<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 March 31, 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 May 4, 1999
was 22,126,206 which includes 14,563,806 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 MARCH 31, 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 Statement 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
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings.................................................................................19
Item 6. Exhibits and Reports on Form 8-K..................................................................20
</TABLE>
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<PAGE> 3
[PRICEWATERHOUSECOOPERS LLP LETTERHEAD]
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 10
of this report on Form 10-Q as of March 31, 1999, and for the three-month
periods ended March 31, 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 financial information as of March 31, 1999, and for
the three-month periods ended March 31, 1999 and 1998, 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.
PricewaterhouseCoopers LLP
Bloomfield Hills, Michigan
April 30, 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>
March 31 December 31
Assets 1999 1998
- ------ ---- ----
Unaudited
<S> <C> <C>
Current Assets
Cash and Cash Equivalents $ 14,674 $ 2,418
Accounts Receivable
Trade and Other (Net of Allowances
of $33,505 and $17,937) 95,290 130,624
Insurance Recovery 98,617 -
Affiliates 3,764 5,644
Inventories 211,995 275,811
Other Current Assets 29,386 7,075
--------- ---------
Total Current Assets 453,726 421,572
--------- ---------
Property, Plant, and Equipment
Land 366 366
Buildings and Improvements 23,008 23,018
Machinery and Equipment 288,866 289,058
Construction in Progress 43,004 4,525
--------- ---------
Subtotal 355,244 316,967
Less: Accumulated Depreciation (63,233) (58,846)
--------- ---------
Net Property, Plant, and Equipment 292,011 258,121
--------- ---------
Investment in Unconsolidated Subsidiaries 65,057 64,646
--------- ---------
Deferred Charges and Other 7,473 24,548
--------- ---------
Total Assets $ 818,267 $ 768,887
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE> 5
ROUGE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
---------------------------
(amounts in thousands except share amounts)
<TABLE>
<CAPTION>
March 31 December 31
Liabilities and Stockholders' Equity 1999 1998
- ------------------------------------ ---- ----
Unaudited
<S> <C> <C>
Current Liabilities
Accounts Payable
Trade $ 193,525 $ 153,115
Affiliates 244 13,776
Accrued Vacation Pay 11,803 10,737
Taxes Other than Income 2,358 6,131
Other Accrued Liabilities 31,159 25,394
--------- ---------
Total Current Liabilities 239,089 209,153
--------- ---------
Long-Term Debt 19,000 29,000
--------- ---------
Other Postretirement Benefits 56,798 54,301
--------- ---------
Other Liabilities 11,466 11,327
--------- ---------
Deferred Insurance Recovery 40,215 -
--------- ---------
Excess of Net Assets Acquired Over Cost 4,035 5,484
--------- ---------
Commitments and Contingencies (Notes 3 and 5)
Stockholders' Equity
Common Stock
Class A, 80,000,000 shares authorized with 14,552,197
and 14,521,538 issued and outstanding as of
March 31, 1999 and December 31, 1998, respectively 145 145
Class B, 8,690,400 shares authorized with 7,562,400 issued and
outstanding 76 76
Capital in Excess of Par Value 129,746 129,458
Retained Earnings 320,630 332,876
Accumulated Other Comprehensive Income (2,933) (2,933)
--------- ---------
Total Stockholders' Equity 447,664 459,622
--------- ---------
Total Liabilities and Stockholders' Equity $ 818,267 $ 768,887
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<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 March 31
------------------------------
1999 1998
---- ----
Sales
- -----
<S> <C> <C>
Unaffiliated Customers $ 222,818 $ 281,872
Affiliates 11,094 37,080
--------- ---------
Total Sales 233,912 318,952
--------- ---------
Costs and Expenses
Costs of Goods Sold 298,263 301,239
Depreciation and Amortization 5,624 5,130
Selling and Administrative Expenses 6,419 5,925
Amortization of Excess of Net Assets Acquired Over Cost (1,449) (1,449)
--------- ---------
Total Costs and Expenses 308,857 310,845
--------- ---------
Operating Income (Loss) (74,945) 8,107
Interest Income 129 51
Interest Expense (351) (425)
Insurance Recovery 58,402 -
Other - Net (2,119) (386
--------- ---------
Income (Loss) Before Income Taxes and
Equity in Unconsolidated Subsidiaries (18,884) 7,347
Income Tax (Provision) Benefit 7,192 (2,212)
--------- ---------
