<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, 1999
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 22,
1999 was 22,130,913 which includes 14,568,513 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, 1999
INDEX
<TABLE>
<CAPTION>
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......................................................19
Item 5. Other Events...........................................................19
Item 6. Exhibits and Reports on Form 8-K.......................................19
</TABLE>
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<PAGE> 3
REPORT OF INDEPENDENT ACCOUNTANTS
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, 1999, and for the three-month
and nine-month periods ended September 30, 1999 and 1998. 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 consolidated interim financial information 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, 1998, 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 February 3, 1999, except as to Note 11 which is as of March 2, 1999 and
the second paragraph of Note 10, which is as of March 25, 1999, 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, 1998, 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
October 22, 1999
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<PAGE> 4
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ROUGE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
<TABLE>
<CAPTION>
September 30 December 31
Assets 1999 1998
------------ -----------
Unaudited
<S> <C> <C>
Current Assets
- --------------
Cash and Cash Equivalents $ 9,137 $ 2,418
Accounts Receivable
Trade and Other (Net of Allowances
of $15,576 and $17,937) 151,910 130,624
Insurance Recovery 87,200 -
Affiliates 3,680 5,644
Inventories 257,418 275,811
Other Current Assets 28,666 7,075
--------- ----------
Total Current Assets 538,011 421,572
--------- ----------
Property, Plant, and Equipment
- ------------------------------
Land 360 366
Buildings and Improvements 23,000 23,018
Machinery and Equipment 357,741 289,058
Construction in Progress 4,120 4,525
--------- -----------
Subtotal 385,221 316,967
Less: Accumulated Depreciation (99,047) (58,846)
--------- -----------
Net Property, Plant, and Equipment 286,174 258,121
--------- -----------
Investment in Unconsolidated Subsidiaries 64,613 64,646
- ----------------------------------------- --------- ----------
Deferred Charges and Other 28,588 24,548
- -------------------------- --------- ----------
Total Assets $917,386 $768,887
======== ========
</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>
September 30 December 31
Liabilities and Stockholders' Equity 1999 1998
------------ -----------
Unaudited
<S> <C> <C>
Current Liabilities
Accounts Payable
Trade $239,302 $153,115
Affiliates 2,517 13,776
Accrued Vacation Pay 11,608 10,737
Taxes Other than Income 7,985 6,131
Other Accrued Liabilities 33,603 25,394
--------- ----------
Total Current Liabilities 295,015 209,153
--------- ---------
Long-Term Debt 87,000 29,000
--------- ----------
Other Postretirement Benefits 61,792 54,301
--------- ----------
Other Liabilities 11,745 11,327
--------- ----------
Deferred Insurance Recovery 39,951 -
--------- ----------
Excess of Net Assets Acquired Over Cost 1,137 5,484
--------- ----------
Commitments and Contingencies (Notes 4 and 5)
Stockholders' Equity
Common Stock
Class A, 80,000,000 shares authorized with 14,568,513 and 14,521,538 issued
and outstanding as of September 30, 1999 and
December 31, 1998, respectively 146 145
Class B, 8,690,400 shares authorized with 7,562,400 issued and
outstanding 76 76
Capital in Excess of Par Value 129,932 129,458
Retained Earnings 293,525 332,876
Accumulated Other Comprehensive Income (Loss) (2,933) (2,933)
-------- --------
Total Stockholders' Equity 420,746 459,622
-------- --------
Total Liabilities and Stockholders' Equity $917,386 $768,887
======== ========
</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
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales
Unaffiliated Customers $ 249,336 $ 241,960 $ 633,597 $ 800,250
Affiliates 11,817 27,719 34,706 94,383
----------- ------------ ------------ -----------
Total Sales 261,153 269,679 668,303 894,633
----------- ------------ ------------ -----------
Costs and Expenses
Costs of Goods Sold 283,294 251,827 820,777 841,309
Depreciation and Amortization 19,915 5,128 40,942 14,498
Selling and Administrative Expenses 5,693 5,285 20,606 17,954
Amortization of Excess of Net Assets Acquired
Over Cost (1,449) (1,449) (4,347) (4,347)
