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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 September 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 | 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
(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 October 25, 2000 was 22,202,272 which includes 15,061,872 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 SEPTEMBER 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 | 26 | |||||
Item 6. Exhibits and Reports on Form 8-K | 26 |
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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 September 30, 2000, and for the three-month and nine-month periods ended September 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.
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
October 20, 2000
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
ROUGE INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEETS
(amounts in thousands)
September 30 | December 31 | |||||||||||
2000 | 1999 | |||||||||||
Unaudited | ||||||||||||
Assets | ||||||||||||
Current Assets | ||||||||||||
Cash and Cash Equivalents | $ | 3,844 | $ | 1,861 | ||||||||
Accounts Receivable | ||||||||||||
Trade and Other (Net of Allowances | ||||||||||||
of $11,067 and $17,937) | 144,406 | 135,588 | ||||||||||
Insurance Recovery | 17,157 | 43,085 | ||||||||||
Affiliates | 2,201 | 2,643 | ||||||||||
Inventories | 242,014 | 269,808 | ||||||||||
Other Current Assets | 14,216 | 27,530 | ||||||||||
Total Current Assets | 423,838 | 480,515 | ||||||||||
Property, Plant, and Equipment | ||||||||||||
Land | 360 | 360 | ||||||||||
Buildings and Improvements | 23,122 | 23,000 | ||||||||||
Machinery and Equipment | 377,349 | 363,406 | ||||||||||
Construction in Progress | 12,721 | 13,145 | ||||||||||
Subtotal | 413,552 | 399,911 | ||||||||||
Less: Accumulated Depreciation | (164,259 | ) | (121,301 | ) | ||||||||
Net Property, Plant, and Equipment | 249,293 | 278,610 | ||||||||||
Investment in Unconsolidated Subsidiaries | 69,011 | 71,258 | ||||||||||
Deferred Taxes | 48,952 | 23,108 | ||||||||||
Deferred Charges and Other | 17,085 | 14,115 | ||||||||||
Total Assets | $ | 808,179 | $ | 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
September 30 | December 31 | ||||||||||
2000 | 1999 | ||||||||||
Unaudited | |||||||||||
Current Liabilities | |||||||||||
Accounts Payable | |||||||||||
Trade | $ | 183,924 | $ | 191,737 | |||||||
Affiliates | 8,239 | 9,890 | |||||||||
Accrued Vacation Pay | 10,942 | 10,484 | |||||||||
Deferred Insurance Recovery | 30,876 | 24,671 | |||||||||
Current Portion of Long-Term Debt | | 4,800 | |||||||||
Taxes Other than Income | 7,771 | 4,506 | |||||||||
Other Accrued Liabilities | 37,962 | 36,129 | |||||||||
Total Current Liabilities | 279,714 | 282,217 | |||||||||
Long-Term Debt | 49,400 | 100,000 | |||||||||
Other Postretirement Benefits | 71,326 | 63,936 | |||||||||
Other Liabilities | 12,100 | 11,678 | |||||||||
Commitments and Contingencies (Notes 4 and 6) | |||||||||||
Stockholders Equity | |||||||||||
Common Stock | |||||||||||
Class A, 80,000,000 shares authorized with 15,039,255 and | |||||||||||
14,570,511 issued and outstanding as of September 30, 2000 and | |||||||||||
December 31, 1999, respectively | 150 | 146 | |||||||||
Class B, 8,690,400 shares authorized with 7,140,400 and 7,562,400 | |||||||||||
issued and outstanding as of September 30, 2000 and | |||||||||||
