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 |
For the quarterly period ended September 30, 2006 | ||
or | ||
o |
| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange |
For the transition period from to
Commission File Number 001- 14568
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 November 6, 2006 is 47,198,092.
IPSCO Inc.
Form 10-Q, September 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 Nine Months Ended |
| |||||||||
|
| Sept 30 |
| Sept 30 |
| Sept 30 |
| Sept 30 |
| |||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| |||||
Plate and Coil Tons Produced (thousands) |
| 946.8 |
| 759.3 |
| 2,794.9 |
| 2,434.5 |
| |||||
Finished Tons Shipped (thousands) |
| 1,041.7 |
| 847.8 |
| 3,048.1 |
| 2,507.1 |
| |||||
Sales |
| $ | 996,867 |
| $ | 726,079 |
| $ | 2,793,321 |
| $ | 2,180,491 |
| |
Cost of sales |
| 682,290 |
| 501,204 |
| 1,937,726 |
| 1,457,676 |
| |||||
Gross income |
| 314,577 |
| 224,875 |
| 855,595 |
| 722,815 |
| |||||
Selling, general and administration |
| 25,696 |
| 23,075 |
| 76,776 |
| 57,553 |
| |||||
Operating income |
| 288,881 |
| 201,800 |
| 778,819 |
| 665,262 |
| |||||
Other expenses (income): |
|
|
|
|
|
|
|
|
| |||||
Interest on long-term debt |
| 6,120 |
| 8,784 |
| 17,661 |
| 29,187 |
| |||||
Net interest income |
| (9,482 | ) | (4,456 | ) | (24,705 | ) | (10,479 | ) | |||||
Loss on early extinguishment of debt |
| — |
| 690 |
| — |
| 10,939 |
| |||||
Foreign exchange loss (gain) |
| 2,497 |
| (18,080 | ) | (1,262 | ) | (19,233 | ) | |||||
Other |
| (135 | ) | (1,767 | ) | (353 | ) | (1,782 | ) | |||||
Income Before Income Taxes |
| 289,881 |
| 216,629 |
| 787,478 |
| 656,630 |
| |||||
Income Tax Expense |
| 92,792 |
| 82,602 |
| 283,320 |
| 240,982 |
| |||||
Net Income |
| 197,089 |
| 134,027 |
| 504,158 |
| 415,648 |
| |||||
Cumulative translation adjustment |
| (1,035 | ) | (3,617 | ) | 29,425 |
| (5,339 | ) | |||||
Change in fair value of derivatives, net of tax |
| (3,060 | ) | 4,235 |
| (10,744 | ) | 7,320 |
| |||||
Comprehensive income |
| $ | 192,994 |
| $ | 134,645 |
| $ | 522,839 |
| $ | 417,629 |
| |
Earnings per Common Share | —Basic |
| $ | 4.19 |
| $ | 2.81 |
| $ | 10.61 |
| $ | 8.52 |
|
| —Diluted |
| $ | 4.15 |
| $ | 2.78 |
| $ | 10.51 |
| $ | 8.44 |
|
Dividends Declared per Common Share (Canadian |
| $ | 0.20 |
| $ | 0.14 |
| $ | 0.58 |
| $ | 0.40 |
|
IPSCO Inc.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (unaudited)
(thousands of United States Dollars)
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
|
| Sept 30 |
| Sept 30 |
| Sept 30 |
| Sept 30 |
| ||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
Retained Earnings at Beginning of Period |
| $ | 1,557,694 |
| $ | 1,058,958 |
| $ | 1,341,659 |
| $ | 884,859 |
|
Net Income |
| 197,089 |
| 134,027 |
| 504,158 |
| 415,648 |
| ||||
Common Share Repurchase |
| (2,029 | ) | (9,018 | ) | (77,125 | ) | (106,086 | ) | ||||
Dividends on Common Shares |
| (8,457 | ) | (5,706 | ) | (24,395 | ) | (16,160 | ) | ||||
Retained Earnings at End of Period |
| $ | 1,744,297 |
| $ | 1,178,261 |
| $ | 1,744,297 |
| $ | 1,178,261 |
|
2
IPSCO Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands of United States Dollars)
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
|
| Sept 30 |
| Sept 30 |
| Sept 30 |
| Sept 30 |
| ||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
Operating Activities |
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 197,089 |
| $ | 134,027 |
| $ | 504,158 |
| $ | 415,648 |
|
Adjustments to reconcile net income to net cash flows from operating activities |
|
|
|
|
|
|
|
|
| ||||
Stock-based compensation |
| 3,373 |
| 2,300 |
| 5,021 |
| 3,281 |
| ||||
Depreciation of capital assets |
| 18,936 |
| 19,901 |
| 52,231 |
| 59,991 |
| ||||
Amortization of deferred charges |
| 507 |
| 409 |
| 1,506 |
| 1,284 |
| ||||
Deferred income taxes |
| 1,259 |
| 17,935 |
| (4,874 | ) | 62,357 |
| ||||
Loss on early extinguishment of debt |
| — |
| 690 |
| — |
| 10,939 |
| ||||
Unrealized foreign exchange gain |
| — |
| (18,714 | ) | — |
| (20,653 | ) | ||||
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
| ||||
Accounts receivable, less allowances |
| 3,704 |
| (27,533 | ) | 2,575 |
| 57,915 |
| ||||
Inventories |
| (103,337 | ) | 29,674 |
| (235,651 | ) | (24,831 | ) | ||||
Other |
| 315 |
| (1,614 | ) | 3,049 |
| 2,528 |
| ||||
Accounts payable and accrued charges |
| 50,333 |
| 29,142 |
| 19,398 |
| (39,132 | ) | ||||
Change in deferred pension liability |
| (283 | ) | (660 | ) | (726 | ) | (315 | ) | ||||
Income taxes payable |
| (7,296 | ) | 33,521 |
| (44,746 | ) | 21,155 |
| ||||
Net cash provided by operations |
| 164,600 |
| 219,078 |
| 301,941 |
| 550,167 |
| ||||
Investing Activities |
|
|
|
|
|
|
|
|
| ||||
Expenditures for capital assets |
| (19,443 | ) | (19,545 | ) | (61,853 | ) | (41,716 | ) | ||||
Proceeds from mortgage receivable, net |
| 7,425 |
| 1,955 |
| 8,396 |
| 3,782 |
| ||||
Acquisition costs |
| (4,371 | ) | 293 |
| (4,371 | ) | 194 |
| ||||
Net cash used for investing activities |
| (16,389 | ) | (17,297 | ) | (57,828 | ) | (37,740 | ) | ||||
Financing Activities |
|
|
|
|
|
|
|
|
| ||||
Common share dividends |
| (8,457 | ) | (5,706 | ) | (24,395 | ) | (16,160 | ) | ||||
Common shares issued pursuant to share option plan |
| 2,330 |
| 4,387 |
| 7,813 |
| 20,810 |
| ||||
Common share repurchase |
| — |
| (11,564 | ) | (85,500 | ) | (132,721 | ) | ||||
Repayment of long-term debt |
| 877 |
| (2,458 | ) | (4,114 | ) | (130,295 | ) | ||||
Net cash used for financing activities |
| (5,250 | ) | (15,341 | ) | (106,196 | ) | (258,366 | ) | ||||
Effect of exchange rate changes on cash and cash equivalents |
| (1,407 | ) | 2,742 |
| 22,565 |
| 4,248 |
| ||||
Increase in Cash and Cash Equivalents |
| 141,554 |
| 189,182 |
| 160,482 |
| 258,309 |
| ||||
Cash and Cash Equivalents at Beginning of Period |
| 601,992 |
| 423,901 |
| 583,064 |
| 354,774 |
| ||||
Cash and Cash Equivalents at End of Period |
| $ | 743,546 |
| $ | 613,083 |
| $ | 743,546 |
| $ | 613,083 |
|
3
IPSCO Inc.
CONSOLIDATED BALANCE SHEETS (unaudited)
(thousands of United States Dollars)
|
| Sept 30 |
| Dec 31 |
| ||
|
| 2006 |
| 2005 |
| ||
Current Assets |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 743,546 |
| $ | 583,064 |
|
Accounts receivable, less allowances |
| 376,334 |
| 388,943 |
| ||
Inventories |
| 764,053 |
| 506,237 |
| ||
Deferred income taxes |
| 37,999 |
| 30,227 |
| ||
Other |
| 5,406 |
| 8,615 |
| ||
|
| 1,927,338 |
| 1,517,086 |
| ||
Non-Current Assets |
|
|
|
|
| ||
Capital assets |
| 1,063,291 |
| 1,056,186 |
| ||
Other |
| 56,710 |
| 65,747 |
| ||
|
| 1,120,001 |
| 1,121,933 |
| ||
Total Assets |
| $ | 3,047,339 |
| $ | 2,639,019 |
|
Current Liabilities |
|
|
|
|
| ||
Accounts payable and accrued charges |
| $ | 335,975 |
| $ | 303,589 |
|
Income and other taxes payable |
| — |
| 41,073 |
| ||
Current portion of long-term debt |
| 20,879 |
| 4,114 |
| ||
|
| 356,854 |
| 348,776 |
| ||
Long-Term Liabilities |
|
|
|
|
| ||
Long-term debt |
| 292,175 |
| 313,053 |
| ||
Other |
| 44,538 |
| 44,584 |
| ||
Deferred income taxes |
| 189,939 |
| 191,973 |
| ||
|
| 526,652 |
| 549,610 |
| ||
Shareholders' Equity |
|
|
|
|
| ||
Common shares |
| 414,499 |
| 419,272 |
| ||
Contributed surplus |
| 22,202 |
| 15,548 |
| ||
Retained earnings |
| 1,744,297 |
| 1,341,659 |
| ||
Accumulated other comprehensive loss |
| (17,165 | ) | (35,846 | ) | ||
|
| 2,163,833 |
| 1,740,633 |
| ||
Total Liabilities and Shareholders' Equity |
| $ | 3,047,339 |
| $ | 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 10.
These unaudited consolidated financial statements have been prepared on a basis consistent with those used in the preparation of the most recent annual financial statements, except as described in note 5, and 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.