----------- ------------ ------------ -----------
Total Costs and Expenses 307,453 260,791 877,978 869,414
----------- ------------ ------------ -----------
Operating Income (Loss) (46,300) 8,888 (209,675) 25,219
Interest Income 200 224 572 1,250
Interest Expense (1,180) (260) (1,693) (677)
Insurance Recovery 26,841 - 149,249 -
Other - Net 1,407 (1,683) (1,189) (2,448)
------------ ------------ ------------ -----------
Income (Loss) Before Income Taxes and Equity
in Unconsolidated Subsidiaries (19,032) 7,169 (62,736) 23,344
Income Tax (Provision) Benefit 7,600 (1,211) 25,236 (5,659)
----------- ------------ ------------ -----------
Income (Loss) Before Equity in
Unconsolidated Subsidiaries (11,432) 5,958 (37,500) 17,685
Equity in Unconsolidated Subsidiaries 482 (415) 141 (1,921)
----------- ------------ ------------ -----------
Net Income (Loss) $ (10,950) $ 5,543 $ (37,359) $ 15,764
=========== ============ ============ ===========
Per Share Amounts
Net Income (Loss) - Basic and Diluted $ (0.49) $ 0.25 $ (1.69) $ 0.72
=========== ============ ============ ===========
Cash Dividends Declared $ 0.03 $ 0.03 $ 0.09 $ 0.09
=========== ============ ============ ===========
Weighted Average Shares Outstanding 22,130,462 22,030,543 22,118,142 22,011,236
=========== ============ ============ ===========
</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, 1999 September 30, 1999
------------------ ------------------
<S> <C> <C>
Common Stock
Beginning Balance $ 222 $ 221
Common Stock Issued for Employee Benefit Plans - 1
----------- -----------
Ending Balance 222 222
----------- -----------
Capital in Excess of Par Value
Beginning Balance 129,880 129,458
Common Stock Issued for Benefit Plans 52 474
----------- -----------
Ending Balance 129,932 129,932
----------- -----------
Retained Earnings
Beginning Balance 305,139 332,876
Net Income (Loss) and Comprehensive Income (Loss) (10,950) (37,359)
Cash Dividends Declared (664) (1,992)
----------- -----------
Ending Balance 293,525 293,525
----------- -----------
Accumulated Other Comprehensive Income (Loss)
Beginning and Ending Balance (2,933) (2,933)
----------- -----------
Total Stockholders' Equity $ 420,746 $ 420,746
=========== ===========
Comprehensive Income (Loss)
Net Income (Loss) $ (10,950) $ (37,359)
Additional Minimum Pension Liability Adjustment - -
----------- -----------
Comprehensive Income (Loss) $ (10,950) $ (37,359)
=========== ===========
</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
------------
1999 1998
Cash Flows From Operating Activities ---- ----
<S> <C> <C>
Net Income (Loss) $ (37,359) $ 15,764
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided By Operating Activities:
Deferred Taxes (25,194) (596)
Depreciation and Amortization 40,942 14,498
Equity in Unconsolidated Subsidiaries (141) 1,921
Amortization of Excess of Net Assets Acquired Over Cost (4,347) (4,347)
Common Stock Issued for Benefit Plans 475 659
Changes in Assets and Liabilities:
Accounts Receivable (106,522) (17,122)
Inventories 18,804 18,361
Prepaid Expenses 651 (913)
Accounts Payable and Accrued Liabilities 42,825 16,841
Deferred Insurance Recovery 39,951 -
Other - Net 2,083 (4)
----------- ----------
Net Cash (Used for) Provided by Operating Activities (27,832) 45,062
----------- ----------
Cash Flows From Investing Activities
Capital Expenditures (21,219) (18,321)
Investment in Unconsolidated Subsidiaries (238) (18,040)
Other - Net - 273
----------- ----------
Net Cash Used for Investing Activities (21,457) (36,088)
----------- ----------
Cash Flows From Financing Activities
Drawdowns on Revolving Line 326,800 226,200
Principal Payments on Revolving Line (268,800) (238,000)
Cash Dividend Payments (1,992) (1,983)
----------- ----------
Net Cash Provided by (Used for) Financing Activities 56,008 (13,783)
----------- ----------
Net Increase (Decrease) in Cash and Cash Equivalents 6,719 (4,809)
Cash and Cash Equivalents - Beginning of Period 2,418 12,570
----------- ----------
Cash and Cash Equivalents - End of Period $ 9,137 $ 7,761
=========== ==========
The accompanying notes are an integral part of the consolidated financial
statements.
</TABLE>
-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 necessary for a
fair statement of the results for the interim periods presented. Such
adjustments include normal recurring adjustments as well as additional
adjustments discussed in Note 4. The foregoing interim results are not
necessarily indicative of the results of operations expected for the full fiscal
year ending December 31, 1999.
