U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 40-F
(Check One)
[ ] Registration statement pursuant to Section 12 of the Securities Exchange
Act of 1934
or
[X] Annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 2005 Commission file number: 333-101591
GERDAU AMERISTEEL CORPORATION
(Exact name of registrant as specified in its charter)
ONTARIO 3312 59-0792436
(Province or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification Number
incorporation Code Number (if applicable)) (if Applicable))
or organization)
4221 BOY SCOUT BOULEVARD, SUITE 600
TAMPA, FLORIDA 33607
(813) 286-8383
(Address and Telephone Number of Registrant's Principal Executive Offices)
MARIO LONGHI
CHIEF EXECUTIVE OFFICER
GERDAU, AMERISTEEL CORPORATION
4221 BOY SCOUT BOULEVARD, SUITE 600
TAMPA, FLORIDA 33607
(813) 286-8383
(Name, Address (Including Zip Code) and Telephone Number
(Including Area Code) of Agent For Service in the United States)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
------------------- ------------------------------------
COMMON STOCK NEW YORK STOCK EXCHANGE
Securities registered or to be registered pursuant to Section 12(g)
of the Act: NONE
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act. SENIOR NOTES DUE 2011
For annual reports, indicate by check mark the information filed with this Form:
[X] Annual Information Form [X] Audited Annual Financial Statements
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the annual
report: 304,729,125
Indicate by check mark whether the registrant by filing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934
(the "Exchange Act"). If "Yes" is marked, indicate the file number assigned to
the registrant in connection with such rule.
Yes No X
----- -----
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports); and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
----- -----
PAGE 2
FORM 40-F
PRINCIPAL DOCUMENTS
The following documents have been filed as part of this Annual Report on Form
40-F, beginning on the following page:
(a) Renewal Annual Information Form dated March 29, 2006;
(b) Management's Discussion and Analysis of Financial Condition and
Results of Operations for the fiscal year ended December 31, 2005; and
(c) Consolidated Financial Statements for the fiscal year ended December
31, 2005.
(GERDAU AMERISTEEL LOGO)
GERDAU AMERISTEEL CORPORATION
RENEWAL ANNUAL INFORMATION FORM
MARCH 29, 2006
TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS................................................. 1
REPORTING CURRENCY AND FINANCIAL INFORMATION............................... 1
OVERVIEW................................................................... 1
CORPORATE STRUCTURE........................................................ 3
OPERATING STRUCTURE........................................................ 3
GENERAL DEVELOPMENT OF THE BUSINESS........................................ 4
INDUSTRY AND TRENDS........................................................ 6
NARRATIVE DESCRIPTION OF THE BUSINESS...................................... 7
BEAUMONT MILL, TEXAS.................................................... 8
CALVERT CITY MILL, KENTUCKY............................................. 8
CAMBRIDGE MILL, ONTARIO................................................. 8
CARTERSVILLE MILL, GEORGIA.............................................. 9
CHARLOTTE MILL, NORTH CAROLINA.......................................... 9
JACKSON MILL, TENNESSEE................................................. 9
JACKSONVILLE MILL, FLORIDA.............................................. 9
KNOXVILLE MILL, TENNESSEE............................................... 9
MANITOBA MILL, MANITOBA................................................. 10
PERTH AMBOY MILL, NEW JERSEY............................................ 10
ST. PAUL MILL, MINNESOTA................................................ 10
SAYREVILLE MILL, NEW JERSEY............................................. 10
WILTON MILL, IOWA....................................................... 10
WHITBY MILL, ONTARIO.................................................... 11
GALLATIN MILL, KENTUCKY................................................. 11
DEPOTS.................................................................. 11
RAILROAD SPIKE OPERATIONS............................................... 11
COLD DRAWN OPERATIONS................................................... 12
SUPER LIGHT BEAM PROCESSING AND ELEVATOR GUIDE RAILS.................... 12
GRINDING BALL OPERATIONS................................................ 12
REBAR FABRICATION....................................................... 12
WIRE DRAWING............................................................ 13
NEW ORLEANS, LOUISIANA FACILITY......................................... 13
BEAUMONT, TEXAS FACILITY................................................ 13
CARROLLTON, TEXAS FACILIY............................................... 14
MEMPHIS, TENESSEE FACILITY.............................................. 14
MERCHANT BARS/SPECIAL SECTIONS/SPECIAL BAR QUALITY...................... 15
STOCK REBAR............................................................. 16
ROD..................................................................... 16
FLAT ROLLED STEEL....................................................... 16
FABRICATED STEEL........................................................ 16
BILLETS................................................................. 16
LOCAL COMPETITION....................................................... 18
FOREIGN COMPETITION..................................................... 18
COMPETITIVE STRENGTHS................................................... 19
RISK FACTORS............................................................... 20
ENVIRONMENTAL AND REGULATORY MATTERS....................................... 24
EMPLOYEES.................................................................. 25
MANAGEMENT'S DISCUSSION AND ANALYSIS....................................... 26
MARKET FOR SECURITIES...................................................... 26
DIVIDENDS.................................................................. 28
DIRECTORS AND OFFICERS..................................................... 28
DIRECTOR INDEPENDENCE...................................................... 31
PRESIDING DIRECTOR AT MEETINGS............................................. 31
COMMUNICATION WITH NON-MANAGEMENT DIRECTORS................................ 32
CORPORATE GOVERNANCE....................................................... 32
BOARD COMMITTEE MANDATES................................................... 32
LEGAL PROCEEDINGS.......................................................... 33
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS................. 33
AUDITOR, TRANSFER AGENT AND REGISTRAR...................................... 33
AUDIT FEES................................................................. 33
INTEREST OF EXPERTS........................................................ 34
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AUDIT COMMITTEE............................................................ 34
STANDARDS OF BUSINESS CONDUCT.............................................. 35
MATERIAL CONTRACTS......................................................... 35
SIGNIFICANT ACQUISITIONS................................................... 36
ADDITIONAL INFORMATION..................................................... 36
SCHEDULE A - SUBSIDIARIES............................................... 37
SCHEDULE B - AUDIT COMMITTEE CHARTER.................................... 38
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As used in this document, unless the context otherwise requires, (i) the
"Company" and "Gerdau Ameristeel" refer to Gerdau Ameristeel Corporation and its
subsidiaries and 50% owned joint ventures, (ii) "Ameristeel" refers to Gerdau
Ameristeel US Inc. (formerly AmeriSteel Corporation), (iii) "Gerdau North
America" refers to the North American operations of Gerdau S.A., on or before
October 23, 2002, and (iv) "we", "us" and "our" refers to the Company and its
subsidiaries and 50% owned joint ventures. Unless otherwise indicated, all
information in this Annual Information Form is given as of March 29, 2006.
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Information Form, including, without
limitation, statements in the sections entitled "OVERVIEW", "GENERAL DEVELOPMENT
OF THE BUSINESS", "NARRATIVE DESCRIPTION OF THE BUSINESS", "RISK FACTORS" AND
"ENVIRONMENTAL AND REGULATORY MATTERS", constitute forward-looking statements.
Such statements describe the Company's assumptions, beliefs and expectations
with respect to its operations, future financial results, business strategies
and growth and expansion plans and strategies and can often be identified by the
words "anticipates," "believes," "estimates," "expects," "intends," "plans," and
other words and terms of similar meaning. As discussed in "Risk Factors" in this
Annual Information Form, the Company cautions readers that forward-looking
statements involve risks and uncertainties that could cause actual results to
differ materially from those currently projected by the Company. In addition to
those noted in the statements themselves, any number of factors could affect
actual results, including, without limitation:
The highly competitive nature of the global steel industry and the
availability of competitive substitute materials; the cyclical nature of the
steel industry and the industries served by the Company and economic conditions
in North America and worldwide; steel imports and trade regulations; the
substantial capital investment and maintenance expenditures required in the
Company's business; unexpected equipment failures, transportation disruptions or
production curtailments or shutdowns; increases in the cost of steel scrap,
energy and other raw materials; the ability to renegotiate collective bargaining
agreements and avoid labor disruptions; the cost of compliance with
environmental laws and regulations; the Company's costs relative to competitors
who have sought bankruptcy protection; currency exchange rate fluctuations; the
Company's ability to fund its pension plans; the deviation of actual results
from estimates made by the Company in the preparation of its financial
statements; the loss of key employees; the Company's reliance on joint ventures
that it does not control; the effects of the consolidation of operations or of
the steel industry; and the timely completion of business or asset purchases and
sales, including receipt of regulatory agency approvals, and the ability to
integrate newly-acquired businesses and achieve synergies.
Any forward-looking statements in this Annual Information Form are based on
current information as of the date of this Annual Information Form and the
Company does not undertake any obligation to update any forward-looking
statements to reflect new information or future developments or events, except
as required by law.
REPORTING CURRENCY AND FINANCIAL INFORMATION
In this Annual Information Form, references to "dollars" and "$" are to
United States dollars. For reporting purposes, the Company's financial results
are presented in United States dollars and in accordance with United States
generally accepted accounting principles ("U.S. GAAP"). Effective January 1,
2004, the Company began reporting financial results under U.S. GAAP. Prior
period results were originally presented in accordance with Canadian GAAP and
also under U.S. GAAP for comparative purposes. The Company's financial
statements are available on SEDAR at www.sedar.com.
OVERVIEW
Gerdau Ameristeel is the second largest minimill steel producer in North
America with annual manufacturing capacity of 8.4 million tons of mill finished
steel products. Through its vertically integrated network of 15 mills (including
one 50% owned minimill), 17 scrap recycling facilities and 43 downstream
operations, Gerdau Ameristeel primarily serves customers in the eastern two
thirds of North America. The Company's products are generally sold to steel
service centers, steel fabricators, or directly to original equipment
manufacturers (or "OEMs") for use in a variety of industries, including
construction, mining,
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cellular and electrical transmission, automotive, metal building manufacturing
and equipment manufacturing.
The Company's operations are segmented into two operating divisions,
minimills and downstream operations.
Minimills. Gerdau Ameristeel owns and operates eleven mills in the United
States and three in Canada and also has a 50% interest in the Gallatin minimill
located in Kentucky, a joint venture with Dofasco Inc. The Company manufactures
and markets a wide range of steel products, including reinforcing steel bar
(rebar), merchant bars, structural shapes, beams, special sections, coiled wire
rod (rod), and flat rolled sheet. For the year ended December 31, 2005,
shipments were approximately 7.1 million tons of mill finished steel products.
Over 90% of the raw material feed for the minimill operations is recycled steel
scrap, making Gerdau Ameristeel the second largest steel recycler in North
America. Six of the mills are provided with scrap by an internal network of 17
scrap recycling facilities. The Company believes the recycling operations
provide a stable supply of these mills' primary raw material.
Downstream operations. The Company has secondary value-added steel
businesses referred to as downstream operations. These steel fabricating and
product manufacturing operations process steel principally produced in our
minimills. For the year ended December 31, 2005, downstream shipments were
approximately 1.1 million tons of processed steel products. The downstream
operations consist of the following:
- Rebar fabrication and epoxy coating -- Gerdau Ameristeel has one of
the largest rebar fabricating and epoxy coating operations in North
America, consisting of 30 rebar fabricating facilities and two epoxy
coating plants, servicing the concrete construction industry in the
eastern half of the United States and Canada. The rebar facilities
have the capacity to produce approximately 785,000 tons of fabricated
and epoxy coated rebar per year. The fabricating facilities purchase
the majority of their rebar requirements from the Company's mills, at
market prices, and cut and bend it to meet our customers' engineering,
architectural and other end-product specifications. The epoxy coating
plants apply epoxy coating to rebar for use in construction projects
requiring rust resistant steel, including bridge and tunnel
construction.
- Railroad spike operations -- Gerdau Ameristeel has two railroad spike
operations that forge steel square bars produced at the Charlotte mill
into track spikes. The rail spike operations manufacture and
distribute the spikes on an annual contract basis to the railroad
industry throughout North America.
- Cold drawn plants -- Gerdau Ameristeel has two cold drawn plants that
process hot rolled merchant and light structural steel bars into cold
drawn bars with improved physical characteristics. The cold drawn
operations purchase approximately 60% of their raw material
requirements from the Company's mills.
- Super light beam processing and elevator guide rails -- Gerdau
Ameristeel has downstream operations that process super light steel
beams into cross members for the truck trailer industry and process
steel guide rail sections for elevator manufacturers.
- Wire mesh, collated nails, chain link fabric fencing and wire drawing
-- Gerdau Ameristeel has four downstream operations that specialize in
producing different wire end products. Specifically, the Atlas and
Beaumont facilities are focused on wire mesh and nails; the Memphis
facility produces galvanized after weave ("GAW") chain link fabric
fencing; and the Carrollton facility produces mainly wire drawing and
heat treating products.
- Grinding balls -- At the Duluth, Minnesota facility, Gerdau Ameristeel
produces grinding balls from 1" through 3.5" diameter using forging
machines. The raw material is supplied from the St. Paul mill.
Grinding balls are used in milling and dispersion processes for
various mineral mining operations.
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CORPORATE STRUCTURE
NAME AND INCORPORATION
Gerdau Ameristeel Corporation (formerly Co-Steel Inc.) was incorporated
under the laws of the Province of Ontario by letters patent dated September 10,
1970.
The Company is the result of a combination of the North American operations
of Brazilian steelmaker Gerdau S.A. and Canadian steelmaker Co-Steel Inc.
("Co-Steel") on October 23, 2002. The registered office of the Company is
located at 1801 Hopkins Street South, Whitby, Ontario, L1N 5T1, Canada. The
executive office is located at 4221 West Boy Scout Blvd., Suite 600, Tampa,
Florida, United States, 33607.
Subsequent to incorporation, the following amendments to the Company's
articles and constating documents were made:
- December 27, 1985 - Co-Steel was amalgamated with its subsidiary, Lake
Ontario Steel Company Limited;
- June 10, 1986 - the name was changed from Co-Steel International
Limited to Co-Steel Inc. and each of the outstanding shares (except
the first preference shares) was reclassified and subdivided into two
multiple voting shares and three subordinate voting shares;
- December 31, 1993 - all of the outstanding multiple voting shares of
the Company were automatically converted into subordinate voting
shares;
- April 27, 1994 - the subordinate voting shares were redesignated as
the common shares of the Company (the "Common Shares");
- December 31, 2000 - 877449 Ontario Limited, a subsidiary, amalgamated
with Co-Steel;
- October 23, 2002 - the name was changed to Gerdau Ameristeel
Corporation;
- May 6, 2003 - By-law No. A2, which amended the Company's general
by-law, was approved by the Company's shareholders; and
- September 26, 2003 - Gerdau Ameristeel amalgamated with its
wholly-owned subsidiaries Gerdau MRM Holdings Inc, Gerdau Ameristeel
Cambridge Inc., Gerdau Ameristeel Distribution Canada Ltd., 1102590
Ontario Limited, 2017387 Ontario Limited and 1585947 Ontario Limited.
OPERATING STRUCTURE
Gerdau Ameristeel conducts its operations directly and indirectly through
subsidiaries and joint ventures in Canada and the United States. The following
chart shows Gerdau Ameristeel Corporation, our principal subsidiaries and joint
ventures and their respective operations. Unless otherwise indicated, all
entities are 100%-owned and are owned directly or indirectly through an
intermediate holding company. Schedule "A" to this Annual Information Form lists
all of the Company's subsidiaries, their jurisdiction of incorporation and the
percentage of shares beneficially owned by the Company.
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[FLOW CHART]
1) Cambridge and Whitby Mills and part of Recycling operations.
2) Manitoba Mill and Mandak Recycling operations.
3) Knoxville, Cartersville, Charlotte, Jacksonville, Jackson, St. Paul,
Wilton, Calvert City, Beaumont, Fabrication Division, Grinding Balls, Wire,
Atlas, Rail Division, Buffalo Recycling and Porter Brothers Recycling.
GENERAL DEVELOPMENT OF THE BUSINESS
HISTORY
Gerdau Ameristeel is an indirect subsidiary of, and controlled by,
Brazilian steelmaker Gerdau S.A., a leading producer of long steel products in
Brazil, Chile, Uruguay, Argentina, Spain and, through Gerdau Ameristeel, Canada
and the United States. Gerdau S.A's history spans over 100 years, during which
it grew from having one nail manufacturing facility to being one of the top
twenty steel companies in the world. Gerdau S.A. has approximately 48% market
share of the long steel market in Brazil. The Gerdau group has global annual
manufacturing capacity of 18.5 million short tons of crude steel products, over
21,000 employees and total assets exceeding $9.0 billion. For the year ended
December 31, 2005, Gerdau S.A. had approximately $9.5 billion in consolidated
net sales and a market capitalization of over $7.3 billion.
Over the last 15 years, Gerdau S.A. has increased its investments abroad,
including its investments in North America. Gerdau S.A. made its initial
investment in the North American steel market in 1989 by acquiring Courtice
Steel Inc. (now part of Gerdau Ameristeel), which operated a minimill in
Cambridge, Ontario, Canada. In 1995, Gerdau S.A. acquired MRM Steel Inc. (now
Gerdau Ameristeel MRM Special Sections Inc.), which operated a minimill in
Selkirk, Manitoba, Canada. In 1999, Gerdau S.A. acquired an indirect majority
interest in AmeriSteel Corporation (now Gerdau Ameristeel US Inc.), which owned
four minimills and operated rebar fabricating plants, epoxy coating plants and
other downstream operations. In April 2001, AmeriSteel Bright Bar, Inc., an
80%-owned subsidiary of Ameristeel, acquired the assets of American Bright Bar,
a manufacturer of cold drawn steel bars in Orrville, Ohio. In December 2001,
Ameristeel acquired the assets of the Cartersville mill in Georgia, expanding
Ameristeel's structural bar size range and adding beams to its product line. In
June 2002, Ameristeel acquired certain assets and assumed certain liabilities of
a Republic Technologies' cold drawn plant in Cartersville, Georgia, a producer
of cold drawn merchant bar products, to expand our cold drawn operations and
complement the operations of AmeriSteel Bright Bar.
In October 2002, the majority shareholder of Gerdau S.A.'s North American
operations, referred to as Gerdau North America, acquired Co-Steel. Co-Steel was
a Canadian public company that owned and operated three minimills, participated
in a 50/50 joint venture that ran a fourth minimill in Kentucky and was a major
participant in the sourcing, trading and processing of scrap metal in the
northeastern North American market. Through the combination, Co-Steel acquired
all of the issued and outstanding shares of the companies included in Gerdau
North America, in exchange for Co-Steel common shares representing
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approximately 74% of Co-Steel's total common shares and changed its name to
Gerdau Ameristeel Corporation. Under reverse-take-over accounting, Gerdau North
America was deemed to be the acquirer and was assumed to have purchased the
assets and liabilities of Co-Steel.
In December 2002, Ameristeel was an 87%-owned subsidiary. In March 2003,
the Company effected an exchange, referred to as the minority exchange, in which
Gerdau Ameristeel acquired the shares of Ameristeel not previously owned by
using newly-issued common shares, making Ameristeel a wholly-owned subsidiary.
Following the transaction with Co-Steel and the acquisition of the shares of
Ameristeel, Gerdau S.A. indirectly held approximately 69% of the Company's
Common Shares.
In June 2003, the Company refinanced most of its outstanding debt by
issuing $405 million of 10 3/8% Senior Notes due 2011 and entering into a $350
million Senior Secured Credit Facility with a syndicate of lenders. The proceeds
were used to repay existing indebtedness under several lending arrangements and
to pay costs associated with the refinancing. Following the completion of the
refinancing, the Company reorganized its subsidiaries to more efficiently
integrate its operations and bring its U.S. operations within the same U.S.
group.
In March 2004, the Company completed the asset acquisition of downstream
operations of Potter Form & Tie Company. The acquisition of Potter Form & Tie
locations not only extended product lines coverage but also expanded market
coverage into the midwest United States.
In April 2004, the Company issued and sold 26.8 million Common Shares to
Gerdau S.A. through a private placement for total proceeds of $97.9 million.
This transaction increased Gerdau S.A.'s ownership to approximately 72% of
Common Shares then outstanding.
In October 2004, the Company completed an equity offering of 70,000,000
Common Shares in Canada and the United States. In November 2004, an additional
8,762,000 Common Shares were issued upon exercise by the underwriters of an
over-allotment option. Of the aggregate 78,762,000 Common Shares issued,
39,381,000 were purchased by Gerdau S.A. Pursuant to the completion of the
offering, Gerdau S.A. owns approximately 67.0% of the Company's Common Shares.
The proceeds of this offering of approximately $370 million were mainly used to
fund the acquisition of the North Star Steel assets from Cargill, Incorporated.
In November 2004, the Company completed the acquisition of the North Star
Steel assets from Cargill, Incorporated and certain of its subsidiaries,
including land, fixed assets and working capital of four long steel product
mills, four downstream operations and two recycling operations. The purchase
price for the acquired assets was $318 million in cash plus the assumption of
some debt and employee benefit obligations. This acquisition expanded the mill
coverage into the midwest and southwest United States. In December 2004, the
Company completed the acquisition of the fixed assets and working capital of the
rebar fabrication and epoxy coating facilities of Gate City Steel, Inc. and RJ
Rebar, Inc., resulting in the addition of six downstream facilities located in
the midwest United States, extending the Company's coverage and participation in
this region.
In June 2005, the Company announced a management succession plan pursuant
to which Mr. Mario Longhi was appointed President of the Company and Mr. Philip
E. Casey, Chief Executive Officer of the Company, assumed the additional
position of Chairman of the Board.
In October 2005, the Company amended and restated its senior secured
revolving credit facility. The facility has a five-year term and increased the
existing revolving credit line from $350 million to $650 million.
In January 2006, Mr. Mario Longhi replaced Mr. Phillip E. Casey as
Chief Executive Officer of the Company with Mr. Casey remaining as Chairman of
the Board.
In February 2006, the Company acquired the capital stock of Fargo Iron and
Metal Company, which operates a recycling yard located in Fargo, North Dakota.
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In March 2006, the Company completed the acquisition of the fixed assets
and working capital of Callaway Building Products, a rebar fabricator and
supplier of concrete construction products located in Knoxville, Tennessee. The
acquisition of Callaway increased the Company's rebar fabrication capabilities
in the State of Tennessee.
INDUSTRY AND TRENDS
The global steel industry is highly cyclical and competitive due to the
large number of steel producers, the dependence upon cyclical end markets and
the high volatility of raw material and energy prices. The North American steel
industry is currently facing a variety of challenges, including volatile
pricing, high fixed costs, low-priced imports, the diminution of the effect of
U.S. tariffs and challenges to the industry's ability to attract new management
talent. The future success of North American steel producers is dependent upon
numerous factors, including general economic conditions, levels and prices of
steel imports and the strength of the U.S. dollar.
Beginning in mid-2000 and continuing through 2002, the North American steel
industry experienced a severe downward cycle due to excess global production
capacity, high import levels at low prices, including prices that were below the
combined costs of production and shipping, and weak general economic conditions.
These forces resulted in lower domestic steel prices and significant domestic
capacity closures. Prices for many steel products reached 10-year lows in late
2001. As a result of these conditions, over 20 U.S. steel companies sought
protection under Chapter 11 of the United States Bankruptcy Code since the
beginning of 2000.
In response to these conditions, in March 2002, President Bush imposed a
series of tariffs and quotas on certain imported steel products under Section
201 of the Trade Act of 1974. These measures were intended to give the domestic
steel industry an opportunity to strengthen its competitive position through
restructuring and consolidation. The duties were imposed for a period of three
years and were to decrease each year they were in effect. For flat rolled
products and various merchant and special bar quality products, the tariff was
set at 30%, 24% and 18% for the first, second and third year, respectively. For
rebar products, the tariff was set at 15%, 12% and 9% for the first, second and
third year, respectively. On November 10, 2003, the World Trade Organization
(WTO) Appellate Body issued a ruling that upheld an initial WTO panel ruling
that declared the Section 201 tariffs on steel imports to be in violation of WTO
rules concerning safeguard measures. On December 4, 2003, President Bush signed
a proclamation terminating the steel safeguard tariffs, and announced that the
tariffs had achieved their purpose and changed economic circumstances indicated
it was time to terminate them. International trade negotiations, such as the
ongoing Organization for Economic Cooperation and Development steel subsidy
agreement negotiations and the WTO Doha Round negotiations, may affect future
international trade rules with respect to trade in steel products.
The North American steel industry has recently experienced some
consolidation. Bankrupt steel companies, once overburdened with underfunded
pension, healthcare and other legacy costs, are being relieved of obligations
and purchased by other steel producers. This consolidation, including the
purchases of the assets of LTV Corporation, Bethlehem Steel Corporation, Trico
Steel Co. LLC and National Steel Corporation, has created a lower operating cost
structure for the resulting entities and a less fragmented industry. In the bar
sector in 2002, the combination of Gerdau North America and Co-Steel in October
2002 and Nucor Corporation's acquisition of Birmingham Steel Corporation in
February 2002 significantly consolidated the market. The Company's acquisition
of the North Star Steel assets from Cargill, Incorporated in November 2004
contributed to this consolidation trend. The Company believes continued
consolidation in the North American steel industry will occur over the next
several years, resulting in the creation of larger steel companies, the
reduction of operating cost structures and further rationalization among steel
producers.
2005 was a strong year for the U.S. steel industry, buoyed by a strong
economy. The industry experienced a growth in demand, some tightening of supply
and increasing prices. These market conditions reflected a growth in demand
worldwide for steel products, including those produced by Gerdau Ameristeel.
Growth in productive capacity abroad, particularly in China, in 2004 and 2005,
began to overtake demand by 2005 in some product areas. Increased imports into
North America from China and other regions with current excess productive
capacity, during a period characterized by high raw material,
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energy and transportation costs, are expected to continue to provide some
challenges for North American steel producers.
NARRATIVE DESCRIPTION OF THE BUSINESS
MINIMILLS
Gerdau Ameristeel operates minimills, which are steel mills that use
electric arc furnaces to melt scrap metal by charging it with electricity.
During melting of scrap metal, alloys and other ingredients (such as fluxes) are
added in measured quantities to achieve desired metallurgical properties. The
resulting molten steel is cast into long strands called billets in a continuous
casting process. The billets are typically cooled and stored, and then
transferred to a rolling mill where they are reheated, passed through roughing
mills for size reduction, and then rolled into products such as rebar, merchant
bars, structural shapes, rods or special sections. These products emerge from
the rolling mill and are uniformly cooled on a cooling bed. Most merchant and
structural products then pass through automated straightening and stacking
equipment. Finished products are neatly bundled prior to shipment to customers,
typically by rail or truck. In some cases, finished products are shipped by rail
to a depot before delivery to customers. The following picture shows the typical
steel production process in our mills:
(STEEL PRODUCTION CHART)
All of the mills are located on Company-owned property, typically located
with convenient access to raw materials, means of transportation (road, and in
some cases, rail and water) and customers. In general, scrap is supplied by
owned or third party scrap recycling operations located within 500 miles of the
mills. Six of the Company's mills are vertically integrated with 17 scrap
recycling facilities that supply a portion of their scrap needs. Rebar finished
product deliveries are generally concentrated within 350 miles of a mill, and
merchant bar deliveries are generally concentrated within 500 miles. Some
products, such as special sections produced by the Manitoba mill, are shipped
greater distances, including overseas.
The table below presents information regarding the Company's mills,
including the estimated annual production capacity and actual production for the
year ended December 31, 2005. Annual melting and rolling capacities are based on
the best historical months of production and best rolling mill cycles,
respectively, both annualized and assuming 18 days per year for maintenance
shutdown. Actual capacity utilization may vary significantly from annual
capacity due to changes in customer requirements;
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sizes, grades and types of products rolled; and production efficiencies.
Capacity calculations may also change from year to year because of the above
mentioned factors. Manufacturer's design capacity information is not presented
because the Company does not consider it a relevant measure due to differences
in the product mix and production efficiency assumptions.
Year Ended December 31, 2005
-----------------------------------------
Melt Shop Rolling Mill
(Thousands of tons) (Thousands of Tons)
------------------- -------------------
Charlotte, North Carolina 460 350
Jacksonville, Florida 640 640
Jackson, Tennessee 670 600
Knoxville, Tennessee 550 520
Cartersville, Georgia 860 640
Wilton, Iowa 350 325
Calvert City, Kentucky -- 325
Manitoba, Manitoba 385 360
Cambridge, Ontario 360 320
Whitby, Ontario 960 800
Sayreville, New Jersey 800 600
Perth Amboy, New Jersey 900 800
Beaumont, Texas 650 800
St. Paul, Minnesota 600 550
----- -----
Total Long Steel 8,185 7,630
----- -----
Gallatin, Kentucky (50%) 750 780
----- -----
Total 8,935 8,410
===== =====
Gerdau Ameristeel operates its mills so inventory levels are maintained
within targeted ranges, therefore, generally the Company does not utilize 100%
of capacity. Although it is generally advantageous to run mills at full
production levels to achieve the lowest unit costs, producing to targeted
inventory levels balances production with marketing and gives management
sufficient flexibility to limit maintenance delays and other downtime. This
approach also results in better working capital management.
BEAUMONT MILL, TEXAS
The Beaumont mill began operations in 1976 and was acquired from Cargill,
Incorporated in November 2004. It is located on a 525 acre site on the Neches
River in Beaumont, Texas, with barge load/unload facilities as well as rail
service. It produces industrial quality rod products that are sold to customers
in the construction, automotive, tire, fasteners, furniture and general
manufacturing industries. The Beaumont mill has a 120-ton electric arc furnace,
a ladle arc refining unit, a four-strand continuous caster, and a rod mill. The
caster was rebuilt in February 2004.
CALVERT CITY MILL, KENTUCKY
The Calvert City mill is a rolling mill facility which was acquired from
Cargill, Incorporated in November 2004. It is located on a 357 acre site in
Calvert City, Kentucky. Approximately 20% of the semi-finished billets rolled by
the mill are sourced from third parties and the remainder from Gerdau
Ameristeel's other mills. The Calvert City mill produces merchant bar, medium
structural channel and beams. The Calvert City rolling mill consists of a
120-ton per hour reheat furnace, two high reversing roughers, six vertical and
horizontal mill stands, a cooling bed, an in-line straightener, a cut-to-length
product shear and an automatic stacker.
CAMBRIDGE MILL, ONTARIO
The Cambridge mill began operations in 1980. It is located on a 32 acre lot
in Cambridge, Ontario, 60 miles west of Toronto. It produces merchant bar,
special bar quality ("SBQ") products and rebar. Rebar produced at the Cambridge
mill is sold primarily to fabricators and service centers in Canada.
-8-
Approximately 75% of the Cambridge mill's production is merchant bar and special
bar quality products. It generally produces smaller sizes in smaller production
runs targeted to niche markets. The mill's melt shop was rebuilt in 1986 and
includes a 45-ton electric arc furnace and a 3-strand continuous caster. The
rolling mill was commissioned in 1987 and includes a 75-tons per hour reheat
furnace, an 18 in-line stand rolling mill, a 256 foot cooling bed, an in-line
cut-to-length shear, and a straightening, stacking, and bundling finishing end.
