (SG&A) expenses. Our SG&A rate in fiscal 2009 increased 1.7% of net sales to 3.2% of net sales even though there was a net decrease of $5.3 million, the majority of which was labor cost. The percentage increase in our SG&A rate is largely attributable to a decrease of our net sales since the majority of our SG&A expenses are fixed costs. Our SG&A expenses consist primarily of labor and various administrative expenses. Labor cost comprised of approximately 58% and 55% of our SG&A expenses for fiscal 2009 and 2008, respectively.

Net interest expense. During 2009, net interest expense decrease $664 thousand, or 7.5%, to $8.2 million when compared to 2008. The decrease in net interest expense was attributable to an increase in capitalized interest of $1.8 million when compared to 2008. The increase in capitalized interest was largely attributable to the construction of our second reheat furnace. The decrease was partially offset by a decrease in interest income of $1.2 million due to a lower cash balance maintained during the year and lower interest rates in fiscal 2008.

Other income (expense), net. Other income, net was $8.5 million for fiscal 2009, compared with an expense of $409 thousand in fiscal 2008. Other income is comprised of miscellaneous income items such as rental income, proceeds from legal settlements, gain on sale of environmental credits, refund from anti dumping subsidy, refund of prior years property taxes, etc. As many of these items occur infrequently or result in a one-time recognition of income, this category is subject to significant fluctuation from year to year.

Income tax (benefit) expense. During 2009, our income tax benefit was $13.8 million, as compared to an income tax expense of $6.3 million during 2008. Our effective tax rate benefit was 51.4% during 2009 compared to an effective income tax rate of 32.3% during 2008. The change in the effective tax rate was attributable to a sales tax credit and hiring credit under the Enterprise Zone (“EZ”) designation. We became eligible for the EZ credits effective October 2006.

Net (loss) income. Net loss was $13.1 million for fiscal 2009 compared to net income of $13.3 million for 2008.

Fiscal 2008 Results Compared With Fiscal 2007

Net sales. Net sales in fiscal year 2008 increased 18% to $1.5 billion compared to $1.3 billion in fiscal 2007. The increase resulted primarily from a 41% increase in the average selling price during fiscal 2008. The higher average selling price increased net sales approximately $414.9 million. This increase was partially offset by a decrease in the sales volume of over 16% compared to fiscal 2007 which decreased net sales approximately $202.7 million. The remaining increase in net sales was primarily from higher value product mix sold in fiscal 2008.

Gross profit. Our gross profit rate in fiscal 2008 increased 1.8% of net sales to 3.6% of net sales. The increase was due to higher average selling prices contributing $414.9 million which was offset by lower sales volume reducing our gross profit by $202.7 million, increased average slab costs of 36% and a write-down of inventory to the lower of cost or market of $135.0 million which represented 9% of net sales.

Selling, general and administrative (SG&A) expenses. Our SG&A rate in fiscal 2008 remained relatively constant with fiscal 2007 decreasing by 0.1% of net sales to 1.5% of net sales even though there was an increase of $2.2 million, the majority of which was labor cost. Our SG&A expenses consist primarily of labor and various administrative expenses. Labor cost comprised of approximately 55% and 48% of our SG&A expenses for fiscal 2008 and 2007, respectively.

Net interest expense. During 2008, net interest expense decrease $1.7 million, or 16.2%, to $8.8 million when compared to 2007. The decrease in net interest expense was attributable to an increase in interest income of $1.1 million and an increase in capitalized interest of $602 thousand when compared to 2007. The increase in interest income was due to the higher cash balance maintained during the year and the increase in capitalized interest was largely attributable to the construction of the second reheat furnace.

Other expense. Other expense was $409 thousand for fiscal 2008, compared to other income of $5.3 million in fiscal 2007. Other income is comprised of miscellaneous income items such as rental income, proceeds from legal settlements, refund from anti dumping subsidy, refund of prior years property taxes, etc. As many of these items occur infrequently or result in a one-time recognition of income, this category is subject to significant fluctuation from year to year.

Income tax expense. During 2008, our income tax expense was $6.3 million, as compared to an income tax benefit of $3.4 million during 2007. Our effective income tax rate was 32.3% during 2008 compared to an effective tax rate benefit of 78.8% during 2007. The change in the effective tax rate was attributable to the change in unrecognized tax benefits, a decrease in tax positions of prior years and higher taxable income.

Net income (loss). Net income was $13.3 million for fiscal 2008 compared to a net loss of $906 thousand for 2007.

 

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Liquidity and Capital Resources

We ended fiscal 2009 with $61.7 million of cash and cash equivalents compared with $10.9 million at the end of fiscal 2008. Working capital, the excess of current assets over current liabilities, was $222.0 million at the end of fiscal 2009, down from $267.3 million at the end of fiscal 2008. We ended fiscal 2009 with over $108.8 million in financing available under our revolving credit facility.

Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities for each of the past two fiscal years ($ in thousands):

 

     2009     2008  

Total cash provided by (used in):

    

Operating activities

   $ 102,458      $ 62,594   

Investing activities

     (46,667     (51,919

Financing activities

     (5,000     (13,425
                

Increase (decrease) in cash and cash equivalents

   $ 50,791      $ (2,750
                

Operating Activities

Cash provided by operating activities was $102.5 million in fiscal 2009 compared with $62.6 million in fiscal 2008. The changes were due primarily due to a decrease in cash provided by net income and the change in operating assets and liabilities between fiscal years. The changes in operating assets and liabilities were due primarily to changes in inventories, prepaid income taxes, accounts payable and other accrued expenses and liabilities. The increase in cash provided for inventories was due to lower inventory levels, decrease in the average cost and the write-down of inventory to the lower of cost or market. The increase in cash provided for prepaid income taxes resulted mainly from income tax refunds and lower estimated taxable income. The increase in cash used for accounts payable was due primarily to a decrease in the slab levels and the average slab price, monitoring our expenses and timing of vendor payments. The increase in cash used for other accrued expenses and liabilities was due primarily to a decrease in accrued salaries and benefits and our forward contracts.

Investing Activities

Cash used in investing activities was $46.7 million in fiscal 2009 compared with $51.9 million in fiscal 2008. The decrease in cash used by investing activities in fiscal 2009 is attributable to the proceeds received for the sale of environmental credits and a decrease in the removal cost from the sale of property, plant and equipment as compared to fiscal 2008.

Financing Activities

Cash used in financing activities was $5.0 million in fiscal 2009 compared with $13.4 million in fiscal 2008. During fiscal 2009, we made principal payments on our long-term debt. During fiscal 2008, we had net repayments on our line-of-credit, additional borrowings of long-term debt and paid dividends to our stockholders.

Sources of Liquidity

Our most significant sources of liquidity continue to be funds generated by operating activities and cash and cash equivalents. We believe funds generated from the expected results of operations and available cash and cash equivalents will be sufficient to finance anticipated expansion plans for the next fiscal year. In addition, our revolving credit facility is available for additional working capital needs. There can be no assurance, however, that we will continue to generate cash flows at or above current levels or that we will be able to maintain our ability to borrow under our revolving credit facility.

On March 28, 2008, we entered into a Term Loan Agreement with The Bank of Tokyo-Mitsubishi, Ltd. for a $40.0 million unsecured five-year term loan maturing April 2013 to finance construction of our second reheat furnace and other working capital needs. The Term Loan Agreement provided for a single loan disbursement of the entire principal amount on April 1, 2008. Interest on the principal balance of the loan shall accrue at a rate of 3.38% for the first two years of the loan and a rate of 3.58% for the remaining three years of the loan and is payable quarterly commencing July 2008. Quarterly principal payments commenced in July 2009.

 

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In September 2005, we entered into a five year $110.0 million credit facility with a bank group led by Mizuho Corporate Bank, as administrative agent and a lender, The Bank of Tokyo-Mitsubishi, Ltd., Citibank (West), FSB and Wells Fargo Bank. Subject to the satisfaction of customary conditions and a borrowing base, advances under this credit facility may be made at any time prior to the credit facility termination date. As of December 31, 2009, there were no outstanding borrowings under this facility. The credit facility is collateralized by accounts receivable and inventory. Advances under this facility may be used for letters of credit, working capital, capital expenditures, payment of dividends and other lawful corporate purposes, including the refinancing of existing debt.

On March 22, 2004, we issued an aggregate of $150.0 million of ten-year, 6.125% senior unsecured notes due in March 2014. With the proceeds of this issuance and cash on hand, we retired our 8.50% senior notes due in 2009. Interest on our 6.125% senior notes is payable on March 15 and September 15 of each year. The notes are senior in right of payment to all of our subordinated indebtedness and equal in right of payment to all of our existing and future indebtedness that is not by its terms subordinated to the notes. We may redeem the notes in whole or in part at any time after March 15, 2009. The redemption price is based on a percentage premium in excess of the face value of the notes which decreases over time. We periodically evaluate the cost of alternative forms of financing in the market versus the cost of redeeming and retiring the notes. Depending on the current market value of the notes, we further periodically evaluate whether to acquire notes in the market as a means to lower our financing costs. The indenture governing the notes contains covenants that limit our ability to incur additional indebtedness, pay dividends, redeem or repurchase capital stock and make investments, create liens, sell assets, sell capital stock of certain subsidiaries, engage in transactions with affiliates and consolidate, merge or transfer all or substantially all of our assets and the assets of certain subsidiaries on a consolidated basis. We were in compliance with all covenants and restrictions at December 31, 2009 and 2008.

We currently have $10.7 million in material commitments for capital expenditures expected to be completed during fiscal 2010. These represent signed purchase orders for various production facility upgrades including the construction of our second reheat furnace. Our total budget for capital improvements in 2010 is $36.7 million of which $6.7 million relates to the second reheat furnace project. We are committed, in the form of open purchase orders, to purchase $105.7 million in steel slabs, of which none are from related parties.

We anticipate that our primary liquidity requirements will be for working capital, capital expenditures, debt service and the payment of dividends. We believe that cash generated from operations and available borrowings under our bank facility will be sufficient to meet our liquidity requirements for fiscal 2010.

Contractual Obligations and Commitments

The following table presents information regarding our contractual obligations and commitments as of December 31, 2009 ($ in thousands):

 

     Total    Less
Than 1
Year
   1-3
Years
   3-5
Years
   More
Than 5
Years

Long Term Debt

   $ 185,000    $ 10,000    $ 20,000    $ 155,000    $ —  

Capital Lease Obligations

     —        —        —        —        —  

Operating Leases

     1,070      642      365      63      —  

Purchase Obligations (1)

     116,398      116,398      —        —        —  

Estimated Interest Payments on Debt (2)

     40,704      10,212      19,368      11,124      —  

Planned Expenditures on Environmental Matters (3)

     2,750      950      1,000      800      —  

Other Long Term Liabilities Reflected on the

Registrant’s Balance Sheet under GAAP

     778      72      145      145      416
                                  

Total

   $ 346,700    $ 138,274    $ 40,878    $ 167,132    $ 416
                                  

 

(1) Amounts relate to contractual commitments to purchase $105.7 million (none from related parties) of steel slabs and material commitments for capital expenditures of $10.7 million.
(2) Amounts represent the annual accrued interest on our $150.0 million ten year, 6.125% senior unsecured notes, which are due and payable in March 2014 and the interest on our $40.0 million five-year unsecured term loan maturing in April 2013.
(3) Amounts reflect $1.0 million of self assessed environmental clean-up of our facility and $1.8 million of anticipated expenditures on environmental matters pursuant to a proposed remediation plan submitted to the California Department of Toxic Substances Control. See discussion in Item 1, Environmental Matters.

 

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When market conditions warrant, we enter into contracts to purchase certain commodities used in the manufacturing of our products, such as electricity and natural gas. Some of these forward contracts do not require derivative accounting as we take possession of the commodities in the normal course of business whereas other forward contracts are accounted for as derivatives in accordance with the accounting standard related to derivatives and hedges by us. None of our current contracts are designated as hedges.

Critical Accounting Policies

Our financial statements are prepared in accordance with generally accepted accounting principles (“GAAP”). In connection with preparation of our financial statements, we are required to make assumptions and estimates about future events, and apply judgments that affect the reported amounts of assets, liabilities, revenue, expenses and the related disclosures. We base our assumptions, estimates and judgments on historical experience, current trends and other factors that management believes to be relevant at the time our financial statements are prepared. On a regular basis, management reviews the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material.

Our significant accounting policies are discussed in Note 1, Summary of Significant Accounting Policies, of the Notes to Financial Statements, included in Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Management believes that the following accounting estimates are the most critical to aid in fully understanding and evaluating our reported financial results, and they require management’s most difficult, subjective or complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.

