United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
or
o 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:
IPSCO Inc.
(Exact name of registrant as specified in its charter)
CANADA
(State or other jurisdiction of incorporation or organization)
98-0077354
(I.R.S. Employer Identification No.)
650 Warrenville Road, Suite 500, Lisle, Illinois 60532
Telephone: (630)-810-4800
(Address and telephone number of principal executive offices)
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.
x Yes o No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x | Accelerated filer o | Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes x No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
o Yes o No
The number of shares of common stock outstanding as of July 31, 2006 is 47,185,923.
IPSCO Inc.
Form 10-Q, June 30, 2006
Table of Contents
IPSCO Inc.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (unaudited)
(thousands of United States Dollars except for per share and ton data)
|
| For the Three Months Ended |
| For the Six Months Ended |
| |||||||||
|
| June 30 |
| June 30 |
| June 30 |
| June 30 |
| |||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| |||||
Plate and Coil Tons Produced (thousands) |
| 952.5 |
| 857.7 |
| 1,848.1 |
| 1,675.2 |
| |||||
Finished Tons Shipped (thousands) |
| 1,001.0 |
| 803.5 |
| 2,006.4 |
| 1,659.3 |
| |||||
|
|
|
|
|
|
|
|
|
| |||||
Sales |
| $ | 893,558 |
| $ | 687,674 |
| $ | 1,796,454 |
| $ | 1,454,412 |
| |
Cost of sales |
| 632,007 |
| 457,321 |
| 1,255,436 |
| 956,472 |
| |||||
Gross income |
| 261,551 |
| 230,353 |
| 541,018 |
| 497,940 |
| |||||
Selling, general and administration |
| 18,694 |
| 16,141 |
| 51,080 |
| 34,478 |
| |||||
Operating income |
| 242,857 |
| 214,212 |
| 489,938 |
| 463,462 |
| |||||
Other expenses (income): |
|
|
|
|
|
|
|
|
| |||||
Interest on long-term debt |
| 5,708 |
| 9,675 |
| 11,541 |
| 20,403 |
| |||||
Net interest income |
| (8,208 | ) | (3,240 | ) | (15,223 | ) | (6,023 | ) | |||||
Loss on early extinguishment of debt |
| — |
| 10,249 |
| — |
| 10,249 |
| |||||
Foreign exchange gain |
| (5,083 | ) | (759 | ) | (3,759 | ) | (1,153 | ) | |||||
Other |
| (106 | ) | 80 |
| (218 | ) | (15 | ) | |||||
Income Before Income Taxes |
| 250,546 |
| 198,207 |
| 497,597 |
| 440,001 |
| |||||
Income Tax Expense |
| 94,178 |
| 71,354 |
| 190,528 |
| 158,380 |
| |||||
Net Income |
| 156,368 |
| 126,853 |
| 307,069 |
| 281,621 |
| |||||
Cumulative translation adjustment |
| 29,234 |
| (3,681 | ) | 30,460 |
| (1,722 | ) | |||||
Fair value of derivatives, net of tax |
| (2,286 | ) | (956 | ) | (7,684 | ) | 3,085 |
| |||||
Comprehensive income |
| $ | 183,316 |
| $ | 122,216 |
| $ | 329,845 |
| $ | 282,984 |
| |
Earnings per Common Share | —Basic |
| $ | 3.28 |
| $ | 2.60 |
| $ | 6.43 |
| $ | 5.71 |
|
| —Diluted |
| $ | 3.25 |
| $ | 2.57 |
| $ | 6.36 |
| $ | 5.64 |
|
Dividends Declared per Common Share |
| $ | 0.20 |
| $ | 0.14 |
| $ | 0.38 |
| $ | 0.26 |
|
IPSCO Inc.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (unaudited)
(thousands of United States Dollars)
|
| For the Three Months Ended |
| For the Six Months Ended |
| ||||||||
|
| June 30 |
| June 30 |
| June 30 |
| June 30 |
| ||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
Retained Earnings at Beginning of Period |
| $ | 1,484,910 |
| $ | 1,021,299 |
| $ | 1,341,659 |
| $ | 884,859 |
|
Net Income |
| 156,368 |
| 126,853 |
| 307,069 |
| 281,621 |
| ||||
Common Share Repurchase |
| (75,096 | ) | (83,698 | ) | (75,096 | ) | (97,068 | ) | ||||
Dividends on Common Shares |
| (8,488 | ) | (5,496 | ) | (15,938 | ) | (10,454 | ) | ||||
Retained Earnings at End of Period |
| $ | 1,557,694 |
| $ | 1,058,958 |
| $ | 1,557,694 |
| $ | 1,058,958 |
|
2
IPSCO Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands of United States Dollars)
|
| For the Three Months Ended |
| For the Six Months Ended |
| ||||||||
|
| June 30 |
| June 30 |
| June 30 |
| June 30 |
| ||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
Operating Activities |
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 156,368 |
| $ | 126,853 |
| $ | 307,069 |
| $ | 281,621 |
|
Adjustments to reconcile net income to net cash flows |
|
|
|
|
|
|
|
|
| ||||
Loss on early extinguishment of debt |
| — |
| 10,249 |
| — |
| 10,249 |
| ||||
Unrealized foreign exchange gain |
| — |
| (1,939 | ) | — |
| (1,939 | ) | ||||
Stock-based compensation |
| 411 |
| 523 |
| 1,648 |
| 981 |
| ||||
Depreciation of capital assets |
| 13,212 |
| 20,288 |
| 33,295 |
| 40,090 |
| ||||
Amortization of deferred charges |
| 538 |
| 505 |
| 999 |
| 875 |
| ||||
Deferred income taxes |
| (6,937 | ) | 4,833 |
| (6,133 | ) | 44,422 |
| ||||
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
| ||||
Accounts receivable, less allowances |
| 11,596 |
| 59,922 |
| (1,129 | ) | 85,448 |
| ||||
Inventories |
| (88,958 | ) | (60,921 | ) | (132,314 | ) | (54,505 | ) | ||||
Other |
| 1,299 |
| 1,562 |
| 2,734 |
| 4,142 |
| ||||
Accounts payable and accrued charges |
| (3,227 | ) | (29,780 | ) | (30,935 | ) | (68,274 | ) | ||||
Change in deferred pension liability |
| (265 | ) | (747 | ) | (443 | ) | 345 |
| ||||
Income taxes payable |
| (66,802 | ) | 48,484 |
| (37,450 | ) | (12,366 | ) | ||||
Net cash provided by operations |
| 17,235 |
| 179,832 |
| 137,341 |
| 331,089 |
| ||||
Investing Activities |
|
|
|
|
|
|
|
|
| ||||
Expenditures for capital assets |
| (11,811 | ) | (8,813 | ) | (42,410 | ) | (22,171 | ) | ||||
Proceeds from mortgage receivable, net |
| 735 |
| 370 |
| 971 |
| 1,827 |
| ||||
Investments |
| 330 |
| 71 |
| — |
| (99 | ) | ||||
Net cash used for investing activities |
| (10,746 | ) | (8,372 | ) | (41,439 | ) | (20,443 | ) | ||||
Financing Activities |
|
|
|
|
|
|
|
|
| ||||
Common share dividends |
| (8,488 | ) | (5,496 | ) | (15,938 | ) | (10,454 | ) | ||||
Common shares issued pursuant to share |
| 5,036 |
| 5,494 |
| 5,483 |
| 16,423 |
| ||||
Common share repurchase |
| (85,500 | ) | (104,896 | ) | (85,500 | ) | (121,157 | ) | ||||
Repayment of long-term debt |
| — |
| (123,248 | ) | (4,991 | ) | (127,837 | ) | ||||
Net cash used for financing activities |
| (88,952 | ) | (228,146 | ) | (100,946 | ) | (243,025 | ) | ||||
Effect of exchange rate changes on cash and cash |
| 21,131 |
| (935 | ) | 23,972 |
| 1,506 |
| ||||
Increase (decrease) in Cash and Cash Equivalents |
| (61,332 | ) | (57,621 | ) | 18,928 |
| 69,127 |
| ||||
Cash and Cash Equivalents at Beginning of |
| 663,324 |
| 481,522 |
| 583,064 |
| 354,774 |
| ||||
Cash and Cash Equivalents at End of Period |
| $ | 601,992 |
| $ | 423,901 |
| $ | 601,992 |
| $ | 423,901 |
|
3
IPSCO Inc.
CONSOLIDATED BALANCE SHEETS (unaudited)
(thousands of United States Dollars)
|
| June 30 |
| December 31 |
| ||
|
| 2006 |
| 2005 |
| ||
Current Assets |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 601,992 |
| $ | 583,064 |
|
Accounts receivable, less allowances |
| 377,223 |
| 388,943 |
| ||
Inventories |
| 661,215 |
| 506,237 |
| ||
Deferred income taxes |
| 36,332 |
| 30,227 |
| ||
Other |
| 6,087 |
| 8,615 |
| ||
|
| 1,682,849 |
| 1,517,086 |
| ||
Non-Current Assets |
|
|
|
|
| ||
Capital assets |
| 1,063,720 |
| 1,056,186 |
| ||
Other |
| 59,974 |
| 65,747 |
| ||
|
| 1,123,694 |
| 1,121,933 |
| ||
Total Assets |
| $ | 2,806,543 |
| $ | 2,639,019 |
|
Current Liabilities |
|
|
|
|
| ||
Accounts payable and accrued charges |
| $ | 280,571 |
| $ | 303,589 |
|
Income and other taxes payable |
| 4,284 |
| 41,073 |
| ||
Current portion of long-term debt |
| 21,015 |
| 4,114 |
| ||
|
| 305,870 |
| 348,776 |
| ||
Long-Term Liabilities |
|
|
|
|
| ||
Long-term debt |
| 291,162 |
| 313,053 |
| ||
Other |
| 44,538 |
| 44,584 |
| ||
Deferred income taxes |
| 188,890 |
| 191,973 |
| ||
|
| 524,590 |
| 549,610 |
| ||
Shareholders’ Equity |
|
|
|
|
| ||
Common shares |
| 414,110 |
| 419,272 |
| ||
Contributed surplus |
| 17,349 |
| 15,548 |
| ||
Retained earnings |
| 1,557,694 |
| 1,341,659 |
| ||
Accumulated other comprehensive loss |
| (13,070 | ) | (35,846 | ) | ||
|
| 1,976,083 |
| 1,740,633 |
| ||
Total Liabilities and Shareholders’ Equity |
| $ | 2,806,543 |
| $ | 2,639,019 |
|
4
IPSCO Inc.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (unaudited)
(thousands of United States Dollars)
1. Effective with the fourth quarter of 2005, the Company prepares its financial statements in accordance with the generally accepted accounting principles (GAAP) of the United States. A reconciliation of the differences between GAAP in Canada and the United States as they apply to the Company is provided in note 9.
These unaudited consolidated financial statements should be read in the context of the consolidated financial statements and notes thereto filed with the Securities and Exchange Commission in the Company’s 2005 Annual Report on Form 10-K. In the opinion of the Company, the information furnished herein reflects all known accruals and adjustments necessary for a fair statement of the results for the periods reported herein. All such adjustments are of a normal recurring nature. These interim results are not necessarily indicative of expected results for the year.
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in tax positions. This interpretation requires that the Company recognize in their financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. This interpretation is effective for fiscal years beginning after December 15, 2006, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company has not yet determined the impact this interpretation will have on the financial statements.