In 2003, a new bag house was installed for the melt shop.
CARTERSVILLE MILL, GEORGIA
The Cartersville mill began its melting operations in 1989 and its rolling
operations in 1999. It is located on a 267 acre site in Cartersville, Georgia.
In addition to a wide range of merchant bars, the mill produces structural
shapes and beams. The mill's melt shop has a 130-ton electric arc furnace, a
ladle refining station and a 6-strand billet caster. Construction of a 58,000
square foot finished product warehouse was completed in October 2003. In 2003
the melt shop introduced new oxygen injection technology, as well as current
conductive arms. Additional storage space was added in 2005 with a new warehouse
and an outside beam loading storage facility.
CHARLOTTE MILL, NORTH CAROLINA
The Charlotte mill began operations in 1961. It is located on a 112 acre
site in Charlotte, North Carolina. It produces rebar and merchant bars that are
sold primarily within the eastern seaboard states from Florida to Pennsylvania.
The mill's melting equipment includes a 75-ton electric arc furnace, a
continuous scrap feeding and preheating system, a ladle refining station and a
3-strand continuous caster. Charlotte's rolling mill includes an 80-tons per
hour reheat furnace, 15 in-line mill stands, a 200-foot cooling bed, an in-line
straightener and flying cut-to-length shear, and an automatic stacker for
merchant bars and rebar. An upgrade to Charlotte's rolling mill electrical
control system was completed in December 2003. A new rolling mill and finishing
end control system was installed during 2004.
JACKSON MILL, TENNESSEE
The Jackson mill began operations in 1981. It is located on a 283 acre site
in Jackson, Tennessee. The Jackson mill is the Company's largest single producer
of merchant bars and also produces some larger size rebar. The merchant bars are
marketed primarily in the southeast and midwest United States. The Jackson
mill's melting equipment includes a 140-ton electric arc furnace and a 4-strand
continuous billet caster. The rolling mill consists of a 120-tons per hour
reheat furnace, 16 vertical and horizontal in-line quick-change mill stands, a
cooling bed, an in-line straightener, a cut-to-length product shear and an
automatic stacker. The Jackson mill has a shredder which is used to process
scrap purchased from third parties. A caster upgrade project at the Jackson mill
was completed in December 2003. During 2004, the melt shop operations invested
in a multi-point carbon injection system. In 2005, a mobile hydraulic shear was
purchased with the capacity of shearing railcars for feedstock for the electric
arc furnace.
JACKSONVILLE MILL, FLORIDA
The Jacksonville mill began operations in 1976. It is located on a 550 acre
site in Jacksonville, Florida and produces rebar and rod. Straight rebar is
marketed primarily in Florida, the nearby Gulf Coast states and Puerto Rico, and
coiled rebar is shipped throughout the eastern United States. The rod products
are sold throughout the southeastern United States. Jacksonville's melting
equipment consists of a 100-ton electric arc furnace and a 4-strand continuous
caster. The rolling mill includes a 90 tons per hour reheat furnace, a 16-stand,
in-line horizontal rolling mill, a 10-stand rod block, a cooling bed for
straight bars and a controlled cooling line for coiled products, a cut-to-length
product shear, and automatic bundling and tying equipment for straight bars and
coils. 40% of the scrap needs of the Jacksonville mill is supplied by an on-site
recycling facility purchased in 2005 from OmniSource Corporation. During the
year 2005, the Company approved construction of a new melt shop that, when
completed, will increase capacity and provide operational improvements in the
steel-making process.
-9-
KNOXVILLE MILL, TENNESSEE
The Knoxville mill began operations in its present location in 1903. It is
located on a 62 acre site in Knoxville, Tennessee and produces almost
exclusively rebar. The rebar is marketed throughout the southern and midwestern
United States. Knoxville's melt shop completed a $34.5 million modernization in
July 2000. The new facility includes a 95-ton electric arc furnace and a
continuous scrap feeding and preheating system. The rolling mill consists of a
90-tons per hour reheat furnace, 17 in-line mill stands utilizing an in-line
heat treating process, a cooling bed and a cut-to-length shear line. In 2005 a
new warehouse facility was completed. The new facility has two overhead cranes,
54,500 square feet of storage under roof and is designed for rail and truck
loading capabilities.
MANITOBA MILL, MANITOBA
The Manitoba mill began operations in 1917. It is located on a 529 acre
site in Selkirk, Manitoba. It produces special sections, merchant bars and
rebar. Approximately 15% of the Manitoba mill's production is rebar which is
sold primarily to fabricators and service centers in Canada. Up to 15% of its
production is merchant bars and structurals. In 2001, the Manitoba mill
increased production capabilities to include flats with a width of more than 10
inches. Approximately 75% of the Manitoba mill's shipments are special sections
sold to the earth moving, material handling and transportation industries. The
Manitoba mill has a 65-ton electric arc furnace, a ladle refining station and a
3-strand continuous caster. The Manitoba mill operates two rolling mills.
Rolling mill #1 has a 15-stand rolling mill. Rolling mill #2 includes two
in-line stands, one horizontal and the other vertical, along with a cooling bed.
The mill is vertically integrated with five scrap recycling facilities located
in North Dakota that collect and/or process scrap for use by the mill and sale
to third parties. The mill also has its own shredder, shears and rail car
dismantling operations for processing scrap on site. The mill's scrap facilities
can supply all of the mill's scrap requirements. However, depending on market
conditions, the mill may from time to time purchase a portion of its scrap needs
from third parties and sell some of its collected scrap to third parties.
PERTH AMBOY MILL, NEW JERSEY
The Perth Amboy mill began operations in 1980. It is located on a 93 acre
site in Perth Amboy, New Jersey. It produces industrial quality rod products
that are sold to customers in the automotive, agricultural, industrial fastener,
welding, appliance and construction industries in the northeastern United
States. The Perth Amboy mill has a 150-ton electric arc furnace, a ladle arc
refining unit, a 5-strand continuous caster, and a rod mill. In 2004, the melt
shop operations invested in a casting machine upgrade, and implemented a mill
speed control and a rod mill finishing block.
ST. PAUL MILL, MINNESOTA
The St. Paul mill began operations in 1967 and was acquired from Cargill,
Incorporated in November 2004. It is located on a 188 acre site in central
Minnesota. The St. Paul mill produces merchant bar quality and special bar
quality round bars and rebar. St. Paul's melting equipment includes a 95-ton
electric arc furnace and a multiple size, four strand continuous billet caster.
The rolling mill consists of an 80-ton per hour reheat furnace, 14 in-line mill
stands, four finishing mill stands, a cooling bed, an in-line straightener, a
cut-to-length product shear and a semi-automatic stacker. The St. Paul facility
has a shredder which is used to process raw scrap purchased from third parties
and supplies the mill with a portion of its scrap raw material needs.
SAYREVILLE MILL, NEW JERSEY
The Sayreville mill began operations in 1972 and revamped the melt shop and
caster in 1997. It is located on a 117 acre site in Sayreville, New Jersey, 30
miles south of New York City. It primarily produces rebar, which is generally
sold to fabricators in the northeastern United States. The Sayreville mill
operates a 135-ton electric arc furnace, a continuous scrap feeding and
preheating system, a ladle arc refining unit, a 6-strand continuous caster and a
bar mill. In February 2006, the mill completed the installation of a new reheat
furnace.
-10-
WILTON MILL, IOWA
The Wilton mill began operations in 1976 and was acquired from Cargill,
Incorporated in November 2004. It is located on a 167 acre site in Wilton, Iowa.
The Wilton mill produces merchant bar, mostly flats and angles, and some rebar.
The Wilton mill's melting equipment includes an 80-ton electric arc furnace and
a three-strand continuous billet caster. The rolling mill consists of a 90-ton
per hour reheat furnace, 14 in-line mill stands, a cooling bed, an in-line
straightener, a cut-to-length product shear and an automatic stacker. The Wilton
minimill has a scrap shredder facility which is used to process raw scrap
purchased from third parties and supplies the mill with a portion of its scrap
raw material needs.
WHITBY MILL, ONTARIO
The Whitby mill began operations in 1964. It is located on a 350 acre site
in Whitby, Ontario, 35 miles east of Toronto. It produces principally merchant
bar, structural shapes and rebar. The Whitby mill has a 150-ton electric arc
furnace, a ladle refining unit, a 5-strand continuous caster, a bar mill and a
structural mill. The mill is vertically integrated with five scrap recycling
facilities in southern Ontario that collect and/or process scrap for use by the
mill and sale to third parties. 100% of the mill's scrap needs are supplied by
its scrap recycling facilities. The electrical control system at the Whitby bar
mill was upgraded in August 2003. A new 110,000 square foot warehouse was
completed during 2005.
GALLATIN MILL, KENTUCKY
The Gallatin mill began operations in 1995. It is a joint venture with
Dofasco Inc. Gerdau Ameristeel owns 50% of Gallatin Steel. The mill is located
in Gallatin County, Kentucky, 40 miles southwest of Cincinnati, Ohio on a
1,000-acre site owned by Gallatin Steel. It produces principally hot band rolled
steel products that are used in the construction, automotive, appliance,
machinery, equipment and packaging industries. The mill operates a direct
current twin-shell 350-ton electric arc furnace with a ladle refining station
and a thin slab caster. The rolling mill is a high-speed tandem rolling mill.
Gallatin also operates a downstream cut-to-length operation.
DEPOTS
The Company leases depots in Chicago, Illinois; North Jackson, Ohio; and
Montreal, Quebec. The Montreal depot was decommissioned in March 2005 after
completion of the Whitby Mill warehouse. The Company owns a warehouse in Milton,
Ontario which is expected to be sold in the second quarter of 2006. The new
warehouse built at the Whitby mill eliminated the need for most off-site
storage. Finished product is still shipped by rail from several of the Company's
mills to Chicago and North Jackson depots, stored, then shipped to customers.
The following table provides information on these facilities:
LOCATION ACREAGE LEASE EXPIRATION
-------- ------- ----------------
Montreal, Quebec..... 1.89 June 30, 2007
Chicago, Illinois.... 8.88 June 30, 2017
North Jackson, Ohio.. 21.75 May 31, 2016
DOWNSTREAM OPERATIONS
The Company has secondary value-added steel businesses, referred to as
downstream operations. These steel fabricating and product manufacturing
operations process steel principally produced in our minimills.
-11-
RAILROAD SPIKE OPERATIONS
Gerdau Ameristeel owns two railroad spike facilities: a 52,000 square foot
facility on 41 acres in Lancaster, South Carolina and a 23,000 square foot
facility on 7.7 acres in Paragould, Arkansas. The railroad spike operations
purchase steel square bars from the Charlotte mill and forge the bars into rail
track spikes. These track spikes are generally sold on an annual contract basis
to the major railroad companies in North America. Gerdau Ameristeel is one of
the leading rail spike producers and sells approximately 50,000 tons of track
spikes per year.
COLD DRAWN OPERATIONS
Gerdau Ameristeel has two cold drawn plants. The Orrville, Ohio plant is a
45,000 square foot greenfield facility built on 6.5 acres of land in 2000. The
Orrville plant is leased by AmeriSteel Bright Bar, Inc., of which a subsidiary
of the Company owns 80% and the remaining 20% is owned by members of the plant's
management. The Orrville plant has capacity to produce 30,000 tons of cold drawn
flats and squares per year. The Cartersville, Georgia cold drawn plant is a
90,000 square foot facility constructed in 1989. The Cartersville cold drawn
plant expanded the Company's cold drawn product offering to include rounds and
hexagons. The Cartersville plant has the capacity to produce 45,000 tons of cold
drawn bars per year. Cold drawn bars are sold primarily to steel service
centers. The Jackson, St. Paul, Cambridge and Cartersville mills, along with
third party mills, supply the Orrville and Cartersville cold drawn facilities.
SUPER LIGHT BEAM PROCESSING AND ELEVATOR GUIDE RAILS
Gerdau Ameristeel operates a super light beam processing facility in
Memphis, Tennessee that fabricates and coats super light beams produced largely
at the Manitoba mill into cross members for the truck trailer industry. This
facility is located on leased property, with the lease expiring on August 31,
2007. Bradley Steel Processors Inc., a 50%-owned joint venture with Buhler
Industries Inc., also operates a super light beam processing facility. Bradley's
facility is located on leased property in Winnipeg, Manitoba, near the Manitoba
mill, and processes beams produced by that mill. Bradley's lease expires on
September 30, 2008.
SSS/MRM Guide Rail Inc., a 50%-joint venture with Monteferro S.p.A.,
processes the Manitoba mill's guide rail sections for elevator manufacturers.
SSS/MRM does business under the name Monteferro North America and has facilities
in Steinbach, Manitoba and in Birds Hill, Manitoba. Both the Steinbach and Birds
Hill facilities are located on leased property, with the leases expiring in June
30, 2008 and May 31, 2007, respectively. SSS/MRM Guide Rail also has a 50%
interest in a guide rail processing facility in Brazil.
GRINDING BALL OPERATIONS
The grinding ball facility began operations in 1977 and was acquired from
Cargill, Incorporated in November 2004. The facility is located on 36.5 acre
site in Duluth, Minnesota. The grinding ball facility has four production lines
which produce approximately 100,000 tons per year of 1" through 3.5" diameter
grinding balls using forging machines. The plant has automatic unscrambling,
four induction heaters, four ball forgers, rounders and a quench tank. The raw
material for this facility is supplied by the St. Paul minimill.
REBAR FABRICATION
Gerdau Ameristeel operates one of North America's largest rebar fabricating
and epoxy coating groups, which has a 50-year history of quality workmanship and
service. Our network consists of 30 rebar fabricating plants. These locations
include three epoxy coating plants that also service the concrete construction
industry in the eastern half of the United States. The fabricating facilities
cut and bend rebar to meet customers' engineering, architectural and other
end-product specifications. The fabricating plants purchase the majority of
their rebar from our Jacksonville, Knoxville, Charlotte and Sayreville mills.
The Company's rebar fabricating capacity is approximately 785,000 tons per year.
Estimated capacity is based on best historical months of production, annualized.
The following table shows the rebar fabricating plant locations and their
approximate annual capacities:
-12-
REBAR FABRICATING PLANT (1, 2) CAPACITY (TONS)
------------------------------ ---------------
Tampa, Florida................................. 52,000
Jacksonville, Florida.......................... 40,000
Ft. Lauderdale, Florida........................ 45,000
Orlando, Florida............................... 15,000
Charlotte, North Carolina...................... 45,000
Raleigh, North Carolina........................ 35,000
Atlanta, Georgia............................... 45,000
Aiken, South Carolina.......................... 15,000
Knoxville, Tennessee........................... 50,000
Knoxville Rebar Express, Tennessee (Callaway).. 10,000
Nashville, Tennessee........................... 35,000
Memphis, Tennessee............................. 20,000
Louisville, Kentucky........................... 35,000
York, Pennsylvania............................. 60,000
Milton, Pennsylvania........................... 15,000
Belvidere, Illinois............................ 35,000
Decatur, Illinois.............................. 20,000
Madison, Wisconsin............................. 25,000
Appleton, Wisconsin............................ 20,000
Hamilton, Ohio................................. 9,000
Indianapolis, Indiana.......................... 35,000
Muncie, Indiana................................ 35,000
Eldridge, Iowa................................. 20,000
Sterling, Illinois............................. 24,000
Birmingham, Alabama............................ 36,000
Trussville, Alabama............................ 9,000
Total.......................................... 785,000
=======
(1) The Company also has a supply facility in Urbana, Illinois which is
included in the rebar fabrication group.
(2) The Company also has one location under construction in Fredericksburg,
Virginia. This unit is expected to start up during the third quarter of
2006 and will have capacity of 50,000 tons.
In addition to the fabricating plants listed above, the Company operates
three epoxy coating plants that are located in Knoxville, Tennessee; Sayreville,
New Jersey; and Muncie, Indiana. These facilities apply epoxy coating to
fabricated rebar for rust applications, and have a combined annual coating
capacity of approximately 180,000 tons.
WIRE DRAWING
With the recent acquisition of the North Star Steel assets, the Company
increased participation in this segment by adding three facilities located in
Carrollton and Beaumont, Texas and Memphis, Tennessee.
NEW ORLEANS, LOUISIANA FACILITY
The New Orleans facility, Atlas Steel & Wire, produces small-diameter drawn
wire from coiled steel rod. The wire is then either manufactured into wire mesh
for concrete pavement reinforcement or converted into collated nails for use in
high-speed nail machines. The Company leases a 120,000 square foot facility on
five acres of land in New Orleans, Louisiana. The lease was renewed on August
31, 2004 and renews annually, unless terminated by the Company.
BEAUMONT, TEXAS FACILITY
The Beaumont wire mesh plant began operations in 1991 and was acquired from
Cargill, Incorporated in November 2004. The facility is located in Beaumont,
Texas and produces welded wire reinforcing mesh for slab on grade, tilt-up
panels, pre-cast designs and state highway construction
-13-
materials. The facility consists of four buildings totaling approximately
244,000 square feet on 13 acres of land.
CARROLLTON, TEXAS FACILITY
The Carrollton plant is located in the Dallas-Fort Worth area and was
acquired from Cargill, Incorporated in November 2004. The Carrollton plant is a
132,000 square foot manufacturing facility located on seven acres of land and
includes state of the art chemical descaling, wire drawing and heat treating
facilities. The Carrollton plant is a leased facility and the current lease
expires in May 2006. The plant has a rail siding used for receipt of wire rod
and has four shipping bays for outbound truck shipments.
MEMPHIS, TENNESSEE FACILITY
The Memphis wire plant produces galvanized after weave (GAW) chain link
fabric fencing. The Memphis plant is a 62,000 square foot manufacturing facility
located on seven acres and is geographically well positioned to provide truck
delivery to markets east of the Rocky Mountains. In March 2006, the Company sold
the real estate on which the plant is located and leased it back from the new
owner of the real estate.
JOINT VENTURES
Gerdau Ameristeel has three 50%-owned joint ventures. The Gallatin mill is
a joint venture with Dofasco Inc. and produces hot rolled steel products.
Bradley Steel Processors Inc. is a joint venture with Buhler Industries Inc. and
processes super light beams. SSS/MRM Guide Rail is a joint venture with
Monteferro S.p.A. and processes the Manitoba mill's guide rail sections for
elevator manufacturers.
In 1994, Co-Steel and Dofasco Inc. established the Gallatin joint venture
by investing $75.0 million each into Co-Steel Dofasco LLC. The initial
investment was used to purchase $150.0 million of industrial revenue bonds from
Gallatin County, Kentucky. The bonds bear interest at a rate of 10%, mature in
2024 and can be prepaid without penalty. Gallatin County used the proceeds from
the industrial revenue bonds to construct the Gallatin steel mill, which is
being leased from Gallatin County by Gallatin Steel. Gallatin Steel makes lease
payments to Gallatin County, which in turn redeems bonds and makes interest
payments on the bonds to Co-Steel Dofasco LLC. As of December 31, 2005, there
were $17 million of bonds outstanding. All proceeds received by Co-Steel Dofasco
LLC from Gallatin County are distributed equally to Dofasco and Gerdau
Ameristeel.
OTHER PROPERTIES
In addition to owned and leased facilities used in operations, the Company
owns two industrial properties in Florida. The Company has signed a contract to
sell the Tampa property and expects to close the sale during the second quarter
of 2006. The Company has leased the executive office in Tampa, Florida since
March 1, 2005. The lease expires on March 1, 2010.
LOCATION USE ACREAGE
-------- --- -------
Tampa, Florida....... Industrial Property 40.0
Indiantown, Florida.. Industrial Property 151.5
-14-
PRODUCTS
The following tables show the breakdown of tons shipped to third parties by
product and average prices by market segment for the two years ended December
31, 2004 and 2005:
TONS SHIPPED
YEAR ENDED
DECEMBER 31
-------------
2004 2005
----- -----
(THOUSANDS)
Merchant bar/special sections .. 2,313 3,054
Rebar .......................... 1,322 1,473
Rod ............................ 787 703
Fabricated steel ............... 756 1,057
----- -----
Sub total ...................... 5,178 6,287
----- -----
Flat rolled (1) ................ 758 764
----- -----
Total finished goods ........... 5,936 7,051
(1) 50% of Gallatin's tons shipped.
MERCHANT BARS/SPECIAL SECTIONS/SPECIAL BAR QUALITY
Merchant bars/special sections refer to merchant bars, structural products,
special sections and special bar quality products.
- - Merchant bars consist of rounds, squares, flats, angles, and channels that
are less than three inches in dimension. Merchant bars are generally sold
to steel service centers and to manufacturers who fabricate the steel to
meet engineering or end-product specifications. Merchant bars are used to
manufacture a wide variety of products, including gratings, transmission
towers, floor and roof joists, safety walkways, ornamental furniture, stair
railings, and farm equipment. Merchant bars typically require more
specialized processing and handling than rebar, including straightening,
stacking, and specialized bundling. Due to their greater variety of shapes
and sizes, merchant bars typically are produced in short production runs,
necessitating frequent changeovers in rolling mill equipment.
- - Structural products consist of angles, channels and beams that are three
inches and larger in size. Structural products are used in construction and
in a wide variety of manufacturing applications, including housing,
trailers and structural support for buildings. Like smaller merchant bars,
structural products typically require specialized processing and handling,
and are produced in short production runs. Structural products are
generally sold to service centers, fabricators and OEMs.
- - Special sections are bar products with singular applications, as compared
to merchant bar products that can be used in a variety of applications.
Special sections include custom shapes for use in the earth moving,
material handling and transportation industries. The Company's special
sections products include grader blades for tractors, elevator guide rails,
light rails for crane and mine applications, and super light-weight beams
for truck trailer cross members.
- - Special bar quality products (SBQ) are merchant bar shapes that have
stringent chemical and dimensional tolerance requirements, and are often
more costly to produce and command a higher margin than smaller dimension
bar products. SBQ are widely used in industries such as mining and
automobile production and are generally sold to OEMs.
-15-
STOCK REBAR
Stock rebar refers to straight reinforcing steel bars, ranging from 20 to
60 feet in length and from 10 millimeter to 57 millimeter in diameter. Small
diameters of stock rebar may also be sold in coils where the extended lengths
provide improved yield performance for rebar fabricators. Stock rebar is sold to
companies that either fabricate it themselves or warehouse it for sale to others
who fabricate it for reinforced concrete construction. Rebar products are used
primarily in two sectors of the construction industry: private commercial
building projects, such as institutional buildings, retail sites, commercial
offices, apartments, condominiums, hotels, manufacturing facilities and sports
stadiums; and infrastructure projects, such as highways, bridges, utilities and
water and waste treatment facilities.
ROD
Rod refers to coiled wire rod. Gerdau Ameristeel produces industrial
quality rod products that are sold to customers in the automotive, agricultural,
industrial fastener, welding, appliance, and construction industries. The
Company sells rod to downstream manufacturers who further process it by cold
drawing into various shapes, including twisted or welded configurations such as
coat hangers, supermarket baskets and chain link fences. Other end uses of wire
rod products include the manufacture of fences, fine wire, chain, welding wire,
plating wire, fasteners and springs. Depending on market conditions and
availability, some rod from the Company's mills may be sold to the Company's
downstream operations that manufacture wire mesh and collated nails.
FLAT ROLLED STEEL
Flat rolled steel is steel that is rolled flat and then packaged into
coils. Gallatin Steel, the Company's joint venture with Dofasco Inc., is the
only mill in Gerdau Ameristeel that produces flat rolled sheet. Flat rolled
sheet is used in the construction, automotive, appliance, machinery, equipment
and packaging industries.
FABRICATED STEEL
Fabricated steel is any steel that is further processed after being rolled
by a mill. As a result of the further processing, fabricated steel generally
receives a higher price in the market than mill finished products. Stock rebar
is fabricated by cutting it to size and bending it into various shapes, and used
in reinforced concrete constructions, such as bridges, roads and buildings.
Fabricated steel also includes flats and squares processed at the cold drawn
plants, and guide rails, super light beams, wire mesh and nails at other
downstream facilities.
BILLETS
Billets are rectangular sections of steel that are semi-finished in a
casting process and cut to various lengths. Billets can be sold to other steel
producers and finished into steel products. The Company's melt shops produce
billets for conversion in the rolling mills into the finished products listed
above, such as rebar, merchant bar, structural shapes and special sections. A
small portion of billet production is sold in the open market to other steel
producers for rolling into finished products.
MARKETING
The Company's products are generally sold to steel service centers,
fabricators, or directly to OEMs in the eastern two thirds of North America.
Products sold by the Company are used in a variety of industries, including
construction, mining, automotive, commercial, cellular and electrical
transmission, metal building manufacturing and equipment manufacturing. The
Company also sells fabricated rebar to contractors performing work in both
private (commercial) and public (road, bridge and other construction or
infrastructure) projects.
In the Company's rebar fabrication business, the market areas covered is
the eastern two thirds of North America, with plants located in or near most
major cities. The Company's strategy is to have
-16-
production facilities located in close proximity (normally 200 miles) to
customers' job-sites so quick delivery times are provided to satisfy their
reinforcing steel needs and construction schedules.
The following table shows information on customers during 2004 and 2005:
PERCENT OF NET
SALES BY
CUSTOMER
--------------
2004 2005
----- ------
Fabricators/OEM........ 36% 37%
Steel service centers.. 45 45
Wire drawing........... 15 14
Other.................. 4 4
--- ---
Total.................. 100% 100%
=== ===
In the year ended December 31, 2005, the Company sold products to over
1,000 customers. Given the diversity of the Company's products and markets, no
one customer comprises 2.3% or greater of consolidated net sales. The five
largest customers comprised approximately 9.0% of total consolidated net sales
in the year ended December 31, 2005. The following table provides a percentage
breakdown of total net sales by customer location for 2004 and 2005:
PERCENTAGE OF NET
SALES BY COUNTRY
-----------------
2004 2005
----- -----
United States.... 81% 85%
Canada........... 18 14
----- -----
Other Countries.. 1 1
----- -----
100.0% 100.0%
===== =====
In general, sales of mill finished products to U.S. customers are centrally
managed by the Tampa sales office and sales to Canadian customers are managed by
the Whitby sales office. The Company has a sales office in Selkirk, Manitoba,
for managing sales of special sections. Metallurgical service representatives at
the mills provide technical support to the sales group. Sales of the cold drawn
and super light beam products are managed by sales representatives located at
their respective facilities. Fabricated rebar and elevator guide rails are
generally sold through a bidding process in which employees at our facilities
work closely with customers to tailor product requirements, shipping schedules
and prices.
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COMPETITION
LOCAL COMPETITION
The Company's geographic market encompasses the eastern two thirds of
Canada and the United States, predominantly throughout the eastern seaboard, the
southeast and the midwest United States. The Company experiences substantial
competition in the sale of each of our products from numerous competitors in our
markets. Rebar, merchant bars, and structural shapes are commodity steel
products for which pricing is the primary competitive factor. Due to the high
cost of freight relative to the value of steel products, competition from
non-regional producers is somewhat limited. Proximity of product inventories to
customers, together with competitive freight costs and low-cost manufacturing
processes, are key to maintaining margins on rebar and merchant bar products.
Rebar deliveries are generally concentrated within a 350 mile radius of the
mills and merchant bar deliveries are generally concentrated within a 500 mile
radius. Some products, such as special sections produced by the Manitoba mill,
are shipped greater distances, including overseas. Except in unusual
circumstances, the customer's delivery expense is limited to freight charges
from the nearest competitive mill, and the supplier absorbs any incremental
freight charges.
Principal competitors to Gerdau Ameristeel include Mittal Inc., Stelco Inc.
and Ivaco Inc. in Canada; and Bayou Steel Corporation, Commercial Metals
Corporation, Nucor Corporation, Sheffield Steel Corporation, and Steel Dynamics
Inc. in the United States. Gallatin Steel competes with numerous other
integrated and minimill steel producers.
Despite the commodity characteristics of the rebar, merchant bar and
structural markets, Gerdau Ameristeel believes it distinguishes itself from
competitors due to our large product range, product quality, consistent delivery
performance, capacity to service large orders and ability to fill most orders
quickly from inventory. The Company believes it produces one of the largest
ranges of bar products and shapes east of the Mississippi River. The Company's
product diversity is an important competitive advantage in a market where many
customers are looking to fulfill their requirements from a few key suppliers.
FOREIGN COMPETITION
All North American steel producers have experienced significant and, in
some cases, unfair competition from foreign steel producers during the past
several years. Due to unfavorable foreign economic conditions and global excess
capacity, imports of steel bar and wire rod products into the United States' and
Canadian markets reached historically high levels in recent years, with a
corresponding negative impact on domestic prices.
In September 2001, the International Trade Commission unanimously found
steel imports to be a major cause of material injury to the domestic steel
industry, and sent proposed remedies to President Bush in December 2001. On
March 5, 2002, President Bush imposed a series of tariffs relating to some
imported steel products that were intended to give the domestic steel industry
an opportunity to strengthen its competitive position through restructuring and
consolidation, and that were to progressively decline in the three years they
were to be in effect.
Many products and countries were not covered by these tariffs, and numerous
foreign steel manufacturers received specific product exemptions from these
tariffs. According to published reports, the exemptions were estimated to have
covered approximately 5.4 million of the original 13.1 million tons of imported
steel products that were covered by the tariffs. The majority of the most recent
exemptions were granted to products made by European Union and Japanese
producers. The Office of the United States Trade Representative and the United
States Department of Commerce granted 1,022 exclusion requests with respect to
the Section 201 tariffs temporarily imposed on steel imports as a safeguard
measure. According to the American Iron and Steel Institute (AISI), the number
of exclusions granted is one reason the tariffs did not effectively reduce steel
imports. The AISI does point to some early indications that the President's
program worked, including improved operating performance, new stock offerings,
increased consolidation activity and partial price restoration for some flat
rolled steel products; however, some analysts attribute these developments to
other factors such as diminished domestic supply, higher domestic demand, the
lower value of the United States dollar and recent successful anti-dumping
cases.
-18-
In November 2003, the World Trade Organization (WTO) Appellate Body
announced that the U.S. tariffs imposed to protect the U.S. steel industry from
imports were illegal under trading rules. On December 4, 2003, President Bush
signed a proclamation terminating the steel safeguard tariffs, and announced
that the tariffs were being terminated as they had achieved their purpose and
changed economic circumstances indicated it was time to terminate the tariffs.
However, it is not known whether the termination of the safeguard tariffs is
permanent as President Bush also announced that the steel import licensing and
monitoring program will continue its work in order to be able to respond to
future import surges that could unfairly damage the U.S. steel industry.
One of the Company's subsidiaries, Gerdau Ameristeel Perth Amboy Inc.
(formerly Co-Steel Raritan), and the Beaumont facility (acquired from North Star
Steel) were parties to a U.S. wire rod anti-dumping and countervailing duty case
against a number of countries and steel producers. In October 2002, the U.S.
