<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
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 1-12852
ROUGE INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 38-3340770
(State of Incorporation) (I.R.S. Employer Identification No.)
3001 MILLER ROAD, DEARBORN, MI 48121-1699
(Address of principal executive offices)
(313) 317-8900
(Registrant's telephone number, including area code)
================================================================================
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares of common stock issued and outstanding as of October 20,
1997 was 21,967,827 which includes 14,405,427 shares of Class A Common Stock
and 7,692,400 shares of Class B Common Stock.
<PAGE> 2
ROUGE INDUSTRIES, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1997
--------------------------------
INDEX
PAGE
- ----
PART I - FINANCIAL INFORMATION
- ------------------------------
<TABLE>
<S> <C> <C>
Item 1. Consolidated Financial Statements
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Consolidated Statements of Changes in Stockholders' Equity . . . . . . . . . . . . . . . . 7
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
</TABLE>
PART II - OTHER INFORMATION
- ---------------------------
<TABLE>
<S> <C> <C>
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 5. Other Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
</TABLE>
-2-
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
October 17, 1997
To the Board of Directors and
Stockholders of Rouge Industries, Inc.
We have reviewed the accompanying consolidated financial information of Rouge
Industries, Inc. and consolidated subsidiaries appearing on pages 4 through 10
of this report on Form 10-Q as of September 30, 1997, and for the three-month
and nine-month periods ended September 30, 1997 and 1996. This financial
information is the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying financial information as of September 30, 1997 and
for the three-month and nine-month periods ended September 30, 1997 and 1996,
for it to be in conformity with generally accepted accounting principles.
We previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of December 31, 1996, and the
related consolidated statements of operations, of changes in stockholders'
equity, and of cash flows for the year then ended (not presented herein), and
in our report dated January 29, 1997, we expressed an unqualified opinion on
those consolidated financial statements. In our opinion, the information set
forth in the accompanying consolidated balance sheet information as of December
31, 1996, is fairly stated in all material respects in relation to the
consolidated balance sheet from which it has been derived.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
-3-
<PAGE> 4
FINANCIAL INFORMATION
---------------------
Item 1. Consolidated Financial Statements
ROUGE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(amounts in thousands)
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
Assets ---- ----
Unaudited
<S> <C> <C>
Current Assets
- --------------
Cash and Cash Equivalents $ 18,374 $ 24,914
Marketable Securities - 2,039
Accounts Receivable
Trade and Other (Net of Allowances
of $6,325 and $7,294) 118,144 102,593
Affiliates 10,496 9,995
Inventories 266,917 267,877
Other Current Assets 9,467 7,483
---------- ----------
Total Current Assets 423,398 414,901
---------- ----------
Property, Plant, and Equipment
- ------------------------------
Buildings and Improvements 17,498 16,942
Machinery and Equipment 227,030 186,851
Construction in Progress 45,681 32,545
---------- ----------
Subtotal 290,209 236,338
Less: Accumulated Depreciation (36,750) (27,176)
---------- ----------
Net Property, Plant, and Equipment 253,459 209,162
---------- ----------
Investment in Unconsolidated Subsidiaries 42,186 15,590
- ----------------------------------------- ---------- ----------
Deferred Charges and Other 27,188 42,300
- -------------------------- ---------- ----------
Total Assets $ 746,231 $ 681,953
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-4-
<PAGE> 5
ROUGE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(amounts in thousands except share amounts)
<TABLE>
<CAPTION>
Liabilities and Stockholders' Equity
September 30 December 31
1997 1996
---- ----
Unaudited
<S> <C> <C>
Current Liabilities
- -------------------