Income (Loss) Before Equity in
Unconsolidated Subsidiaries (11,692) 5,135
Equity in Unconsolidated Subsidiaries 110 (1,064)
--------- ---------
Net Income (Loss) $ (11,582) $ 4,071
========= =========
Per Share Amounts
Net Income (Loss) - Basic and Diluted $ (0.52) $ 0.19
========= =========
Cash Dividends Declared $ 0.03 $ 0.03
========= =========
Weighted Average Shares Outstanding 22,098,004 21,998,285
========== ==========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE> 7
ROUGE INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
---------------------------------------------------------
(amounts in thousands)
Unaudited
<TABLE>
<CAPTION>
For the Quarter Ended
March 31,1999
-------------
<S> <C>
Common Stock
Beginning Balance $ 221
Common Stock Issued for Employee Benefit Plans -
---------
Ending Balance 221
Capital in Excess of Par Value
Beginning Balance 129,458
Common Stock Issued for Employee Benefit Plans 288
Ending Balance 129,746
Retained Earnings
Beginning Balance 332,876
Net Income (Loss) and Comprehensive Income (Loss) (11,582)
Cash Dividends Declared (664)
---------
Ending Balance 320,630
Accumulated Other Comprehensive Income
Beginning Balance (2,933)
Required Minimum Pension Liability Adjustment -
Ending Balance (2,933)
Total Stockholders' Equity $ 447,664
=========
Comprehensive Income (Loss)
Net Income (Loss) $ (11,582)
Additional Minimum Pension Liability Adjustment -
---------
Comprehensive Income (Loss) $ (11,582)
=========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
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<PAGE> 8
ROUGE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(amounts in thousands)
Unaudited
<TABLE>
<CAPTION>
For the Quarter Ended
March 31
------------------------
1999 1998
---- ----
<S> <C> <C>
Cash Flows From Operating Activities
Net Income (Loss) $ (11,582) $ 4,071
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by Operating Activities
Deferred Taxes (7,870) (54)
Depreciation and Amortization 5,624 5,130
Equity in Unconsolidated Subsidiaries (110) 1,064
Amortization of Excess of Net Assets Acquired Over Cost (1,449) (1,449)
Common Stock Issued for Benefit Plans 288 136
Changes in Assets and Liabilities
Accounts Receivable (61,403) (20,943)
Inventories 63,628 57,501
Prepaid Expenses 2,625 2,848
Accounts Payable and Accrued Liabilities (7,636) (15,725)
Deferred Insurance Recovery 40,215 -
Other - Net (8) (2)
--------- ---------
Net Cash Provided by Operating Activities 22,322 32,577
--------- ---------
Cash Flows from Investing Activities
Capital Expenditures (903) (9,627)
Investment in Unconsolidated Subsidiaries (121) (7,642)
Other - Net 1,622 247
--------- ---------
Net Cash Provided by (Used for) Investing Activities 598 (17,022)
--------- ---------
Cash Flows From Financing Activities
Drawdowns on Revolving Line 90,100 104,000
Principal Payments on Revolving Line (100,100) (121,900)
Cash Dividend Payments (664) (660)
--------- ---------
Net Cash Used for Financing Activities (10,664) (18,560)
--------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 12,256 (3,005)
Cash and Cash Equivalents - Beginning of Period 2,418 12,570
--------- ---------
Cash and Cash Equivalents - End of Period $ 14,674 $ 9,565
========= =========
</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 necessary for a
fair statement of the results for the interim period. Such adjustments include
normal recurring adjustments as well as additional adjustments discussed in Note
3. 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>
March 31 December 31
1999 1998
---- ----
Unaudited
<S> <C> <C>
Production
Raw Materials $ 78,091 $ 83,422
Semifinished and Finished Steel Products 120,441 175,831
--------- ---------
Total Production at FIFO 198,532 259,253
LIFO Reserve (7,042) (4,651)
--------- ---------
Total Production at LIFO 190,490 254,602
Nonproduction and Sundry 21,505 21,209
--------- ---------
Total Inventories $ 211,995 $ 275,811
========= =========
</TABLE>
NOTE 3 - 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 Company's
wholly-owned subsidiary. 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 managed and operated 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 of disruption to operations. The
Company is evaluating 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
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<PAGE> 10
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. Anticipated 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 described above, at March 31, 1999, the Company has
recorded a receivable of $98,617,000, which is net of reserves of $17,168,000.
