<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, 1998
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, P.O. BOX 1699, 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 21,
1998 was 22,059,518 which includes 14,497,118 shares of Class A Common Stock and
7,562,400 shares of Class B Common Stock.
<PAGE> 2
ROUGE INDUSTRIES, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
INDEX
PAGE
PART I - FINANCIAL INFORMATION
<S> <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.................................................12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.........................................................20
Item 5. Other Events..............................................................20
Item 6. Exhibits and Reports on Form 8-K..........................................20
</TABLE>
-2-
<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
October 20, 1998
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 11
of this report on Form 10-Q as of September 30, 1998, and for the three-month
and nine-month periods ended September 30, 1998 and 1997. 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, 1998 and
for the three-month and nine-month periods ended September 30, 1998 and 1997,
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, 1997, 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 28, 1998, 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, 1997,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS 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
Assets 1998 1997
---- ----
Unaudited
<S> <C> <C>
Current Assets
Cash and Cash Equivalents $ 7,761 $ 12,570
Accounts Receivable
Trade and Other (Net of Allowances
of $11,941 and $6,333) 130,166 101,590
Affiliates 5,033 9,876
Inventories 230,163 248,317
Other Current Assets 17,200 8,562
--------- ---------
Total Current Assets 390,323 380,915
--------- ---------
Property, Plant, and Equipment
Land 366 -
Buildings and Improvements 25,449 24,718
Machinery and Equipment 280,727 275,489
Construction in Progress 8,014 10,517
--------- ---------
Subtotal 314,556 310,724
Less: Accumulated Depreciation (53,439) (42,162)
--------- ----------
Net Property, Plant, and Equipment 261,117 268,562
--------- ---------
Investment in Unconsolidated Subsidiaries 65,149 50,936
--------- ---------
Deferred Charges and Other 20,038 28,096
--------- ---------
Total Assets $ 736,627 $ 728,509
========= =========
</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)
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
---- ----
Unaudited
<S> <C> <C>
Current Liabilities
Accounts Payable
Trade $151,530 $152,917
Affiliates 9,162 13,924
Accrued Vacation Pay 11,758 11,007
Taxes Other than Income 7,634 4,312
Other Accrued Liabilities 26,554 21,579
-------- --------
Total Current Liabilities 206,638 203,739
-------- --------
Long-Term Debt 6,100 17,900
-------- --------
Other Liabilities 63,892 56,969
-------- --------
Excess of Net Assets Acquired Over Cost 6,936 11,280
-------- --------
Stockholders' Equity
Common Stock
Class A, 80,000,000 shares authorized with 14,487,808 and 14,428,219 issued
and outstanding as of September 30, 1998 and
December 31, 1997, respectively 144 144
Class B, 8,690,400 shares authorized with 7,562,400 issued and
outstanding 76 76
Capital in Excess of Par Value 129,176 128,517
Retained Earnings 325,911 312,130
Additional Minimum Pension Liability (2,246) (2,246)
-------- --------
Total Stockholders' Equity 453,061 438,621
-------- --------
Total Liabilities and Stockholders' Equity $736,627 $728,509
======== ========
</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
------------ ------------
1998 1997 1998 1997
---- ---- ---- ----
Sales
<S> <C> <C> <C> <C>
Unaffiliated Customers $ 241,960 $ 276,174 $ 800,250 $ 870,971
Affiliates 27,719 44,533 94,383 139,113
----------- ---------- ---------- ----------
Total Sales 269,679 320,707 894,633 1,010,084
----------- ---------- ---------- ----------
Costs and Expenses
Costs of Goods Sold 251,827 303,964 841,309 950,377
Depreciation and Amortization 5,128 3,808 14,498 11,026
Selling and Administrative Expenses 5,285 5,523 17,954 17,305
Amortization of Excess of Net Assets Acquired
Over Cost (1,449) (1,449) (4,347) (4,347)
----------- ---------- ---------- ----------
Total Costs and Expenses 260,791 311,846 869,414 974,361
----------- ---------- ---------- ----------
Operating Income 8,888 8,861 25,219 35,723