Accounts Payable
Trade $ 191,159 $ 154,338
Affiliates 12,392 8,188
Accrued Vacation Pay 12,179 11,243
Taxes Other than Income 7,039 4,580
Other Accrued Liabilities 12,503 19,921
---------- ---------
Total Current Liabilities 235,272 198,270
---------- ---------
Other Liabilities 55,072 49,342
- ----------------- ---------- ---------
Excess of Net Assets Acquired Over Cost 12,729 17,076
- --------------------------------------- ---------- ---------
Commitments and Contingencies (Note 4)
Stockholders' Equity
- --------------------
Common Stock
Class A, 80,000,000 shares authorized with 14,397,279 and
14,341,136 issued and outstanding as of September 30, 1997 and
December 31, 1996, respectively 144 143
Class B, 8,690,400 shares authorized with 7,562,000 issued and
outstanding 76 76
Capital in Excess of Par Value 128,077 127,096
Retained Earnings 317,260 292,349
Additional Minimum Pension Liability (2,399) (2,399)
----------- ---------
Total Stockholders' Equity 443,158 417,265
----------- ---------
Total Liabilities and Stockholders' Equity $ 746,231 $ 681,953
=========== =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-5-
<PAGE> 6
ROUGE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(amounts in thousands except share and per share amounts)
Unaudited
<TABLE>
<CAPTION>
For the Quarter Ended For the Nine Months Ended
September 30 September 30
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales
- -----
Unaffiliated Customers $ 276,174 $ 271,492 $ 870,971 $ 846,731
Affiliates 44,533 48,661 139,113 142,574
----------- ----------- ----------- -----------
Total Sales 320,707 320,153 1,010,084 989,305
----------- ----------- ----------- -----------
Costs and Expenses
- ------------------
Costs of Goods Sold 303,964 294,594 950,377 925,503
Depreciation and Amortization 3,808 3,543 11,026 9,611
Selling and Administrative Expenses 5,523 6,584 17,305 19,017
Amortization of Excess of Net Assets Acquired
Over Cost (1,449) (1,449) (4,347) (4,347)
----------- ----------- ----------- -----------
Total Costs and Expenses 311,846 303,272 974,361 949,784
----------- ----------- ----------- -----------
Operating Income 8,861 16,881 35,723 39,521
Interest Income 315 1,516 1,254 4,413
Interest Expense (107) (83) (282) (248)
Other - Net (301) 112 404 585
----------- ----------- ----------- -----------
Income Before Income Taxes, Minority Interest
and Equity in Loss of Unconsolidated Subsidiaries 8,768 18,426 37,099 44,271
Income Tax Provision (1,387) (4,610) (9,105) (12,219)
----------- ----------- ----------- -----------
Income Before Minority Interest and Equity in Loss
of Unconsolidated Subsidiaries 7,381 13,816 27,994 32,052
Minority Interest in Net Income of Consolidated
Subsidiary - (429) - (192)
Equity in Loss of Unconsolidated Subsidiaries (402) - (1,109) -
----------- ----------- ----------- -----------
Net Income $ 6,979 $ 13,387 $ 26,885 $ 31,860
=========== =========== =========== ===========
Per Share Amounts
- -----------------
Net Income $ 0.32 $ 0.61 $ 1.23 $ 1.46
=========== =========== =========== ===========
Cash Dividends Declared $ 0.03 $ 0.03 $ 0.09 $ 0.09
=========== =========== =========== ===========
Weighted Average Shares Outstanding 21,941,641 21,851,450 21,925,938 21,831,844
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-6-
<PAGE> 7
ROUGE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(amounts in thousands)
Unaudited
<TABLE>
<CAPTION>
For the Quarter Ended For the Nine Months Ended
September 30, 1997 September 30, 1997
--------------------- -------------------------
<S> <C> <C>
Common Stock
Beginning Balance $ 219 $ 219
Common Stock issued for Benefit Plans 1 1
--------------------- -------------------------
Ending Balance 220 220
--------------------- -------------------------
Capital in Excess of Par Value
Beginning Balance 127,578 127,096
Common Stock Issued for Benefit Plans 499 981
--------------------- -------------------------
Ending Balance 128,077 128,077
--------------------- -------------------------
Retained Earnings
Beginning Balance 310,940 292,349
Net Income 6,979 26,885
Cash Dividends Declared (659) (1,974)
--------------------- -------------------------
Ending Balance 317,260 317,260
--------------------- -------------------------
Additional Minimum Pension Liability
Beginning and Ending Balance (2,399) (2,399)
--------------------- -------------------------