In September 2006, the FASB issued SFAS No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158). SFAS 158 amends SFAS No. 87 “Employer’s Accounting for Pensions,” SFAS No. 88 “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” SFAS No. 106 “Employers’ Accounting for Postretirement Benefits Other than Pensions” and SFAS No. 132 “Employers’ Disclosures about Pensions and Other Postretirement Benefits.” The amendments retain most of the existing measurement and disclosure guidance and will not change the amount recognized in the Company’s statement of operations. SFAS 158 requires companies to recognize a net asset or liability with an offset to equity for the amount, by which the defined-benefit-postretirement obligation is over or under-funded. SFAS 158 requires prospective application, and the recognition and disclosure requirements will be effective for the Company’s fiscal year ending December 31, 2006. The Company is currently evaluating the impact SFAS 158 will have on its consolidated balance sheet.
|
| Sept 30 |
| Dec 31 |
| ||
|
| 2006 |
| 2005 |
| ||
Finished goods |
| $ | 233,153 |
| $ | 148,650 |
|
Work-in-process |
| 318,364 |
| 190,860 |
| ||
Raw materials |
| 117,170 |
| 99,706 |
| ||
Supplies |
| 95,366 |
| 67,021 |
| ||
|
| $ | 764,053 |
| $ | 506,237 |
|
5
Pension cost attributable to the Company’s pension plans is as follows:
|
| For the Three Months Ended |
| For the Nine Months Ended |
| |||||||||||||||||
|
| Sept 30 |
| Sept 30 |
| Sept 30 |
| Sept 30 |
| |||||||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| |||||||||||||
Defined benefit plans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Service cost |
|
| $ | 2,120 |
|
|
| $ | 1,456 |
|
|
| $ | 6,297 |
|
|
| $ | 4,293 |
|
|
|
Interest cost |
|
| 3,260 |
|
|
| 2,789 |
|
|
| 9,683 |
|
|
| 8,223 |
|
|
| ||||
Expected return on plan assets |
|
| (3,296 | ) |
|
| (2,607 | ) |
|
| (9,790 | ) |
|
| (7,686 | ) |
|
| ||||
Amortization of gains, losses and past service costs |
|
| 1,598 |
|
|
| 854 |
|
|
| 4,747 |
|
|
| 2,518 |
|
|
| ||||
|
|
| 3,682 |
|
|
| 2,492 |
|
|
| 10,937 |
|
|
| 7,348 |
|
|
| ||||
Defined contribution plans |
|
| 1,182 |
|
|
| 1,010 |
|
|
| 3,967 |
|
|
| 3,251 |
|
|
| ||||
|
|
| $ | 4,864 |
|
|
| $ | 3,502 |
|
|
| $ | 14,904 |
|
|
| $ | 10,599 |
|
|
|
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 Nine Months Ended |
| ||||||||
|
| Sept 30 |
| Sept 30 |
| Sept 30 |
| Sept 30 |
| ||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||
Numerator for basic and diluted earnings per share |
| $ | 197,089 |
| $ | 134,027 |
| $ | 504,158 |
| $ | 415,648 |
|
Common shares outstanding—September 30 |
| 47,193,592 |
| 48,036,319 |
| 47,193,592 |
| 48,036,319 |
| ||||
Non-vested restricted shares—September 30 |
| (163,884 | ) | (171,504 | ) | (163,884 | ) | (171,504 | ) | ||||
Weighted average impact of shares repurchased (issued) |
| (13,422 | ) | (100,834 | ) | 466,945 |
| 921,441 |
| ||||
Denominator for basic earnings per share |
| 47,016,286 |
| 47,763,981 |
| 47,496,653 |
| 48,786,256 |
| ||||
Adjustment for share options |
| 93,168 |
| 127,318 |
| 98,574 |
| 248,024 |
| ||||
Adjustment for deferred share units |
| 119,717 |
| 112,205 |
| 118,193 |
| 108,861 |
| ||||
Adjustment for restricted shares |
| 79,591 |
| 133,431 |
| 126,295 |
| 112,485 |
| ||||
Adjustment for performance units |
| 169,675 |
| 24,849 |
| 109,078 |
| — |
| ||||
Denominator for diluted earnings per share |
| 47,478,437 |
| 48,161,784 |
| 47,948,793 |
| 49,255,626 |
| ||||
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.
6
The Company has an incentive share plan under which common shares are reserved for directors, officers and employees. As of September 30, 2006 and September 30, 2005, shares available for future grants are 599,149 and 729,645, 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 September 30, 2006 and September 30, 2005 compensation expense of $3,732 and $2,300 has been recorded, respectively. Compensation expense of $12,966 and $3,281 has been recorded in the nine month periods ended September 30, 2006 and September 30, 2005, respectively.
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 |
| ||||||||||||
|
| September 30, 2006 |
| September 30, 2005 |
| ||||||||||||
|
| Number of |
| Weighted |
| Number of |
| Weighted |
| ||||||||
Balance at beginning of period |
|
| 150,625 |
|
|
| 23.44 |
|
|
| 369,170 |
|
|
| 26.30 |
|
|
Options exercised |
|
| (4,500 | ) |
|
| 35.10 |
|
|
| (176,645 | ) |
|
| 29.84 |
|
|
Balance at end of period |
|
| 146,125 |
|
|
| 23.08 |
|
|
| 192,525 |
|
|
| 23.05 |
|
|
|
| For the Nine Months Ended |
| For the Nine Months Ended |
| ||||||||||
|
| September 30, 2006 |
| September 30, 2005 |
| ||||||||||
|
| Number of |
| Weighted |
| Number of |
| Weighted |
| ||||||
Balance at beginning of period |
|
| 175,025 |
|
|
| 23.50 |
|
| 1,205,065 |
|
| 24.90 |
|
|
Options exercised |
|
| (28,900 | ) |
|
| 25.61 |
|
| (1,012,540 | ) |
| 25.26 |
|
|
Balance at end of period |
|
| 146,125 |
|
|
| 23.08 |
|
| 192,525 |
|
| 23.05 |
|
|
The September 30, 2006 weighted average remaining contractual life of the outstanding options is 4.4 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 September 30, 2006 is CDN $10.8 million. The total intrinsic value of options exercised during the quarters ended September 30, 2006 and 2005 was CDN $0.3 million and CDN $7.0 million, respectively. The total intrinsic value of options exercised for the nine months ended September 30, 2006 and 2005 was CDN $2.4 million and CDN $38.5 million, respectively.
Performance Units
The following is the continuity of performance units outstanding:
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||||||
|
| Sept 30 |
| Sept 30 |
| Sept 30 |
| Sept 30 |
| ||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||||||
Balance at beginning of period |
|
| 187,746 |
|
|
| 145,985 |
|
|
| 242,766 |
|
|
| 133,985 |
|
|
Performance units granted |
|
| 88,817 |
|
|
| 96,926 |
|
|
| 99,217 |
|
|
| 108,926 |
|
|
Performance units cancelled |
|
| — |
|
|
| (1,250 | ) |
|
| (625 | ) |
|
| (1,250 | ) |
|
Performance units converted to common shares on vesting |
|
| — |
|
|
| — |
|
|
| (44,605 | ) |
|
| — |
|
|
Performance units paid in cash on vesting |
|
| — |
|
|
| — |
|
|
| (20,190 | ) |
|
| — |
|
|
Balance at end of period |
|
| 276,563 |
|
|
| 241,661 |
|
|
| 276,563 |
|
|
| 241,661 |
|
|
7
As of September 30, 2006 the weighted average grant date fair value of the outstanding performance units is CDN $71.80.
The total fair value of performance units which vested during the three and nine months ended September 30, 2006 was $nil and $6.2 million, respectively.
Restricted Shares
The following is the continuity of restricted shares outstanding:
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||||||
|
| Sept 30 |
| Sept 30 |
| Sept 30 |
| Sept 30 |
| ||||||||
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
| ||||||||
Balance at beginning of period |
|
| 210,003 |
|
|
| 171,504 |
|
|
| 210,003 |
|
|
| 171,504 |
|
|
Restricted shares granted |
|
| 30,798 |
|
|
| 38,499 |
|
|
| 30,798 |
|
|
| 38,499 |
|
|
Restricted shares converted to common shares on vesting |
|
| (49,287 | ) |
|
| — |
|
|
| (49,287 | ) |
|
| — |
|
|
Restricted shares paid in cash on vesting |
|
| (27,630 | ) |
|
| — |
|
|
| (27,630 | ) |
|
| — |
|
|
Balance at end of period |
|
| 163,884 |
|
|
| 210,003 |
|
|
| 163,884 |
|
|
| 210,003 |
|
|
The September 30, 2006 weighted average grant date fair value of the restricted shares is CDN $58.98.
The total fair value of restricted shares which vested during the three and nine months ended September 30, 2006 was $6.6 million.
At September 30, 2006, there was $25.7 million of unrecognized compensation cost related to share-based payments which is expected to be recognized over the weighted-average vesting period of 2.5 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 September 30, 2005, 258,500 common shares were purchased for $11.6 million. During the nine months ended September 30, 2005, 2,751,900 common shares were purchased for $132.7 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 nine months ended September 30, 2006, 934,700 common shares were purchased for $85.5 million. No shares were repurchased in the third quarter 2006.
During the quarter ended September 30, 2006, the Company decreased its annual effective income tax rate from 38.3% to 36% primarily due to the planned reinvestment of U.S. earnings through the announced acquisition of NS Group, Inc. (see Note 8). The change in the effective rate reduced income tax expense for the three months ended September 30, 2006 by $18.2 million ($0.38 per diluted share). The 32% effective tax rate for the quarter ended September 30, 2006 as compared to the 38.1% effective tax rate for the quarter ended September 30, 2005 reflects the reduction of U.S. withholding tax previously recorded.
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.
8
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 Nine Months Ended |
| ||||||||
|
| Sept 30 |
| Sept 30 |
| Sept 30 |
| Sept 30 |
| ||||
Sales |
|
|
|
|
|
|
|
|
| ||||
Canada |
| $ | 289,715 |
| $ | 266,721 |
| $ | 850,133 |
| $ | 683,945 |
|
United States |
| 707,152 |
| 459,358 |
| 1,943,188 |
| 1,496,546 |
| ||||
|
| $ | 996,867 |
| $ | 726,079 |
| $ | 2,793,321 |
| $ | 2,180,491 |
|
|
| Sept 30 |
| December 31 |
| ||
|
| 2006 |
| 2005 |
| ||
Capital Assets |
|
|
|
|
| ||
Canada |
| $ | 223,507 |
| $ | 213,621 |
|
United States |
| 839,784 |
| 842,565 |
| ||
|
| $ | 1,063,291 |
| $ | 1,056,186 |
|
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
|
| Sept 30 |
| Sept 30 |
| Sept 30 |
| Sept 30 |
| ||||
Sales information by product group is as follows: |
|
|
|
|
|
|
|
|
| ||||
Steel mill products |
| $ | 566,479 |
| $ | 379,507 |
| $ | 1,623,547 |
| $ | 1,329,861 |
|
Tubular products |
| 430,388 |
| 346,572 |
| 1,169,774 |
| 850,630 |
| ||||
|
| $ | 996,867 |
| $ | 726,079 |
| $ | 2,793,321 |
| $ | 2,180,491 |
|
Tubular product sales volume in the first and second quarters can be negatively impacted by weather conditions in Western Canada.
On September 11, 2006, the Company announced that it had entered into a definitive agreement with NS Group, Inc. to acquire all of the outstanding shares of NS Group for $66 per share for a total cost of approximately $1.5 billion plus transaction costs. The acquisition will be funded through a combination of cash on hand and debt obtained under a fully committed bank credit facility.
The transaction, subject to customary conditions including approval of the holders of NS Group, Inc. common stock, and regulatory approval, is expected to close before December 31, 2006.
9
9. Consolidating Financial Statements
The following information presents the condensed consolidating balance sheets as at September 30, 2006 and December 31, 2005, and the condensed consolidating statements of income and cash flows for the three and nine months ended September 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. 8¾% 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.