Interest Income 224 315 1,250 1,254
Interest Expense (260) (107) (677) (282)
Other - Net (1,683) (301) (2,448) 404
----------- ---------- ---------- ----------
Income Before Income Taxes and Equity
in Loss of Unconsolidated Subsidiaries 7,169 8,768 23,344 37,099
Income Tax Provision (1,211) (1,387) (5,659) (9,105)
----------- ---------- ---------- ----------
Income Before Equity in Loss of
Unconsolidated Subsidiaries 5,958 7,381 17,685 27,994
Equity in Loss of Unconsolidated Subsidiaries (415) (402) (1,921) (1,109)
----------- ---------- ---------- ----------
Net Income $ 5,543 $ 6,979 $ 15,764 $ 26,885
=========== ========== ========== ==========
Per Share Amounts
Net Income - Basic and Diluted $ 0.25 $ 0.32 $ 0.72 $ 1.23
=========== =========== =========== ==========
Cash Dividends Declared $ 0.03 $ 0.03 $ 0.09 $ 0.09
=========== =========== =========== ==========
Weighted Average Shares Outstanding 22,030,543 21,941,641 22,011,236 21,925,938
=========== =========== =========== ==========
</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, 1998 September 30, 1998
------------------ ------------------
<S> <C> <C>
Common Stock
Beginning and Ending Balance $ 220 $ 220
----------- ----------
Capital in Excess of Par Value
Beginning Balance 128,850 128,517
Common Stock Issued for Benefit Plans 326 659
----------- ----------
Ending Balance 129,176 129,176
----------- ----------
Retained Earnings
Beginning Balance 321,030 312,130
Net Income and Comprehensive Income 5,543 15,764
Cash Dividends Declared (662) (1,983)
----------- ----------
Ending Balance 325,911 325,911
----------- ----------
Additional Minimum Pension Liability
Beginning and Ending Balance (2,246) (2,246)
----------- ----------
Total Stockholders' Equity $ 453,061 $ 453,061
=========== ==========
</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
------------
1998 1997
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net Income $ 15,764 $ 26,885
Adjustments to Reconcile Net Income to Net Cash
Provided By Operating Activities:
Proceeds from Property Tax Settlement - 710
Deferred Taxes (596) 14,316
Depreciation and Amortization 14,498 11,026
Amortization of Capitalized Debt Costs - 27
Equity in Loss of Unconsolidated Subsidiaries 1,921 1,109
Amortization of Excess of Net Assets Acquired Over Cost (4,347) (4,347)
Common Stock Issued for Benefit Plans 659 982
Changes in Assets and Liabilities:
Accounts Receivable (17,122) (16,762)
Inventories 18,361 735
Prepaid Expenses (913) (1,572)
Accounts Payable and Accrued Liabilities 16,841 38,294
Other - Net (4) 1
---------- --------
Net Cash Provided by Operating Activities 45,062 71,404
---------- --------
Cash Flows From Investing Activities
Capital Expenditures (18,321) (48,923)
Purchase of Marketable Securities - (3,311)
Sale of Marketable Securities - 5,350
Investment in Unconsolidated Subsidiaries (18,040) (28,030)
Other - Net 273 (1,057)
---------- --------
Net Cash Used for Investing Activities (36,088) (75,971)
---------- --------
Cash Flows From Financing Activities
Drawdowns on Revolving Line 226,200 16,500
Principal Payments on Revolving Line (238,000) (16,500)
Cash Dividend Payments (1,983) (1,973)
---------- --------
Net Cash Used For Financing Activities (13,783) (1,973)
---------- --------
Net (Decrease) Increase in Cash and Cash Equivalents (4,809) (6,540)
Cash and Cash Equivalents - Beginning of Period 12,570 24,914
---------- --------
Cash and Cash Equivalents - End of Period $ 7,761 $ 18,374
========== ========
</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
The interim consolidated financial statements are unaudited; however, in the
opinion of the Company, the statements include all adjustments, consisting of
only normal recurring 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, 1998.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income." SFAS No. 130
requires disclosure of comprehensive income in interim periods and additional
disclosures of the components of comprehensive income on an annual basis.
Comprehensive income includes all changes in equity during a period except those
resulting from investments by and distributions to the Company's stockholders.
The Company's comprehensive income is comprised of net income and minimum
pension liability adjustments. For the three-month and nine-month periods ended
September 30, 1998 and 1997, there were no adjustments to the minimum pension
liability.