Allowance for Doubtful Accounts: We have attempted to reserve for expected credit losses based on past experience with similar accounts receivable and believe our reserves to be adequate. It is possible, however, that the accuracy of our estimation process could be materially impacted as the composition of this pool of accounts receivable changes over time. We continually review and refine the estimation process to make it as reactive to these changes as possible; however, we cannot guarantee that we will be able to accurately estimate credit losses on these accounts receivable.

Inventory Reserve: Inventory is stated at the lower of cost or market. We routinely evaluate the carrying value of inventories and make adjustments to reduce the cost of inventory to its net realizable value, if required, for market adjustments, estimated excess, obsolescence or impaired balances. Factors influencing these adjustments include change in demand, cost trends, product pricing and quality issues. In 2009 and 2008, our inventory was written down to market value by $44.5 million and $135.0 million, respectively.

Environmental Reserve: We have engaged an environmental consultant to conduct a remedial investigation and develop a remediation plan and remediation cost projections based upon that plan. Utilizing the remediation plan developed by the environmental consultant, we developed an estimate for future costs of the remediation plan. The total aggregate cost of remediation is estimated to be approximately $1.8 million, which was accrued in 2002 and is included in other liabilities in the 2009 and 2008 financial statements. The California Department of Toxic Substances Control (“DTSC”) has not yet completed its review and approval of our plan; however, preliminary discussions with DTSC have not indicated the need for any significant changes to the remediation plan or to our estimate of related costs. The estimate of costs could change as a result of changes to the remediation plan required by the DTSC or unforeseen circumstances at the site.

Self-insurance Liability: We are self-insured for workers’ compensation with a stop loss. The accrued liability associated with these programs is based on management’s estimate of the ultimate costs to settle known claims as well as claims incurred but not yet reported (“IBNR claims”) as of the balance sheet date. The estimated liability is not discounted and is based on information provided by our insurance brokers and insurers, combined with management’s judgments regarding a number of assumptions and factors, including the frequency and severity of claims, our claims development history, case jurisdiction, related legislation, and our claim settlement practice. Significant judgment is required to estimate IBNR claims as parties have yet to assert such claims. If actual claim trends, including the severity or frequency of claims, differ from management’s estimates, our financial results could be impacted.

Revenue Recognition: We recognize revenue when products are shipped or delivered to the customer, depending on the terms of the sale. For products shipped FOB shipping point, revenue is recognized at the time of shipment when title and risk of loss are transferred to the customer. For products shipped FOB destination, revenue is recognized at the time of delivery when title and risk of loss are transferred to the customer. In certain cases, at the customer’s request, we will enter into bill and hold transactions whereby title transfers to the customer, but the product does not ship until a specified later date. Revenue on such transactions is recognized when the product is ready for shipment, and only after all conditions set forth under ASC Topic 605 have been met.

 

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Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued new accounting standards related to business combinations and non-controlling interest. These standards establish principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. These standards also establish disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. We adopted these new standards concurrently on January 1, 2009. There was no impact upon adoption of these standards to our financial statements.

In March 2008, the FASB issued a new accounting standard related to derivative instruments and hedging activities. This accounting standard establishes disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This accounting standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We adopted this accounting standard on January 1, 2009. There was no impact upon adoption of this accounting standard to our financial statements.

In May 2008, the FASB issued a new accounting standard related to the hierarchy of generally accepted principles. This accounting standard identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). This accounting standard will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” We do not expect the adoption of this accounting standard to have a material effect on our results of operations and financial condition.

In April 2009, the FASB issued new accounting standards related to interim disclosures about fair value of financial instruments. These accounting standards require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. These accounting standards also require disclosures in summarized financial information at interim reporting periods. These accounting standards are effective for interim reporting periods ending after June 15, 2009. There was no impact upon adoption of these accounting standards to our financial statements.

In May 2009, the FASB issued a new accounting standard related to subsequent events, which was amended in February 2010. This accounting standard is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. This accounting standard is effective for interim or annual financial periods ending after June 15, 2009 and the amendment is effective immediately for all companies which have not issued financial statements as of February 24, 2010. There was no impact upon adoption of this accounting standard to our financial statements. We have evaluated subsequent events for disclosure as prescribed by the standard as amended.

In June 2009, the FASB issued a new accounting standard related to accounting standards codification and the hierarchy of generally accepted accounting principles. This accounting standard establishes the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. Under this accounting standard, the FASB Accounting Standards Codification (“Codification”) will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. This accounting standard is effective for financial statements issued for fiscal years and interim periods ending after September 15, 2009. There was no impact upon adoption of this accounting standard to our financial statements.

In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, “Measuring Liabilities at Fair Value” (“ASU 2009-05”). This update provides amendments to Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosure” for the fair value measurement of liabilities. There was no impact upon adoption of ASU 2009-05 for all financial liabilities. We will adopt ASU 2009-05 for all non-financial liabilities in the first quarter of fiscal 2010 when we fully adopt SFAS 157, “Fair Value Measurements.” Although we will continue to evaluate the application of SFAS 157 and this update for its non-financial liabilities, we do not expect the adoption of ASU 2009-05 will have a material impact on our financial statements.

 

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In October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”). This update provides amendments to the criteria to ASC Topic 605, “Revenue Recognition” for separating consideration in multiple-deliverable arrangements. The amendments to this update establish a selling price hierarchy for determining the selling price of a deliverable. ASU 2009-13 is effective for financial statements issued for years beginning on or after June 15, 2010. We are currently evaluating the effect that the adoption of ASU 2009-13 will have on our results of operation, financial position, and cash flows, but do not expect the adoption will have a material impact.

 

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

In addition to the risks inherent in our operations, we are exposed to market risks, including interest rates and utility consumption rates.

Interest Rate Risk

Floating rate credit facility

At December 31, 2009, there were no borrowings on our $110.0 million floating rate credit facility. The carrying value of the floating rate credit facility approximates fair value as the interest rate is variable and resets frequently. Changes in interest rates generally do not affect the fair value of our credit facility, but do affect earnings and cash flow. The credit facility bears interest at the Eurodollar rate or the prime rate, which was approximately 1.15% (one month rate) (including margin) and 3.25%, respectively, at December 31, 2009. We do not expect to borrow any money under the facility for fiscal year 2010; however, if we had to borrow and our estimated average amount of debt under the facility for fiscal 2010 was approximately $10.0 million, a one-percentage point increase in interest rates would result in an increase in interest expense of $100 thousand for the year. We do not manage the interest rate risk on our credit facility through the use of derivative instruments.

Fixed rate debt

At December 31, 2009, our short-term and long-term fixed rate debt comprised of our $150.0 million senior notes and $40.0 million term loan. Changes in interest rates generally affect the fair value of our fixed rate debt instruments. We do not have an obligation to repay our senior notes prior to maturity and, as a result, interest rate risk and changes in fair value should not have a significant impact on us. We believe that the interest rate on our term loan approximates the current rate available for similar types of financing and as a result the carrying amount approximates the fair value. We do not manage the interest rate risk on our fixed rate debt through the use of derivative instruments.

We do not believe that the future market rate risk related to our floating rate credit facility and fixed rate debt will have a material impact on our financial position, results of operations or liquidity.

Other Market Risks

Utility consumption rates

Our daily average electrical demand is approximately 35 megawatts to operate production equipment in manufacturing our products. We are currently a full-service bundled utility customer of Southern California Edison. Due to higher projected production in 2010, our electricity costs are expected to be higher than 2009 levels. In 2009, our electricity costs accounted for 2.8% of our cost of goods sold compared to approximately 1.6% in 2008.

At full capacity, we generally utilize a daily average of approximately 12,000 million British thermal units, or MMBTUs, of natural gas to produce our products. To stabilize price volatility, we regularly use a risk management approach to fix the price on portions of our natural gas requirements up to two years ahead through financial and/or physical hedging arrangements. These arrangements include fixed-price contracts for the New York Mercantile Exchange (NYMEX), and/or the Southern California border basis (basis represents the difference between the NYMEX price at Henry Hub, Louisiana and the price at the Southern California border).

We currently do not have any fixed price purchase agreements for our natural gas commodity requirements for 2010. We continue to monitor the near and long term price trends of natural gas and may enter into additional purchase agreements when we deem it appropriate or when opportunities present themselves. In 2009, our natural gas costs accounted for approximately 2.4% of our cost of goods sold compared to approximately 2.1% in 2008.

 

Item 8. Financial Statements and Supplementary Data

The Financial Statements required to be filed hereunder are set forth on pages F-1 through F-21.

 

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Item 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosure

None.

 

Item 9A. Controls and Procedures

With the participation of management, our chief executive officer and executive vice president, finance and administration evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2009. Based upon this evaluation, the chief executive officer and executive vice president, finance and administration concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) were effective as of December 31, 2009.

There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our fourth quarter ended December 31, 2009, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Under the supervision and with the participation of management, our chief executive officer and executive vice president, finance and administration conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation under the framework in Internal Control – Integrated Framework, management concluded that our internal control over financial reporting was effective as of December 31, 2009.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report on Form 10-K.

 

Item 9B. Other Information

There was no information required to be disclosed in a Current Report on Form 8-K during the fourth quarter of the fiscal year covered by this Annual Report on Form 10-K that was not reported.

 

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PART III

 

Item 10. Directors and Executive Officers of the Registrant

The following table sets forth our Directors and executive officers as of December 31, 2009. Directors are elected to terms of one year. All Directors hold their positions until their term expires and until their respective successor is elected and qualified. Executive officers are elected by and serve at the discretion of the Board of Directors until their term expires and their successor is duly chosen and qualified.

 

Name

   Age   

Position

Masakazu Kurushima (*)

   61    Chairman of the Board of Directors

Aristides Corbellini

   62    Director

Hiroshi Adachi

   54    Director

Renato Almeida

   49    Director

Vicente Wright

   57    President and Chief Executive Officer

Ricardo Bernardes (**)

   46    Executive Vice President, Commercial

Toshiyuki Tamai

   58    Executive Vice President, Operations

Brett Guge (**)

   55    Executive Vice President, Finance and Administration and Corporate Secretary

 

(*)   -  Effective March 31, 2010, Mr. Kurushima will resign as a Director and as Chairman of the Board of Directors. Mr. Adachi will replace Mr. Kurushima as the new Chairman. A successor has not yet been named for the vacancy on the Board of Directors.
(**) -  Effective January 1, 2010, the principal financial officer is Brett Guge. His new position is Executive Vice President, Finance and Administration. Ricardo Bernardes moved from the position of Executive Vice President, Finance to Executive Vice President, Commercial.

Masakazu Kurushima began serving as Chairman of the Board of Directors on July 1, 2008. Before serving as Chairman of the Board of Directors, Mr. Kurushima served as President and Chief Executive Officer of California Steel from July 2004. Mr. Kurushima came to California Steel from JFE Steel America, Inc. (formerly Kawasaki Steel America) where he served as President. Prior to his appointment to JFE Steel America, Mr. Kurushima was Staff General Manager of the Export Department of Kawasaki Steel Corporation, Tokyo. He joined Kawasaki Steel Corporation in 1972 after graduating from Waseda University, Japan, with a degree in Economics.

Aristides Corbellini has served as a Director since October 2008. He also served as a Director of Vale Steel Department since October 2008. Before joining Vale, he was President and CEO of ThyssenKrupp CSA Siderúrgica do Atlântico, a 4.5 billion euro joint venture of ThyssenKrupp Steel with Vale, since its incorporation in September 2004. Mr. Corbellini originally joined ThyssenKrupp Steel in 1998 to establish Galvasud S.A., a joint venture between ThyssenKrupp Steel and Companhia Siderúrgia Nacional. In his position of President and CEO, he was responsible for this $250 million investment. Mr. Corbellini started his career at Westinghouse Electric Co. In 1974, he moved onto Snamprogetti, the engineering subsidiary of E.N.I., the Italian state oil company. After two years, Mr. Corbellinin joined the Petrobras Group, where he remained for eleven years, until 1987, during the last five years as the Executive Director of Petrobras International Trade arm. Between 1987 and 1998, Mr. Corbellini worked as a private entrepreneur. During this period he founded institutions such as Boss-Assessoria de Comércio International S/C, an international consulting and steel trader, and Novatrading S.A., a trading company in partnership with Thyssen Stahlunion of Dusseldorf, Germany. He graduated from Politécnico di Milano in Italy with a Doctorate Degree in Electrical Engineering and from Pontificia Universidade Católica do Rio de Janeiro – PUC in Brazil with an Electrical Engineering degree.

