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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 June 30, 2000
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 (State of Incorporation) |
38-3340770 (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
(Registrants 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 July 25, 2000 was 22,136,412. This amount includes 14,996,012 shares of Class A Common Stock and 7,140,400 shares of Class B Common Stock.
ROUGE INDUSTRIES, INC.
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 2000
INDEX
Page | |||||||
PART I FINANCIAL INFORMATION | |||||||
| |||||||
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. | Managements Discussion and Analysis of Financial Condition and Results of Operations | 14 | |||||
| |||||||
PART II OTHER INFORMATION | |||||||
| |||||||
Item 1. | Legal Proceedings | 24 | |||||
Item 4. | Submission of Matters to a Vote of Security Holders | 24 | |||||
Item 6. | Exhibits and Reports on Form 8-K | 24 |
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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 its subsidiaries appearing on pages 4 through 13 of this report on Form 10-Q as of June 30, 2000, and for the three-month and six-month periods ended June 30, 2000 and 1999. This financial information is the responsibility of the Companys 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, 1999, 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 2, 2000, except as to Note 12 which is as of March 1, 2000, 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, 1999, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Detroit, Michigan
July 24, 2000
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ROUGE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
June 30 | December 31 | |||||||||||||
2000 | 1999 | |||||||||||||
Assets | Unaudited | |||||||||||||
| ||||||||||||||
Current Assets | ||||||||||||||
Cash and Cash Equivalents | $ | 42,144 | $ | 1,861 | ||||||||||
Accounts Receivable Trade and Other (Net of Allowances of $14,111 and $15,997) | 148,598 | 135,588 | ||||||||||||
Insurance Recovery | 24,127 | 43,085 | ||||||||||||
Affiliates | 2,471 | 2,643 | ||||||||||||
Inventories | 223,393 | 269,808 | ||||||||||||
Other Current Assets | 12,912 | 27,530 | ||||||||||||
Total Current Assets | 453,645 | 480,515 | ||||||||||||
Property, Plant, and Equipment Land | 360 | 360 | ||||||||||||
Buildings and Improvements | 23,122 | 23,000 | ||||||||||||
Machinery and Equipment | 371,911 | 363,406 | ||||||||||||
Construction in Progress | 6,524 | 13,145 | ||||||||||||
Subtotal | 401,917 | 399,911 | ||||||||||||
Less: Accumulated Depreciation | (150,505 | ) | (121,301) | |||||||||||
Net Property, Plant, and Equipment | 251,412 | 278,610 | ||||||||||||
Investment in Unconsolidated Subsidiaries | 70,107 | 71,258 | ||||||||||||
Deferred Taxes | 39,112 | 23,108 | ||||||||||||
Deferred Charges and Other | 15,885 | 14,115 | ||||||||||||
Total Assets | $ | 830,161 | $ | 867,606 | ||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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ROUGE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share amounts)
Liabilities and Stockholders' Equity | ||||||||||||||
June 30 | December 31 | |||||||||||||
2000 | 1999 | |||||||||||||
Unaudited | ||||||||||||||
Current Liabilities | ||||||||||||||
Accounts Payable Trade |
$ | 214,086 | $ | 191,737 | ||||||||||
Affiliates | 7,499 | 9,890 | ||||||||||||
Deferred Insurance Recovery | 11,268 | 24,671 | ||||||||||||
Current Portion of Long-Term Debt | | 4,800 | ||||||||||||
Accrued Vacation Pay | 10,893 | 10,484 | ||||||||||||
Taxes Other than Income | 9,987 | 4,506 | ||||||||||||