These consolidated financial statements should be read together with the
Company's audited financial statements presented in the Company's Annual Report
on Form 10-K for the year ended December 31, 1997 filed with the Securities and
Exchange Commission on March 6, 1998. For the purpose of these Notes to
Consolidated Financial Statements, "Rouge Industries" or the "Company" refers to
Rouge Industries, Inc. and its subsidiaries unless the context requires
otherwise.
NOTE 2 - BING BLANKING, L.L.C.
On March 31, 1998, Bing Blanking, L.L.C. ("Bing Blanking"), a joint venture
between the Company and Bing Management II, L.L.C., acquired the machinery and
equipment of Freedland Industries Corp., an automotive blanking and rollforming
supplier, for $4,026,000. The acquisition was financed by a loan to Bing
Blanking from the Company. During the third quarter of 1998, Bing Blanking
negotiated a bank loan and repaid the Company all but $3,000,000 of the
Company's loan to Bing Blanking with the proceeds of the bank loan. The Company
acquired the land and building associated with the Bing Blanking acquisition for
$2,212,000 and is leasing them to Bing Blanking.
NOTE 3 - INTERNAL USE SOFTWARE COSTS
Effective January 1, 1998, the Company adopted AICPA Statement of Position
("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP No. 98-1 requires, in certain cases,
capitalization of software costs that previously would have been expensed as
incurred. Software costs capitalized in the three-month and nine-month periods
ended September 30, 1998 were $186,000 and $2,491,000, respectively. These
capitalized software costs will be amortized over the lesser of 60 months or the
useful life of the software.
- 9 -
<PAGE> 10
NOTE 4 - INVENTORIES
The major classes of inventories are as follows (dollars in thousands):
<TABLE>
<CAPTION>
September 30 December 31
1998 1997
---- ----
Unaudited
<S> <C> <C>
Production
Raw Materials $ 53,492 $ 84,169
Semifinished and Finished Steel Products 166,438 160,017
-------- --------
Total Production at FIFO 219,930 244,186
LIFO Reserve (12,089) (17,285)
-------- --------
Total Production at LIFO 207,841 226,901
Nonproduction and Sundry 22,322 21,416
-------- --------
Total Inventories $230,163 $248,317
======== ========
</TABLE>
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Shiloh of Michigan, L.L.C. Loan Guaranty. Rouge Industries guarantees 20 percent
of a $30,000,000 line of credit for Shiloh of Michigan, L.L.C. ("Shiloh of
Michigan"), the Company's engineered steel blanking joint venture with Shiloh
Industries, Inc. As of September 30, 1998, Shiloh of Michigan had borrowings of
$30,000,000 outstanding under its line of credit.
Delaco Steel Processing, L.L.C. Loan Guaranty. Rouge Industries and Delaco Steel
Corporation have agreed to jointly and severally guarantee a $7,300,000 line of
credit for Delaco Steel Processing, L.L.C. ("Delaco Steel Processing"), the
Company's 49 percent owned steel slitting joint venture with Delaco Supreme Tool
& Gear Co. As of September 30, 1998, Delaco Steel Processing did not have any
borrowings outstanding under its line of credit.
Bing Blanking, L.L.C. Loan Guaranty. The Company has agreed to guarantee a
$4,000,000 term loan and a $1,000,000 line of credit loan for Bing Blanking. As
of September 30, 1998, Bing Blanking had $4,000,000 outstanding under its term
loan and did not have any borrowings outstanding under its line of credit.
Other than the matters discussed above, there have been no significant changes
to commitments and contingencies as discussed in the prior year-end consolidated
financial statements.
NOTE 6 - EARNINGS PER SHARE
There was no difference between basic and diluted earnings per share in the
three-month and nine-month periods ended September 30, 1998 and 1997. The tables
below present dilutive securities, which represent stock options granted to
members of management or the board of directors with exercise prices lower than
the average market price of the Company's Class A Common Stock, and
anti-dilutive securities, which represent stock options granted to members of
management or the board of directors with exercise prices higher than the
average market price of the Company's Class A Common Stock. All of the stock
options will expire between 2004 and 2008.