December 31, 1999, respectively | 72 | 76 | |||||||||
Capital in Excess of Par Value | 130,115 | 129,943 | |||||||||
Retained Earnings | 268,101 | 282,409 | |||||||||
Accumulated Other Comprehensive Income (Loss) | (2,799 | ) | (2,799 | ) | |||||||
Total Stockholders Equity | 395,639 | 409,775 | |||||||||
Total Liabilities and Stockholders Equity | $ | 808,179 | $ | 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 Nine Months Ended | |||||||||||||||||
September 30 | September 30 | |||||||||||||||||
2000 | 1999 | 2000 | 1999 | |||||||||||||||
Sales | ||||||||||||||||||
Unaffiliated Customers | $ | 251,316 | $ | 249,336 | $ | 824,787 | $ | 633,597 | ||||||||||
Affiliates | 6,615 | 11,817 | 24,187 | 34,706 | ||||||||||||||
Total Sales | 257,931 | 261,153 | 848,974 | 668,303 | ||||||||||||||
Costs and Expenses | ||||||||||||||||||
Costs of Goods Sold | 267,752 | 283,294 | 880,618 | 820,777 | ||||||||||||||
Depreciation and Amortization | 13,803 | 19,915 | 43,567 | 40,942 | ||||||||||||||
Selling and Administrative Expenses | 6,497 | 5,693 | 20,912 | 20,606 | ||||||||||||||
Amortization of Excess of Net Assets Acquired | ||||||||||||||||||
Over Cost | | (1,449 | ) | | (4,347 | ) | ||||||||||||
Total Costs and Expenses | 288,052 | 307,453 | 945,097 | 877,978 | ||||||||||||||
Operating Loss | (30,121 | ) | (46,300 | ) | (96,123 | ) | (209,675 | ) | ||||||||||
Interest Income | 139 | 200 | 840 | 572 | ||||||||||||||
Interest Expense | (876 | ) | (1,180 | ) | (3,939 | ) | (1,693 | ) | ||||||||||
Insurance Recovery | 13,233 | 26,841 | 68,911 | 149,249 | ||||||||||||||
Other Net | 366 | 1,407 | 1,314 | (1,189 | ) | |||||||||||||
Loss Before Income Taxes and Equity | ||||||||||||||||||
in Unconsolidated Subsidiaries | (17,259 | ) | (19,032 | ) | (28,997 | ) | (62,736 | ) | ||||||||||
Income Tax Benefit | 10,239 | 7,600 | 14,745 | 25,236 | ||||||||||||||
Loss Before Equity in | ||||||||||||||||||
Unconsolidated Subsidiaries | (7,020 | ) | (11,432 | ) | (14,252 | ) | (37,500 | ) | ||||||||||
Equity in Unconsolidated Subsidiaries | 741 | 482 | 1,937 | 141 | ||||||||||||||
Net Loss | $ | (6,279 | ) | $ | (10,950 | ) | $ | (12,315 | ) | $ | (37,359 | ) | ||||||
Per Share Amounts | ||||||||||||||||||
Net Loss Basic and Diluted | $ | (0.28 | ) | $ | (0.49 | ) | $ | (0.56 | ) | $ | (1.69 | ) | ||||||
Cash Dividends Declared | $ | 0.03 | $ | 0.03 | $ | 0.09 | $ | 0.09 | ||||||||||
Weighted Average Shares Outstanding | 22,145,791 | 22,130,462 | 22,138,529 | 22,118,142 | ||||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
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ROUGE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(amounts in thousands)
Unaudited
For the Quarter Ended | For the Nine Months Ended | |||||||||
September 30, 2000 | September 30, 2000 | |||||||||
Common Stock | ||||||||||
Beginning Balance | $ | 222 | $ | 222 | ||||||
Common Stock Issued for Employee Benefit Plans | | | ||||||||
Ending Balance | 222 | 222 | ||||||||
Capital in Excess of Par Value | ||||||||||
Beginning Balance | 129,966 | 129,943 | ||||||||
Common Stock Issued for Benefit Plans | 149 | 172 | ||||||||
Ending Balance | 130,115 | 130,115 | ||||||||
Retained Earnings | ||||||||||
Beginning Balance | 275,045 | 282,409 | ||||||||
Net Loss and Comprehensive Loss | (6,279 | ) | (12,315 | ) | ||||||
Cash Dividends Declared | (665 | ) | (1,993 | ) | ||||||
Ending Balance | 268,101 | 268,101 | ||||||||