Of the net receivable recorded, $58,402,000 has been included in other income,
and $40,215,000 has been deferred and will be recognized over the period the
related capital items are amortized.
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
upon the available information, the Company has recorded a $3,000,000 reserve
for its share of the cost to encapsulate the Powerhouse. If the abatement costs
are expected to 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.
NOTE 4 - EARNINGS PER SHARE
There was no difference between basic and diluted earnings per share in the
first quarter of 1999 or in the first quarter of 1998. The table below presents
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 are 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 these stock options will expire
between 2004 and 2009.
<TABLE>
<CAPTION>
For the Quarter Ended For the Quarter Ended
March 31, 1999 March 31, 1998
--------------------- ---------------------
(Unaudited) (Unaudited)
Range of Range of
Exercise Exercise
Securities Prices Securities Prices
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Dilutive Securities 40,724 $ 8.75 18,586 $12.13
Anti-dilutive Securities 383,950 $12.13 - $28.88 297,250 $15.13 - $28.88
</TABLE>
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Other than the matters discussed in Note 3, there have been no changes to the
commitments and contingencies discussed in the Company's Annual Report on Form
10-K for the year ended December 31, 1998.
-10-
<PAGE> 11
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 managed and operated 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 of disruption to operations. The Company is evaluating 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 $1.6 million, was written off in the first
quarter. Anticipated proceeds from the property damage claims which
exceed the net book value of the property written off are expected to
result in
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<PAGE> 12
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 described above, at March 31, 1999, the
Company has recorded a receivable of $98.6 million which is net of reserves
of $17.2 million. Of the net receivable recorded, $58.4 million has been
included in other income, and $40.2 million has been deferred and will be
recognized over the period that the related capital items are amortized. The
Company continues to discuss the determination of the total claim with its
insurers. The Company's assessment of probability with respect to the $98.6
million 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, the Company has recorded
a $3.0 million reserve for its share of the cost to encapsulate the
Powerhouse. If the abatement costs are expected to 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 currently negotiating with its insurance carriers for
interim cash payments on the insurance claims. In April 1999, an advance of
$35.0 million was received from the Company's insurance carriers for
business interruption losses. The Company expects to fund the cash needs
relating to the matters noted above from bank borrowings, insurance proceeds
and working capital.
-12-
<PAGE> 13
On May 6, 1999, Rouge Steel began limited operation of its smaller "B"
blast furnace. The Company intends to increase production gradually on "B"
blast furnace and begin operating "C" blast furnace after approximately one
week. The Company anticipates that both the blast furnaces will be able to
produce at normal rates by the end of May 1999.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE - MONTH PERIODS ENDED MARCH 31, 1999 AND 1998
Total Sales. Total sales for Rouge Industries decreased 26.7% in the
first quarter of 1999 to $233.9 million from $319.0 million in the first
quarter of 1998, a decrease of $85.1 million. The decrease in total sales
resulted principally from lower steel product shipments and selling prices.
Shipments decreased 25.7% in the first quarter of 1999 to 541,000 tons from
728,000 tons in the first quarter of 1998, a decrease of 187,000 tons.
Shipments were lower in the first quarter of 1999 primarily because of the
disruption of production resulting from the February 1, 1999 explosion and
fire at the Powerhouse. The Company lost approximately 450,000 tons of slab
production in the first quarter of 1999. A portion of the lost production
was made up by processing semi-finished inventories and purchased slabs and
coils. The Company estimates that it lost approximately 125,000 tons of
sales in the first quarter as a result of the production curtailment.