Department of Commerce made a determination of injury against wire rod producers
in seven foreign countries with respect to both anti-dumping and countervailing
duties that range from 4% to 369%. Although there have been recent increases in
rod pricing following the imposition of these duties, a considerable amount of
imported rod continues to enter U.S. markets, particularly from countries not
subject to anti-dumping or countervailing duties such as China. In November
2005, the Company was a party to a U.S. wire rod anti-dumping and countervailing
duty case against China, Turkey and Germany that was terminated by the
International Trade Commission. This case is currently being appealed.
The Organization for Economic Cooperation and Development (OECD) has
initiated a process to address worldwide over-capacity in the steel industry.
Although meetings have been held by the OECD Steel Committee to discuss methods
to reduce this steel surplus, there is no certainty that such efforts will lead
to a satisfactory resolution of this issue. Continuing over-capacity in the
steel industry would adversely affect the Company's ability to compete and
affect the Company's sales levels.
In the beginning of 2004, the global steel supply-demand balance shifted
from an apparent surplus to an apparent shortage. With China's economic growth
fueling worldwide steel and raw material demand, steel industry conditions
changed dramatically for the better in 2004. As China's steel output has
increased at double-digit rates, the global steel industry has witnessed
unprecedented escalation of scrap raw material costs and steel prices rose well
past historic highs in 2004. These positive trends were further fueled by
fluctuations in currency exchange rates and the recent upturn in the North
American and other world economies.
In 2005, the demand for finished steel in some other regions of the world,
particularly China, has not kept pace with the large additions to capacity being
brought on line. This factor, along with the undervaluation of certain Asian
currencies, most notably China's, has led to a high level of imports into North
America from China and elsewhere. The demand upswing moderated in 2005 and there
were inventory corrections for both steel producing and steel consuming
industries during 2005 after high imports in 2004. Imports continue to take a
large portion of the steel market.
COMPETITIVE STRENGTHS
LEADING MARKET POSITION. Gerdau Ameristeel is the second largest minimill
steel producer in North America. Through a network of minimills and downstream
operations strategically located throughout the eastern two thirds of the United
States and Canada, we are able to efficiently service customers on a local basis
over a broad geographical segment of the North American steel market. Our
manufacturing capacity and wide range of shapes and sizes of bar steel products
enable us to meet a wide variety of customers' steel and fabricated product
needs. Our broad geographic reach and product diversity, combined with our
centralized order management system, is particularly well suited to serve larger
steel service centers and other customers that are increasingly seeking to
fulfill their steel supply requirements from a small number of suppliers.
VERTICALLY INTEGRATED OPERATIONS. Our minimills are integrated with 43
downstream steel fabricating facilities and 17 upstream scrap raw material
recycling facilities. Downstream integration provides a captive market for our
mills' production, and valuable market information on the end-use demand for
steel products. Our downstream operations have historically produced a high
return on investment, been less capital intensive and been subject to less
import competition compared to our
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minimill operations. Our downstream operations also balance some of the
cyclicality and volatility of the base minimill business and enable us to
capture additional value-added margins on the steel produced at our minimills.
In the year ended December 31, 2005, our downstream businesses accounted for
approximately 15% of our shipments of total finished steel shipments and
generated approximately 19% of our net sales. Our 17 upstream scrap recycling
facilities provide approximately 30% of our minimill scrap needs, thereby
decreasing our dependency on third-party scrap suppliers.
SCOPE FOR FUTURE OPERATIONAL IMPROVEMENT. We have achieved significant cost
savings from the integration of the operations of Co-Steel and Gerdau North
America through the sharing of best operating practices, freight optimization,
minimill production scheduling efficiencies, consolidated procurement activities
and efficiencies in administrative and management functions. We believe we may
achieve additional cost savings over the mid- to long-term from these sources,
as well as from operational improvements through the coordination of
manufacturing technologies, knowledge-sharing and the fostering of an operating
culture focused on continuous improvement.
DISCIPLINED BUSINESS SYSTEM PLATFORM. We believe that our employees are our
most valuable resource and are key to maintaining a competitive advantage. Our
corporate culture is geared toward engaging all employees in a common,
disciplined business system focused on continuous improvement. We have
implemented a business system which identifies global industry benchmarks for
key operational and safety measures. This system includes training and safety
programs and performance-based incentives that are designed to improve
performance and motivate employees.
STRONG SPONSORSHIP. We have access to the knowledge base of, and
sponsorship from, our majority shareholder, Gerdau S.A., one of the largest long
steel producers in the world with a history of over 100 years in the steel
industry. We expect to continue to benefit from Gerdau S.A.'s management
experience and its expertise in manufacturing. Gerdau S.A. and its subsidiaries,
including us, have global annual manufacturing capacity of 18.5 million tons of
crude steel with 31 steel plants and three strategic shareholdings. With the
talent depth, technical support and financial strength of Gerdau S.A., we
believe we are strategically positioned to grow and succeed within the North
American steel industry.
EXPERIENCED MANAGEMENT TEAM. We have a growth-oriented senior management
team that has an average of over 20 years of experience in the steel industry.
Management's extensive experience has been instrumental in our historical growth
and provides a solid base on which to expand our operations. For instance, our
management has a proven track record in successfully managing and integrating
acquisitions.
RISK FACTORS
EXCESS GLOBAL CAPACITY
We compete with numerous foreign and domestic steel producers, largely
minimill producers that produce steel by melting scrap in electric arc furnaces,
but also integrated producers that produce steel from coke and iron ore.
Competition is based on price, quality and the ability to meet customers'
product specifications and delivery schedules. Global overcapacity in steel
manufacturing has in the past had a negative impact on steel pricing and could
adversely affect our sales and profit margins in the future. The construction of
new mills, expansion and improved production efficiencies of existing mills,
restarting of currently idled facilities and the expansion of foreign steel
production capacity all contribute to an increase in global steel production
capacity. Increases in global steel production capacity combined with high
levels of steel imports into North America could exert downward pressure on the
prices of our products, which would adversely affect our sales and profit
margins.
CYCLICAL AND SEASONAL NATURE OF THE BUSINESS
The North American steel industry is highly cyclical in nature and is
affected significantly by prevailing economic conditions in the major world
economies. The Company is particularly sensitive to trends in cyclical
industries such as the North American construction, appliance, machinery and
equipment, and transportation industries, which are significant markets for the
Company's products. In addition, certain customers have been adversely affected
by the continuing North American and worldwide economic
-20-
downturn, which has resulted, and may in the future result, in defaults in the
payment of accounts receivable owed to the Company and reduce sales levels.
Market conditions for steel products in the U.S. and Canadian market have
fluctuated over the years. A significant portion of our products is also
destined for the steel service center industry. Many of our markets are cyclical
in nature and affect the demand for our finished products. A disruption or
downturn in any of these industries could negatively impact our financial
condition, production, sales, margins and earnings. We are also sensitive to
trends and events that may impact these industries, including strikes and labor
unrest.
COST OF SCRAP, ENERGY AND OTHER RAW MATERIALS
Our operating results are significantly affected by the cost of steel scrap
and scrap substitutes that are the primary raw material for our minimill
operations. Prices for steel scrap are subject to market forces largely beyond
our control, including demand by U.S. and international steel producers, freight
costs and speculation. The increasing rate of worldwide steel scrap consumption,
especially in China, has placed significant upward pressure on the price of
steel scrap. A combination of a weaker U.S. dollar, strong global demand for
steel scrap and lower production of domestic steel scrap due to a weaker
domestic manufacturing economy have reduced the domestic steel scrap supply
resulting in steel scrap prices which are currently at a 10-year high. Metal
spread, the difference between mill selling prices and scrap raw material cost,
is also currently well above previous 10-year highs. We do not know how long
these levels can be maintained and if scrap prices increase significantly
without a commensurate increase in finished steel selling prices, our profit
margins could be materially adversely affected. We may not be able to pass on
higher scrap costs to our customers by increasing mill selling prices and prices
of downstream products. Further increases in the prices paid for scrap and other
inputs could also impair our ability to compete with integrated mills and cause
our production to decline and adversely affect sales and profit margins.
Most of our minimill operations have long-term electricity supply contracts
with either major utilities or energy suppliers. The electric supply contracts
typically have two components: a firm portion and an interruptible portion. The
firm portion supplies a base load for essential plant requirements. The
interruptible portion supplies the electric arc furnace and rolling mill power
demand. This portion represents the majority of the total electric demand and,
for the most part, is affected by spot market prices of electricity. Therefore,
we have significant exposure to the variances of the electricity market which
could materially adversely affect operating margins and results of operations.
Generally, we do not have long-term contracts for natural gas and therefore are
subject to market supply variables and pricing that could materially adversely
affect operating margins and results of operations.
IMPORTS OF STEEL INTO NORTH AMERICA
Imports of steel into North America have exerted in recent years, and may
again in the future exert, downward pressure on steel prices, which adversely
affects our sales and profit margins. Competition from foreign steel producers
is strong and may increase due to increases in foreign steel production
capacity, the relative conversion rate of the U.S. dollar compared to foreign
currencies and the reduction of domestic steel demand in the economies of the
foreign producers. These factors encourage higher levels of steel exports to
North America at lower prices. In the past, protective actions taken by the U.S.
government to regulate the steel trade, including import quotas and tariffs,
have been temporary in nature and have been found by the World Trade
Organization to violate global trade rules. Protective actions may not be taken
in the future and, despite trade regulation efforts, unfairly priced imports
could enter into the North American markets in the future resulting in price
depression which would adversely affect our ability to compete and maintain our
sales levels and profit margins.
CAPITAL INVESTMENT AND MAINTENANCE
Steel manufacturing is very capital intensive, requiring us and other steel
producers to maintain a large fixed-cost base requiring substantial maintenance
expenditures. The high levels of fixed costs of operating a minimill encourage
mill operators to maintain high levels of output, even during periods of reduced
demand, which may exert additional downward pressure on selling prices and
profit margins in those periods.
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UNEXPECTED EQUIPMENT FAILURE
Interruptions in our production capabilities would increase our production
costs and reduce our sales and earnings for the affected period. In addition to
periodic equipment failures, our facilities are also subject to the risk of
catastrophic loss due to unanticipated events such as fires, explosions or
violent weather conditions. Unexpected interruptions in our production
capabilities would adversely affect our productivity and results of operations.
Our insurance may not cover our losses.
BANKRUPTCY PROTECTION
Many U.S. and Canadian steel companies have sought bankruptcy protection
over the last several years. Several of these companies have continued to
operate, while reducing prices to maintain volumes and cash flow, and have
obtained concessions from their employees, suppliers and lenders. Upon emerging
from bankruptcy, these companies, or new entities that purchased their
facilities through the bankruptcy process, have been relieved of many
obligations including debt, environmental, employee and retiree benefits and
other obligations, commonly referred to as legacy costs. As a result, they may
be able to operate more competitively than us and other producers that have
remained solvent.
ENVIRONMENTAL AND OCCUPATIONAL HEALTH AND SAFETY LAWS
Our business units are required to comply with an evolving body of
environmental and occupational health and safety laws and regulations. These
laws and regulations concern, among other things, air emissions, discharges to
soil, surface water and ground water, noise control, the generation, handling,
storage, transportation and disposal of hazardous substances and wastes, the
clean-up of contamination, indoor air quality and worker health and safety.
These laws and regulations vary by location and can fall within federal,
provincial, state or municipal jurisdictions. There is a risk that we have not
been or will not be in the future in compliance with all such requirements.
Violations could result in penalties or the curtailment or cessation of
operations, any of which could have a material adverse effect on us.
Our operations involve the use of large and complex machinery and equipment
and exposure to various substances. As a consequence, there is an inherent risk
to our workers' health and safety. From time to time, workplace illnesses and
accidents, including serious injury and fatalities, do occur. Any serious
occurrences of this nature may have a material adverse effect on our operations.
We generate certain wastes, primarily electric arc furnace dust (EAF dust),
that are classified as hazardous wastes and must be properly managed under
applicable environmental laws and regulations. In the United States and Canada,
certain environmental laws and regulations impose joint and several liability on
certain classes of persons for the costs of investigation and clean-up of
contaminated properties. Liability may attach regardless of fault or the
legality of the original disposal. Some of our present and former facilities
have been in operation for many years and, over such time, have used substances
and disposed of wastes that may require clean-up. We could be liable for the
costs of such clean-ups. Clean-up costs for any contamination, whether known or
not yet discovered, could be substantial and could have a material adverse
effect on our results of operations and financial condition.
Changes, such as new laws or enforcement policies, including currently
proposed restrictions on the emissions of mercury and other pollutants, a
currently proposed interpretation of existing rules applicable to the disposal
of scrap metal shredder residue or an incident at one of our properties or
operations, could have a material adverse effect on our business, financial
condition, or results of operations. In addition, our environmental and
occupational health and safety capital expenditures could materially increase in
the future. See "Environmental and Regulatory Matters".
PENSION PLANS
We have several pension plans that are currently underfunded and adverse
market conditions could require us to make substantial cash payments to fund the
plans which could reduce cash available for other business needs. Our funding
requirements may rise above expected amounts commencing in the year ended
December 31, 2006 if temporary relief provisions enacted by the United States
Congress are not extended.
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COLLECTIVE BARGAINING AGREEMENTS
Approximately 35% of the Company's employees are represented by the United
Steelworkers of America ("USWA") and other unions under different collective
bargaining agreements. The agreements have different expiration dates. During
2005 we reached new agreements with the employees at our Memphis wire, Cambridge
minimill and Wilton recycling operations. The collective bargaining agreements
with employees at the Beaumont, St. Paul and Wilton facilities expired in 2005
and, although negotiations are ongoing, new agreements have not yet been
reached. One collective bargaining agreement, with the employees at our Perth
Amboy Mill, will expire in July 2006.
On May 26, 2005, the Company ceased operations at its Beaumont facility to
encourage the USWA to act on the Company's "last, best and final" agreement
offer that was presented to the union committee in May 2005. On December 12,
2005, the Beaumont facility began to resume normal operations although
negotiations are ongoing and a final contract has not yet been concluded with
the Beaumont union representatives.
The Beaumont and Wilton facilities are currently operating without a
collective bargaining agreement. The collective bargaining agreement at the St.
Paul facility has been temporarily extended. The Company cannot assure you that
these collective bargaining agreements will be successfully renegotiated without
the occurrence of a work stoppage.
The Company may be unable to successfully negotiate new collective
bargaining agreements without any labor disruption. A labor disruption could,
depending on the operations affected and the length of the disruption, have a
material adverse effect on the Company's operations. Labor organizing activities
could occur at one or more of the Company's other facilities or at other
companies upon which the Company is dependent for raw materials, transportation
or other services. Such activities could result in a significant loss of
production and revenue and have a material adverse effect on the Company's
financial results and results of operations.
SENIOR MANAGEMENT
Our operations and prospects depend in large part on the performance of our
senior management team. We do not have employment contracts with any of our
executive officers other than Mario Longhi, our Chief Executive Officer and
President. We cannot assure you that these individuals will remain with us as
employees. In addition, we cannot assure you that we would be able to find
qualified replacements for any of these individuals if their services were no
longer available. The loss of the services of one or more members of our senior
management team or our difficulty in attracting, retaining and maintaining
additional senior management personnel could have a material adverse effect on
our business, financial condition and results of operations.
JOINT VENTURES
We have three 50%-owned joint ventures that contribute to our financial
results but that we do not control. These joint ventures contributed $91.2
million to our net income for the year ended December 31, 2005 and $141.5
million to our net income for the year ended December 31, 2004. We received
$115.8 million of cash distributions from our joint ventures in the year ended
December 31, 2005 and $82.8 million of cash distributions for the year ended
December 31, 2004. However, we do not control the joint ventures and cannot,
without agreement from our partner, cause any joint venture to distribute its
income from operations to us. In addition, Gallatin's existing financing
agreement prohibits it from distributing cash to us unless specified financial
covenants are satisfied. Additionally, since we do not control our joint
ventures, they may not be operated in a manner that we believe would be in the
joint ventures', or our, best interests.
FOREIGN OPERATIONS RISK
No material foreign operations risks exist other than currency
fluctuations. Gerdau Ameristeel reports results in U.S. dollars. A portion of
net sales and operating costs are in Canadian dollars. As a result, fluctuations
in the exchange rate between the U.S. dollar and the Canadian dollar may affect
operating
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results. In addition, the Canadian operations compete with U.S. producers and
are less competitive as the Canadian dollar strengthens relative to the U.S.
dollar.
ENVIRONMENTAL AND REGULATORY MATTERS
We are required to comply with a complex and evolving body of environmental
and occupational health and safety laws and regulations concerning, among other
things, air emissions, discharges to soil, surface water and groundwater, noise
control, the generation, handling, storage, transportation and disposal of toxic
and hazardous substances and waste, the clean-up of contamination, indoor air
quality and worker health and safety. These laws and regulations vary by
location and can fall within federal, provincial, state or municipal
jurisdictions.
We generate certain wastes, including electric arc furnace (EAF) dust and
other contaminants, that are classified as hazardous and must be properly
controlled and disposed of under applicable environmental laws and regulations.
In the United States and Canada, certain environmental laws and regulations
impose joint and several liability on certain classes of persons for the costs
of investigation and clean-up of contaminated properties, regardless of fault,
the legality of the original operation or disposal, or the ownership of the
site. Some of our present and former facilities have been in operation for many
years and, over such time, the facilities have used substances and disposed of
wastes (both on-site and off-site) that may require clean-up for which we could
be liable. Reserves based on estimated costs have been made for the clean-up of
sites of which we have knowledge. However, there is no assurance that the costs
of such clean-ups or the clean-up of any potential contamination not yet
discovered will not materially adversely affect us.
In April 2001, we were notified by the Environmental Protection Agency (the
"EPA"), of an investigation that identifies us as a potential responsible party
("PRP") in a Superfund Site in Pelham, Georgia. The Pelham site was a fertilizer
manufacturer in operation from 1910 through 1992, lastly operated by Stoller
Chemical Company, a now bankrupt corporation. The EPA has filed suit under the
Comprehensive Environmental Response, Compensation, and Liability Act ("CERCLA")
with us named as a defendant. CERCLA imposes joint and several strict liability
in connection with environmental contamination. We are included in this action
because we allegedly shipped EAF dust to this property during 1978. In 2003, the
EPA offered a settlement to the named PRPs totaling $15.5 million under which
our allocation was approximately $1.8 million. One of the named PRPs is in
bankruptcy proceedings. The EPA has recently indicated that it is reconsidering
the appropriate allocation; that reconsideration could cause the EPA's view of
the Company's allocation to substantially increase. We object to our inclusion
as a PRP on several bases, have asserted defenses and are pursuing legal
alternatives, including adding a larger third party which we believe was
incorrectly excluded from the original lawsuit. In 2004, the court denied a
motion asserting some, but not all, of our defenses. Also in 2004, the EPA and
the Company had further discussions on a settlement and, based on these
discussions, the Company believes that the EPA is considering a settlement range
of $8.0 to $10.0 million. The Company is not in agreement with this assessment
and is considering legal alternatives including pursuing other contributing
parties' insurance carriers. At this time, the ultimate exposure is uncertain.
While we do not anticipate that the outcome of this matter will have a material
adverse effect on our financial position or consolidated earnings, we cannot
assure you that the final outcome of this matter will not have a material
adverse effect on us.
The potential presence of radioactive materials in our scrap supply
presents a significant economic exposure and may present a safety risk to
workers. In addition to the risk to workers and the public, the cost to clean up
the contaminated material and the loss of revenue resulting from the loss in
production time can be material. Radioactive materials are usually in the form
of: sealed radioactive sources, typically installed in measurement gauges used
in manufacturing operations or in hospital equipment; scrap from decommissioned
nuclear power and U.S. Department of Energy facilities; and imported scrap. Past
regulations for generally licensed devices did not provide for tracking of
individual owners. This lack of accountability makes it easy for third parties
to negligently or purposely discard sealed sources in scrap without
consequences. In response to this regulatory gap, we have installed
sophisticated radiation detection systems at our minimills to monitor all
incoming shipments of scrap. If radioactive material is in the scrap received
and is not detected, and is accidentally melted in an electric furnace,
significant costs would be incurred to clean up the contamination of facilities
and to dispose of the contaminated material.
-24-
While we have redundant detection systems at our minimills, there is no
assurance that radioactive materials will be detected.
No assurance can be given that regulatory changes, such as new laws or
enforcement policies, including currently proposed restrictions on the emission
of mercury and other pollutants, a currently proposed interpretation of existing
rules applicable to the disposal of scrap metal shredder residue, or an incident
at one of our properties or operations, will not have a material adverse effect
on the business, financial condition or results of our operations. In December
2002, the Canadian federal government officially ratified the Kyoto Protocol to
the United Nations Framework Convention on Climate Change. We anticipate that
our Canadian minimills may, in the future, be in some way affected by proposed
federal initiatives intended to contribute to Canada meeting its Kyoto target.
The steel industry has been involved in ongoing dialogue with the Canadian
government and several options are being discussed, ranging from covenants to
emissions cap and trade. We expect that a system will be in place in time to
meet the first Kyoto target period of 2008 to 2012. It is too early to determine
the outcome of these discussions or the impact on our results of operations and
financial condition.
Our business units are required to have governmental permits and approvals.
Any of these permits or approvals may be subject to denial, revocation or
modification under various circumstances. Failure to obtain or comply with the
conditions of permits and approvals may adversely affect operations and may
subject us to penalties. In addition, we may be required to obtain additional
operating permits or governmental approvals and incur additional costs. There
can be no assurance that we will be able to meet all applicable regulatory
requirements. There is no assurance that environmental capital expenditures will
not materially increase in the future. Moreover, we may be subject to fines,
penalties or other liabilities arising from actions imposed under environmental
legislation or regulations.
In meeting our environmental goals and government-imposed standards in
2005, we incurred operating costs of approximately $2.13 million and spent $4.2
million on environmental-related capital improvements. We expect to spend
approximately $12.9 million on environmental control capital expenditures in
2006.
EMPLOYEES
Gerdau Ameristeel believes it has been, and continues to be, proactive in
establishing and fostering a climate of positive employee relations. The Company
has an "open book" management system and provides opportunities for employees to
participate in employee involvement teams. The Company believes high employee
involvement is a key factor in the success of its operations. Gerdau Ameristeel
strives to ensure that its compensation programs are designed to make employees'
financial interests congruous with those of the Company's shareholders and
competitive within the market place.
Safety is the most important corporate value and the Company makes every
effort to put safety first in its operations. The Company also strives to
involve employees in our safety programs and in improving operations. The
Company has implemented the Gerdau Ameristeel business system, in which
benchmarks are identified for key operational and safety measures and then
processes are developed to improve performance relative to these benchmarks.
Training and safety programs are currently embedded within this initiative.
Gerdau Ameristeel currently employs approximately 7,200 employees
(including 50% of the employees at the joint ventures), of which approximately
4,650 employees work in minimills, 1,700 work in downstream and recycling
operations and 230 work in corporate and sales offices. Approximately 35% of our
employees are represented by unions under a number of different collective
bargaining agreements. The collective bargaining agreements with employees at
the Beaumont, St. Paul and Wilton facilities expired in 2005 and, although
negotiations are ongoing, new agreements have not yet been reached. One
collective bargaining agreement, with the employees at our Perth Amboy Mill,
will expire in July 2006. See "Risk Factors -- Collective Bargaining
Agreements".
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MANAGEMENT'S DISCUSSION AND ANALYSIS
The section entitled "Management's Discussion and Analysis" in the
Company's Annual Report for the year ended December 31, 2005 is incorporated
herein by reference.
MARKET FOR SECURITIES
The share capital of the Company consists of an unlimited number of Common
Shares and an unlimited number of preferred shares, issuable in series. The
holders of the Common Shares are entitled to receive dividends when declared by
the Board, to receive notice of and attend shareholders' meetings, to vote one
vote per Common Share at shareholders' meetings and, subject to the prior rights
of the holders of any shares ranking senior to the Common Shares, in the event
of the Company's dissolution or liquidation, to receive the Company's remaining
property.
The preferred shares may be issued in one or more series and the Board may
determine the rights, privileges, restrictions and conditions attaching to the
preferred shares including dividends, rights of redemption and retraction,
conversion rights, and dissolution or liquidation rights. In the event of the
Company's liquidation or dissolution, the preferred shares of each series rank
on a parity with the preferred shares of every other series and are entitled to
preference over the Common Shares and over any other shares of the Company
ranking junior to the preferred shares. The holders of the preferred shares are
not entitled to receive notice of or to attend any shareholders' meetings unless
the Company has failed to pay dividends of any one series for a period of two
years. So long as any dividends on the preferred shares of any series remain in
arrears, the holders of such preferred shares are entitled to receive notice of
and to attend all shareholders' meetings and are entitled, voting separately and
as a series, to elect one member of the Board.
As at December 31, 2005, the Company had outstanding 304,471,493 Common
Shares and no preferred shares. The Company's Common Shares are listed on the
Toronto Stock Exchange (the "TSX") under the symbol "GNA.TO", and effective
October 25, 2004, are listed on the New York Stock Exchange (the "NYSE") under
the symbol "GNA".
-26-
The following table sets forth the reported weighted average trading prices
and trading volumes of the Company's common shares as reported by the TSX and
NYSE from January through December 2005.
TSX (1) NYSE (2)
PRICE (CDN$) PRICE ($)
------------ VOLUME ----------- VOLUME
MONTH HIGH LOW (MILLIONS) HIGH LOW (MILLIONS)
----- ---- ---- ---------- ---- ---- ----------
January 7.95 6.89 5.9 6.85 5.57 6.0
February 8.96 6.75 14.7 7.29 5.45 11.3
March 9.10 7.01 10.2 7.39 5.84 8.9
April 7.68 6.05 7.9 6.26 4.80 8.8
May 6.85 5.54 15.4 5.51 4.35 8.5
June 6.07 5.08 8.2 4.85 4.13 6.1
July 6.36 5.13 10.6 5.20 4.13 4.6
August 6.50 5.83 6.3 5.36 4.82 5.7
September 7.58 5.91 7.9 6.60 5.00 8.8
October 6.08 5.36 5.5 5.23 4.55 4.1
November 6.72 5.59 5.7 5.73 4.73 4.2
December 6.97 6.40 5.9 6.00 5.50 3.8
- ----------
(1) Source, TSX Market Data.
(2) Source, LexisNexis (Sunguard).
As at December 31, 2005, the Company also had Cdn$125,000,000 in unsecured,
subordinated convertible debentures, which bear interest at 6.5% per annum,
mature on April 30, 2007, and at the holders' option, are convertible into
Common Shares at a conversion price of Cdn$26.25 per share. Under the terms of
the trust indenture for the convertible debentures, no adjustment to the
conversion price is required if the Company issues Common Shares in a customary
offering. The debentures are redeemable, at the Company's option, at par plus
accrued interest and the Company has the right to settle the principal amount by
the issuance of Common Shares based on their market value at the time of
redemption.
The following table sets forth the reported weighted average trading prices
and trading volumes of the Company's convertible debentures as reported by the
TSX from January through December 2005.
TSX (1)
PRICE (CDN$)
--------------- VOLUME
MONTH HIGH LOW (THOUSANDS)
----- ------ ------ -----------
January 102.97 101.05 8.88
February 104.5 101 15.97
March 102.5 99.5 45.38
April 102 99 42.99
May 105 100 14.44
June 102.95 101.05 17.36
July 105 101.6 6.51
August 105 100.85 3.35
September 103 100.85 6.31
October 102 96 5.57
November 101.75 100 4.13
December 101.75 100.65 2.97
- ----------
(1) Source, TSX Market Data.
-27-
DIVIDENDS
No dividends were paid from January 2003 until January 2005 when the board
of directors of Gerdau Ameristeel approved the initiation of a quarterly cash
dividend of $0.02 cents per common share. In 2005 the Company paid dividends
totaling $ 0.20 cents per common share, consisting of three regular quarterly
dividends of $0.02 cents per common share and a special dividend of $0.14 cents
per common share that was paid on June 2, 2005. On February 7, 2006, the Board
of Directors approved a quarterly dividend of $0.02 cents per common share and a
special dividend of $0.22 cents per common share that was paid on March 9, 2006
to shareholders of record on February 22, 2006.
DIRECTORS AND OFFICERS
Gerdau Ameristeel's board of directors (the "Board of Directors" or the
"Board") consists of nine directors, each of whom will hold office until the
next annual meeting of shareholders or until his successor is elected or
appointed. The Company has an Audit Committee, a Corporate Governance Committee
and a Human Resources Committee. The name, province or state and country of
residence, position with the Company, and principal occupation of the directors
and executive officers of the Company and Committee memberships are as shown
below:
NAME, AGE AND PROVINCE/STATE AND MAJOR POSITIONS WITH THE COMPANY AND
COUNTRY OF RESIDENCE SIGNIFICANT AFFILIATES PRINCIPAL OCCUPATION
-------------------------------- ------------------------------------ --------------------
Andre Beaudry, 47 Vice President, Steel Product Sales of the Vice President, Steel
Florida, United States Company Product Sales of the
Company
Phillip E. Casey, 63 Director since 2002, President until June Chairman of the Board
Florida, United States 2005 and Chief Executive Officer until
January 2006. Chairman of the Board since
June 2005.
Mario Longhi, 51 President and Chief Executive Officer Director, President and
Florida, United States Chief Executive Officer of
the Company
Kenneth W. Harrigan, 78 Director since 1994 Chairman, K.W. Harrigan
Ontario, Canada Consultants (business
consultant)
Independent
Member of:
- the Audit Committee
- the Human Resources Committee
Joseph J. Heffernan, 59 Director since 1996 Chairman, Rothmans Inc.
Ontario, Canada (tobacco manufacturer)
Independent
Member of:
- the Human Resources Committee
- the Corporate Governance Committee
(Chair)
Jorge Gerdau Johannpeter, 69 Director since 2002, Chairman of the Board Director and Chairman of
Rio Grande do Sul, Brazil from 2002 until December 2005. the Board of Directors of
Gerdau S.A.
Frederico C. Gerdau Johannpeter, 63 Director since 2002 Vice President of Gerdau
Rio Grande do Sul, Brazil S.A.
Andre Bier Johannpeter, 43 Director since 2002, and Vice-President Director, Executive Vice
Rio Grande do Sul, Brazil and Chief Operating Officer of the Company President of Gerdau S.A.
from August 2004 until March 2006
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NAME, AGE AND PROVINCE/STATE AND MAJOR POSITIONS WITH THE COMPANY AND
COUNTRY OF RESIDENCE SIGNIFICANT AFFILIATES PRINCIPAL OCCUPATION
-------------------------------- ------------------------------------ --------------------
Tom J. Landa, 54 Vice President, Finance, Chief Financial Vice President, Finance,
Florida, United States Officer and Assistant Secretary of the Chief Financial Officer and
Company Assistant Secretary of the
Company
Robert E. Lewis, 45 Vice President, General Counsel and Vice President, General
Florida, United States Corporate Secretary of the Company Counsel and Corporate
Secretary of the Company
J. Spencer Lanthier, 65 Director since 2000 Corporate Director
Ontario, Canada
Independent
Member of:
- the Audit Committee (Chair)
Michael P. Mueller, 59 Vice President, Steel Mill Operations Vice President, Steel Mill
Florida, United States Operations
Arthur Scace, 67 Director since 2003 Corporate Director
Ontario, Canada
Independent
Member of:
- the Audit Committee
- the Corporate Governance Committee
Dr. Michael D. Sopko, 67(1) Director since 1997 Corporate Director
Ontario, Canada
Independent
Member of:
- the Human Resources Committee (Chair)
- ----------
(1) Dr. Sopko is not standing for re-election at the 2006 annual meeting of
shareholders. Mr. Richard McCoy has been nominated to replace Dr. Sopko on
the Company's board of directors subject to shareholder approval at the
Company's 2006 Annual Meeting. Mr. McCoy has been in the investment banking
business for over 35 years. Prior to retiring in October 2003, Mr. McCoy
was Vice Chairman, Investment Banking at TD Securities Inc. Prior to
joining TD Securities Inc. in May 1997, Mr. McCoy was Deputy Chairman of
CIBC Wood Gundy Securities. Mr. McCoy is a director of several companies.