- 10 -
<PAGE> 11
NOTE 6 - EARNINGS PER SHARE (continued)
<TABLE>
<CAPTION>
For the Quarter Ended September 30
----------------------------------------------------------------------------
1998 1997
---------------------------------- ---------------------------------
Range of Range of
Securities Exercise Prices Securities Exercise Prices
---------- --------------- ---------- ---------------
<S> <C> <C> <C> <C>
Dilutive Securities - 131 $15.13
Anti-dilutive Securities 385,450 $12.13 - $28.88 302,200 $21.00 - $28.88
For the Nine Months Ended September 30
----------------------------------------------------------------------------
1998 1997
---------------------------------- ---------------------------------
Range of Range of
Securities Exercise Prices Securities Exercise Prices
---------- --------------- ---------- ---------------
Dilutive Securities - 95 $15.13
Anti-dilutive Securities 385,450 $12.13 - $28.88 302,200 $21.00 - $28.88
</TABLE>
- 11 -
<PAGE> 12
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, 1998 AND 1997
Total Sales. Total sales for Rouge Industries, Inc. (together with its
subsidiaries, "Rouge Industries" or the "Company") decreased 15.9% in the third
quarter of 1998 to $269.7 million from $320.7 million in the third quarter of
1997, a decrease of $51.0 million. The decrease in total sales resulted
principally from lower shipments and lower steel product selling prices. Steel
product shipments decreased 17.7% in the third quarter of 1998 to 598,000 net
tons from 726,000 net tons in the third quarter of 1997, a decrease of 128,000
net tons. The unfavorable effect of lower shipments and prices was partially
offset by the favorable effect of improved product and market sales mix.
Costs and Expenses. Total costs and expenses decreased 16.4% in the third
quarter of 1998 to $260.8 million from $311.8 million in the third quarter of
1997, a decrease of $51.0 million. Costs of goods sold decreased 17.2% in the
third quarter of 1998 to $251.8 million from $304.0 million in the third quarter
of 1997, a decrease of $52.2 million. The decrease in costs of goods sold was
caused primarily by the lower steel product shipments discussed above and lower
scrap prices. The price of steel scrap, one of Rouge Industries' major raw
materials, has decreased 18% since the third quarter of 1997. The Company
expects scrap prices to decrease further in the fourth quarter and then begin to
increase in 1999. Costs of goods sold in the third quarter of 1998 was 93.4% of
total sales compared to 94.8% of total sales in the third quarter of 1997.
Depreciation and amortization increased 34.7% in the third quarter of 1998 to
$5.1 million from $3.8 million in the third quarter of 1997, an increase of $1.3
million. The higher depreciation and amortization expense reflects the
completion of major capital projects, primarily the automated raw material
handling system and the reline of the Company's smaller blast furnace.
- 12 -
<PAGE> 13
Operating Income. Operating income was essentially unchanged from the third
quarter of 1997 to the third quarter of 1998 at $8.9 million. Operating income
represented 3.3% of total sales in the third quarter of 1998 compared to 2.8% of
total sales in the third quarter of 1997.
Other - Net. Other expense - net increased in the third quarter of 1998 to
$1.7 million from $300,000 in the third quarter of 1997, an increase of $1.4
million. The increase was comprised of two items: (i) insurance deductibles for
a railroad accident and a mobile equipment fire and (ii) the writeoff of
accounts receivable resulting from a bankruptcy filing and a potential
bankruptcy filing by two of the Company's customers.
Net Income. As a result of lower sales volume and the other-net items
discussed above, net income decreased 20.6% in the third quarter of 1998 to $5.5
million from $7.0 million in the third quarter of 1997, a decrease of $1.5
million.
COMPARISON OF THE NINE - MONTH PERIODS ENDED SEPTEMBER 30, 1998 AND 1997
Total Sales. Total sales decreased 11.4% in the first nine months of 1998
to $894.6 million from $1.0 billion in the first nine months of 1997, a decrease
of $115.5 million. The decrease in total sales in the first nine months of 1998
was caused principally by lower steel product shipments. Steel product shipments
decreased 11.2% in the first nine months of 1998 to 2,018,000 net tons from
2,273,000 net tons in the first nine months of 1997, a decrease of 255,000 net
tons. Rouge Industries' shipments were lower in the first nine months of 1998
because of blast furnace and downstream facility production issues and the
substantial increase of low-priced imported steel into the Company's markets
relative to the third quarter of 1997.