Other Accrued Liabilities | 38,873 | 36,129 | ||||||||||||
Total Current Liabilities | 292,606 | 282,217 | ||||||||||||
Long Term Debt | 54,300 | 100,000 | ||||||||||||
Other Postretirement Benefits | 68,863 | 63,936 | ||||||||||||
Other Liabilities | 11,959 | 11,678 | ||||||||||||
Commitments and Contingencies (Notes 4 and 6) | ||||||||||||||
Stockholders Equity Common Stock Class A, 80,000,000 shares authorized with 14,996,012 and 14,570,511 issued and outstanding as of June 30, 2000 and December 31, 1999, respectively |
150 | 146 | ||||||||||||
Class B, 8,690,400 shares
authorized with 7,140,400 and 7,562,400 shares issued and outstanding as of June 30, 2000 and December 31, 1999, respectively |
71 | 76 | ||||||||||||
Capital in Excess of Par Value | 129,966 | 129,943 | ||||||||||||
Retained Earnings | 275,045 | 282,409 | ||||||||||||
Accumulated Other Comprehensive Income (Loss) | (2,799) | (2,799) | ||||||||||||
Total Stockholders Equity | 402,433 | 409,775 | ||||||||||||
Total Liabilities and StockholdersEquity | $ | 830,161 | $ | 867,606 | ||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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ROUGE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands except share and per share amounts)
Unaudited
For the Quarter Ended | For the Six Months Ended | |||||||||||||||||||||||||||
June 30 | June 30 | |||||||||||||||||||||||||||
2000 | 1999 | 2000 | 1999 | |||||||||||||||||||||||||
Sales | ||||||||||||||||||||||||||||
Unaffiliated Customers | $ | 270,248 | $ | 161,442 | $ | 573,471 | $ | 384,261 | ||||||||||||||||||||
Affiliates | 5,995 | 11,796 | 17,572 | 22,890 | ||||||||||||||||||||||||
Total Sales | 276,243 | 173,238 | 591,043 | 407,151 | ||||||||||||||||||||||||
Costs and Expenses | ||||||||||||||||||||||||||||
Costs of Goods Sold | 284,870 | 239,159 | 612,868 | 537,529 | ||||||||||||||||||||||||
Depreciation and Amortization | 14,611 | 15,469 | 29,762 | 20,986 | ||||||||||||||||||||||||
Selling and Administrative Expenses | 6,949 | 8,488 | 14,415 | 14,908 | ||||||||||||||||||||||||
Amortization of
Excess of Net Assets Acquired Over Cost |
| (1,449 | ) | | (2,898 | ) | ||||||||||||||||||||||
Total Costs and Expenses | 306,430 | 261,667 | 657,045 | 570,525 | ||||||||||||||||||||||||
Operating Loss | (30,187 | ) | (88,429 | ) | (66,002 | ) | (163,374 | ) | ||||||||||||||||||||
Interest Income | 510 | 242 | 701 | 371 | ||||||||||||||||||||||||
Interest Expense | (1,007 | ) | (162 | ) | (3,063 | ) | (513 | ) | ||||||||||||||||||||
Insurance Recovery | 40,083 | 64,006 | 55,678 | 122,408 | ||||||||||||||||||||||||
Other Net | 83 | (478 | ) | 948 | (2,597 | ) | ||||||||||||||||||||||
Income (Loss) Before Income Taxes and Equity In Unconsolidated Subsidiaries | 9,482 | (24,821 | ) | (11,738 | ) | (43,705 | ) | |||||||||||||||||||||
Income Tax (Provision) Benefit | (3,305 | ) | 10,444 | 4,506 | 17,636 | |||||||||||||||||||||||
Income (Loss) Before Equity in Unconsolidated Subsidiaries | 6,177 | (14,377 | ) | (7,232 | ) | (26,069 | ) | |||||||||||||||||||||
Equity in Unconsolidated Subsidiaries | 684 | (450 | ) | 1,196 | (340 | ) | ||||||||||||||||||||||
Net Income (Loss) | $ | 6,861 | $ | (14,827 | ) | $ | (6,036) | $ | (26,409) | |||||||||||||||||||
Per Share Amounts | ||||||||||||||||||||||||||||
Net Income (Loss) Basic and Diluted | $ | 0.31 | $ | (0.67 | ) | $ | (0.27 | ) | $ | (1.19 | ) | |||||||||||||||||
Cash Dividends Declared | $ | 0.03 | $ | 0.03 | $ | 0.06 | $ | 0.06 | ||||||||||||||||||||
Weighted Average Shares Outstanding | 22,135,782 | 22,125,604 | 22,134,857 | 22,111,880 |
The accompanying notes are an integral part of the consolidated financial statements.