2. Inventories
|
| June 30 |
| December 31 |
| ||||
|
| 2006 |
| 2005 |
| ||||
Finished goods |
| $ | 201,807 |
|
| $ | 148,650 |
|
|
Work-in-process |
| 250,921 |
|
| 190,860 |
|
| ||
Raw materials |
| 117,296 |
|
| 99,706 |
|
| ||
Supplies |
| 91,191 |
|
| 67,021 |
|
| ||
|
| $ | 661,215 |
|
| $ | 506,237 |
|
|
3. Pension cost attributable to the Company’s pension plans is as follows:
|
| For the Three Months Ended |
| For the Six Months Ended |
| ||||||||||||||||
|
| June 30 |
| June 30 |
| June 30 |
| June 30 |
| ||||||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||||||||||
Defined benefit plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Service cost |
|
| $ | 2,118 |
|
|
| $ | 1,232 |
|
|
| $ | 4,177 |
|
|
| $ | 2,837 |
|
|
Interest cost |
|
| 3,257 |
|
|
| 2,360 |
|
|
| 6,423 |
|
|
| 5,434 |
|
| ||||
Expected return on plan assets |
|
| (3,293 | ) |
|
| (2,206 | ) |
|
| (6,494 | ) |
|
| (5,079 | ) |
| ||||
Amortization of gains, losses and past service costs |
|
| 1,597 |
|
|
| 723 |
|
|
| 3,149 |
|
|
| 1,664 |
|
| ||||
|
|
| 3,679 |
|
|
| 2,109 |
|
|
| 7,255 |
|
|
| 4,856 |
|
| ||||
Defined contribution plans |
|
| 1,135 |
|
|
| 947 |
|
|
| 2,785 |
|
|
| 2,241 |
|
| ||||
|
|
| $ | 4,814 |
|
|
| $ | 3,056 |
|
|
| $ | 10,040 |
|
|
| $ | 7,097 |
|
|
5
4. Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share is calculated by dividing net income by the weighted average shares outstanding plus share equivalents that would arise from the exercise of share options, deferred share units, restricted shares and performance units. The per share amounts disclosed are based on the following:
|
| For the Three Months Ended |
| For the Six Months Ended |
| ||||||||
|
| June 30 |
| June 30 |
| June 30 |
| June 30 |
| ||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
Numerator for basic and diluted earnings per share |
| $ | 156,368 |
| $ | 126,853 |
| $ | 307,069 |
| $ | 281,621 |
|
|
|
|
|
|
|
|
|
|
| ||||
Common shares outstanding—January 1 |
| 48,051,619 |
| 49,737,180 |
| 48,051,619 |
| 49,737,180 |
| ||||
Non-vested restricted shares |
| (210,003 | ) | (171,504 | ) | (210,003 | ) | (171,504 | ) | ||||
Weighted average impact of shares issued (repurchased) |
| (212,150 | ) | (744,803 | ) | (100,798 | ) | (259,814 | ) | ||||
Denominator for basic earnings per share |
| 47,629,466 |
| 48,820,873 |
| 47,740,818 |
| 49,305,862 |
| ||||
Adjustment for share options |
| 96,231 |
| 207,471 |
| 100,900 |
| 301,953 |
| ||||
Adjustment for deferred share units |
| 118,257 |
| 108,865 |
| 117,418 |
| 107,161 |
| ||||
Adjustment for restricted shares |
| 126,693 |
| 144,066 |
| 129,639 |
| 144,147 |
| ||||
Adjustment for performance units |
| 181,991 |
| 108,628 |
| 181,802 |
| 104,532 |
| ||||
Denominator for diluted earnings per share |
| 48,152,638 |
| 49,389,903 |
| 48,270,577 |
| 49,963,655 |
| ||||
5. Effective January 1, 2006, the Company adopted SFAS No. 123 (revised, Share-Based Payment (SFAS 123(R)) using the modified prospective approach. Prior to the adoption of SFAS 123(R) the Company accounted for share based awards in accordance with FASB Statement No. 123, Accounting for Stock Based Compensation. Under the modified prospective approach, SFAS 123(R) applies to new awards and to awards outstanding on January 1, 2006 that are subsequently modified, repurchased or cancelled. Under the modified prospective approach, compensation cost recognized in the first quarter 2006 includes compensation cost for all share based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant-date fair value estimated in accordance with the original provisions of SFAS 123, and compensation cost for all share based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with provisions of SFAS 123(R). The impact of adopting SFAS 123(R) was not material to the financial statements.
The Company has a share option plan under which common shares are reserved for directors, officers and employees. As of June 30, 2006 and June 30, 2005, shares available for future grants are 736,694 and 863,819, respectively. The restricted shares and performance units vest at the end of three years based on continued employment and achievement of certain Company performance objectives. Restricted shares are entitled to dividends declared on common shares during the vesting period and, upon vesting, performance units are entitled to an amount equal to dividends declared during the vesting period. The fair value of the grants is being amortized to compensation expense over the vesting period. For the quarters ended June 30, 2006 and June 30, 2005 compensation expense of $1,298 and $540 has been recorded, respectively. Compensation expense of $9,234 and $1,037 has been recorded in the six month periods ended June 30, 2006 and June 30, 2005, respectively.
6
Share Options
The following is the continuity of granted options outstanding with weighted average exercise price in Canadian dollars:
|
| For the Three Months Ended |
| For the Three Months Ended |
| ||||||||
|
| June 30, 2006 |
| June 30, 2005 |
| ||||||||
|
|
|
| Weighted |
|
|
| Weighted |
| ||||
|
| Number of |
| Average |
| Number of |
| Average |
| ||||
|
| Shares |
| Exercise Price |
| Shares |
| Exercise Price |
| ||||
Balance at beginning of period |
| 153,625 |
|
| 23.41 |
|
| 670,970 |
|
| 24.69 |
|
|
Options exercised |
| (3,000 | ) |
| 21.70 |
|
| (301,800 | ) |
| 22.71 |
|
|
Balance at end of period |
| 150,625 |
|
| 23.44 |
|
| 369,170 |
|
| 26.30 |
|
|
|
| For the Six Months Ended |
| For the Six Months Ended |
| ||||||||
|
| June 30, 2006 |
| June 30, 2005 |
| ||||||||
|
|
|
| Weighted |
|
|
| Weighted |
| ||||
|
| Number of |
| Average |
| Number of |
| Average |
| ||||
|
| Shares |
| Exercise Price |
| Shares |
| Exercise Price |
| ||||
Balance at beginning of period |
| 175,025 |
|
| 23.50 |
|
| 1,205,065 |
|
| 24.90 |
|
|
Options exercised |
| (24,400 | ) |
| 23.86 |
|
| (835,895 | ) |
| 24.29 |
|
|
Balance at end of period |
| 150,625 |
|
| 23.44 |
|
| 369,170 |
|
| 26.30 |
|
|
The June 30, 2006 weighted average remaining contractual life of the outstanding options is 4.6 years.
Intrinsic value for stock options is defined as the difference between the current market value and the grant price. The total intrinsic value of the outstanding and exerciseable options at June 30, 2006 is CDN $12.6 million. The total intrinsic value of options exercised during the quarters ended June 30, 2006 and 2005 was CDN $0.3 million and CDN $11.7 million, respectively. The total intrinsic value of options exercised for the six months ended June 30, 2006 and 2005 was CDN $2.1 million and CDN $31.5 million, respectively.
Performance Units
The following is the continuity of performance units outstanding:
|
| For the Three Months Ended |
| For the Six Months Ended |
| ||||||||||||
|
| June 30 |
| June 30 |
| June 30 |
| June 30 |
| ||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||||||
Balance at beginning of period |
|
| 242,941 |
|
|
| 133,985 |
|
|
| 242,766 |
|
|
| 133,985 |
|
|
Performance units granted |
|
| 9,600 |
|
|
| 12,000 |
|
|
| 10,400 |
|
|
| 12,000 |
|
|
Performance units converted to common shares on vesting |
|
| (46,865 | ) |
|
| — |
|
|
| (46,865 | ) |
|
| — |
|
|
Performance units paid in cash on vesting |
|
| (17,930 | ) |
|
| — |
|
|
| (18,555 | ) |
|
| — |
|
|
Balance at end of period |
|
| 187,746 |
|
|
| 145,985 |
|
|
| 187,746 |
|
|
| 145,985 |
|
|
As of June 30, 2006 the weighted average grant date fair value of the outstanding performance units is CDN $56.35.
The total fair value of performance units which vested during the three and six months ended June 30, 2006 was $6.2 million.
7
Restricted Shares
The following is the continuity of restricted shares outstanding:
|
| For the Three Months Ended |
| For the Six Months Ended |
| ||||||||||||
|
| June 30 |
| June 30 |
| June 30 |
| June 30 |
| ||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||||||
Balance at beginning and end of period |
|
| 210,003 |
|
|
| 171,504 |
|
|
| 210,003 |
|
|
| 171,504 |
|
|
The June 30, 2006 weighted average grant date fair value of the restricted shares is CDN $30.70.
At June 30, 2006, there was $14.1 million of unrecognized compensation cost related to share-based payments which is expected to to be recognized over the weighted-average vesting period of 2 years.
In March 2005, the Company filed a normal course issuer bid which entitled the Company to acquire approximately 4.2 million of its common shares between March 16, 2005 and March 15, 2006. All purchases were made on the open market at the market price at the time of the purchase. All shares purchased under the bid were cancelled. During the quarter ended June 30, 2005, 2,199,400 common shares were purchased for $104.8 million.
In May 2006, the Company filed a normal course issuer bid which entitled the Company to acquire up to 4.7 million of its common shares between May 9, 2006 and May 8, 2007. All purchases were made on the open market at the market price at the time of the purchase. All shares purchased under the bid were cancelled. During the quarter ended June 30, 2006, 934,700 common shares were purchased for $85.5 million.
6. During the quarter ended June 30, 2006, the Company decreased its annual effective income tax rate from 39% to 38.3% as a result of tax law changes in Canada. The change in the effective rate reduced income tax expense for the three months ended June 30, 2006 by $3.5 million ($0.07 per diluted share). The 37.6% effective tax rate for the quarter ended June 30, 2006 as compared to the 36% effective tax rate for the quarter ended June 30, 2005 reflects the Company’s full utilization of its net U.S. operating losses and continued profitability.
8
7. The Company is organized and managed as a single business segment, being steel products, and the Company is viewed as a single operating segment by the chief operating decision maker for the purposes of resource allocation and assessing performance.
Financial information on the Company’s geographic areas follows. Sales are allocated to the country in which the third party customer receives the product.
|
| For the Three Months Ended |
| For the Six Months Ended |
| ||||||||
|
| June 30 |
| June 30 |
| June 30 |
| June 30 |
| ||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
Sales |
|
|
|
|
|
|
|
|
| ||||
Canada |
| $ | 219,585 |
| $ | 171,715 |
| $ | 560,418 |
| $ | 417,224 |
|
United States |
| 673,973 |
| 515,959 |
| 1,236,036 |
| 1,037,188 |
| ||||
|
| $ | 893,558 |
| $ | 687,674 |
| $ | 1,796,454 |
| $ | 1,454,412 |
|
|
| June 30 |
| December 31 |
| ||
|
| 2006 |
| 2005 |
| ||
Capital Assets |
|
|
|
|
| ||
Canada |
| $ | 222,766 |
| $ | 213,621 |
|
United States |
| 840,954 |
| 842,565 |
| ||
|
| $ | 1,063,720 |
| $ | 1,056,186 |
|
|
| For the Three Months Ended |
| For the Six Months Ended |
| ||||||||
|
| June 30 |
| June 30 |
| June 30 |
| June 30 |
| ||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
Sales information by product group is as follows: |
|
|
|
|
|
|
|
|
| ||||
Steel mill products |
| $ | 552,855 |
| $ | 449,865 |
| $ | 1,057,068 |
| $ | 950,354 |
|
Tubular products |
| 340,703 |
| 237,809 |
| 739,386 |
| 504,058 |
| ||||
|
| $ | 893,558 |
| $ | 687,674 |
| $ | 1,796,454 |
| $ | 1,454,412 |
|
Tubular product sales volume in the first and second quarters can be negatively impacted by weather conditions in Western Canada.