Costs and Expenses. Total costs and expenses decreased 10.8% in the first
nine months of 1998 to $869.4 million from $974.4 million in the first nine
months of 1997, a decrease of $105.0 million. Costs of goods sold decreased
11.5% in the first nine months of 1998 to $841.3 million from $950.4 million in
the first nine months of 1997, a decrease of $109.1 million. The decrease in
costs of goods sold was primarily due to lower steel product shipments in the
first nine months
- 13 -
<PAGE> 14
of 1998 to $841.3 million from $950.4 million in the first nine months of 1997,
a decrease of $109.1 million. The decrease in costs of goods sold was primarily
due to lower steel product shipments in the first nine months of 1998 and lower
scrap prices. Costs of goods sold in the first nine months of 1998 was 94.0% of
total sales which was approximately equal to the first nine months of 1997.
Depreciation and amortization increased 31.5% in the first nine months of 1998
to $14.5 million from $11.0 million in the first nine months of 1997, an
increase of $3.5 million. The higher depreciation and amortization expense
reflects the completion of major capital projects, primarily the automated raw
material handling system and the reline of the Company's smaller blast furnace.
Operating Income. As a result of the lower shipments and lower steel
product selling prices described above, operating income decreased 29.4% in the
first nine months of 1998 to $25.2 million from $35.7 million in the first nine
months of 1997, a decrease of $10.5 million. Operating income represented 2.8%
of total sales in the first nine months of 1998 compared to 3.5% of total sales
in the first nine months of 1997.
Other - Net. Other expense - net in the first nine months of 1998 was $2.4
million compared to other income - net of $400,000 in the first mine months of
1997, a change of $2.8 million. The change was comprised of three items: (i)
insurance deductibles for a railroad accident and a mobile equipment fire, (ii)
the writeoff of accounts receivable resulting from a bankruptcy filing and a
potential bankruptcy filing by two of the Company's customers, and (iii) an
increase in the reserve for doubtful accounts.
Income Tax Provision. The lower income tax provision in the first nine
months of 1998 was a function of lower taxable income.
Equity in Loss of Unconsolidated Subsidiaries. Equity in loss of
unconsolidated subsidiaries increased 73.2% in the first nine months of 1998 to
$1.9 million from $1.1 million in the first nine months of 1997, an increase of
$800,000. The amount in 1998 is comprised primarily of Rouge Industries' share
of the startup costs associated with Spartan Steel and expenses associated with
a major fire at EVTAC Mining. The equity in loss of unconsolidated subsidiaries
in the first nine
- 14 -
<PAGE> 15
months of 1997 was comprised primarily of startup losses incurred by Shiloh of
Michigan and costs associated with major equipment repairs at EVTAC Mining.
Net Income. As a result of the lower shipments and steel product selling
prices as well as the other - net items discussed above, net income decreased
41.4% in the first nine months of 1998 to $15.8 million from $26.9 million in
the first nine months of 1997, a decrease of $11.1 million.
FINANCIAL CONDITION,LIQUIDITY AND CAPITAL RESOURCES
Cash, cash equivalents and marketable securities on September 30, 1998
totaled $7.8 million compared to $12.6 million on December 31, 1997, a decrease
of $4.8 million. Cash provided by operating activities was partially offset by
capital spending and investments in unconsolidated subsidiaries during the first
nine months of 1998.
Cash Flows from Operating Activities. Net cash provided by operating
activities decreased 36.9% in the first nine months of 1998 to $45.1 million
from $71.4 million in the first nine months of 1997, a decrease of $26.3
million.
Capital Expenditures. Cash used for capital expenditures, including
investments in unconsolidated subsidiaries, decreased 52.7% in the first nine
months of 1998 to $36.4 million from $77.0 million in the first nine months of
1997, a decrease of $40.6 million. The most significant of the expenditures made
in the first nine months of 1998 were for computer system upgrades and
investments in Spartan Steel. Other expenditures were made to modernize and
expand the Company's facilities. During the remainder of the year, it is
anticipated that an additional $8 million will be spent on capital items or
investments in unconsolidated subsidiaries. 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 December 16, 2002. Rouge Steel
- 15 -
<PAGE> 16
had borrowings of $6.1 million under the Credit Agreement as of September 30,
1998. The Company believes that net income and funds available under the Credit
Agreement will be adequate for its working capital and capital expenditure
requirements.