IPSCO Inc. Condensed Consolidating Statements of Income
Three Months Ended September 30, 2006
(thousands of United States dollars)
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| Parent |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
Sales |
| $ | 212,003 |
| $ | 868,901 |
| $ | 177,540 |
| $ | (261,577 | ) | $ | 996,867 |
|
Cost of sales |
| 179,878 |
| 616,132 |
| 154,061 |
| (267,781 | ) | 682,290 |
| |||||
Gross income |
| 32,125 |
| 252,769 |
| 23,479 |
| 6,204 |
| 314,577 |
| |||||
Selling, general and administration |
| 9,237 |
| 16,454 |
| 5 |
| — |
| 25,696 |
| |||||
Operating income |
| 22,888 |
| 236,315 |
| 23,474 |
| 6,204 |
| 288,881 |
| |||||
Other expenses (income) |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest on long-term debt |
| 4,037 |
| 2,694 |
| — |
| (611 | ) | 6,120 |
| |||||
Other interest (income) expense, |
| (1,391 | ) | (7,389 | ) | (702 | ) | — |
| (9,482 | ) | |||||
Foreign exchange loss (gain) |
| 1,028 |
| 1,432 |
| 35 |
| 2 |
| 2,497 |
| |||||
Intercompany interest/dividend |
| 905 |
| (1,043 | ) | 137 |
| 1 |
| — |
| |||||
Equity income |
| (167,630 | ) | (12,257 | ) | — |
| 179,752 |
| (135 | ) | |||||
Other (income) expense |
| (6,784 | ) | — |
| — |
| 6,784 |
| — |
| |||||
Income (loss) before income taxes |
| 192,723 |
| 252,878 |
| 24,004 |
| (179,724 | ) | 289,881 |
| |||||
Income taxes |
| (4,366 | ) | 90,012 |
| 7,096 |
| 50 |
| 92,792 |
| |||||
NET INCOME (LOSS) |
| $ | 197,089 |
| $ | 162,866 |
| $ | 16,908 |
| $ | (179,774 | ) | $ | 197,089 |
|
10
IPSCO Inc. Condensed Consolidating Statements of Income
Nine Months Ended September 30, 2006
(thousands of United States dollars)
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||||||||||||
|
| Parent |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||||||||||||
Sales |
|
| $ | 598,880 |
|
|
| $ | 2,480,919 |
|
|
| $ | 457,477 |
|
|
| $ | (743,955 | ) |
|
| $ | 2,793,321 |
|
|
Cost of sales |
|
| 520,847 |
|
|
| 1,780,430 |
|
|
| 399,005 |
|
|
| (762,556 | ) |
|
| 1,937,726 |
|
| |||||
Gross income |
|
| 78,033 |
|
|
| 700,489 |
|
|
| 58,472 |
|
|
| 18,601 |
|
|
| 855,595 |
|
| |||||
Selling, general and administration |
|
| 26,308 |
|
|
| 50,572 |
|
|
| (104 | ) |
|
| — |
|
|
| 76,776 |
|
| |||||
Operating income |
|
| 51,725 |
|
|
| 649,917 |
|
|
| 58,576 |
|
|
| 18,601 |
|
|
| 778,819 |
|
| |||||
Other expenses (income) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Interest on long-term debt |
|
| 12,084 |
|
|
| 8,070 |
|
|
| — |
|
|
| (2,493 | ) |
|
| 17,661 |
|
| |||||
Other interest (income) expense, |
|
| (5,073 | ) |
|
| (18,185 | ) |
|
| (1,447 | ) |
|
| — |
|
|
| (24,705 | ) |
| |||||
Foreign exchange loss (gain) |
|
| 1,782 |
|
|
| (3,036 | ) |
|
| (10 | ) |
|
| 2 |
|
|
| (1,262 | ) |
| |||||
Intercompany interest/dividend |
|
| 4,574 |
|
|
| (3,690 | ) |
|
| 7 |
|
|
| (891 | ) |
|
| — |
|
| |||||
Equity income |
|
| (470,153 | ) |
|
| (31,030 | ) |
|
| — |
|
|
| 500,830 |
|
|
| (353 | ) |
| |||||
Other (income) expense |
|
| (20,173 | ) |
|
| (891 | ) |
|
| — |
|
|
| 21,064 |
|
|
| — |
|
| |||||
Income (loss) before income taxes |
|
| 528,684 |
|
|
| 698,679 |
|
|
| 60,026 |
|
|
| (499,911 | ) |
|
| 787,478 |
|
| |||||
Income taxes |
|
| 24,526 |
|
|
| 237,828 |
|
|
| 20,571 |
|
|
| 395 |
|
|
| 283,320 |
|
| |||||
NET INCOME (LOSS) |
|
| $ | 504,158 |
|
|
| $ | 460,851 |
|
|
| $ | 39,455 |
|
|
| $ | (500,306 | ) |
|
| $ | 504,158 |
|
|
IPSCO Inc. Condensed Consolidating Statements of Income
Three Months Ended September 30, 2005
(thousands of United States dollars)
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||||||||||||
|
| Parent |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||||||||||||
Sales |
|
| $ | 216,141 |
|
|
| $ | 629,725 |
|
|
| $ | 92,197 |
|
|
| $ | (211,984 | ) |
|
| $ | 726,079 |
|
|
Cost of sales |
|
| 199,527 |
|
|
| 443,784 |
|
|
| 81,764 |
|
|
| (223,871 | ) |
|
| 501,204 |
|
| |||||
Gross income |
|
| 16,614 |
|
|
| 185,941 |
|
|
| 10,433 |
|
|
| 11,887 |
|
|
| 224,875 |
|
| |||||
Selling, general and administration |
|
| 9,994 |
|
|
| 13,591 |
|
|
| (145 | ) |
|
| (365 | ) |
|
| 23,075 |
|
| |||||
Operating income |
|
| 6,620 |
|
|
| 172,350 |
|
|
| 10,578 |
|
|
| 12,252 |
|
|
| 201,800 |
|
| |||||
Other expenses (income) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Interest on long-term debt |
|
| 6,015 |
|
|
| 2,769 |
|
|
| — |
|
|
| — |
|
|
| 8,784 |
|
| |||||
Other interest (income) expense, net |
|
| (200 | ) |
|
| (3,994 | ) |
|
| (262 | ) |
|
| — |
|
|
| (4,456 | ) |
| |||||
Loss on early extinguishment of debt |
|
| 690 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 690 |
|
| |||||
Foreign exchange loss (gain) |
|
| 8,929 |
|
|
| (26,994 | ) |
|
| (15 | ) |
|
| — |
|
|
| (18,080 | ) |
| |||||
Intercompany interest/dividend |
|
| 1,005 |
|
|
| (916 | ) |
|
| (89 | ) |
|
| — |
|
|
| — |
|
| |||||
Equity income |
|
| (146,755 | ) |
|
| (12,330 | ) |
|
| — |
|
|
| 159,181 |
|
|
| 96 |
|
| |||||
Other (income) expense |
|
| (7,203 | ) |
|
| (1,202 | ) |
|
| (7 | ) |
|
| 6,549 |
|
|
| (1,863 | ) |
| |||||
Income (loss) before income taxes |
|
| 144,139 |
|
|
| 215,017 |
|
|
| 10,951 |
|
|
| (153,478 | ) |
|
| 216,629 |
|
| |||||
Income taxes |
|
| 10,112 |
|
|
| 66,194 |
|
|
| 4,185 |
|
|
| 2,111 |
|
|
| 82,602 |
|
| |||||
NET INCOME (LOSS) |
|
| $ | 134,027 |
|
|
| $ | 148,823 |
|
|
| $ | 6,766 |
|
|
| $ | (155,589 | ) |
|
| $ | 134,027 |
|
|
11
IPSCO Inc. Condensed Consolidating Statements of Income
Nine Months Ended September 30, 2005
(thousands of United States dollars)
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| Parent |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
Sales |
| $ | 521,656 |
| $ | 2,044,340 |
| $ | 206,296 |
| $ | (591,801 | ) | $ | 2,180,491 |
|
Cost of sales |
| 490,243 |
| 1,425,264 |
| 182,369 |
| (640,200 | ) | 1,457,676 |
| |||||
Gross income |
| 31,413 |
| 619,076 |
| 23,927 |
| 48,399 |
| 722,815 |
| |||||
Selling, general and administration |
| 21,038 |
| 37,689 |
| (77 | ) | (1,097 | ) | 57,553 |
| |||||
Operating income |
| 10,375 |
| 581,387 |
| 24,004 |
| 49,496 |
| 665,262 |
| |||||
Other expenses (income) |
|
|
|
|
|
|
|
|
|
|
| |||||
Interest on long-term debt |
| 20,889 |
| 8,298 |
| — |
| — |
| 29,187 |
| |||||
Other interest (income) expense, |
| (588 | ) | (9,305 | ) | (586 | ) | — |
| (10,479 | ) | |||||
Loss on early extinguishment of |
| 10,939 |
| — |
| — |
| — |
| 10,939 |
| |||||
Foreign exchange loss (gain) |
| 983 |
| (20,207 | ) | (9 | ) | — |
| (19,233 | ) | |||||
Intercompany interest/dividend |
| (1,279 | ) | 2,921 |
| (1,642 | ) | — |
| — |
| |||||
Equity income |
| (430,939 | ) | (20,710 | ) | — |
| 451,730 |
| 81 |
| |||||
Other (income) expense |
| (17,246 | ) | (3,524 | ) | (20 | ) | 18,927 |
| (1,863 | ) | |||||
Income (loss) before income taxes |
| 427,616 |
| 623,914 |
| 26,261 |
| (421,161 | ) | 656,630 |
| |||||
Income taxes |
| 11,968 |
| 207,343 |
| 10,305 |
| 11,366 |
| 240,982 |
| |||||
NET INCOME (LOSS) |
| $ | 415,648 |
| $ | 416,571 |
| $ | 15,956 |
| $ | (432,527 | ) | $ | 415,648 |
|
12
IPSCO Inc. Condensed Consolidating Statements of Cash flows
Three Months Ended September 30, 2006
(thousands of United States dollars)
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| Parent |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income (loss) |
| $ | 197,089 |
| $ | 162,866 |
| $ | 16,908 |
| $ | (179,774 | ) | $ | 197,089 |
|
Non-cash adjustments |
| (162,756 | ) | 6,711 |
| 186 |
| 179,934 |
| 24,075 |
| |||||
Change in operating assets and liabilities |
| (14,078 | ) | (68,933 | ) | 25,849 |
| 598 |
| (56,564 | ) | |||||
Net cash provided by operating activities |
| 20,255 |
| 100,644 |
| 42,943 |
| 758 |
| 164,600 |
| |||||
Investing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Expenditures for capital assets |
| (3,048 | ) | (15,321 | ) | (463 | ) | (611 | ) | (19,443 | ) | |||||
Proceeds from mortgage receivable, net |
| — |
| 7,428 |
| (3 | ) | — |
| 7,425 |
| |||||
Other investing activities |
| — |
| (4,371 | ) | — |
| — |
| (4,371 | ) | |||||
Net cash used for investing |
| (3,048 | ) | (12,264 | ) | (466 | ) | (611 | ) | (16,389 | ) | |||||
Financing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Common share dividends |
| (8,457 | ) | — |
| — |
| — |
| (8,457 | ) | |||||
Common shares issued pursuant to share option plan |
| 2,330 |
| — |
| — |
| — |
| 2,330 |
| |||||
Repayment of long-term debt |
| — |
| 877 |
| — |
| — |
| 877 |
| |||||
Net cash provided by (used for) financing activities |
| (6,127 | ) | 877 |
| — |
| — |
| (5,250 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
| 72 |
| (2,933 | ) | 1,601 |