8. Consolidating Financial Statements
The following information presents the condensed consolidating balance sheets as at June 30, 2006 and December 31, 2005, and the condensed consolidating statements of income and cash flows for the three- and six-months ended June 30, 2006 and 2005. The condensed consolidating financial statements present the accounts of IPSCO Inc. (“Parent”), and its Guarantor and Non-Guarantor subsidiaries, as defined in the indenture dated as of June 18, 2003 to the IPSCO Inc. 83¤4% Senior Notes due 2013 (“the Notes”) which were issued on June 18, 2003. The Notes are fully and unconditionally guaranteed, on a joint and several basis, by the Guarantor subsidiaries. The Guarantor subsidiaries, all of which are wholly-owned by IPSCO Inc., are IPSCO Saskatchewan Inc., IPSCO Recycling Inc., IPSCO Enterprises Inc., IPSCO Minnesota Inc., IPSCO Texas Inc., IPSCO Tubulars Inc., IPSCO Steel Inc., and IPSCO Steel (Alabama) Inc. Non-Guarantor subsidiaries are IPSCO Direct Inc., Western Steel Limited, General Scrap Partnership, IPSCO Sales Inc., IPSCO Construction Inc. and General Scrap Inc.
9
IPSCO Inc. Condensed Consolidating Statements of Income
Three Months Ended June 30, 2006
(thousands of United States dollars)
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| Parent |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
Sales |
| $ | 157,218 |
| $ | 813,636 |
| $ | 142,251 |
| $ | (219,547 | ) | $ | 893,558 |
|
Cost of sales |
| 139,358 |
| 594,448 |
| 124,252 |
| (226,051 | ) | 632,007 |
| |||||
Gross income |
| 17,860 |
| 219,188 |
| 17,999 |
| 6,504 |
| 261,551 |
| |||||
Selling, general and administration |
| (395 | ) | 19,093 |
| (4 | ) | — |
| 18,694 |
| |||||
Operating income |
| 18,255 |
| 200,095 |
| 18,003 |
| 6,504 |
| 242,857 |
| |||||
Other expenses (income) |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest on long-term debt |
| 4,024 |
| 2,680 |
| — |
| (996 | ) | 5,708 |
| |||||
Other interest (income) expense, |
| (2,457 | ) | (5,216 | ) | (535 | ) | — |
| (8,208 | ) | |||||
Foreign exchange loss (gain) |
| (339 | ) | (4,681 | ) | (63 | ) | — |
| (5,083 | ) | |||||
Intercompany interest/dividend |
| 1,787 |
| (1,851 | ) | 64 |
| — |
| — |
| |||||
Equity income |
| (154,423 | ) | (9,823 | ) | — |
| 164,140 |
| (106 | ) | |||||
Other (income) expense |
| (6,814 | ) | — |
| — |
| 6,814 |
| — |
| |||||
Income (loss) before income taxes |
| 176,477 |
| 218,986 |
| 18,537 |
| (163,454 | ) | 250,546 |
| |||||
Income taxes |
| 20,109 |
| 66,915 |
| 6,932 |
| 222 |
| 94,178 |
| |||||
NET INCOME (LOSS) |
| $ | 156,368 |
| $ | 152,071 |
| $ | 11,605 |
| $ | (163,676 | ) | $ | 156,368 |
|
IPSCO Inc. Condensed Consolidating Statements of Income
Six Months Ended June 30, 2006
(thousands of United States dollars)
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| Parent |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
Sales |
| $ | 386,877 |
| $ | 1,612,018 |
| $ | 279,937 |
| $ | (482,378 | ) | $ | 1,796,454 |
|
Cost of sales |
| 340,969 |
| 1,164,298 |
| 244,944 |
| (494,775 | ) | 1,255,436 |
| |||||
Gross income |
| 45,908 |
| 447,720 |
| 34,993 |
| 12,397 |
| 541,018 |
| |||||
Selling, general and administration |
| 17,071 |
| 34,118 |
| (109 | ) | — |
| 51,080 |
| |||||
Operating income |
| 28,837 |
| 413,602 |
| 35,102 |
| 12,397 |
| 489,938 |
| |||||
Other expenses (income) |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest on long-term debt |
| 8,047 |
| 5,376 |
| — |
| (1,882 | ) | 11,541 |
| |||||
Other interest (income) expense, |
| (3,682 | ) | (10,796 | ) | (745 | ) | — |
| (15,223 | ) | |||||
Foreign exchange loss (gain) |
| 754 |
| (4,468 | ) | (45 | ) | — |
| (3,759 | ) | |||||
Intercompany interest/dividend |
| 3,669 |
| (2,647 | ) | (130 | ) | (892 | ) | — |
| |||||
Equity income |
| (302,523 | ) | (18,773 | ) | — |
| 321,078 |
| (218 | ) | |||||
Other (income) expense |
| (13,389 | ) | (891 | ) | — |
| 14,280 |
| — |
| |||||
Income (loss) before income taxes |
| 335,961 |
| 445,801 |
| 36,022 |
| (320,187 | ) | 497,597 |
| |||||
Income taxes |
| 28,892 |
| 147,816 |
| 13,475 |
| 345 |
| 190,528 |
| |||||
NET INCOME (LOSS) |
| $ | 307,069 |
| $ | 297,985 |
| $ | 22,547 |
| $ | (320,532 | ) | $ | 307,069 |
|
10
IPSCO Inc. Condensed Consolidating Statements of Income
Three Months Ended June 30, 2005
(thousands of United States dollars)
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| Parent |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
Sales |
| $ | 126,132 |
| $ | 688,431 |
| $ | 58,292 |
| $ | (185,181 | ) | $ | 687,674 |
|
Cost of sales |
| 121,186 |
| 475,576 |
| 51,914 |
| (191,355 | ) | 457,321 |
| |||||
Gross income |
| 4,946 |
| 212,855 |
| 6,378 |
| 6,174 |
| 230,353 |
| |||||
Selling, general and administration |
| 4,666 |
| 11,773 |
| 68 |
| (366 | ) | 16,141 |
| |||||
Operating income |
| 280 |
| 201,082 |
| 6,310 |
| 6,540 |
| 214,212 |
| |||||
Other expenses (income) |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest on long-term debt |
| 6,917 |
| 2,758 |
| — |
| — |
| 9,675 |
| |||||
Other interest (income) expense, |
| (160 | ) | (2,943 | ) | (137 | ) | — |
| (3,240 | ) | |||||
Loss on early extinguishment of |
| 10,249 |
| — |
| — |
| — |
| 10,249 |
| |||||
Foreign exchange loss (gain) |
| (5,563 | ) | 4,800 |
| 4 |
| — |
| (759 | ) | |||||
Intercompany interest/dividend |
| (1,986 | ) | 1,719 |
| (561 | ) | 828 |
| — |
| |||||
Equity income |
| (130,921 | ) | (3,786 | ) | — |
| 134,787 |
| 80 |
| |||||
Other (income) expense |
| (5,068 | ) | (1,137 | ) | (7 | ) | 6,212 |
| — |
| |||||
Income (loss) before income taxes |
| 126,812 |
| 199,671 |
| 7,011 |
| (135,287 | ) | 198,207 |
| |||||
Income taxes |
| (41 | ) | 68,399 |
| 2,876 |
| 120 |
| 71,354 |
| |||||
NET INCOME (LOSS) |
| $ | 126,853 |
| $ | 131,272 |
| $ | 4,135 |
| $ | (135,407 | ) | $ | 126,853 |
|
IPSCO Inc. Condensed Consolidating Statements of Income
Six Months Ended June 30, 2005
(thousands of United States dollars)
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| Parent |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
Sales |
| $ | 305,515 |
| $ | 1,414,615 |
| $ | 114,099 |
| $ | (379,817 | ) | $ | 1,454,412 |
|
Cost of sales |
| 290,716 |
| 981,480 |
| 100,605 |
| (416,329 | ) | 956,472 |
| |||||
Gross income |
| 14,799 |
| 433,135 |
| 13,494 |
| 36,512 |
| 497,940 |
| |||||
Selling, general and administration |
| 11,044 |
| 24,098 |
| 68 |
| (732 | ) | 34,478 |
| |||||
Operating income |
| 3,755 |
| 409,037 |
| 13,426 |
| 37,244 |
| 463,462 |
| |||||
Other expenses (income) |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest on long-term debt |
| 14,874 |
| 5,529 |
| — |
| — |
| 20,403 |
| |||||
Other interest (income) expense, |
| (388 | ) | (5,311 | ) | (324 | ) | — |
| (6,023 | ) | |||||
Loss on early extinguishment of |
| 10,249 |
| — |
| — |
| — |
| 10,249 |
| |||||
Foreign exchange loss (gain) |
| (7,946 | ) | 6,787 |
| 6 |
| — |
| (1,153 | ) | |||||
Intercompany interest/dividend |
| (2,284 | ) | 3,837 |
| (1,553 | ) | — |
| — |
| |||||
Equity income |
| (284,184 | ) | (8,380 | ) | — |
| 292,549 |
| (15 | ) | |||||
Other (income) expense |
| (10,043 | ) | (2,322 | ) | (13 | ) | 12,378 |
| — |
| |||||
Income (loss) before income taxes |
| 283,477 |
| 408,897 |
| 15,310 |
| (267,683 | ) | 440,001 |
| |||||
Income taxes |
| 1,856 |
| 141,149 |
| 6,120 |
| 9,255 |
| 158,380 |
| |||||
NET INCOME (LOSS) |
| $ | 281,621 |
| $ | 267,748 |
| $ | 9,190 |
| $ | (276,938 | ) | $ | 281,621 |
|
11
IPSCO Inc. Condensed Consolidating Statements of Cash Flows
Three Months Ended June 30, 2006
(thousands of United States dollars)
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| Parent |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income (loss) |
| $ | 156,368 |
| $ | 152,071 |
| $ | 11,605 |
| $ | (163,676 | ) | $ | 156,368 |
|
Non-cash adjustments |
| (141,712 | ) | (18,163 | ) | 2,515 |
| 164,584 |
| 7,224 |
| |||||
Change in operating assets and liabilities |
| (86,213 | ) | (88,027 | ) | 27,907 |
| (24 | ) | (146,357 | ) | |||||
Net cash provided by (used for) operating activities |
| (71,557 | ) | 45,881 |
| 42,027 |
| 884 |
| 17,235 |
| |||||
Investing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Expenditures for capital assets |
| (2,900 | ) | (10,556 | ) | 2,642 |
| (997 | ) | (11,811 | ) | |||||
Proceeds from mortgage receivable, net |
| — |
| 971 |
| (236 | ) | — |
| 735 |
| |||||
Other investing activities |
| — |
| 330 |
| — |
| — |
| 330 |
| |||||
Net cash provided by (used for) investing activities |
| (2,900 | ) | (9,255 | ) | 2,406 |
| (997 | ) | (10,746 | ) | |||||
Financing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Common share dividends |
| (8,488 | ) | 13,992 |
| (13,992 | ) | — |
| (8,488 | ) | |||||
Common shares issued pursuant to share option plan |
| 5,036 |
| — |
| — |
| — |
| 5,036 |
| |||||
Common share repurchase |
| (85,500 | ) | — |
| — |
| — |
| (85,500 | ) | |||||
Repayment of long-term debt |
| — |
| — |
| — |
| — |
| — |
| |||||
Net cash provided by (used for) financing activities |
| (88,952 | ) | 13,992 |
| (13,992 | ) | — |
| (88,952 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
| 7,173 |
| 14,896 |
| (1,051 | ) | 113 |
| 21,131 |
| |||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
| (156,236 | ) | 65,514 |
| 29,390 |
| — |
| (61,332 | ) | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
| 269,459 |
| 372,604 |
| 21,261 |
| — |
| 663,324 |
| |||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
| $ | 113,223 |
| $ | 438,118 |
| $ | 50,651 |
| $ | — |
| $ | 601,992 |
|
12
IPSCO Inc. Condensed Consolidating Statements of Cash Flows
Six Months Ended June 30, 2006