Accumulated Other Comprehensive Loss | ||||||||||
Beginning and Ending Balance | (2,799 | ) | (2,799 | ) | ||||||
Total Stockholders Equity | $ | 395,639 | $ | 395,639 | ||||||
Comprehensive Loss | ||||||||||
Net Loss and Comprehensive Loss | $ | (6,279 | ) | $ | (12,315 | ) | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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ROUGE INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Unaudited
For the Nine Months Ended | ||||||||||||
September 30 | ||||||||||||
2000 | 1999 | |||||||||||
Cash Flows From Operating Activities | ||||||||||||
Net Loss | $ | (12,315 | ) | $ | (37,359 | ) | ||||||
Adjustments to Reconcile Net Loss to Net Cash | ||||||||||||
Provided By (Used for) Operating Activities: | ||||||||||||
Deferred Taxes | (9,490 | ) | (25,194 | ) | ||||||||
Depreciation and Amortization | 43,567 | 40,942 | ||||||||||
Equity in Unconsolidated Subsidiaries | ||||||||||||
(1,937 | ) | (141 | ) | |||||||||
Amortization of Excess of Net Assets Acquired Over Cost | | (4,347 | ) | |||||||||
Common Stock Issued for Benefit Plans | 172 | 475 | ||||||||||
Changes in Assets and Liabilities: | ||||||||||||
Accounts Receivable | 17,553 | (106,522 | ) | |||||||||
Inventories | 29,943 | 18,804 | ||||||||||
Prepaid Expenses | (6,987 | ) | 651 | |||||||||
Accounts Payable and Accrued Liabilities | 18,350 | 42,825 | ||||||||||
Deferred Insurance Recovery | 6,205 | 39,951 | ||||||||||
Other Net | | 2,083 | ||||||||||
Net Cash Provided by (Used for) Operating Activities | 85,061 | (27,832 | ) | |||||||||
Cash Flows From Investing Activities | ||||||||||||
Capital Expenditures | (28,838 | ) | (21,219 | ) | ||||||||
Investment in Unconsolidated Subsidiaries | (1,008 | ) | (546 | ) | ||||||||
Distributions from Unconsolidated Subsidiaries | 4,267 | 308 | ||||||||||
Other Net | (106 | ) | | |||||||||
Net Cash Used for Investing Activities | (25,685 | ) | (21,457 | ) | ||||||||
Cash Flows From Financing Activities | ||||||||||||
Drawdowns on Revolving Line | 290,500 | 326,800 | ||||||||||
Principal Payments on Revolving Line | (345,900 | ) | (268,800 | ) | ||||||||
Cash Dividend Payments | (1,993 | ) | (1,992 | ) | ||||||||
Net Cash Provided by (Used for) Financing Activities | (57,393 | ) | 56,008 | |||||||||
Net Increase in Cash and Cash Equivalents | 1,983 | 6,719 | ||||||||||
Cash and Cash Equivalents Beginning of Period | 1,861 | 2,418 | ||||||||||
Cash and Cash Equivalents End of Period | $ | 3,844 | $ | 9,137 | ||||||||
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. During the third quarter of 2000, the Companys assessment of its deferred tax assets and the related valuation allowance resulted in a net benefit of $4,400,000, which was included in the tax provision for the period. The foregoing interim results are not necessarily indicative of the results of operations expected for the full fiscal year ending December 31, 2000.
During the fourth quarter of 2000, the Company will adopt Staff Accounting Bulletin 101, Revenue Recognition and Emerging Issues Task Force Issue 00-10, Accounting for Shipping and Handling Fees and Costs. During the first quarter of 2001, the Company will adopt Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. Although these pronouncements are not expected to have a significant impact on the Companys results of operations or financial position, the Company continues to evaluate the full extent of such impact.