Additionally, the Company expects to lose approximately 300,000 tons of
sales in the second quarter because inventories will need to be replenished
once full production has resumed. See "Powerhouse Explosion and Insurance
Claim".
Costs and Expenses. Total costs and expenses decreased 0.6% in the first
quarter of 1999 to $308.9 million from $310.9 million in the first quarter
of 1998, a decrease of $2.0 million. Costs of goods sold decreased 1.0% in
the first quarter of 1999 to $298.3 million from $301.2 million in the first
quarter of 1998, an decrease of $2.9 million. The decrease in costs of goods
sold was primarily due to the lower volume resulting from the lost
production discussed above, partially offset by additional costs related to
the Powerhouse explosion. Rouge Steel recorded the continuing expenses
associated with its steel making plant in the first quarter of 1999 despite
the fact that the entire plant was shut down for 11 days and primary
operations, which includes the blast furnaces, the basic oxygen furnace and
the continuous caster, still were not operating by the end of the first
quarter. Additionally, the Company recorded expenses for
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<PAGE> 14
non-capital repairs to its damaged property, including its 60% ownership of
the Powerhouse assets. Costs of goods sold in the first quarter of 1999 were
127.5% of total sales, up from 94.4% of total sales in the first quarter of
1998. Depreciation and amortization increased 9.6% in the first quarter of
1999 to $5.6 million from $5.1 million in the first quarter of 1998, an
increase of $500,000. The increase in depreciation and amortization reflects
the completion of major capital projects. Selling and administrative
expenses increased 8.3% in the first quarter of 1999 to $6.4 million from
$5.9 million in the first quarter of 1998, an increase of $500,000. See
"Powerhouse Explosion and Insurance Claim".
Operating Income (Loss). The operating loss in the first quarter of 1999
was $74.9 million compared to operating income of $8.1 million in the first
quarter of 1998, a decrease of $83.0 million. The decrease in operating
income was primarily due to the Powerhouse explosion discussed above.
Insurance Recovery. The Company recognized $58.4 million of income in the
first 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 explosion insurance
claim will take at least two years to settle. Since it is so early in the
claim process, the Company is unable to reasonably 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 the income
recognized. See "Powerhouse Explosion and Insurance Claim."
Income Tax (Provision) Benefit. The income tax benefit in the first
quarter of 1999 was $7.2 million compared to an income tax provision of $2.2
million in the first quarter of 1998. The income tax benefit in the first
quarter of 1999 was a function of the loss incurred as a result of the
Powerhouse explosion. Net Income (Loss). The net loss in the first quarter
of 1999 was $11.6 million compared to net income of $4.1 million in the
first quarter of 1998. The net loss was primarily due to the Powerhouse
explosion.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents on March 31, 1999 totaled $14.7 million
compared to $2.4 million on December 31, 1998, an increase of $12.3 million.
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<PAGE> 15
Cash Flows from Operating Activities. Net cash provided by operating
activities decreased 31.5% in the first quarter of 1999 to $22.3 million
from $32.6 million in the first quarter of 1998. The decrease in net cash
provided by operating activities was primarily attributable the Powerhouse
explosion and the resulting net loss. The $61.4 million increase in accounts
receivable since December 31, 1998 reflects an increase of $98.6 million for
insurance recovery partially offset by lower trade receivables resulting
from lower shipments. Inventories decreased by $63.6 million reflecting the
depletion of in-process and finished goods inventories to offset lost liquid
steel production. The Company expects that as steel production reaches
normal operating rates in the second quarter, its semi-finished and finished
goods inventories will be replenished. The $40.2 million deferred insurance
recovery was recorded to correspond with the cost of a new electrical
substation and steam system which were capitalized. As these assets are
amortized, the deferred insurance recovery will be amortized for the same
amount over the same period.