Mr. McCoy holds a Masters of Business Administration from Richard Ivey
School of Business Administration, University of Western Ontario. Mr. McCoy
serves as a director of the following Canadian public companies: Ace
Aviation Holdings Inc., Jazz Air Income Fund, MDS Inc., Rothmans Inc.,
Aberdeen Asia-Pacific Income Investment Company Ltd., Pizza Pizza Royalty
Income Fund, Canadian Mini Warehouse Properties, and Uranium Participation
Corporation.
ANDRE BEAUDRY has been our Vice President, Steel Product Sales since
October 2002. Prior to that, Mr. Beaudry was Vice President, Mill Product Sales,
of Ameristeel from September 2001. Mr. Beaudry was employed by Gerdau Ameristeel
Cambridge Inc. starting as Vice President Sales and Marketing in 1991 and
serving as President from April 1998 through September 2001. Mr. Beaudry has
over 25 years experience in the steel industry.
PHILLIP E. CASEY was the President of the Company from October 2002 until
June 2005 and Chief Executive Officer of the Company from October 2002 until
January 2006. Prior to that he was Chief Executive Officer and a director of
Ameristeel Corporation starting in June 1994 and President of Ameristeel
Corporation starting in September 1999. Mr. Casey was Chairman of the Board of
Ameristeel from June 1994 until September 1999. In June 2005, Mr. Casey was
appointed Chairman of the Board of the Company. Mr. Casey is also a director of
Astec Industries, Inc.
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KENNETH W. HARRIGAN has been a director of Gerdau Ameristeel since 1994.
Mr. Harrigan is also Chairman of K.W. Harrigan Consultants and a director of the
following Canadian public companies: Camco Inc., Great Lakes Hydro Income Fund
and Samuel Manu-Tech Inc. Mr. Harrigan was previously Chairman and Chief
Executive Officer of and consultant to Ford Motor Company of Canada, Limited.
JOSEPH J. HEFFERNAN has been a director of Gerdau Ameristeel since 1996. He
was non-executive Vice-Chairman of Gerdau Ameristeel (when it was Co-Steel) from
1999 until October 2002. Mr. Heffernan is a director of the following Canadian
public companies: Rothmans Inc. and Clairvest Group Inc. and serves as Chairman
of both companies.
JORGE GERDAU JOHANNPETER has been working for the Gerdau group since 1954.
Mr. Jorge Johannpeter became an executive officer of Gerdau S.A. in 1971 and was
appointed Chairman of the Board of Directors and President in 1983. Since 2002,
after the implementation of Gerdau S.A.'s new corporate governance structure, he
also became the President of Gerdau S.A.'s Executive Committee. He holds a
degree in Law from the Federal University of Rio Grande do Sul, Brazil. Mr.
Johannpeter served as Chairman of the Board for the Company from October 2002
until June 2005.
FREDERICO C. GERDAU JOHANNPETER has worked for the Gerdau group since 1961.
Mr. Johannpeter became an executive officer of Gerdau S.A. in 1971 and has been
a director since 1973. Under Gerdau S.A.'s new corporate governance structure,
he also became Senior Vice President of Gerdau S.A.'s Executive Committee. He
holds a degree in Business Administration from the Federal University of Rio
Grande do Sul, Brazil and a Masters degree in Business, Finance, Costs and
Investments from the University of Cologne, Germany.
ANDRE BIER JOHANNPETER served as Chief Operating Officer of the Company
from August 2004 until March 2006 when he was named Executive Vice President of
Gerdau S.A. He has been working for the Gerdau companies since 1980. Mr.
Johannpeter originally became an Executive Officer of Gerdau S.A. in 1989. In
1998, Mr. Johannpeter was appointed Director of Information Systems of Gerdau
S.A. and in 1999 became Director of New Business Development of Gerdau S.A. and
in 2002 he was appointed Vice President, North American Operations of Gerdau
S.A. Mr. Johannpeter became a director and was appointed Vice-President, Chief
Operating Officer of Gerdau Ameristeel, Canadian Operations in October 2002 and
was appointed Vice President, Business Development of Gerdau Ameristeel in
November 2003. He received a degree in Business Management from the Catholic
Pontiff University of Rio Grande do Sul, Brazil.
TOM J. LANDA has been our Vice President, Finance and Chief Financial
Officer since October 2002. Prior to that, Mr. Landa was Chief Financial
Officer, Vice President and Secretary of Ameristeel starting in April 1995. Mr.
Landa was elected a director of Ameristeel in March 1997. Before joining
Ameristeel, Mr. Landa spent over 19 years in various financial management
positions with Exxon Corporation and its affiliates worldwide.
J. SPENCER LANTHIER has been a director of Gerdau Ameristeel since 2000.
Mr. Lanthier is also a director of the following Canadian public companies:
Emergis Inc., Torstar Corporation, TSX Group Inc. and Zarlink Semiconductor Inc.
ROBERT E. LEWIS has been our Vice President, General Counsel and Corporate
Secretary since January 2005. Mr. Lewis was Senior Vice President, General
Counsel and Secretary of Eckerd Corporation from August 1994 through January
2005. Prior to August 1994, he was an attorney and shareholder with the Tampa
law firm Shackleford, Farrior, Stallings, & Evans, P.A.
MARIO LONGHI was appointed as President in June 2005 and as Chief Executive
Officer of the Company in January 2006 replacing Mr. Casey. Mario Longhi joined
Gerdau Ameristeel as President following a 23-year international career with the
executive team of Alcoa Inc. Prior to his appointment at Gerdau Ameristeel, Mr.
Longhi held various positions with Alcoa and served most recently as Executive
Vice President, President of the Extrusions and End Products Group. Mr. Longhi
received Bachelor and Masters degrees in Metallurgical Engineering from the
University of Technology Maua, Brazil.
-30-
MICHAEL MUELLER served as Vice President, Steel Mill Southeast Operations
from October 2002 until January 2006 when he was appointed Vice President, Steel
Mill Operations. Prior to that, he was Group Vice President, Steel Mill
Operations of Ameristeel, since April 2001. Prior to that, Mr. Mueller served as
President and Chief Executive Officer of Auburn Steel from September 1998. Mr.
Mueller previously worked for Ameristeel as Vice President, General Manager from
October 1997 through September 1998. Prior to 1997, Mr. Mueller served as a Vice
President for Birmingham Steel Corporation for three years. Mr. Mueller has over
33 years of steel industry experience.
ARTHUR SCACE has been a director of Gerdau Ameristeel since 2003. Mr. Scace
previously acted as counsel to McCarthy Tetrault LLP, a Canadian law firm, and
is the former national chairman and managing partner of the firm. He is a
director of the following Canadian public companies: The Bank of Nova Scotia,
Garbell Holdings Limited, Sceptre Investment Counsel Limited, and West Jet
Airlines Ltd. Mr. Scace is a Rhodes Scholar with degrees from the University of
Toronto, Harvard University and Oxford University.
DR. MICHAEL D. SOPKO has been a director of Gerdau Ameristeel since 1997.
Dr. Sopko is also a director of a number of Canadian public companies, including
a Canadian chartered bank and Voisey's Bay Nickel Company Limited. Dr. Sopko has
decided to not stand for re-election as a director of the Company.
Messrs. Jorge and Frederico Johannpeter are brothers. Andre Bier
Johannpeter is the son of Jorge Johannpeter. None of the other directors are
related to one another.
SHARE OWNERSHIP
As a group, the directors and executive officers of the Company
beneficially own, directly or indirectly, or exercise control or direction over
211,725,589 Common Shares, representing approximately 70% of our total
outstanding Common Shares.
DIRECTOR INDEPENDENCE
Four of the directors of the nine directors on the Company's Board of
Directors are considered related to the business, because they are part of
management or because of their involvement with Gerdau S.A., the Company's
majority shareholder. The other five directors, constituting a majority of the
Board of Directors, are unrelated to the business and meet the independence and
other qualifications of the Sarbanes-Oxley Act of 2002, the New York Stock
Exchange, the Canadian securities regulatory authorities and all other
applicable laws and regulations.
The independent directors are Kenneth W. Harrigan, Joseph J. Heffernan, J.
Spencer Lanthier, Arthur Scace and Dr. Michael D. Sopko
The Chairman of the Board of Directors, Mr. Phillip E. Casey, is formerly a
member of management and is not independent.
All of the Committee members are unrelated and independent, with each
Committee chaired by a person who is not the Chairman of the Board of Directors
or the chairman of another Committee.
PRESIDING DIRECTOR AT MEETINGS
Following each regularly scheduled Board meeting, the independent directors
meet separately in an executive session. The chairman of the Corporate
Governance Committee has the responsibility to preside over the independent
director executive sessions and is referred to as the presiding director. The
independent directors may also meet at such other times as determined by the
presiding director or at the request of any independent director. The presiding
director will, from time to time, discuss with the Chairman of the Board
potential items for inclusion in the agendas of future meetings of the Board.
-31-
COMMUNICATION WITH NON-MANAGEMENT DIRECTORS
Shareholders may send communications to the Company's non-management
directors by writing to:
The Presiding Director of the Independent Directors
c/o Robert E. Lewis
Vice President, General Counsel and Corporate Secretary
Gerdau Ameristeel Corporation
P.O. Box 31328
Tampa, Florida
United States, 33631-3328
CORPORATE GOVERNANCE
The Corporate Governance Committee develops the Company's approach to
corporate governance and recommends to the Board corporate governance principles
to be followed by the Company. The Board has adopted corporate governance
guidelines (the "Corporate Governance Guidelines"), which set out the functions
of the Board and details regarding the composition of the Board (including
director independence), Board and Committee meetings, the Committees of the
Board, director access to management and independent advisors, director
compensation, director orientation and continuing education, the appointment,
supervision, succession and development of senior management and a performance
assessment of the Board and its Committees.
The Board maintains the Company's corporate integrity by ensuring that the
Chief Executive Officer and the senior management create a culture of integrity
throughout the organization.
The Corporate Governance Committee and the directors have reviewed and
approved this summary of governance practices with reference to the guidelines
for effective corporate governance issued by the Toronto Stock Exchange (TSX).
The Company's Corporate Governance Guidelines are posted on the Company's
website at www.gerdauameristeel.com. They are also available in print to any
shareholder who requests them. Requests for copies of these documents may be
made by contacting:
Robert E. Lewis
Vice President, General Counsel and Corporate Secretary
Gerdau Ameristeel Corporation
P.O. Box 31328
Tampa, Florida
United States, 33631-3328
BOARD COMMITTEE MANDATES
The directors have established three Committees of the Board: a Corporate
Governance Committee, an Audit Committee and a Human Resources Committee. The
directors and each of the Committees on which they serve are listed above under
"Directors and Officers".
The charters for each of the Committees are posted on the Company's website
at www.gerdauameristeel.com. They are also available in print to any shareholder
who requests them. Requests for copies of these documents should be made by
contacting:
Robert E. Lewis
Vice President, General Counsel and Corporate Secretary
Gerdau Ameristeel Corporation
P.O. Box 31328
Tampa, Florida
United States, 33631-3328
-32-
LEGAL PROCEEDINGS
The Company is occasionally named as a party in various claims and legal
proceedings which arise during the normal course of its business. Although there
can be no assurance that any particular claim will be resolved in the Company's
favor, the Company does not believe that the outcome of any claims or potential
claims of which it is currently aware will have a material adverse effect on the
Company.
INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
To the knowledge of the directors and officers of the Company, the only
persons or companies who beneficially own, directly or indirectly, or exercise
control or direction over, securities of the Company carrying more than 10% of
the voting rights attached to any class of outstanding voting securities having
a material interest, direct or indirect, in any material transaction or proposed
transaction of the Company or its affiliates from January 1, 2003 through
December 31, 2005 are indicated below:
From January 1, 2003 through December 31, 2005, Gerdau S.A., which
beneficially owns securities of the Company carrying approximately 67% of the
voting rights attached to the Company's Common Shares, had a material interest
in the following material transactions:
- During the first quarter of 2004, Gerdau S.A. guaranteed the following
loans from Brazilian banks in favor of the Company: (i) a $20.0
million, one year, 2.65% interest bearing loan; and (ii) a $5.0
million, one year, 2.56% interest bearing loan. Both of these loans
were repaid as of November 30, 2004.
- On April 16, 2004, the Company issued and sold 26.8 million Common
Shares to Gerdau S.A. through a private placement for total proceeds
of $97.9 million. This transaction increased Gerdau S.A.'s ownership
to approximately 72% of Common Shares then outstanding.
- On October 19, 2004, Gerdau S.A. purchased 35,000,000 Common Shares of
70,000,000 Common Shares offered by the Company pursuant to a
supplemental PREP prospectus of the Company dated October 14, 2004 and
filed with the securities regulatory authorities in Canada and with
the U.S. Securities Exchange Commission on October 15, 2004.
Subsequently, on November 18, 2004, Gerdau S.A. purchased 4,381,000
additional Common Shares pursuant to the offering's over-allotment
option. This transaction reduced Gerdau S.A.'s share ownership to
approximately 67.0% Common Shares then outstanding.
AUDITOR, TRANSFER AGENT AND REGISTRAR
Gerdau Ameristeel's auditor is PricewaterhouseCoopers LLP whose Tampa
office is located at Bank of America Building, 101 East Kennedy Boulevard, Suite
1500, Tampa, Florida, United States, 33602.
The transfer agent and registrar for the Common Shares in Canada is CIBC
Mellon Trust Company at its principal offices in Toronto, Montreal and Calgary
and, in the United States, is its U.S. affiliate, Mellon Investor Services LLC
at its principal office in New York.
AUDIT FEES
PricewaterhouseCoopers LLP billed the Company for the following fees in the
last two fiscal years:
2004 2005
---------- --------
Fees for Audit Services $1,020,000 $700,000
Audit-Related Fees $ 101,000 $189,000
-33-
Tax Fees $ 180,000 $195,000
All Other Fees Nil Nil
Audit fees include fees for services that would normally be provided by the
external auditor in connection with statutory and regulatory filings or
engagements, including fees for services necessary to perform an audit or review
in accordance with generally accepted auditing standards. This category also
includes services that generally only the external auditor reasonably can
provide, including comfort letters, statutory audits, attest services, consents
and assistance with and review of certain documents filed with securities
regulatory authorities.
Audit-related fees are for assurance and related services, such as due
diligence services, that traditionally are performed by the external auditor.
More specifically, these services include, among others: employee benefit plan
audits, due diligence related to acquisitions, accounting consultations and
audits in connection with acquisitions, accounting consultations regarding
accounting standards, internal control reviews, attest services that are not
required by statute or regulation and consultation concerning financial
accounting and reporting standards.
Tax fees are for professional services rendered for tax compliance,
assistance with tax audits and inquiries, tax advice and tax planning on certain
transactions.
INTEREST OF EXPERTS
The Company's auditors are PricewaterhouseCoopers LLP, independent
registered certified public accountants, who have prepared an independent
auditors' report dated March 8, 2006 in respect of the Company's consolidated
financial statements with accompanying notes as at and for the years ended
December, 31, 2005 and 2004. PricewaterhouseCoopers LLP has advised the Company
that they are independent with respect to the Company within the meaning of the
Rules of Professional Conduct of the AICPA and the rules of the U.S. Securities
and Exchange Commission.
AUDIT COMMITTEE
The Audit Committee is presently comprised of Mr. Spencer Lanthier (Chair),
Mr. Kenneth Harrigan and Mr. Arthur Scace. All members of the Audit Committee
are required to be independent and financially literate and at least one member
of the Committee shall be a "financial expert" as such term is defined by the
U.S. Securities and Exchange Commission. Each member of the Audit Committee is
independent and financially literate within the meaning of applicable law and
stock exchange listing requirements. The Board has determined that J. Spencer
Lanthier is an "audit committee financial expert".
RELEVANT EDUCATION AND EXPERIENCE
Each member of the Audit Committee has acquired significant financial
experience and exposure to accounting and financial issues. Mr. Lanthier worked
as a public company auditor for 28 years, and has served as a director and a
member of the audit committee of several public and private companies. Mr.
Harrigan holds an H.B.A. and LLD from the Ivey School of Business at the
University of Western Ontario. From 1991 to 1999 he was the President and Chief
Executive Officer of the Ford Motor Company of Canada Limited, and from 1990 to
1992 he was the Chairman and Chief Executive Officer of the Ford Motor Company
of Canada Limited. Mr. Scace has served as a director and a member of the audit
committee of several public companies.
Pursuant to the New York Stock Exchange Listed Company Manual, the members
of the Audit Committee may not serve on the audit committee of more than two
other public companies without prior Board approval. With the Board's approval,
Mr. Lanthier, Mr. Harrigan and Mr. Scace currently serve on the audit committee
of more than two other public companies. The Board has determined that such
simultaneous service will not impair the ability of Mr. Lanthier, Mr. Harrigan
and Mr. Scace to effectively serve the Audit Committee.
AUDIT COMMITTEE MANDATE
The Audit Committee is responsible for assisting the Board in its oversight
of:
-34-
- the integrity of the Company's financial statements and related
disclosure;
- the Company's compliance with legal and regulatory requirements;
- the independent auditor's qualifications, performance and
independence;
- the performance of the Company's internal audit function;
- the internal controls and disclosure controls at the Company; and
- any additional matters delegated to the Audit Committee by the Board.
PRE-APPROVAL POLICIES AND PROCEDURES
The Audit Committee has established a policy of pre-approving all auditing
services and non-audit services to be performed for the Company by its external
auditors, and the Committee shall not engage the external auditors to perform
those specific non-audit services proscribed by law or regulation. The Committee
may form and delegate authority to subcommittees consisting of one or more
members when appropriate, including the authority to grant pre-approvals of
audit and permitted non-audit services, provided that decisions of such
subcommittee to grant pre-approvals shall be presented to the full Committee at
its next scheduled meeting.
On a quarterly basis, the Audit Committee meets separately with the
external auditors without management being present and meets separately with
management without the external auditors being present.
AUDIT COMMITTEE CHARTER AND WHISTLE BLOWER POLICY
The charter of the Audit Committee is attached to this Annual Information
Form as Schedule "B" and is also available on the Company's website at
www.gerdauameristeel.com.
The Audit Committee has adopted a whistle blower policy (the "Whistle
Blower Policy") which establishes procedures for the receipt, retention and
treatment of complaints received by the Company regarding accounting, internal
accounting control or auditing matters, and the confidential, anonymous
submission by Company employees of concerns regarding questionable accounting or
auditing matters. The Whistle Blower Policy is available on the Company's
website at www.gerdauameristeel.com.
STANDARDS OF BUSINESS CONDUCT
The Company has adopted a code of ethics entitled the "Code of Ethics and
Business Conduct," which is applicable to all employees, officers and directors
of the Company, and a code of ethics entitled the "Code of Ethics Applicable to
Senior Executives" which is applicable to all senior management of the Company.
The Code of Ethics and Business Conduct and the Code of Ethics Applicable to
Senior Executives embody the commitment of the Company and its subsidiaries to
conduct business in accordance with the highest ethical standards and applicable
laws, rules and regulations. The Code of Ethics and Business Conduct and the
Code of Ethics Applicable to Senior Executives can be found at the Company's
website at www.gerdauameristeel.com.
MATERIAL CONTRACTS
The following are the only material contracts, other than contracts entered
into in the ordinary course of business, which have been entered into by Gerdau
Ameristeel within the most recently completed fiscal year or before the most
recently completed fiscal year but still in effect:
In relation to the Company's amendment and restatement in October 2005 of
its senior secured revolving credit facility, the amended and restated credit
agreement (the "Amended and Restated Credit Agreement") dated October 28, 2005
between the Company, Bank of America, N.A., as administrative agent and a
syndicate of lenders. A material change report dated October 28, 2005 was filed
on Form 51-102F3 in relation to the Amended and
-35-
Restated Credit Agreement and the Amended and Restated Credit Agreement was
filed contemporaneously with the material change report on SEDAR at
www.sedar.com.
SIGNIFICANT ACQUISITIONS
The business acquisition report filed on Form 51-105F2 dated January 14,
2005 relating to the Company's acquisition of the North Star Steel assets from
Cargill, Incorporated on November 1, 2004, available through SEDAR at
www.sedar.com, is incorporated by reference in this Annual Information Form.
-36-
ADDITIONAL INFORMATION
Additional information, including directors' and officers' remuneration and
indebtedness and principal holders of the Company's securities is contained in
the Company's Management Information Circular dated March 30, 2006 for the
annual and special meeting of shareholders for 2006, which involves the election
of directors.
Additional financial information is provided in the Company's audited
consolidated financial statements for the year ended December 31, 2005 and the
management's discussion and analysis related thereto in the Company's Annual
Report for the year ended December 31, 2005.
You may access other information about the Company, including disclosure
documents, reports, statements or other information that the Company files with
the Canadian securities regulatory authorities through SEDAR at www.sedar.com
and in the United States with the SEC at www.sec.gov and on the Company's
website at www.gerdauameristeel.com.
-37-
SCHEDULE A - SUBSIDIARIES
All entities are 100%-owned unless otherwise indicated.
Gerdau Ameristeel MRM Special Sections Inc. (Saskatchewan)
Bradley Steel Processors Inc. (50%) (Manitoba)
SSS/MRM Guide Rail Inc. (50%) (Manitoba)
Canadian Guide Rail Corporation (50%) (Canada)
GUSAP Partners (Delaware)
3038482 Nova Scotia Company (Nova Scotia)
3100361 Nova Scotia Company (Nova Scotia)
PASUG LLC (Delaware)
Gerdau USA Inc. (Delaware)
GNA Financing Inc. (Delaware)
Gerdau Ameristeel US Inc. (Florida)
GANS LLC (Delaware)
AmeriSteel Bright Bar, Inc. (80%) (Florida)
MFT Acquisition, Corp. (Delaware)
1062316 Ontario limited
Co-Steel Benefit Plans Inc. (Ontario)
1300554 Ontario Limited
1551533 Ontario Limited
Co-Steel C.S.M. Corp. (Delaware)
Gallatin Steel Company (50%) (Kentucky)
Ghent Industries (50%) (Kentucky)
Gallatin Terminal Company (50%) (Kentucky)
Gallatin Transit Authority (50%) (Kentucky)
Gerdau Ameristeel Perth Amboy Inc. (New Jersey)
Raritan River Urban Renewal Corporation (New Jersey)
Co-Steel Benefit Plans USA Inc. (Delaware)
Gerdau Ameristeel Sayreville Inc. (Delaware)
N.J.S.C. Investment Co., Inc. (New Jersey)(1)
Co-Steel Dofasco LLC (50%) (Wyoming)
Co-Steel (UK) Limited (United Kingdom)
Goldmarsh Enterprises (Ireland)
Acierco S.A. (Luxembourg)
Co-Steel Liquidity Management Hungary Limited Liability Company (Hungary)
Monteferro International Business S.A. (50%) (Spain)
Monteferro America Latina Ltda. (50%) (Brazil)
Fargo Iron and Metal Company (North Dakota).
(1) This company is in the process of being dissolved.
-38-
SCHEDULE B - AUDIT COMMITTEE CHARTER
GERDAU AMERISTEEL CORPORATION
AUDIT COMMITTEE CHARTER
(ADOPTED MARCH 23, 2005)
1. PURPOSE
The Audit Committee has been established by the Board for the purposes of
overseeing the accounting and financial reporting processes of the Company,
including the audit of the financial statements of the Company.
The Audit Committee is responsible for assisting the Board in its oversight of:
- - the integrity of the Company's financial statements and related disclosure;
- - the Company's compliance with legal and regulatory requirements;
- - the independent auditor's qualifications, performance and independence;
- - the performance of the Company's internal audit function;
- - the internal controls and disclosure controls at the Company; and
- - any additional matters delegated to the Audit Committee by the Board.
The Audit Committee shall prepare all reports of the Audit Committee required to
be included in the Company's annual proxy statement, as required by the rules of
the Canadian securities regulatory authorities (the "CSRA") and the U.S.
Securities and Exchange Commission (the "SEC") from time to time. Currently no
report of the Audit Committee is required.
2. COMPOSITION AND QUALIFICATIONS
(A) MEMBERS
The Audit Committee shall be comprised of three or more members of the Board, as
the Board may determine from time to time. Members of the Audit Committee will
be appointed by the Board, taking into account any recommendation that may be
made by the Corporate Governance Committee. Any member of the Audit Committee
may be removed and replaced at any time by the Board, and will automatically
cease to be a member if he or she ceases to meet the qualifications set out
below. The Board will fill vacancies on the Audit Committee by appointment from
among qualified members of the Board, taking into account any recommendation
that may be made by the Corporate Governance Committee. If a vacancy exists, the
remaining members of the Audit Committee may exercise all of their powers so
long as there is a quorum and subject to any legal requirements regarding the
minimum number of members of the Audit Committee.
(B) QUALIFICATIONS
Each Member of the Audit Committee shall meet the independence and other
qualification requirements of the Sarbanes-Oxley Act of 2002, the New York Stock
Exchange, the CSRA and all other applicable laws and regulations. Each member of
the Audit Committee shall be financially literate and at least one member shall
have accounting or related financial management expertise as such qualification
is interpreted by the Board in its business judgment. At least one member shall
be an "Audit Committee Financial Expert", as such term is defined by the SEC. In
addition, at least a majority of the members must be residents of Canada (so
long as this is required under
-39-
applicable law). A member of the Audit Committee may not serve on more than two
other public company audit committees except with prior approval of the Board.
(C) INDEPENDENCE
Members of the Audit Committee (i) may not accept any consulting, advisory, or
other compensatory fee from the Company or any of its subsidiaries, other than
director and committee fees and pension or other form of deferred compensation
for prior service and (ii) may not be an affiliated person (within the meaning
of applicable law or regulations) of the Company or any of its subsidiaries.
3. DUTIES AND RESPONSIBILITIES
The Audit Committee is responsible for performing the duties set out below and
any other duties that may be assigned to it by the Board and performing any
other functions that may be necessary or appropriate for the performance of its
duties.
(A) APPOINTMENT AND REVIEW OF INDEPENDENT AUDITOR
- - The Company's independent auditors are ultimately accountable to the Audit
Committee, which has the direct authority and responsibility to appoint,
retain, compensate, oversee and evaluate and, where appropriate, replace
the independent auditors, subject to shareholder approval where applicable.
In connection with the Audit Committee's oversight of the independent
auditor the Audit Committee will have the following responsibilities and
take the following actions:
- - The Audit Committee will review and approve the independent auditor's
engagement letters and the fees to be paid to the independent auditors.
- - The Audit Committee will obtain and review with the lead audit partner
annually or more frequently as the Audit Committee considers appropriate, a
report by the independent auditor describing: (A) the independent auditor's
internal quality-control procedures; (B) any material issues raised by the
most recent internal quality-control review, or peer review, of the
independent auditor, or by any inquiry or investigation by governmental or
professional authorities, within the preceding five years, respecting
independent audits carried out by the independent auditor, and any steps
taken to deal with these issues; and (C) in order to assess the independent
auditor's independence, all relationships between the independent auditor
and the Company.
- - After reviewing the report referred to above and the independent auditor's
performance throughout the year, the Audit Committee will evaluate the
independent auditor's qualifications, performance and independence. The
evaluation will include a review and evaluation of the lead partner of the
independent auditor. In making its evaluation, the Audit Committee will
take into account the opinions of management and the officer in charge of
internal audit and the Company's internal auditors (or other personnel
responsible for the internal audit function). The Audit Committee will also
consider, if appropriate and in order to assure continuing auditor
independence, whether there should be a rotation of the audit firm itself.
The Audit Committee will present its conclusions to the Board.
- - The Audit Committee will obtain confirmation and assurance as to the
independent auditor's independence, including ensuring that it submits on a
periodic basis (not less than annually) to the Audit Committee a formal
written statement delineating all relationships between the independent
auditors and the Company. The Audit Committee is responsible for actively
engaging in a dialogue with the independent auditors with respect to any
disclosed relationships or services that may impact the objectivity and
independence of the independent auditor and for taking appropriate action
in response to the independent auditor's report to satisfy itself of its
independence.
- - The Audit Committee will resolve disagreements between management and the
independent auditor regarding financial reporting.
-40-
- - The Audit Committee will review with the Board any issues that arise with
respect to the performance and independence of the independent auditor and
make recommendations about whether the Company should continue with that
independent auditor.
- - The Audit Committee will ensure the regular rotation of members of the
independent auditor's team as required by law.
- - The Audit Committee will review and approve the Company's hiring of
employees and former employees of the independent auditor or former
independent auditors.
(B) PRE-APPROVAL OF NON-AUDIT SERVICES
- - The Audit Committee will pre-approve the appointment of the independent
auditor for any non-audit service to be provided to the Company, provided
that it will not approve any service that is prohibited under the rules of
the Canadian Public Accountability Board or the Public Company Accounting
Oversight Board, the Independence Standards of the Canadian Institute of
Chartered Accountants or the United States Securities Exchange Act of 1934,
as amended, and the rules promulgated thereunder. The Audit Committee may
establish policies and procedures, from time to time, pre-approving the
appointment of the independent auditor for certain non-audit services. In
addition, the Audit Committee may delegate to one or more members the
authority to pre-approve the appointment of the independent auditor for any
non-audit service to the extent permitted by applicable law, provided that
any pre-approvals granted pursuant to such delegation shall be reported to
the full Audit Committee at its next scheduled meeting.
(C) REVIEW OF THE INTERNAL AUDIT FUNCTION
- - The Audit Committee will review the mandate, budget, plan and scope of
activities, staffing and organizational structure of the internal audit
function to confirm that it is independent of management and has sufficient
resources to carry out its mandate. The Audit Committee will discuss this
mandate with the independent auditor.
- - The Audit Committee will review the appointment and replacement of the
officer in charge of the internal audit and will review the significant
reports to management prepared by the internal auditing department and
management's responses to such report.
- - The Audit Committee has the authority to communicate directly with the
officer in charge of the internal audit. In addition, as frequently as it
deems necessary to fulfill its responsibilities, but not less often than
annually, the Audit Committee will meet privately with the officer in
charge of the internal audit to discuss any areas of concern to the Audit
Committee or the officer in charge of the internal audit.