Total Stockholders' Equity $ 443,158 $ 443,158
===================== =========================
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-7-
<PAGE> 8
ROUGE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Unaudited
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30
------------
1997 1996
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
- ------------------------------------
Net Income $ 26,885 $ 31,860
Adjustments to Reconcile Net Income to Net Cash
Provided By Operating Activities:
Proceeds from Property Tax Settlement 710 -
Deferred Taxes 14,316 5,673
Depreciation and Amortization 11,026 9,611
Amortization of Capitalized Debt Costs 27 27
Equity in Loss of Unconsolidated Subsidiaries 1,109 -
Amortization of Excess of Net Assets Acquired Over Cost (4,347) (4,347)
Minority Interest in Consolidated Subsidiary - 192
Common Stock Issued for Benefit Plans 982 1,825
Changes in Assets and Liabilities:
Accounts Receivable (16,762) (10,908)
Inventories 735 (12,962)
Prepaid Expenses (1,572) (3,071)
Accounts Payable and Accrued Liabilities 38,294 52,331
Other - Net 1 (159)
---------- ----------
Net Cash Provided by Operating Activities 71,404 70,072
---------- ----------
Cash Flows From Investing Activities
- ------------------------------------
Capital Expenditures (48,923) (63,219)
Purchase of Marketable Securities (3,311) (30,276)
Sale of Marketable Securities 5,350 57,952
Investment in Unconsolidated Subsidiaries (28,030) (671)
Other - Net (1,057) (146)
---------- ----------
Net Cash Used for Investing Activities (75,971) (36,360)
---------- ----------
Cash Flows From Financing Activities
- ------------------------------------
Drawdowns on Revolving Line 16,500 -
Principal Payments on Revolving Line (16,500) -
Cash Dividend Payments (1,973) (1,964)
---------- ----------
Net Cash Used for Financing Activities (1,973) (1,964)
---------- ----------
Net (Decrease) Increase in Cash and Cash Equivalents (6,540) 31,748
Cash and Cash Equivalents - Beginning of Period 24,914 57,036
---------- ----------
Cash and Cash Equivalents - End of Period $ 18,374 $ 88,784
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
-8-
<PAGE> 9
ROUGE INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
Rouge Steel Company ("Rouge Steel") and its subsidiaries were reorganized into
a holding company structure effective July 30, 1997. Pursuant to the
reorganization, Rouge Steel became a wholly-owned subsidiary of Rouge
Industries, Inc. ("Rouge Industries"). Rouge Industries, the new holding
company, is the issuer of all shares of Class A and B Common Stock outstanding.
The transaction was accounted for as a reorganization of entities under common
control. On the reorganization date, Rouge Industries and its subsidiaries had
the same consolidated net worth as Rouge Steel and its subsidiaries prior to
the reorganization.
Rouge Steel is the principal operating subsidiary of Rouge Industries. Rouge
Steel is engaged in the production and sale of flat rolled steel products
principally to domestic automotive manufacturers and their suppliers. Other
wholly-owned subsidiaries of Rouge Industries are QS Steel Inc. ("QS Steel") and
Eveleth Taconite Company. QS Steel, a Michigan corporation, holds minority
ownership interests in four Michigan-based joint ventures: Shiloh of Michigan,
L.L.C., Spartan Steel Coating, L.L.C., TWB Company, L.L.C. and Delaco
Processing, L.L.C. Eveleth Taconite Company holds a 45 percent interest in
Eveleth Mines LLC, a Minnesota based iron ore mining and pellet producing
operation. For purposes of the Notes to Consolidated Financial Statements,
"Rouge Industries" or "the Company" refers to Rouge Industries, Inc. and its
subsidiaries, unless the context requires otherwise.
The interim consolidated financial statements are unaudited; however, in the
opinion of the Company, the statements include all adjustments necessary for a
fair statement of the results for the interim periods presented. The foregoing
interim results are not necessarily indicative of the results of operations
expected for the full fiscal year ending December 31, 1997.
These consolidated financial statements should be read together with the
audited financial statements presented in Rouge Steel Company's Annual Report
on Form 10-K for the year ended December 31, 1996, filed with the Securities
and Exchange Commission on February 10, 1997.