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):
September 30 | December 31 | ||||||||||
2000 | 1999 | ||||||||||
Unaudited | |||||||||||
Production Raw Materials | $ | 57,340 | $ | 79,434 | |||||||
Semifinished and Finished Steel Products | 178,460 | 182,517 | |||||||||
Total Production at FIFO | 235,800 | 261,951 | |||||||||
LIFO Reserve | (9,958 | ) | (9,214 | ) | |||||||
Total Production at LIFO | 225,842 | 252,737 | |||||||||
Nonproduction and Sundry | 16,172 | 17,071 | |||||||||
Total Inventories | $ | 242,014 | $ | 269,808 | |||||||
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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 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 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 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 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 have been capitalized and are being 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 |
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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. The Company and its insurers are presently discussing the period of indemnity for the Powerhouse claim. The Company's insurers have indicated that coverage for business interruption costs incurred after December 31, 2000 may be denied, a prospect the Company will vigorously contest. The business interruption issues that remain open for subsequent settlement are listed below. |
1) | 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 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. | ||
2) | Blast furnace gas The Companys blast furnaces produce a by-product fuel (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 during the period of indemnity. The part of the claim related to blast furnace gas is still open and will be settled as the costs are incurred. | ||
3) | 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, all of the invoices have not been received by Rouge Steel and reviewed by the insurers. The partial settlement included payments of $58,941,000 for the temporary boilers against a claim which is expected to be approximately $60,400,000 and payments of $7,564,000 for the temporary electrical distribution system against a claim which is expected to be approximately $11,200,000. 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. |
During the second quarter of 2000, the partial first-party settlement resulted in net recoveries of $21,584,000 in excess of amounts previously recognized. During the third quarter of 2000, the Company received a cash advance of $9,800,000 related to the open business interruption issues.
Pursuant to the accounting methodology described above, with respect to items not fully settled, during the third quarter of 2000, the Company recorded recoverable insurance proceeds of $13,233,000. As of September 30, 2000, $5,876,000 has been deferred and will be recognized in income over the period the related capital items are amortized. During the third quarter, the Company received an advance of $25,000,000 related to the Powerhouse claim, which has been deferred and will be recognized in income in future periods as certain costs are incurred or when the claim is settled. At September 30, 2000, the Company has a receivable with respect to the Powerhouse explosion of $11,815,000, which is net of reserves of $26,874,000 and advances from the insurance carriers of $88,261,000. Total cash proceeds through September 30, 2000 amount to $258,800,000.
With respect to unsettled matters in the Powerhouse insurance claim discussed above, the Company continues to discuss the determination of the total claim with its insurers. The Companys
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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 claim, 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, during the first quarter of 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.
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. A $2,500,000 deductible and $7,500,000 of recoverable insurance proceeds were recorded in the first quarter and an $800,000 reserve was recorded in the second quarter. The Company settled the BOF claim in the third quarter for an amount which was not materially different than amounts previously recorded. The recovery related receivable includes $5,342,000 associated with the BOF incident.
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NOTE 5 EARNINGS PER SHARE
There was no difference between basic and diluted earnings per share in the three-month and nine-month periods ended September 30, 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 presently 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 presently higher than the average market price of the Companys Class A Common Stock. All of the stock options will expire between 2004 and 2010.