-6-
ROUGE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(amounts in thousands)
Unaudited
For the Quarter Ended | For the Six Months Ended | ||||||||||||||
June 30, 2000 | June 30, 2000 | ||||||||||||||
Common Stock Beginning and Ending Balance | $ | 221 | $ | 221 | |||||||||||
Capital in Excess of Par Value Beginning Balance | 129,954 | 129,943 | |||||||||||||
Common Stock Issued for Benefit Plans | 12 | 23 | |||||||||||||
Ending Balance | 129,966 | 129,966 | |||||||||||||
| |||||||||||||||
Retained Earnings Beginning Balance | 268,848 | 282,409 | |||||||||||||
Net Income (Loss) and Comprehensive Income
(Loss) |
(6,861 | ) | (6,036 | ) | |||||||||||
Cash Dividends Declared | (664 | ) | (1,328 | ) | |||||||||||
Ending Balance | 275,045 | 275,045 | |||||||||||||
| |||||||||||||||
Accumulated Other Comprehensive Income (Loss) Beginning and Ending Balance | (2,799 | ) | (2,799 | ) | |||||||||||
Total Stockholders Equity | $ | 402,433 | $ | 402,433 | |||||||||||
| |||||||||||||||
Comprehensive Income (Loss) Net Income (Loss) and Comprehensive Income (Loss) | $ | 6,861 | $ | (6,036) | |||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
-7-
ROUGE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Unaudited
For the Six Months Ended | ||||||||||||||||
June 30 | ||||||||||||||||
2000 | 1999 | |||||||||||||||
Cash Flows From Operating Activities | ||||||||||||||||
Net Loss | $ | (6,036 | ) | $ | (26,409 | ) | ||||||||||
Adjustments to Reconcile Net Loss to Net Cash Provided By Operating Activities: | ||||||||||||||||
Deferred Taxes | (1,385 | ) | (15,622 | ) | ||||||||||||
Depreciation and Amortization | 29,762 | 20,986 | ||||||||||||||
Equity in Unconsolidated Subsidiaries | (1,196 | ) | 340 | |||||||||||||
Amortization of Excess of Net Assets Acquired Over Cost | | (2,898 | ) | |||||||||||||
Common Stock Issued for Benefit Plans | 23 | 421 | ||||||||||||||
Changes in Assets and Liabilities: | ||||||||||||||||
Accounts Receivable | 6,121 | (45,544 | ) | |||||||||||||
Inventories | 48,305 | 31,913 | ||||||||||||||
Prepaid Expenses | (4,541 | ) | 4,511 | |||||||||||||
Accounts Payable and Accrued Liabilities | 60,398 | 43,159 | ||||||||||||||
Deferred Insurance Recovery | (13,403 | ) | 31,661 | |||||||||||||
Other Net | | (1,270 | ) | |||||||||||||
Net Cash Provided by Operating Activities | 118,048 | 41,248 | ||||||||||||||
Cash Flows From Investing Activities Capital Expenditures | (27,069 | ) | (16,415 | ) | ||||||||||||
Investment in Unconsolidated Subsidiaries | 1,188 | (196 | ) | |||||||||||||
Other Net | (56 | ) | 1,605 | |||||||||||||
Net Cash Used for Investing Activities | (25,937 | ) | (15,006 | ) | ||||||||||||
Cash Flows From Financing Activities Drawdowns on Revolving Line | 145,600 | 174,000 | ||||||||||||||
Principal Payments on Revolving Line | (196,100 | ) | (193,000 | ) | ||||||||||||
Cash Dividend Payments | (1,328) | (1,328) | ||||||||||||||
Net Cash Used for Financing Activities | (51,828) | (20,328 | ) | |||||||||||||
Net Increase in Cash and Cash Equivalents | 40,283 | 5,914 | ||||||||||||||
Cash and Cash Equivalents Beginning of Period | 1,861 | 2,418 | ||||||||||||||
Cash and Cash Equivalents End of Period | $ | 42,144 | $ | 8,332 | ||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
-8-
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, 2000.
These consolidated financial statements should be read together with the Companys audited financial statements presented in the Companys Annual Report on Form 10-K for the year ended December 31, 1999 filed with the Securities and Exchange Commission on March 20, 2000. 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):
June 30 | December 31 | |||||||||
2000 | 1999 | |||||||||
Unaudited | ||||||||||
Production Raw Materials | $ | 48,785 | $ | 79,434 | ||||||
Semifinished and Finished Steel Products | 169,377 | 182,517 | ||||||||
Total Production at FIFO | 218,162 | 261,951 | ||||||||
LIFO Reserve | (12,083 | ) | (9,214 | ) | ||||||
Total Production at LIFO | 206,079 | 252,737 | ||||||||
Nonproduction and Sundry | 17,314 | 17,071 | ||||||||
Total Inventories | $ | 223,393 | $ | 269,808 | ||||||
NOTE 3 DEBT
During the second quarter of 2000, Rouge Steel Company (Rouge Steel), the Companys primary operating subsidiary, executed an amendment (the Amendment) to its $125,000,000 revolving loan facility (the Credit Agreement). The Amendment changed, among other things, (i) a financial covenant, with which the Company would have been out of compliance and (ii) the expiration date of $25,000,000 of the commitments of the banks under the Credit Agreement. On December 31, 2000, $25,000,000 of the commitments of the banks will expire with the remaining $100,000,000 expiring on December 16, 2002. In addition, the Amendment includes provisions which would result in the loan becoming secured upon an Event of Default. 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
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Interbank Offered Rate plus a margin ranging from 0.725% to 1.20%, depending on the Companys debt to EBITDA ratio at the time of borrowing.