| (147 | ) | (1,407 | ) | |||||
INCREASE IN CASH AND CASH EQUIVALENTS |
| 11,152 |
| 86,324 |
| 44,078 |
| — |
| 141,554 |
| |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
| 113,223 |
| 438,118 |
| 50,651 |
| — |
| 601,992 |
| |||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
| $ | 124,375 |
| $ | 524,442 |
| $ | 94,729 |
| $ | — |
| $ | 743,546 |
|
13
IPSCO Inc. Condensed Consolidating Statements of Cash flows
Nine Months Ended September 30, 2006
(thousands of United States dollars)
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| Parent |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income (loss) |
| $ | 504,158 |
| $ | 460,851 |
| $ | 39,455 |
| $ | (500,306 | ) | $ | 504,158 |
|
Non-cash adjustments |
| (445,813 | ) | (8,933 | ) | 7,054 |
| 501,576 |
| 53,884 |
| |||||
Change in operating assets and liabilities |
| 109,654 |
| (421,426 | ) | 54,337 |
| 1,334 |
| (256,101 | ) | |||||
Net cash provided by operating activities |
| 167,999 |
| 30,492 |
| 100,846 |
| 2,604 |
| 301,941 |
| |||||
Investing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Expenditures for capital assets |
| (8,903 | ) | (48,739 | ) | (1,718 | ) | (2,493 | ) | (61,853 | ) | |||||
Proceeds from mortgage receivable, net |
| — |
| 8,399 |
| (3 | ) | — |
| 8,396 |
| |||||
Other investing activities |
| — |
| (4,371 | ) | — |
| — |
| (4,371 | ) | |||||
Net cash used for investing activities |
| (8,903 | ) | (44,711 | ) | (1,721 | ) | (2,493 | ) | (57,828 | ) | |||||
Financing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Common share dividends |
| (24,395 | ) | 13,992 |
| (13,992 | ) | — |
| (24,395 | ) | |||||
Common shares issued pursuant to share option plan |
| 7,813 |
| — |
| — |
| — |
| 7,813 |
| |||||
Common share repurchase |
| (85,500 | ) | — |
| — |
| — |
| (85,500 | ) | |||||
Repayment of long-term debt |
| — |
| (4,114 | ) | — |
| — |
| (4,114 | ) | |||||
Net cash provided by (used for) financing activities |
| (102,082 | ) | 9,878 |
| (13,992 | ) | — |
| (106,196 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
| 9,995 |
| 14,184 |
| (1,503 | ) | (111 | ) | 22,565 |
| |||||
INCREASE IN CASH AND CASH EQUIVALENTS |
| 67,009 |
| 9,843 |
| 83,630 |
| — |
| 160,482 |
| |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
| 57,366 |
| 514,599 |
| 11,099 |
| — |
| 583,064 |
| |||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
| $ | 124,375 |
| $ | 524,442 |
| $ | 94,729 |
| $ | — |
| $ | 743,546 |
|
14
IPSCO Inc. Condensed Consolidating Statements of Cash flows
Three Months Ended September 30, 2005
(thousands of United States dollars)
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| Parent |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income (loss) |
| $ | 134,027 |
| $ | 148,823 |
| $ | 6,766 |
| $ | (155,589 | ) | $ | 134,027 |
|
Non-cash adjustments |
| (137,200 | ) | 15,620 |
| (17,192 | ) | 161,293 |
| 22,521 |
| |||||
Change in operating assets and liabilities |
| 44,764 |
| (666 | ) | 23,835 |
| (5,403 | ) | 62,530 |
| |||||
Net cash provided by operating activities |
| 41,591 |
| 163,777 |
| 13,409 |
| 301 |
| 219,078 |
| |||||
Investing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Expenditures for capital assets |
| (245 | ) | (20,147 | ) | 847 |
| — |
| (19,545 | ) | |||||
Proceeds from mortgage receivable, net |
| — |
| 57 |
| 1,898 |
| — |
| 1,955 |
| |||||
Other investing activities |
| — |
| 293 |
| — |
| — |
| 293 |
| |||||
Net cash provided by (used for) investing activities |
| (245 | ) | (19,797 | ) | 2,745 |
| — |
| (17,297 | ) | |||||
Financing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Common share dividends |
| (5,706 | ) | — |
| — |
| — |
| (5,706 | ) | |||||
Common shares issued pursuant to share option plan |
| 4,387 |
| — |
| — |
| — |
| 4,387 |
| |||||
Common share repurchase |
| (11,564 | ) | — |
| — |
| — |
| (11,564 | ) | |||||
Issue (repayment) of long-term debt |
| (3,226 | ) | 768 |
| — |
| — |
| (2,458 | ) | |||||
Net cash provided by (used for) financing activities |
| (16,109 | ) | 768 |
| — |
| — |
| (15,341 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
| (10,931 | ) | (844 | ) | 14,818 |
| (301 | ) | 2,742 |
| |||||
INCREASE IN CASH AND CASH EQUIVALENTS |
| 14,306 |
| 143,904 |
| 30,972 |
| — |
| 189,182 |
| |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
| 14,491 |
| 390,387 |
| 19,023 |
| — |
| 423,901 |
| |||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
| $ | 28,797 |
| $ | 534,291 |
| $ | 49,995 |
| $ | — |
| $ | 613,083 |
|
15
IPSCO Inc. Condensed Consolidating Statements of Cash flows
Nine Months Ended September 30, 2005
(thousands of United States dollars)
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| Parent |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Net income (loss) |
| $ | 415,648 |
| $ | 416,571 |
| $ | 15,956 |
| $ | (432,527 | ) | $ | 415,648 |
|
Non-cash adjustments |
| (423,129 | ) | 75,843 |
| 1,389 |
| 463,096 |
| 117,199 |
| |||||
Change in operating assets and liabilities |
| 273,192 |
| (230,224 | ) | 3,200 |
| (28,848 | ) | 17,320 |
| |||||
Net cash provided by operating activities |
| 265,711 |
| 262,190 |
| 20,545 |
| 1,721 |
| 550,167 |
| |||||
Investing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Expenditures for capital assets |
| (918 | ) | (41,125 | ) | 327 |
| — |
| (41,716 | ) | |||||
Proceeds from mortgage receivable, net |
| — |
| 1,921 |
| 1,861 |
| — |
| 3,782 |
| |||||
Other investing activities |
| — |
| 194 |
| — |
| — |
| 194 |
| |||||
Net cash provided by (used for) investing activities |
| (918 | ) | (39,010 | ) | 2,188 |
| — |
| (37,740 | ) | |||||
Financing activities |
|
|
|
|
|
|
|
|
|
|
| |||||
Common share dividends |
| (16,160 | ) | 12,429 |
| (12,429 | ) | — |
| (16,160 | ) | |||||
Common shares issued pursuant to share option plan |
| 20,810 |
| — |
| — |
| — |
| 20,810 |
| |||||
Common share repurchase |
| (132,721 | ) | — |
| — |
| — |
| (132,721 | ) | |||||
Issue (repayment) of long-term debt |
| (126,474 | ) | (3,821 | ) | — |
| — |
| (130,295 | ) | |||||
Net cash provided by (used for) financing activities |
| (254,545 | ) | 8,608 |
| (12,429 | ) | — |
| (258,366 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
| 4,272 |
| (2,282 | ) | 3,979 |
| (1,721 | ) | 4,248 |
| |||||
INCREASE IN CASH AND CASH EQUIVALENTS |
| 14,520 |
| 229,506 |
| 14,283 |
| — |
| 258,309 |
| |||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
| 14,277 |
| 304,785 |
| 35,712 |
| — |
| 354,774 |
| |||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
| $ | 28,797 |
| $ | 534,291 |
| $ | 49,995 |
| $ | — |
| $ | 613,083 |
|
16
IPSCO Inc. Condensed Consolidating Balance Sheets
(thousands of United States dollars)
|
|
|
| Guarantor |
| Non-Guarantor |
|
|
| Consolidated |
| |||||
|
| Parent |
| Subsidiaries |
| Subsidiaries |
| Eliminations |
| Total |
| |||||
CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
|
| |||||
Cash and cash equivalents |
| $ | 124,375 |
| $ | 524,442 |
| $ | 94,729 |
| $ | — |
| $ | 743,546 |
|
Accounts receivable, less allowances |
| 84,571 |
| 244,004 |
| 47,759 |
| — |
| 376,334 |
| |||||
Net intercompany balances |
| (132,980 | ) | 199,473 |
| (66,493 | ) | — |
| — |
| |||||
Inventories |
| 278,799 |
| 484,369 |
| 16,639 |
| (15,754 | ) | 764,053 |
| |||||
Deferred income taxes |
| 31,732 |
| 4,788 |
| 1,479 |
| — |
| 37,999 |
| |||||
Other |
| 1,238 |
| 2,488 |
| 1,680 |
| — |
| 5,406 |
| |||||
|
| 387,735 |
| 1,459,564 |
| 95,793 |
| (15,754 | ) | 1,927,338 |
| |||||
NON-CURRENT ASSETS |
|
|
|
|
|
|
|
|
|
|
| |||||
Capital assets |
| 137,201 |
| 895,680 |
| 26,293 |
| 4,117 |
| 1,063,291 |
| |||||
Other |
| 1,964,240 |
| 111,492 |
| 1,564 |
| (2,020,586 | ) | 56,710 |
| |||||
|
| 2,101,441 |
| 1,007,172 |
| 27,857 |
| (2,016,469 | ) | 1,120,001 |
| |||||
TOTAL ASSETS |
| $ | 2,489,176 |
| $ | 2,466,736 |
| $ | 123,650 |
| $ | (2,032,223 | ) | $ | 3,047,339 |
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
|
|
| |||||
Accounts payable and accrued |
| $ | 79,661 |
| $ | 249,206 |
| $ | 7,108 |
| $ | — |
| $ | 335,975 |
|
Current portion of long-term debt |
| 14,715 |
| 6,164 |
| — |
| — |
| 20,879 |
| |||||
|
| 94,376 |
| 255,370 |
| 7,108 |
| — |
| 356,854 |
| |||||
LONG-TERM LIABILITIES |
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term debt |
| 153,855 |
| 138,320 |
| — |
| — |
| 292,175 |
| |||||
Other |
| 16,949 |
| 27,589 |
| — |
| — |
| 44,538 |
| |||||
Deferred income taxes |
| 60,163 |
| 104,783 |
| 29,620 |
| (4,627 | ) | 189,939 |
| |||||
|
| 230,967 |
| 270,692 |
| 29,620 |
| (4,627 | ) | 526,652 |
| |||||
SHAREHOLDERS’ EQUITY |
| 2,163,833 |
| 1,940,674 |
| 86,922 |
| (2,027,596 | ) | 2,163,833 |