For the Quarter Ended September 30 | ||||||||||||||||
2000 | 1999 | |||||||||||||||
Range of | ||||||||||||||||
Securities | Exercise Prices | Securities | Exercise Prices | |||||||||||||
Dilutive Securities | | | ||||||||||||||
Anti-dilutive Securities | 656,450 | $ | 7.88 - $28.88 | 542,425 | $ | 8.75 - $28.88 |
For the Nine Months Ended September 30 | ||||||||||||||||
2000 | 1999 | |||||||||||||||
Range of | Range of | |||||||||||||||
Securities | Exercise Prices | Securities | Exercise Prices | |||||||||||||
Dilutive Securities | | 170,800 | $ | 8.75 | ||||||||||||
Anti-dilutive Securities | 656,450 | $ | 7.88 - $28.88 | 341,950 | $ | 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
Comparison of the Three Month Periods Ended September 30, 2000 and 1999
Total Sales. Total sales for Rouge Industries, Inc. (Rouge Industries or the Company) decreased 1.2% in the third quarter of 2000 to $257.9 million from $261.1 million in the third quarter of 1999, a decrease of $3.2 million. The decrease in total sales resulted from lower steel product shipments partially offset by improved prices since the third quarter of 1999 and improved product mix. Steel product shipments decreased 7.3% in the third quarter of 2000 to 622,000 net tons from 671,000 net tons in the third quarter of 1999, a decrease of 49,000 net tons. Since the third quarter of 1999, there have been three spot market price increases. In the third quarter of 2000, although prices dropped significantly from the second quarter, the average quarter prices were higher than a year ago. Steel product shipments were higher in the third quarter of 1999, but the Company had taken orders in less profitable markets to compensate for orders lost when, during the production outage related to the Rouge Complex Powerhouse (the Powerhouse) explosion, customers in more profitable markets placed orders with other steel companies through September. The absence of these less profitable orders resulted in a mix improvement in the third quarter of 2000.
Costs and Expenses. Total costs and expenses decreased 6.3% in the third quarter of 2000 to $288.1 million from $307.5 million in the third quarter of 1999, a decrease of $19.4 million. Costs of goods sold decreased 5.5% in the third quarter of 2000 to $267.8 million from $283.3 million in the third quarter of 1999, a decrease of $15.5 million. The decrease in costs of goods sold was due to the lower steel product shipments discussed above and lower costs related to the Powerhouse explosion. Costs of goods sold in the third quarter of 2000 was 103.8% of total sales compared to 108.5% of total sales in the third quarter of 1999. Depreciation and amortization decreased 30.7% in the third quarter of 2000 to $13.8 million from $19.9 million in the third quarter of 1999, a decrease of $6.1 million. The lower depreciation and amortization expense is primarily attributable
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to lower amortization of the cost of the temporary steam boilers and electrical distribution systems installed to provide the Company with steam and electricity until the new power plant is placed into service. Last year, it was believed that the new power plant would be placed into service in the third quarter of 2000; therefore, the amortization period was only 13 months. It is now believed that the new power plant will not be placed into service until early 2001. The longer assumed amortization period caused the amount amortized in the third quarter of 2000 to be lower than the amount amortized in the third quarter of 1999. See Powerhouse Explosion and Insurance Claims.
Operating Loss. The operating loss decreased 34.9% in the third quarter of 2000 to $30.1 million from $46.3 million in the third quarter of 1999, a decrease of $16.2 million. The decrease in operating loss was primarily due to higher costs from the Powerhouse explosion last year partially offset by lower shipments this year.
Insurance Recovery. The Company recognized $13.2 million of income in the third quarter of 2000 for anticipated insurance recovery compared to $26.8 million in the third quarter of 1999, a decrease of $13.6 million. 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. The Company reached a partial settlement of its first-party claim in the second quarter of 2000; however, it is expected that the Powerhouse insurance claim may take another several months 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 Claims.
Income Tax Benefit. The income tax benefit increased 34.7% in the third quarter of 2000 to $10.2 million from $7.6 million in the third quarter of 1999, an increase of $2.6 million. The income tax benefit in the third quarter of 1999 was a function of the loss incurred. In the third quarter of
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2000, the income tax benefit reflected the loss incurred plus a net benefit of $4.4 million, which reflected the Companys assessment of its deferred tax assets and the change in the related valuation allowance.
Net Loss. The net loss decreased 42.7% in the third quarter of 2000 to $6.3 million from $11.0 million in the third quarter of 1999, a decrease of $4.7 million. The decrease was primarily due to lower Powerhouse explosion - related costs, partially offset by lower steel product shipments and the change in the income tax valuation allowance discussed above.