NOTE 4 POWERHOUSE EXPLOSION AND INSURANCE CLAIMS
Powerhouse Explosion. 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 Companys wholly-owned subsidiary. The loss of power resulted in the temporary shutdown of Rouge Steels 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 management, operation and maintenance of the Powerhouse.
The Companys 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 certain 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 Companys 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 1999. Any proceeds from the claims relating to Powerhouse property damage (other than amounts relating to repairs discussed in 1. above) 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. | |
During the second quarter of 2000, the Company received cash proceeds representing a partial settlement with its insurers regarding Rouge Steel first-party property damage and business interruption through March 31, 2000. The partial settlement covers all of the first-party property damage and substantially all aspects of the business interruption claim, including profit on lost sales, operating inefficiencies caused by the loss and costs to mitigate the claim. Three significant business interruption issues remain open for subsequent settlement: |
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a) | Excess utility costs During the period of indemnity, the Companys insurers have agreed to pay any excess utility costs above the costs that would have been incurred under the old Powerhouse configuration. Rouge Steel expects to incur excess utility costs until the new co-generation power plant, which is being constructed by CMS Energy Corporation (CMS), begins to provide the Company with electricity and steam. The insurers have paid $16,382,000 of excess utility costs incurred through March 31, 2000 and have agreed to settle any additional excess utility costs as the costs are incurred on a quarterly basis. | ||
b) | Blast furnace gas The Companys blast furnaces produce a by-product (blast furnace gas) which, before the explosion, was used by the Powerhouse to produce steam and served to reduce the Companys production costs. When the new co-generation power plant begins operating its steam boilers, the blast furnace gas will used by CMS. Until such time, however, the blast furnace gas, with a value of approximately $2,400,000 per month, is being flared. The Companys insurers have agreed to reimburse the Company for the value of the blast furnace gas which is being flared. The part of the claim related to blast furnace gas is still open and will be settled as the costs are incurred on a quarterly basis. | ||
c) | Temporary facilities During the first quarter of 1999, the Company installed temporary package steam boilers to provide heating and processing steam after the Powerhouse explosion. Additionally, a temporary electrical distribution system was installed. Although the temporary steam and electrical distribution systems have been in use for more than a year, the total costs are not known. The partial settlement included payments of $58,941,000 for the temporary boilers against a claim which is expected to be approximately $61,800,000 and payments of $7,564,000 for the temporary electrical distribution system against a claim which is expected to be approximately $7,600,000. When all the invoices have been received by Rouge Steel and reviewed by the insurers, the part of the claim related to the temporary facilities will be settled. |
The partial settlement resulted in net recoveries of $21,584,000 in excess of amounts previously recognized. |
Pursuant to the accounting methodology described above, with respect to items not fully settled, for the second quarter of 2000, the Company recorded recoverable insurance proceeds of $19,299,000 net of reserves of $6,173,000. As of June 30, 2000 $11,268,000 has been deferred and will be recognized in other income over the remaining period the related capital items are amortized. At June 30, 2000, the Company has a receivable of $17,427,000, which is net of reserves of $26,854,000 and advances of $78,505,000 from the insurance carriers which are still subject to settlement. Total cash proceeds through June 30, 2000 amount to $224,000,000.
BOF Incident. On January 7, 2000, a mechanical system failure occurred at Rouge Steels basic oxygen furnace facility (the BOF) which required approximately seven weeks to repair. The BOF operated at approximately 85% of its normal production capacity during the repair. The BOF incident is expected to result in a total loss of approximately $10,000,000. All amounts in excess of the $2,500,000 deductible and an $800,000 reserve recorded in the second quarter are
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expected to be covered under the Companys insurance program and are included in the recovery related receivable and other income.