(D) REVIEW OF FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION
- - The Audit Committee will review and discuss the annual audited financial
statements and quarterly financial statements with management and the
independent auditor, including reviewing the Company's disclosure under
"Management's Discussion and Analysis of Financial Conditions and Results
of Operations" and any reconciliation of the Company's financial
statements, before recommending them for approval by the Board for release
and filing with securities regulatory authorities, including the filing of
Form 40-F or Form 6-K, as applicable.
- - The Audit Committee will review with management and the independent
auditor: (A) major issues regarding accounting principles and financial
statement presentations, including any significant changes to the Company's
selection or application of accounting principles, and major issues as to
the adequacy of the Company's internal controls and any special audit steps
adopted in light of material control deficiencies; (B) analyses prepared by
management and/or the independent auditor setting forth significant
financial reporting issues and judgments made in connection with the
preparation of the financial statements, including analysis of the effects
of alternative GAAP methods on the financial statements of the Company;
-41-
(C) the effect of regulatory and accounting initiatives, as well as
off-balance sheet structures, on the financial statements of the Company;
and (D) the type and presentation of information to be included in earnings
press releases (including any use of "pro forma" or "adjusted" non GAAP
information) as well as any financial information and earnings guidance
provided to analysts and rating agencies.
- - The Audit Committee will review reports required to be submitted by the
independent auditors concerning: (A) all critical accounting policies and
practices used; (B) all alternative treatments of financial information
within generally accepted accounting principles ("GAAP") that have been
discussed with management, the ramifications of such alternatives, and the
accounting treatment preferred by the independent auditors; and (C) any
other material written communications with management.
- - The Audit Committee will review earnings press releases and other press
releases containing financial information based on the Company's financial
statements prior to their release. The Audit Committee will also review the
use of "pro forma" or "adjusted" non-GAAP information in such press
releases.
- - The Audit Committee will discuss generally (meaning a discussion of the
types of information to be disclosed and the type of presentation to be
made) financial information and earnings guidance provided to analysts and
rating agencies. The Audit Committee need not discuss in advance each
earnings release or each instance in which the Company may provide earnings
guidance.
- - The Audit Committee will review all other financial statements of the
Company that require approval by the Board before they are released to the
public, including, without limitation, financial statements for use in
prospectuses or other offering or public disclosure documents and financial
statements required by regulatory authorities.
- - The Audit Committee will discuss with the independent auditors the matters
required to be disclosed by Statement on Auditing Standards No. 61 (as may
be modified or supplemented) and the matters in the written disclosures
required by Independence Standards Board Standard No. 1 relating to the
conduct of the audit.
- - The Audit Committee will review the effect of regulatory and accounting
initiatives as well as off-balance sheet structures on the Company's
financial statements.
- - The Audit Committee will review significant changes in accounting or
auditing policies.
- - The Audit Committee will oversee management's design and implementation of
an adequate and effective system of internal controls at the Company,
including ensuring adequate internal audit functions and any significant
findings and recommendations with respect to such internal controls. The
Audit Committee will review the processes for complying with internal
control reporting and certification requirements and for evaluating the
adequacy and effectiveness of internal controls. The Audit Committee will
review the annual and interim conclusions of the effectiveness of the
Company's disclosure controls and procedures and internal controls and
procedures (including the independent auditor's attestation that is
required to be filed with securities regulators).
- - The Audit Committee will regularly review with the independent auditor any
problems or difficulties the independent auditor encountered in the course
of its audit work, including any change in the scope of the planned audit
activities and any restrictions placed on the scope of such activities or
access to requested information, management's response to such problems and
difficulties and any significant disagreements with management. The Audit
Committee will also review with the independent auditor any material
communications with the independent auditor, including any "management" or
"internal control" letters or schedule of unadjusted differences.
- - The Audit Committee will review with management and any outside
professionals as the Audit Committee considers appropriate important trends
and developments in financial reporting practices and requirements and
their effect on the Company's financial statements.
-42-
- - The Audit Committee will review with management and the independent auditor
the scope, planning and staffing of the proposed audit for the current
year.
- - The Audit Committee will discuss guidelines and policies governing the
process by which risk assessment and risk management are undertaken and
meet with management to review and assess the Company's major financial
risk exposures and the steps management has taken to monitor and control
such exposures.
- - The Audit Committee will review with management and the general counsel or
any external counsel as the Audit Committee considers appropriate any
legal, regulatory or other matters (including pending litigation, claims,
contingencies and tax assessments) which may have a material effect on the
Company and its financial statements, any material reports or inquiries
from regulatory or governmental agencies and corporate compliance policies
or codes of conduct.
- - The Audit Committee will review with the Board any issues that arise with
respect to the quality or integrity of the Company's financial statements,
compliance with legal or regulatory requirements or the performance of the
internal audit function.
- - The Audit Committee will review with management the status of significant
taxation matters of the Company.
- - The Audit Committee will meet separately and periodically with management,
the internal auditors (or other personnel responsible for the internal
audit function) and the independent auditor.
(E) COMPLAINTS PROCEDURE
- - The Audit Committee will establish procedures for
(i) the receipt, retention and treatment of complaints and concerns
received by the Company regarding accounting, internal accounting
controls and auditing matters, and
(ii) the confidential and/or anonymous submission by employees of
complaints or concerns regarding questionable accounting or
auditing matters. This will include the establishment of a
whistleblower policy and an employee "hotline" for making
anonymous submissions.
(F) ASSESSMENT
- - The Audit Committee will review and reassess annually the adequacy of this
Audit Committee Charter and recommend any proposed changes to the Board.
4. REPORTING
The Audit Committee will regularly report to the Board on:
- - the independent auditor's independence;
- - the performance of the independent auditor and the Audit Committee's
recommendations regarding its reappointment or termination;
- - the performance of the internal audit function;
- - the adequacy of the Company's internal controls and disclosure controls;
-43-
- - its recommendations regarding the annual and interim financial statements
of the Company and any reconciliation of the Company's financial
statements, including any issues with respect to the quality or integrity
of the financial statements;
- - its review of the annual and interim management's discussion and analysis;
- - the Company's compliance with legal and regulatory requirements related to
financial reporting; and
- - all other significant matters it has addressed and with respect to such
other matters that are within its responsibilities.
5. CHAIR
Each year, the Board will appoint one member to be Chair of the Audit Committee.
If, in any year, the Board does not appoint a Chair, the incumbent Chair will
continue in office until a successor is appointed. In the Chair's absence, the
Audit Committee may select another member as Chair by majority vote. The Chair
will have the right to exercise all powers of the Audit Committee between
meetings but will attempt to involve all other members as appropriate prior to
the exercise of any powers and will, in any event, advise all other members of
any decisions made or powers exercised.
6. MEETINGS
The Audit Committee will determine the date, time and place of its meetings, but
will meet at least quarterly. The Audit Committee may meet on not less than 48
hours written or verbal notice from the Chair to all members (or without notice
if all persons entitled to notice have waived or are deemed to have waived such
notice). If the Chair is absent or if the position is vacant, any member may
call a meeting. The Audit Committee may establish those procedures it deems
appropriate, such procedures to be in keeping with those adopted by the Board.
The Audit Committee shall act on the affirmative vote of a majority of members
present at a meeting at which a quorum is present. In the event of a tie, the
Chairperson will have the second, or casting vote in addition to his or her
original vote. Without a meeting, the Audit Committee may act by unanimous
written consent of all members. However, the Audit Committee may delegate to one
or more of its members the authority to grant pre-approvals of audit and
permitted non-audit services, provided the decision is reported to the full
Audit Committee at the next scheduled meeting.
7. QUORUM
A majority of the members of the entire Audit Committee will constitute a quorum
for the transaction of business decisions.
8. SECRETARY AND MINUTES
The Controller of the Company, or such other person as may be appointed by the
Chair of the Audit Committee, will act as the secretary of the Audit Committee.
The minutes of the Audit Committee will be in writing and duly entered in the
books of the Company. The minutes of the Audit Committee will be available to
all other members of the Board.
9. APPOINTMENT AND REMOVAL
The members of the Audit Committee shall be appointed by the Board at its first
meeting following the annual meeting of shareholders and shall serve until their
successors are elected or until their earlier deaths, resignation or removal,
with or without cause in the discretion of the Board.
Any member may be removed and replaced at any time without cause by the Board
and will automatically cease to be a member as soon as the member ceases to meet
the qualifications set out above. The Board will fill vacancies on the Audit
Committee by appointment from among qualified and independent members of the
Board for the
-44-
remainder of the unexpired term. If a vacancy exists on the Audit Committee, the
remaining members may exercise all of its powers so long as a quorum remains in
office.
10. ACCESS TO OUTSIDE ADVISORS
The Audit Committee may, in its sole discretion, retain counsel, auditors or
other advisors in connection with the execution of its duties and
responsibilities and may determine the fees of any advisors so retained. The
Company will provide the Audit Committee with appropriate funding for payment of
compensation to such counsel, auditors or other advisors and for ordinary
administrative expenses of the Audit Committee that are necessary or appropriate
in carrying out its duties.
11. LIMITATIONS
While the Audit Committee has the responsibilities and powers set forth in this
Charter, it is not the duty of the Audit Committee to plan or conduct audits or
to determine that the Company's financial statements are complete and accurate
and are in accordance with GAAP. This is the responsibility of management and
the independent auditors.
-45-
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In this report, "Gerdau Ameristeel" and "Company" refer to Gerdau Ameristeel
Corporation and its subsidiaries and 50%-owned joint ventures. Certain
statements in this report constitute forward-looking statements. Such statements
describe the Company's assumptions, beliefs and expectations with respect to its
operations, future financial results, business strategies and growth and
expansion plans and strategies and can often be identified by the words
"anticipates," "believes," "estimates," "expects," "intends," "plans," and other
words and terms of similar meaning. The Company cautions readers that
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from those currently projected by the
Company. In addition to those noted in the statements themselves, any number of
factors could affect actual results, including, without limitation:
The highly competitive nature of the global steel industry and the availability
of competitive substitute materials; the cyclical nature of the steel industry
and the industries served by the Company and economic conditions in North
America and worldwide steel imports and trade regulations; the substantial
capital investment and maintenance expenditures required in the Company's
business; unexpected equipment failures, transportation disruptions or
production curtailments or shutdowns; increases in the cost of steel scrap,
energy and other raw materials; the ability to renegotiate collective bargaining
agreements and avoid labor disruptions; the cost of compliance with
environmental laws and regulations; the Company's costs relative to competitors
who have sought bankruptcy protection; currency exchange rate fluctuations; the
Company's ability to fund its pension plans; the deviation of actual results
from estimates made by the Company in the preparation of its financial
statements; the loss of key employees; the Company's reliance on joint ventures
that it does not control; the effects of the consolidation of operations or of
the steel industry; and the timely completion of business or asset purchases and
sales, including receipt of regulatory agency approvals, and the ability to
integrate newly-acquired businesses and achieve synergies.
Any forward-looking statements in this report are based on current information
as of the date of this report and the Company does not undertake any obligation
to update any forward-looking statements to reflect new information or future
developments or events, except as required by law.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OVERVIEW
Gerdau Ameristeel is the second largest minimill steel producer in North America
with annual manufacturing capacity of over 8.4 million tons of mill finished
steel products. Through a vertically integrated network of 15 minimills
(including one 50%-owned minimill), 17 scrap recycling facilities (including
Fargo Iron and Metal Company acquired on February 10, 2006) and 43 downstream
operations and including Callaway Building Products, Inc. acquired on March 10,
2006 and (including two 50% owned joint ventures), the Company primarily serves
customers in the eastern two thirds of North America. The Company's products are
generally sold to steel service centers, steel fabricators, or directly to
original equipment manufacturers, for use in a variety of industries, including
construction, automotive, mining and equipment manufacturing. Over 90% of the
raw material feed for the minimill operations is recycled steel scrap, making
Gerdau Ameristeel the second largest steel recycler in North America.
BUSINESS UNIT SEGMENTS
Gerdau Ameristeel is organized with two business unit segments, mills and
downstream. The mills segment consists of eleven minimills in the United States
and three in Canada. This segment manufactures and markets a wide range of steel
products, including reinforcing steel bar (rebar), merchant bars, structural
shapes, beams, special sections and coiled wire rod. The mills segment also
produces rebar, merchant, rod and SBQ products used by the downstream segment
and transfers these products at an arms-length, market price to the downstream
segment. The downstream segment is secondary value-added steel businesses and
consists of rebar fabrication, railroad spikes, cold drawn products, super light
beam processing, elevator guide rails, grinding balls, wire mesh and collated
nails.
1
2005 HIGHLIGHTS
- Net income of $295.5 million or $.97 per common share diluted for the
year ended December 31, 2005.
- Record shipments of 6.3 million tons of finished steel for the year
ended December 31, 2005.
- Successful integration of the 2004 acquisitions, which include North
Star Steel, Gate City and RJ Rebar Inc., into the Gerdau Ameristeel
Business System.
- Generation of cash flows from operations of $578.5 million during
2005.
- Reduction of net debt to $116 million at December 31, 2005 from $436
million at the end of the prior year.
- Amended the Senior Secured Credit Facility to increase the facility
from $350 million to $650 million.
- Successful execution of executive management succession plan.
2
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2005, COMPARED TO YEAR ENDED DECEMBER 31, 2004.
The following tables summarize the results of Gerdau Ameristeel for the year
ended December 31, 2005, and for the year ended December 31, 2004.
(US$ IN THOUSANDS)
YEAR ENDED % OF
----------------------------------- SALES
DECEMBER 31, % OF DECEMBER 31, % OF INCREASE $ INCREASE
2005 SALES 2004 SALES (DECREASE) (DECREASE)
------------ ----- ------------ ----- ---------- ----------
Finished steel shipments (tons)
Rebar 1,473,216 1,322,826
Merchant/special sections 3,054,154 2,312,704
Rod 702,970 786,662
Fabricated steel 1,057,133 755,818
---------- ----------
6,287,473 5,178,010
Net sales $3,897,143 100.0% $3,009,854 100.0% $887,289
Operating expenses
Cost of sales (exclusive of depreciation) 3,253,865 83.5% 2,450,945 81.4% 2.1% 802,920
Selling and administrative 125,558 3.2% 109,384 3.6% (0.4)% 16,174
Depreciation 103,035 2.6% 79,311 2.5% 0.1% 23,724
Other operating expense (income) 14,180 0.4% (3,062) 0.1% 0.3% 17,242
---------- ----- ---------- ----- ---- --------
3,496,638 89.7% 2,636,578 87.6% 2.1% 860,060
Income from operations 400,505 10.3% 373,276 12.4% (2.1)% 27,229
Earnings from joint ventures 91,201 2.3% 141,474 4.7% (2.4)% (50,273)
---------- ----- ---------- ----- ---- --------
Income before other expenses & income taxes 491,706 12.6% 514,750 17.1% (4.5)% (23,044)
Other expenses
Interest, net 50,420 1.3% 56,330 1.9% (0.6)% (5,910)
Foreign exchange (gain) loss (1,554) 0.0% 8,123 0.2% (0.2)% (9,677)
Amortization of deferred financing costs 2,656 0.0% 2,551 0.1% (0.1)% 105
---------- ----- ---------- ----- ---- --------
51,522 1.3% 67,004 2.2% (0.9)% (15,482)
Income before income taxes 440,184 11.3% 447,746 14.9% (3.6)% (7,562)
Income tax expense 144,687 3.7% 110,077 3.7% 0.0% 34,610
---------- ----- ---------- ----- ---- --------
Net income $ 295,497 7.6% $ 337,669 11.2% (3.6)% $(42,172)
========== ===== ========== ===== ==== ========
Earnings per common share - basic $ 0.97 $ 1.46
Earnings per common share - diluted $ 0.97 $ 1.45
3
The Company uses weighted average net selling prices ("net selling prices") as a
non-GAAP financial measure. The Company believes that net selling prices are
commonly used in the steel industry to measure a company's revenue performance.
The Company believes that net selling prices represent a more meaningful measure
because it reflects the revenue earned net of freight. Weighted average net
selling prices were computed by dividing the shipment revenue by the steel
shipments as follows:
YEAR ENDED
---------------------------
DECEMBER 31, DECEMBER 31, $ INCREASE % INCREASE
2005 2004 (DECREASE) (DECREASE)
------------ ------------ ---------- ----------
Mill external shipment revenue $2,737,769 $2,174,701
Fabricated steel shipment revenue 745,723 454,300
Other products shipment revenue* 210,689 236,503
Freight 202,962 144,350
---------- ----------
Net Sales 3,897,143 3,009,854
Mill external steel shipments (tons) 5,230,340 4,422,192
Fabricated steel shipments (tons) 1,057,133 755,818
Weighted Average Selling Price ($/ton)
Mill external steel shipments $ 523.44 $ 491.77 $ 31.67 6.4%
Fabricated steel shipments $ 705.42 $ 601.07 $104.35 17.4%
Scrap Charged $ 178.28 $ 189.34 $(11.06) (5.8)%
Metal Spread (selling price less scrap)
Mill external steel shipments $ 345.16 $ 302.43 $ 42.73 14.1%
Fabricated steel shipments $ 527.14 $ 411.73 $115.41 28.0%
Mill Manufacturing Cost ($/ton) $ 239.38 $ 210.62 $ 28.76 13.7%
* Other products shipment revenue includes ferrous scrap, nonferrous scrap,
semifinished steel billets, and other building products.
Net sales: Finished tons shipped for the year ended December 31, 2005 increased
1.1 million tons, or 21.4%, compared to the year ended December 31, 2004. On
November 1, 2004, the Company acquired four North Star Steel ("North Star")
mills and four downstream facilities from Cargill. The consolidated financial
statements of the Company for the years ended December 31, 2005 and 2004 include
the results of the acquired businesses only subsequent to their acquisition.
Shipments for the acquired North Star locations were 1.4 million tons or $889
million for the year ended December 31, 2005, as compared to 0.2 million tons or
$154 million for the year ended December 31, 2004. Excluding the North Star
shipments, overall shipments remained relatively flat with increased volumes of
rebar and merchant products being offset by a decrease in rod shipments. Market
demand at the beginning of 2005 was relatively weak as customers worked through
high levels of inventory; however the second half of the year brought a return
to very strong market fundamentals and strong shipments.
As a result of the strong market demand and the continued consolidation of North
American steel producers, the environment of the Company's steel prices was
positive. Average mill finished goods selling prices increased $32 per ton, or
6.4%, from the average selling prices for the year ended December 31, 2004 and
fabricated steel shipment selling prices increased $104 per ton as lower priced
contracts negotiated in 2003 and early 2004 were replaced by contracts
reflecting increased steel prices.
Cost of sales: Cost of sales as a percentage of net sales increased 2.1% for the
year ended December 31, 2005 compared to the year ended December 31, 2004
representing an increase of $44 per ton shipped. Mill manufacturing costs in
2005 were approximately 13.7% or $29 per ton higher than 2004 as a result of
higher electricity, natural gas, maintenance and alloy costs. In addition, cost
of sales as a percentage of sales increased as a result of higher fuel costs
which increased delivery costs and the increase mix of fabricated steel
shipments which have a higher cost per ton than the other finished steel
shipments.
4
Gross margins were also impacted by changes in metal spread, the difference
between mill selling prices and scrap raw material cost. Metal spread increased
$43 per ton for the year ended December 31, 2005 compared to the year ended
December 31, 2004. However, this measure compares the current selling prices
with the current price of scrap melted in production and does not consider the
timing effect of the scrap costs for product sold. Due to the one to two months
of finished product inventories that the Company maintains, scrap costs related
to steel sold in the year ended December 31, 2005 were approximately $5 per ton
lower than during the year ended 2004, which reduced the realized metal spread
increase to $37 per ton. The combined effect of the increased manufacturing
costs partially offset by the metal spread increase, resulted in a decrease in
the gross margins earned over the period.
Selling and administrative: Selling and administrative expenses for the year
ended December 31, 2005 increased $16.2 million when compared to the year ended
December 31, 2004. Included in selling and administrative expenses for the year
ended December 31, 2005 is a non-cash pretax expense of $4.1 million to
mark-to-market outstanding stock appreciation rights (SARs) and other expenses
associated with equity based compensation held by employees compared to $21.8
million for the same period in the prior year. Excluding this item, selling and
administrative expenses increased $33.9 million for the year ended December 31,
2005 when compared to the year ended December 31, 2004. The most significant
cause of this increase was the increase in salaries and benefits costs. From the
beginning of 2004 through the end of 2005, administrative headcount increased by
more than 100% as the Company's administrative structure grew to accommodate the
growth that had been realized. In addition, the current year costs include a $3
million incentive payment as part of the executive management succession plan
that was executed during 2005.
Depreciation: Depreciation for the year ended December 31, 2005 increased $23.7
million when compared to the year ended December 31, 2004. The increase in
depreciation for the year ended December 31, 2005 reflects $8.5 million of
depreciation of the North Star assets compared to $1.3 million for the year
ended December 31, 2004 as a result of 2005 including a full year of
depreciation expense versus only two months in 2004. Additionally, during the
course of 2005, the Company accelerated depreciation on specific assets that
were replaced or that the Company was planning to replace before the end of the
originally estimated useful life. This accelerated depreciation was
approximately $10.6 million during 2005. The remainder of the increase was the
result of normal increases in depreciation expense from routine equipment
additions.
Other operating expense/ income: Other expenses, net of other income for the
year ended December 31, 2005, consists primarily of $14 million of fixed costs
associated with the Beaumont, Texas steel mill facility, which was idled during
part of 2005. In addition, included in other operating expenses was a $3.3
million write-down on certain assets held for sale. These expenses were
partially offset by $1.1 million collected under the U.S. Continued Dumping
Subsidy Offset Act and other miscellaneous receipts. Other income, net of other
expenses for the year ended December 31, 2004, consists of income of $1.2
million from a power interruption claim, $1.0 million collected under the U.S.
Continued Dumping Subsidy Offset Act, and $1.0 million from the mark to market
of marketable securities.
Income from operations: As a percentage of net sales, operating income for 2005
was 10.3% compared to 12.4% for 2004. Metal spread, the difference between mill
selling prices and scrap raw material cost, increased 14.1% to $345 per ton for
the year ended December 31, 2005 from $302 per ton for the year ended December
31, 2004. As discussed above, the metal spread increase was partially offset by
increases in manufacturing costs, depreciation expense, selling and
administrative expenses and other operating expenses.
Earnings from joint ventures: Earnings from the Company's 50% joint ventures
were $91.2 million for the year ended December 31, 2005 compared to $141.5
million for the year ended December 31, 2004. Shipments from Gallatin Steel, a
flat rolled mill joint venture with Dofasco Inc., remained relatively flat with
the prior year at 764,000 tons, but metal spreads at Gallatin Steel for the year
ended December 31, 2005 were $308 per ton in comparison to $361 per ton for the
same period in the prior year. Flat rolled sheet metal spreads decreased through
the first nine months of 2005, from the historically high levels of 2004.
However they rebounded with strong demand and order backlogs in the fourth
quarter of 2005. Gallatin paid cash distributions to the Company of $115.8
million during 2005.
Interest expense and other expense on debt: Interest expense and other expense
on debt, including amortized deferred financing costs, decreased $5.9 million
for the year ended December 31, 2005 compared to the year ended December 31,
2004. The primary cause of the decrease was the interest earned from the cash
and cash equivalents during 2005 and also the effect of the mark to market
adjustment on interest rate swap agreements. During the year
5
ended December 31, 2005, the mark-to-market adjustment resulted in $2.9 million
of income related to a favorable adjustment in comparison to $1.6 million of
income for the year ended December 31, 2004.
Income taxes: The Company's effective income tax rate was approximately 32.9 %
and 24.6 % respectively for the year ended December 31, 2005 and 2004. The
increase in rate between years is primarily attributable to the Company
recording the utilization of net operating losses related to the US operations
that resulting in a $48.6 million reduction of tax expense during 2004. The net
operating losses are related to the U.S. operations of the former Co-Steel
entity. At the time of the acquisition of Co-Steel, the tax assets were recorded
at their estimated realization rate according to purchase accounting under U.S.
GAAP. Due to the high profitability of our U.S. operations during the past 2
years, the Company was able to utilize these losses. In addition, during 2005
the Company recorded a valuation allowance of $3.6 million against certain state
tax loss carryforwards and recycling credits. Management believes that it is
more likely than not that these deferred assets will not be realized.
The Company has not provided for Canadian income taxes or foreign withholding
taxes that would apply on the distribution of the earnings of its non-Canadian
subsidiaries, as these earnings are intended to be reinvested indefinitely by
these subsidiaries.
Segments: Gerdau Ameristeel is organized with two business unit segments, mills
and downstream.
Mills segment sales increased to $4.0 billion for year ended December 31, 2005
from $3.2 billion for the year ended December 31, 2004. The North Star locations
contributed $729.0 million of sales for the year ended December 31, 2005
compared to $106.0 million the year ended December 31, 2004. Mills segment sales
include sales to the downstream segment of $866.0 million and $688.5 million for
the years ended December 31, 2005 and 2004, respectively. Mills segment
operating income for the year ended December 31, 2005 was $401.7 million
compared to a $428.8 million operating income for the year ended December 31,
2004, a decrease of $27.1 million. The decrease in operating income is discussed
in the cost of sales section above.
Downstream segment sales increased to $810.0 million for the year ended December
31, 2005, from $517.7million for the year ended December 31, 2004. The recently
acquired North Star downstream operations and Gate City/RJ Rebar fabricating
facilities contributed $214.7 million in sales revenue for the year ended
December 31, 2005 compared to $25.9 million for the year ended December 31,
2004. Downstream segment operating income for the year ended December 31, 2005
was $46.4 million compared to $18.9 million for the year ended December 31,
2004, an increase of $27.5 million. In addition to the increased volume as a
result of the acquisitions, the increase in profit was also due to increased
average selling prices of $104 per ton.
See "Note 17" to Gerdau Ameristeel Corporation and Subsidiaries Consolidated
Financial Statements for the years ended December 31, 2005 and 2004 - "Segment
information" for a reconciliation of segment sales and income to consolidated
results.
EBITDA: EBITDA (earnings before interest, taxes, depreciation and amortization)
is a non-GAAP measure that management believes is a useful supplemental measure
of cash available prior to debt service, capital expenditures and income tax.
Investors are cautioned that EBITDA should not be construed as an alternative to
net income determined in accordance with GAAP as an indicator of the Company's
performance or to cash flows from operations as a measure of liquidity and cash
flows. EBITDA does not have a standardized meaning prescribed by GAAP. The
Company's method of calculating EBITDA may differ from the methods used by other
companies and, accordingly, it may not be comparable to similarly titled
measures used by other companies. Reconciliation of EBITDA to net income for the
years ended December 31, 2005 and 2004 is shown below:
FOR THE YEAR ENDED
---------------------------
December 31, December 31,
2005 2004
------------ ------------
($000s)
Net income $295,497 $ 337,669
Income tax expense 144,687 110,077
Interest and other expense on debt 50,420 56,330
Depreciation and amortization 105,691 81,862
Earnings from joint ventures (91,201) (141,474)
Cash distribution from joint ventures 115,828 82,803
-------- ---------
EBITDA $620,922 $ 527,267
======== =========
6
CANADIAN GAAP
Effective June 1, 2005, public companies incorporated under Ontario's Business
Corporations Act (OBCA) that have securities registered with the U.S. Securities
and Exchange Commission (SEC) may prepare their financial statements in
accordance with U.S. generally accepted accounting principles (GAAP) and have
them audited under U.S. generally accepted auditing standards (GAAS). Therefore,
a cross-border public company incorporated under the OBCA can prepare its
financial statements (including those for periods ended before June 1, 2005) in
accordance with U.S. GAAP if they are mailed to shareholders on or after June 1,
2005.
Results reported under Canadian GAAP may differ from results reported under U.S.
GAAP. Under Canadian GAAP for the years ended December 31, 2005 and 2004, net
income was $302.0 million and $341.5 million, a decrease of $39.5 million. The
material differences between Canadian GAAP and U.S. GAAP are described in Note
18 to the audited consolidated financial statements for the years ended December
31, 2005 and 2004. The following is a summary of these differences:
- Under U.S. GAAP, joint ventures are accounted for using the equity
method. Under Canadian GAAP, joint ventures are proportionately
consolidated. This means that 50% of each line item is recorded, such
as individual assets and liabilities, sales, costs of sales, interest,
depreciation and amortization. This means, among other differences,
that depreciation expense associated with our joint ventures is not
reported under U.S. GAAP.
- As a result of proportionate accounting, under Canadian GAAP there is
no equity investment account in long term assets to which allocations
of negative goodwill can be made under the purchase method of
accounting. Therefore, in the business combination with Co-Steel,
negative goodwill was only allocated against property, plant and
equipment, which lowers depreciation expense. Under U.S. GAAP, joint
ventures are accounted for under the equity method and, therefore,
negative goodwill is allocated to the equity investment and property,
plant and equipment.
- Comprehensive income is not reported under Canadian GAAP. Under U.S.
GAAP, comprehensive income represents the change in equity during a
reporting period from transactions and other events and circumstances
from non-shareholder sources. Components of comprehensive income
include items such as net earnings (loss), changes in the fair value
of investments not held for trading, minimum pension liability
adjustments, derivative instruments and foreign currency translation
gains and losses.
- Under U.S. GAAP, an additional minimum pension liability is charged to
other comprehensive income in shareholders' equity to the extent that
the unfunded accumulated benefit obligation (ABO) exceeds the fair
value of the plan assets, and this amount is not covered by the
pension liability already recognized in the balance sheet. The
calculation of the ABO is based on the actuarial present value of the
vested benefits to which the employee is currently entitled, based on
the employee's expected date of separation or retirement. The
recognition of an additional minimum liability is not required under
Canadian GAAP.
- Under U.S. GAAP, the Company accrues for scheduled annual maintenance
shutdowns. Canadian GAAP does not allow this accounting practice.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Operating activities: Net cash provided by operations for the year ended
December 31, 2005 was $578.5 million compared to net cash provided by operations
of $125.0 million for the year ended December 31, 2004. Excluding the impact of
the acquired operations, for the year ended December 31, 2005, accounts
receivable provided $18.9 million, inventories provided $113.1 million as a
result of reduced inventory levels as at December 31, 2005 in comparison to the
prior year and reduced scrap costs, and an increase in accounts payable and
other liabilities provided $1.4 million in 2005.
During 2005, the Company received cash distributions from its investment in
joint ventures (primarily Gallatin Steel) of $115.8 million in comparison with
$82.8 million during the prior year.
7
Investing activities: Net cash used in investing activities was $179.1 million
in the year ended December 31, 2005 compared to $380.6 million in the year ended
December 31, 2004. For the year ended December 31, 2005, capital expenditures
totalled $135.9 million and proceeds received from the sale of excess land was
$6.4 million. During 2004, Gerdau Ameristeel made the following acquisitions: in
March 2004, the Company acquired the operating assets of Potter Form & Tie Co.,
a rebar fabricator in the Midwest United States for $11.1 million in cash; in
November 2004, the Company acquired four North Star Steel mills and four
downstream facilities from Cargill for $320.8 million, of which $51.8 million
was paid during 2005; and in December 2004, the Company acquired the fixed
assets and working capital of Gate City's and RJ Rebar, Inc.'s rebar fabrication
facilities for $16.4 million.