Capital Expenditures. Cash used for capital expenditures, including
investments in unconsolidated subsidiaries, decreased 94.1% in the first
quarter of 1999 to $1.0 million from $17.3 million in the first quarter of
1998, a decrease of $16.3 million. The first quarter 1999 capital
expenditures were primarily made to modernize the Company's computer
hardware. The 1998 expenditures were carryovers from the raw material
handling system and investments in Spartan Steel Coating Company, the
Company's joint venture hot dip galvanized line. During the rest of 1999, it
is anticipated that an additional $70 million will be paid or accrued for
capital projects and investment in unconsolidated subsidiaries. The largest
projects during the remainder of 1999 include the package steam boilers and
the Company's share of an electrical substation to replace the assets
damaged in the Powerhouse explosion, an improved shipping facility, reheat
furnace improvements at the hot strip mill and projects related to Year-2000
readiness. The remaining capital expenditures will be generally directed at
improving and maintaining the Company's fixed assets and plant efficiency to
enhance the Company's competitive position in the marketplace.
Credit Facility. Rouge Steel has a five-year, $100 million, unsecured
revolving loan commitment under a credit agreement (the "Credit Agreement")
which expires on December 16, 2002. The Company had borrowings of $19.0
million under the facility on March 31, 1999. In addition to the Credit
Agreement, during the second quarter, the Company obtained two $25 million,
unsecured credit facilities.
-15-
<PAGE> 16
One of the unsecured credit facilities expires on June 30, 1999 and the
other expires on April 30, 2000. The Company believes that funds available
under the Credit Agreement and the unsecured credit facilities, along with
anticipated insurance advances and cash flows from operations 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 in the day-to-day conduct of its business. 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
Company has reached the point where the majority of the remediation efforts
have been competed and testing is well underway, with no major unresolvable
problems identified to date.
The remediation program is proceeding on four fronts: technical
infrastructure, business computing and manufacturing systems, plant-floor
and other facility related equipment and external suppliers and customers.
The technical infrastructure effort, which refers to the technical computing
environment such as networks and personal computers, is more than 90%
complete. More than three-quarters of the network servers have been upgraded
and are now Year-2000 ready. The Company has replaced or upgraded 95% of its
computers. Infrastructure is targeted for completion by the end of May 1999.
Remediation of business computing and manufacturing systems is being
handled by replacing selected business systems with third-party applications
and by the efforts of internal and outside technical resources. A program
was undertaken in 1998 to replace the Company's accounting and purchasing
systems with third-party applications. The final two modules of the
accounting system and the purchasing system launch
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<PAGE> 17
for existing sites will be completed in June 1999. Nearly all of the
remaining business computing and manufacturing systems have been remediated
and will be tested and installed into production by the end of June 1999.
All plant-floor equipment has been assessed; 95% of the hardware and 80%
of the software are now considered ready. A successful Year-2000 live
production test has been completed in the Hot Strip Mill. Successful
simulation tests also were performed in the basic oxygen furnace ("BOF") and
caster. Tandem mill and other cold mill tests will be conducted in May.
Remediation and testing of all remaining plant-floor equipment are scheduled
to be completed by the end of the second quarter of 1999.
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.
The Company is conducting interviews with outside processors to ensure that
they will be ready within the required time frame. To date, interviews have
been completed with 24 companies representing 38 facilities, or about 60% of
the total. The Company plans to conduct a live Year-2000 electronic data
interchange test with each of its outside processors beginning in May 1999.
The Company's purchasing organization has completed its contact program
with key suppliers relative to their Year-2000 plans. The Company plans to
elicit the use of an outside auditing firm to assist in developing an action
plan that will include a review of critical suppliers, conducting audits
where necessary and implementing contingency plans in the event of the
replacement of the supplier.
Estimated Costs: The Company estimates that capital expenditures of
approximately $8 million will be incurred to replace or significantly
upgrade existing hardware and software with new equipment. The Company also
expects to incur approximately $4 million of additional expense to remediate
existing computer systems and manufacturing equipment that are not Year-2000
ready. To date, virtually all of the capital expenditures have been made and
approximately 60% of the total expenses have been incurred in the course of
addressing the Year-2000 problem. A majority of the remaining expenses
relate to the actual labor for both remediation and testing activities
during the second quarter of 1999. The remaining expense represents
approximately 20% of Rouge Steel's information technology expense budget and
were identified
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<PAGE> 18
as part of the normal planning processes used by the Company in the
development of its future fiscal year budgets. As a result, there has been
virtually no impact on previously-scheduled systems replacements or
upgrades.