YEAR-2000 READINESS
The Year-2000 problem affects computer hardware, software and other
equipment used by the Company. The use of two-digit dates in computational and
other decision-making functions could result in computer system and operating
equipment failures, potentially leading to business and manufacturing
disruptions. The Company has performed an assessment of its Year-2000 issues and
a program is underway to modify or replace significant portions of the Company's
hardware and software so that its systems will properly interpret dates beyond
January 1, 2000.
The Company believes that it has identified virtually all of its computer
systems, software applications and manufacturing equipment that could be
impacted by Year-2000 related problems. An aggressive program is underway which
will ultimately result in upgrading or replacing several critical business and
manufacturing systems and remediating the remaining applications. All of the
remediation is targeted for completion by the end of the first quarter of 1999.
Testing of many of the Company's manufacturing facilities is scheduled for the
fourth quarter 1998 with testing projected to be completed by the second quarter
1999.
The Company has commenced a remediation process with respect to other
non-information technology equipment such as voice systems, security systems,
office and facilities equipment, etc. This effort is proceeding and is expected
to be completed at the same time as the manufacturing systems remediation.
The Company has initiated contact with all of its outside processors and
key suppliers to determine their progress in achieving Year-2000 readiness. All
outside processors (which represent an extension of Rouge Steel's manufacturing
process) have indicated that they are either Year-2000 ready today or have
established plans to be so. Approximately 75% of the key
- 16 -
<PAGE> 17
suppliers have responded to Year-2000 surveys. Rouge Steel's purchasing
organization is monitoring the progress of each of these suppliers relative to
their Year-2000 plans. By mid-1999, the Company will begin searching for
replacements for suppliers who do not respond or are making unsatisfactory
progress.
The Company estimates that capital expenditures between $6 and $8 million
will be incurred to replace or significantly upgrade existing hardware and
software with new equipment. The Company also expects to incur between $5 and $7
million of additional expense to remediate existing computer systems and
manufacturing equipment that are not Year-2000 ready. To date, approximately 80%
of the capital expenditures and 25% of the total expense has been recorded with
respect to addressing the Year-2000 problem. The majority of the remaining
expense will involve the actual labor for remediation and testing activities
over the next nine months. The expense represents about 20% of Rouge Steel's
information technology expense budget and was identified as part of the normal
planning processes used by the Company in the development of its budget. As a
result, there has been virtually no impact on previously-scheduled systems
replacements or upgrades.
The Company expects to identify and resolve all Year-2000 problems that
could materially affect its business. Nevertheless, there is a possibility that
the Company could experience unforseen problems that could result in disruptions
of its manufacturing capabilities. In the event of such disruptions, the Company
will take every means available to rectify the problems and resume normal
manufacturing operations. It is difficult to accurately predict the magnitude
and extent of such disruptions; however, the Company believes that it can
operate the majority of its administrative and some of its manufacturing
operations manually without suffering the consequences of a lengthy outage. It
would be difficult to operate Rouge Steel's manufacturing facilities in the
event of a catastrophic failure of many of the manufacturing operations. To
mitigate these concerns, both simulation and live testing are planned for late
1998 and early 1999.
- 17 -
<PAGE> 18
The Company believes that all other operational failures,
particularly those of an administrative nature, can be handled through means
such as manual intervention and processing or the use of contract labor. The
Company recognizes the need for effective contingency plans and has embarked on
a program to establish these contingency plans by mid-1999. If it becomes
necessary for the Company to rely on its contingency plans, it is uncertain,
until the contingency plans are finalized, whether this would result in
significant delays in business operations or have a material adverse effect on
the Company's results of operations, financial position or cash flow.
The costs and timing of the Year-2000 project are based on management's
best estimates, which were derived using assumptions of future events. There can
be no guarantee that actual costs will not exceed such estimates or that the
project will be completed on time. Specific factors which might cause higher
actual costs or delays include the availability and cost of trained personnel,
the ability to locate all computer codes requiring correction and the failure of
third parties to remediate their own potential problems related to the Year-2000
issue.
ANTIDUMPING AND COUNTERVAILING DUTY INVESTIGATION
On September 30, 1998, 12 steel companies filed a petition with the United
States International Trade Commission (the "ITC") alleging injury to the
domestic steel industry by reason of imports from Brazil, Japan and Russia. The
ITC is instituting antidumping and countervailing duty investigations and is
expected to reach a preliminary determination in November 1998. If a favorable
determination is reached by the ITC, the Company expects that the high level of
imports that have prevailed during 1998 will be reduced during the next six
months.