Certain reclassifications have been made to conform with current period
presentation.
NOTE 2 - INVENTORIES
The major classes of inventories are as follows (dollars in thousands):
<TABLE>
<CAPTION>
September 30 December 31
1997 1996
---- ----
Unaudited
<S> <C> <C>
Production
Raw Materials $ 55,027 $ 85,306
Semifinished and Finished Steel Products 208,692 174,746
---------- -----------
Total Production at FIFO 263,719 260,052
LIFO Reserve (17,402) (14,390)
---------- -----------
Total Production at LIFO 246,317 245,662
Nonproduction and Sundry 20,600 22,215
---------- -----------
Total Inventories $ 266,917 $ 267,877
========== ===========
</TABLE>
NOTE 3 - JOINT VENTURE OPERATING AGREEMENT SIGNED
As of September 3, 1997, QS Steel entered into an agreement with Delaco Supreme
Tool & Gear Co. to form Delaco Processing, L.L.C. QS Steel owns 49 percent of
the joint venture. Delaco Processing, L.L.C. will process steel coils and
warehouse secondary and surplus steel material. The new facility is expected
to be operational by the third quarter of 1998.
-9-
<PAGE> 10
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Spartan Steel Commitment. QS Steel and Worthington Industries, Inc. are
constructing a cold rolled hot dipped galvanizing line near Monroe, Michigan,
called Spartan Steel Coating, L.L.C. ("Spartan Steel"). The project is
expected to cost approximately $95,000,000. Rouge Industries will be
responsible for 48 percent of the total cost, or approximately $45,600,000.
Through September 30, 1997, the Company had invested $19,426,000 in Spartan
Steel. Construction of the facility is expected to be completed by mid-1998.
Shiloh of Michigan, L.L.C. Loan Guaranty. Shiloh of Michigan, L.L.C.
has a $28,000,000 credit facility, of which 20 percent is guaranteed by Rouge
Industries. As of September 30, 1997, borrowing under that facility totaled
$27,600,000.
Other than the matters discussed above, there have been no significant changes
to the prior year-end consolidated financial statements.
-10-
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
RESULTS OF OPERATIONS
COMPARISON OF THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
Total Sales. Total sales for Rouge Industries, Inc. ("Rouge Industries"
or the "Company") increased slightly in the third quarter of 1997 to $320.7
million from $320.2 million in the third quarter of 1996, an increase of
$500,000. The increase in total sales resulted principally from higher
shipments offset partially by lower steel product selling prices. Steel
product shipments increased 2.4% in the third quarter of 1997 to 726,000 net
tons from 709,000 net tons in the third quarter of 1996, an increase of 17,000
net tons.
Costs and Expenses. Total costs and expenses increased 2.8% in the
third quarter of 1997 to $311.8 million from $303.3 million in the third
quarter of 1996, an increase of $8.5 million. Costs of goods sold increased
3.2% in the third quarter of 1997 to $304.0 million from $294.6 million in the
third quarter of 1996, an increase of $9.4 million. The increase in costs of
goods sold was caused primarily by the higher steel product shipments discussed
above and increased purchased slab costs in the third quarter of 1997
partially offset by improved productivity throughout the operation. Costs of
goods sold in the third quarter of 1997 was 94.8% of total sales compared to
92.0% of total sales in the third quarter of 1996. Depreciation and
amortization increased 7.5% in the third quarter of 1997 to $3.8 million from
$3.5 million in the third quarter of 1996, an increase of $300,000. The higher
depreciation and amortization expense reflects the completion of major capital
projects. Selling and administrative expenses decreased 16.1% in the third
quarter of 1997 to $5.5 million from $6.6 million in the third quarter of 1996,
a decrease of $1.1 million. The decrease in selling and administrative
expenses is attributable primarily to three items: (1) nonrecurring legal and
other fees recorded in the third quarter of 1996 associated with the offering
by Worthington Industries, Inc. of debt exchangeable for shares of Rouge
Industries' common stock, (2) a reduction in Michigan single business tax and
(3) a reduction in profit sharing paid to administrative employees. The
-11-
<PAGE> 12
decreased Michigan single business tax and profit sharing are both the result
of the Company's reduced profitability in the third quarter of 1997.