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, 1998 filed with the Securities and
Exchange Commission on March 31, 1999. 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 - INVENTORIES
The major classes of inventories are as follows (dollars in thousands):
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
------------ -----------
Unaudited
<S> <C> <C>
Production
Raw Materials $ 58,383 $ 83,422
Semifinished and Finished Steel Products 193,042 175,831
--------- --------
Total Production at FIFO 251,425 259,253
LIFO Reserve (11,876) (4,651)
--------- --------
Total Production at LIFO 239,549 254,602
Nonproduction and Sundry 17,869 21,209
--------- --------
Total Inventories $ 257,418 $275,811
========= ========
</TABLE>
NOTE 3 - DEBT
During the second quarter of 1999, the Company obtained uncommitted credit
facilities from two banks for $25,000,000 each. Additionally, on July 23, 1999,
as a result of the Powerhouse explosion discussed in Note 4 and its effect on
the Company's results of operations and cash flow, Rouge Steel Company ("Rouge
Steel"), the Company's wholly-owned subsidiary, executed an amendment (the
"Amendment") to its $100,000,000, unsecured revolving loan facility (the "Credit
Agreement"). The Amendment changed, among other things, (i) a financial covenant
and (ii) the amount of borrowings available under the Credit Agreement, which
increased to $125,000,000. Interest on loans made under the amended Credit
Agreement is calculated using one of two methods. Loans under the base rate
option are charged interest equal to the higher of the prime rate or the federal
funds rate plus 0.5%. Loans under the LIBOR option are charged interest at the
London Interbank Offered Rate plus a margin ranging from 0.5% to 0.8%, depending
on the Company's debt to capitalization ratio at the time of borrowing.
-9-
<PAGE> 10
NOTE 4 - POWERHOUSE EXPLOSION AND INSURANCE CLAIM
On February 1, 1999, an explosion and fire at the Rouge Complex Powerhouse (the
"Powerhouse") resulted in the interruption of the supply of electricity, process
and heating steam, turbo air, mill water and other utilities to virtually all of
the facilities of Rouge Steel. The loss of power resulted in the temporary
shutdown of Rouge Steel's steel making facilities. The Powerhouse is owned 60%
by Rouge Steel and 40% by Ford Motor Company ("Ford"). Ford was responsible for
the day-to-day operation of the Powerhouse.
The Company's insurance program provides coverage for damage to property
destroyed, interruption of business operations, including profit recovery, and
expenditures incurred to minimize the period and total cost of disruption to
operations. The Company continues to evaluate its potential insurance recoveries
in three areas:
1. Damage to Rouge Steel property and Powerhouse property as a result of the
explosion - Costs for repairs are being expensed as incurred, with
related estimated insurance recoveries recorded as they are considered to
be probable, up to the amount of the actual costs incurred.
2. Rouge Steel business interruption costs - The non-capitalizable costs are
being expensed as incurred. Estimated insurance recoveries are recorded
to the extent such recoveries are considered to be probable. Recoveries
in excess of actual costs incurred will be recorded as gains when the
claims are settled and proceeds are received. Certain costs relating to
capital improvements incurred to mitigate the Company's loss from the
Powerhouse explosion are being capitalized and amortized over their
estimated useful lives. Insurance recoveries relating to these items are
being recognized over the same periods.
3. Powerhouse property damage - The net book value of the Powerhouse
property destroyed, which was $1,622,000, was written off in the first
quarter. Any such proceeds from the claims relating to Powerhouse
property damage are expected to result in a gain since the proceeds are
expected to exceed the net book value of the property written off. The
anticipated gain will be recorded as the claims are settled and proceeds
are received.
Pursuant to the accounting methodology described above, through September 30,
1999, the Company has recorded recoverable insurance proceeds of $189,200,000
net of reserves of $33,209,000. Of the total amount recorded, $149,249,000 has
been included in other income and $39,951,000 has been deferred and will be
recognized in other income over the period the related capital items are
amortized. At September 30, 1999, the Company has a receivable of $87,200,000,
which is net of reserves of $33,209,000 and advances from the insurance carriers
of $102,000,000.
In addition to costs discussed above, the Company is evaluating ancillary costs,
including cleanup and abatement activities, relating to the explosion. Certain
of these costs are probable, but are not currently subject to reasonable
estimation. Such amounts could be material to the Company's results of
operations, cash flows and financial position during future periods. Based upon
the available information, during the first quarter of 1999, the Company
recorded a $3,000,000 reserve for its share of the estimated cost to encapsulate
the Powerhouse. If the abatement costs exceed $3,000,000, those costs will be
recorded as incurred if they relate to future operations. If they do not result
in future benefit to the Company, additional abatement costs will be recorded in
the period during which losses become probable and reasonably estimable.