(thousands of United States dollars)
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| Parent |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income (loss) |
| $ | 307,069 |
| $ | 297,985 |
| $ | 22,547 |
| $ | (320,532 | ) | $ | 307,069 |
|
Non-cash adjustments |
| (283,057 | ) | (15,644 | ) | 6,868 |
| 321,642 |
| 29,809 |
| |||||
Change in operating assets and liabilities |
| 123,732 |
| (352,493 | ) | 28,488 |
| 736 |
| (199,537 | ) | |||||
Net cash provided by (used for) operating activities |
| 147,744 |
| (70,152 | ) | 57,903 |
| 1,846 |
| 137,341 |
| |||||
Investing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Expenditures for capital assets |
| (5,855 | ) | (33,418 | ) | (1,255 | ) | (1,882 | ) | (42,410 | ) | |||||
Proceeds from mortgage receivable, net |
| — |
| 971 |
| — |
| — |
| 971 |
| |||||
Net cash used for investing |
| (5,855 | ) | (32,447 | ) | (1,255 | ) | (1,882 | ) | (41,439 | ) | |||||
Financing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Common share dividends |
| (15,938 | ) | 13,992 |
| (13,992 | ) | — |
| (15,938 | ) | |||||
Common shares issued pursuant to share option plan |
| 5,483 |
| — |
| — |
| — |
| 5,483 |
| |||||
Common share repurchase |
| (85,500 | ) | — |
| — |
| — |
| (85,500 | ) | |||||
Repayment of long-term debt |
| — |
| (4,991 | ) | — |
| — |
| (4,991 | ) | |||||
Net cash provided by (used for) financing activities |
| (95,955 | ) | 9,001 |
| (13,992 | ) | — |
| (100,946 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
| 9,923 |
| 17,117 |
| (3,104 | ) | 36 |
| 23,972 |
| |||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
| 55,857 |
| (76,481 | ) | 39,552 |
| — |
| 18,928 |
| |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
| 57,366 |
| 514,599 |
| 11,099 |
| — |
| 583,064 |
| |||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
| $ | 113,223 |
| $ | 438,118 |
| $ | 50,651 |
| $ | — |
| $ | 601,992 |
|
13
IPSCO Inc. Condensed Consolidating Statements of Cash Flows
Three Months Ended June 30, 2005
(thousands of United States dollars)
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| Parent |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income (loss) |
| $ | 126,853 |
| $ | 131,272 |
| $ | 4,135 |
| $ | (135,407 | ) | $ | 126,853 |
|
Non-cash adjustments |
| (136,364 | ) | 17,592 |
| 18,324 |
| 134,907 |
| 34,459 |
| |||||
Change in operating assets and liabilities |
| 194,228 |
| (171,492 | ) | (4,803 | ) | 587 |
| 18,520 |
| |||||
Net cash provided by (used for) operating activities |
| 184,717 |
| (22,628 | ) | 17,656 |
| 87 |
| 179,832 |
| |||||
Investing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Expenditures for capital assets |
| 5,441 |
| (15,113 | ) | 859 |
| — |
| (8,813 | ) | |||||
Proceeds from mortgage receivable, net |
| — |
| 326 |
| 44 |
| — |
| 370 |
| |||||
Other investing activities |
| — |
| 71 |
| — |
| — |
| 71 |
| |||||
Net cash provided by (used for) investing activities |
| 5,441 |
| (14,716 | ) | 903 |
| — |
| (8,372 | ) | |||||
Financing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Common share dividends |
| (5,496 | ) | 12,429 |
| (12,429 | ) | — |
| (5,496 | ) | |||||
Common shares issued pursuant to share option plan |
| 5,494 |
| — |
| — |
| — |
| 5,494 |
| |||||
Common share repurchase |
| (104,896 | ) | — |
| — |
| — |
| (104,896 | ) | |||||
Issue (repayment) of long-term debt |
| (123,248 | ) | — |
| — |
| — |
| (123,248 | ) | |||||
Net cash provided by (used for) financing activities |
| (228,146 | ) | 12,429 |
| (12,429 | ) | — |
| (228,146 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
| 10,192 |
| 5,027 |
| (16,067 | ) | (87 | ) | (935 | ) | |||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
| (27,796 | ) | (19,888 | ) | (9,937 | ) | — |
| (57,621 | ) | |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
| 42,287 |
| 410,275 |
| 28,960 |
| — |
| 481,522 |
| |||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
| $ | 14,491 |
| $ | 390,387 |
| $ | 19,023 |
| $ | — |
| $ | 423,901 |
|
14
IPSCO Inc. Condensed Consolidating Statements of Cash Flows
Six Months Ended June 30, 2005
(thousands of United States dollars)
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| Parent |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income (loss) |
| $ | 281,621 |
| $ | 267,748 |
| $ | 9,190 |
| $ | (276,938 | ) | $ | 281,621 |
|
Non-cash adjustments |
| (285,929 | ) | 60,223 |
| 18,581 |
| 301,803 |
| 94,678 |
| |||||
Change in operating assets and liabilities |
| 228,428 |
| (229,558 | ) | (20,635 | ) | (23,445 | ) | (45,210 | ) | |||||
Net cash provided by operating activities |
| 224,120 |
| 98,413 |
| 7,136 |
| 1,420 |
| 331,089 |
| |||||
Investing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Expenditures for capital assets |
| (673 | ) | (20,978 | ) | (520 | ) | — |
| (22,171 | ) | |||||
Proceeds from mortgage receivable, net |
| — |
| 1,864 |
| (37 | ) | — |
| 1,827 |
| |||||
Other investing activities |
| — |
| (99 | ) | — |
| — |
| (99 | ) | |||||
Net cash used for investing activities |
| (673 | ) | (19,213 | ) | (557 | ) | — |
| (20,443 | ) | |||||
Financing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Common share dividends |
| (10,454 | ) | 12,429 |
| (12,429 | ) | — |
| (10,454 | ) | |||||
Common shares issued pursuant to share option plan |
| 16,423 |
| — |
| — |
| — |
| 16,423 |
| |||||
Common share repurchase |
| (121,157 | ) | — |
| — |
| — |
| (121,157 | ) | |||||
Issue (repayment) of long-termdebt |
| (123,248 | ) | (4,589 | ) | — |
| — |
| (127,837 | ) | |||||
Net cash provided by (used for) financing activities |
| (238,436 | ) | 7,840 |
| (12,429 | ) | — |
| (243,025 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
| 15,203 |
| (1,438 | ) | (10,839 | ) | (1,420 | ) | 1,506 |
| |||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
| 214 |
| 85,602 |
| (16,689 | ) | — |
| 69,127 |
| |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
| 14,277 |
| 304,785 |
| 35,712 |
| — |
| 354,774 |
| |||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
| $ | 14,491 |
| $ | 390,387 |
| $ | 19,023 |
| $ | — |
| $ | 423,901 |
|
15
IPSCO Inc. Condensed Consolidating Balance Sheets
As at June 30, 2006
(thousands of United States dollars)
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| Parent |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| $ | 113,223 |
| $ | 438,118 |
| $ | 50,651 |
| $ | — |
| $ | 601,992 |
|
Accounts receivable, less |
| (32,417 | ) | 387,733 |
| 21,907 |
| — |
| 377,223 |
| |||||
Inventories |
| 224,648 |
| 438,145 |
| 13,604 |
| (15,182 | ) | 661,215 |
| |||||
Deferred income taxes |
| 27,043 |
| 5,100 |
| 4,189 |
| — |
| 36,332 |
| |||||
Other |
| 3,443 |
| 2,174 |
| 470 |
| — |
| 6,087 |
| |||||
|
| 335,940 |
| 1,271,270 |
| 90,821 |
| (15,182 | ) | 1,682,849 |
| |||||
NON-CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
|
| |||||
Capital assets |
| 138,225 |
| 895,149 |
| 26,347 |
| 3,999 |
| 1,063,720 |
| |||||
Other |
| 1,800,338 |
| 88,025 |
| 1,566 |
| (1,829,955 | ) | 59,974 |
| |||||
|
| 1,938,563 |
| 983,174 |
| 27,913 |
| (1,825,956 | ) | 1,123,694 |
| |||||
TOTAL ASSETS |
| $ | 2,274,503 |
| $ | 2,254,444 |
| $ | 118,734 |
| $ | (1,841,138 | ) | $ | 2,806,543 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
|
| |||||
Accounts payable and accrued charges |
| $ | 52,983 |
| $ | 220,742 |
| $ | 6,846 |
| $ | — |
| $ | 280,571 |
|
Income and other taxes payable |
| (2,049 | ) | (7,095 | ) | 13,428 |
| — |
| 4,284 |
| |||||
Current portion of long-term debt |
| 14,715 |
| 6,300 |
| — |
| — |
| 21,015 |
| |||||
|
| 65,649 |
| 219,947 |
| 20,274 |
| — |
| 305,870 |
| |||||
LONG-TERM LIABILITIES |
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term debt |
| 153,854 |
| 137,308 |
| — |
| — |
| 291,162 |
| |||||
Other |
| 16,947 |
| 27,591 |
| — |
| — |
| 44,538 |
| |||||
Deferred income taxes |
| 61,970 |
| 103,181 |
| 28,425 |
| (4,686 | ) | 188,890 |
| |||||
|
| 232,771 |
| 268,080 |
| 28,425 |
| (4,686 | ) | 524,590 |
| |||||
SHAREHOLDERS’ EQUITY |
| 1,976,083 |
| 1,766,417 |
| 70,035 |
| (1,836,452 | ) | 1,976,083 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
| $ | 2,274,503 |
| $ | 2,254,444 |
| $ | 118,734 |
| $ | (1,841,138 | ) | $ | 2,806,543 |
|
16
IPSCO Inc. Condensed Consolidating Balance Sheets
As at December 31, 2005
(thousands of United States dollars)
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| Parent |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| $ | 57,366 |
| $ | 514,599 |
| $ | 11,099 |
| $ | — |
| $ | 583,064 |
|
Accounts receivable, less |
| 173,594 |
| 178,538 |
| 36,811 |
| — |
| 388,943 |
| |||||
Inventories |
| 144,730 |
| 363,974 |
| 11,594 |
| (14,061 | ) | 506,237 |
| |||||
Deferred income taxes |
| 25,169 |
| 4,651 |
| 407 |
| — |
| 30,227 |
| |||||
Other |
| 5,156 |
| 2,410 |
| 1,049 |
| — |
| 8,615 |
| |||||
|
| 406,015 |
| 1,064,172 |
| 60,960 |
| (14,061 | ) | 1,517,086 |
| |||||
NON-CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
|
| |||||
Capital assets |
| 138,449 |
| 894,130 |
| 22,086 |
| 1,521 |
| 1,056,186 |
| |||||
Other |
| 1,470,677 |
| 104,284 |
| 3,182 |
| (1,512,396 | ) | 65,747 |
| |||||
|
| 1,609,126 |
| 998,414 |
| 25,268 |
| (1,510,875 | ) | 1,121,933 |
| |||||
TOTAL ASSETS |
| $ | 2,015,141 |
| $ | 2,062,586 |
| $ | 86,228 |
| $ | (1,524,936 | ) | $ | 2,639,019 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
|
| |||||
Accounts payable and accrued charges |
| $ | 53,428 |
| $ | 246,843 |
| $ | 3,318 |
| $ | — |
| $ | 303,589 |
|
Income and other taxes payable |
| (11,794 | ) | 50,668 |
| 2,199 |
| — |
| 41,073 |
| |||||
Current portion of long-term debt |
| — |
| 4,114 |