Hiroshi Adachi has served as a Director since April 2007. He is currently President of JFE Steel America, Inc. since April 2007. From 1980 to 2006, Mr. Adachi has held various management positions at NKK Corporation, NKK America and JFE Steel Corporation with a primary focus on sales. From 1990 to 1994, he was stationed in Los Angeles, California, as Manager. He graduated from Tokyo University in 1980 with a Bachelor’s Degree in Economics and from John Molson School of Business, Concordia University in Montreal, Canada with a Master’s Degree in Business Administration in 1986.

Renato Almeida has served as a Director since July 2008. He joined Vale Asia Corporation in Tokyo, Japan in 2006 and is currently the Senior Managing Director. Before his current position, Mr. Almeida was Commercial Director of Minerações Brasileiras Reunidas in Belo Horizonte, Brazil and General Manager of Marketing for Vale S.A. (formerly Companhia Vale

 

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do Rio Doce) in Rio de Janeiro, Brazil. He graduated from Universidade Federal de Minas Gerais in Brazil with a Mechanical Engineering degree and from Fundacão Dom Cabral in Brazil with a Master’s Degree in Business Administration.

Vicente Wright began serving as President and Chief Executive Officer of California Steel on July 1, 2008. Before serving as President and Chief Executive Officer, Mr. Wright served as Chairman of the Board of Directors from July 2004. In January 2007, he returned to Rio de Janeiro, Brazil to assume his new responsibilities Managing Director for the Iron and Pellets Sales for the Americas and Commercial Administration Department of Vale S.A. (formerly Companhia Vale do Rio Doce). From October 2004 to December 2006, he held the position of Managing Director of Rio Doce America, a subsidiary of Vale S.A. in New York, USA. Mr. Wright was named President and Chief Executive Officer of the California Steel Industries in February 2003 after serving as our Executive Vice President, Finance, from February 1998 to February 2003. Mr. Wright was the Steel Division General Manager from 1992 to 1998 and Iron Ore Sales General Manager from 1991 to 1992 of Vale S.A. From 1987 to 1988, he served as Iron Ore Sales General Manager for Rio Doce Asia Ltd., a subsidiary of Vale S.A. in Tokyo, Japan. In 1986 and 1987, he was the assistant to the President of California Steel Industries in charge of slab procurement and all of its related logistics. From 1978 to 1986, he served as Purchasing Executive and Slab Marketing Manager at Companhia Siderurgica de Tubarão (“CST”). Mr. Wright was a member of the Board of Directors of Companhia Siderurgica Nacional (“CSN”), the largest steel company in Brazil, from 1993 to 1997; Acominas, a Brazilian steel mill, from 1994 to 1998; Siderar, an Argentine steel mill, from 1994 to 1997; Chairman of Nova Era Silicon, a Brazilian ferro-silicon company mill, from 1994 to 1997; and SEAS from 1994 to 1998. He graduated from Marquette University, Milwaukee, Wisconsin with a Bachelor’s Degree in Business Administration.

Ricardo Bernardes joined California Steel in September 2003 as Executive Vice President, Finance and Chief Financial Officer. As of January 1, 2010, Mr. Bernardes will be responsible for slab acquisition and transportation and product sales as Executive Vice President, Commercial. Mr. Bernardes held various financial and executive positions in Brazil with RBS Group from November 1995 to July 2003, including the positions of Executive Director of Business Development, CFO Media, Broadcasting Finance Director and Telecommunications Director. He is familiar with the steel industry from his work on various projects as a senior consultant for Booz Allen & Hamilton in Latin America and from his work experience with the Gerdau Group. Mr. Bernardes holds a Master of Business Administration Degree from the University of California, Los Angeles.

Toshiyuki Tamai has served as Executive Vice President, Operations since July 2001. He has been with California Steel since 1995, previously holding positions as Manager, Hot Strip Rolling and Finishing Operations and General Manager, Hot Rolling and Tubular Products. He joined Kawasaki Steel Corporation in 1973 where he served as Manager at the No. 2 Hot Strip Mill at Chiba Works. Prior to joining California Steel Industries, he worked as Senior Staff Engineer at AK Steel, Middletown, Ohio. Mr. Tamai graduated from Kyoto University with a Bachelor’s Degree in Mechanical Engineering.

Brett Guge has served as Vice President, Administration and Corporate Secretary since May 1997. As of January 1, 2010, Mr. Guge will be responsible for all financial and administrative matters as Executive Vice President, Finance and Administration. From 1994 to 1997, he served as the Manager of Administration of Gallatin Steel. From 1983 to 1994, he was employed by Alcoa where he held positions as the Superintendent of Industrial Relations and Employment, Supervisor of Employee Relations and Superintendent of Industrial Relations and Training. Mr. Guge graduated from the University of Tennessee with a Bachelor’s Degree in Communications, and from Xavier University with a Master’s Degree in Business Administration.

Board Committees

Our Board of Directors has a Compensation Committee and an Operations and Finance Committee.

The Compensation Committee is comprised of four members: Mr. Hiroshi Adachi, Director, and Mr. Kazuo Fujisawa, both of JFE Steel Corporation, and Mr. Aristides Corbellini, Director, and Mr. Renato Cantanhede, both of Vale S.A. (formerly Companhia Vale do Rio Doce). The Compensation Committee reviews compensation packages for our officers and prepares the executive compensation proposal to the Board.

The Operations and Finance Committee is comprised of four members including Mr. Hiroshi Adachi , Director, and Mr. Kazuo Fujisawa, both of JFE Steel Corporation, and Mr. Renato Almeida, Director, and Mr. Marcelo Tertuliano, both of Vale S.A. (formerly Companhia Vale do Rio Doce). This committee met twice during 2009. The Operations and Finance Committee mainly reviews our investment plans, business plan, annual operating plan and budget. The Operations and Finance Committee is also responsible for reviewing our operating results and performance.

 

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There is no separate Audit Committee as audit related decisions are made by the entire Board of Directors. The Board of Directors does not contain an audit committee financial expert as such term is defined in Item 401(h)(2) of Regulation S-K as the Board has determined that such an expert is not necessary to properly carry out its oversight responsibilities.

Code of Ethics

We have adopted a written code of ethics for our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. A copy of the current Code of Ethics is attached to our Annual Statement on Form 10-K filed with the Securities and Exchange Commission on March 28, 2007.

 

Item 11. Executive Compensation

Compensation Discussion and Analysis

This section discusses the compensation paid to the principal executive and principal financial officers of California Steel, as well as the three other most highly compensated executive officers of the Company (collectively, the “Executive Officers”).

Compensation Process

Executive compensation is the responsibility of the Board of Directors. The Board considers recommendations from the Compensation Committee of the Board with respect to the periodic review of the compensation of the Executive Officers and the design and structure of incentive compensation to reward executive performance. The Compensation Committee further authorizes benchmarking surveys of executive compensation for similarly sized manufacturing companies, including private companies and those publicly traded. The surveys are conducted by recognized consulting firms, analyzing executive compensation within the steel industry and other manufacturing sectors.

Objectives of Executive Compensation

The objectives of the executive compensation system at California Steel are to (i) maximize our annual profitability, (ii) reward the achievement of Company and individual objective performance targets, (iii) develop management competency and skill in a variety of areas related to our operations, and (iv) provide a compensation package that is competitive within the steel industry and other manufacturing sectors.

Elements of Executive Compensation

The executive compensation system is designed to achieve the objectives of California Steel and reward Executive Officer performance in three ways:

 

   

Base Salary – California Steel seeks to provide a base salary to each of the Executive Officers which is competitive and will retain executives and thus provide stability and continuity within senior management. Base salary is benchmarked from time to time within the steel industry and other manufacturing sectors and is subject to adjustment on an annual basis in the form of cost of living adjustment applicable to all Executive Officers and/or individual changes. None of the Executive Officers base salary changed in 2009.

 

   

Employee Profit Sharing Plan – The Executive Officers are eligible to receive profit sharing bonuses twice a year along with all other employees of the California Steel pursuant to our profit sharing plan. The purpose of this plan is to provide an incentive for all employees, including the Executive Officers, to contribute to our success and to maximize corporate profitability. Our profit sharing plan awards bonuses to all employees based on a pool amount equal to 8% of our income before taxes excluding gain or loss on disposition of fixed assets and some other adjustments. The basis for determining the profit sharing pool is subject to review and approval of our Board of Directors. The employee’s share in the pool amount is based on his or her length of service with California Steel during the profit sharing period. Employees who voluntarily terminate their employment for reasons others than retirement before the end of the profit sharing period and employees whose employment is involuntarily terminated are not eligible to receive any profit sharing award.

 

   

Executive Incentive Plan – The Executive Plan for the Executive Officers is made up of two components:

(i) Executive Profit Sharing – There is a separate profit sharing plan for the Executive Officers which provides an additional reward and incentive to the Executive Officers for maximizing corporate profitability. The profit sharing component of the Executive Incentive Plan is based on a pool amount equal to 0.5% of our income before taxes excluding gain or loss on disposition of fixed assets and some other adjustments. The Executive Officers participate in the pool based on a fixed percentage for each executive position, subject to a maximum bonus

 

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cap. The percentage allocation of each executive and the basis for determining the executive profit sharing pool is subject to review and approval of our Board of Directors.

(ii) Target Achievement – The second component of the Executive Incentive Plan is an individual target achievement component which rewards each Executive Officer with points for performance in a number of target areas. Target areas include general Company performance targets for all Executive Officers such as cash flow, on-time performance and plant safety and more specific target areas for individual Executive Officers such as yield, margin, inventory, sourcing of manufacturing inputs and sales. Finally, each Executive Officer is further given targets for improving management competencies in areas such as initiative, innovation, teamwork, resource utilization, governance and adherence to our principals. Points are awarded in ranges and the point total for each Executive Officer corresponds with a range of incentive bonus values, with higher point values earning greater bonus awards.

Equity Compensation and Incentives

We do not have any public equity outstanding and do not award equity compensation or incentives to our Executive Officers.

Executive Officer Benefits and 401K Plan

In addition to the compensation described above, we offer certain standard benefits, including paid vacation, subsidized health and dental insurance, subsidized life insurance, and an automobile allowance.

We further maintain the California Steel Industries, Inc. 401(k) Savings Plan (“401(k) Plan”), a tax qualified cash or deferred tax arrangement under Section 401(k) of the Internal Revenue Code of 1986, as amended. The 401(k) Plan provides the participants with benefits upon retirement, death, disability or termination of employment with us. Employees are eligible to participate in the salary reduction portion of the plan on the first day of the calendar month following their date of hire.

Participants may authorize us to contribute to the 401(k) Plan on their behalf a percentage of their compensation, not to exceed legally permissible limits, including an overall dollar limit of $16,500 for 2009 and $5,500 as a catch-up contribution for those participants who are 50 years old or older at December 31, 2009. The 401(k) Plan provides for our discretionary matching and profit sharing contributions. We currently match 100% of the participant’s deferral equal to 4% of his or her compensation and an additional 50% of deferrals equal to the next 2% of the participant’s compensation under the 401(k) Plan each year. We elected not to match the participant’s deferral during the last three quarters of fiscal 2009 and have begun matching the participant’s deferral in fiscal 2010. Deferrals made with respect to the Employee Profit-Sharing Plan are not subject to matching contributions. Each plan year we may also elect to make an additional contribution to the 401(k) Plan. This discretionary employer contribution, if we make it, is allocated to each participant’s account based on the participant’s compensation (as defined under the Plan) for the year relative to the compensation of all participants for that year. In order to share in the allocation of the discretionary employer contribution, if any, a participant must complete 1,000 hours of service in the plan year.

Furthermore, the principal executive and principal financial officers, who are dispatched personnel from our two stockholders located in Japan and Brazil, receive certain additional extended paid home leave and expense reimbursements (which are described in greater detail below). These benefits are intended to compensate the dispatched personnel for the hardships of working for extended periods outside of their home country.

 

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Summary Compensation Table

The following summary compensation table sets forth information regarding compensation earned in the fiscal years 2009, 2008 and 2007 by our Principal Executive Officer, Principal Financial Officer and each of our other three most highly compensated executive officers.