Material Impact on the Business: The Company expects to identify and
resolve all Year-2000 problems that could materially affect its business.
Nevertheless, there is always a possibility that the Company could
experience unforseen problems that could result in a disruption of its
manufacturing capabilities. In the event of such disruption, the Company
will take every means available at its disposal to rectify the problem 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 on a manual basis without suffering the
consequences of a lengthy outage. All manufacturing operations are
particularly critical to the Company's operations in the event of Year-2000
failures. It would be difficult to operate the manufacturing facilities in
the event of a catastrophic failure of any of these operations. To mitigate
these concerns, the Company plans to continue both simulation and live
testing for these areas during 1999 to assure compliance.
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. The present plan is
to establish the majority of these contingency plans by mid-1999. The
Company foresees no problem in this regard in that the time-horizon-to-
failure for most systems is not projected to occur until the latter part of
1999 or beyond.
"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,
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<PAGE> 19
cost-reduction strategies, product mix, anticipated capital expenditures 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) higher than expected year-2000
readiness costs, (vii) the Company's ability to locate all computer codes
requiring correction related to the Year-2000 issue, (viii) the failure of
third parties to remediate their potential problems related to the Year-2000
issue, (ix) uncertainty related to the Powerhouse explosion and the
Company's ability to resolve the insurance claim, and (x) higher than
expected operating costs.
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 in the circuit court for the County of
Wayne. The lawsuit alleges tresspass, 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 intends to vigorously oppose the
lawsuit. It is presently not possible to reasonably estimate either the level of
the Company's monetary exposure or the likely outcome of the lawsuit.
OTHER PROCEEDINGS
In addition to the matter discussed above, from time to time, Rouge
Industries and its consolidated subsidiaries are defendants in routine lawsuits
incidental to its business. The Company believes that such
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<PAGE> 20
other current proceedings, individually or in the aggregate, will not have a
materially adverse effect on the Company.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) The following exhibit is included in this report.
Exhibit Number Description of Exhibit
- -------------- -------------------------
15 PricewaterhouseCoopers LLP Awareness Letter
(b) During the quarter ended March 31,1999, the Company filed
one current report on Form 8-K with the Securities and
Exchange Commission. The report, filed on February 12, 1999,
described the effect on the Company of the February 1, 1999
explosion and fire at the Rouge Complex Powerhouse. No
financial statements were filed with the current report on
Form 8-K.
-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 thereunto duly authorized.
Date: May 11, 1999 ROUGE INDUSTRIES, INC.
By: /s/ Carl L. Valdiserri
-------------------------------
Name: Carl L. Valdiserri
Title: Chairman of the Board and
Chief Executive Officer
Date: May 11, 1999 By: /s/ Gary P. Latendresse
-------------------------------
Name: Gary P. Latendresse
Title: Executive Vice President and
Chief Financial Officer
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<PAGE> 22
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
EX-15 Letter regarding unaudited interim financial
information
EX-27 Financial Data Schedule
<PAGE> 1
Exhibit 15
May 10, 1999
Securities and Exchange Commission
450 Fifth Street, N. W.
Washington, D. C. 20549
Commissioners:
We are aware that our report dated April 30, 1999 on our review of interim
financial information of Rouge Industries, Inc. (the "Company") as of and for
the period ended March 31, 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 Statements on Form S-3 (Registration No. 333-16183) amended as
February 11, 1997 and in its Registration Statements on Form S-8 (Registration
No. 33-88518, No. 33-88520, No. 333-53741 and No. 333-53743).
Very truly yours,
PricewaterhouseCoopers LLP
Bloomfield Hills, Michigan
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AS OF MARCH 31, 1999 AND THE RELATED CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED MARCH 31, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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