| — |
| — |
| 4,114 |
| |||||
|
| 41,634 |
| 301,625 |
| 5,517 |
| — |
| 348,776 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
LONG-TERM LIABILITIES |
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term debt |
| 168,569 |
| 144,484 |
| — |
| — |
| 313,053 |
| |||||
Other |
| 16,966 |
| 27,618 |
| — |
| — |
| 44,584 |
| |||||
Deferred income taxes |
| 47,339 |
| 127,623 |
| 21,843 |
| (4,832 | ) | 191,973 |
| |||||
|
| 232,874 |
| 299,725 |
| 21,843 |
| (4,832 | ) | 549,610 |
| |||||
SHAREHOLDERS’ EQUITY |
| 1,740,633 |
| 1,461,236 |
| 58,868 |
| (1,520,104 | ) | 1,740,633 |
| |||||
|
|
|
|
|
|
|
|
|
|
|
| |||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
| $ | 2,015,141 |
| $ | 2,062,586 |
| $ | 86,228 |
| $ | (1,524,936 | ) | $ | 2,639,019 |
|
17
9. Differences between United States and Canadian generally accepted accounting principles
Reconciliation of the line items of the consolidated statements of income and cash flows and the consolidated balance sheets from U.S. GAAP to Canadian GAAP follows. Information on the nature of these adjustments is provided in Note 21 to the Company’s 2005 consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
(thousands of United States Dollars except for per share and ton data)
|
| For the Three Months Ended June 30, 2006 |
| For the Three Months Ended June 30, 2005 |
| |||||||||||||||||||||||
|
| U.S. GAAP |
| Ref |
| Amount |
| Canadian |
| U.S. GAAP |
| Ref |
| Amount |
| Canadian |
| |||||||||||
Plate and Coil Tons Produced (thousands) |
| 952.5 |
|
|
|
|
|
|
| 952.5 |
| 857.7 |
|
|
|
|
|
|
| 857.7 |
| |||||||
Finished Tons Shipped (thousands) |
| 1,001.0 |
|
|
|
|
|
|
| 1,001.0 |
| 803.5 |
|
|
|
|
|
|
| 803.5 |
| |||||||
Sales |
| $ | 893,558 |
|
| a) |
|
| $ | (31,315 | ) | $ | 862,243 |
| $ | 687,674 |
|
| a) |
|
| $ | (20,962 | ) | $ | 666,712 |
| |
Cost of sales |
| 632,007 |
|
| a) |
|
| (31,315 | ) | 603,490 |
| 457,321 |
|
| a) |
|
| (20,962 | ) | 439,322 |
| |||||||
|
|
|
|
| b) |
|
| 1,247 |
|
|
|
|
|
| b) |
|
| 1,248 |
|
|
| |||||||
|
|
|
|
| c) |
|
| (107 | ) |
|
|
|
|
| c) |
|
| 80 |
|
|
| |||||||
|
|
|
|
| d) |
|
| 1,658 |
|
|
|
|
|
| d) |
|
| 1,635 |
|
|
| |||||||
|
| 632,007 |
|
|
|
|
| (28,517 | ) | 603,490 |
| 457,321 |
|
|
|
|
| (17,999 | ) | 439,322 |
| |||||||
Gross income |
| 261,551 |
|
|
|
|
| (2,798 | ) | 258,753 |
| 230,353 |
|
|
|
|
| (2,963 | ) | 227,390 |
| |||||||
Selling, general and administration |
| 18,694 |
|
|
|
| �� |
|
| 18,694 |
| 16,141 |
|
|
|
|
|
|
| 16,141 |
| |||||||
Operating income |
| 242,857 |
|
|
|
|
| (2,798 | ) | 240,059 |
| 214,212 |
|
|
|
|
| (2,963 | ) | 211,249 |
| |||||||
Other expenses (income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Interest on long-term debt |
| 5,708 |
|
| b) |
|
| (2,103 | ) | 3,605 |
| 9,675 |
|
| b) |
|
| (2,179 | ) | 7,496 |
| |||||||
Net interest income |
| (8,208 | ) |
|
|
|
|
|
| (8,208 | ) | (3,240 | ) |
|
|
|
|
|
| (3,240 | ) | |||||||
Foreign exchange loss (gain) |
| (5,083 | ) |
|
|
|
|
|
| (5,083 | ) | (759 | ) |
|
|
|
|
|
| (759 | ) | |||||||
Other (income) expenses |
| (106 | ) |
| c) |
|
| 106 |
| — |
| 80 |
|
| c) |
|
| (80 | ) | — |
| |||||||
Loss on early extinguishment of debt |
| — |
|
|
|
|
|
|
| — |
| 10,249 |
|
|
|
|
|
|
| 10,249 |
| |||||||
Income before income taxes and cumulative effect of accounting change |
| 250,546 |
|
|
|
|
| (801 | ) | 249,745 |
| 198,207 |
|
|
|
|
| (704 | ) | 197,503 |
| |||||||
Income tax expense |
| 94,178 |
|
| b) |
|
| 321 |
| 93,879 |
| 71,354 |
|
| b) |
|
| 335 |
| 71,101 |
| |||||||
|
|
|
|
| d) |
|
| (620 | ) |
|
|
|
|
| d) |
|
| (588 | ) |
|
| |||||||
Net Income |
| $ | 156,368 |
|
|
|
|
| $ | (502 | ) | $ | 155,866 |
| $ | 126,853 |
|
|
|
|
| $ | (451 | ) | $ | 126,402 |
| |
Earnings Per Common Share | —Basic |
| $ | 3.28 |
|
|
|
|
|
|
| $ | 3.27 |
| $ | 2.60 |
|
|
|
|
|
|
| $ | 2.59 |
| ||
| —Diluted |
| $ | 3.25 |
|
|
|
|
|
|
| $ | 3.24 |
| $ | 2.57 |
|
|
|
|
|
|
| $ | 2.56 |
|
a) Freight invoiced to customers
b) 2000 sale-leaseback transaction
c) Joint venture
d) Amortization of difference in amounts capitalized
e) Translation of convenience
f) Capitalization of interest
g) Capitalization of commissioning costs
h) Derivatives
i) Minimum pension liability
j) Change in accounting policy
18
|
| For the Six Months Ended June 30, 2006 |
| For the Six Months Ended June 30, 2005 |
| |||||||||||||||||||||||
|
| U.S. GAAP |
| Ref |
| Amount |
| Canadian |
| U.S. GAAP |
| Ref |
| Amount |
| Canadian |
| |||||||||||
Plate and Coil Tons Produced (thousands) |
| 1,848.1 |
|
|
|
|
|
|
| 1,848.1 |
| 1,675.2 |
|
|
|
|
|
|
| 1,675.2 |
| |||||||
Finished Tons Shipped (thousands) |
| 2,006.4 |
|
|
|
|
|
|
| 2,006.4 |
| 1,659.3 |
|
|
|
|
|
|
| 1,659.3 |
| |||||||
Sales |
| $ | 1,796,454 |
|
| a) |
|
| $ | (58,798 | ) | $ | 1,737,656 |
| $ | 1,454,412 |
|
| a) |
|
| $ | (41,703 | ) | $ | 1,412,709 |
| |
Cost of sales |
| 1,255,436 |
|
| a) |
|
| (58,798 | ) | 1,205,890 |
| 956,472 |
|
| a) |
|
| (41,703 | ) | 920,514 |
| |||||||
|
|
|
|
| b) |
|
| 2,494 |
|
|
|
|
|
| b) |
|
| 2,495 |
|
|
| |||||||
|
|
|
|
| c) |
|
| (219 | ) |
|
|
|
|
| c) |
|
| (20 | ) |
|
| |||||||
|
|
|
|
| d) |
|
| 6,977 |
|
|
|
|
|
| d) |
|
| 3,270 |
|
|
| |||||||
|
| 1,255,436 |
|
|
|
|
| (49,546 | ) | 1,205,890 |
| 956,472 |
|
|
|
|
| (35,958 | ) | 920,514 |
| |||||||
Gross income |
| 541,018 |
|
|
|
|
| (9,252 | ) | 531,766 |
| 497,940 |
|
|
|
|
| (5,745 | ) | 492,195 |
| |||||||
Selling, general and administration |
| 51,080 |
|
|
|
|
|
|
| 51,080 |
| 34,478 |
|
|
|
|
|
|
| 34,478 |
| |||||||
Operating income |
| 489,938 |
|
|
|
|
| (9,252 | ) | 480,686 |
| 463,462 |
|
|
|
|
| (5,745 | ) | 457,717 |
| |||||||
Other expenses (income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Interest on long-term debt |
| 11,541 |
|
| b) |
|
| (4,221 | ) | 7,320 |
| 20,403 |
|
| b) |
|
| (4,373 | ) | 16,030 |
| |||||||
Net interest income |
| (15,223 | ) |
|
|
|
|
|
| (15,223 | ) | (6,023 | ) |
| c) |
|
| 5 |
| (6,018 | ) | |||||||
Foreign exchange loss (gain) |
| (3,759 | ) |
|
|
|
|
|
| (3,759 | ) | (1,153 | ) |
|
|
|
|
|
| (1,153 | ) | |||||||
Other (income) expenses |
| (218 | ) |
| c) |
|
| 218 |
| — |
| (15 | ) |
| c) |
|
| 15 |
| — |
| |||||||
Loss on early extinguishment of debt |
| — |
|
|
|
|
|
|
| — |
| 10,249 |
|
|
|
|
|
|
| 10,249 |
| |||||||
Income before income taxes and cumulative effect of accounting change |
| 497,597 |
|
|
|
|
| (5,249 | ) | 492,348 |
| 440,001 |
|
|
|
|
| (1,392 | ) | 438,609 |
| |||||||
Income tax expense |
| 190,528 |
|
| b) |
|
| 660 |
| 188,494 |
| 158,380 |
|
| b) |
|
| 676 |
| 157,879 |
| |||||||
|
|
|
|
| d) |
|
| (2,694 | ) |
|
|
|
|
| d) |
|
| (1,177 | ) |
|
| |||||||
Net Income |
| $ | 307,069 |
|
|
|
|
| $ | (3,215 | ) | $ | 303,854 |
| $ | 281,621 |
|
|
|
|
| $ | (891 | ) | $ | 280,730 |
| |
Earnings Per Common Share | —Basic |
| $ | 6.43 |
|
|
|
|
|
|
| $ | 6.36 |
| $ | 5.71 |
|
|
|
|
|
|
| $ | 5.69 |
| ||
| —Diluted |
| $ | 6.36 |
|
|
|
|
|
|
| $ | 6.29 |
| $ | 5.64 |
|
|
|
|
|
|
| $ | 5.62 |
|
19
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands of United States Dollars)
| For the Three Months Ended June 30, 2006 |
| For the Three Months Ended June 30, 2005 |
| |||||||||||||||||||||||
|
| U.S. GAAP |
| Ref |
| Amount |
| Canadian |
| U.S. GAAP |
| Ref |
| Amount |
| Canadian |
| ||||||||||
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
| $ | 156,368 |
|
|
|
|
| $ | (502 | ) | $ | 155,866 |
| $ | 126,853 |
|
|
|
|
| $ | (451 | ) | $ | 126,402 |
|
Adjustments to reconcile net income to net cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Depreciation of capital assets |
| 13,212 |
|
| b) |
|
| (2,223 | ) | 12,690 |
| 20,288 |
|
| b) |
|
| (2,223 | ) | 19,662 |
| ||||||
|
|
|
| c) |
|
| 43 |
|
|
|
|
|
| c) |
|
| (38 | ) |
|
| |||||||
|
|
|
|
| d) |
|
| 1,658 |
|
|
|
|
|
| d) |
|
| 1,635 |
|
|
| ||||||
Amortization of deferred charges |
| 538 |
|
|
|
|
|
|
| 538 |
| 505 |
|
|
|
|
|
|
| 505 |
| ||||||
Stock based compensation |
| 411 |
|
|
|
|
|
|
| 411 |
| 523 |
|
|
|
|
|
|
| 523 |
| ||||||
Deferred income taxes |
| (6,937 | ) |
| b) |
|
| 321 |
| (7,236 | ) | 4,833 |
|
| b) |
|
| 335 |
| 4,580 |
| ||||||
|
|
|
|
| d) |
|
| (620 | ) |
|
|
|
|
| d) |
|
| (588 | ) |
|
| ||||||
Unrealized foreign exchange gain |
| — |
|
|
|
|
|
|
| — |
| (1,939 | ) |
|
|
|
|
|
| (1,939 | ) | ||||||
Loss on early extinguishment of debt |
| — |
|
|
|
|
|
|
| — |
| 10,249 |
|
|
|
|
|
|
| 10,249 |
| ||||||
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Accounts receivable |
| 11,596 |
|
| c) |
|
| 95 |
| 11,691 |
| 59,922 |
|
| c) |
|
| (124 | ) | 59,798 |
| ||||||
Inventories |
| (88,958 | ) |
| c) |
|
| 20 |
| (88,938 | ) | (60,921 | ) |
| c) |
|
| (15 | ) | (60,936 | ) | ||||||
Other current assets |
| 1,299 |
|
| c) |
|
| 39 |
| 1,338 |
| 1,562 |
|
|
|
|
|
|
| 1,562 |
| ||||||
Accounts payable and accrued charges |
| (3,227 | ) |
| b) |
|
| 1,366 |
| (1,941 | ) | (29,780 | ) |
| b) |
|
| 1,292 |
| (28,329 | ) | ||||||
|
|
|
|
| c) |
|
| (80 | ) |
|
|
|
|
| c) |
|
| 159 |
|
|
| ||||||
Change in deferred pension liability |
| (265 | ) |
|
|
|
|
|
| (265 | ) | (747 | ) |
|
|
|
|
|
| (747 | ) | ||||||
Income and other taxes payable |
| (66,802 | ) |
| c) |
|
| — |
| (66,802 | ) | 48,484 |
|
| c) |
|
| (155 | ) | 48,329 |
| ||||||
Net cash provided by operations |
| 17,235 |
|
|
|
|
| 117 |
| 17,352 |
| 179,832 |
|
|
|
|
| (173 | ) | 179,659 |
| ||||||
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Expenditures for capital assets, net of litigation settlement |
| (11,811 | ) |
| c) |
|
| 154 |
| (11,657 | ) | (8,813 | ) |
| c) |
|
| (46 | ) | (8,859 | ) | ||||||
Proceeds from mortgage receivable, net |
| 735 |