With respect to unsettled matters in the insurance claims discussed above, the Company continues to discuss the determination of the total claims with its insurers. The Companys assessments of probability with respect to the receivables were made based on discussions with insurers and legal and financial experts retained to assist in the claim process. The estimates will change as additional information becomes available with respect to actual costs and as the insurers perform their review of claim information submitted by the Company. Based on the magnitude and complexity of the insurance claims, the Company is presently unable to reasonably estimate the amount of actual costs to be incurred in the future as well as the extent of the Companys exposure for amounts not covered by its insurance program.
In addition to costs discussed above, the Company is evaluating ancillary costs, including cleanup and abatement activities, relating to the explosion. Such amounts could be material to the Companys results of operations, cash flows and financial position during future periods. Based upon the available information, in 1999, the Company recorded a $3,000,000 reserve for its share of the minimum estimated cost to mitigate further environmental contamination at 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.
NOTE 5 EARNINGS PER SHARE
There was no difference between basic and diluted earnings per share in the three-month and six-month periods ended June 30, 2000 and 1999. The tables below present dilutive securities, which represent stock options granted to members of management or the board of directors with exercise prices lower than the average market price of the Companys Class A Common Stock, and anti-dilutive securities, which represent stock options granted to members of management or the board of directors with exercise prices higher than average market price of the Companys Class A Common Stock. All of these stock options will expire between 2004 and 2010.
For the Quarter Ended June 30 | |||||||||||||||||||||||||||||||||||
2000 | 1999 | ||||||||||||||||||||||||||||||||||
Range of | Range of | ||||||||||||||||||||||||||||||||||
Securities | Exercise Prices | Securities | Exercise Prices | ||||||||||||||||||||||||||||||||
Dilutive Securities | - | 16,467 | $8.75 | ||||||||||||||||||||||||||||||||
Anti-dilutive Securities | 656,450 | $7.88 - $28.88 | 370,025 | $11.44 - $28.88 |
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For the Six Months Ended June 30 | ||||||||||||||||||||||||||||
2000 | 1999 | |||||||||||||||||||||||||||
Range of | Range of | |||||||||||||||||||||||||||
Securities | Exercise Prices | Securities | Exercise Prices | |||||||||||||||||||||||||
Dilutive Securities | | 32,336 | $8.75 | |||||||||||||||||||||||||
Anti-dilutive Securities | 656,450 | $7.88 - $28.88 | 370,025 | $11.44 - $28.88 |
NOTE 6 COMMITMENTS AND CONTINGENCIES
Other than the matters discussed in Note 4, there have been no material changes to the commitments and contingencies discussed in the Companys Annual Report on Form 10-K for the year ended December 31, 1999.
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Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Comparison of the Three Month Periods Ended June 30, 2000 and 1999
Total Sales. Total sales for Rouge Industries, Inc. (together with its subsidiaries, Rouge Industries or the Company) increased 59.5% in the second quarter of 2000 to $276.2 million from $173.2 million in the second quarter of 1999, an increase of $103.0 million. The increase in total sales was caused principally by an increase in steel product shipments. Shipments increased 71.5% in the second quarter of 2000 to 638,000 net tons from 372,000 net tons in the second quarter of 1999, an increase of 266,000 net tons. Rouge Steel Companys (Rouge Steels) shipments were lower in the second quarter of 1999 primarily because of the disruption of production resulting from the February 1, 1999 explosion and fire at the Rouge Complex Powerhouse (the Powerhouse). The Company lost approximately 450,000 tons of slab production in the second quarter of 1999. A portion of the lost production was made up by purchased slabs and coils. The effect on the Company of the increase in total sales resulting from higher shipments in the second quarter of 2000 was partially offset by lower steel product selling prices and a less favorable product mix.
Costs and Expenses. Total costs and expenses increased 17.1% in the second quarter of 2000 to $306.4 million from $261.7 million in the second quarter of 1999, an increase of $44.7 million. Costs of goods sold increased 19.1% in the second quarter of 2000 to $284.9 million from $239.2 million in the second quarter of 1999, an increase of $45.7 million. The higher costs of goods sold was due to the lower shipments in 1999 resulting from the lost production discussed above, largely offset by lower costs related to the Powerhouse explosion and the less favorable product mix. Rouge Steel recorded continuing expenses associated with its steel making plant in the second quarter of 1999 even though its primary operations, which includes the blast furnaces, basic oxygen furnaces
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and continuous caster, did not resume production until May. Additionally, the Company recorded expenses for non-capital repairs to its damaged property. In the second quarter of 2000, the Powerhouse-explosion related costs were lower than 1999. Costs of goods sold in the second quarter of 2000 was 100.5% of total sales, down from 138.1% of total sales in the second quarter of 1999. See Powerhouse Explosion and Insurance Claim.