Comparison of the Nine Month Periods Ended September 30, 2000 and 1999
Total Sales. Total sales increased 27.0% in the first nine months of 2000 to $849.0 million from $668.3 million in the first nine months of 1999, an increase of $180.7 million. The increase in total sales in the first nine months of 2000 was caused principally by higher steel product shipments. Steel product shipments increased 26.5% in the first nine months of 2000 to 2,004,000 net tons from 1,584,000 net tons in the first nine months of 1999, an increase of 420,000 net tons. Rouge Industries shipments were lower in the first nine months of 1999 because of the disruption of production resulting from the February 1, 1999 explosion and fire at the Powerhouse. The Company lost approximately 900,000 tons of slab production in the first half of 1999. A portion of the lost production was made up by processing semi-finished inventories and purchased slabs and coils. The effect on the Company of the increase in total sales in the first nine months of 2000 resulting from higher shipments was partially offset by a less favorable product mix.
Costs and Expenses. Total costs and expenses increased 7.6% in the first nine months of 2000 to $945.1 million from $878.0 million in the first nine months of 1999, an increase of $67.1 million. Costs of goods sold increased 7.3% in the first nine months of 2000 to $880.6 million from $820.8 million in the first nine months of 1999, an increase of $59.8 million. The increase in costs of goods sold was primarily due to higher steel product shipments in the first nine months of 2000 resulting from the lost production in 1999 discussed above, largely offset by lower costs in 2000 related to
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the Powerhouse explosion in 1999. Rouge Steel Company (Rouge Steel), the Companys primary operating subsidiary, recorded continuing expenses associated with its steel making plant in the first nine months of 1999 despite the entire plant being shut down for 11 days and primary operations, which includes the blast furnaces, basic oxygen furnaces and continuous caster, not resuming production until more than three months after the Powerhouse explosion. Additionally, the Company recorded expenses for non-capital repairs to its damaged property. Costs of goods sold in the first nine months of 2000 was 103.7% of total sales compared to 122.8% of total sales in the first nine months of 1999. Depreciation and amortization increased 6.4% in the first nine months of 2000 to $43.6 million from $41.0 million in the first nine months of 1999, an increase of $2.6 million. The higher depreciation and amortization expense in 2000 reflects nine months of amortization of the cost of the temporary steam boilers and electrical distribution systems installed to provide the Company with steam and electricity until the new power plant is placed into service. The first nine months of 1999 included fewer months of such amortization because the facilities were not capitalized until March and May. See Powerhouse Explosion and Insurance Claims.
Operating Loss. The operating loss decreased 54.2% in the first nine months of 2000 to $96.1 million from $209.7 million in the first nine months of 1999, a decrease of $113.6 million. The decrease in the operating loss was primarily due to the Powerhouse explosion in 1999 discussed above.
Insurance Recovery. The Company recognized $68.9 million of income in the first nine months of 2000 for anticipated insurance proceeds compared to $149.2 million in the first nine months of 1999, a decrease of $80.3 million. 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 reached a partial settlement of its first-party claim in the second quarter of 2000, however it is expected that the Powerhouse insurance claim may take another several months to settle. Since the claim is not fully settled, the Company
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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 Claims.
Income Tax Benefit. The income tax benefit decreased 41.6% in the first nine months of 2000 to $14.7 million from $25.2 million in the first nine months of 1999, a decrease of $10.5 million. The income tax benefit in the first nine months of 1999 was a function of the loss incurred. In the first nine months of 2000, the income tax benefit reflected the loss incurred plus a net benefit of $4.4 million, which reflected the Companys assessment of its deferred tax assets and the change in the related valuation allowance.
Net Loss. The net loss decreased 67.0% in the first nine months of 2000 to $12.3 million from $37.4 million in the first nine months of 1999, a decrease of $25.1 million. The lower net loss was primarily due to lower expenses related to the Powerhouse explosion in the first nine months of 2000, partially offset by the change in the income tax valuation allowance discussed above.