| |||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
| $ | 2,489,176 |
| $ | 2,466,736 |
| $ | 123,650 |
| $ | (2,032,223 | ) | $ | 3,047,339 |
|
17
IPSCO Inc. Condensed Consolidating Balance Sheets
(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 allowances |
| 93,245 |
| 262,293 |
| 33,405 |
| — |
| 388,943 |
| |||||
Net intercompany balances |
| 80,349 |
| (83,755 | ) | 3,406 |
| — |
| — |
| |||||
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 |
| $ | 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 |
|
18
10. 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 (unaudited)
(thousands of United States Dollars except for per share and ton data)
|
| For the Three Months Ended September 30, 2006 |
| For the Three Months Ended September 30, 2005 |
| |||||||||||||||||||||||
|
| U.S. GAAP |
| Ref |
| Amount |
| Canadian |
| U.S. GAAP |
| Ref |
| Amount |
| Canadian |
| |||||||||||
Plate and Coil Tons Produced (thousands) |
| 946.8 |
|
|
|
|
|
|
| 946.8 |
| 759.3 |
|
|
|
|
|
|
| 759.3 |
| |||||||
Finished Tons Shipped (thousands) |
| 1,041.7 |
|
|
|
|
|
|
| 1,041.7 |
| 847.8 |
|
|
|
|
|
|
| 847.8 |
| |||||||
Sales |
| $ | 996,867 |
|
| a) |
|
| $ | (48,653 | ) | $ | 948,214 |
| $ | 726,079 |
|
| a) |
|
| $ | (20,914 | ) | $ | 705,165 |
| |
Cost of sales |
| 682,290 |
|
| a) |
|
| (48,653 | ) | 636,409 |
| 501,204 |
|
| a) |
|
| (20,914 | ) | 483,268 |
| |||||||
|
|
|
|
| b) |
|
| 1,248 |
|
|
|
|
|
| b) |
|
| 1,247 |
|
|
| |||||||
|
|
|
|
| c) |
|
| (134 | ) |
|
|
|
|
| c) |
|
| 96 |
|
|
| |||||||
|
|
|
|
| d) |
|
| 1,658 |
|
|
|
|
|
| d) |
|
| 1,635 |
|
|
| |||||||
Gross income |
| 314,577 |
|
|
|
|
| (2,772 | ) | 311,805 |
| 224,875 |
|
|
|
|
| (2,978 | ) | 221,897 |
| |||||||
Selling, general and administration |
| 25,696 |
|
|
|
|
|
|
| 25,696 |
| 23,075 |
|
|
|
|
|
|
| 23,075 |
| |||||||
Operating income |
| 288,881 |
|
|
|
|
| (2,772 | ) | 286,109 |
| 201,800 |
|
|
|
|
| (2,978 | ) | 198,822 |
| |||||||
Other expenses (income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Interest on long-term debt |
| 6,120 |
|
| b) |
|
| (2,116 | ) | 4,004 |
| 8,784 |
|
| b) |
|
| (2,191 | ) | 6,593 |
| |||||||
Net interest income |
| (9,482 | ) |
|
|
|
|
|
| (9,482 | ) | (4,456 | ) |
|
|
|
|
|
| (4,456 | ) | |||||||
Foreign exchange loss (gain) |
| 2,497 |
|
|
|
|
|
|
| 2,497 |
| (18,080 | ) |
|
|
|
|
|
| (18,080 | ) | |||||||
Gain on sale of assets held for sale |
| — |
|
|
|
|
|
|
| — |
| (1,863 | ) |
|
|
|
|
|
| (1,863 | ) | |||||||
Other (income) expenses |
| (135 | ) |
| c) |
|
| 135 |
| — |
| 96 |
|
| c) |
|
| (96 | ) | — |
| |||||||
Loss on early extinguishment of debt |
| — |
|
| �� |
|
|
|
| — |
| 690 |
|
|
|
|
|
|
| 690 |
| |||||||
Income before income taxes and cumulative effect of accounting change |
| 289,881 |
|
|
|
|
| (791 | ) | 289,090 |
| 216,629 |
|
|
|
|
| (691 | ) | 215,938 |
| |||||||
Income tax expense |
| 92,792 |
|
| b) |
|
| 325 |
| 92,496 |
| 82,602 |
|
| b) |
|
| 340 |
| 82,353 |
| |||||||
|
|
|
|
| d) |
|
| (621 | ) |
|
|
|
|
| d) |
|
| (589 | ) |
|
| |||||||
Net Income |
| $ | 197,089 |
|
|
|
|
| $ | (495 | ) | $ | 196,594 |
| $ | 134,027 |
|
|
|
|
| $ | (442 | ) | $ | 133,585 |
| |
Earnings Per Common Share | —Basic |
| $ | 4.19 |
|
|
|
|
|
|
| $ | 4.18 |
| $ | 2.81 |
|
|
|
|
|
|
| $ | 2.80 |
| ||
| —Diluted |
| $ | 4.15 |
|
|
|
|
|
|
| $ | 4.14 |
| $ | 2.78 |
|
|
|
|
|
|
| $ | 2.77 |
|
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
19
CONSOLIDATED STATEMENTS OF INCOME (unaudited)
(thousands of United States Dollars except for per share and ton data)
|
| For the Nine Months Ended September 30, 2006 |
| For the Nine Months Ended September 30, 2005 |
| |||||||||||||||||||||||
|
| U.S. GAAP |
| Ref |
| Amount |
| Canadian |
| U.S. GAAP |
| Ref |
| Amount |
| Canadian |
| |||||||||||
Plate and Coil Tons Produced (thousands) |
| 2,794.9 |
|
|
|
|
|
|
| 2,794.9 |
| 2,434.5 |
|
|
|
|
|
|
| 2,434.5 |
| |||||||
Finished Tons Shipped (thousands) |
| 3,048.1 |
|
|
|
|
|
|
| 3,048.1 |
| 2,507.1 |
|
|
|
|
|
|
| 2,507.1 |
| |||||||
Sales |
| $ | 2,793,321 |
|
| a) |
|
| $ | (107,451 | ) | $ | 2,685,870 |
| $ | 2,180,491 |
|
| a) |
|
| $ | (62,617 | ) | $ | 2,117,874 |
| |
Cost of sales |
| 1,937,726 |
|
| a) |
|
| (107,451 | ) | 1,842,299 |
| 1,457,676 |
|
| a) |
|
| (62,617 | ) | 1,403,782 |
| |||||||
|
|
|
|
| b) |
|
| 3,742 |
|
|
|
|
|
| b) |
|
| 3,742 |
|
|
| |||||||
|
|
|
|
| c) |
|
| (353 | ) |
|
|
|
|
| c) |
|
| 76 |
|
|
| |||||||
|
|
|
|
| d) |
|
| 8,635 |
|
|
|
|
|
| d) |
|
| 4,905 |
|
|
| |||||||
Gross income |
| 855,595 |
|
|
|
|
| (12,024 | ) | 843,571 |
| 722,815 |
|
|
|
|
| (8,723 | ) | 714,092 |
| |||||||
Selling, general and administration |
| 76,776 |
|
|
|
|
|
|
| 76,776 |
| 57,553 |
|
|
|
|
|
|
| 57,553 |
| |||||||
Operating income |
| 778,819 |
|
|
|
|
| (12,024 | ) | 766,795 |
| 665,262 |
|
|
|
|
| (8,723 | ) | 656,539 |
| |||||||
Other expenses (income): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Interest on long-term debt |
| 17,661 |
|
| b) |
|
| (6,337 | ) | 11,324 |
| 29,187 |
|
| b) |
|
| (6,564 | ) | 22,623 |
| |||||||
Net interest income |
| (24,705 | ) |
|
|
|
|
|
| (24,705 | ) | (10,479 | ) |
| c) |
|
| 5 |
| (10,474 | ) | |||||||
Foreign exchange loss (gain) |
| (1,262 | ) |
|
|
|
|
|
| (1,262 | ) | (19,233 | ) |
|
|
|
|
|
| (19,233 | ) | |||||||
Gain on sale of assets held for sale |
| — |
|
|
|
|
|
|
| — |
| (1,863 | ) |
|
|
|
|
|
| (1,863 | ) | |||||||
Other (income) expenses |
| (353 | ) |
| c) |
|
| 353 |
| — |
| 81 |
|
| c) |
|
| (81 | ) | — |
| |||||||
Loss on early extinguishment of debt |
| — |
|
|
|
|
|
|
| — |
| 10,939 |
|
|
|
|
|
|
| 10,939 |
| |||||||
Income before income taxes and cumulative effect of accounting change |
| 787,478 |
|
|
|
|
| (6,040 | ) | 781,438 |
| 656,630 |
|
|
|
|
| (2,083 | ) | 654,547 |
| |||||||
Income tax expense |
| 283,320 |
|
| b) |
|
| 985 |
| 280,990 |
| 240,982 |
|
| b) |
|
| 1,016 |
| 240,232 |
| |||||||
|
|
|
|
| d) |
|
| (3,315 | ) |
|
|
|
|
| d) |
|
| (1,766 | ) |
|
| |||||||
Net Income |
| $ | 504,158 |
|
|
|
|
| $ | (3,710 | ) | $ | 500,448 |
| $ | 415,648 |
|
|
|
|
| $ | (1,333 | ) | $ | 414,315 |
| |
Earnings Per Common Share | —Basic |
| $ | 10.61 |
|
|
|
|
|
|
| $ | 10.54 |
| $ | 8.52 |
|
|
|
|
|
|
| $ | 8.49 |
| ||
| —Diluted |
| $ | 10.51 |
|
|
|
|
|
|
| $ | 10.44 |
| $ | 8.44 |
|
|
|
|
|
|
| $ | 8.41 |
|
20
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands of United States Dollars)
|
| For the Three Months Ended September 30, 2006 |
| For the Three Months Ended September 30, 2005 |
| ||||||||||||||||||||||
|
| U.S. GAAP |
| Ref |
| Amount |
| Canadian |
| U.S. GAAP |
| Ref |
| Amount |
| Canadian |
| ||||||||||
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
| $ | 197,089 |
|
|
|
|
| $ | (495 | ) | $ | 196,594 |
| $ | 134,027 |
|
|
|
|
| $ | (442 | ) | $ | 133,585 |
|
Adjustments to reconcile net income to net cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Depreciation of capital assets |
| 18,936 |
|
| b) |
|
| (2,224 | ) | 18,404 |
| 19,901 |
|
| b) |
|
| (2,224 | ) | 19,431 |
| ||||||
|
|
|
|
| c) |
|
| 34 |
|
|
|
|
|
| c) |
|
| 119 |
|
|
| ||||||
|
|
|
|
| d) |
|
| 1,658 |
|
|
|
|
|
| d) |
|
| 1,635 |
|
|
| ||||||
Amortization of deferred charges |
| 507 |
|
|
|
|
|
|
| 507 |
| 409 |
|
|
|
|
|
|
| 409 |
| ||||||
Stock based compensation |
| 3,373 |
|
|
|
|
|
|
| 3,373 |
| 2,300 |
|
|
|
|
|
|
| 2,300 |
| ||||||
Deferred income taxes |
| 1,259 |
|
| b) |
|
| 325 |
| 963 |
| 17,935 |
|
| b) |
|
| 340 |
| 17,686 |
| ||||||
|
|
|
|
| d) |
|
| (621 | ) |
|
|
|
|
| d) |
|
| (589 | ) |
|
| ||||||
Gain on sale of assets held for sale |
| — |
|
|
|
|
|
|
| — |
| (1,863 | ) |
|
|
|
|
|
| (1,863 | ) | ||||||
Unrealized foreign exchange gain |
| — |
|
|
|
|
|
|
| — |
| (18,714 | ) |
|
|
|
|
|
| (18,714 | ) | ||||||
Loss on early extinguishment of debt |
| — |
|
|
|
|
|
|
| — |
| 690 |
|
|
|
|
|
|
| 690 |
| ||||||
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Accounts receivable |
| 3,704 |
|
| c) |
|
| 8 |
| 3,712 |
| (27,533 | ) |
| c) |
|
| 234 |
| (27,299 | ) | ||||||
Inventories |
| (103,337 | ) |
| c) |
|
| 24 |
| (103,313 | ) | 29,674 |
|
| c) |
|
| (13 | ) | 29,661 |
| ||||||
Other current assets |
| 315 |
|
| c) |
|
| (42 | ) | 273 |
| 249 |
|
|
|
|
|
|
| 249 |
| ||||||
Accounts payable and accrued charges |
| 50,333 |
|
| b) |
|
| 2,234 |
| 52,845 |
| 29,142 |
|
| b) |
|
| 2,048 |
| 31,159 |
| ||||||
|
|
|
|
| c) |
|
| 278 |
|
|
|
|
|
| c) |
|
| (31 | ) |
|
| ||||||
Change in deferred pension liability |
| (283 | ) |
|
|
|
|
|
| (283 | ) | (660 | ) |
|
|
|
|
|
| (660 | ) | ||||||
Income and other taxes payable |
| (7,296 | ) |
| c) |
|
| — |
| (7,296 | ) | 33,521 |
|
| c) |