Operating Loss. The operating loss in the second quarter of 2000 was $30.2 million compared to an operating loss of $88.4 million in the second quarter of 1999, a decrease of $58.2 million. The decrease in the operating loss was primarily due to the effect on 1999 of the Powerhouse explosion discussed above.
Insurance Recovery. The Company recognized $40.1 million of income in the second quarter of 2000 for settled and anticipated insurance proceeds compared to $64.0 million in the second quarter of 1999, a decrease of $23.9 million. The Company reached a partial settlement of its first-party claim in the second quarter of 2000 which resulted in $21.6 million of recoveries in excess of previously recorded amounts. 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 of operations. The Company expects that the Powerhouse insurance claim may take another year to settle. Since the claim is not fully settled, 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 provision in the second quarter of 2000 was $3.3 million compared to an income tax benefit of $10.4 million in the second quarter of 1999. The income tax provision in the second quarter of 2000 was a function of taxable income.
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Net Income (Loss). Net income in the second quarter of 2000 was $6.9 million compared to a net loss of $14.8 million in the second quarter of 1999 primarily due to the Powerhouse explosion first-party settlement during 2000.
Comparison of the Six Month Periods Ended June 30, 2000 and 1999
Total Sales. Total sales increased 45.2% in the first half of 2000 to $591.1 million from $407.2 million in the first half of 1999, an increase of $183.9 million. The increase in total sales was caused principally by higher steel product shipments. Steel product shipments increased 51.4% in the first half of 2000 to 1,382,000 net tons from 913,000 net tons in the first half of 1999, an increase of 469,000 net tons. Rouge Steels shipments were lower in the first half 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 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 increase in total sales resulting from higher shipments in the first half of 2000 was partially offset by a less favorable product mix.
Costs and Expenses. Total costs and expenses increased 15.2% in the first half of 2000 to $657.0 million from $570.5 million in the first half of 1999, an increase of $86.5 million. Costs of goods sold increased 14.0% in the first half of 2000 to $612.9 million from $537.5 million in the first half of 1999, an increase of $75.4 million. The higher costs of goods sold in 2000 was primarily due to the lower shipments in 1999 resulting from the lost production discussed above and the cost associated with four unplanned outages in the first quarter of 2000, largely offset by lower costs related to the Powerhouse explosion and the less favorable product mix. Rouge Steel recorded continuing expenses associated with its steel making plant in the first half of 1999 despite the fact that the entire plant was shut down for 11 days and primary operations, which includes the blast furnaces, basic oxygen furnaces and continuous caster, did not resume production until May.
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Additionally the Company recorded expenses for non-capital repairs to its damaged property. Costs of goods sold in the first half of 2000 was 103.7% of total sales, compared to 132.0% of total sales in the first half of 1999. Depreciation and amortization increased in the first half of 2000 to $29.8 million from $21.0 million in the first half of 1999, an increase of $8.8 million. The increase in depreciation and amortization reflects the completion of major capital projects as well as 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. The first half of 2000 included six months of the amortization ($17.7 million) compared to three months in the first half of 1999 ($9.8 million). See Powerhouse Explosion and Insurance Claim.
Operating Loss. The operating loss decreased 59.6% in the first half of 2000 to $66.0 million from $163.4 million in the first half of 1999, a decrease of $97.4 million. The decrease in operating loss was primarily due to the Powerhouse explosion discussed above.
Insurance Recovery. The Company recognized $55.7 million of income in the first half of 2000 for settled and anticipated insurance proceeds compared to $122.4 million in the first half of 1999, a decrease of $66.7 million. The Company reached a partial settlement of its first-party claim in the first half of 2000 which resulted in $21.6 million of recoveries in excess of previously recorded amounts. See Powerhouse Explosion and Insurance Claim.
Income Tax (Provision) Benefit. The income tax benefit decreased 74.4% in the first half of 2000 to $4.5 million from $17.6 million in the first half of 1999, a decrease of $13.1 million. The income tax benefits were a function of the losses incurred.