Financial Condition, Liquidity and Capital Resources
Cash and cash equivalents on September 30, 2000 totaled $3.8 million compared to $1.9 million on December 31, 1999, an increase of $1.9 million. Cash used for financing activities and capital expenditures offset cash provided by operating activities during the first nine months of 2000.
Cash Flows from Operating Activities. Net cash provided by operating activities was $85.1 million in the first nine months of 2000 compared to net cash used for operating activities of $27.8 million in the first nine months of 1999. The net cash provided by operating activities was primarily attributable to lower net loss, accounts receivable, and inventories.
Capital Expenditures. Cash used for capital expenditures, including investments in unconsolidated subsidiaries, increased 37.1% in the first nine months of 2000 to $29.8 million from $21.8 million in the first nine months of 1999, an increase of $8.0 million. The expenditures made
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in the first nine months of 2000 were primarily for the temporary steam boilers which were installed after the Powerhouse explosion and the permanent electrical distribution facility being constructed to replace those facilities destroyed in the Powerhouse explosion. Other expenditures were made to modernize and expand the Companys facilities. During the remainder of 2000, capital expenditures will be generally directed toward non-discretionary projects designed to maintain the Companys facilities.
Credit Facility. Rouge Steel, a wholly-owned subsidiary of Rouge Industries, 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. Rouge Steel had borrowings of $49.4 million under the Credit Agreement as of September 30, 2000. In addition to the Credit Agreement, the Company is currently negotiating an additional credit facility. It is expected that once this new facility is put into place, the borrowing capacity of the Company will be $175 million. The Company believes that cash flows from operations and funds available under its credit facilities, along with anticipated insurance proceeds, will be adequate for its working capital and capital expenditure requirements.
Powerhouse Explosion and Insurance Claims
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 Rouge Steel and 40% by Ford Motor Company (Ford). Ford was responsible for the day-to-day management, operation and maintenance of the Powerhouse.
Rouge Industries insurance program provides coverage for damage to property destroyed, interruption of business operations, including profit recovery, and expenditures incurred to minimize
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the period and total cost of disruption to operations. The Company continues to evaluate its potential insurance recoveries in three areas:
1. | Damage to Rouge Steel property and Powerhouse property as a result of the explosion Costs for repairs are being expensed as incurred, with related estimated insurance recoveries recorded as they are considered to be probable, up to the amount of the actual costs incurred. | |
2. | Rouge Steel business interruption costs The non-capitalizable costs are being expensed as incurred. Estimated insurance recoveries are recorded to the extent such recoveries are considered to be probable. Recoveries in excess of actual costs incurred will be recorded as gains when the claims are settled and proceeds are received. Certain costs relating to temporary steam boilers and electrical distribution equipment which were procured to mitigate the Companys loss from the Powerhouse explosion have been capitalized and are being amortized over their estimated useful lives. Insurance recoveries relating to these items are being recognized over the same periods. The amount capitalized for these temporary facilities was approximately $71.6 million. | |
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 property damage claims (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 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. The Company and its insurers are presently discussing the period of indemnity for the Powerhouse claim. The Company's insurers have indicated that coverage for business interruption costs incurred after December 31, 2000 may be denied, a prospect the Company will
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vigorously contest. The business interruption issues that remain open for the subsequent settlement are listed below.
1) | 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 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. | ||
2) | Blast furnace gas The Companys blast furnaces produce a by-product fuel (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 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 during the period of indemnity. The part of the claim related to blast furnace gas is still open and will be settled as the costs are incurred. | ||
3) | 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, all of the invoices have not been received by Rouge Steel and reviewed by the insurers. The partial settlement included payments of $58.9 million for the temporary boilers against a claim which is expected to be approximately $60.4 million and payments of $7.6 million for the temporary electrical distribution system against a claim which is expected to be approximately $11.2 million. When all the invoices have been received by Rouge Steel and reviewed |
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by the insurers, the part of the claim related to the temporary facilities will be settled. |
During the second quarter of 2000, the partial first-party settlement resulted in net recoveries of $21.6 million in excess of amounts previously recognized. During the third quarter of 2000, the Company received a cash advance of $9.8 million related to the open business interruption issues.