-10-
<PAGE> 11
NOTE 5 - COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL LAWSUIT
Seven residents of Melvindale, a city that borders Dearborn, Michigan, filed a
lawsuit against Rouge Steel in 1998 alleging trespass, nuisance and negligence
by Rouge Steel in the emission of particulates for an unspecified period of
time. The Company has agreed to the plaintiffs' request that they be certified a
class comprising 3,765 households in Melvindale. The Company is continuing
facilitation proceedings with plaintiffs' counsel.
POWERHOUSE EXPLOSION LAWSUITS
Three liability lawsuits resulting from the Powerhouse explosion have been filed
against Rouge Steel. The Company has general liability insurance that provides
coverage for such lawsuits. Ford Motor Company ("Ford"), which owns 40% of the
Powerhouse assets and was responsible for the day-to-day operation of the
Powerhouse, has made settlement offers to certain workers injured in the
explosion and the families of the deceased, including the three persons
maintaining the above-referenced lawsuits. The Company has been informed that
the settlement offers have been accepted by the three persons maintaining
lawsuits against Rouge Steel and lawsuit dismissal documents are in process. It
is possible that Ford will seek recovery from Rouge Steel or its insurers for
liabilities incurred to settle with the workers who accept Ford's settlement
offers. It is presently not possible to reasonably estimate the Company's
monetary exposure with respect to these matters.
Other than the matters discussed above and in Note 4, there have been no
material changes to the commitments and contingencies discussed in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
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, 1999 and 1998. The tables
below present dilutive securities, which represent stock options granted to
members of management or the board of directors with exercise prices presently
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 presently higher than
the average market price of the Company's Class A Common Stock. All of the stock
options will expire between 2004 and 2009.
<TABLE>
<CAPTION>
For the Quarter Ended September 30
----------------------------------------------------------------
1999 1998
------------------------------ ------------------------------
Range of Range of
Securities Exercise Prices Securities Exercise Prices
---------- --------------- ---------- -----------------
<S> <C> <C> <C> <C>
Dilutive Securities - -
Anti-dilutive Securities 542,425 $8.75 - $28.88 385,450 $12.13 - $28.88
<CAPTION>
For the Nine Months Ended September 30
----------------------------------------------------------------
1999 1998
------------------------------ ------------------------------
Range of Range of
Securities Exercise Prices Securities Exercise Prices
---------- --------------- ---------- -----------------
<S> <C> <C> <C> <C>
Dilutive Securities 170,800 $8.75 -
Anti-dilutive Securities 341,950 $11.44 - $28.88 385,450 $12.13 - $28.88
</TABLE>
-11-
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
POWERHOUSE EXPLOSION AND INSURANCE CLAIM
On February 1, 1999, an explosion and fire at the Rouge Complex Powerhouse
(the "Powerhouse") resulted in the interruption of the supply of electricity,
process and heating steam, turbo air, mill water and other utilities to
virtually all of the facilities of Rouge Steel Company ("Rouge Steel"). The loss
of power resulted in the temporary shutdown of Rouge Steel's steel making
facilities. The Powerhouse is owned 60% by Rouge Steel and 40% by Ford Motor
Company ("Ford"). Ford was responsible for the day-to-day operation of the
Powerhouse.
Rouge Industries, Inc.'s ("Rouge Industries" or the "Company") insurance
program provides coverage for damage to property destroyed, interruption of
business operations, including profit recovery, and expenditures incurred to
minimize the period and total cost of disruption to operations. The Company
continues to evaluate its potential insurance recoveries in three areas:
1. Damage to Rouge Steel property and Powerhouse property as a result of the
explosion - Costs for repairs are being expensed as incurred, with related
estimated insurance recoveries recorded as they are considered to be
probable, up to the amount of the actual costs incurred.
2. Rouge Steel business interruption costs - The non-capitalizable costs are
being expensed as incurred. Estimated insurance recoveries are recorded to
the extent such recoveries are considered to be probable. Recoveries in
excess of actual costs incurred will be recorded as gains when the claims
are settled and proceeds are received. Certain costs relating to temporary
steam boilers and electrical distribution equipment which were procured to
mitigate the Company's loss from the Powerhouse explosion are being
capitalized and amortized over their estimated useful lives. Insurance
recoveries relating to these items are being recognized over the same
periods. The amount capitalized for these temporary facilities was
approximately $63.8 million. Of that amount, approximately $23.8 million has
been amortized through September 30, 1999 and the remainder will be
amortized through the second quarter of 2000.