Net Loss. The net loss decreased 77.1% in the first half of 2000 to $6.0 million from $26.4 million in the first half of 1999, a decrease of $20.4 million.
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Liquidity and Capital Resources
Cash Flows from Operating Activities. Net cash provided by operating activities increased 186.2% in the first half of 2000 to $118.0 million from $41.2 million in the first half of 1999, an increase of $76.8 million. The increase in net cash provided by operating activities was primarily attributable to the Powerhouse explosion and the resulting net loss representing a use of cash in 1999.
Capital Expenditures. Cash used for capital expenditures, including investments in unconsolidated subsidiaries, increased 55.8% in the first half of 2000 to $25.9 million from $16.6 million in the first half of 1999, an increase of $9.3 million. The expenditures made in the first half of 2000 were primarily to partially pay for the steam boilers which were installed after the Powerhouse explosion. During the remainder of 2000, capital expenditures will be generally directed at improving plant efficiency and product quality.
Credit Facility. Rouge Steel has a $125 million, revolving loan commitment under a credit agreement (the Credit Agreement). On December 31, 2000, $25 million of the commitments of the banks will expire with the remaining $100 million expiring on December 16, 2002. The Company had borrowings of $54.3 million under the facility as of June 30, 2000. The Company believes that net income and funds available under its credit facilities, along with anticipated insurance proceeds, will be adequate for its working capital and capital expenditure requirements.
Powerhouse Explosion and Insurance Claims
Powerhouse Explosion. On February 1, 1999, an explosion and fire at 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 Steels steel making facilities. The Powerhouse is owned 60% by
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Rouge Steel and 40% by Ford Motor Company (Ford). Ford was responsible for the day-to-day management, operation and maintenance of the Powerhouse.
The Companys 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 certain 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 Companys 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 1999. Any proceeds from the claims relating to Powerhouse property damage (other than amounts relating to repairs discussed in 1. above) 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. |
During the second quarter of 2000, the Company received cash proceeds representing a partial settlement with its insurers regarding Rouge Steel first-party property damage and business
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interruption through March 31, 2000. The partial settlement covers all of the first-party property damage and substantially all aspects of the business interruption claim, including profit on lost sales, operating inefficiencies caused by the loss and costs to mitigate the claim. Three significant business interruption issues remain open for subsequent settlement: |
a) | Excess utility costs During the period of indemnity, the Companys insurers have agreed to pay any excess utility costs above the costs that would have been incurred under the old Powerhouse configuration. Rouge Steel expects to incur excess utility costs until the new co-generation power plant, which is being constructed by CMS Energy Corporation (CMS), begins to provide the Company with electricity and steam. The insurers have paid $16.4 million of excess utility costs incurred through March 31, 2000 and have agreed to settle any additional excess utility costs as the costs are incurred on a quarterly basis. |
b) | Blast furnace gas The Companys blast furnaces produce a by-product (blast furnace gas) which, before the explosion, was used by the Powerhouse to produce steam and served to reduce the Company's production costs. When the new co-generation power plant begins operating its steam boilers, the blast furnace gas will be used by CMS. Until such time, however, the blast furnace gas, with a value of approximately $2.4 million per month, is being flared. The Companys insurers have agreed to reimburse the Company for the value of the blast furnace gas which is being flared. The part of the claim related to blast furnace gas is still open and will be settled as the costs are incurred on a quarterly basis. |
c) | Temporary facilities During the first quarter of 1999, the Company installed temporary package steam boilers to provide heating and processing steam after the Powerhouse explosion. Additionally, a temporary electrical distribution system was installed. Although the temporary steam and electrical distribution systems have been in use for |
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more than a year, the total costs are not known. The partial settlement included payments of $58.9 million for the temporary boilers against a claim which is expected to be approximately $61.8 million and payments of $7.6 million for the temporary electrical distribution system against a claim which is expected to be approximately $7.6 million. When all the invoices have been received by Rouge Steel and reviewed by the insurers, the part of the claim related to the temporary facilities will be settled. |
The partial settlement resulted in net recoveries of $21.6 million in excess of amounts previously recognized.