|
|
|
|
|
|
| 735 |
| 370 |
|
|
|
|
|
|
| 370 |
| ||||||
Investments |
| 330 |
|
| c) |
|
| (330 | ) | — |
| 71 |
|
| c) |
|
| (71 | ) | — |
| ||||||
Net cash used for investing activities |
| (10,746 | ) |
|
|
|
| (176 | ) | (10,922 | ) | (8,372 | ) |
|
|
|
| (117 | ) | (8,489 | ) | ||||||
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Common shares issued pursuant to share option plan |
| 5,036 |
|
|
|
|
|
|
| 5,036 |
| 5,494 |
|
|
|
|
|
|
| 5,494 |
| ||||||
Common share dividends |
| (8,488 | ) |
|
|
|
|
|
| (8,488 | ) | (5,496 | ) |
|
|
|
|
|
| (5,496 | ) | ||||||
Common share repurchase |
| (85,500 | ) |
|
|
|
|
|
| (85,500 | ) | (104,896 | ) |
|
|
|
|
|
| (104,896 | ) | ||||||
Repayment of long-term debt |
| — |
|
|
|
|
|
|
| — |
| (123,248 | ) |
|
|
|
|
|
| (123,248 | ) | ||||||
Net cash (used for) provided by financing activities |
| (88,952 | ) |
|
|
|
| — |
| (88,952 | ) | (228,146 | ) |
|
|
|
| — |
| (228,146 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents |
| 21,131 |
|
|
|
|
|
|
| 21,131 |
| (935 | ) |
|
|
|
|
|
| (935 | ) | ||||||
Increase in Cash and Cash Equivalents |
| (61,332 | ) |
|
|
|
| (59 | ) | (61,391 | ) | (57,621 | ) |
|
|
|
| (290 | ) | (57,911 | ) | ||||||
Cash and Cash Equivalents at Beginning of Period |
| 663,324 |
|
| c) |
|
| 210 |
| 663,534 |
| 481,522 |
|
| c) |
|
| 612 |
| 482,134 |
| ||||||
Cash and Cash Equivalents at End of Period |
| $ | 601,992 |
|
|
|
|
| $ | 151 |
| $ | 602,143 |
| $ | 423,901 |
|
|
|
|
| $ | 322 |
| $ | 424,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
| For the Six Months Ended June 30, 2006 |
| For the Six Months Ended June 30, 2005 |
| ||||||||||||||||||||||
|
| U.S. GAAP |
| Ref |
| Amount |
| Canadian |
| U.S. GAAP |
| Ref |
| Amount |
| Canadian |
| ||||||||||
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
| $ | 307,069 |
|
|
|
|
| $ | (3,215 | ) | $ | 303,854 |
| $ | 281,621 |
|
|
|
|
| $ | (891 | ) | $ | 280,730 |
|
Adjustments to reconcile net income to net cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Depreciation of capital assets |
| 33,295 |
|
| b) |
|
| (4,447 | ) | 35,909 |
| 40,090 |
|
| b) |
|
| (4,447 | ) | 38,913 |
| ||||||
|
|
|
|
| c) |
|
| 84 |
|
|
|
|
|
| d) |
|
| 3,270 |
|
|
| ||||||
|
|
|
|
| d) |
|
| 6,977 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Amortization of deferred charges |
| 999 |
|
|
|
|
|
|
| 999 |
| 875 |
|
|
|
|
|
|
| 875 |
| ||||||
Stock based compensation |
| 1,648 |
|
|
|
|
|
|
| 1,648 |
| 981 |
|
|
|
|
|
|
| 981 |
| ||||||
Deferred income taxes |
| (6,133 | ) |
| b) |
|
| 660 |
| (8,167 | ) | 44,422 |
|
| b) |
|
| 676 |
| 43,921 |
| ||||||
|
|
|
|
| d) |
|
| (2,694 | ) |
|
|
|
|
| d) |
|
| (1,177 | ) |
|
| ||||||
Unrealized foreign exchange gain |
| — |
|
|
|
|
|
|
| — |
| (1,939 | ) |
|
|
|
|
|
| (1,939 | ) | ||||||
Loss on early extinguishment of debt |
| — |
|
|
|
|
|
|
| — |
| 10,249 |
|
|
|
|
|
|
| 10,249 |
| ||||||
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Accounts receivable |
| (1,129 | ) |
| c) |
|
| (199 | ) | (1,328 | ) | 85,448 |
|
| c) |
|
| 31 |
| 85,479 |
| ||||||
Inventories |
| (132,314 | ) |
| c) |
|
| (47 | ) | (132,361 | ) | (54,505 | ) |
| c) |
|
| 17 |
| (54,488 | ) | ||||||
Other current assets |
| 2,734 |
|
| c) |
|
| 39 |
| 2,773 |
| 4,142 |
|
|
|
|
|
|
| 4,142 |
| ||||||
Accounts payable and accrued charges |
| (30,935 | ) |
| b) |
|
| (2,272 | ) | (33,177 | ) | (68,274 | ) |
| b) |
|
| (2,020 | ) | (70,328 | ) | ||||||
|
|
|
|
| c) |
|
| 30 |
|
|
|
|
|
| c) |
|
| (34 | ) |
|
| ||||||
Change in deferred pension liability |
| (443 | ) |
|
|
|
|
|
| (443 | ) | 345 |
|
|
|
|
|
|
| 345 |
| ||||||
Income and other taxes payable |
| (37,450 | ) |
|
|
|
|
|
| (37,450 | ) | (12,366 | ) |
|
|
|
|
|
| (12,366 | ) | ||||||
Net cash provided by operations |
| 137,341 |
|
|
|
|
| (5,084 | ) | 132,257 |
| 331,089 |
|
|
|
|
| (4,575 | ) | 326,514 |
| ||||||
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Expenditures for capital assets, net of litigation settlement |
| (42,410 | ) |
| c) |
|
| 100 |
| (42,310 | ) | (22,171 | ) |
| c) |
|
| (94 | ) | (22,265 | ) | ||||||
Proceeds from mortgage receivable, net |
| 971 |
|
|
|
|
|
|
| 971 |
| 1,827 |
|
|
|
|
|
|
| 1,827 |
| ||||||
Investments |
| — |
|
|
|
|
|
|
| — |
| (99 | ) |
| c) |
|
| 99 |
| — |
| ||||||
Net cash used for investing activities |
| (41,439 | ) |
|
|
|
| 100 |
| (41,339 | ) | (20,443 | ) |
|
|
|
| 5 |
| (20,438 | ) | ||||||
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Common shares issued pursuant to share option plan |
| 5,483 |
|
|
|
|
|
|
| 5,483 |
| 16,423 |
|
|
|
|
|
|
| 16,423 |
| ||||||
Common share dividends |
| (15,938 | ) |
|
|
|
|
|
| (15,938 | ) | (10,454 | ) |
|
|
|
|
|
| (10,454 | ) | ||||||
Common share repurchase |
| (85,500 | ) |
|
|
|
|
|
| (85,500 | ) | (121,157 | ) |
|
|
|
|
|
| (121,157 | ) | ||||||
Repayment of long-term debt |
| (4,991 | ) |
| b) |
|
| 4,991 |
| — |
| (127,837 | ) |
| b) |
|
| 4,589 |
| (123,248 | ) | ||||||
Net cash (used for) provided by financing activities |
| (100,946 | ) |
|
|
|
| 4,991 |
| (95,955 | ) | (243,025 | ) |
|
|
|
| 4,589 |
| (238,436 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents |
| 23,972 |
|
|
|
|
|
|
| 23,972 |
| 1,506 |
|
|
|
|
|
|
| 1,506 |
| ||||||
Increase in Cash and Cash Equivalents |
| 18,928 |
|
|
|
|
| 7 |
| 18,935 |
| 69,127 |
|
|
|
|
| 19 |
| 69,146 |
| ||||||
Cash and Cash Equivalents at Beginning of Period |
| 583,064 |
|
| c) |
|
| 144 |
| 583,208 |
| 354,774 |
|
| c) |
|
| 303 |
| 355,077 |
| ||||||
Cash and Cash Equivalents at End of Period |
| $ | 601,992 |
|
|
|
|
| $ | 151 |
| $ | 602,143 |
| $ | 423,901 |
|
|
|
|
| $ | 322 |
| $ | 424,223 |
|
21
CONSOLIDATED BALANCE SHEETS (unaudited)
(thousands of United States Dollars)
| June 30, 2006 |
| December 31, 2005 |
| |||||||||||||||||||||||
|
| U.S. GAAP |
| Ref |
| Amount |
| Canadian |
| U.S. GAAP |
| Ref |
| Amount |
| Canadian |
| ||||||||||
Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash and cash equivalents |
| $ | 601,992 |
|
| c) |
|
| $ | 151 |
| $ | 602,143 |
| $ | 583,064 |
|
| c) |
|
| $ | 144 |
| $ | 583,208 |
|
Accounts receivable, less allowances |
| 377,223 |
|
| c) |
|
| 686 |
| 375,537 |
| 388,943 |
|
| c) |
|
| 222 |
| 377,324 |
| ||||||
|
|
|
|
| h) |
|
| (2,372 | ) |
|
|
|
|
| h) |
|
| (11,841 | ) |
|
| ||||||
Inventories |
| 661,215 |
|
| c) |
|
| 198 |
| 661,413 |
| 506,237 |
|
| c) |
|
| 150 |
| 506,387 |
| ||||||
Future income taxes |
| 36,332 |
|
|
|
|
|
|
| 36,332 |
| 30,227 |
|
|
|
|
|
|
| 30,227 |
| ||||||
Other |
| 6,087 |
|
| c) |
|
| 7 |
| 6,094 |
| 8,615 |
|
| c) |
|
| 22 |
| 8,637 |
| ||||||
|
| 1,682,849 |
|
|
|
|
| (1,330 | ) | 1,681,519 |
| 1,517,086 |
|
|
|
|
| (11,303 | ) | 1,505,783 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Non-Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Capital assets |
| 1,063,720 |
|
| b) |
|
| (108,357 | ) | 1,070,597 |
| 1,056,186 |
|
| b) |
|
| (112,804 | ) | 1,065,558 |
| ||||||
|
|
|
| c) |
|
| 2,604 |
|
|
|
|
|
| c) |
|
| 2,569 |
|
|
| |||||||
|
|
|
|
| d) |
|
| (13,505 | ) |
|
|
|
|
| d) |
|
| (6,528 | ) |
|
| ||||||
|
|
|
| f) |
|
| 13,902 |
|
|
|
|
|
| f) |
|
| 13,902 |
|
|
| |||||||
|
|
|
|
| g) |
|
| 112,233 |
|
|
|
|
|
| g) |
|
| 112,233 |
|
|
| ||||||
Other |
| 59,974 |
|
| c) |
|
| (3,284 | ) | 63,798 |
| 65,747 |
|
| c) |
|
| (2,776 | ) | 70,033 |
| ||||||
|
|
|
|
| i) |
|
| 7,108 |
|
|
|
|
|
| i) |
|
| 7,062 |
|
|
| ||||||
| 1,123,694 |
|
|
|
|
| 10,701 |
| 1,134,395 |
| 1,121,933 |
|
|
|
|
| 13,658 |
| 1,135,591 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Total Assets |
| $ | 2,806,543 |
|
|
|
|
| $ | 9,371 |
| $ | 2,815,914 |
| $ | 2,639,019 |
|
|
|
|
| $ | 2,355 |
| $ | 2,641,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Accounts payable and accrued charges |
| $ | 280,571 |
|
| b) |
|
| $ | (8,873 | ) | $ | 269,614 |
| $ | 303,589 |
|
| b) |
|
| $ | (6,602 | ) | $ | 297,318 |
|
|
|
|
| c) |
|
| 362 |
|
|
|
|
|
| c) |
|
| 331 |
|
|
| |||||||
|
|
|
|
| h) |
|
| (2,446 | ) |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income and other taxes payable |
| 4,284 |
|
|
|
|
|
|
| 4,284 |
| 41,073 |
|
|
|
|
|
|
| 41,073 |
| ||||||
Current portion of long-term debt |
| 21,015 |
|
| b) |
|
| (6,300 | ) | 14,715 |
| 4,114 |
|
| b) |
|
| (4,114 | ) | — |
| ||||||
| 305,870 |
|
|
|
|
| (17,257 | ) | 288,613 |
| 348,776 |
|
|
|
|
| (10,385 | ) | 338,391 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Long-Term Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Long-term debt |
| 291,162 |
|
| b) |
|
| (109,307 | ) | 181,855 |
| 313,053 |
|
| b) |
|
| (116,483 | ) | 196,570 |
| ||||||
Other |
| 44,538 |
|
| i) |
|
| (44,538 | ) | — |
| 44,584 |
|
| i) |
|
| (44,584 | ) | — |
| ||||||
Future income taxes |
| 188,890 |
|
| b) |
|
| 5,950 |
| 253,766 |
| 191,973 |
|
| b) |
|
| 5,290 |
| 254,652 |
| ||||||
|
|
|
|
| d) |
|
| (5,545 | ) |
|
|
|
|
| d) |
|
| (2,851 | ) |
|
| ||||||
|
|
|
| f) |
|
| 5,172 |
|
|
|
|
|
| f) |
|
| 5,172 |
|
|
| |||||||
|
|
|
|
| g) |
|
| 41,751 |
|
|
|
|
|
| g) |
|
| 41,751 |
|
|
| ||||||
|
|
|
| h) |
|
| (115 | ) |
|
|
|
|
| h) |
|
| (4,346 | ) |
|
| |||||||
|
|
|
|
| i) |
|
| 17,663 |
|
|
|
|
|
| i) |
|
| 17,663 |
|
|
| ||||||
| 524,590 |
|
|
|
|
| (88,969 | ) | 435,621 |
| 549,610 |
|
|
|
|
| (98,388 | ) | 451,222 |
| |||||||
Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Common shares |
| 414,110 |
|
| e) |
|
| (40,733 | ) | 373,377 |
| 419,272 |
|
| e) |
|
| (40,733 | ) | 378,539 |
| ||||||
Contributed surplus |
| 17,349 |
|
|
|
|
|
|
| 17,349 |
| 15,548 |
|
|
|
|
|
|
| 15,548 |
| ||||||
Retained earnings |
| 1,557,694 |
|
| b) |
|
| 10,177 |
| 1,591,423 |
| 1,341,659 |
|
| b) |