Summary Compensation Table

 

                        Change in        
                        Pension        
                        Value        
        Annual Compensation   and Non-   All    
                Stock   Incentive   Qualified   Other    
                and   Compens-   Deferred   Compens-    
                Option   ation   Compensation   ation    

Name and Principal Position

  Year   Salary   Bonus   Awards   (2)   Earnings   (3)   Total

Masakazu Kurushima (1)

  2008   $ 195,272   $ —     n/a   $ 5,159   $ —     $ 11,194   $ 211,625

President and Chief Executive Officer

  2007     390,544     —     n/a     223,592     —       89,490     703,626

Vicente Wright (1)

  2009     390,544     —     n/a     122,104     —       46,430     559,078

President and Chief Executive Officer

  2008     193,770     —     n/a     9,168     —       51,798     254,736

Ricardo Bernardes (*)

  2009     251,962     —     n/a     85,324     —       78,594     415,880

Executive Vice President, Commercial

  2008     251,962     —     n/a     14,327     —       100,557     366,846
  2007     251,962     —     n/a     142,592     —       78,780     473,334

Toshiyuki Tamai

  2009     251,962     —     n/a     68,449     —       55,243     375,654

Executive Vice President, Operations

  2008     251,962     —     n/a     14,327     —       69,315     335,604
  2007     251,962     —     n/a     154,592     —       78,677     485,231

James Wilson (**)

  2008     231,839     —     n/a     14,327     160,332     61,081     467,579

Vice President, Commercial

  2007     231,839     —     n/a     167,592     180,714     34,664     614,809

Brett Guge (*)

  2009     231,839     —     n/a     80,824     83,170     22,122     417,955

Executive Vice President,

  2008     231,839     —     n/a     14,327     88,600     67,759     402,525

Finance & Administration &

  2007     231,839     —     n/a     132,592     82,572     29,453     476,456

Corporate Secretary

               

 

(*) - Brett Guge was Vice President, Adminstration before becoming Executive Vice President, Finance & Administration on January 1, 2010. Ricardo Bernardes moved from the position of Executive Vice President, Finance to Executive Vice President, Commercial on January 1, 2010.
(**) - James Wilson resigned from California Steel to pursue other interest on January 8, 2009.
(1) Mr. Vicente Wright took over the position following the resignation of Mr. Masakazu Kurushima on July 1, 2008 as Mr. Kurushima became Chairman of the Board of Directors.

 

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(2) Incentive compensation is composed of participation by the Executive Officers in the Employee Profit Sharing Plan and the Executive Incentive Plan. The breakdown for each Executive between the two plans for fiscal years 2009, 2008 and 2007 is as follows:

 

Name

   Year    Employee
Profit
Sharing Plan
   Executive
Incentive
Plan
   Total
Incentive
Compensation

Masakazu Kurushima

   2008    $ 5,159    $ —      $ 5,159
   2007      1,592      222,000      223,592

Vicente Wright

   2009      893      121,211      122,104
   2008      9,168      —        9,168

Ricardo Bernardes

   2009      893      84,431      85,324
   2008      14,327      —        14,327
   2007      1,592      141,000      142,592

Toshiyuki Tamai

   2009      893      67,556      68,449
   2008      14,327      —        14,327
   2007      1,592      153,000      154,592

James Wilson

   2008      14,327      —        14,327
   2007      1,592      166,000      167,592

Brett Guge

   2009      893      79,931      80,824
   2008      14,327      —        14,327
   2007      1,592      131,000      132,592

 

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(3) See “Summary Compensation Table – All Other Compensation” below for details of all other compensation.

Summary Compensation Table -

All Other Compensation

 

Name

   Year    Perquisites     Tax
Reimburse-
ment
   Lump
Sum
Payment
(1)
   Company
Contributions
to Defined
Contribution
Plan (2)
   Total
of All
Other
Compensation

Masakazu Kurushima

   2008    $ 6,525  (3)    $ 4,669    $ —      $ —      $ 11,194
   2007      65,453  (4)      24,037      —        —        89,490

Vicente Wright

   2009      23,917  (5)      18,007      —        4,506      46,430
   2008      9,532  (6)      6,411      26,166      9,689      51,798

Ricardo Bernardes

   2009      43,153  (7)      32,534      —        2,907      78,594
   2008      43,453  (8)      29,223      16,881      11,000      100,557
   2007      49,030  (9)      18,750      —        11,000      78,780

Toshiyuki Tamai

   2009      33,380  (10)      21,863      —        —        55,243
   2008      35,247  (11)      17,187      16,881      —        69,315
   2007      57,035  (12)      21,642      —        —        78,677

James Wilson

   2008      27,128  (13)      6,502      15,533      11,918      61,081
   2007      16,992  (13)      5,982      —        11,690      34,664

Brett Guge

   2009      12,930  (13)      6,517      —        2,675      22,122
   2008      34,999  (13)      6,259      15,533      10,968      67,759
   2007      12,363  (13)      5,944      —        11,146      29,453

 

(1) Represents a one-time special lump sum payment approved by the Board of Directors of 6.7% of the base salary.
(2) Represents matching contributions made to the executive’s account in the Company’s 401(k) plan.
(3) Represents $5,875 in car allowance and $650 in medical expenses and home leave reimbursements. Home leave reimbursement is paid to executives who are foreign nationals in connection with trips by them and their family members to their country of origin.
(4) Represents $10,250 in car allowance and $55,203 in medical expenses and home leave reimbursements. Home leave reimbursement is paid to executives who are foreign nationals in connection with trips by them and their family members to their country of origin.
(5) Represents $11,750 in car allowance and $12,167 in medical expenses and home leave reimbursements. Home leave reimbursement is paid to executives who are foreign nationals in connection with trips by them and their family members to their country of origin.
(6) Represents $7,211 in car allowance and $2,321 in medical expenses and home leave reimbursements. Home leave reimbursement is paid to executives who are foreign nationals in connection with trips by them and their family members to their country of origin.
(7) Represents $11,832 in car allowance and $31,321 in medical expenses and home leave reimbursements. Home leave reimbursement is paid to executives who are foreign nationals in connection with trips by them and their family members to their country of origin.

 

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(8) Represents $9,750 in car allowance and $33,703 in medical expenses and home leave reimbursements. Home leave reimbursement is paid to executives who are foreign nationals in connection with trips by them and their family members to their country of origin.
(9) Represents $9,750 in car allowance and $39,280 in medical expenses and home leave reimbursements. Home leave reimbursement is paid to executives who are foreign nationals in connection with trips by them and their family members to their country of origin.
(10) Represents $11,250 in car allowance and $22,130 in medical expenses and home leave reimbursements. Home leave reimbursement is paid to executives who are foreign nationals in connection with trips by them and their family members to their country of origin.
(11) Represents $11,250 in car allowance and $23,997 in medical expenses and home leave reimbursements. Home leave reimbursement is paid to executives who are foreign nationals in connection with trips by them and their family members to their country of origin.
(12) Represents $11,250 in car allowance and $45,785 in medical expenses and home leave reimbursements. Home leave reimbursement is paid to executives who are foreign nationals in connection with trips by them and their family members to their country of origin.
(13) Represents car allowance and other fringe benefits.

Pension Benefits

We currently have no defined benefit pension plan.

Non-Qualified Defined Benefit and Deferred Compensation Plans

The following table sets forth the non-qualified deferred compensation benefits payable to the named executive officer for the fiscal year ended 2009. The benefits mentioned below are calculated under the plan as described below.

 

Name

   Plan Name    Number of Years
Credited Service
   Present Value of
Accumulated Benefits
   Payment During
Last Fiscal Year

Brett Guge

   SERP    10    469,373    —  

Supplemental Executive Retirement Plan

On September 19, 2000, California Steel entered into a Supplemental Executive Retirement Plan with Brett J. Guge, Executive Vice President, Finance and Administration and Corporate Secretary, who has been employed with us since 1997, intended to induce Mr. Guge to remain in our employ. Upon his retirement, we are obligated to pay Mr. Guge a monthly benefit for 180 months calculated as follows: one-twelfth of the product of 2.5% multiplied by the number of years he is employed with us limited to 18 years, multiplied by his average annual compensation, using a 5% discounted rate. “Annual Compensation” is defined in the Plan to include average salary plus short-term incentive payments over the highest three years in the last five years. This benefit vests at the rate of 4% per year, continuing yearly except for the year Mr. Guge turns 65, when the vesting will be 24%. The payment of the vested portion of this benefit will start at the first day of the month following the month in which Mr. Guge reaches age 65. Upon death of the Executive, we agree to pay the benefits to the Executive’s designated beneficiary. At December 31, 2009, he was vested 40% under this agreement. In the event of a change in control in which the successor does not assume liabilities under these Plans, we will pay to Mr. Guge a single lump sum payment equal to the present value of the retirement benefit.

Severance and Change in Control Payments

See description of Supplemental Executive Retirement Plans under the “Non-Qualified Defined Benefit and Deferred Compensation Plans” item above.

Director Compensation

No compensation payments are made to Directors or Committee Members of California Steel. However, JFE Steel Corporation and Vale S.A. (formerly Companhia Vale do Rio Doce) were paid by us for providing the services of the Directors and the Committee Members for fiscal year 2009. The payment for Directors, except the Chairman, was $3,000 per month and $1,000 per month for committee members. For services of the Chairman of the Board of Directors, we paid Mr. Masakazu Kurushima $577,398.

 

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Shareholders’ Agreement

We are owned 50% by JFE Steel Corporation (formerly Kawasaki Steel Corporation), a Japanese corporation, and 50% by Vale Limited (formerly Rio Doce Limited), a New York corporation and a subsidiary of Vale S.A. (formerly Companhia Vale do Rio Doce), a Brazilian corporation. In June 2004, JFE Steel USA, Inc., a Delaware corporation (formerly Kawasaki Steel Holdings (USA), Inc.), also a subsidiary of JFE Steel Corporation, transferred its shares to JFE Steel Corporation. Our two stockholders entered into a Shareholders’ Agreement dated April 1, 2008, replacing the June 27, 1995 and June 1, 1987 Shareholders’ Agreements. The Shareholders’ Agreement, among other things, establishes the threshold for decisions which are within the authority of the Board and those decisions that require stockholder approval. According to the Shareholders’ Agreement, the stockholders agreed to subscribe for additional shares of our stock in proportion to their respective ownership if any new stock is issued, and increases in our capital stock from time to time shall be allocated between our common stock and preferred stock as agreed upon by the stockholders. Each of the stockholders has the right and obligation to subscribe and pay fully for the new shares in proportion to its respective ownership of our common stock. In addition, either stockholder may let its Affiliated Corporations, as defined the Shareholders’ Agreement, subscribe, in whole or in part, to the new shares to be issued to it under the terms described below.

The Shareholders’ Agreement provides that the Board of Directors shall be constituted of four directors, with the chairman being elected by and among the directors. Each stockholder shall have the right to appoint two Directors. The stockholders have further agreed to instruct their representatives on the Board of Directors to appoint the executive officers of California Steel Industries as follows: the President/CEO is jointly appointed, the officers responsible for financial matters is appointed by the President/CEO in consultation with the Vale Limited (formerly Rio Doce Limited) representatives, the officers responsible for product, quality control, engineering and technology are appointed by the President/CEO in consultation with the JFE Steel Corporation representatives and all other officers are appointed by the President/CEO in consultation with the Board. The new Shareholders’ Agreement eliminates the Consultative Council as a mechanism for resolving deadlocks and stockholder disputes and replaces this mechanism with a consultation process between the stockholder representatives to resolve any deadlock among the Directors. If the stockholder representatives cannot resolve a deadlock, then no action is taken on the disputed item. Because no stockholder holds a majority of our stock and the Directors and stockholder representatives are elected by the stockholders in proportion to each of the stockholders’ holdings, there is a possibility that a deadlock may occur on any issue voted on by the stockholders and the Board of Directors. If a deadlock was to occur and the stockholder representatives could not resolve the issue, then action on the issue that is creating the deadlock is not taken and there is no further mechanism of dispute resolution. The Shareholders’ Agreement contains an arbitration clause; however, this clause does not apply to deadlocks and is limited to disputes over the enforcement of the terms of the Agreement.

The Shareholders’ Agreement provides that the stockholders shall recommend to their representatives on the Board that we distribute from our profits the maximum dividend possible after taking into account any limitations imposed by applicable law, the restrictions contained in our financing agreements, and after taking into consideration factors such as maintaining competitiveness, our financial position and cash flow. We have historically paid dividends of 50% of our net income per year.

If either one of the stockholders wishes to transfer or assign their shares of our stock to a third party, other than to one of its affiliated corporations, the stockholder must first offer to sell those shares to the other stockholder upon the same terms and conditions that the third party has offered to purchase the shares. Any stockholder who sells, transfers, assigns, or creates a pledge or other encumbrance on its shares in favor a third party, other than its affiliated corporations, is obligated to obtain an undertaking letter from the third party according to which the third party undertakes unconditionally and irrevocably the obligations of the transferring stockholder under the Shareholders’ Agreement in proportion to the number of shares transferred. Either stockholder may sell, transfer or assign to its affiliated corporations all or any part of its shares or preemptive rights to subscribe for new shares of our stock by giving written notice to the other stockholder, provided that the affiliated corporation has agreed to become a party to the Shareholders’ Agreement. In this case, both the transferor and the affiliated corporation shall jointly assume all of the obligations of the transferor under the Shareholders’ Agreement.