-12-
<PAGE> 13
3. Powerhouse property damage - The net book value of the Powerhouse property
destroyed, which was $1.6 million, was written off in the first quarter. Any
such proceeds from the property damage claims which exceed the net book
value of the property written off are expected to result in a gain since the
proceeds are expected to exceed the net book value of the property written
off. The anticipated gain will be recorded as the claims are settled and
proceeds are received.
Based on the magnitude and complexity of the insurance claim, the Company is
currently unable to reasonably estimate the amount of actual costs to be
incurred in the future as well as the extent of the Company's exposure for
amounts not covered by its insurance program.
Pursuant to the accounting methodology described above, through September
30, 1999, the Company has recorded recoverable insurance proceeds of $189.2
million net of reserves of $33.2 million. Of the total amount recorded, $149.2
million has been included in other income and $40.0 million has been deferred
and will be recognized in other income over the period the related capital items
are amortized. At September 30, 1999, the Company has a receivable of $87.2
million, which is net of reserves of $33.2 million and advances from the
insurance carriers of $102.0 million. The Company continues to discuss the
determination of the total claim with its insurers. The Company's assessment of
probability with respect to the receivable was made based on discussions with
insurers and legal and financial experts retained to assist in the claims
process. The estimates will change as additional information becomes available
with respect to actual costs and as the insurers perform their review of claims
information submitted by the Company.
In addition to costs discussed above, the Company is currently evaluating
ancillary costs, including cleanup and abatement activities, relating to the
explosion. Certain of these costs are probable, but are not currently subject to
reasonable estimation. Such amounts could be material to the Company's results
of operations, cash flows and financial position during future periods. Based on
the available information, during the first quarter of 1999, the Company
recorded a $3.0 million reserve for its share of the estimated cost to
encapsulate the Powerhouse. If the abatement costs exceed $3.0 million, those
costs will be recorded as incurred if they relate to future operations. If they
do not result in future benefit to the Company, additional abatement costs will
be recorded in the period during which losses become probable and reasonably
estimable.
The Company is negotiating with its insurance carriers for interim cash
payments on the insurance claims. Through September 30, 1999, advances totaling
$95.0 million were received from the Company's insurance carriers for business
interruption losses. An additional $7.0 million advance was received for
property damage losses. In October, the Company received additional advances
from its insurance carriers of $27.0 million, including $20.0 million for
business interruption and $7.0 million for property damage. The Company expects
to fund the cash needs relating to the matters noted above from bank borrowings,
insurance proceeds and working capital.
-13-
<PAGE> 14
RESULTS OF OPERATIONS
COMPARISON OF THE THREE - MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
Total Sales. Total sales for Rouge Industries decreased 3.2% in the third
quarter of 1999 to $261.2 million from $269.7 million in the third quarter of
1998, a decrease of $8.5 million. The decrease in total sales resulted
principally from lower steel product selling prices and unfavorable product and
market mix. Steel product shipments increased 12.2% in the third quarter of 1999
to 671,000 net tons from 598,000 net tons in the third quarter of 1998, an
increase of 73,000 net tons. The third quarter of 1998 was adversely impacted by
a strike at General Motors Corporation, one of the Company's largest customers.
Although Rouge Steel's shipments were higher in the third quarter of 1999, the
Company took orders in less profitable markets to compensate for orders lost
when, during Rouge Steel's outage, customers in more profitable markets placed
orders with other steel companies through September.
Costs and Expenses. Total costs and expenses increased 17.9% in the third
quarter of 1999 to $307.5 million from $260.8 million in the third quarter of
1998, an increase of $46.7 million. Costs of goods sold increased 12.5% in the
third quarter of 1999 to $283.3 million from $251.8 million in the third quarter
of 1998, an increase of $31.5 million. The increase in costs of goods sold was
due to the higher steel product shipments discussed above and additional costs
related to the Powerhouse explosion. Costs of goods sold in the third quarter of
1999 was 108.5% of total sales compared to 93.4% of total sales in the third
quarter of 1998. Depreciation and amortization increased 288.4% in the third
quarter of 1999 to $19.9 million from $5.1 million in the third quarter of 1998,
an increase of $14.8 million. The higher depreciation and amortization expense
reflects three months of the 13-month amortization of the cost of the temporary
steam and electrical distribution systems installed to provide the Company with
steam and electricity until the new powerhouse is placed in service. See
"Powerhouse Explosion and Insurance Claim."