|
| 9,110 |
| 1,378,603 |
| ||||||
|
|
|
|
| d) |
|
| (7,960 | ) |
|
|
|
|
| d) |
|
| (3,678 | ) |
|
| ||||||
|
|
|
| e) |
|
| (47,700 | ) |
|
|
|
|
| e) |
|
| (47,700 | ) |
|
| |||||||
|
|
|
|
| f) |
|
| 8,730 |
|
|
|
|
|
| f) |
|
| 8,730 |
|
|
| ||||||
|
|
|
| g) |
|
| 70,482 |
|
|
|
|
|
| g) |
|
| 70,482 |
|
|
| |||||||
Accumulated other comprehensive loss |
| (13,070 | ) |
| e) |
|
| 88,433 |
| 109,531 |
| (35,846 | ) |
| e) |
|
| 88,433 |
| 79,071 |
| ||||||
Cumulative translation adjustment |
|
|
|
| h) |
|
| 185 |
|
|
|
|
|
| h) |
|
| (7,495 | ) |
|
| ||||||
|
|
|
|
| i) |
|
| 33,983 |
|
|
|
|
|
| i) |
|
| 33,979 |
|
|
| ||||||
| 1,976,083 |
|
|
|
|
| 115,597 |
| 2,091,680 |
| 1,740,633 |
|
|
|
|
| 111,128 |
| 1,851,761 |
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Total Liabilities and Shareholders’ Equity |
| $ | 2,806,543 |
|
|
|
|
| $ | 9,371 |
| $ | 2,815,914 |
| $ | 2,639,019 |
|
|
|
|
| $ | 2,355 |
| $ | 2,641,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Statements made in this report that are not statements of historical fact are “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements include, without limitation, any statements that may project, indicate or imply future results, events, performance or achievements and can be identified by the use of forward-looking words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates” or “anticipates” or the negative of these terms or other comparable words, or by discussions of strategy, plans or intentions.
Forward-looking information reflects management’s current views of future events and financial performance that involve a number of risks and uncertainties. The factors that could cause actual results to differ materially include, but are not limited to, the following: (1) general economic conditions; (2) changes in financial markets; (3) political conditions and developments, including conflict in the Middle East and the war on terrorism; (4) changes in the supply and demand for steel and our specific steel products; (5) the level of demand outside of North America for steel and steel products; (6) equipment performance at our manufacturing facilities; (7) the occurrence of any material lawsuits; (8) the availability of capital; (9) our ability to properly and efficiently staff our manufacturing facilities; (10) domestic and international competitive factors, including the level of steel imports into the Canadian and U.S. markets; (11) economic conditions in steel exporting nations; (12) trade sanction activities and the enforcement of trade sanction remedies; (13) supply and demand for scrap steel and iron, alloys and other raw materials; (14) supply, demand and pricing for the electricity and natural gas that we use; (15) changes in environmental and other regulations, including regulations arising from the Canadian Parliament’s ratification of the Kyoto Protocol, and the magnitude of future environmental expenditures; (16) inherent uncertainties in the development and performance of new or modified equipment or technologies; (17) North American interest rates; and (18) exchange rates.
This list is not exhaustive of the factors that may impact our forward-looking statements. These and other factors should be considered carefully and users should not place undue reliance on our forward-looking statements. As a result of the foregoing and other factors, no assurance can be given as to any such future results, levels of activity or achievements and neither we nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements.
We refer you to the sections captioned “Statement Regarding Forward-Looking Information” and “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2005, incorporated herein by reference, for a more detailed discussion of some of the many factors, variables, risks, and uncertainties that could cause actual results to differ materially from those we may have expected or anticipated. We caution that any forward-looking statement reflects only our reasonable belief at the time the statement is made. The Company undertakes no obligation to publicly update forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures the Company makes on related subjects as may be detailed in our other filings made from time to time with the Securities and Exchange Commission.
The following discussion and analysis presents factors which affected the Company’s consolidated results of operations for the three-month and six-month periods ended June 30, 2006 and June 30, 2005, and the Company’s consolidated financial position at June 30, 2006. We continue to operate and report our business as a single business segment. The following information should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in this Form10-Q and in the Company’s Form 10-K for the year-ended December 31, 2005. As used in this report, IPSCO Inc. and its subsidiaries, unless otherwise specified, are collectively referred to as “IPSCO” or the “Company”, and unless the context otherwise requires, the terms “we”, “us”, “our” and similar references refer to the Company.
23
Overview: Second Quarter Operating Results 2006 vs. 2005
Second quarter 2006 sales were a second quarter record $893.6 million, $205.9 million or 30% higher than the $687.7 million reported in the second quarter of 2005. Steel mill product revenue of $552.9 million increased $103.0 million over the second quarter 2005 as steel mill product volumes reached a new quarterly record of 702,000 tons, 21% higher than the second quarter 2005. In addition, the average price per ton of steel mill product increased $11 per ton or 1% from the prior year. Tubular product sales of $340.7 million increased $102.9 million or 43% from the same quarter last year, driven by higher sales volumes in large diameter pipe, increased shipments in energy and non energy tubular shipments in the United States and higher average tubular product pricing.
IPSCO shipped a second quarter record 1,001,000 tons of finished products, up 198,000 tons or 25% from the 803,000 tons reported last year. Steel mill products had record shipments in the second quarter of 702,000 tons, 122,000 tons or 21% more than the prior year. Second quarter 2006 tubular product shipments were 299,000 tons, 75,000 tons or 34% higher compared to last year’s second quarter. Energy tubular shipments were 180,000 tons, an increase of 24,000 tons from the same period last year. Large diameter pipe shipments were 57,000 tons, up 44,000 tons from second quarter of 2005.
Gross income of $261.6 million for the second quarter of 2006 was $31.2 million higher than the same period last year due to the significant increases in volumes. As a percent of sales, gross margin declined from 33% in the second quarter of 2005 to 29% for the second quarter of 2006. Margin declines were due to higher costs for steel and tubular product raw material inputs and higher conversion costs which were partially offset by higher average product pricing of $37 per ton or 4%.
The average per ton cost of scrap consumed in the second quarter of 2006 increased 18% from the second quarter of 2005. Aggregate conversion costs for the three steelworks were 3% higher than the same period last year due to increases in alloys, energy costs, and labor and maintenance expense. IPSCO supplies the majority of steel input needed to make our tubular products. Any additional coil needed for tubular production is purchased externally. The increase in the cost of steel produced, as well as the increase in the cost of purchased coil, increased average tubular costs. The average cost per ton of all products sold increased to $631 per ton, $62 per ton higher than the same quarter last year.
Plate and coil tons produced in the second quarter of 2006 were a record 952,000 tons compared to 858,000 tons in second quarter of 2005. Volume increases over the second quarter of 2005 were due to steel mill production efficiencies. Operating income per ton in the second quarter was $243 per ton compared to $267 per ton in the prior period due to the factors previously discussed.
Selling, general and administration expenses were $18.7 million during the second quarter of 2006, as compared to $16.1 million during the same period in 2005, an increase of $2.6 million, or 16%, driven by higher outside professional fees. Selling, general and administrative expenses represented 2.1% of sales compared to 2.3% in 2005.
Interest expense on long-term debt was $5.7 million, down 41% from $9.7 million in the second quarter of 2005. The lower interest expense for the quarter is the result of significant reduction in long-term debt during 2005 from scheduled payments, redemptions and open market purchases. In the second quarter of 2005, IPSCO prepaid $100 million of debt and incurred $10.2 million of debt retirement expense and premiums. Interest income increased $5.0 million to $8.2 million due to higher average cash balances and higher interest rates compared to the prior period.
Changes in the Canadian to U.S. dollar exchange rate can impact reported earnings. The second quarter 2006 foreign exchange gain was $5.1 million compared to a gain in 2005 of $0.8 million.
In the second quarter, the estimate of the 2006 annual effective tax rate was reduced to 38.3%, resulting in an effective tax rate for the quarter of 37.6%. The second quarter tax rate, compared to the prior year’s rate of 36%, reflects the full utilization of net U.S. operating losses, continued profitability, and certain tax law changes in Canada. The current quarter effective tax rate decreased net earnings by $0.08 per diluted share as compared to the second quarter of 2005.