Financing activities: During 2005, the Company initiated a quarterly dividend of
$0.02 per Common Share and also paid a special dividend of $0.14 per Common
Share in June 2005. Total dividend payments were $66.9 million. The Company used
$130 million to reduce its outstanding indebtedness in 2004, and no significant
debt reductions occurred during the current year due to limitations on the
remaining debt amortization schedules.
On April 16, 2004, the Company sold 26.8 million common shares to its majority
shareholder, Gerdau S.A., for total proceeds of $97.9 million. The proceeds were
used for general corporate purposes, including capital expenditures, working
capital and repayment of debt.
On October 15, 2004, the Company sold 70 million common shares for $4.70 (Cdn
$5.90) per share, including 35 million common shares to Gerdau S.A., and on
November 18, the over-allotment option was exercised for 8,762,000 common shares
of which Gerdau S.A. purchased 4,381,000. These transactions generated net
proceeds of approximately $362.4 million after deducting underwriters' fees and
estimated expenses. The proceeds were used primarily for the purchase of the
North Star Steel assets.
OUTSTANDING SHARES
As of December 31, 2005, the Company had outstanding 304,471,493 common shares
and Cdn $125.0 million of convertible debentures. The convertible debentures are
convertible to common shares of the Company at a conversion price of Cdn $26.25
per share. See "Credit Facilities and indebtedness - Convertible debentures."
On October 15, 2004, the common shares of the Company commenced trading on the
New York Stock Exchange under the symbol "GNA". The common shares will continue
to trade on the Toronto Stock Exchange, also under the symbol "GNA".
CREDIT FACILITIES AND INDEBTEDNESS
The principal sources of liquidity are cash flow generated from operations and
borrowings under the Senior Secured Credit Facility and the Company believes
these sources will be sufficient to meet its cash flow requirements. The
principal liquidity requirements are working capital, capital expenditures and
debt service for the foreseeable future.
The following is a summary of existing credit facilities and other long-tem
debt:
Senior Secured Credit Facility: On October 31, 2005, the Company completed an
amendment and restatement of the Senior Secured Credit Facility. The Senior
Secured Credit Facility provides commitments of up to $650.0 million and expires
in October 2010. The Company will be able to borrow under the Senior Secured
Credit Facility the lesser of (i) the committed amount, and (ii) the borrowing
base (which is based upon a portion of the inventory and accounts receivable
held by most of the Company's operating units less certain reserves), minus
outstanding loans, letter of credit obligations and other obligations owed under
the Senior Secured Credit Facility. Since the borrowing base under the Senior
Secured Credit Facility will be based on actual inventory and accounts
receivable levels, available borrowings under the facility will fluctuate. The
borrowings under the Senior Secured Credit Facility are secured by the Company's
inventory and accounts receivable.
Loans under the Senior Secured Credit Facility bear interest at a per annum rate
equal to one of several rate options (LIBOR, federal funds rate, bankers'
acceptance or prime rate) based on the facility chosen at the time of borrowing
plus an applicable margin determined by excess availability from time to time.
Borrowings under the Senior Secured Credit Facility may be made in U.S. dollars
or Canadian dollars, at the option of the Company. Our Senior Secured Credit
Facility contains restrictive covenants that limit our ability to engage in
specified types of transactions without the consent of the lenders. These
covenants may limit our ability to, among other things: incur additional debt,
issue redeemable stock and preferred stock, pay dividends on our common shares,
sell or otherwise dispose of certain assets and enter into mergers or
consolidations.
8
At December 31, 2005, there were no borrowings under the facility, and there was
$544.1 million available under the Senior Secured Credit Facility compared to
$27 thousand borrowed and $295.0 million available at December 31, 2004.
Senior Notes: On June 27, 2003, the Company issued $405.0 million of 10 3/8%
Senior Notes, of which $35.0 million were sold to an indirect wholly-owned
subsidiary of the Company's parent, Gerdau S.A. The notes mature on July 15,
2011. The notes were issued at 98% of face value. The notes are unsecured, are
effectively junior to secured debt to the extent of the value of the assets
securing such debt, rank equally with all existing and future unsecured
unsubordinated debt, and are senior to any future senior subordinated or
subordinated debt. Interest on the notes accrues at 10 3/8% per annum (10.75%
effective rate) and is payable semi-annually on July 15 and January 15. At any
time prior to July 15, 2006, the Company may redeem up to 35% of the original
principal amount of the notes with the proceeds of one or more equity offerings
of common shares at a redemption price of 110.75% of the principal amount of the
notes, together with accrued and unpaid interest, if any, to the date of
redemption. The indenture governing the notes permits the Company and its
restricted subsidiaries to incur additional indebtedness, including secured
indebtedness, subject to certain limitations. On January 23, 2004, the Company
completed an exchange of the Senior Notes. The exchanged notes have
substantially the same form and terms as the original notes issued on June 27,
2003. The exchanged notes were issued under a prospectus in Ontario and the
exchanged notes and subsidiary guarantees were registered under the U.S.
Securities Act of 1933, as amended, and are not subject to restrictions on
transfer.
AmeriSteel Bright Bar, Inc. Term Loan: At December 31, 2005, AmeriSteel Bright
Bar, Inc. had a $2.4 million term loan outstanding. The loan bears interest at a
fixed rate of 6% and matures in September 2011.
Industrial Revenue Bonds: The Company had $31.6 million of industrial revenue
bonds outstanding as of December 31, 2005. $23.8 million of the bonds were
issued by Gerdau Ameristeel US Inc., a wholly owned subsidiary of the Company,
in prior years to construct facilities in Jackson, Tennessee. The Company
assumed an industrial revenue bond in the amount of $3.6 million with the
acquisition of the Cartersville cold drawn facility in September 2002. The
Company assumed an additional industrial revenue bond in the amount of $4.2
million with the acquisition of the North Star locations in November 2004. The
interest rates on these bonds range from 50% to 75% of the prime rate. The
industrial revenue bonds mature in 2014, 2017 and 2018. These bonds are secured
by letters of credit issued under the Senior Secured Credit Facility.
Related party loans: In the first quarter of 2004, the Company obtained a $25
million, one year, 2.65% interest bearing loan from a Brazilian bank. The loan
was guaranteed by Gerdau S.A and was repaid.
Convertible debentures: The Company has unsecured, subordinated convertible
debentures in the principal amount of Cdn $125.0 million, which bear interest at
6.5% per annum, mature on April 30, 2007, and, at the holders' option, are
convertible into our common shares at a conversion price of Cdn $26.25 per
share. Under the terms of the trust indenture for the convertible debentures, no
adjustment to the conversion price is required if the Company issues common
shares in a customary offering. The debentures are redeemable, at the Company's
option, at par plus accrued interest, and the Company has the right to settle
the principal amount by the issuance of common shares based on their market
value at the time of redemption.
Capital leases: Gerdau Ameristeel had $0.8 million of capital leases as of
December 31, 2005.
CAPITAL EXPENDITURES
Gerdau Ameristeel spent $135.9 million on capital projects in the year ended
December 31, 2005, compared to $82.1 million in the same period in 2004. Major
capital investments in 2005 included improved warehouse facilities at the
Whitby, Ontario facility ($10.8 million), a new reheat furnace at the
Sayreville, New Jersey facility ($10.0 million), and the purchase of shredders
at the Jacksonville, Florida facility ($5.0 million) and the Jackson, Tennessee
facility ($6.1 million). Capital expenditures for 2006 are expected to be
approximately $200 to $230 million.
On February 10, 2006, the Company completed the acquisition of the outstanding
shares of capital stock of Fargo Iron and Metal Company, a scrap recycling
facility located in Fargo, North Dakota.
On March 10, 2006, the Company completed the acquisition of the assets of
Callaway Building Products Inc., a rebar fabricator and supplier of concrete
construction products located in Knoxville, Tennessee.
9
OFF- BALANCE SHEET ARRANGEMENTS
Other than non-cancelable operating lease commitments, the Company does not have
any off-balance sheet arrangements, financings or other relationships with
unconsolidated special purpose entities. The Company's operating lease
commitments are set out in the contractual obligation table below.
CONTRACTUAL OBLIGATIONS
The following table presents the Company's contractual obligations as of
December 31, 2005.
Less than 1 - 3 4 - 5 After 5
Contractual Obligations ($000's) Total one Year Years Years Years
- -------------------------------- --------- --------- ------- ------- -------
Long-term debt (1) 433,751 1,014 1,230 891 430,616
Convertible debentures 95,594 -- 95,594 -- --
Interest (2) 246,458 50,464 89,047 85,938 21,009
Operating leases (3) 81,666 13,934 20,354 14,252 33,126
Capital expenditures (4) 238,629 156,488 58,158 23,983 --
Unconditional purchase obligations (5) 69,875 69,875 -- -- --
Pension funding obligations (6) 25,407 25,407 -- -- --
--------- ------- ------- ------- -------
Total contractual obligations 1,191,380 317,182 264,383 125,064 484,751
--------- ------- ------- ------- -------
(1) Total amounts are included in the December 31, 2005 consolidated balance
sheet. See Note 7, Long-term Debt, to the consolidated financial
statements.
(2) Interest payments related to our short-term debt are not included in the
table as they do not represent a significant obligation as of December 31,
2005.
(3) Includes minimum lease payment obligations for equipment and real property
leases in effect as of December 31, 2005.
(4) Purchase obligations for capital expenditure projects in progress.
(5) A majority of these purchase obligations are for inventory and operating
supplies and expenses used in the ordinary course of business.
(6) Pension funding obligations are included only for 2006 as the amount of
funding obligations beyond the next year are not yet determinable.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The selected consolidated financial data below is presented in U.S. GAAP.
ANNUAL RESULTS
YEARS ENDED DECEMBER 31, 2003 2004 2005
- ------------------------ ---------- ---------- ----------
Net sales $1,811,171 $3,009,854 $3,897,143
Net (loss) income (26,694) 337,669 295,497
(Loss) earnings per common share, basic (0.14) 1.46 0.97
(Loss) earnings per common share, diluted (0.14) 1.45 0.97
Total assets 1,665,540 2,582,023 2,829,451
Total long-term debt 641,005 519,333 529,331
Cash dividends per common share - - .22
QUARTERLY RESULTS
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
---------- -------- ------------- ------------
2005
Net sales $1,002,538 $961,076 $999,286 $934,243
Cost of sales 857,014 805,960 825,700 765,191
Net income 78,572 74,325 62,208 80,392
Earnings per common share, basic and diluted 0.26 0.24 0.20 0.26
2004
Net sales $ 618,953 $733,774 $807,883 $849,244
Cost of sales 541,257 556,288 638,441 714,959
Net income 21,505 105,466 144,286 66,412
Earnings per common share, basic and diluted 0.11 0.48 0.64 0.23
FOURTH QUARTER RESULTS
10
The three months ended December 31, 2005 generated net income of $80.4 million
in comparison to $66.4 million during the same period of the prior year. Total
shipments of 1.5 million tons represented an increase of 14.1% from the same
period of time of the prior year. The results for the three months ended
December 31, 2004 include the results of the North Star acquisition only
subsequent to the November 1, 2004 acquisition date. Consistent with purchase
price accounting requirements, the North Star location's opening finished steel
inventories were recorded at market value and therefore did not contribute any
significant margin in the three months ended December 31, 2004. For the three
months ended December 31, 2005, selling prices were approximately $10 per ton
less than the same period of the prior year, but scrap costs were approximately
$30 per ton less, resulting in improved metal spreads of approximately $20 per
ton.
CRITICAL ACCOUNTING POLICIES
Gerdau Ameristeel's Consolidated Financial Statements are prepared in accordance
with U.S. generally accepted accounting principles that often require management
to make judgments, estimates and assumptions regarding uncertainties that affect
the reported amounts presented and disclosed in the financial statements.
Management reviews these estimates and assumptions based on historical
experience, changes in business conditions and other relevant factors as it
believes to be reasonable under the circumstances.
Critical accounting policies are those that may have a material impact on the
consolidated financial statements and also require management to exercise
significant judgment due to a high degree of uncertainty at the time the
estimates are made. Senior management has reviewed the development and selection
of the Company's accounting policies, related account estimates and the
disclosures set forth below with the Audit Committee of the Board of Directors.
REVENUE RECOGNITION
The Company's products are usually sold on credit terms. The credit terms, which
are established in accordance with local and industry practices, typically
require payment within 30 days of delivery and may allow discounts for early
payment. Revenue is recognized at the time products are shipped to customers.
ALLOWANCES FOR DOUBTFUL ACCOUNTS
The allowance for doubtful accounts is evaluated on a regular basis and adjusted
based upon management's best estimate of probable losses inherent in accounts
receivable. In estimating probable losses, the Company reviews accounts that are
past due, non-performing or in bankruptcy. The Company also reviews accounts
that may be at risk using information available about the customer, such as
financial statements and published credit ratings. General information regarding
industry trends and the general economic environment is also used. The Company
determines an estimated loss for specific accounts and estimates an additional
amount for the remainder of receivables based on historical trends and other
factors. Adverse economic conditions or other factors that might cause
deterioration of the financial health of customers could change the timing and
level of payments received and necessitate a change in estimated losses.
ACCOUNTING FOR GOODWILL
Goodwill represents the cost of investments in operating companies in excess of
the fair value of the net identifiable assets acquired. Goodwill is reviewed for
impairment annually, or, when events or circumstances dictate, more frequently.
The Company's goodwill impairment reviews consist of a two-step process of first
determining the fair value of the reporting unit and comparing it to the
carrying value of the net assets allocated to the reporting unit. Fair values of
the reporting units were determined based on our estimates of comparable market
values. If this fair value exceeds the carrying value, no further analysis or
goodwill write-down is required. If the fair value of the reporting unit is less
than the carrying value of the net assets, the implied fair value of the
reporting unit is allocated to all the underlying assets and liabilities,
including both recognized and unrecognized tangible and intangible assets, based
on their fair value. If necessary, goodwill is then written-down to its implied
fair value.
LONG-LIVED ASSETS
The Company is required to assess potential impairments of long-lived assets in
accordance with SFAS No. 144, Accounting for Impairment of Long-lived Assets, if
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. An impaired asset is written down to its estimated fair
value based upon the most recent information available. Estimated fair market
value is generally measured by discounting estimated future cash flows developed
by management. Long-lived assets that are held for disposal are recorded at the
lower of the carrying value or the fair market value less the estimated cost to
sell. The Company's long-lived assets primarily include property, plant and
equipment used in operations and property held for sale.
11
ACCOUNTING FOR INCOME TAXES
The Company accounts for income taxes in accordance with FASB Statement No. 109,
Accounting for Income Taxes. Significant judgment is required in determining the
provision for income taxes and related accruals, deferred tax assets and
liabilities. In the ordinary course of business, there are transactions and
calculations where the ultimate tax outcome is uncertain. Additionally, the
Company's tax returns are subject to audit by various domestic and foreign tax
authorities. Although the Company believes its estimates are reasonable, no
assurance can be given that the final tax outcome will not be materially
different from that which is reflected in the income tax provisions and
accruals.
The Company has recorded deferred tax assets related to domestic and foreign tax
loss carry-forwards. Limitations on the utilization of these tax assets may
apply and the Company may in the future provide a valuation allowance to reduce
certain of these deferred tax assets if it concludes that it is more likely than
not that the deferred tax assets will not be fully realized.
ENVIRONMENTAL REMEDIATION
The Company is subject to environmental laws and regulations established by
federal, state and local authorities and makes provisions for the estimated cost
of compliance based on currently available facts, present laws and regulations,
and current technology. The liability estimates are reviewed periodically and,
as investigations and remediation proceed, the Company makes necessary
adjustments to the estimates. The liability estimates are not reduced by
possible recoveries from insurance or other third parties.
POST RETIREMENT BENEFITS
Primary actuarial assumptions are determined as follows:
- - The expected long-term rate of return on plan assets is based on the
Company's estimate of long-term returns for equities and fixed income
securities weighted by the allocation of assets in the plans. The rate is
impacted by changes in general market conditions, but because it represents
a long-term rate, it is not significantly impacted by short-term market
swings. Changes in the allocation of plan assets would also impact this
rate.
- - The assumed discount rate is used to discount future benefit obligations
back to today's dollars. The U.S. discount rate is as of the measurement
date, December 31. A similar process is used to determine the assumed
discount rate for the non-U.S. plans. This rate is sensitive to changes in
interest rates. A decrease in the discount rate would increase the
Company's obligation and expense.
- - The expected rate of compensation increase is used to develop benefit
obligations using projected pay at retirement. This rate represents average
long-term salary increases and is influenced by the Company's long-term
compensation policies. An increase in the rate would increase the Company's
obligation and expense.
- - The assumed health care trend rate represents the rate at which health care
costs are assumed to increase and is based on historical and expected
experience. Changes in projections of future health care costs due to
general economic conditions and those specific to health care will impact
this trend rate. An increase in the trend rate would increase the Company's
obligation and expense.
RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the Financial Accounting Standards Board (FASB) issued a
revised Statement of Financial Accounting Standard (SFAS) No. 123(R), "Share
Based Payment." The revised SFAS No. 123 requires that the fair value of stock
options be recorded in the results of operations for fiscal years beginning
after June 15, 2005. The pro forma disclosures permitted under SFAS 123 will no
longer be an alternative to financial statement recognition. The Company expects
to adopt this revised standard as of January 1, 2006, and currently intends to
use the "modified prospective" method and choose the Black-Scholes model for
estimating the fair value of equity compensation. The Company is currently
assessing the implications of this revised standard and the effect it will have
on its results of operations in the first quarter of 2006 and thereafter.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs". This
statement clarifies the accounting for the abnormal amount of idle facilities
expense, freight, handling costs and wasted material. This statement requires
that those items be recognized as current-period expenses. In addition, the
statement requires that allocation of fixed overhead to the cost of conversion
be based on the normal capacity of the production facilities. This statement is
effective for fiscal years beginning after June 15, 2005. The Company's current
inventory accounting policy generally follows SFAS 151; therefore, the adoption
of SFAS 151 is not expected to have a significant impact on the consolidated
results of operations.
12
RISKS AND UNCERTAINTIES
EXCESS GLOBAL CAPACITY IN THE STEEL INDUSTRY AND THE AVAILABILITY OF COMPETITIVE
SUBSTITUTE MATERIAL HAVE RESULTED IN INTENSE COMPETITION, WHICH MAY EXERT
DOWNWARD PRESSURE ON THE PRICES OF THE COMPANY'S PRODUCTS.
The Company competes with numerous foreign and domestic steel producers, largely
minimill producers that produce steel by melting scrap in electric arc furnaces,
but also integrated producers that produce steel from coke and iron ore.
Competition is based on price, quality and the ability to meet customers'
product specifications and delivery schedules. In the past, global overcapacity
in steel manufacturing has had a negative impact on steel pricing and could
adversely affect sales and profit margins in the future. The construction of new
mills, expansion and improved production efficiencies of existing mills,
restarting of currently idled facilities and the expansion of foreign steel
production capacity all contribute to an increase in global steel production
capacity. Increases in global steel production capacity combined with high
levels of steel imports into North America could exert downward pressure on the
prices of the Company's products, which would adversely affect sales and profit
margins.
THE CYCLICAL NATURE OF THE STEEL INDUSTRY AND THE INDUSTRIES WE SERVE AND
ECONOMIC CONDITIONS IN NORTH AMERICA AND WORLDWIDE MAY CAUSE FLUCTUATIONS IN THE
COMPANY'S REVENUE AND PROFITABILITY.
The North American steel industry is cyclical in nature and is affected
significantly by prevailing economic conditions in the major world economies. In
particular, the North American steel industry is influenced by a combination of
factors, including periods of economic growth or recession, strength or weakness
of the U.S. or Canadian dollar relative to other currencies, worldwide
production capacity and levels of steel imports and applicable tariffs. Future
economic downturns, stagnant economic conditions or currency fluctuations could
decrease the demand for the Company's products or increase the amount of imports
of steel into its markets, any of which could cause fluctuations in the
Company's revenue and profitability.
Market conditions for steel products in the U.S. and Canadian market have
fluctuated over recent years. The Company is particularly sensitive to trends in
cyclical industries, such as the North American construction, transportation,
appliance, machinery and equipment industries, which are significant markets for
the Company's products. A significant portion of the Company's products is
destined for the construction industry and the steel service center industry.
Many of the Company's markets are cyclical in nature and affect the demand for
its finished products. A disruption or downturn in any of these industries could
negatively impart the Company's financial condition, production, sales, margins
and earnings. The Company is also sensitive to trends and events that may impact
these industries, including strikes and labor unrest.
IMPORTS OF STEEL INTO NORTH AMERICA HAVE ADVERSELY AFFECTED AND MAY AGAIN
ADVERSELY AFFECT STEEL PRICES, AND DESPITE TRADE REGULATION EFFORTS, THE
INDUSTRY MAY NOT BE SUCCESSFUL IN REDUCING STEEL IMPORTS.
Imports of steel into North America have exerted in recent years, and may again
in the future exert, downward pressure on steel prices, which adversely affects
the Company's sales and profit margins. Competition from foreign steel producers
is strong and may increase due to increases in foreign steel production
capacity, the relative strengthening of the U.S. dollar compared to foreign
currencies and the reduction of domestic steel demand in the economies of the
foreign producers. These factors encourage higher levels of steel exports to
North America at lower prices. In the past, protective actions taken by the U.S.
government to regulate the steel trade, including import quotas and tariffs,
have been temporary in nature and have been found by the World Trade
Organization to violate global trade rules. Protective actions may not be taken
in the future and, despite trade regulation efforts, unfairly priced imports
could enter the North American markets in the future, resulting in price
depression that would adversely affect our ability to compete and maintain our
sales levels and profit margins.
STEEL OPERATIONS REQUIRE SUBSTANTIAL CAPITAL INVESTMENT AND MAINTENANCE
EXPENDITURES THAT MAY ENCOURAGE PRODUCERS TO MAINTAIN PRODUCTION IN PERIODS OF
REDUCED DEMAND, WHICH MAY IN TURN EXERT DOWNWARD PRESSURE ON PRICES FOR THE
COMPANY'S PRODUCTS.
Steel manufacturing is very capital intensive, requiring the Company and other
steel producers to maintain a large fixed-cost base requiring substantial
maintenance expenditures. The high levels of fixed costs of operating a minimill
encourage mill operators to maintain high levels of output, even during periods
of reduced demand, which may exert additional downward pressure on selling
prices and profit margins in those periods.
UNEXPECTED EQUIPMENT FAILURES MAY LEAD TO PRODUCTION CURTAILMENTS OR SHUTDOWNS.
Interruptions in the Company's production capabilities would increase production
costs and reduce sales and earnings for the affected period. In addition to
periodic equipment failures, the Company's facilities are also subject to the
risk of catastrophic loss due to unanticipated events such as fires, explosions
or violent weather conditions.
13
Unexpected interruptions in production capabilities would adversely affect
productivity and results of operations. The Company's insurance may not cover
its losses.
THE COMPANY'S PROFITABILITY CAN BE ADVERSELY AFFECTED BY INCREASES IN RAW
MATERIAL AND ENERGY COSTS.
The Company's operating results are significantly affected by the cost of steel
scrap and scrap substitutes that are the primary raw material for the Company's
minimill production facilities. Prices for steel scrap are subject to market
forces largely beyond the Company's control, including demand by U.S. and
international steel producers, freight costs and speculation. The increasing
rate of worldwide steel scrap consumption, especially in China, has placed
significant upward pressure on the price of steel scrap. A combination of a
weaker U.S. dollar, strong global demand for steel scrap and lower production of
domestic steel scrap due to a weaker domestic manufacturing economy have reduced
the domestic steel scrap supply resulting in steel scrap prices that are
currently at a ten-year high. Metal spread, the difference between mill selling
prices and scrap raw material cost, is also currently well above previous
ten-year highs. The Company does not know how long these levels can be
maintained and if scrap prices increase significantly without a commensurate
increase in finished steel selling prices, profit margins could be materially
adversely affected. The Company may not be able to pass on higher scrap costs to
its customers by increasing mill selling prices and prices of downstream
products. Further increases in the prices paid for scrap and other inputs could
also impair our ability to compete with integrated mills and cause production to
decline and adversely affect sales and profit margins.
Most of the Company's minimill operations have long-term electricity supply
contracts with either major utilities or energy suppliers. The electric supply
contracts typically have two components: a firm portion and an interruptible
portion. The firm portion supplies a base load for essential plant requirements.
The interruptible portion supplies the electric arc furnace power demand, which
represents the majority of the total electric demand, and, for the most part, is
based on spot market prices of electricity. Therefore, the Company has
significant exposure to the variances of the electricity market that could
materially adversely affect operating margins and results of operations.
Generally, the Company does not have long-term contracts for natural gas and
oxygen and therefore, is subject to market supply variables and pricing that
could materially adversely affect operating margins and results of operations.
THE COMPANY MAY NOT BE ABLE TO SUCCESSFULLY RENEGOTIATE COLLECTIVE BARGAINING
AGREEMENTS WHEN THEY EXPIRE AND FINANCIAL RESULTS MAY BE ADVERSELY AFFECTED BY
LABOR DISRUPTIONS.
Approximately 35% of the Company's employees are represented by the United
Steelworkers of America ("USWA") and other unions under different collective
bargaining agreements. The agreements have different expiration dates. During
2005 we reached new agreements with the employees at our Memphis wire, Cambridge
minimill and Wilton recycling operations. The collective bargaining agreements
with employees at the Beaumont, St. Paul and Wilton facilities expired in 2005
and, although negotiations are ongoing, new agreements have not yet been
reached. One collective bargaining agreement, with the employees at our Perth
Amboy Mill, will expire in July 2006.
On May 26, 2005, the Company ceased operations at its Beaumont facility to
encourage the USWA to act on the Company's "last, best and final" agreement
offer that was presented to the union committee in May 2005. On December 12,
2005, the Beaumont facility began to resume normal operations although
negotiations are ongoing and a final contract has not yet been concluded with
the Beaumont union representatives.
The Beaumont and Wilton facilities are currently operating without a collective
bargaining agreement. The collective bargaining agreement at the St. Paul
facility has been temporarily extended. The Company cannot assure you that these
collective bargaining agreements will be successfully renegotiated without the
occurrence of a work stoppage.
The Company may be unable to successfully negotiate new collective bargaining
agreements without any labor disruption. A labor disruption could, depending on
the operations affected and the length of the disruption, have a material
adverse effect on the Company's operations. Labor organizing activities could
occur at one or more of the Company's other facilities or at other companies
upon which the Company is dependent for raw materials, transportation or other
services. Such activities could result in a significant loss of production and
revenue and have a material adverse effect on the Company's financial results
and results of operations.
ENVIRONMENTAL LAWS AND REGULATIONS AFFECT THE COMPANY AND COMPLIANCE MAY BE
COSTLY AND REDUCE PROFITABILITY.
As the Company is involved in steel production, it produces and uses certain
substances that may pose environmental hazards. The principal hazardous waste
generated by steel producing operations is electric arc
14
furnace (EAF) dust, a residual from the production of steel in electric arc
furnaces. EAF dust is collected, handled and disposed of in a manner the Company
believes meets all current federal, state and provincial environmental
regulations, and the costs of collection and disposal of EAF dust are being
expensed as operating costs when incurred. Environmental legislation and
regulations at the federal, state and provincial levels over EAF dust are
subject to change which may change the cost of compliance and have a material
adverse effect on the Company's financial results and results of operations.
In April 2001, the Company was notified by the Environmental Protection Agency
(EPA), of an investigation that identifies the Company as a potential
responsible party (PRP) in a Superfund Site in Pelham, Georgia. The Pelham site
was a fertilizer manufacturer in operation from 1910 through 1992, lastly
operated by Stoller Chemical Company, a now bankrupt corporation. The EPA has
filed suit under the Comprehensive Environmental Response, Compensation, and
Liability Act (CERCA) with the Company named as a defendant seeking damages of
$16.6 million. CERCA imposes joint and several strict liability in connection
with environmental contamination. The Company is included in this action because
the Company allegedly shipped EAF dust to this property. The EPA originally
offered a settlement to the named PRPs under which the Company's allocation was
approximately $1.8 million. One of the named PRPs is in bankruptcy proceedings.
The EPA has reconsidered the appropriate allocation. That reconsideration caused
the EPA's view of the Company's allocation to substantially increase. The
Company objects to its inclusion as a PRP on several bases, has asserted
defenses, including statute of limitations defenses, and is pursuing legal
alternatives, including adding a third party which the Company believes was
incorrectly excluded from the original lawsuit. In 2004, the court denied a
motion asserting some, but not all, of the Company's defenses. Also in 2004, the
EPA and the Company had further discussions on a settlement and, based on these
discussions, the Company believes that the EPA has a settlement range of $8.0 to
$10.0 million. The Company is not in agreement with this assessment. The Company
previously offered to settle the matter for $1.6 million. EPA is in the process
of finalizing a settlement with two of the five defendants for $1.7 million. The
EPA and the Company have filed cross-motions for summary judgment on the issue
of liability. Although the Company has accrued $1.6 million with respect to this
matter, the ultimate outcome of this matter cannot be determined at this time.
BY SEEKING PROTECTION UNDER BANKRUPTCY LAWS, SOME OF THE COMPANY'S COMPETITORS
HAVE BEEN RELIEVED OF DEBT BURDENS AND LEGACY COSTS WHICH MAY ENABLE THEM TO
OPERATE MORE COMPETITIVELY.
Many U.S. and Canadian steel companies have sought bankruptcy protection over
the last several years. Several of these companies have continued to operate,
while reducing prices to maintain volumes and cash flow, and have obtained
concessions from their employees, suppliers and lenders. Upon emerging from
bankruptcy, these companies, or new entities that purchased their facilities
through the bankruptcy process, have been relieved of many obligations including
debt, environmental, employee and retiree benefits and other obligations,
commonly referred to as legacy costs. As a result, they may be able to operate
more competitively than the Company and other producers that have remained
solvent.
CURRENCY FLUCTUATIONS COULD ADVERSELY AFFECT THE COMPANY'S FINANCIAL RESULTS OR
COMPETITIVE POSITION.
The Company reports its results in U.S. dollars. As a result, fluctuations in
the exchange rate between the U.S and Canadian dollar will affect reported
results. The percentage of the Company's costs that are denominated in Canadian
dollars is greater than the percentage of net sales, which means results are
negatively affected when the Canadian dollar strengthens compared to the U.S
dollar. In addition, the Company's Canadian operations compete with U.S.
producers and are less competitive as the Canadian dollar strengthens relative
to the U.S. dollar. Similarly, the U.S. and Canadian operations are more
susceptible to the threat of imports during times when the U.S and Canadian
dollars strengthen relative to the currencies of exporting countries. To the
extent the Company has borrowings that are denominated in Canadian dollars,
results of operations are also negatively affected by a strengthening in the
Canadian dollar compared to the U.S. dollar.
THE COMPANY'S PENSION PLANS ARE UNDERFUNDED.