Operating Income. Primarily as a result of the changes costs and
expenses described above, operating income decreased 47.5% in the third quarter
of 1997 to $8.9 million from $16.9 million in the third quarter of 1996, a
decrease of $8.0 million. Operating income represented 2.8% of total sales in
the third quarter of 1997 compared to 5.3% of total sales in the third quarter
of 1996, primarily as a result of lower steel product selling prices and higher
purchased slab costs in the third quarter of 1997.
Interest Income. Interest income decreased 79.2% in the third quarter of
1997 to $315,000 from $1.5 million in the third quarter of 1996, a decrease of
$1.2 million. The decrease in interest income was the result of a lower cash
and marketable securities balance in the third quarter of 1997. The average
cash and marketable securities balance in the third quarter of 1997 was $16.5
million compared to $99.9 million in the third quarter of 1996.
Income Tax Provision. The lower income tax provision in the third
quarter of 1997 was a function of lower taxable income.
Minority Interest in Consolidated Subsidiary. There was no minority
interest in consolidated subsidiary recorded in the third quarter of 1997
compared to $429,000 in the third quarter of 1996. The elimination of minority
interest was the result of the restructuring of Rouge Industries'
pellet-producing subsidiary into a limited liability company in which the
Company has minority ownership.
Equity in Loss of Unconsolidated Subsidiaries. Equity in loss of
unconsolidated subsidiaries was $402,000 in the third quarter of 1997. This
amount in 1997 is comprised of Rouge Industries' share of startup costs
incurred by new joint ventures and costs associated with major equipment
repairs at Eveleth Mines LLC ("EVTAC Mining") the Company's 45% owned
pellet-producing joint venture. No such costs were incurred in the third
quarter of 1997.
-12-
<PAGE> 13
Net Income. As a result of the factors discussed above, net income
decreased 47.9% in the third quarter of 1997 to $7.0 million from $13.4 million
in the third quarter of 1996, a decrease of $6.4 million.
COMPARISON OF THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1997 AND 1996
Total Sales. Total sales increased 2.1% in the first nine months of
1997 to $1.0 billion from $989.3 million in the first nine months of 1996, an
increase of $20.8 million. The increase in total sales in the first nine
months of 1997 was caused principally by higher steel product shipments. Steel
product shipments increased 4.4% in the first nine months of 1997 to 2,273,000
net tons from 2,177,000 net tons in the first nine months of 1996, an increase
of 96,000 net tons. This increase in steel product shipments is partially
offset by lower steel product selling prices in the first nine months of 1997.
Costs and Expenses. Total costs and expenses increased 2.6% in the
first nine months of 1997 to $974.4 million from $949.8 million in the first
nine months of 1996, an increase of $24.6 million. Costs of goods sold
increased 2.7% in the first nine months of 1997 to $950.4 million from $925.5
million in the first nine months of 1996, an increase of $24.9 million. The
increase in costs of goods sold was primarily due to higher steel product
shipments and increased purchased slab prices in the first nine months of 1997
offset partially by improved operating productivity in 1997. Costs of goods
sold in the first nine months of 1997 was 94.1% of total sales, up from 93.6%
of total sales in the first nine months of 1996. Depreciation and
amortization increased 14.7% in the first nine months of 1997 to $11.0 million
from $9.6 million in the first nine months of 1996, an increase of $1.4
million. The higher depreciation and amortization expense reflects the
completion of major capital projects. Selling and administrative expenses
decreased 9.0% in the first nine months of 1997 to $17.3 million from $19.0
million in the first nine months of 1996, a decrease of $1.7 million. The
decrease in selling and administrative expenses was largely caused by lower
Michigan single business tax in the first nine months of 1997.