|
| — |
| 33,521 |
| ||||||
Net cash provided by operations |
| 164,600 |
|
|
|
|
| 1,179 |
| 165,779 |
| 219,078 |
|
|
|
|
| 1,077 |
| 220,155 |
| ||||||
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Expenditures for capital assets, net of litigation settlement |
| (19,443 | ) |
| c) |
|
| (220 | ) | (19,663 | ) | (21,091 | ) |
| c) |
|
| (7 | ) | (21,098 | ) | ||||||
Proceeds from sale of capital assets |
| — |
|
|
|
|
|
|
| — |
| 1,546 |
|
|
|
|
|
|
| 1,546 |
| ||||||
Proceeds from mortgage receivable, net |
| 7,425 |
|
|
|
|
|
|
| 7,425 |
| 1,955 |
|
|
|
|
|
|
| 1,955 |
| ||||||
Investments |
| — |
|
| c) |
|
| — |
| — |
| 293 |
|
| c) |
|
| (293 | ) | — |
| ||||||
Expenditures for other long-term assets |
| (4,371 | ) |
|
|
|
|
|
| (4,371 | ) | — |
|
|
|
|
|
|
| — |
| ||||||
Net cash used for investing activities |
| (16,389 | ) |
|
|
|
| (220 | ) | (16,609 | ) | (17,297 | ) |
|
|
|
| (300 | ) | (17,597 | ) | ||||||
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Common shares issued pursuant to share option plan |
| 2,330 |
|
|
|
|
|
|
| 2,330 |
| 4,387 |
|
|
|
|
|
|
| 4,387 |
| ||||||
Tax benefit share option plan |
| — |
|
|
|
|
|
|
| — |
| — |
|
|
|
|
|
|
| — |
| ||||||
Common share dividends |
| (8,457 | ) |
|
|
|
|
|
| (8,457 | ) | (5,706 | ) |
|
|
|
|
|
| (5,706 | ) | ||||||
Common share repurchase |
| — |
|
|
|
|
|
|
| — |
| (11,564 | ) |
|
|
|
|
|
| (11,564 | ) | ||||||
Repayment of long-term debt |
| 877 |
|
| b) |
|
| (877 | ) | — |
| (2,458 | ) |
| b) |
|
| (768 | ) | (3,226 | ) | ||||||
Net cash (used for) provided by financing activities |
| (5,250 | ) |
|
|
|
| (877 | ) | (6,127 | ) | (15,341 | ) |
|
|
|
| (768 | ) | (16,109 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents |
| (1,407 | ) |
|
|
|
|
|
| (1,407 | ) | 2,742 |
|
|
|
|
|
|
| 2,742 |
| ||||||
Increase in Cash and Cash Equivalents |
| 141,554 |
|
|
|
|
| 82 |
| 141,636 |
| 189,182 |
|
|
|
|
| 9 |
| 189,191 |
| ||||||
Cash and Cash Equivalents at Beginning of Period |
| 601,992 |
|
| c) |
|
| 151 |
| 602,143 |
| 423,901 |
|
| c) |
|
| 322 |
| 424,223 |
| ||||||
Cash and Cash Equivalents at End of Period |
| $ | 743,546 |
|
|
|
|
| $ | 233 |
| $ | 743,779 |
| $ | 613,083 |
|
|
|
|
| $ | 331 |
| $ | 613,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(thousands of United States Dollars)
|
| For the Nine Months Ended September 30, 2006 |
| For the Nine Months Ended September 30, 2005 |
| ||||||||||||||||||||||
|
| U.S. GAAP |
| Ref |
| Amount |
| Canadian |
| U.S. GAAP |
| Ref |
| Amount |
| Canadian |
| ||||||||||
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Net income |
| $ | 504,158 |
|
|
|
|
| $ | (3,710 | ) | $ | 500,448 |
| $ | 415,648 |
|
|
|
|
| $ | (1,333 | ) | $ | 414,315 |
|
Adjustments to reconcile net income to net cash flows from operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Depreciation of capital assets |
| 52,231 |
|
| b) |
|
| (6,671 | ) | 54,313 |
| 59,991 |
|
| b) |
|
| (6,671 | ) | 58,344 |
| ||||||
|
|
|
|
| c) |
|
| 118 |
|
|
|
|
|
| c) |
|
| 119 |
|
|
| ||||||
|
|
|
|
| d) |
|
| 8,635 |
|
|
|
|
|
| d) |
|
| 4,905 |
|
|
| ||||||
Amortization of deferred charges |
| 1,506 |
|
|
|
|
|
|
| 1,506 |
| 1,284 |
|
|
|
|
|
|
| 1,284 |
| ||||||
Stock based compensation |
| 5,021 |
|
|
|
|
|
|
| 5,021 |
| 3,281 |
|
|
|
|
|
|
| 3,281 |
| ||||||
Deferred income taxes |
| (4,874 | ) |
| b) |
|
| 985 |
| (7,204 | ) | 62,357 |
|
| b) |
|
| 1,016 |
| 61,607 |
| ||||||
|
|
|
|
| d) |
|
| (3,315 | ) |
|
|
|
|
| d) |
|
| (1,766 | ) |
|
| ||||||
Gain on sale of assets held for sale |
| — |
|
|
|
|
|
|
| — |
| (1,863 | ) |
|
|
|
|
|
| (1,863 | ) | ||||||
Unrealized foreign exchange gain |
| — |
|
|
|
|
|
|
| — |
| (20,653 | ) |
|
|
|
|
|
| (20,653 | ) | ||||||
Loss on early extinguishment of debt |
| — |
|
|
|
|
|
|
| — |
| 10,939 |
|
|
|
|
|
|
| 10,939 | ) | ||||||
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Accounts receivable |
| 2,575 |
|
| c) |
|
| (191 | ) | 2,384 |
| 57,915 |
|
| c) |
|
| 265 |
| 58,180 |
| ||||||
Inventories |
| (235,651 | ) |
| c) |
|
| (23 | ) | (235,674 | ) | (24,831 | ) |
| c) |
|
| 4 |
| (24,827 | ) | ||||||
Other current assets |
| 3,049 |
|
| c) |
|
| (3 | ) | 3,046 |
| 4,391 |
|
|
|
|
|
|
| 4,391 |
| ||||||
Accounts payable and accrued charges |
| 19,398 |
|
| b) |
|
| (38 | ) | 19,668 |
| (39,132 | ) |
| b) |
|
| 28 |
| (39,169 | ) | ||||||
|
|
|
|
| c) |
|
| 308 |
|
|
|
|
|
| c) |
|
| (65 | ) |
|
| ||||||
Change in deferred pension liability |
| (726 | ) |
|
|
|
|
|
| (726 | ) | (315 | ) |
|
|
|
|
|
| (315 | ) | ||||||
Income and other taxes payable |
| (44,746 | ) |
|
|
|
|
|
| (44,746 | ) | 21,155 |
|
|
|
|
|
|
| 21,155 |
| ||||||
Net cash provided by operations |
| 301,941 |
|
|
|
|
| (3,905 | ) | 298,036 |
| 550,167 |
|
|
|
|
| (3,498 | ) | 546,669 |
| ||||||
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Expenditures for capital assets, net of litigation settlement |
| (61,853 | ) |
| c) |
|
| (120 | ) | (61,973 | ) | (43,262 | ) |
| c) |
|
| (101 | ) | (43,363 | ) | ||||||
Proceeds from sale of capital assets |
| — |
|
|
|
|
|
|
| — |
| 1,546 |
|
|
|
|
|
|
| 1,546 |
| ||||||
Proceeds from mortgage receivable, net |
| 8,396 |
|
|
|
|
|
|
| 8,396 |
| 3,782 |
|
|
|
|
|
|
| 3,782 |
| ||||||
Investments |
| — |
|
|
|
|
|
|
| — |
| 194 |
|
| c) |
|
| (194 | ) | — |
| ||||||
Expenditures for other long-term assets |
| (4,371 | ) |
|
|
|
|
|
| (4,371 | ) | — |
|
|
|
|
|
|
| — |
| ||||||
Net cash used for investing activities |
| (57,828 | ) |
|
|
|
| (120 | ) | (57,948 | ) | (37,740 | ) |
|
|
|
| (295 | ) | (38,035 | ) | ||||||
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Common shares issued pursuant to share option plan |
| 5,141 |
|
|
|
|
|
|
| 5,141 |
| 20,810 |
|
|
|
|
|
|
| 20,810 |
| ||||||
Tax benefit share option plan |
| 2,672 |
|
|
|
|
|
|
| 2,672 |
| — |
|
|
|
|
|
|
| — |
| ||||||
Common share dividends |
| (24,395 | ) |
|
|
|
|
|
| (24,395 | ) | (16,160 | ) |
|
|
|
|
|
| (16,160 | ) | ||||||
Common share repurchase |
| (85,500 | ) |
|
|
|
|
|
| (85,500 | ) | (132,721 | ) |
|
|
|
|
|
| (132,721 | ) | ||||||
Current portion of long-term debt |
| 2,050 |
|
| b) |
|
| (2,050 | ) | — |
| — |
|
|
|
|
|
|
| — |
| ||||||
Repayment of long-term debt |
| (6,164 | ) |
| b) |
|
| 6,164 |
| — |
| (130,295 | ) |
| b) |
|
| 3,821 |
| (126,474 | ) | ||||||
Net cash (used for) provided by financing activities |
| (106,196 | ) |
|
|
|
| 4,114 |
| (102,082 | ) | (258,366 | ) |
|
|
|
| 3,821 |
| (254,545 | ) | ||||||
Effect of exchange rate changes on cash and cash equivalents |
| 22,565 |
|
|
|
|
|
|
| 22,565 |
| 4,248 |
|
|
|
|
|
|
| 4,248 |
| ||||||
Increase in Cash and Cash Equivalents |
| 160,482 |
|
|
|
|
| 89 |
| 160,571 |
| 258,309 |
|
|
|
|
| 28 |
| 258,337 |
| ||||||
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 |
| $ | 743,546 |
|
|
|
|
| $ | 233 |
| $ | 743,779 |
| $ | 613,083 |
|
|
|
|
| $ | 331 |
| $ | 613,414 |
|
22
CONSOLIDATED BALANCE SHEETS (unaudited)
(thousands of United States Dollars)
|
| September 30, 2006 |
| December 31, 2005 |
| ||||||||||||||||||||||
|
| U.S. GAAP |
| Ref |
| Amount |
| Canadian |
| U.S. GAAP |
| Ref |
| Amount |
| Canadian |
| ||||||||||
Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Cash and cash equivalents |
| $ | 743,546 |
|
| c) |
|
| $ | 233 |
| $ | 743,779 |
| $ | 583,064 |
|
| c) |
|
| $ | 144 |
| $ | 583,208 |
|
Accounts receivable, less allowances |
| 376,334 |
|
| c) |
|
| 745 |
| 377,124 |
| 388,943 |
|
| c) |
|
| 222 |
| 377,324 |
| ||||||
|
|
|
|
| h) |
|
| 45 |
|
|
|
|
|
| h) |
|
| (11,841 | ) |
|
| ||||||
Inventories |
| 764,053 |
|
| c) |
|
| 173 |
| 764,226 |
| 506,237 |
|
| c) |
|
| 150 |
| 506,387 |
| ||||||
Future income taxes |
| 37,999 |
|
|
|
|
|
|
| 37,999 |
| 30,227 |
|
|
|
|
|
|
| 30,227 |
| ||||||
Other |
| 5,406 |
|
| c) |
|
| 25 |
| 5,431 |
| 8,615 |
|
| c) |
|
| 22 |
| 8,637 |
| ||||||
|
| 1,927,338 |
|
|
|
|
| 1,221 |
| 1,928,559 |
| 1,517,086 |
|
|
|
|
| (11,303 | ) | 1,505,783 |
| ||||||
Non-Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Capital assets |
| 1,063,291 |
|
| b) |
|
| (106,133 | ) | 1,070,702 |
| 1,056,186 |
|
| b) |
|
| (112,804 | ) | 1,065,558 |
| ||||||
|
|
|
|
| c) |
|
| 2,572 |
|
|
|
|
|
| c) |
|
| 2,569 |
|
|
| ||||||
|
|
|
|
| d) |
|
| (15,163 | ) |
|
|
|
|
| d) |
|
| (6,528 | ) |
|
| ||||||
|
|
|
|
| f) |
|
| 13,902 |
|
|
|
|
|
| f) |
|
| 13,902 |
|
|
| ||||||
|
|
|
|
| g) |
|
| 112,233 |
|
|
|
|
|
| g) |
|
| 112,233 |
|
|
| ||||||
Other |
| 56,710 |
|
| c) |
|
| (3,244 | ) | 60,574 |
| 65,747 |
|
| c) |
|
| (2,776 | ) | 70,033 |
| ||||||
|
|
|
|
| i) |
|
| 7,108 |
|
|
|
|
|
| i) |
|
| 7,062 |
|
|
| ||||||
|
| 1,120,001 |
|
|
|
|
| 11,275 |