Pursuant to the accounting methodology described above, with respect to items not fully settled, for the second quarter of 2000, the Company recorded recoverable insurance proceeds of $19.3 million net of reserves of $6.2 million. As of June 30, 2000, $11.3 million has been deferred and will be recognized in other income over the remaining period the related capital items are amortized. At June 30, 2000, the Company has a receivable with respect to the Powerhouse explosion of $17.4 million, which is net of reserves of $26.9 million and advances of $78.5 million from the insurance carriers which are still subject to settlement. Total cash proceeds through June 30, 2000 amount to $224.0 million. The insurance recovery related receivable presented on the Companys consolidated balance sheet as of June 30, 2000 includes amounts for the Powerhouse explosion insurance claim as well as $6.7 million for the first quarter 2000 BOF incident.
BOF Incident. On January 7, 2000, a mechanical system failure occurred at Rouge Steels basic oxygen furnace facility (the BOF) which required approximately seven weeks to repair. The BOF operated at approximately 85% of its normal production capacity during the repair. The BOF incident is expected to result in a total loss of approximately $10 million. All amounts in excess of the $2.5 million deductible and an $800,000 reserve recorded in the second quarter are expected to
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be covered under the Companys insurance program and are included in the recovery related receivable and other income.
With respect to the unsettled matters in the insurance claims discussed above, the Company continues to discuss the determination of the total claim with its insurers. The Companys 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 evaluating ancillary costs, including cleanup and abatement activities, relating to the explosion. Such amounts could be material to the Companys results of operations, cash flows and financial position during future periods. Based on the available information, in 1999, the Company recorded a $3.0 million reserve for its share of the minimum estimated cost to mitigate further environmental contamination at 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 expects to fund the cash needs relating to the matters noted above from bank borrowings, insurance proceeds and working capital.
Recent Developments
Steel Market. The Company has recently encountered weakened steel demand and spot market pricing. The Company believes that the conditions contributing to the steel market deterioration are a result of inventory corrections, increased imports and concerns about the economy in light of higher interest rates and may be temporary.
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Labor Contract. On June 30, 2000, Rouge Steel and the United Auto Workers reached a tentative settlement agreement on a new four-year collective bargaining agreement covering Rouge Steels 2,400 production and maintenance employees. Although ratification of the early settlement was not successful, the Company has resumed discussions with the UAW in hopes of a timely and amicable resolution prior to the August 1, 2000 expiration of the present agreement.
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, 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 Companys 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 Companys markets, (iii) pricing of steel products in the Companys markets, (iv) potential environmental liabilities, (v) the availability and prices of raw materials, supplies, utilities and other services and items required by the Companys operations, (vi) uncertainty related to the Powerhouse explosion and the Companys ability to resolve the insurance claim and (vii) higher than expected operating costs.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time, Rouge Industries and its consolidated subsidiaries are defendants in routine lawsuits incidental to its business. The Company believes that such current proceedings, individually or in the aggregate, will not have a materially adverse effect on the Company.
Item 4. Submission of Matters to a Vote of Security Holders
Rouge Industries Annual Meeting of Stockholders was held on May 11, 2000. In connection with the meeting, proxies were solicited. Set forth below are the voting results on proposals considered and voted upon:
1) | Both nominees for Class III Director were elected by a plurality of the votes entitled to be cast by the stockholders who were present or represented by proxy. |
For | Withheld | |||||||
Clayton P. Shannon | 21,642,592 | 175,823 | ||||||
Carl L. Valdiserri | 19,693,357 | 2,125,058 |
2) | The appointment of PricewaterhouseCoopers LLP as the Companys independent public accountants for the fiscal year ending December 31, 2000 was ratified by a majority of the votes entitled to be cast by the stockholders who were present or represented by proxy. |
For | Against | Abstain | ||||||||||
Ratification of the appointment of PricewaterhouseCoopers LLP as Rouge Industries independent public accountants for the fiscal year ending December 31, 2000 | 21,703,546 | 55,586 | 59,283 |
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 |
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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: July 28, 2000 | ROUGE INDUSTRIES, INC. | |
By: /s/ Carl L. Valdiserri Name: Carl L. Valdiserri Title: Chairman of the Board and Chief Executive Officer |
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Date: July 28, 2000 |
By: /s/ Gary P. Latendresse Name: Gary P. Latendresse Title: Vice Chairman and Chief Financial Officer |
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EXHIBIT INDEX
Exhibit Number | Description of Exhibit | |
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15 | PricewaterhouseCoopers LLP Awareness Letter | |
27 | Financial Data Schedule |
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