-13-
<PAGE> 14
Operating Income. As a result of the changes in total sales and
costs and expenses described above, operating income decreased 9.6% in the
first nine months of 1997 to $35.7 million from $39.5 million in the first nine
months of 1996, a decrease of $3.8 million. Operating income represented 3.5%
of total sales in the first nine months of 1997 compared to 4.0% of total sales
in the first nine months of 1996.
Interest Income. Interest income decreased 71.6% in the first nine
months of 1997 to $1.3 million from $4.4 million in the first nine months of
1996, a decrease of $3.1 million. The decrease in interest income was the
result of a lower cash and marketable securities balance in the first nine
months of 1997. The average cash and marketable securities balance in the
first nine months of 1997 was $26.7 million compared to $93.2 million in the
first nine months of 1996.
Income Tax Provision. The lower income tax provision in the first
nine months of 1996 was a function of lower taxable income.
Minority Interest in Consolidated Subsidiary. There was no minority
interest in consolidated subsidiary recorded in the first nine months of 1997
compared to $192,000 in the first nine months of 1996. The elimination of
minority interest was the result of the restructuring of Rouge Industries'
pellet-producing subsidiary into a limited liability company in which the
Company has minority ownership.
Equity in Loss of Unconsolidated Subsidiaries. Equity in loss of
unconsolidated subsidiaries was $1.1 million in the first nine months of 1997.
This amount in 1997 is comprised of Rouge Industries' share of startup costs
incurred by new joint ventures and costs associated with major equipment
repairs at EVTAC Mining. No such costs were incurred in the first nine months
of 1997.
Net Income. As a result of the factors discussed above, net income
decreased 15.6% in the first nine months of 1997 to $26.9 million from $31.9
million in the first nine months of 1996, a decrease of $5.0 million.
-14-
<PAGE> 15
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities on September 30, 1997
totalled $18.4 million compared to $27.0 million on December 31, 1996, a
decrease of $8.6 million. Cash provided by operating activities was partially
offset by capital spending during the first nine months of 1997.
Cash Flows from Operating Activities. Net cash provided by operating
activities increased 1.9% in the third quarter of 1997 to $71.4 million from
$70.1 million in the first nine months of 1996, an increase of $1.3 million.
Capital Expenditures. Cash used for capital expenditures, including
investments in unconsolidated subsidiaries, increased 20.4% in the first nine
months of 1997 to $76.9 million from $63.9 million in the first nine months of
1996, an increase of $13.0 million. The most significant of the expenditures
made in the first nine months of 1997 were for an automated raw material
handling system, the reline of the Company's smaller blast furnace and
investments in Spartan Steel Coating, L.L.C. ("Spartan Steel"), Rouge
Industries' 48%-owned hot dipped galvanizing joint venture with Worthington
Industries, Inc. Other expenditures were made to modernize and expand the
Company's facilities. During the remainder of the year, it is anticipated that
an additional $50 million will be spent on capital items or investments in
unconsolidated subsidiaries primarily to complete the raw material handling
system and the blast furnace reline and to continue the construction of Spartan
Steel. The Company's capital expenditures are generally directed at improving
plant efficiency and product quality in order to improve Rouge Industries'
competitive position in the marketplace.
Credit Facility. Rouge Steel Company ("Rouge Steel"), a wholly-owned
subsidiary of Rouge Industries, has a five-year, $100 million, unsecured
revolving loan commitment under a credit agreement (the "Credit Agreement")
which expires on November 29, 2001. Rouge Steel had no borrowings under the
Credit Agreement as of September 30, 1997. The Company believes that net
-15-
<PAGE> 16
income and funds available under the Credit Agreement will be adequate for its
working capital and capital expenditure requirements.
OUTLOOK
Blast Furnace Reline. On September 6, 1997, Rouge Steel began a full
reline of its smaller blast furnace. The planned outage is expected to last
approximately 68 days and is expected to have a negative impact on the
Company's results of operations in the fourth quarter.
"Safe Harbor" Statement under the Private Securities Litigation Reform Act
of 1995. With the exception of historical information, the matters discussed
in this Quarterly Report on Form 10-Q include certain forward-looking
statements that involve risks and uncertainties. Stockholders of the Company
are cautioned not to place undue reliance on such forward-looking statements
contained herein.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, Rouge Industries and its consolidated subsidiaries are
defendants in routine lawsuits incidental to their businesses. The Company
believes that none of such current proceedings, individually or in the
aggregate, will have a materially adverse effect on the Company.