The Company has several pension plans that are currently underfunded, and
adverse market conditions could require the Company to make substantial cash
payments to fund the plans which would reduce cash available for other business
needs.
THE COMPANY USES ESTIMATES.
The Company prepares financial statements in conformity with generally accepted
accounting principles which require management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, amounts reported as
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses in the accounting period. Actual
results could differ from the estimates made by
15
management. Significant differences between actual results and estimates could
have a material adverse effect on the Company's financial results and results of
operations.
THE COMPANY DEPENDS ON SENIOR MANAGEMENT AND MAY BE UNABLE TO REPLACE KEY
EXECUTIVES IF THEY LEAVE.
The Company's operations and prospects depend in large part on the performance
of its senior management team. The Company does not have employment contracts
with any of its executive officers other than Mario Longhi, CEO and President.
The Company cannot assure you that these individuals will remain with the
Company as employees. In addition, the Company cannot assure you that it would
be able to find qualified replacements for any of these individuals if their
services were no longer available. The loss of the services of one or more
members of the senior management team or the difficulty in attracting, retaining
and maintaining additional senior management personnel could have a material
adverse effect on the Company's business, financial condition and results of
operations.
THE COMPANY RELIES ON ITS JOINT VENTURES FOR A PORTION OF ITS INCOME AND CASH
FLOW, BUT DOES NOT CONTROL THEM OR THEIR DISTRIBUTIONS.
The Company has three 50%-owned joint ventures that contribute to its financial
results but that it does not control. These joint ventures contributed $91.2
million to net income for the year ended December 31, 2005, and $141.5 million
to net income for the year ended December 31, 2004. The Company received $115.8
million of cash distributions from its joint ventures in the year ended December
31, 2005, and $82.8 million of cash distributions for the year ended December
31, 2004. However, the Company does not control the joint ventures and cannot,
without agreement from its partner, cause any joint venture to distribute its
income from operations to the Company. In addition, Gallatin's existing
financing agreement prohibits it from distributing cash to the Company unless
specified financial covenants are satisfied. Additionally, since the Company
does not control its joint ventures, they may not be operated in a manner that
the Company believes would be in the joint ventures', or the Company's, best
interests.
16
REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Gerdau Ameristeel Corporation
In our opinion, based on our audits and the report of other auditors, the
accompanying consolidated balance sheets and the related consolidated statements
of earnings, of shareholders' equity and comprehensive income and of cash flows
present fairly, in all material respects, the financial position of Gerdau
Ameristeel Corporation and its subsidiaries at December 31, 2005 and 2004, and
the results of their operations and their cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Gallatin Steel Company, a 50% owned joint venture, which statements comprise
assets of 6 percent of the related consolidated totals as of December 31, 2005
and 2004 and earnings from joint ventures which comprises 17 percent and 29
percent of the related consolidated income before income taxes for the years
ended December 31, 2005 and 2004, respectively. Those statements were audited by
other auditors whose report thereon has been furnished to us, and our opinion
expressed herein, insofar as it relates to the amounts included for Gallatin
Steel Company, is based solely on the report of the other auditors. We conducted
our audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Tampa, Florida
March 8, 2006
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(US$ in thousands)
DECEMBER 31, DECEMBER 31,
2005 2004
------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 414,259 $ 88,132
Restricted cash 473 465
Accounts receivable, net of allowance of $4,000 in 2005 and 2004 344,758 360,379
Inventories (note 4) 745,165 853,155
Deferred tax assets (note 10) 23,212 8,754
Other current assets 23,236 31,698
---------- ----------
TOTAL CURRENT ASSETS 1,551,103 1,342,583
INVESTMENTS (note 6) 153,439 177,795
PROPERTY, PLANT AND EQUIPMENT (note 5) 955,601 919,862
GOODWILL 122,716 122,716
DEFERRED FINANCING COSTS 14,451 13,616
DEFERRED TAX ASSETS (note 10) 23,424 8,234
OTHER ASSETS 8,717 7,725
---------- ----------
TOTAL ASSETS $2,829,451 $2,592,531
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 285,019 $ 295,001
Accrued salaries, wages and employee benefits 66,744 59,318
Accrued interest 21,003 21,071
Other current liabilities 61,271 54,715
Acquisition liability -- 51,790
Current portion of long-term borrowings (note 7) 1,014 4,644
---------- ----------
TOTAL CURRENT LIABILITIES 435,051 486,539
LONG-TERM BORROWINGS, LESS CURRENT PORTION (note 7) 432,737 432,823
CONVERTIBLE DEBENTURES (note 9) 96,594 86,510
ACCRUED BENEFIT OBLIGATIONS (note 11) 147,167 114,792
OTHER LIABILITIES 65,246 68,325
DEFERRED TAX LIABILITIES (note 10) 68,637 38,778
---------- ----------
TOTAL LIABILITIES 1,245,432 1,227,767
---------- ----------
SHAREHOLDERS' EQUITY
Capital stock (note 13) 1,010,341 1,008,511
Retained earnings 540,415 311,853
Accumulated other comprehensive income 33,263 44,400
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 1,584,019 1,364,764
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,829,451 $2,592,531
========== ==========
See accompanying notes to consolidated financial statements.
1
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(US$ in thousands, except earnings per share data)
YEAR ENDED
---------------------------
DECEMBER 31, DECEMBER 31,
2005 2004
------------ ------------
NET SALES $3,897,143 $3,009,854
OPERATING EXPENSES
Cost of sales (exclusive of depreciation) 3,253,865 2,450,945
Selling and administrative 125,558 109,384
Depreciation 103,035 79,311
Other operating expense (income) 14,180 (3,062)
---------- ----------
3,496,638 2,636,578
---------- ----------
INCOME FROM OPERATIONS 400,505 373,276
EARNINGS FROM JOINT VENTURES 91,201 141,474
---------- ----------
INCOME BEFORE OTHER EXPENSES AND INCOME TAXES 491,706 514,750
OTHER EXPENSES
Interest, net 50,420 56,330
Foreign exchange (gain) loss (1,554) 8,123
Amortization of deferred financing costs 2,656 2,551
---------- ----------
51,522 67,004
---------- ----------
INCOME BEFORE INCOME TAXES 440,184 447,746
INCOME TAX EXPENSE (note 10) 144,687 110,077
---------- ----------
$ 295,497 $ 337,669
NET INCOME
========== ==========
EARNINGS PER COMMON SHARE - BASIC $ 0.97 $ 1.46
EARNINGS PER COMMON SHARE - DILUTED $ 0.97 $ 1.45
See accompanying notes to consolidated financial statements.
2
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(US$ in thousands)
ACCUMULATED OTHER
NUMBER OF INVESTED RETAINED EARNINGS COMPREHENSIVE
SHARES CAPITAL (ACCUMULATED DEFICIT) INCOME TOTAL
----------- ---------- --------------------- ----------------- ----------
BALANCES AT DECEMBER 31, 2003 198,090,861 $ 547,601 $(25,816) $ 11,822 $ 533,607
----------
Net income 337,669 337,669
Other comprehensive income:
Foreign exchange 36,400 36,400
Minimum pension liability,
net of tax of $2,100 (3,822) (3,822)
----------
Comprehensive income 370,247
----------
Stock issuance 105,562,000 460,203 460,203
Employee stock options 375,261 707 707
----------- ---------- -------- -------- ----------
BALANCES AT DECEMBER 31, 2004 304,028,122 1,008,511 311,853 44,400 1,364,764
----------
Net income 295,497 295,497
Other comprehensive income:
Foreign exchange 8,626 8,626
Minimum pension liability,
net of tax of $8,900 (19,763) (19,763)
----------
Comprehensive income 284,360
Dividends (66,935) (66,935)
Employee stock options 443,371 1,830 1,830
----------- ---------- -------- -------- ----------
BALANCES AT DECEMBER 31, 2005 304,471,493 $1,010,341 $540,415 $ 33,263 $1,584,019
=========== ========== ======== ======== ==========
See accompanying notes to consolidated financial statements.
3
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US$ in thousands)
DECEMBER 31, DECEMBER 31,
2005 2004
------------ ------------
OPERATING ACTIVITIES
Net income $ 295,497 $ 337,669
Adjustment to reconcile net income to net cash provided by operating activities:
Depreciation 103,035 79,311
Amortization 2,656 2,551
Deferred income taxes 17,256 7,463
Loss on disposition of property, plant and equipment 3,328 --
Income from joint ventures (91,201) (141,474)
Distributions from joint ventures 115,828 82,803
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 18,898 (13,355)
Inventories 113,056 (278,679)
Other assets (1,284) (9,531)
Liabilities 1,387 58,222
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 578,456 124,980
INVESTING ACTIVITIES
Additions to property, plant and equipment (135,864) (82,149)
Proceeds received from the disposition of property, plant and equipment 6,444 --
Acquisitions (49,654) (298,422)
Sales of short term investments 140,950 60,051
Purchases of short term investments (140,950) (60,051)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (179,074) (380,571)
FINANCING ACTIVITIES
Proceeds from issuance of new debt -- 25,000
Payments on term loans (4,392) (25,664)
Senior Secured Credit Facility borrowings -- 82,788
Senior Secured Credit Facility payments -- (212,754)
Additions to deferred financing costs (3,491) --
Dividends (66,935) --
Changes in restricted cash (8) (465)
Proceeds from issuance of employee stock option purchases 1,830 707
Proceeds from the issuance of common stock -- 460,203
--------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (72,996) 329,815
--------- ---------
Effect of exchange rate changes on cash and cash equivalents (259) 3,958
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 326,127 78,182
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 88,132 9,950
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 414,259 $ 88,132
========= =========
See accompanying notes to consolidated financial statements.
4
GERDAU AMERISTEEL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(US$ IN THOUSANDS)
NOTE 1 -- BASIS OF PRESENTATION
The Company operates steel minimills, producing primarily steel bars and special
sections for commercial and industrial building construction, steel service
centers and original equipment manufacturers. Its principal market area is the
eastern United States and Canada. Principal suppliers to the Company include
scrap metal producers, electric utilities, natural gas suppliers, and rail and
truck carriers.
As of December 31, 2005, Gerdau S.A. owned approximately 66.8% of common shares
outstanding.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP) in the United States. All dollar
amounts are reported in United States dollars unless otherwise indicated.
CONSOLIDATION: The consolidated financial statements include the accounts of the
Company, its subsidiaries and joint ventures. The results of companies acquired
during the year are included in the consolidated financial statements from the
effective date of acquisition. All significant intercompany transactions and
accounts have been eliminated in consolidation.
JOINT VENTURES AND OTHER INVESTMENTS: The Company's investments in Gallatin
Steel Company, Bradley Steel Processors and MRM Guide Rail are 50% joint
ventures, and are recorded under the equity method. Other investments where the
Company does not exercise significant influence are accounted for by the cost
method. The Company evaluates the carrying value of the investments to determine
if there has been an impairment in value considered other than temporary, which
is assessed by reviewing cash flows and operating income and takes into
consideration trading values on recognized stock exchanges. If impairment is
considered other than temporary, a provision is recorded.
REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS: The Company recognizes
revenues from sales and the allowance for estimated costs associated with
returns from these sales when the product is shipped and title transferred to
the buyer. Provisions are made for estimated product returns and customer claims
based on estimates and actual historical experience. If the historical data used
in the estimates does not reflect future returns and claims trends, additional
provisions may be necessary. An allowance for doubtful accounts is maintained
for estimated losses resulting from the inability of customers to make required
payments. Freight costs are classified as part of cost of sales.
CASH AND CASH EQUIVALENTS: The Company considers all cash on deposit and term
deposits with original maturities of three months or less, to be cash
equivalents. Cash classified as restricted is restricted from use as the result
of bonds pledged to environmental regulatory bodies.
SHORT TERM INVESTMENTS: From time to time, the Company invests excess cash in
short-term investments that are comprised of investment grade variable rate debt
obligations, which are asset-backed and categorized as available-for-sale.
Accordingly, the Company's investments in these securities are recorded at cost,
which approximates fair value due to their variable interest rates, which
typically reset every 28 days. Despite the long-term nature of their stated
contractual maturities, the Company has the ability to quickly liquidate these
securities. All income generated from these investments was recorded as interest
income. There was no investment in these securities at December 31, 2005 or
2004.
INVENTORIES: Billets and finished goods are valued at the lower of cost
(calculated on an average cost basis) or net realizable value. Scrap,
consumables and operating supplies inventories are valued at the lower of cost
(calculated on an average cost basis) or replacement value. Consumables include
mill rolls, which are recorded at cost and amortized based on usage.
PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment are recorded at
cost. Major renewals and betterments are capitalized and depreciated over their
estimated useful lives. Maintenance and repair expenses are charged against
operating expenses as incurred; however, as is typical in the industry, certain
major maintenance requires occasional shutdown and production curtailment. The
Company accrues for planned periodic major maintenance activities and the
estimated cost of these shutdowns. The Company has accrued $8.4 million and $2.0
million as of December 31, 2005 and 2004, respectively. Interest incurred in
connection with significant capital projects is capitalized. Maintenance and
repairs are charged against operations as incurred. Upon retirement or other
disposition of property, plant and equipment, the cost and related allowances
for depreciation are removed from the accounts and any resulting gain or loss is
recorded in the statement of operations. Property, plant and equipment held for
sale are carried at the lower of cost or net realizable value.
For financial reporting purposes, the Company provides for depreciation of
property, plant and equipment using the straight-line method over the estimated
useful lives of 10 to 30 years for buildings and improvements and 4 to 15 years
for other equipment.
GOODWILL: Goodwill represents the cost of investments in operating companies in
excess of the fair value of the net identifiable assets acquired. Goodwill is
reviewed for impairment annually, or, when events or circumstances dictate, more
frequently. The Company's goodwill impairment reviews consist of a two-step
process of first determining the fair value of the reporting unit and comparing
it to the carrying value of the net assets allocated to the reporting unit. Fair
values of the reporting units were determined based on our estimates of
comparable market values. If this fair value exceeds the carrying value, no
further analysis or goodwill write-down is required. If the fair value of the
reporting unit is less than the carrying value of the net assets, the implied
fair value of the reporting unit is allocated to all the underlying assets and
liabilities, including both recognized and unrecognized tangible and intangible
assets, based on their fair value. If necessary, goodwill would then be
written-down to its implied fair value.
DEFERRED FINANCING COSTS: Deferred financing costs incurred in relation to
revolving and long term debt agreements, are reflected net of accumulated
amortization and are amortized over the term of the respective debt instruments,
which range from 5 to 22 years from the debt inception date. Deferred financing
costs are amortized using the effective interest method.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amount of the Company's
floating rate debt instruments approximates fair value because the interest
rates adjust periodically to the current market rates. The fair value of the
Company's fixed rate notes, the Senior Notes, was $449.6 million and $474.9
million as of December 31, 2005 and 2004 respectively. The fair value of the
Company's Convertible Debentures was Cdn $127.2 million and Cdn $126.9 million
as of December 31, 2005 and 2004, respectively. Fair values were estimated based
on quoted market prices from the trading desk of a nationally recognized
investment bank.
DEFERRED INCOME TAXES: The liability method of accounting for income taxes is
used whereby deferred income taxes arise from temporary differences between the
book value of assets and liabilities and their respective tax value. Deferred
income tax assets and liabilities are measured using substantially enacted tax
rates expected to apply to taxable income in the years in which those
5
temporary differences are expected to be recovered or settled. The effect on
deferred income tax assets and liabilities of a change in tax rates is
recognized in operations in the period that includes the substantive enactment
date. A valuation allowance is recorded to the extent the recoverability of
deferred income tax assets is considered more likely than not.
PENSIONS AND POST RETIREMENT BENEFITS: The Company accrues its obligations under
employee benefit plans and the related costs, net of plan assets, under the
following policies:
- - The cost of pensions and other retirement benefits earned by employees is
actuarially determined using the projected benefit method prorated on
service and management's best estimate of expected plan investment
performance for funded plans, salary escalation, retirement ages of
employees and expected health care costs. The discount rate used for
determining the liability for future benefits is the current interest rate
at the balance sheet date on high quality fixed income investments with
maturities that match the expected maturity of the obligations.
- - Pension assets are valued at fair market value.
- - Past service costs from plan amendments are amortized on a straight-line
basis over the average remaining service period of employees active at the
date of amendment.
- - The excess of the net actuarial gain or loss over 10% of the greater of the
benefit obligation and the fair value of plan assets is amortized over the
average remaining service period of the active employees.
- - A plan curtailment will result if there has been a significant reduction in
the expected future service of present employees. A net curtailment loss is
recognized when the event is probable and can be estimated, a net
curtailment gain is deferred until realized.
ENVIRONMENTAL LIABILITIES: The Company provides for potential environmental
liabilities based on the best estimates of potential clean-up and remediation
estimates for known environmental sites. The Company employs a staff of
environmental experts to administer all phases of its environmental programs,
and uses outside experts where needed. These professionals develop estimates of
potential liabilities at these sites based on projected and known remediation
costs. This analysis requires the Company to make significant estimates, and
changes in facts and circumstances could result in material changes in the
environmental accrual.
REPORTING CURRENCY AND FOREIGN CURRENCY TRANSLATION: Operating revenue and
expenses arising from foreign currency transactions are translated into U.S.
dollars at exchange rates in effect on the date of the transactions. Assets and
liabilities are translated into U.S. dollars at the exchange rate in effect at
the balance sheet date. Gains or losses arising from these translations are
included in earnings, with the exception of unrealized foreign exchange gains or
losses on long-term monetary items that hedge net investments in foreign
operations, which are accumulated in other comprehensive income.
Assets and liabilities of foreign operations are translated into U.S. dollars at
the exchange rate in effect at the balance sheet date. Operating revenue and
expense items are translated at average exchange rates prevailing during the
year. Equity is translated at historical rates, and the resulting cumulative
foreign currency translation adjustments resulting from this process are
included in accumulated other comprehensive income.
The consolidated financial statements have been prepared in U.S. dollars as the
majority of the Company's transactions occur in U.S. dollars.
EARNINGS PER SHARE: The financial statements include "basic" and "diluted" per
share information. Basic per share information is calculated by dividing net
income by the weighted average number of common shares outstanding. Diluted per
share information is calculated by also considering the impact of potential
common stock on both net income available to common shareholders and the
weighted average number of shares outstanding. The Company's potential common
stock consists of employee and director stock options.
STOCK-BASED COMPENSATION: The Company accounts for stock-based compensation
plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25). The Company applies the disclosure provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123), which allows companies to continue following the
accounting guidance of APB 25, but requires pro forma disclosure of net income
and net income per share for the effects on compensation expense had the fair
value method of accounting for stock options and stock purchases been adopted.
For SFAS 123 purposes, the fair value of each option grant has been estimated as
of the date of grant using the Black-Scholes option-pricing model. In March
2003, the Company adopted the Financial Accounting Standards Board, Statement of
Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation
- - Transitions and Disclosure" (SFAS 148). Under SFAS 148, the pro forma
disclosures of stock-based compensation, as if the fair value method had been
used, are required in both annual and interim financial statements.
During December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (Revised 2004), "Share-Based
Payment" (SFAS 123(R)). SFAS 123(R) replaces FASB Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), supersedes Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock issued to Employees" (APB 25), and amends FASB Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows" (SFAS 95). Statement
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values and eliminates the pro forma disclosures that were permitted
as an alternative to financial statement recognition. SFAS 123(R) is effective
for fiscal years beginning after June 15, 2005. The Company will adopt the
provisions of SFAS 123(R) as of January 1, 2006, and currently intends to use
the "modified prospective" method and choose the Black-Scholes model for
estimating the fair value of equity compensation. The Company is currently
assessing the implications of this revised standard and the effect it will have
on its results of operations in the first quarter of 2006 and thereafter.
6
As permitted by SFAS 123, through fiscal year 2005, the Company accounted for
stock options granted to employees using the intrinsic value based method of
accounting set forth under APB 25. Under this method, the Company did not
recognize compensation expense for the stock options because the exercise price
is equal to the market price of the underlying stock on the date of grant. Had
the Company applied the fair value based method of accounting, the impact on net
income and earnings per share would be immaterial.
DEFERRED SHARE UNIT PLAN: The Company offers a Deferred Share Unit Plan (DSUP)
for independent members of the board of directors. Under the DSUP, each
director receives a percentage of his annual compensation in the form of
deferred share units (DSUs), which are notional common shares of the Company.
The issue price of each DSU is based on the closing trading value of the common
shares on the meeting dates and an expense is recognized at that time. The
shares are subsequently marked to market and expensed accordingly. The DSU
account of each director includes the value of dividends, if any, as if
reinvested in additional DSUs. The director is not permitted to convert DSUs
into cash until retirement from the board. The value of the DSUs, when converted
to cash, will be equivalent to the market value of the common shares at the time
the conversion takes place. The value of the outstanding DSUs was $524 thousand
and $354 thousand at December 31, 2005 and 2004, respectively.
USE OF ESTIMATES: The preparation of financial statements in conformity with
U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS: Certain amounts for prior years have been reclassified to
conform to the 2005 presentation. Such reclassifications had no effect on
amounts previously reported for net income or shareholders' equity.
NOTE 3 -- ACQUISITIONS
On March 19, 2004, the Company acquired certain assets and assumed certain
liabilities of Potter Form & Tie Co., a rebar fabricator with six locations
throughout the Midwest, for approximately $11.1 million. As a result of this
transaction, $1.4 million of goodwill was recorded. The transaction was
accounted for as a purchase.
On December 10, 2004, the Company completed the acquisition of the fixed assets
and working capital of Gate City's and RJ Rebar, Inc.'s rebar fabrication
facilities in the Midwest with annual production capacity of approximately
150,000 tons for approximately $16.4 million. As a result of this transaction,
$4.7 million of goodwill was recorded. The transaction was accounted for as a
purchase.
On November 1, 2004, Gerdau Ameristeel completed the acquisition of four long
steel product minimills and four downstream facilities, which are referred to as
North Star Steel, from Cargill Incorporated. This acquisition increased mill
manufacturing capacity by approximately 2.0 million tons for finished long steel
products. The facilities acquired consist of four long steel product minimills
located in St. Paul, Minnesota; Wilton, Iowa; Calvert City, Kentucky; and
Beaumont, Texas; and four downstream facilities - one that processes grinding
balls located in Duluth, Minnesota and three wire rod processing facilities
located in Beaumont, Texas; Memphis, Tennessee; and Carrollton, Texas. The St.
Paul and Wilton minimills have scrap shredder facilities which process raw scrap
into shredded scrap to supply a large part of the minimills' raw material needs.
North Star's products are generally sold to steel service centers, steel
fabricators or directly to OEMs, for use in a variety of industries. The
purchase price for the acquired assets was $266 million in cash plus the
assumption of certain liabilities of the businesses being acquired and changes
in working capital from April 30, 2004 to the date of closing. $181 million of
the purchase price was for working capital computed as of April 30, 2004. On
November 1, 2004, working capital of the acquired business had increased $51.8
million. This amount was accrued as of December 31, 2004 and paid in 2005.
The following table summarizes the fair value of assets acquired and liabilities
assumed for the North Star acquisition at the date of the acquisition, November
1, 2004 ($000s):
Net assets (liabilities) acquired
Current assets $325,751
Current liabilities (67,674)
Property, plant and equipment 86,244
Other long-term liabilities (23,789)
--------
$320,532
========
Purchase price $266,000
Plus transaction costs 2,742
Accrued working capital adjustment 51,790
--------
$320,532
========
The following unaudited pro forma data summarizes the results of operations for
the periods indicated as if the 2004 North Star Steel acquisition had been
completed as of January 1, 2004.
7
YEAR ENDED
DECEMBER 31, 2004
-----------------
Net sales $3,760,139
Net income 460,454
Earnings per share - Basic 1.98
Diluted 1.97
NOTE 4 -- INVENTORIES
Inventories consist of the following ($000s):
AT DECEMBER 31, AT DECEMBER 31,
2005 2004
--------------- ---------------
Ferrous and non-ferrous scrap $128,772 $148,273
Work in-process 106,370 121,618
Finished goods 306,263 376,528
Raw materials (excluding scrap)
and operating supplies 203,760 206,736
-------- --------
$745,165 $853,155
======== ========
NOTE 5 -- PROPERTY, PLANT & EQUIPMENT
Property, plant and equipment consist of the following ($000s):
AT DECEMBER 31, 2005
--------------------------------------
ACCUMULATED NET
COST DEPRECIATION BOOK VALUE
---------- ------------ ----------
Land and improvements $ 80,387 $ (5,301) $ 75,086
Buildings and improvements 180,463 (34,541) 145,922
Machinery and equipment 1,101,654 (474,437) 627,217
Construction in progress 101,626 -- 101,626
Property, plant and equipment held for sale 5,750 -- 5,750
---------- --------- --------
$1,469,880 $(514,279) $955,601
========== ========= ========
AT DECEMBER 31, 2004
--------------------------------------
ACCUMULATED NET
COST DEPRECIATION BOOK VALUE
---------- ------------ ----------
Land and improvements $ 74,443 $ (3,725) $ 70,718
Buildings and improvements 157,654 (26,880) 130,774
Machinery and equipment 1,017,979 (376,402) 641,577
Construction in progress 63,895 -- 63,895
Property, plant and equipment held for sale 12,898 -- 12,898
---------- --------- --------
$1,326,869 $(407,007) $919,862
========== ========= ========
Capitalized interest costs for property, plant and equipment construction
expenditures were approximately $1.2 million and $353 thousand for the years
ended December 31, 2005 and 2004, respectively.
NOTE 6 -- JOINT VENTURES
The Company's investments in Gallatin Steel Company, Bradley Steel Processors
and MRM Guide Rail are 50% joint ventures. The Company's interests in the joint
ventures have been accounted for using the equity method under which the
Company's proportionate share of earnings has been included in these
consolidated financial statements.
The following table sets forth selected data for the Company's joint ventures
($000s):
8
DECEMBER 31,
-------------------
2005 2004
-------- --------
BALANCE SHEET
Current assets $ 96,411 $128,004
Property, plant and equipment, net 132,768 132,472
Current liabilities 31,558 27,517
Long-term debt 1,678 1,709
STATEMENT OF EARNINGS
Sales $443,728 $465,493
Operating income 91,091 142,429
Income before income taxes 91,301 142,538
Net Income 91,201 141,474
NOTE 7 -- LONG-TERM DEBT
On June 27, 2003, the Company refinanced its debt by issuing $405.0 million
aggregate principal 10 3/8% Senior Notes, of which $35.0 million were sold to an
indirect wholly-owned subsidiary of the Company's parent, Gerdau S.A. The notes
mature July 15, 2011 and were issued at 98% of face value. The Company also
entered into a new Senior Secured Credit Facility with a term of up to five
years, which provided commitments of up to $350.0 million. The borrowings under
the Senior Secured Credit Facility are secured by the Company's inventory and
accounts receivable. The proceeds were used to repay existing indebtedness.
On October 31, 2005, the Company completed an amendment of the Senior Secured
Credit Facility. The significant changes from the existing agreement include an
increase of commitments to up to $650 million and an extension of the term to
October 31, 2010.
At December 31, 2005, there was nothing drawn against this facility and based
upon available collateral under the terms of the agreement, approximately $544.1
million was available under the Senior Secured Credit Facility, net of $60.5
million of outstanding letters of credit.
During the first quarter of 2004, the Company obtained a $25.0 million, one
year, 2.65% interest bearing loan from a Brazilian bank. This loan was
guaranteed by Gerdau S.A and was repaid in the fourth quarter of 2004.
Debt includes the following ($000s):
DECEMBER 31, DECEMBER 31,
2005 2004
------------ ------------
Senior Notes, bearing interest of 10.375%, due
July 2011, net of original issue discount $398,780 $397,986
Senior Secured Credit Facility, bearing interest
of 5.75%, due through December 2006 -- 27
Industrial Revenue Bonds, bearing interest of
1.74% to 6.38%, due through December 2018 31,600 31,600
AmeriSteel Bright Bar Term Loan, bearing interest
of 5.25%, due June 2011 2,395 2,734
Other, bearing interest of 3.75%, due through May 2009 976 5,120
-------- --------
433,751 437,467
Less current portion (1,014) (4,644)
-------- --------
$432,737 $432,823
======== ========
The maturities of borrowings for the years subsequent to December 31, 2005, are
as follows ($000s):
AMOUNT
--------
2006 $ 1,014
2007 659
2008 571
2009 498
2010 393
Thereafter 430,616
--------
$433,751
========
Cash paid for interest was $46.3 million and $54.5 million for the years ended
December 31, 2005 and 2004, respectively.
The Company's debt agreements contain covenants that require the Company to,
among other things, maintain a minimum fixed charge coverage ratio. In addition,
if the Company's business suffers a material adverse change or if other events
of default under the loan agreements are triggered, then pursuant to cross
default acceleration clauses, substantially all of the outstanding debt could
become due and the underlying facilities could be terminated. At December 31,
2005, the Company was in compliance with all of its debt covenants.
NOTE 8 -- RELATED PARTY TRANSACTIONS
The Company is affiliated with a group of companies controlled by Gerdau S.A.
Through the June 2003 refinancing, an indirect wholly-owned subsidiary of Gerdau
S.A. purchased $35.0 million of bonds. These bonds were exchanged subsequent to
the
9
exchange offer in 2004. Accrued liabilities due to related parties were zero and
$6.2 million as of December 31, 2005 and 2004, respectively.
In the normal course of business, the Company and/or certain of its subsidiaries
make purchases from time to time of steel products from affiliated companies.
For the year ended December 31, 2005 and 2004, the Company and/or certain of its
subsidiaries purchased approximately 85,630 tons and 59,392 tons of steel
products from affiliated companies for $27.7 million and $18.0 million,
respectively. These purchases do not represent a significant percentage of the
Company's total purchases and on terms which management believes were no less
favorable than could be obtained from unaffiliated third parties.
See notes 7 and 13 for additional information on related party transactions.
NOTE 9 -- CONVERTIBLE DEBENTURES
The Company's unsecured, subordinated convertible debentures bear interest at
6.5% per annum, mature on April 30, 2007, and, at the holders' option, are
convertible into common shares of the Company at a conversion price of Cdn
$26.25 per share. Under the terms of the Trust Indenture for the Convertible
Debentures, no adjustment to the conversion price is required if the Company
issues common shares in a customary offering. The debentures are redeemable, at
the option of the Company, at par plus accrued interest. The Company has the
right to settle the principal amount by the issuance of common shares based on
their market value at the time of redemption.