| 1,131,276 |
| 1,121,933 |
|
|
|
|
| 13,658 |
| 1,135,591 |
| ||||||
Total Assets |
| $ | 3,047,339 |
|
|
|
|
| $ | 12,496 |
| $ | 3,059,835 |
| $ | 2,639,019 |
|
|
|
|
| $ | 2,355 |
| $ | 2,641,374 |
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Accounts payable and accrued charges |
| $ | 335,975 |
|
| b) |
|
| $ | (6,640 | ) | $ | 324,919 |
| $ | 303,589 |
|
| b) |
|
| $ | (6,602 | ) | $ | 297,318 |
|
|
|
|
|
| c) |
|
| 549 |
|
|
|
|
|
| c) |
|
| 331 |
|
|
| ||||||
|
|
|
|
| h) |
|
| (4,965 | ) |
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income and other taxes payable |
| — |
|
|
|
|
|
|
| — |
| 41,073 |
|
|
|
|
|
|
| 41,073 |
| ||||||
Current portion of long-term debt |
| 20,879 |
|
| b) |
|
| (6,164 | ) | 14,715 |
| 4,114 |
|
| b) |
|
| (4,114 | ) | — |
| ||||||
|
| 356,854 |
|
|
|
|
| (17,220 | ) | 339,634 |
| 348,776 |
|
|
|
|
| (10,385 | ) | 338,391 |
| ||||||
Long-Term Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Long-term debt |
| 292,175 |
|
| b) |
|
| (110,320 | ) | 181,855 |
| 313,053 |
|
| b) |
|
| (116,483 | ) | 196,570 |
| ||||||
Other |
| 44,538 |
|
| i) |
|
| (44,538 | ) | — |
| 44,584 |
|
| i) |
|
| (44,584 | ) | — |
| ||||||
Future income taxes |
| 189,939 |
|
| b) |
|
| 6,275 |
| 256,350 |
| 191,973 |
|
| b) |
|
| 5,290 |
| 254,652 |
| ||||||
|
|
|
|
| d) |
|
| (6,166 | ) |
|
|
|
|
| d) |
|
| (2,851 | ) |
|
| ||||||
|
|
|
|
| f) |
|
| 5,172 |
|
|
|
|
|
| f) |
|
| 5,172 |
|
|
| ||||||
|
|
|
|
| g) |
|
| 41,751 |
|
|
|
|
|
| g) |
|
| 41,751 |
|
|
| ||||||
|
|
|
|
| h) |
|
| 1,716 |
|
|
|
|
|
| h) |
|
| (4,346 | ) |
|
| ||||||
|
|
|
|
| i) |
|
| 17,663 |
|
|
|
|
|
| i) |
|
| 17,663 |
|
|
| ||||||
|
| 526,652 |
|
|
|
|
| (88,447 | ) | 438,205 |
| 549,610 |
|
|
|
|
| (98,388 | ) | 451,222 |
| ||||||
Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Common shares |
| 414,499 |
| �� | e) |
|
| (40,733 | ) | 373,766 |
| 419,272 |
|
| e) |
|
| (40,733 | ) | 378,539 |
| ||||||
Contributed surplus |
| 22,202 |
|
|
|
|
|
|
| 22,202 |
| 15,548 |
|
|
|
|
|
|
| 15,548 |
| ||||||
Retained earnings |
| 1,744,297 |
|
| b) |
|
| 10,720 |
| 1,777,532 |
| 1,341,659 |
|
| b) |
|
| 9,110 |
| 1,378,603 |
| ||||||
|
|
|
|
| d) |
|
| (8,997 | ) |
|
|
|
|
| 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 |
| (17,165 | ) |
| e) |
|
| 88,433 |
| 108,496 |
| (35,846 | ) |
| e) |
|
| 88,433 |
| 79,071 |
| ||||||
Cumulative translation adjustment |
|
|
|
| h) |
|
| 3,245 |
|
|
|
|
|
| h) |
|
| (7,495 | ) |
|
| ||||||
|
|
|
|
| i) |
|
| 33,983 |
|
|
|
|
|
| i) |
|
| 33,979 |
|
|
| ||||||
|
| 2,163,833 |
|
|
|
|
| 118,163 |
| 2,281,996 |
| 1,740,633 |
|
|
|
|
| 111,128 |
| 1,851,761 |
| ||||||
Total Liabilities and Shareholders’ Equity |
| $ | 3,047,339 |
|
|
|
|
| $ | 12,496 |
| $ | 3,059,835 |
| $ | 2,639,019 |
|
|
|
|
| $ | 2,355 |
| $ | 2,641,374 |
|
23
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 nine-month periods ended September 30, 2006 and September 30, 2005, and the Company’s consolidated financial position at September 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.
24
We entered into a definitive merger agreement, dated September 10, 2006 (the “Merger Agreement”), among the Company, NS Group, Inc. (“NS Group”) and PI Acquisition Corporation (“PI Acquisition”), a wholly-owned subsidiary of the Company. Under the terms of the Merger Agreement, PI Acquisition will be merged with and into NS Group and each outstanding share of NS Group (other than dissenting shares) will be converted into the right to receive $66 per share in cash, without interest. Taking into account the amount of net cash of NS Group assumed to be available at the date of the merger, aggregate consideration, net of NS Group cash, will be approximately $1.46 billion. NS Group has a combined annual capacity of 820 thousand short tons of steel pipe, including 250 thousand tons of seamless pipe capacity, with a size range from 1.9 inches to 16 inches, and has approximately 1,480 employees. In 2005, NS Group reported net revenues of approximately $600 million, of which 94% were from its energy tubular products. The transaction is subject to the approval by the holders of a majority of the outstanding shares of NS Group common stock, the receipt of regulatory approvals and other customary closing conditions. On October 16, 2006, the 30-day waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, expired. The expiration of the Hart-Scott-Rodino waiting period satisfies one of the conditions to our acquisition of NS Group.
The transaction is not conditioned on financing and is expected to close by year end. We expect to finance the NS Group acquisition through a combination of cash-on-hand and debt obtained under a fully committed five year unsecured bank credit facility (the “Bank Credit Facility”) arranged through Banc of America Securities, LLC in aggregate principal amount of up to $1.25 billion. We are also considering the issuance of fixed-rate bonds, which would reduce the amount of bank debt needed for the funding of the acquisition. If we enter into the Bank Credit Facility or issue bonds as noted above, the relevant documentation would contain customary terms and covenants that may limit, in certain circumstances, our ability to, among other things, pay dividends or make other restricted payments. The loan documentation associated with the Bank Credit Facility would also require us and our subsidiaries to meet certain financial covenants, ratios and other tests.
Overview: Third Quarter Operating Results 2006 vs. 2005
Third quarter 2006 sales were a record $996.9 million, $270.8 million or 37% higher than the third quarter of 2005. Steel mill product revenue of $566.5 million increased 49% or $187.0 million over the third quarter 2005. Steel mill product revenue increases were driven by higher sales volumes and higher average pricing. The average price per ton of steel mill product increased $101 per ton or 14% from the prior year. Tubular product sales of $430.4 million increased $83.8 million or 24% from the same quarter last year, driven by higher sales volumes of large diameter pipe, increased energy tubular sales in the U.S. and higher average tubular product pricing.
IPSCO shipped a record 1,042,000 tons of finished products, up 194,000 tons or 23% from the 848,000 tons shipped during the same period last year. Steel mill product shipments in the third quarter were 691,000 tons, 163,000 tons or 31% more than the same period last year. Total tubular product shipments were a record 351,000 tons, 31,000 tons or 9.5% higher compared to last year’s third quarter. Within the tubular product line, energy tubular shipments were nearly flat at 216,000 tons while non energy tubular shipments of 53,000 tons declined modestly from the prior year. Large diameter pipe shipments however were 82,000 tons, up 36,000 tons from third quarter of 2005.
Gross income of $314.6 million for the third quarter of 2006 was $89.7 million higher than the same period last year due to volume increases, and higher average product pricing. Margins as a percent to sales increased from 31% to 32% due to a favorable tubular mix and higher average product pricing in most product lines.
The average per ton cost of scrap consumed in the third quarter of 2006 increased 33% from the third quarter of 2005. Aggregate conversion costs for the three steelworks were 3% higher than the same period last year due to small increases in energy costs, yield loss and maintenance expense. The average cost per ton of all products sold increased
25
to $655 per ton, $64 per ton higher than the same quarter last year. Despite the increase in conversion costs operating income per ton in the third quarter was $277 per ton compared to $238 per ton in the prior year due to the mix and pricing factors previously referenced.
Plate and coil tons produced in the third quarter of 2006 were 947,000 tons compared to 759,000 tons in third quarter of 2005. Steel mill production was impacted in third quarter 2005 by Hurricanes Katrina and Dennis and planned maintenance outages which resulted in lower volumes in 2005. However, quarterly production volumes have been increasing in the last year as the result of capital spending related to efficiencies, as well as and other best practice improvement efforts.
Selling, general and administration expenses were $25.7 million during the third quarter of 2006, as compared to $23.1 million during the same period in 2005, an increase of $2.6 million, or 11%, due to higher outside professional fees, charitable contributions, and share-based payment expense. Selling, general and administrative expenses represented 2.6% of sales compared to 3.2% in 2005.