Item 5. Other Events
On September 11, 1997, Rouge Industries' board of directors declared a cash
dividend of $0.03 per share on the Company's common stock. The dividend will
be payable on October 24, 1997 to stockholders of record on October 10, 1997.
The total amount of dividends to be paid is $658,907.
Rouge Steel has received nine air pollution notices of violation from Wayne
County Air Quality Management Division (the "County") since March 1997. Rouge
Steel is presently negotiating a consent order to settle the violations with
the County. An accrual was made in the third quarter for penalties which are
expected to be imposed in connection with the consent order. The consent
order is expected to be completed in the fourth quarter of 1997.
-16-
<PAGE> 17
Rouge Steel and its subsidiaries were reorganized into a holding company
form of organizational structure effective July 30, 1997 (the
"Reorganization"). The holding company structure is intended to provide
greater flexibility in the management and financing of existing and future
business operations and to facilitate entry into new businesses and the
formation of joint ventures and other strategic alliances. Additionally, the
reorganization is expected to permit (i) the integrated steel-producing
business to be maintained separately from businesses that the holding company
may acquire or initiate and (ii) business units with distinct and valuable
corporate cultures to be managed without dilution of their unique
characteristics.
Pursuant to the Reorganization, Rouge Steel became a wholly-owned
subsidiary of Rouge Industries, which also holds all the outstanding stock of
QS Steel Inc., and Eveleth Taconite Company. QS Steel Inc., a Michigan
corporation, holds minority equity positions in four Michigan-based joint
venture companies: Shiloh of Michigan, L.L.C., Spartan Steel, TWB Company,
L.L.C. and Delaco Processing, L.L.C. Eveleth Taconite Company holds a 45%
interest in EVTAC Mining, a Minnesota-based iron ore mining and pellet
producing operation.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included in this report.
Exhibit Number Description of Exhibit
-------------- ----------------------
15 Price Waterhouse LLP Awareness Letter
-17-
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: October 23, 1997 ROUGE INDUSTRIES, INC.
By: /s/ Carl L. Valdiserri
----------------------
Name: Carl L. Valdiserri
Title: Chairman of the Board and
Chief Executive Officer
Date: October 23, 1997 By: /s/ Gary P. Latendresse
-----------------------
Name: Gary P. Latendresse
Title: Vice President and
Chief Financial Officer
- 18 -
<PAGE> 19
EXHIBIT INDEX
Exhibit Number Description of Exhibit
-------------- ----------------------
15 Price Waterhouse LLP Awareness Letter
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 15
October 22, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We are aware that Rouge Industries, Inc. has incorporated by reference our
report dated October 22, 1997 (issued pursuant to the provisions of Statements
on Auditing Standards No. 71 and No. 42) in the Prospectus constituting part of
its Registration Statement on Form S-3 (Registration No. 333-16183) amended as
of February 11, 1997 and in its Registration Statements on Form S-8 (No.
33-88518 and No. 33-88520). We are also aware of our responsibilities under
the Securities Act of 1933.
Yours very truly,
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND THE RELATED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 18,374
<SECURITIES> 0
<RECEIVABLES> 134,965
<ALLOWANCES> 6,325
<INVENTORY> 266,917
<CURRENT-ASSETS> 423,398
<PP&E> 290,209
<DEPRECIATION> 36,750
<TOTAL-ASSETS> 746,231
<CURRENT-LIABILITIES> 235,272
<BONDS> 0
0
0
<COMMON> 144
<OTHER-SE> 443,014
<TOTAL-LIABILITY-AND-EQUITY> 746,231
<SALES> 1,010,084
<TOTAL-REVENUES> 1,010,084
<CGS> 950,377
<TOTAL-COSTS> 961,403
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 282
<INCOME-PRETAX> 37,099
<INCOME-TAX> 9,105
<INCOME-CONTINUING> 27,994
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,885
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.23
</TABLE>