Operating Income (Loss). The operating loss in the third quarter of 1998
was $46.3 million compared to operating income of $8.9 million in the third
quarter of 1998, a decrease of $55.2 million. The decrease in operating income
was primarily due to the Powerhouse explosion discussed above, weak steel
product prices and a less profitable sales mix.
Insurance Recovery. The Company recognized $26.8 million of income in the
third quarter of 1999 for anticipated insurance proceeds related to the
Powerhouse explosion. The Company has an insurance program that provides
coverage for damage to property destroyed, interruption of business operations
and expenses incurred to minimize the period of disruption to operations. The
Company expects that the Powerhouse insurance claim will not be settled until at
least two years from the incident. Since the claim is not near settlement, the
Company is unable to accurately estimate the extent of its exposure to
unrecoverable losses incurred as a result of the Powerhouse explosion. The
Company has recorded a reserve with respect to its anticipated insurance
proceeds which has the effect of reducing income recognized. See "Powerhouse
Explosion and Insurance Claim."
Income Tax (Provision) Benefit. The income tax benefit in the third quarter
of 1999 was $7.6 million compared to an income tax provision of $1.2 million in
the third quarter of 1998. The income tax benefit in the third quarter of 1999
was a function of the loss incurred.
Net Income (Loss). The net loss in the third quarter of 1999 was $11.0
million compared to net income of $5.5 million in the third quarter of 1998. The
net loss was primarily due to the Powerhouse explosion, weak steel product
prices and less profitable sales mix.
-14-
<PAGE> 15
COMPARISON OF THE NINE - MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND 1998
Total Sales. Total sales decreased 25.3% in the first nine months of 1999
to $668.3 million from $894.6 million in the first nine months of 1998, a
decrease of $226.3 million. The decrease in total sales in the first nine months
of 1999 was caused principally by lower steel product shipments. Steel product
shipments decreased 21.5% in the first nine months of 1999 to 1,584,000 net tons
from 2,018,000 net tons in the first nine months of 1998, a decrease of 434,000
net tons. Rouge Industries' shipments were lower in the first nine months of
1999 because of the disruption of production resulting from the February 1, 1999
explosion and fire at the Powerhouse. The Company lost approximately 900,000
tons of slab production in the first half of 1999. A portion of the lost
production was made up by processing semi-finished inventories and purchased
slabs and coils. The effect on the Company of the decrease in total sales
resulting from lower shipments was magnified by lower steel product selling
prices in the first nine months of 1999.
Costs and Expenses. Total costs and expenses increased 1.0% in the first
nine months of 1999 to $878.0 million from $869.4 million in the first nine
months of 1998, an increase of $8.6 million. Costs of goods sold decreased 2.4%
in the first nine months of 1999 to $820.8 million from $841.3 million in the
first nine months of 1998, a decrease of $20.5 million. The decrease in costs of
goods sold was primarily due to lower steel product shipments in the first nine
months of 1999 resulting from the lost production discussed above largely offset
by additional costs related to the Powerhouse explosion. Rouge Steel recorded
continuing expenses associated with its steel making plant in the first nine
months of 1999 despite the entire plant being shut down for 11 days and primary
operations, which includes the blast furnaces, basic oxygen furnaces and
continuous caster, not resuming production until May. Additionally, the Company
recorded expenses for non-capital repairs to its damaged property. Costs of
goods sold in the first nine months of 1999 was 122.8% of total sales compared
to 94.0% in the first nine months of 1998. Depreciation and amortization
increased 182.4% in the first nine months of 1999 to $40.9 million from $14.5
million in the first nine months of 1998, an increase of $26.4 million. The
higher depreciation and amortization expense reflects the completion of major
capital projects as well as three months of the 13-month amortization of the
cost of the temporary steam and electrical distribution systems installed to
provide the Company with steam and electricity until the new powerhouse is
placed into service. See "Powerhouse Explosion and Insurance Claim."
Operating Income (Loss). The operating loss in the first nine months of
1999 was $209.7 million compared to operating income of $25.2 million in the
first nine months of 1998, a decrease of $234.9 million. The decrease in
operating income was primarily due to the Powerhouse explosion discussed above,
weak steel product prices and a less profitable sales mix.