Interest expense on long-term debt was $6.1 million, down 30% from $8.8 million in the third 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. Interest income increased $5.0 million to $9.5 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 impact reported earnings. The third quarter 2006 foreign exchange loss was $2.5 million compared to a gain in 2005 of $18.1 million.
In the third quarter, the estimate of the 2006 annual effective tax rate was reduced to 36.0%, resulting in an effective tax rate for the quarter of 32.0%. The third quarter tax rate, compared to the prior year’s third quarter tax rate of 38.1%, is primarily due to the planned reinvestment of U.S. earnings through the announced acquisition of NS Group and the resulting decrease of the U.S. withholding tax liability. The current quarter effective tax rate increased net earnings by $0.37 per diluted share as compared to the third quarter of 2005.
Net income for the third quarter of 2006 was $197.1 million or $4.15 per diluted share compared to $134.0 million or $2.78 per diluted share for the third quarter of 2005. Net income increased in the third quarter compared with the third quarter of 2005 due to higher volumes, selling price increases in excess of cost increases, decreased interest expenses, higher interest income, and a lower effective tax rate. Record sales volumes and average pricing along with a lower effective tax rate resulted in record earnings per share that were 49% higher than the third quarter of last year.
First Nine Months Operating Results 2006 vs. 2005
Sales were $2.8 billion, $612.8 million or 28% higher than the $2.2 billion reported for the first nine months of 2005. Average selling price increased to $916 per ton in the first nine months of 2006 compared to $870 per ton in the first nine months of 2005, while total tons shipped increased 22%.
For the first nine months of 2006, IPSCO shipped 3,048,000 tons of finished products, up 541,000 tons from the 2,507,000 tons reported for the same period last year. Steel mill products had shipments in the first nine months of 2,051,000 tons, 326,000 tons or 19% more than the prior year. Tubular products shipments in the first nine months were 997,000 tons, 215,000 tons or 28% higher than the same period last year. Energy tubular shipments were 605,000 tons, up 49,000 tons from the same period last year. Large diameter pipe shipments were 218,000 tons, up 156,000 tons from the first nine months of 2005.
Plate and coil tons produced in the first nine months of 2006 were 2,795,000 tons compared to 2,434,000 tons in the first nine months of 2005. Fewer maintenance and weather related outages and productivity improvements related to recent capital expenditures resulted in higher production at our steel facilities.
Gross income of $855.6 million for the first nine months of 2006 was $132.8 million higher than the same period last year. Year-to-date gross margin declined from 33% to 31% due to increases in input and conversion costs in excess of increases in average realized pricing.
26
Selling, general and administration expenses were $76.8 million during the first nine months of 2006, as compared to $57.6 million during the same period in 2005, an increase of $19.2 million, or 33%. The impact of share price appreciation and adoption of FAS 123(R) increased administration expenses by $6.9 million compared to the prior year. Higher outside professional fees and charitable contributions also contributed to the increase year over year. Selling, general and administrative expenses represented 2.7% of sales compared to 2.6% in 2005.
Operating income per ton in the first nine months of 2006 was $256 per ton compared to $265 per ton in the same period last year due to the factors previously discussed.
Interest expense on long-term debt was $17.7 million, down 39% from $29.2 million in the first nine months of 2005. This reduction in the first nine months of 2006 compared to the first nine months 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 $14.2 million to $24.7 million due to higher average cash balances and interest rate increases compared to the prior period.
Our annual effective income tax rate was reduced to 36% for the first nine months of 2006 versus 36.7% in the first nine months of 2005.
Net income for the first nine months of 2006 was $504.2 million, or $10.51 per diluted share, compared to $415.6 million, or $8.44 per diluted share for the first nine months of 2005. Net income increased due to higher volumes, decreased interest expense, higher interst income and a lower effectie tax rate.
We expect end-user demand for plate and energy tubular goods will continue to be strong. While energy prices have fallen recently we expect them to remain at levels sufficient to maintain high drilling activity and resultant demand for OCTG products. However, demand from service centers and distributor customers is declining in the fourth quarter as these customers reduce inventories. As previously announced, we will be adjusting our production accordingly, utilizing this opportunity to accelerate maintenance of our equipment that has been running at capacity during this record year and to better align our own inventories.
We expect total shipment levels to remain comparable to the prior quarter. However, unabsorbed overhead and higher maintenance expenses resulting from these production curtailments and a less favorable product mix related to lower large diameter sales will cause some margin compression. While demand for large diameter spiral pipe continues to be exceptionally strong, actual fourth quarter sales are expected to be lower than in the third quarter. Excluding any impact of the NS Group acquisition, foreign exchange gains or losses, and share price volatility, and assuming an effective tax rate of 36%, we forecast the fourth quarter earnings to be in the range of $3.30 to $3.50 per diluted share.
The NS Group transaction continues to be on schedule for closing prior to year end. The expiration of the Hart-Scott-Rodino waiting period satisfies one of the conditions to our acquisition of NS Group. Consummation of the merger, which is expected to occur in the fourth quarter 2006, remains subject to other customary closing conditions, including approval of the merger by NS Group’s shareholders.
Financial Position and Liquidity
Cash at September 30, 2006 was $743.5 million, an increase of $141.6 million in the quarter. Net cash generated by operating activities for the three months ended September 30, 2006 was $164.6 million compared to $219.1 million generated by operating activities for the same period in 2005. This decrease of $54.5 million was primarily due to an increase in inventory of $103.3 million in the third quarter of 2006 versus a reduction in inventory of $29.7 million in the third quarter 2005. This was partially offset by increased net income and accounts payable and reduced accounts receivable, while income taxes payable used $40.8 million. Higher inventory levels will be reduced in the fourth quarter through some production decreases.
27
Capital expenditures in the third quarter of 2006 were $19.4 million, compared with $19.5 million in the same period in 2005. Capital expenditures are anticipated to total approximately $85 million in 2006. During the third quarter, $7.4 million was generated from the collection of mortgage receivables and $4.4 million was invested in the acquisition of NS Group.
In May 2006, the Company announced a new share repurchase program to purchase up to 4.7 million of our common shares. In the third quarter of 2006, no common shares were repurchased under the new repurchase program compared to 258,500 common shares purchased totaling $11.6 million in the same quarter last year under the previous repurchase program.
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.
On September 11, 2006, IPSCO announced an agreement to purchase NS Group, Inc for $66.00 per share in cash. The transaction is valued at approximately $1.46 billion, net of NS Group cash. IPSCO expects to fund this acquisition through a combination of cash on hand and debt obtained under a committed bank credit facility.
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 underlying transaction is concluded. At September 30, 2006, accumulated other comprehensive loss includes $3.2 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 September 30, 2006, due to hypothetical declines of 10% and 25% in market prices of natural gas at that time would be $3.1 million and $7.8 million, respectively (at September 30, 2005 - $3.1 million and $7.6 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 has not engaged 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 September 30, 2006, there were no foreign exchange contracts outstanding.
28
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 September 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 September 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 September 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
29
In October 2006, NS Group, its directors, IPSCO and PI Acquisition were named as defendants in a class action lawsuit filed in the Campbell Circuit Court of the Commonwealth of Kentucky, Case # 06-CI-01422 #2. The plaintiff, a purported shareholder of the NS Group, has alleged, among other things, that the merger consideration to be paid to the shareholders of NS Group in the merger is unfair and inadequate, as a result of alleged breaches of fiduciary duty by NS Group and its directors. According to the complaint, NS Group’s directors agreed to an allegedly unfair and inadequate price and agreed to a termination fee, which is alleged to serve as a substantial deterrent to other prospective buyers, because of the directors’ interest in “quickly” signing the merger agreement in order to obtain allegedly “improper” personal benefits from the acceleration of various stock options and incentive plans and the indemnification provision of the merger agreement and, in the case of certain directors, salary continuation agreements. The complaint further alleges that the NS Group defendants breached an alleged duty of “full and fair disclosure” by failing to disclose in a previously filed preliminary proxy statement certain allegedly material information regarding the negotiation of the merger agreement, including information relating to NS Group and its directors’ consideration of alternative transactions, additional information regarding the criteria that Raymond James utilized in certain aspects of its financial analysis, as well as the percentage of its fee that is contingent on consummation of the merger. The complaint alleges that IPSCO aided and abetted NS Group and its directors in the breaches of their duties to NS Group’s shareholders. The complaint seeks, among other relief, compensatory and/or rescissory damages to the class, and an award of attorneys’ fees and expenses to the plaintiff. We believe the resolution of this matter will not have a material adverse effect on our consolidated financial condition or results of operations. Apart from the foregoing, 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.
In addition to the other information set forth in this report, you should carefully consider the risk factors described below along with the factors discussed in Item 1A of Part 1 of the Company’s Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition or future results. These cautionary statements are to be used as a reference in connection with any forward-looking statements. The factors, risks and uncertainties identified in these cautionary statements are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the Securities and Exchange Commission.
Timely completion of the NS Group acquisition, including receipt of shareholder approval, and the ability to integrate NS Group’s business and achieve synergies may not be successful and may reduce our profitability
The proposed acquisition of NS Group involves risks, including that the acquisition may not be completed. The transaction involves numerous risks, including the diversion of our management’s attention from other business concerns, the possibility that current operating and financial systems and controls may be inadequate to deal with our growth, the possibility of increased leverage and the potential loss of key employees. If the acquisition is completed there may be risks relating to the difficulty of integrating our business, operations, products and services with those of NS Group. The success of this transaction depends on our ability to successfully merge corporate cultures and operational and financial systems and controls; realize marketing and cost reduction synergies; and as necessary, retain key management members and technical personnel of NS Group. If we fail to integrate the NS Group business successfully, or to manage our growth, that failure could have a material adverse effect on our business. Although we have conducted what we believe to be a prudent investigation in connection with the transaction, an unavoidable level of risk remains regarding any undisclosed or unknown liabilities or issues concerning the NS Group.
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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 September 30, 2006, we made no purchases under the Bid. There remain 3,765,300 shares that may yet be purchased under the Bid.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
2.1 |
| Agreement and Plan of Merger, dated September 10, 2006, between IPSCO Inc., NS Group, Inc. and PI Acquisition Company (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K, filed with the SEC on September 11, 2006). |
3.1 |
| Articles of Continuance of IPSCO Inc., incorporated by reference to Exhibit 3.1 to Form F-4/A filed November 3, 2003 (Registration No. 333-108820). |
3.2 |
| Article of Incorporation of IPSCO Inc., incorporated by reference to Exhibit 3.2 to Form F-4/A filed November 3, 2003 (Registration No. 333-108820). |
3.3 |
| Bylaws of IPSCO Inc. incorporated by reference to Exhibit 3.13 to Form F-4/A filed November 3, 2003 (Registration No. 333-108820). |
10.1* |
| IPSCO Enterprises Inc. U.S. Supplemental Executive Retirement Plan (As Amended and Restated Effective January 1, 2005), approved by the Company’s Board of Directors on February 24, 2006. |
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. |
* Filed herewith
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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. (Registrant) | ||
Date: November 8, 2006 | By: | /s/ DAVID S. SUTHERLAND |
|
| David S. Sutherland |
|
| President and Chief Executive Officer |
Date: November 8, 2006 | By: | /s/ VICKI L. AVRIL |
|
| Vicki L. Avril |
|
| Senior Vice President and Chief Financial Officer |
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