MULTIMEDIA INSPECTION
On August 25, 1998, the U.S. Environment Protection Agency (the "Agency")
commenced an unannounced multimedia inspection. The inspection was continued
through September 30, 1998. To date, no violations have been issued; however,
the Company anticipates that the Agency will issue a report of findings in late
October or early November 1998. The Company has made an
- 18 -
<PAGE> 19
accrual in the third quarter to cover certain remediation actions and other
expenses that it believes will be required as a result of the inspection.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
The matters discussed in this Quarterly Report on Form 10-Q include certain
forward-looking statements that involve risks and uncertainties. These
forward-looking statements may include, among others, statements concerning
projected levels of production, sales, shipments and income, pricing trends,
cost reduction strategies, product mix, anticipated capital expenditures,
Year-2000 readiness and other future plans and strategies.
As permitted by the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, Rouge Industries is identifying in this Quarterly
Report on Form 10-Q a number of factors which could cause the Company's actual
results to differ materially from those anticipated. These factors include, but
are not necessarily limited to, (i) changes in the general economic climate,
(ii) the supply of and demand for steel products in the Company's markets, (iii)
pricing of steel products in the Company's markets, (iv) potential environmental
liabilities, (v) the ability and prices of raw materials, supplies, utilities
and other services and items required by the Company's operations, (vi) the
level of imported steel competing with the steel the Company markets, (vii)
higher than expected Year-2000 readiness costs, and (viii) higher than expected
operating costs.
- 19 -
<PAGE> 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
ENVIRONMENTAL LAWSUIT
Seven residents of Melvindale, a city that borders Dearborn, Michigan, have
filed a lawsuit against Rouge Steel in the Circuit Court for the County of
Wayne. The lawsuit alleges trespass, nuisance and negligence by Rouge Steel in
the emission of particulates for an unspecified period of time including the
period March to June 1997. The plaintiffs are requesting that they be certified
a class comprising 3,765 households in Melvindale. The Circuit Court judge is
expected to rule on the class action certification motion in the fourth quarter.
The Company intends to vigorously oppose the lawsuit.
OTHER 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 10, 1998, 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 23, 1998 to stockholders of record on October 9, 1998. The
total amount of dividends to be paid is $662,000.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included in this report.
Exhibit Number Description of Exhibit
-------------- ----------------------
15 PricewaterhouseCoopers LLP Awareness Letter
- 20 -
<PAGE> 21
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 hereunto duly authorized.
Date: October 23, 1998 ROUGE INDUSTRIES, INC.
By: /s/ Carl L. Valdiserri
----------------------
Name: Carl L. Valdiserri
Title: Chairman of the Board and
Chief Executive Officer
Date: October 23, 1998 By: /s/ Gary P. Latendresse
-----------------------
Name: Gary P. Latendresse
Title: Vice President and
Chief Financial Officer
- 21 -
<PAGE> 22
EXHIBIT INDEX
Exhibit Number Description of Exhibit
----------------------
15 PricewaterhouseCoopers LLP Awareness Letter
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 15
October 23, 1998
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 20, 1998 (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, No. 33-88520, No. 333-53741 and No. 333-53743). We are also aware of
our responsibilities under the Securities Act of 1933.
Yours very truly,
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1998 AND THE RELATED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 7,761
<SECURITIES> 0
<RECEIVABLES> 147,140
<ALLOWANCES> 11,941
<INVENTORY> 230,163
<CURRENT-ASSETS> 390,323
<PP&E> 314,556
<DEPRECIATION> 53,439
<TOTAL-ASSETS> 736,627
<CURRENT-LIABILITIES> 206,638
<BONDS> 0
0
0
<COMMON> 220
<OTHER-SE> 452,841
<TOTAL-LIABILITY-AND-EQUITY> 736,627
<SALES> 894,633
<TOTAL-REVENUES> 894,633
<CGS> 841,309
<TOTAL-COSTS> 855,807
<OTHER-EXPENSES> 13,607
<LOSS-PROVISION> 5,608
<INTEREST-EXPENSE> 677
<INCOME-PRETAX> 23,344
<INCOME-TAX> 5,659
<INCOME-CONTINUING> 17,685
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,764
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.72
</TABLE>