Dispatched Personnel

Pursuant to agreements with our stockholders Vale S.A. (formerly Companhia Vale do Rio Doce), and JFE, certain of our executive officers and employees coming from the stockholders are treated as dispatched personnel, which means that these executive officers and employees retain active employment status in their home country with the stockholder who appointed them. These agreements further require that we provide certain benefits to employees who have been sent by a stockholder to work at California Steel, such as extended home leave, home leave reimbursements and some other benefits. We further have an agreement with our stockholder, JFE, to reimburse JFE for the salary of employees who are designated as dispatched personnel, whereas dispatched personnel from our stockholder, Vale S.A. (formerly Companhia Vale do Rio Doce), are paid directly by us.

 

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Executive officers who in 2009 were treated as dispatched personnel from JFE Steel Corporation and its subsidiaries included only Toshiyuki Tamai. Executive officers who in 2009 were treated as dispatched personnel from Vale S.A. (formerly Companhia Vale do Rio Doce) and its subsidiaries included Vicente Wright and Ricardo Bernardes. Notwithstanding the retention of formal active status, all individuals designated as dispatched personnel are full time employees of California Steel.

The compensation and benefits of executive dispatched personnel, including any home leave reimbursement, is set forth in the Summary Compensation Table in Item 11.

Compensation Committee Interlocks and Inside Participation

Mr. Hiroshi Adachi, Director, Mr. Aristides Corbellini, Director, Mr. Kazuo Fujisawa, and Mr. Renato Cantanhede served as members of our Compensation Committee. None of the members of the Compensation Committee was, during 2009, an officer, employee or formerly an officer or employee of California Steel.

Mr. Adachi served as President of JFE Steel America, Inc. during 2009. In 2009, Mr. Fujisawa served as General Manager of Overseas Business Planning, Corporate Planning Department of JFE Steel Corporation. In 2009, Mr. Corbellini served as Director of Vale S.A. Steel Department (Companhia Vale do Rio Doce). In 2009, Mr. Cantanhede served as Compensation Manager for Vale S.A. (formerly Companhia Vale do Rio Doce).

Board Compensation Committee Report on Executive Compensation

The Compensation Committee has reviewed and discussed with management the disclosures contained in the Compensation Discussion and Analysis section of this Item 11. Based upon this review and our discussions, the Compensation Committee recommended to its Board of Directors that the Compensation Discussion and Analysis section be included in this Annual Report on Form 10-K.

 

Submitted by the Compensation Committee of the Board of Directors:

Hiroshi Adachi

Aristides Corbellini

Kazuo Fujisawa

Renato Cantanhede

 

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Table of Contents
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The following table sets forth, as of December 31, 2009, information regarding the shares of our common stock beneficially owned by each stockholder that beneficially owns in excess of 5% of the outstanding shares of our common stock. No director or named executive officer beneficially owns any shares of our common stock.

 

     Common  

Name of Beneficial Owner

   Number    % of
Class
 

Vale Limited (1)

   2,000    50

546 5th Avenue, 12th Floor

     

New York, New York 10036

     

JFE Steel Corporation (2)

   2,000    50

2-3 Uchisaiwai-cho 2-chome

     

Chiyoda-ku, Tokyo 100-0011 Japan

     

 

(1) Vale Limited (formerly known as Rio Doce Limited) is a subsidiary of Vale S.A. (formerly Companhia Vale do Rio Doce), a Brazilian corporation.
(2) In 2004, JFE Steel U.S.A., Inc., transferred its common stock in California Steel to JFE Steel Corporation.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

Our stockholders, JFE Steel Corporation, and Vale Limited (formerly Rio Doce Limited), a subsidiary of Vale S.A. (formerly Companhia Vale do Rio Doce), are parties to a Shareholders’ Agreement. According to the Shareholders’ Agreement, the stockholders control the election of the Board of Directors. The stockholders also indirectly control the appointment of officers through their right to jointly elect the president, who is entitled to appoint our other officers.

We have transactions in the normal course of business with affiliated companies. For example, we purchase slab from Cosipa Overseas, a wholly-owned subsidiary of Usinas Siderurgicas de Minas Gerais – Usiminas. Usiminas which was an affiliate of Vale S.A. (formerly Companhia Vale do Rio Doce). On April 16, 2009, Vale S.A. sold its interest in Usiminas. During 2009, we purchased $84.4 million of slab and recorded revenues of $31.7 million from JFE Steel Corporation. We conducted arms-length negotiations with Cosipa Overseas and JFE Steel Corporation in 2009. The executive officer negotiating the market price for the steel slab was the Executive Vice President, Commercial.

We further maintain contractual relationships with our stockholders in the form of Dispatched Personnel Agreements, as described in Item 11. Executive Compensation – Dispatched Personnel. These agreements provide for certain benefits and salary reimbursements with respect to personnel who are sent by the stockholders to work at California Steel. All compensation and benefits paid to such personnel, including salary which is reimbursed, is set forth in Item 11. Executive Compensation – Summary Compensation Schedule.

On May 22, 2009, Companhia Vale do Rio Doce changed its legal name to Vale S.A.

 

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Table of Contents
Item 14. Principal Accounting Fees and Services

Aggregate fees billed by principal accountant in the past two years.

 

     2009    2008

Ernst & Young, LLP

     

Audit Fees

   $ 264,000    $ 243,000

Audit Related Fees

   $ 97,067    $ 2,300

Tax Fees

   $ 436,370    $ 9,036

Other Fees

   $ 18,000    $ 25,000

Audit Fees. Audit fees consist of amounts billed for professional services rendered for the audit of our annual financial statements included in our Annual Reports on Form 10-K, and reviews of our interim financial statements included in our Quarterly Reports on Form 10-Q.

Audit Related Fees. Audit related fees consist of fees billed for professional services that are reasonably related to the performance of the audit or review or our financial statements but are not reported under “Audit Fees.”

Tax Fees. Tax fees consist of fees for professional services for tax compliance activities, including the preparation of federal and state tax returns and related compliance matters.

Other Fees. Consists of amounts billed for services other than those noted above.

 

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Table of Contents

PART IV

 

Item 15. Exhibits and Financial Statement Schedules

(a) (1) and (2) Financial Statements:

The following financial statements and schedule of the Registrant are included in response to Item 8 of this Annual Report on Form 10-K:

 

  1. Financial Statements:

 

     Page

Index to Financial Statements

   F-1

Report of Independent Registered Public Accounting Firm

   F-2

Balance Sheets as of December 31, 2009 and 2008

   F-3

Statements of Operations for the years ended December 31, 2009, 2008 and 2007

   F-4

Statements of Stockholders’ Equity for the years ended December 31, 2009, 2008 and 2007

   F-5

Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007

   F-6

Notes to Financial Statements

   F-7

2.      Financial Statement Schedule:

  

Schedule II – Valuation and Qualifying Accounts

   S-1

All other schedules have been omitted since they are either not required, not applicable or the information is otherwise included.

(a)(3) Exhibits:

The Exhibits required to be filed with this Annual Report on Form 10-K are listed in the Exhibit Index included herein immediately following the Signature Page.

 

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Table of Contents

INDEX TO FINANCIAL STATEMENTS

 

     Page

Report of Independent Registered Public Accounting Firm

   F-2

Balance Sheets as of December 31, 2009 and 2008

   F-3

Statements of Operations for the years ended December 31, 2009, 2008 and 2007

   F-4

Statements of Stockholders’ Equity for the years ended December 31, 2009, 2008 and 2007

   F-5

Statements of Cash Flows for the years ended December 31, 2009, 2008 and 2007

   F-6

Notes to Financial Statements

   F-7

 

F-1


Table of Contents

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

California Steel Industries, Inc.

We have audited the accompanying balance sheets of California Steel Industries, Inc. (the Company) as of December 31, 2009 and 2008, and the related statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2009. Our audits also included the information included in the financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of California Steel Industries, Inc. at December 31, 2009 and 2008, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ Ernst & Young LLP

Los Angeles, California

March 11, 2010

 

F-2


Table of Contents

California Steel Industries, Inc. and Subsidiary

Balance Sheets

 

     December 31,
     2009    2008
     (In Thousands, except for
share amounts)

Assets

     

Current assets

     

Cash and cash equivalents

   $ 61,671    $ 10,880

Trade accounts receivable, less allowance for doubtful accounts of $700 and $1,550 in 2009 and 2008, respectively

     24,108      44,944

Inventories

     185,068      224,146

Prepaid income taxes

     16,160      75,515

Other receivables and prepaid expenses

     2,201      2,894
             

Total current assets

     289,208      358,379

Other assets

     19,646      21,423

Property, plant and equipment, net

     276,593      261,027
             

Total assets

   $ 585,447    $ 640,829
             

Liabilities and stockholders’ equity

     

Current liabilities

     

Accounts payable

   $ 39,793    $ 66,009

Accrued interest expense

     3,010      3,074

Accrued utilities

     1,433      1,392

Deferred income taxes

     6,682      4,815

Other accrued expenses

     6,290      10,755

Current portion of long-term debt

     10,000      5,000
             

Total current liabilities

     67,208      91,045
             

Other liabilities

     2,506      2,495

Long-term debt

     175,000      185,000

Deferred income taxes

     40,062      48,517

Commitments and contingencies

     

Stockholders’ equity

     

Class A preferred stock, $10,000 par value per share. Authorized 1,000 shares; none issued

     —        —  

Class B preferred stock, $10,000 par value per share. Authorized 2,000 shares; none issued

     —        —  

Class C preferred stock, $10,000 par value per share. Authorized 3,000 shares; none issued

     —        —  

Common stock, no par value. Authorized 5,000 shares; 4,000 shares issued and outstanding

     40,000      40,000

Retained earnings

     260,671      273,772
             

Total stockholders’ equity

     300,671      313,772
             

Total liabilities and stockholders’ equity

   $ 585,447    $ 640,829
             

See accompanying notes.

 

F-3


Table of Contents

California Steel Industries, Inc. and Subsidiary

Statements of Operations

 

     Years Ended December 31,  
     2009     2008     2007  
     (In Thousands)  

Net sales

   $ 551,808      $ 1,510,613      $ 1,282,967   

Cost of sales

      

Cost of sales, excluding lower of cost or market adjustment

     516,620        1,320,739        1,259,416   

Lower of cost or market adjustment

     44,500        135,000        957   
                        

Gross (loss) profit

     (9,312     54,874        22,594   

Selling, general and administrative expenses

     17,481        22,779        20,601   

Loss on disposition of property, plant and equipment

     485        3,256        1,005   
                        

(Loss) income from operations

     (27,278     28,839        988   

Other (expense) income:

      

Interest expense, net

     (8,159     (8,823     (10,528

Other, net

     8,492        (409     5,270   
                        

(Loss) income before income tax (benefit) expense

     (26,945     19,607        (4,270

Income tax (benefit) expense

     (13,844     6,332        (3,364
                        

Net (loss) income available to common stockholders

   $ (13,101   $ 13,275      $ (906
                        

See accompanying notes.

 

F-4


Table of Contents

California Steel Industries, Inc. and Subsidiary

Statements of Stockholders’ Equity

 

     Common
Stock
   Retained
Earnings
    Total
Stockholders’
Equity
 
    

(In Thousands, except shares and

per share amounts)

 

Balance at December 31, 2006

     40,000      309,846        349,846   

Cumulative effect: Recording of uncertain tax positions

     —        (335     (335

Net loss

     —        (906     (906

Cash dividends:

       

Common stock, $5,296 on 4,000 shares

     —        (21,183     (21,183
                       

Balance at December 31, 2007

     40,000      287,422        327,422   

Net income

     —        13,275        13,275   

Cash dividends:

       

Common stock, $6,731 on 4,000 shares

     —        (26,925     (26,925
                       

Balance at December 31, 2008

     40,000      273,772        313,772   

Net loss

     —        (13,101     (13,101
                       

Balance at December 31, 2009

   $ 40,000    $ 260,671      $ 300,671   
                       

See accompanying notes.