Insurance Recovery. The Company recognized $149.2 million of income in the
first nine months of 1999 for anticipated insurance proceeds related to the
Powerhouse explosion. The Company has an insurance program that provides
coverage for damage to property destroyed, interruption of business operations
and expenses incurred to minimize the period of disruption to operations. The
Company expects that the Powerhouse insurance claim will not be settled until at
least two years from the incident. Since the claim is not near settlement, the
Company is unable to accurately estimate the extent of its exposure to
unrecoverable losses incurred as a result of the Powerhouse explosion. The
Company has recorded a reserve with respect to its anticipated insurance
proceeds which has the effect of reducing income recognized. See "Powerhouse
Explosion and Insurance Claim."
Income Tax (Provision) Benefit. The income tax benefit in the first nine
months of 1999 was $25.2 million compared to an income tax provision of $5.7
million in the first nine months of 1998. The income tax benefit in the third
quarter of 1999 was a function of the loss incurred.
Net Income (Loss). The net loss in the first nine months of 1999 was $37.4
million compared to net income of $15.8 million in the first nine months of
1998. The net loss was primarily due to the Powerhouse explosion, weak steel
product prices and a less profitable sales mix.
-15-
<PAGE> 16
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents on September 30, 1999 totaled $9.1 million
compared to $2.4 million on December 31, 1998, an increase of $6.7 million. Cash
provided by financing activities was more than offset by cash used for operating
activities and capital expenditures during the first nine months of 1999.
Cash Flows from Operating Activities. Net cash used for operating
activities was $27.8 million in the first nine months of 1999 compared to net
cash provided by operating activities of $45.1 million in the first nine months
of 1998. The decrease of $72.9 million was primarily attributable to the
Powerhouse explosion and the resulting net loss. The $106.5 increase in accounts
receivable since December 31, 1998 is primarily comprised of the insurance
recovery receivable. Many of the Powerhouse-related accruals had not yet been
paid as of September 30, 1999, which explains the high level of payables.
Capital Expenditures. Cash used for capital expenditures, including
investments in unconsolidated subsidiaries, increased 41.0% in the first nine
months of 1999 to $21.5 million from $36.4 million in the first nine months of
1998, an increase of $14.9 million. The expenditures made in the first nine
months of 1999 were primarily for computer systems, "C" blast furnace upgrades
and to partially pay for the temporary steam boilers which were installed after
the Powerhouse explosion. Other expenditures were made to modernize and expand
the Company's facilities. During the remainder of 1999, the largest capital
expenditure will be approximately $40 million more for the temporary steam
boilers and electrical distribution equipment purchased to provide steam and
electricity until the new powerhouse is placed into service. The remaining
capital expenditures will be generally directed at improving plant efficiency
and product quality in order to improve Rouge Industries' competitive position
in the marketplace.
Credit Facility. Rouge Steel, a wholly-owned subsidiary of Rouge
Industries, has a $125 million, unsecured revolving loan commitment under a
credit agreement (the "Credit Agreement") which expires on December 16, 2002.
Rouge Steel had borrowings of $87.0 million under the Credit Agreement as of
September 30, 1999. In addition to the Credit Agreement, the Company has
obtained two $25 million uncommitted credit facilities. The Company believes
that cash flows from operations and funds available under its credit facilities,
along with anticipated insurance proceeds, will be adequate for its working
capital and capital expenditure requirements.
-16-
<PAGE> 17
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
believes that it has identified all of its computer systems, software
applications and manufacturing equipment that could be impacted by Year-2000
related problems. A remediation program was undertaken in 1998 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 remediation program was conducted on four fronts:
1. The technical infrastructure effort, which refers to the technical
computing environment such as networks and personal computers, is
complete.
2. Remediation of business computing and manufacturing systems was handled
by replacing selected business systems with third-party applications
and by the efforts of internal and outside technical resources.
3. All plant-floor equipment has been assessed; the hardware the software
are now considered ready. Live Year-2000 production or simulation tests
have been successfully conducted on all manufacturing facilities.
4. The Company has contacted all of its outside processors and key
suppliers to determine their progress in achieving Year-2000 readiness.
All outside processors have indicated, through a self-assessment
checklist, that they are either Year-2000 ready today, or have
established plans to be so. Suppliers which were identified as critical
have been asked for, and are providing, details regarding their
contingency plans. The Company's critical infrastructure providers for
electricity, natural gas and oxygen have provided assurances that they
will be Year-2000 ready.