Pursuant to the accounting methodology described above, with respect to items not fully settled, during the third quarter of 2000, the Company recorded recoverable insurance proceeds of $13.2 million. As of September 30, 2000, $5.9 million has been deferred and will be recognized in income over the remaining period the related capital items are amortized. During the third quarter, the Company received an advance of $25.0 million related to the Powerhouse claim, which has been deferred and will be recognized in income in future periods as certain costs are incurred or when the claim is settled. At September 30, 2000, the Company has a receivable with respect to the Powerhouse explosion of $11.8 million, which is net of reserves of $26.9 million and advances of $88.3 million from the insurance carriers. Total cash proceeds through September 30, 2000 amount to $258.8 million.
With respect to the unsettled matters in the Powerhouse insurance claim 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. Based on the magnitude and complexity of the insurance claim, the Company is presently unable to definitively 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 currently evaluating ancillary costs, including cleanup and abatement activities, relating to the explosion. Such amounts could be
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material to the Companys results of operations, cash flows and financial position during future periods. Based on the available information, during the first quarter of 1999, the Company recorded a $3.0 million reserve for its share of the 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.
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. A $2.5 million deductible and $7,500,000 of recoverable insurance proceeds were recorded in the first quarter and an $800,000 reserve was recorded in the second quarter. The Company settled the BOF claim in the third quarter for an amount which was not materially different than amounts previously recorded. The recovery related receivable includes $5.3 million associated with the BOF incident.
Recent Developments
Steel Market. The Company has 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 are likely to continue into the first quarter of 2001.
Labor Contract. On August 9, 2000, the United Auto Workers ratified a new four-year contract covering Rouge Steels 2,400 production and maintenance employees. This new contract provides for wage and benefit improvements in each of the four years, expanded means for employees to participate in the success of the business and provisions for the Company to more effectively and efficiently utilize its work force.
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EVTAC Fire. On October 13, 2000, Eveleth Mines LLC (EVTAC) the Companys 45%- owned pellet producing subsidiary, experienced a fire in its pellet load-out conveyor system which caused a complete cessation of iron ore pellet production. Preliminary estimates of the loss prior to insurance recovery range from $11.0 million to $15.0 million, including property damage costs and the business interruption impact. The Company expects that EVTAC operations will be restored by early November using temporary conveyors. EVTACs insurance program provides coverage for property damage costs, business interruption losses, profit recovery, and loss mitigation expenditures in excess of a $500,000 property damage deductible and a five-day waiting period deductible on business interruption losses. The fire and subsequent outage are not expected to have a material impact on the Companys ability to procure sufficient pellets for its operations.
Recent Accounting Pronouncements. During the fourth quarter of 2000, the Company will adopt Staff Accounting Bulletin 101, Revenue Recognition and Emerging Issues Task Force Issue 00-10, Accounting for Shipping and Handling Fees and Costs. During the first quarter of 2001, the Company will adopt Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. Although these pronouncements are not expected to have a significant impact on the Companys results of operations or financial position, the Company continues to evaluate the full extent of such impact.
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, insurance claims and other future plans and strategies.
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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 (vii) uncertainty related to the EVTAC fire and EVTACs ability to resolve the insurance claim and (viii) 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 their businesses. The Company believes that such 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 exhibits are included in this report.
Exhibit Number 15 |
Description of Exhibit PricewaterhouseCoopers LLP Awareness Letter |
|
27 | Financial Data Schedule |
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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 hereunto duly authorized.
Date: | October 26, 2000 | ROUGE INDUSTRIES, INC. | ||
By: /s/ Carl L. Valdiserri | ||||
Name: Carl L. Valdiserri | ||||
Title: Chairman of the Board and | ||||
Chief Executive Officer | ||||
Date: | October 26, 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 15 |
Description of Exhibit PricewaterhouseCoopers LLP Awareness Letter |
|
27 | Financial Data Schedule |
|