 

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Table of Contents

California Steel Industries, Inc. and Subsidiary

Statements of Cash Flows

 

     Years Ended December 31,  
     2009     2008     2007  
     (In Thousands)  

Operating activities

      

Net (loss) income

   $ (13,101   $ 13,275      $ (906

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

      

Depreciation and amortization

     32,811        33,013        31,624   

Deferred income taxes

     (6,588     955        7,113   

Gain on sale of environmental credits

     (438     —          —     

Loss on disposition of property, plant and equipment

     485        3,256        1,005   

Inventory write-down

     44,500        135,000        957   

Changes in assets and liabilities:

      

Trade accounts receivable, net

     20,836        22,421        30,695   

Inventories

     (5,422     (101,909     31,775   

Prepaid income taxes

     59,355        (61,020     (18,234

Other receivables and prepaid expenses

     713        997        (102

Accounts payable

     (26,216     14,073        (34,737

Accrued interest expense

     (64     236        31   

Other accrued expenses and liabilities

     (4,413     2,297        (3,943
                        

Net cash provided by operating activities

     102,458        62,594        45,278   

Investing activities

      

Additions to property, plant and equipment

     (48,231     (48,974     (41,062

Proceeds received for the sale of environmental credits

     1,519        —          —     

Proceeds (removal costs, net of proceeds) from sale of property, plant and equipment

     45        (2,037     (834

Additions to intangible assets

     —          (908     (630
                        

Net cash used in investing activities

     (46,667     (51,919     (42,526

Financing activities

      

Net (repayments) advances on line-of-credit

     —          (26,500     26,500   

(Repayments) borrowings of long-term debt

     (5,000     40,000        —     

Dividends paid

     —          (26,925     (21,183
                        

Net cash (used in) provided by financing activities

     (5,000     (13,425     5,317   
                        

Net increase (decrease) in cash and cash equivalents

     50,791        (2,750     8,069   

Cash and cash equivalents at beginning of year

     10,880        13,630        5,561   
                        

Cash and cash equivalents at end of year

   $ 61,671      $ 10,880      $ 13,630   
                        

Supplemental disclosures of cash flow information

      

Cash paid during the year for:

      

Interest (net of amount capitalized)

   $ 8,297      $ 9,834      $ 10,645   
                        

Income taxes (net of amount refunded)

   $ (66,422   $ 68,097      $ 6,961   
                        

See accompanying notes.

 

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Table of Contents

California Steel Industries, Inc. and Subsidiary

Notes to Financial Statements

1. Summary of Significant Accounting Policies

Description of Business

Unless the context otherwise requires, the use of the terms “California Steel,” “we,” “us” and “our” in these notes to financial statements refers to California Steel Industries, Inc.

California Steel was incorporated in the state of Delaware on November 3, 1983. Our stockholders consist of two companies, JFE Steel Corporation (formerly Kawasaki Steel Corporation), a Japanese corporation, and Vale Limited (formerly Rio Doce Limited), a New York corporation, which each own 50% of our stock. From our site in Fontana, California, we manufacture a wide range of flat rolled steel products, including hot rolled, cold rolled, and galvanized coil and sheet. We also produce electric resistant welded pipe.

Reclassifications

To maintain consistency and comparability, certain amounts from previously reported financial statements have been reclassified to conform to the current-year presentation. We reclassified to cost of sales, excluding lower of cost or market adjustment, $9.1 million and $7.9 million in shipping expenses for the years ended 2008 and 2007, respectively, which were previously reported in selling, general and administrative expenses on our statements of operations.

Use of Estimates in the Preparation of Financial Statements

The preparation of financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires us to make estimates and assumptions. The estimates and assumptions affect the reported amounts in the balance sheets and statements of operations, as well as the disclosure of contingent liabilities. Future results could be materially affected if actual results were to differ from these estimates and assumptions.

Cash and Cash Equivalents

Cash primarily consists of cash on hand and bank deposits. We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. These bank accounts are guaranteed by the Federal Deposit Insurance Corporation (FDIC) up to $250,000. As of December 31, 2009 and 2008, we had cash balances with banks in excess of the federally insured limit.

Trade Accounts Receivable

Trade accounts receivable are carried at original invoice amount less an estimate made for doubtful receivables based on a review of all outstanding amounts on a monthly basis. We determine the allowance for doubtful accounts by identifying troubled accounts, using historical experience applied to an aging of accounts, regularly evaluating individual customer receivables and considering a customer’s financial condition and credit history, and current economic conditions. Trade accounts receivable are written off when deemed uncollectible. Recoveries of trade accounts receivable previously written off are recorded when received.

 

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Table of Contents

California Steel Industries, Inc. and Subsidiary

Notes to Financial Statements (continued)

 

1. Summary of Significant Accounting Policies (continued)

Inventories

Inventories are stated at the lower of cost or market. Cost is determined using the first-in, first-out (FIFO) method of inventory accounting. We routinely evaluate the carrying value of inventories and provide reserves when appropriate to reduce inventories to the lower of cost or market to reflect estimated net realizable value. In 2009 and 2008, our inventory was written down to the lower of cost or market value by $44.5 million and $135.0 million, respectively.

Deferred Financing Costs

Debt issuance costs are amortized on a straight-line basis (which approximates the effective interest method) over the term of the related debt agreement. These costs are included in other assets in the 2009 and 2008 balance sheets. Amortization of issuance costs is included as a component of interest expense and amounted to $353 thousand for each of the three years ended December 31, 2009, 2008 and 2007.

Indefinite-Lived Purchased Intangible Assets

We account for purchased intangible assets with indefinite useful lives in accordance with the accounting standard related to intangibles assets,, which prohibits the amortization of purchased intangible assets with indefinite lives. This accounting standard requires that purchased intangible assets with indefinite lives be reviewed for impairment at least annually or whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. If the carrying amount of an intangible asset exceeds its estimated fair value, an impairment loss is recognized by the amount by which the carrying amount of the asset exceeds the estimated fair value of the indefinite-lived purchased intangible assets. When intangible assets with indefinite useful lives are sold or otherwise disposed of, the cost is eliminated, and any related gain or loss is included in the statement of operations. The amount of purchased intangible assets with indefinite lives was approximately $2.9 million and $4.0 million at December 31, 2009 and 2008, respectively, and is included in other asset on the balance sheets.

Property, Plant and Equipment

Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets. The estimated useful lives of the assets are as follows:

 

Plant and equipment    3 to 25 years
Plant refurbishment costs    10 years
Furniture and fixtures    5 years

Assets under construction are not depreciated until placed into service. Ordinary repairs and maintenance are charged to operating costs when incurred. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the respective accounts, and any related gain or loss is included in the statement of operations.

 

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Table of Contents

California Steel Industries, Inc. and Subsidiary

Notes to Financial Statements (continued)

 

1. Summary of Significant Accounting Policies (continued)

Impairment of Long-Lived Assets

We account for long-lived assets in accordance with the accounting standard related to property, plant and equipment. This accounting standard requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided against the deferred tax assets for amounts which are not considered “more likely than not” to be realized.

Environmental

Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures are capitalized if they meet one of the following criteria: (1) extend the useful life, increase the capacity, or improve the safety or efficiency of property, (2) mitigate or prevent environmental contamination that has yet to occur and that otherwise may result from future operations or activities, or (3) incurred in preparing property currently held for sale. We accrue for costs associated with environmental remediation obligations when such losses are probable and reasonably estimable. Accruals for estimated losses from environmental remediation obligations are recognized no later than completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change (see Note 8). Costs of future expenditures for environmental remediation obligations are not discounted to their present value.

Derivative Financial Instruments

We account for derivative financial instruments in accordance with the accounting standard related to derivatives and hedges which establishes accounting and reporting standards for derivative instruments (including certain derivative instruments embedded in other contracts). This accounting standard requires companies to record derivatives on their balance sheets as either assets or liabilities measured at their fair value unless exempted from derivative treatment as a normal sale and purchase transaction. All changes in the fair value of derivatives are recognized currently in earnings unless specific hedge criteria are met, which requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting.

 

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Table of Contents

California Steel Industries, Inc. and Subsidiary

Notes to Financial Statements (continued)

 

1. Summary of Significant Accounting Policies (continued)

We enter into contracts to purchase certain commodities used in the manufacturing of our products, such as electricity and natural gas. Some of these forward contracts do not require derivative accounting as we take possession of the commodities in the normal course of business whereas other forward contracts are accounted for as derivatives in accordance with the accounting standard related to derivatives and hedges by us. These derivatives did not qualify for hedge accounting treatment; therefore, these financial instruments are reported at fair value, with changes in fair value reported in current earnings. Credit risk related to the derivative financial instruments is considered minimal and is managed by requiring high credit standards for its counterparties and periodic settlements.

Self-Insurance Liability

We are self-insured for workers’ compensation with a stop loss. The accrued liability associated with these programs is based on our estimate of the ultimate costs to settle known claims as well as claims incurred but not yet reported (IBNR claims) as of the balance sheet date. The estimated liability is not discounted and is based on information provided by our insurance brokers and insurers, combined with our judgments regarding a number of assumptions and factors, including the frequency and severity of claims, our claims development history, case jurisdiction, related legislation, and our claim settlement practice. Significant judgment is required to estimate IBNR claims as parties have yet to assert such claims. If actual claim trends, including the severity or frequency of claims, differ from our estimates, our financial results could be impacted.

Fair Value Measurements

The carrying value of cash and cash equivalents, trade accounts receivable, other receivables, accounts payable, and other accrued expenses are measured at cost which approximates their fair value because of the short maturity of those instruments. The fair values of long-term indebtedness are estimated based on the quoted market prices for the same or similar issues, or the current rates offered to us for debt of similar maturities.

Revenue Recognition

Revenue is recognized when products are shipped, title has transferred to the customer and collectibility is reasonably assured.

Shipping Costs

We charge shipping fees to certain customers based upon the actual amounts incurred. Amounts billed for shipping costs are included in net sales. We include the associated shipping costs in cost of sales, excluding lower of cost or market adjustment.

Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (“FASB”) issued new accounting standards related to business combinations and non-controlling interest. These standards establish principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any non-controlling interest in the acquiree and the goodwill acquired. These standards also establish disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. We adopted these new standards concurrently on January 1, 2009. There was no impact upon adoption of these standards to our financial statements.

 

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Table of Contents

California Steel Industries, Inc. and Subsidiary

Notes to Financial Statements (continued)

 

1. Summary of Significant Accounting Policies (continued)

In March 2008, the FASB issued a new accounting standard related to derivative instruments and hedging activities. This accounting standard establishes disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This accounting standard is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. We adopted this accounting standard on January 1, 2009. There was no impact upon adoption of this accounting standard to our financial statements.

In May 2008, the FASB issued a new accounting standard related to the hierarchy of generally accepted principles. This accounting standard identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). This accounting standard will become effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” We do not expect the adoption of this accounting standard to have a material effect on our results of operations and financial condition.

In April 2009, the FASB issued new accounting standards related to interim disclosures about fair value of financial instruments. These accounting standards require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. These accounting standards also require disclosures in summarized financial information at interim reporting periods. These accounting standards are effective for interim reporting periods ending after June 15, 2009. There was no impact upon adoption of these accounting standards to our financial statements.

In May 2009, the FASB issued a new accounting standard related to subsequent events, which was amended in February 2010. This accounting standard is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for selecting that date, that is, whether that date represents the date the financial statements were issued or were available to be issued. This accounting standard is effective for interim or annual financial periods ending after June 15, 2009 and the amendment is effective immediately for all companies which have not issued financial statements as of February 24, 2010. There was no impact upon adoption of this accounting standard to our financial statements. We have evaluated subsequent events for disclosure as prescribed by the standard as amended.

In June 2009, the FASB issued a new accounting standard related to accounting standards codification and the hierarchy of generally accepted accounting principles. This accounting standard establishes the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. Under this accounting standard, the FASB Accounting Standards Codification (“Codification”) will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. This accounting standard is effective for financial statements issued for fiscal years and interim periods ending after September 15, 2009. There was no impact upon adoption of this accounting standard to our financial statements.

 

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Table of Contents

California Steel Industries, Inc. and Subsidiary

Notes to Financial Statements (continued)

 

1. Summary of Significant Accounting Policies (continued)

In August 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-05, “Measuring Liabilities at Fair Value” (“ASU 2009-05”). This update provides amendments to Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosure” for the fair value measurement of liabilities. There was no impact upon adoption of ASU 2009-05 for all financial liabilities. We will adopt ASU 2009-05 for all non-financial liabilities in the first quarter of fiscal 2010 when we fully adopt SFAS 157, “Fair Value Measurements.” Although we will continue to evaluate the application of SFAS 157 and this update for its non-financial liabilities, we do not expect the adoption of ASU 2009-05 will have a material impact on our financial statements.

In October 2009, the FASB issued ASU No. 2009-13, “Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force” (“ASU 2009-13”). This update provides amendments to the criteria to ASC Topic 605, “Revenue Recognition” for separating consideration in multiple-deliverable arrangements. The amendments to this update establish a selling price hierarchy for determining the selling price of a deliverable. ASU 2009-13 is effective for financial statements issued for years beginning on or after June 15, 2010. We are currently evaluating the effect that the adoption of ASU 2009-13 will have on our results of operation, financial position, and cash flows, but do not expect the adoption will have a material impact.