Estimated Costs: Capital expenditures of approximately $7 million have been
made to replace or significantly upgrade existing hardware and software with new
equipment. The Company also has incurred approximately $4 million of additional
expense to remediate existing computer systems and manufacturing equipment that
were not Year-2000 ready. To date, all of the capital expenditures have been
made and more than 95% of the total expenses have been incurred in the course of
addressing the Year-2000 issue. The capital expenditures and expenses discussed
above represent approximately 20% of the information technology budget and were
identified as part of the normal planning process used by the Company in the
development of its fiscal-year budgets.
Material Impact on the Business: The Company believes that it has
identified and resolved all Year-2000 issues that could materially affect its
business. Nevertheless, there remains a possibility that the Company could
experience unforeseen problems that could result in a disruption of its
manufacturing capabilities. In the event of such disruption, 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 potential disruptions; however, the Company believes that it
can operate the majority of its administrative and some of its manufacturing
operations on a manual basis without suffering the consequences of a lengthy
outage. All manufacturing facilities are particularly critical to Rouge Steel's
operations in the event of Year-2000 failures. It would be difficult to operate
Rouge Steel's manufacturing facilities in the event of a catastrophic failure of
any of these facilities.
Contingency Plans: The Company believes that all other operational
failures, particularly those of an administrative nature, can be handed through
other means, such as manual intervention and processing, the use of contract
labor, etc. One prerequisite is the establishment of effective contingency
plans. The Company recognizes the need for effective contingency plans and has
embarked on a program to establish them. Efforts in this regard will continue
through the remainder of 1999.
-17-
<PAGE> 18
"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 availability and prices of raw materials, supplies,
utilities and other services and items required by the Company's operations,
(vi) uncertainty related to the Powerhouse explosion and the Company's ability
to resolve the insurance claim (vii) higher than expected Year-2000 readiness
costs, and (viii) higher than expected operating costs.
-18-
<PAGE> 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
ENVIRONMENTAL LAWSUIT
Seven residents of Melvindale, a city that borders Dearborn, Michigan,
filed a lawsuit against Rouge Steel alleging trespass, nuisance and negligence
by Rouge Steel in the emission of particulates for an unspecified period of
time. The Company has agreed to the plaintiffs' request that they be certified a
class comprising 3,765 households in Melvindale. The Company is continuing
facilitation proceedings with plaintiffs' counsel.
POWERHOUSE EXPLOSION LAWSUITS
Three liability lawsuits resulting from the Powerhouse explosion have been
filed against Rouge Steel. The Company has general liability insurance that
provides coverage for such lawsuits. Ford Motor Company ("Ford"), which owns 40%
of the Powerhouse assets and was responsible for the day-to-day operation of the
Powerhouse, has made settlement offers to certain workers injured in the
explosion and the families of the deceased, including the three persons
maintaining the above-referenced lawsuits. The Company has been informed that
the settlement offers have been accepted by the three persons maintaining
lawsuits against Rouge Steel and lawsuit dismissal documents are in process. It
is possible that Ford will seek recovery from Rouge Steel or its insurers for
liabilities incurred to settle with the workers who accept Ford's settlement
offers. It is presently not possible to reasonably estimate the Company's
monetary exposure with respect to these matters.
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 16, 1999, Rouge Industries' board of directors declared a cash
dividend of $0.03 per share on the Company's common stock. The dividend was
payable on October 22, 1999 to stockholders of record on October 8, 1999. The
total amount of dividends paid was $664,000.
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
27 Financial Data Schedule
-19-
<PAGE> 20
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 27, 1999 ROUGE INDUSTRIES, INC.
By: /s/ Carl L. Valdiserri
----------------------
Name: Carl L. Valdiserri
Title: Chairman of the Board and
Chief Executive Officer
Date: October 27, 1999 By: /s/ Gary P. Latendresse
-----------------------
Name: Gary P. Latendresse
Title: Vice Chairman and
Chief Financial Officer
-20-
<PAGE> 21
EXHIBIT INDEX
Exhibit Number Description of Exhibit
-------------- ----------------------
15 PricewaterhouseCoopers LLP Awareness Letter
27 Financial Data Schedule
<PAGE> 1
Exhibit 15
October 27, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Commissioners:
We are aware that our report dated October 22, 1999 on our review of interim
financial information of Rouge Industries, Inc. (the "Company") as of and for
the period ended September 30, 1999 and included in the Company's quarterly
report on Form 10-Q for the quarter then ended is incorporated by reference in
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).
Yours very truly,
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1999 AND THE RELATED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE NINE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<RECEIVABLES> 258,366
<ALLOWANCES> 15,576
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