24
Net income for the second quarter of 2006 was $156.4 million or $3.25 per diluted share compared to $126.9 million or $2.57 per diluted share during second quarter of 2005. Net income increased in the second quarter compared with the second quarter of 2005 due to higher volumes, higher selling prices, decreased interest expenses, higher interest income, higher foreign exchange gains and the absence of debt extinguishment expense. Earnings per diluted share in the second quarter of 2006 were reduced by $0.08 as compared to the prior year due to the impact of the higher effective tax rate. In addition, earnings per diluted share benefited by $0.12 compared to the prior year due to the impact of the share repurchase efforts in 2005 and 2006. The denominator used in the earnings per share calculation was 48.2 million shares in the second quarter of 2006 versus 49.4 million shares in the second quarter of 2005.
First Half Operating Results 2006 vs. 2005
Sales were $1.8 billion, $342.0 million or 24% higher than the $1.5 billion reported in the first half of 2005. Average selling price increased to $895 per ton in the first half of 2006 compared to $877 per ton in the first half of 2005, while total tons shipped increased 21%.
For the first half of 2006, IPSCO shipped 2,006,000 tons of finished products, up 347,000 tons from the 1,659,000 tons reported last year. Steel mill products had shipments in the first half of 1,360,000 tons, 162,000 tons or 14% more than the prior year. Tubular products had shipments in the first half of 646,000 tons, 185,000 tons or 40% higher compared to last year. Energy tubular shipments were 389,000 tons, up 49,000 tons from the same period last year. Large diameter pipe shipments were 136,000 tons, up 120,000 tons from the first half of 2005.
Plate and coil tons produced in the first half of 2006 were 1,848,000 tons compared to 1,675,000 tons in the first half of 2005. During the first half of 2006, the average utilization rates of all operating facilities in the steel mills and tubular mills were approximately 96% and 84%, respectively, compared to 94% and 68% in the prior year.
Gross income of $541.0 million for the first half of 2006 was $43.1 million higher than the same period last year. Year-to-date gross margin declined from 34% to 30% due to increases in input and conversion costs.
Selling, general and administration expenses were $51.1 million during the first half of 2006, as compared to $34.5 million during the same period in 2005, an increase of $16.6 million, or 48%. The impact of share price appreciation and adoption of FAS 123(R) increased administration expenses by $9.5 million compared to the prior year. Year-over-year, outside professional fees increased $2.6 million. Selling, general and administrative expenses represented 2.8% of sales compared to 2.4% in 2005.
Operating income per ton in the first half of 2006 was $244 per ton compared to $279 per ton in the prior period compared due to the factors previously discussed.
Interest expense on long-term debt was $11.5 million, down 43% from $20.4 million in the first half of 2005. This reduction in the first half of 2006 compared to the first half of 2005 is the result of the reduction in long-term debt during 2005 and 2006 from scheduled payments, redemptions and open market purchases. Interest income increased $9.2 million to $15.2 million due to higher average cash balances and interest rate increases compared to the prior period.
Our annual effective income tax rate was 38.3% for the first half of 2006 versus 36% in the first half of 2005 as previously referenced.
Continued strong demand for steel mill products is expected for the balance of 2006. IPSCO’s steel mill capacity is fully committed through the third quarter of this year, and we anticipate similar demand when we open the fourth quarter order book. Operations are expected to maintain strong performance, as scheduled maintenance outages are minimal during the remainder of the year.
25
We expect energy prices to remain high and therefore continue to drive high drilling activity and demand for OCTG products. In addition, our large diameter spiral pipe facilities are booked at full capacity through the third quarter of 2007.
We expect margins to be stable for the last half of the year. Excluding the effects of foreign exchange gains or losses and share price volatility, and assuming an effective tax rate of 38.3%, we forecast third quarter 2006 earnings to be in the range of $3.30 to $3.50 per diluted share.
Financial Position and Liquidity
Cash at June 30, 2006 was $602.0 million, a decrease of $61.3 million in the quarter. Net cash generated by operating activities for the three months ended June 30, 2006 was $17.2 million compared to $179.8 million generated by operating activities for the same period in 2005. This decrease of $162.6 million was primarily due to increased tax payments, a smaller reduction in accounts receivable related to a smaller reduction in sales, and an increase in inventories. Cash invested in inventories was $89.0 million in the second quarter of 2006 versus $60.9 million in 2005 primarily due to production in anticipation of strong demand for tubular products in the second half of 2006, and higher average inventory costs compared to the prior year.
Depreciation on the cash flow statement is lower than usual as a result of an adjustment between depreciation and capital expenditures between the first and second quarters. This adjustment does not affect the income statement. Going forward, we expect depreciation to run between $18-20 million per quarter depending on the capitalization of fixed assets.
Capital expenditures in the second quarter of 2006 were $11.8 million, compared with $8.8 million in the same period in 2005. In the prior year, capital expenditures focused primarily on maintenance projects. In 2006, in addition to maintenance projects, IPSCO has approved a number of projects targeted to reduce costs and add value to our product lines. In February 2006, the Company approved the expenditure of a total of $45.2 million for the installation of a vacuum degasser at the Montpelier Steelworks and a coil preparation facility, as well as other related enhancements to the large diameter spiral pipe mill operations located in Regina, Saskatchewan. Capital expenditures are anticipated to total approximately $100 million in 2006.
In May 2006, the Company announced a new share repurchase program to purchase up to 4.7 million of our common shares. In the second quarter of 2006, 934,700 common shares were repurchased totaling $85.5 million versus 2,199,400 common shares purchased totaling $104.9 million in the same quarter last year under the previous repurchase program. Part II—Item 2 of this Report provides further information regarding share repurchases made over the quarter.
In May 2006, IPSCO’s Board of Directors approved an 11% increase in the quarterly cash dividend on the Company’s common shares from CDN $0.18 to $0.20 per share, paid on June 30, 2006 to shareholders of record on June 15, 2006. On July 27, 2006, IPSCO’s Board of Directors declared a CDN $0.20 per share cash dividend on the Company’s common shares, payable September 29, 2006 to shareholders of record on September 15, 2006.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are exposed to various market risks, including commodity price risk, foreign currency risk and interest rate risk. To help manage the volatility related to these risks, from time to time we enter into various derivative contracts, the majority of which are settled in cash. Such settlements have not had a significant effect on our liquidity in the past, nor are they expected to be significant in the future. We do not use derivatives for speculative or trading purposes.
IPSCO manages a portion of our exposure to price risk related to natural gas purchases by using derivative financial instruments. Changes in the market value of these derivative instruments have a high correlation to changes in the spot price of natural gas. Gains and losses from the use of these instruments are deferred in accumulated other comprehensive loss on the consolidated balance sheets and recognized into production costs in the same period as the
26
underlying transaction. At June 30, 2006, accumulated other comprehensive loss includes $0.2 million in unrealized net-of-tax losses for the fair value of these instruments. A sensitivity analysis indicates that the reduction in the fair value of these instruments at June 30, 2006, due to hypothetical declines of 10% and 25% in market prices of natural gas at that time would be $3.8 million and $9.5 million, respectively (June 30, 2005—$3.1 million and $7.5 million, respectively). Any resulting changes in fair value would be recorded as adjustments to other comprehensive income, net of tax. Because these instruments are hedges, these hypothetical losses would be offset by the benefit of lower prices paid for the natural gas used in the normal production cycle.
IPSCO’s outstanding debt is fixed rate debt and IPSCO’s investment practice is to invest in highly liquid money market funds or securities with short remaining maturities. As a result, changes in interest rates are not expected to have a significant impact on the value of these investments. As such, future changes in interest rates are not expected to impact interest expense or the value of cash equivalent investments. IPSCO does not engage in interest swaps to manage interest rate exposure.
IPSCO is subject to the impact of changes in exchange rates on revenues and operating costs, firm commitments for capital expenditures and existing assets or liabilities (including certain inter-company balances), particularly changes in the value of the U.S. dollar versus the Canadian dollar. At June 30, 2006, there were no foreign exchange contracts outstanding.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Management, under the supervision of the President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of June 30, 2006. Based on such evaluation, IPSCO’s President and Chief Executive Officer and Senior Vice President and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of June 30, 2006, and that there have been no significant changes in such controls and procedures, or in other factors, that could significantly affect these controls subsequent to their evaluation date.
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
27
There have been no material changes in legal proceedings since the issuance of the Company’s Form 10-K for the year ended December 31, 2005.
There have been no material changes in the risk factors provided in Item 1A of Part 1 of the Company’s Form 10-K for the year ended December 31, 2005.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Company Purchases of Equity Securities
In May 2006, IPSCO filed a normal course issuer bid (the “Bid”) with Canadian regulators to repurchase, by way of open market purchases on the TSX and NYSE, up to 4.7 million of our common shares between May 9, 2006 and May 8, 2007. During the quarter ended June 30, 2006 we made the following purchases:
|
| (a) Total Number of |
| (b) Average Price |
| (c) Total Number of |
| (d) Maximum Number |
| |
Period: |
|
|
|
|
|
|
|
|
| |
April 1 - 30 |
| — |
| — |
| — |
| 4,700,000 |
| |
May 1 - 31 |
| 214,000 |
| $ | 92.08 | (1) | 214,000 |
| 4,486,000 |
|
June 1 - 30 |
| 720,700 |
| $ | 91.30 | (2) | 934,700 |
| 3,765,300 |
|
(1) These repurchases were made pursuant to the Bid at an average price of CDN $102.16 per share (including commissions and fees). The average price noted above was converted from Canadian to U.S. dollars using the Bank of Canada average exchange rate in effect for May 2006 of 1.1095.
(2) These repurchases were made pursuant to the Bid at an average price of CDN $101.69 per share (including commissions and fees). The average price noted above was converted from Canadian to U.S. dollars using the Bank of Canada average exchange rate in effect for June 2006 of 1.1138.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
The annual and special meeting of the shareholders of the Company (the “Meeting”) was held on May 4, 2006. Of the 48,073,018 shares entitled to be voted at the Meeting, 35,254,660 shares (or 73%) were represented at the Meeting in person or by proxy.
28
The individuals listed below were re-elected (for a term of one year) as directors of the Company:
Michael A. Grandin |
| Richard G. Sim |
Juanita A. Hinshaw |
| David S. Sutherland |
Burton M. Joyce |
| Roger E. Tetrault |
Jack D. Michaels |
| Gordon G. Thiessen, O.C. |
Bernard M. Michel |
| D. Murray Wallace |
Allan S. Olson |
| John B. Zaozirny, Q.C. |
Arthur R. Price |
|
|
The shareholders elected the above-noted slate of directors as follows:
Number of shares voted FOR: 35,186,475 |
Number of shares voted AGAINST: 0 |
Number of shares WITHELD: 62,385 |
Number of shares INVALID: 5,800 |
Number of NON VOTES: 0 |
The appointment of Ernst & Young LLP as the Company’s independent registered public accounting firm was ratified by the shareholders as follows:
Number of shares voted FOR: 35,184,157 |
Number of shares voted AGAINST: 0 |
Number of shares WITHELD: 70,503 |
Number of shares INVALID: 0 |
Number of NON VOTES: 0 |
The shareholders approved the Annual Incentive Plan for Senior Officers as follows:
Number of shares voted FOR: 34,937,220 |
Number of shares voted AGAINST: 317,440 |
Number of shares WITHELD: 0 |
Number of shares INVALID: 0 |
Number of NON VOTES: 0 |
None.
31.1 |
| Certification of President and Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31.2 |
| Certification of Senior Vice President and Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.1 |
| Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
29
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.
IPSCO INC. | ||
Date: August 1, 2006 | By: | /s/ DAVID S. SUTHERLAND |
|
| David S. Sutherland |
|
| President and Chief Executive Officer |
Date: August 1, 2006 | By: | /s/ VICKI L. AVRIL |
|
| Vicki L. Avril |
|
| Senior Vice President and Chief Financial Officer |
30