2. Inventories

Inventories consist of the following at December 31 (dollars in thousands):

 

     2009    2008

Finished goods

   $ 11,294    $ 16,160

Work in process

     17,164      34,168

Raw materials

     137,234      160,096

Supplies

     19,376      13,722
             
     185,068      224,146
             

3. Property, Plant and Equipment

Property, plant and equipment consist of the following at December 31 (dollars in thousands):

 

     2009     2008  

Land

   $ 14,432      $ 14,432   

Plant and equipment

     592,474        581,141   

Plant refurbishment costs

     22,220        22,220   

Furniture and fixtures

     13,882        13,682   

Construction in progress

     66,932        38,707   
                
     709,940        670,182   

Accumulated depreciation

     (433,347     (409,155
                
   $ 276,593      $ 261,027   
                

Depreciation expense was $32.5 million, $32.7 million and $31.3 million for the years ended December 31, 2009, 2008 and 2007, respectively. Capitalized interest was $2.4 million, $688 thousand and $86 thousand for the years ended December 31, 2009, 2008 and 2007, respectively.

 

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Table of Contents

California Steel Industries, Inc. and Subsidiary

Notes to Financial Statements (continued)

 

4. Leases

We are obligated under various equipment leases that expire at various dates during the next five years. At December 31, 2009, the future minimum lease payments under non-cancelable operating leases with commitments of at least one year are as follows (dollars in thousands):

 

Year ending December 31:

    

2010

   $ 642

2011

     231

2012

     134

2013

     61

2014

     2
      
   $ 1,070
      

Rental expense under operating leases totaled $1.1 million, $1.3 million and $1.7 million for the years ended December 31, 2009, 2008 and 2007, respectively.

5. Notes Payable and Long-Term Debt

Our five-year revolving credit facility (the Facility) is with a syndicate of four financial institutions. The Facility provides for an aggregate principal amount of up to $110.0 million subject in all respects to a borrowing base coverage requirement. Advances under this Facility may be used for letters of credit, working capital, capital expenditures, payment of dividends and other lawful corporate purposes, including the refinancing of existing debt. Under the Facility, a commitment fee is applied on the average daily undrawn portion of the commitments at a rate equal to the applicable margin. The applicable margin in effect from time to time will range from 0.1% to 0.3%, based upon the leverage ratio.

At our election, the amounts advanced under the Facility bear interest at the base rate or the Eurodollar rate, plus the applicable margin. Interest is generally payable quarterly and any accrued interest and principal is due and payable in September 2010. There were no outstanding borrowings as of December 31, 2009. As of December 31, 2009, we had three outstanding letters of credit totaling $1.1 million which expire on various dates through August 2010. This outstanding balance reduces the borrowing base. We had over $108.8 million of borrowings available under the Facility as of December 31, 2009.

Fees incurred on the Facility are being amortized over the term of the loan. The unamortized amount of financing costs were $83 thousand and $195 thousand at December 31, 2009 and 2008, respectively, and are classified as other assets in the balance sheets.

The Facility is collateralized by our accounts receivable and inventories. The Facility requires compliance with certain covenants and restrictions with regard to the interest coverage ratio, tangible net worth and shareholder distributions. We were in compliance with all covenants and restrictions at December 31, 2009 and 2008, respectively.

On March 22, 2004, we issued an aggregate of $150.0 million of ten-year, 6.125% unsecured senior notes due in March 2014. The interest on these senior notes is payable on March 15 and September 15 of each year, commencing September 15, 2004. The notes are senior in right of payment to all of our subordinated indebtedness and equal in right of payment to all of our existing and future indebtedness that is not by its terms subordinated to the notes. We may redeem the notes in whole or in part any time after March 15, 2009. On June 24, 2004, we completed an exchange offer exchanging our unregistered 6.125% senior notes for 6.125% senior notes registered by us pursuant to a registration statement filed under the Securities Act of 1933.

 

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Table of Contents

California Steel Industries, Inc. and Subsidiary

Notes to Financial Statements (continued)

 

5. Notes Payable and Long-Term Debt (continued)

The unamortized portion of the financing costs related to the 6.125% senior notes due in 2014 was $1.0 million and $1.3 million at December 31, 2009 and 2008, respectively, and is classified as other assets in the balance sheet.

On March 28, 2008, we entered into a Term Loan Agreement with The Bank of Tokyo-Mitsubishi, Ltd. for $40.0 million unsecured five-year term loan maturing April 2013. The Term Loan Agreement provided for a single loan disbursement of the entire principal amount on April 1, 2008. Interest on the principal balance of the loan shall accrue at a rate of 3.38% for the first two years of the loan and a rate of 3.58% for the remaining three years of the loan and is payable quarterly commencing July 2008. Quarterly principal payments commence in July 2009.

Long-term debt at December 31, 2009 and 2008, consisted of the following (dollars in thousands):

 

     2009    2008

Senior notes bearing interest at 6.125% interest payable semiannually, due March 2014

   $ 150,000    $ 150,000

Term loan bearing interest at 3.38% throught April 2010 and 3.58% through April 2013. Interest payable quarterly, due April 2013

     35,000      40,000

Revolving line of credit payable to banks consists of amounts advanced under $110.0 million bank facility, bearing interest at either the Eurodollar rate or the base rate, plus the applicable margin. Interest is generally payable quarterly, and any accrued interest and principal are due and payable in full in September 2010

     —        —  
             
     185,000      190,000

Less current maturities

     10,000      5,000
             
   $ 175,000    $ 185,000
             

The following are future maturities of long-term debt and credit facility for each of the next five years ending December 31 (dollars in thousands):

 

2010

   $ 10,000

2011

     10,000

2012

     10,000

2013

     5,000

2014

     150,000
      
   $ 185,000
      

Interest expense was $10.7 million, $10.8 million and $10.8 million for the years ended 2009, 2008 and 2007, respectively.

 

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Table of Contents

California Steel Industries, Inc. and Subsidiary

Notes to Financial Statements (continued)

 

6. Redeemable Preferred Stock and Stockholders’ Equity

The Class A, B and C preferred stock is redeemable at our option, in whole or in part, at par value. Class C preferred stock has priority over the common stock in the distribution of dividends and is entitled to a dividend equivalent to 10% of the par value per annum on a cumulative basis and is thereafter entitled to participate in the distribution of dividends at the same rate and upon the same conditions as the common stock.

Each holder of common stock is entitled to one vote for each share held on record on each matter submitted to a vote of the stockholders. Holders of the common stock have no cumulative voting, conversion, or redemption rights, but are entitled to preemptive rights to subscribe for additional shares of common stock in any additional issuance of common stock or any security convertible into common stock. Subject to any preferences that may be granted to the holders of preferred stock, each holder of common stock is entitled to receive ratably dividends as may be declared by the board of directors, and in the event of liquidation, dissolution, or winding up, is entitled to share ratably in all our assets remaining after payment of liabilities.

No dividends were declared or paid for the year ended December 31, 2009. During the years ended December 31, 2008 and 2007, $26.9 million and $21.2 million, respectively, in dividends were declared and paid.

7. Related-Party Transactions

We have transactions in the normal course of business with affiliated companies. We are 50% owned by JFE Steel Corporation, a Japanese corporation, and 50% owned by Vale Limited (formerly Rio Doce Limited), a subsidiary of Vale S.A. (formerly Companhia Vale do Rio Doce), a Brazilian corporation.

We purchase steel slab from JFE Steel and from Cosipa Overseas, which was an affiliate of Vale S.A. from November 2006 to April 2009. The following represents total purchases made from affiliated companies for the years ended December 31 (dollars in thousands):

 

     2009    2008    2007

JFE Steel

   $ 84,646    $ 71,123    $ 95,342

Cosipa Overseas

     —        —        14,322

No amounts were owed our affiliated companies for goods and services at December 31, 2009. At December 31, 2008 and 2007, we owed affiliated companies $30 thousand and $252 thousand, respectively, for goods and services.

During the years ended December 31, 2009, 2008 and 2007, we had revenues from an affiliated company of JFE Steel. Sales to the affiliated company are at current market rates and terms. At December 31, 2009, 2008 and 2007, net sales and accounts receivable to this related party were (dollars in thousands):

 

     Net Sales    Trade
Receivables

December 31, 2009

   $ 31,685    $ 192

December 31, 2008

     95,577      56

December 31, 2007

     54,994      3,273

 

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Table of Contents

California Steel Industries, Inc. and Subsidiary

Notes to Financial Statements (continued)

 

8. Commitments and Contingencies

At December 31, 2009, we are committed, in the form of open purchase orders, to purchase approximately $105.7 million in steel slabs, of which none are from related parties and material commitments for capital expenditures of $10.7 million.

When market conditions warrant, we enter into contracts to purchase certain commodities used in the manufacturing of our products, such as electricity and natural gas. Some of these forward contracts do not require derivative accounting as we take possession of the commodities in the normal course of business whereas other forward contracts are accounted for as derivatives in accordance with the accounting standard related to derivatives and hedges by us.

We have been contacted by various governmental agencies regarding specified environmental matters at our operating facility in Fontana, California. During September 1990, we reached a preliminary agreement with the California Regional Department of Health Services, which allows us to draft our own remediation agreement and move forward with our own plan of action at our operating facility. In November 1992, we entered into a Voluntary and Enforceable Agreement (the Agreement) with the California Department of Toxic Substances Control (DTSC) which sets forth certain terms and conditions related to the remediation of hazardous substances at our operating facility. The Agreement also preserves our right as to future assignment and apportionment of costs to other parties.

We are addressing environmental concerns caused by the former occupant at our Fontana site. We engaged an environmental consultant to conduct a remedial investigation and develop a remediation plan and remediation cost projections based upon the plan. Utilizing the remediation plan developed by the environmental consultant, we developed an estimate of future costs of the remediation plan. The total aggregate cost of remediation is estimated to be approximately $1.8 million, which is included in the other liabilities in the 2009 and 2008 financial statements. The DTSC has not yet completed its review and approval of our remediation plan; however, preliminary discussions between the DTSC and us have not indicated the need for any significant changes to the remediation plan or our estimate of related costs. The estimate of costs could change as a result of changes to the remediation plan required by the DTSC or unforeseen circumstances, including without limitations, unknown site conditions, changes to applicable regulations or increased enforcement requirements by the regulators existing at the site.

We are involved in legal actions and claims arising in the ordinary course of business. It is of our opinion, based on advice of legal counsel, that this litigation will be resolved without material effect on our financial position, results of operations, or liquidity.

 

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Table of Contents

California Steel Industries, Inc. and Subsidiary

Notes to Financial Statements (continued)

 

9. Income Taxes

Income tax (benefit) expense for the years ended December 31, 2009, 2008 and 2007, consists of the following (dollars in thousands):

 

     2009     2008     2007  

Current:

      

Federal

   $ (6,265   $ 5,485      $ (9,482

State

     (991     (108     (995
                        
     (7,256     5,377        (10,477
                        

Deferred:

      

Federal

     (1,072     278        7,491   

State

     (5,516     677        (378
                        
     (6,588     955        7,113   
                        
   $ (13,844   $ 6,332      $ (3,364
                        

A reconciliation of income tax (benefit) expense (computed by applying the U.S. federal statutory tax rate of 35% to income before income tax (benefit) expense to actual income tax (benefit) expense) is as follows (dollars in thousands):

 

     2009     2008     2007  

Computed statutory tax (benefit) expense

   $ (9,431   $ 6,863      $ (1,495

State income taxes, net of federal (benefit) expense

     (1,548     1,127        (245

Enterprise zone credits, net of federal benefit

     (2,146     —          —     

Changes in valuation allowance

     —          —          23   

Decrease in reserve for uncertain tax positions

     —          (1,232     (1,728

Other

     (719     (426     81   
                        
   $ (13,844   $ 6,332      $ (3,364
                        

 

F-17


Table of Contents

California Steel Industries, Inc. and Subsidiary

Notes to Financial Statements (continued)

 

9. Income Taxes (continued)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2009 and 2008, are as follows (dollars in thousands):

 

     2009     2008  

Deferred tax assets:

    

Inventory

   $ 401      $ 146   

State taxes

     309        2,624   

Allowance for doubtful accounts

     307        680   

Accrued expenses

     3,155        5,006   

Net operating loss carryforward

     2,734        723   

Foreign tax credit carryforward

     978        1,036   

Enterprise zone credit carryforward

     3,383        —     

Other

     26        23   
                

Total gross deferred tax assets

     11,293        10,238   

Valuation allowance

     (978     (1,036
                

Net deferred tax assets

     10,315        9,202   
                

Deferred tax liabilities:

    

Property, plant and equipment

     (47,388     (51,752

Prepaid expenses

     (3,853     (3,863

Inventory

     (5,346     (6,150

Other

     (472     (769
                

Total gross deferred tax liabilities

     (57,059     (62,534
                

Net deferred tax liabilities

   $ (46,744   $ (53,332
                

We recorded a valuation allowance to reduce our deferred tax asset attributable to foreign tax credits for taxes withheld on the sale of investment in affiliated company. We considered future foreign source income in determining the need for the valuation allowance and have determined that it is more likely than not that we will not generate a significant amount of foreign source income to realize the foreign tax credits before expiration. Therefore, a valuation allowance for the full amount of the remaining foreign tax credit carry-forward was recorded as of December 31, 2009. Based on our historical pretax earnings, we believe it is more likely than not that we will realize the benefit of the remaining deferred tax assets existing at December 31, 2009.

 

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Table of Contents

California Steel Industries, Inc. and Subsidiary

Notes to Financial Statements (continued)

 

9. Income Taxes (continued)

The accounting standard related to income taxes applies to all tax positions and defines the confidence level that a tax position must meet in order to be recognized in the financial statements. The interpretation requires that the tax effects of a position be recognized only if it is “more-likely-than-not” to be sustained by the taxing authority as of the reporting date. If a tax position is not considered “more-likely-than-not” to be sustained then no benefits of the position are to be recognized. This accounting standard requires additional disclosures. Upon adoption of this accounting standard, deferred tax liabilities decreased $2.5 million, there was a reclass from accounts payable and income tax payable of $2.4 million, the liability for unrecognized tax benefits increased $5.2 million, and the beginning retained earnings decreased $335 thousand. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (dollars in thousands):

 

     2009    2008  

Unrecognized tax benefits at the beginning of the period

   $ —      $ 1,590   

Gross decreases for tax positions

     —        (358

Settlements

     —        (2

Lapse of applicable statute of limitations

     —        (1,230
               

Unrecognized tax benefits at the end of the period

   $ —      $ —     
               

We account for uncertain tax positions in accordance with the accounting standard related to income taxes. We report a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. There was no accrued interest or penalties to unrecognized tax benefits at December 31, 2009 and 2008, respectively. The tax years 2005 through 2008 remain open to examination by the major taxing jurisdictions to which we are subject.

10. Employee Benefit and Retirement Plans

401(k) Plan

We maintain a 401(k) savings plan (the 401(k) Plan), a tax qualified cash or deferred tax arrangement defined contribution plan under Section 401(k) of the Internal Revenue Code of 1986, as amended. The 401(k) Plan provides the participants with benefits upon retirement, death, disability or termination of employment with us. Employees are eligible to participate in the salary reduction portion of the 401(k) Plan on the first day of the calendar month following their date of hire. Participants may authorize us to contribute to the 401(k) Plan on their behalf a percentage of their compensation, not to exceed the legally permissible limits.

The 401(k) Plan provides for our discretionary matching and profit sharing contributions. We currently match 100% of the first 4% of the participant’s deferral under the 401(k) Plan and 50% of the next 2% of the participant’s deferral under the 401(k) Plan each year. We elected not to match the participant’s deferral during the last three quarters of fiscal 2009. Participants are immediately 100% vested in their contributions and our contributions plus actual earnings and losses thereon. Our contributions are accrued as participant contributions are withheld and are paid in full to the trustee of the 401(k) Plan on a pay period basis. Each year we may elect to make additional contributions to the 401(k) Plan. This discretionary employer contribution, if we make it, is allocated to each participant’s account based on the participant’s compensation for the year relative to the compensation of all the participants for that year. In order to share in the allocation of the discretionary employer contribution, if any, a participant must complete 1,000 hours of service in the plan year. For the 2010 plan year, participants were notified that the 401(k) plan has been qualified under “Safe Harbor” provisions.

 

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Table of Contents

California Steel Industries, Inc. and Subsidiary

Notes to Financial Statements (continued)

 

10. Employee Benefit and Retirement Plans (continued)

Plan expense for the three years ended December 31, 2009, 2008 and 2007, were $523 thousand, $2.5 million and $2.5 million, respectively.

Profit Sharing Plan

We sponsor a profit sharing plan under which contributions are established based on a pool amount, equal to 8% of our income before taxes excluding gain or loss on disposition of fixed assets and some other adjustments for the six months ended May and November. The basis for determining the profit sharing pool is subject to review and approval of our board of directors. The employee’s share in the pool amount is based on his or her length of service with us during the profit sharing period. Employees who voluntarily terminate their employment for reasons other than retirement before the end of the profit sharing period and employees whose employment is involuntarily terminated are not eligible to receive any profit sharing award. Profit sharing expense for the years ended December 31, 2009, 2008 and 2007, were $781 thousand, $13.0 million and $1.5 million, respectively.

11. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy prescribed by the accounting literature contains three levels as follows:

 

   

Level 1 – Inputs to the valuation based upon quoted prices (unadjusted) for identical assets or liabilities in active markets that are accessible as of the measurement date.

 

   

Level 2 – Inputs to the valuation include quoted prices in either markets that are not active, or in active markets for similar assets or liabilities, inputs other than quoted prices that are observable, and inputs that are derived principally from or corroborated by observable market data.

 

   

Level 3 – Inputs to the valuation that are unobservable inputs for the asset or liability.

Our financial assets and liabilities measured at fair value on a recurring basis at December 31, 2009, were as follows (dollars in thousands):

 

     Fair Value Measurement Using

Description

   Quoted Prices in
Active Markets
for Identical
Assets

(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
   Total

Cash and cash equivalents

   $ 61,671    $ —      $ —      $ 61,671
                           

Our senior notes are reported at carrying value. Fair value of our senior notes is the asking price of our senior notes at the end of the fiscal year. The carrying value and fair value of our senior notes are $150.0 million and $144.0 million at December 31, 2009 and $150.0 million and $105.0 million at December 31, 2008, respectively.

 

F-20


Table of Contents

California Steel Industries, Inc. and Subsidiary

Notes to Financial Statements (continued)

 

12. Selected Quarterly Financial Data (Unaudited)

Summarized quarterly financial data for 2009 and 2008 is as follows (dollars in thousands):

 

     Quarter        
     1st     2nd     3rd    4th     Total  

2009

           

Net sales

   $ 147,067      $ 104,195      $ 146,983    $ 153,563      $ 551,808   

Gross profit (loss) (1)

     (21,253     (2,472     12,230      2,183        (9,312

Income (loss) from operations operations (1)

     (25,659     (6,600     7,916      (2,935     (27,278

Net income (loss) (1)

     (15,333     (2,827     7,350      (2,291     (13,101

2008

           

Net sales

   $ 369,197      $ 431,118      $ 440,836    $ 269,462      $ 1,510,613   

Gross profit (loss) (2)

     24,127        76,512        68,055      (113,820     54,874   

Income (loss) from operations operations (2)

     17,321        70,638        60,929      (120,049     28,839   

Net income (loss) (2)

     9,608        44,241        35,546      (76,120     13,275   

 

(1) Reflects an inventory adjustment to the lower of cost or market for each of the four quarters of $35.0 million, $4.8 million, $2.0 million and $2.7 million, respectively.
(2) Reflects a $135.0 million adjustment of inventory to the lower of cost or market in the fourth quarter.

 

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Table of Contents

CALIFORNIA STEEL INDUSTRIES, INC.

AND SUBSIDIARY

SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS

 

     Balance at
Beginning of
Period
   Additions    (1)
Deductions
to Reserve
   Balance at
End of
Period
        Charged to
Costs and
Expenses
    Charged
to Other
Accounts
     

A/R Allowance

             

Year ended December 31, 2009

   $ 1,550,000    $ 173,000      $ —      $ 1,023,000    $ 700,000

Year ended December 31, 2008

   $ 400,000    $ 1,150,000      $ —      $ —      $ 1,550,000

Year ended December 31, 2007

   $ 700,000    $ (300,000   $ —      $ —      $ 400,000

Tax Valuation Allowance

             

Year ended December 31, 2009

   $ 1,036,000    $ (58,000   $ —      $ —      $ 978,000

Year ended December 31, 2008

   $ 1,036,000    $ —        $ —      $ —      $ 1,036,000

Year ended December 31, 2007

   $ 1,013,000    $ 23,000      $ —      $ —      $ 1,036,000

Inventory Reserve

             

Year ended December 31, 2009

   $ —      $ 726,000      $ —      $ —      $ 726,000

 

(1) Represents write-off of customer receivables against allowance for doubtful accounts.

 

S-1


Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    CALIFORNIA STEEL INDUSTRIES, INC.
  March 11, 2010     By:   /s/    VICENTE WRIGHT        
        Vicente Wright
        President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/s/    VICENTE WRIGHT        

Vicente Wright

  

President and Chief Executive Officer (Principal Executive Officer)

  March 11, 2010

/s/    BRETT GUGE        

Brett Guge

  

Executive Vice President, Finance and Administration (Principal Financial and Accounting Officer)

  March 11, 2010

/s/    MASAKAZU KURUSHIMA        

Masakazu Kurushima

  

Chairman of the Board

  March 11, 2010

/s/    ARISTIDES CORBELLINI        

Aristides Corbellini

  

Director

  March 11, 2010

/s/    HIROSHI ADACHI        

Hiroshi Adachi

  

Director

  March 11, 2010

/s/    RENATO ALMEIDA        

Renato Almeida

  

Director

  March 11, 2010


Table of Contents

EXHIBIT INDEX

 

Exhibit

Number

  

Description

  3.1    Certificate of Incorporation of the Registrant, as amended by Amendment to the Certificate of Incorporation filed June 6, 1984 with the Delaware Secretary of State, as amended by the Certificate of Amendment to the Certificate of Incorporation filed on August 2, 1984 with the Delaware Secretary of State, as amended by the Certificate of Amendment to the Certificate of Incorporation file on January 12, 1988 with the Delaware Secretary of State, and as amended by the Certificate of Ownership merging California Steel Industries Tubular Products, Inc. into the Registrant, filed with the Delaware Secretary of State on December 20, 1993. (1)
  3.2    Certificate of Amendment to the Certificate of Incorporation filed July 27, 1999, with the Delaware Secretary of State. (2)
  3.3    Certificate of Amendment to the Certificate of Incorporation filed July 24, 2006, with the Delaware Secretary of State. (3)
  3.4    Bylaws of the Registrant, as amended on July 16, 1999. (2)
  4.1    Indenture, dated as of March 22, 2004, between the Registrant and U.S. Bank National Association, Trustee. (4)
  4.2    Specimen Series A note – 6.125% Senior Notes due 2014 (included in Exhibit 4.4). (4)
  4.3    Shareholders’ Agreement, dated April 1, 2008, by and among Vale Limited (formerly Rio Doce Limited), Vale S.A. (formerly Companhia Vale do Rio Doce), and JFE Steel Corporation. (8)
10.1    Senior Secured Revolving Credit Agreement dated as of September 29, 2005 by and among California Steel Industries, Inc., Mizuho Corporate Bank, The Bank of Tokyo-Mitsubishi, Ltd., Citibank (West), FSB and Wells Fargo Bank. (5)
10.2    Term Loan Agreement dated March 28, 2008 by and among California Steel Industries, Inc., and The Bank of Tokyo-Mitsubishi, Ltd. (6)
14.1    Revised Code of Ethics. (7)
31.1    Certification of President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification of Executive Vice President, Finance and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1    Certification of President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2    Certification of Executive Vice President, Finance and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

(1) Incorporated by reference to the Registrant’s Registration Statement on Form S-4, File No. 333-79587, as filed with the Securities and Exchange Commission on May 28, 1999, as amended.
(2) Incorporated by reference to the Registrant’s Annual Report on Form 10-K, for the year ended December 31, 2001, as filed with the Securities and Exchange Commission on March 28, 2002.
(3) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, for the quarter ended September 30, 2006, as filed with the Securities and Exchange Commission on October 27, 2006.
(4) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, for the quarter ended March 31, 2004, as filed with the Securities and Exchange Commission on April 28, 2004.
(5) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, for the quarter ended September 30, 2005, as filed with the Securities and Exchange Commission on October 28, 2005.


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(6) Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q, for the quarter ended March 31, 2008, as filed with the Securities and Exchange Commission on April 25, 2008.
(7) Incorporated by reference to the Registrant’s Annual Report on Form 10-K, for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on March 28, 2007.
(8) Incorporated by reference to the Registrant’s Annual Report on Form 10-K, for the year ended December 31, 2008, as filed with the Securities and Exchange Commission on March 13, 2009.