NOTE 10 -- INCOME TAXES
The income tax expense is comprised of ($000s):
2005 2004
-------- --------
Current $127,431 $102,614
Deferred 17,256 7,463
-------- --------
$144,687 $110,077
======== ========
Current income taxes:
Canada $ 615 $ 1,216
U.S 125,717 101,381
Other 1,099 17
-------- --------
127,431 102,614
Deferred income taxes:
Canada 1,871 12,333
U.S 15,385 (4,870)
-------- --------
17,256 7,463
-------- --------
Total provision for income taxes $144,687 $110,077
======== ========
The income tax expense differs from the amount computed by applying Canadian
income tax rate (federal and provincial) to income before income taxes, as
follows:
2005 2004
-------- ---------
Income tax expense computed using Canadian statutory tax rates $150,191 $151,481
Increased (decreased) by the tax effect of:
Tax exempt income (24,520) (16,679)
Effect of different rates in foreign jurisdictions 7,402 18,965
Convertible debenture purchase price adjustment 2,431 2,235
Unrealized foreign exchange losses 4,582 2,504
Change in valuation allowance 3,570 (48,563)
Other, net 1,031 134
-------- --------
Income tax expense $144,687 $110,077
======== ========
Cash payments for income taxes $122,743 $ 95,766
======== ========
10
The components of the deferred tax assets and liabilities consisted of the
following:
2005 2004
-------- --------
CANADA
NON-CURRENT DEFERRED TAX ASSETS
Operating loss carryforwards $ 32,274 $ 29,891
Pension and retirement accruals 28,314 16,835
Long-term liabilities not currently deductible 2,193 2,333
Other 540 523
-------- --------
Total non-current deferred tax assets 63,321 49,582
NON-CURRENT DEFERRED TAX LIABILITIES
Property, plant and equipment 39,897 41,348
-------- --------
NET NON-CURRENT DEFERRED TAX ASSETS $ 23,424 $ 8,234
======== ========
UNITED STATES
CURRENT DEFERRED TAX ASSETS
Accounting provisions not currently deductible
for tax purposes $ 23,212 $ 8,754
-------- --------
NON-CURRENT DEFERRED TAX ASSETS
Operating loss carryforwards $ 26,925 $ 34,805
Recycling and AMT credits 4,916 4,927
Pension and retirement accruals 12,594 19,784
Long-term liabilities not currently deductible 13,514 32,420
-------- --------
57,949 91,936
Less: valuation allowance (3,570) --
-------- --------
Total non-current deferred tax assets 54,379 91,936
NON-CURRENT DEFERRED TAX LIABILITIES
Property, plant and equipment 122,340 129,842
Other 676 872
-------- --------
Total non-current deferred tax liabilities 123,016 130,714
--------
NET NON-CURRENT DEFERRED TAX LIABILITIES $ 68,637 $ 38,778
======== ========
In 2004, the Company recorded the utilization of net operating losses related to
the former Co-Steel U.S. group resulting in a $48.6 million reduction of U.S.
tax expense. The NOL carryforward from the predecessor company is subject to
annual limitations as outlined in Internal Revenue Code (IRC) S. 382 and IRC S.
1502, Separate Return Limitation Year provisions. At the time of the acquisition
of Co-Steel, the tax assets were recorded at their estimated realization rate
under purchase accounting which resulted in a portion of the existing NOLs not
being recognized in the financial statements. Due to the current high
profitability of the former Co-Steel U.S. group, the Company believes it is more
likely than not that it will be able to realize the benefit of these losses and
as such the valuation reserve related to these NOLs has been reversed. This
represents substantially all of the federal NOLs that are available to the
Company under the applicable change in ownership rules which limit a company's
ability to utilize NOLs that existed as of the date of an ownership change.
As of December 31, 2005, the Company had a combined non-capital loss carry
forward of approximately $98.4 million for Canadian tax purposes that expires on
various dates between 2008 through 2015. The Company also had a combined net
operating loss carryforward of approximately $113.8 million for U.S. federal and
state income tax purposes that expires on various dates between 2006 and 2023.
The Company believes its Canadian net deferred tax asset at December 31, 2005,
of $23.4 million is more likely than not to be realized based on the combination
of future taxable income from operations and various tax planning strategies
that will be
11
implemented, if necessary.
During 2005, the Company recorded a valuation allowance of $3.6 million against
certain state tax loss carryforwards and recycling credits because management
determined that it is more likely than not that these deferred tax assets would
not be realized.
The Company has not provided for Canadian income taxes or foreign withholding
taxes that would apply on the distribution of the earnings of its non-Canadian
subsidiaries, as these earnings are intended to be reinvested indefinitely by
these subsidiaries.
NOTE 11 -- POST RETIREMENT BENEFITS
The Company maintains defined benefit pension plans covering the majority of
employees. The benefits are based on years of service and compensation during
the period of employment. Annual contributions are made in conformity with
minimum funding requirements and maximum deductible limitations. Many employees
are also covered by defined contribution retirement plans for which Company
contributions and expense amounted to approximately $5.4 million and $3.4
million for the years ended December 31, 2005 and 2004, respectively.
The Company currently provides specified health care benefits to retired
employees. Employees who retire after a certain age with specified years of
service become eligible for benefits under this unfunded plan. The Company has
the right to modify or terminate these benefits. The Company uses a December 31
measurement date for its plans. The following tables summarize the accumulated
pension benefits and postretirement medical benefit obligations included in the
Company's consolidated statements of financial position.
PENSION BENEFITS OTHER BENEFIT PLANS
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
-------------------- -------------------
2005 2004 2005 2004
--------- -------- -------- --------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 16,918 $ 10,980 $ 1,450 $ 1,133
Interest cost 24,537 22,274 2,736 2,153
Expected return on plan assets (24,388) (20,975) -- --
Amortization of transition liability 187 174 -- --
Amortization of prior service cost 1,296 293 (329) (212)
Recognized actuarial loss 3,349 2,214 98 30
--------- -------- -------- --------
Net periodic benefit cost $ 21,899 $ 14,960 $ 3,955 $ 3,104
========= ======== ======== ========
CHANGE IN BENEFIT OBLIGATIONS
Benefit obligation at beginning of period $ 416,633 $359,568 $ 49,186 $ 38,554
Acquisition of North Star -- -- -- 8,716
Service cost 16,918 10,980 1,450 1,133
Interest cost 24,537 22,274 2,736 2,153
Plan participants' contributions -- -- 923 733
Amendments 1,731 3,149 (2,107) (3,161)
Actuarial loss 51,018 25,193 8,404 1,793
Benefits and administrative expenses paid (17,971) (19,381) (2,228) (2,501)
Foreign exchange gain 8,769 14,851 1,191 1,766
--------- -------- -------- --------
Benefit obligation at end of period $ 501,635 $416,634 $ 59,555 $ 49,186
========= ======== ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of period $ 322,719 $278,243 $ -- $ --
Actual return on plan assets 27,201 30,509 -- --
Employer contribution 22,805 20,815 1,305 1,769
Plan participants' contributions -- -- 923 732
Benefits and administrative expenses paid (17,971) (19,381) (2,228) (2,501)
Foreign exchange gain 6,660 12,533 -- --
--------- -------- -------- --------
Fair value of plan assets at end of period $ 361,414 $322,719 $ -- $ --
========= ======== ======== ========
RECONCILIATION OF FUNDED STATUS - END OF PERIOD
Funded status $(140,221) $(93,915) $(59,530) $(49,186)
Unrecognized transition liability 1,723 1,857 -- --
Unrecognized prior service cost 6,607 5,962 (4,805) (2,948)
Unrecognized actuarial loss 98,763 52,610 13,227 3,052
--------- -------- -------- --------
Net amount recognized $ (33,128) $(33,486) $(51,108) $(49,082)
========= ======== ======== ========
12
AMOUNTS RECOGNIZED IN BALANCE SHEET
Accrued benefit liability $(96,059) $(65,710) $(51,108) $(49,082)
Intangible asset 8,301 7,618 -- --
Accumulated pretax charge to other omprehensive
income 54,630 24,606 -- --
-------- -------- -------- --------
Net amount recognized $(33,128) $(33,486) $(51,108) $(49,082)
======== ======== ======== ========
ASSUMPTIONS
2005 2004
------------ ------------
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE
BENEFITS OBLIGATIONS AT DECEMBER 31
Discount rate 5.00% - 5.75% 5.75% - 6.00%
Rate of compensation increases 2.50% - 4.25% 2.50% - 4.25%
WEIGHTED-AVERAGE ASSUMPTIONS USED TO DETERMINE
NET PERIODIC BENEFIT COST FOR THE YEAR
ENDED DECEMBER 31
Discount rate 5.75% - 6.00% 6.25% - 6.50%
Expected long-term return on plan assets 7.50% - 8.40% 7.25% - 8.40%
Rate of compensation increase 2.50% - 4.25% 2.50% - 4.50%
------------ -------------
ASSUMED HEALTH CARE COST TREND RATES AT
DECEMBER 31
Health care cost trend rate assumed for next
year 9.50% - 12.0% 9.50% - 13.00%
Rate to which the cost trend rate is assumed
to decline (ultimate trend rate) 5.50% 4.50% - 5.50%
Year that the rate reaches the ultimate trend
rate 2010 - 2013 2010 - 2013
Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
1 PERCENTAGE POINT 1 PERCENTAGE POINT
INCREASE DECREASE
------------------ ------------------
Effect on total service and interest cost $ 785 $ (607)
Effect on postretirement benefit obligation 8,540 (6,829)
PLAN ASSETS
The Company's pension plan weighted-average asset allocations at December 31,
2005 and 2004, by asset category are as follows:
PLAN ASSETS AT
DECEMBER 31,
-------------
ASSET CATEGORY 2005 2004
- -------------- ---- ----
Equity securities 66.3% 67.3%
Debt securities 31.7% 26.5%
Real estate 0.0% 2.7%
Other 2.0% 3.5%
---- ----
Total 100% 100%
The Company has an Investment Committee that defines the investment policy
related to the defined benefit plans. The primary investment objective is to
ensure the security of benefits that have accrued under the plans by providing
an adequately funded asset pool that is separate from and independent of Gerdau
Ameristeel Corporation. To accomplish this objective, the fund shall be invested
in a manner that adheres to the safeguards and diversity to which a prudent
investor of pension funds would normally adhere. Gerdau Ameristeel retains
specialized consultant providers that advise and support the Investment
Committee decisions and recommendations.
The asset mix policy will consider the principles of diversification and
long-term investment goal, as well as liquidity requirements. In order to
accomplish that, the target allocations range between 65% - 78% in equity
securities and 25% - 35% in debt securities.
BENEFIT PAYMENTS
13
The expected benefit payments, in future years, are as follows ($000s):
OTHER
PENSION BENEFIT
BENEFITS PLANS
-------- -------
2006 $ 18,467 $ 2,003
2007 19,136 2,159
2008 20,188 2,366
2009 21,383 2,551
2010 22,786 2,769
2011 to 2015 140,390 17,115
CONTRIBUTIONS
The Company expects to contribute $25.4 million to its pension plans in 2006.
NOTE 12 -- FINANCIAL INSTRUMENTS
The Company's use of derivative instruments is limited. Derivative instruments
are not used for speculative purposes but they are used to manage well-defined
interest rate risks arising in the normal course of business. In order to reduce
its exposure to changes in the fair value of its Senior Notes, the Company
entered into interest rate swaps subsequent to the June 2003 refinancing. The
agreements have a notional value of $200 million and expiration dates of July
15, 2011. The Company receives a fixed interest rate and pays a variable
interest rate based on LIBOR. The aggregate mark-to-market (fair value) of the
interest rate agreements, which represents the amount that would be received if
the agreements were terminated at December 31, 2005, was approximately $1.2
million.
NOTE 13 -- SHAREHOLDERS' EQUITY
Capital stock consists of the following shares:
Authorized Issued Invested Capital
Number Number (in thousands)
---------- ----------- ----------------
December 31, 2005
Common Unlimited 304,471,493 $1,010,341
December 31, 2004
Common Unlimited 304,028,122 $1,008,511
On April 16, 2004, shares outstanding increased by 26,800,000 shares as the
Company sold and issued common shares to its majority shareholder, Gerdau S.A.
On October 20, 2004, the Company was listed on the New York Stock Exchange and
sold and issued 70,000,000 common shares including 35,000,000 that were sold and
issued to its majority shareholder, Gerdau S.A. On November 18, 2004 the
over-allotment option was exercised for 8,762,000 common shares of which Gerdau
S.A. purchased 4,381,000. Total proceeds from the offerings were $460.2 million,
net of offering costs.
At December 31, accumulated other comprehensive income was as follows ($000's):
2005 2004
-------- --------
Cumulative foreign currency translation adjustments, net of taxes $ 68,347 $ 59,721
Minimum pension liability adjustments, net of taxes (35,084) (15,321)
-------- --------
Total $ 33,263 $ 44,400
-------- --------
EARNINGS PER SHARE
The following table identifies the components of basic and diluted earnings per
share ($000s except per share data):
14
YEAR ENDED DECEMBER 31,
---------------------------
2005 2004
------------ ------------
Basic earnings per share:
Basic net earnings $ 295,497 $ 337,669
Average shares outstanding 304,276,512 232,047,518
Basic net earnings per share $ 0.97 $ 1.46
Diluted earnings per share:
Diluted net earnings $ 295,497 $ 337,669
Diluted average shares outstanding:
Average shares outstanding 304,276,512 232,047,518
Dilutive effect of stock options 1,175,460 1,241,571
------------ ------------
305,451,972 233,289,089
Diluted net earnings per share $ 0.97 $ 1.45
At December 31, 2005, options to purchase 593,000 (692,000 at December 31, 2004)
common shares were not included in the computation of diluted earnings per share
as their inclusion would be anti-dilutive.
NOTE 14 -- STOCK BASED COMPENSATION
The Company has several stock based compensation plans, which are described
below.
For the year ended December 31, 2004, the Company's Human Resources Committee
adopted the 2004 Long-Term Incentive Stakeholder Plan (the "2004 Stakeholder
Plan"). The 2004 Stakeholder Plan is designed to reward the Company's senior
management with a share of the Company's profits after a capital charge. Awards,
calculated in dollars, are invested in phantom common shares at a price equal to
the closing price of the common shares on the New York Stock Exchange on the
date of the grant, and vest in equal installments on each of the four
anniversary dates of the date of grant. Payouts will be calculated based on the
closing price of Common Shares on the New York Stock Exchange on the vesting
date and will be paid as soon as practicable following vesting. An award of
approximately $14 million was earned by participants in the 2004 Stakeholder
Plan for the year ended December 31, 2004 and was granted on March 1, 2005. The
award is being accrued over the vesting period. No further awards will be made
under this plan.
For the year commencing January 1, 2005, the Human Resources Committee adopted
the 2005 Long-Term Incentive Plan (the "2005 LTI Plan"). The 2005 LTI Plan is
designed to reward the Company's employees with bonuses based on the achievement
of return on capital invested targets. Bonuses which have been earned are
awarded after the end of the year in the form of cash, stock appreciation rights
("SARs"), and/or options. The portion of any bonus which is payable in cash is
to be paid in the form of phantom stock. The number of shares of phantom stock
awarded to a participant is determined by dividing the cash bonus amount by the
fair market value of a Common Share at the date the award of phantom stock is
made based on the weighted average trading price of Common Shares on the New
York Stock Exchange. Phantom stock and SARs vest 25% on each of the first four
anniversaries of the date of the award. Phantom stock will be paid out following
vesting on the basis of a cash payment. The number of options awarded to a
participant is determined by dividing the non-cash amount of the bonus by the
fair market value of a Common Share at the date the award of the options is
made, and then adjusting this amount by a factor calculated based on the value
of such options at that date (where the value of the options is determined by
the Committee based on a Black Scholes or other method for determining option
values). Options vest 25% on each of the first four anniversaries of the date of
the award. Options may be exercised following vesting. Options have a maximum
term of 10 years. The maximum number of options able to be granted under this
plan is 6,000,000. An award of approximately $3.0 million was earned by
participants in 2005 and will be payable 50% in options and 50% in phantom
stock. The award is being accrued over the vesting period.
Under the Company's Stock-Based Option Plan, the Company was permitted to grant
options to employees and directors to acquire up to a maximum of 3,041,335
common shares. The exercise price was based on the closing price of common
shares on the trading date previous to the date the options are issued. The
options have a maximum term of 10 years, have a vesting term of various periods
as determined by the Plan administrator at the time of grant, and are
exercisable in installments. The remaining 593,000 options outstanding under
this plan expire on various dates up to April 13, 2008. No grants have been made
under this plan since 1998.
A subsidiary of the Company, Gerdau Ameristeel US Inc. ("Ameristeel"), had
several stock compensation plans for its employees. Under the terms of the
Transaction Agreement relating to the 2002 merger with Co-Steel Inc., minority
shareholders of Ameristeel exchanged shares of Ameristeel stock and options for
stock and options of the Company at an exchange rate of 9.4617 Company shares
and options for each Ameristeel share or option. This exchange took place on
March 31, 2003. All amounts presented in the discussion below have been restated
to reflect the historical shares at the exchanged value.
In September 1996, Ameristeel's Board of Directors approved the Ameristeel
Corporation Equity Ownership Plan (the "Equity Ownership Plan"), which provided
for grants of common stock, options to purchase common stock and SARs. After
conversion into common shares of the Company, the maximum number of common
shares issuable under the plan is 4,152,286. All issued options and shares of
issued common stock become one-third vested two years from the grant date, and
one third in each of the subsequent two years from the grant date. All grants
were at the estimated fair market value of the common stock on the grant date,
determined based on an independent appraisal as of the end of the previous
year-end. Options may be exercised for 10 years from the grant date. The Company
accounts for stock options granted to employees using the intrinsic value based
method
15
of accounting (see note 2).
In July 1999, Ameristeel's Board of Directors approved a Stock Purchase/SAR Plan
(the "SAR Plan") available to essentially all employees. The SAR Plan authorized
946,170 shares of common stock to be sold to employees during three offering
periods, July through September in each of 1999, 2002 and 2005. Employees who
purchased stock were awarded stock appreciation rights ("SARs") equal to four
times the number of shares purchased. SARs were granted at fair value at the
date of the grant, determined based on an independent appraisal as of the
previous year-end. The SARs become exercisable at the rate of 25% annually from
the grant date and may be exercised for 10 years from the grant date. The SARs
are recorded as a liability and benefits are charged to expense. Under this
plan, for the year ended December 31, 2005, there was a $1.5 million expense
recovery compared to a $6.4 million expense for the year ended December 31,
2004.
In July 2002, Ameristeel's Board of Directors approved the issuance of SARs that
were granted to officers with exercise prices granted at fair value at the date
of grant. 6,244,722 SARs were authorized and issued. The SARs become one-third
vested two years from the grant date, and one third in each of the subsequent
two years from the grant date. SARs may be exercised for 10 years from the grant
date. The SARs are recorded as a liability and benefits are charged to expense.
Under this plan, for the year ended December 31, 2005, there was a $0.8 million
expense recovery compared to a $14.3 million expense for the year ended December
31, 2004.
A summary of the Company's stock option plans is as follows:
YEAR ENDED DECEMBER 31, 2005 YEAR ENDED DECEMBER 31, 2004
----------------------------- -----------------------------
NUMBER OF WEIGHTED- AVERAGE NUMBER OF WEIGHTED- AVERAGE
SHARES EXERCISE PRICE SHARES EXERCISE PRICE
--------- ----------------- --------- -----------------
Outstanding, beginning of period 2,833,288 $ 5.94 3,606,570 $ 6.41
Granted -- -- -- --
Exercised (443,371) 1.86 (375,261) 1.90
Forfeited (26,341) 1.85 (76,321) 1.92
Expired (99,000) 19.00 (321,700) 19.46
--------- ------ --------- ------
Outstanding, end of period 2,264,576 $ 6.42 2,833,288 $ 5.94
========= ====== ========= ======
Options exercisable 2,128,241 2,350,378
========= =========
The following table summarizes information about options outstanding at December
31, 2005:
Weighted
- Average
Remaining Weighted -
Exercise Price Number Contractual Average Number
Range US$ Outstanding Life Exercise Price Exercisable
- -------------------- ----------- ----------- -------------- -----------
$1.32 to $1.43 545,482 3.8 $ 1.39 545,482
$1.80 to $1.91 671,369 5.2 1.84 535,034
$2.11 to $2.96 454,725 3.5 2.61 454,725
$15.95 to $19.30 (1) 297,500 1.5 17.41 297,500
$20.71 to $26.27 (1) 295,500 0.9 20.91 295,500
--------- ---------
2,264,576 2,128,241
Note: (1) these options are denominated in Canadian dollars and have been
translated to US$ using the exchange rate at December 31, 2005.
Commencing with the Company's fiscal year that begins January 1, 2006, SFAS
123(R) will require that the Company recognize
16
compensation expense equal to the fair value of equity-based compensation awards
over the vesting period of each such award. See Note 19 below for additional
information related to stock options.
NOTE 15 -- CONTINGENCIES AND COMMITMENTS
ENVIRONMENTAL
As the Company is involved in the manufacturing of steel, it produces and uses
certain substances that may pose environmental hazards. The principal hazardous
waste generated by current and past operations is electric arc furnace ("EAF")
dust, a residual from the production of steel in electric arc furnaces.
Environmental legislation and regulation at both the federal and state level
over EAF dust is subject to change, which may change the cost of compliance.
While EAF dust is generated in current production processes, such EAF dust is
being collected, handled and disposed of in a manner that the Company believes
meets all current federal, state and provincial environmental regulations. The
costs of collection and disposal of EAF dust are expensed as operating costs
when incurred. In addition, the Company has handled and disposed of EAF dust in
other manners in previous years, and is responsible for the remediation of
certain sites where such dust was generated and/or disposed.
In general, the Company's estimate of remediation costs is based on its review
of each site and the nature of the anticipated remediation activities to be
undertaken. The Company's process for estimating such remediation costs includes
determining for each site the expected remediation methods, and the estimated
cost for each step of the remediation. In such determinations, the Company may
employ outside consultants and providers of such remedial services to assist in
making such determinations. Although the ultimate costs associated with the
remediation are not known precisely, the Company estimated the present value of
total remaining costs to be approximately $16.4 million and $16.2 million as of
December 31, 2005 and 2004, respectively. Of the $16.4 million of costs recorded
as a liability at December 31, 2005, the Company expects to pay approximately
$3.3 million during the year ended December 31, 2006.
Based on past use of certain technologies and remediation methods by third
parties, evaluation of those technologies and methods by the Company's
consultants and third-party estimates of costs of remediation-related services
provided to the Company of which the Company and its consultants are aware, the
Company and its consultants believe that the Company's cost estimates are
reasonable. Considering the uncertainties inherent in determining the costs
associated with the clean-up of such contamination, including the time periods
over which such costs must be paid, the extent of contribution by parties which
are jointly and severally liable, and the nature and timing of payments to be
made under cost sharing arrangements, there can be no assurance the ultimate
costs of remediation may not differ from the estimated remediation costs.
In April 2001, the Company was notified by the Environmental Protection Agency
(EPA) of an investigation that identifies the Company as a potential responsible
party (PRP) in a Superfund Site in Pelham, Georgia. The Pelham site was a
fertilizer manufacturer in operation from 1910 through 1992, lastly operated by
Stoller Chemical Company, a now bankrupt corporation. The EPA has filed suit
under the Comprehensive Environmental Response, Compensation, and Liability Act
(CERCLA) with the Company named as a defendant seeking damages of $16.6 million.
CERCLA imposes joint and several strict liability in connection with
environmental contamination. The Company is included in this action because the
Company allegedly shipped EAF dust to this property. The EPA originally offered
a settlement to the named PRPs under which the Company's allocation was
approximately $1.8 million. One of the named PRPs is in bankruptcy proceedings.
The EPA has reconsidered the appropriate allocation. That reconsideration caused
the EPA's view of the Company's allocation to substantially increase. The
Company objects to its inclusion as a PRP on several bases, has asserted
defenses, including statute of limitations defenses, and is pursuing legal
alternatives, including adding a third party which the Company believes was
incorrectly excluded from the original lawsuit. In 2004, the court denied a
motion asserting some, but not all, of the Company's defenses. Also in 2004, the
EPA and the Company had further discussions on a settlement and, based on these
discussions, the Company believes that the EPA has a settlement range of $8.0 to
$10.0 million. The Company is not in agreement with this assessment. The Company
previously offered to settle the matter for $1.6 million. EPA is in the process
of finalizing a settlement with two of the five defendants for $1.7 million. The
EPA and the Company have filed cross-motions for summary judgment on the issue
of liability. Although the Company has accrued $1.6 million with respect to this
matter, the ultimate outcome of this matter cannot be determined at this time.
OTHER CLAIMS
In the normal course of its business, various lawsuits and claims are brought
against the Company. The Company vigorously contests any claim which it believes
is without merit. Management believes that any claims will not have a material
effect on the financial position, consolidated earnings or the cash flows of the
Company.
OPERATING LEASE COMMITMENTS
The Company leases certain equipment and real property under non-cancelable
operating leases. Aggregate future minimum payments under these leases are as
follows ($000s):
YEAR ENDING
DECEMBER 31, AMOUNT
- ------------ -------
2006 $13,934
2007 10,850
2008 9,504
2009 7,575
2010 6,678
Thereafter 33,125
-------
$81,666
=======
17
Rent expense related to operating leases was $26.4 million and $19.8 million for
the years ended December 31, 2005 and 2004, respectively.
Certain of the operating lease commitments of the former Co-Steel entities were
at lease rates in excess of fair value as of the acquisition date. Accordingly,
a purchase accounting liability was recorded by the Company for the present
value of the unfavorable lease commitments.
SERVICE COMMITMENTS
The Company has long-term contracts with several raw material suppliers. The
Company typically realizes lower costs and improved service from these
contracts. The Company believes these raw materials would be readily available
in the market without such contracts.
NOTE 16 - OTHER EXPENSE/INCOME
Other expenses, net of other income for the year ended December 31, 2005,
consists primarily of $14 million of fixed costs associated with the idled
Beaumont, Texas steel mill facility and a $3.3 million write-down on certain
assets held for sale. These expenses were partially offset by $1.1 million
collected under the U.S. Continued Dumping Subsidy Offset Act and other
miscellaneous receipts.
Other income, net of other expenses for the year ended December 31, 2004,
consists of income of $1.2 million from a power interruption claim, $1.0 million
collected under the US Continued Dumping Subsidy Offset Act, and $1.0 million
from the mark to market of trading securities.
NOTE 17 -- SEGMENT INFORMATION
The Company is organized into two primary business segments: (a) Steel mills and
(b) Downstream products. Steel products sold to the downstream divisions are
sold at market prices with intracompany transactions eliminated upon
consolidation. Performance is evaluated and resources allocated based on
specific segment requirements and measurable factors. Segment assets are those
assets that are specifically identified with the operations in each operational
segment. Corporate assets include primarily: cash; assets held for sale; some
property, plant and equipment; deferred income taxes; and deferred financing
costs. Corporate expense includes: corporate headquarters staff, including
executive management; human resources; finance and accounting; procurement and
environmental; and management information systems. Included in these respective
areas are payroll costs, travel and entertainment, professional fees and other
costs that may not be directly attributable to either specific segment.
Operational results and other financial data for the geographic and two business
segments for the years ended December 31 are presented below ($000s):
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------- -----------------
REVENUE FROM EXTERNAL CUSTOMERS
Steel mills $3,087,160 $2,492,190
Downstream products 809,983 517,664
---------- ----------
Total $3,897,143 $3,009,854
========== ==========
INTER-COMPANY SALES
Steel mills $ 866,006 $ 688,450
Downstream products -- --
Corp/eliminations/other (866,006) (688,450)
---------- ----------
Total $ -- $ --
========== ==========
TOTAL SALES
Steel mills $3,953,166 $3,180,640
Downstream products 809,983 517,664
Corp/eliminations/other (866,006) (688,450)
---------- ----------
Total $3,897,143 $3,009,854
========== ==========
OPERATING INCOME (LOSS):
Steel mills $ 401,747 $ 428,810
Downstream products 46,420 18,871
Corp/eliminations/other (47,662) (74,405)
---------- ----------
Total $ 400,505 $ 373,276
========== ==========
DEPRECIATION AND AMORTIZATION EXPENSE
18
Steel mills $ 82,972 $ 63,742
Downstream products 7,939 6,318
Corp/eliminations/other 14,780 11,802
---------- ----------
Total $ 105,691 $ 81,862
========== ==========
SEGMENT ASSETS
Steel mills $1,840,562 $1,848,390
Downstream products 284,752 265,833
Corp/eliminations/other 704,137 478,308
---------- ----------
Total $2,829,451 $2,592,531
========== ==========
SEGMENT GOODWILL
Steel mills $ 90,889 $ 90,889
Downstream products 31,827 31,827
Corp/eliminations/other -- --
---------- ----------
Total $ 122,716 $ 122,716
========== ==========
CAPITAL EXPENDITURES
Steel mills $ 119,416 $ 74,797
Downstream products 5,237 3,274
Corp/eliminations/other 11,211 4,078
---------- ----------
Total $ 135,864 $ 82,149
========== ==========
Geographic data is as follows:
UNITED STATES CANADA TOTAL
------------- -------- ----------
DECEMBER 31, 2005
Revenue from external customers $3,078,901 $818,242 $3,897,143
Long-lived assets 660,404 295,197 955,601
DECEMBER 31, 2004
Revenue from external customers $2,480,627 $529,227 $3,009,854
Long-lived assets 634,325 285,537 919,862
YEAR ENDED YEAR ENDED
DECEMBER 31, 2005 DECEMBER 31, 2004
----------------- -----------------
REVENUES BY PRODUCT LINES
Mill finished goods:
Stock rebar $ 858,095 $ 627,765
Merchant bar/special sections 1,699,091 1,247,004
Rod 362,978 423,516
---------- ----------
Total mill finished goods 2,920,164 2,298,285
Billets 9,951 10,442
---------- ----------
Total mill products 2,930,115 2,308,727
Other mill segments 158,095 183,463
Fabricating and downstream 808,933 517,664
---------- ----------
Total segment revenues $3,897,143 $3,009,854
========== ==========
NOTE 18 -- DIFFERENCES BETWEEN UNITED STATES AND CANADIAN GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES
The Company's consolidated financial statements are prepared in accordance with
U.S. generally accepted accounting principles ("GAAP"). The most significant
differences between United States and Canadian GAAP, in terms of impact on the
Company's consolidated financial statements, relate to the accounting for joint
ventures, pensions and the reporting of comprehensive income.
The following tables reconcile the consolidated statements of earnings as
reported under U.S. GAAP with those that would have been reported under Canadian
GAAP:
19
YEAR ENDED 2005 2004
---------- -------- --------
NET INCOME -- U.S. GAAP ................................. $295,497 $337,669
Adjustment to purchase price allocation relating to
differences under Canadian GAAP (net of tax) (a) ..... 2,622 1,360
Maintenance shutdown accrual (net of tax) (d) ........... 3,876 2,507
-------- --------
NET INCOME -- CANADIAN GAAP ............................ $301,995 $341,536
======== ========
Net earnings per share -- Canadian GAAP
Basic ................................................ $ 0.99 $ 1.47
Diluted .............................................. $ 0.99 $ 1.46
======== ========
(a) Adjustment to Purchase Price Allocation relating to differences under
Canadian GAAP
Under Canadian GAAP, joint ventures are accounted for using the
proportionate consolidation method, while under U.S. GAAP, joint ventures are
accounted for under the equity method. The different accounting treatment
affects only the display and classification of financial statement items and not
net income or shareholders' equity. See note 6 for summarized financial
information in respect of the Company's joint ventures.
Because of the different treatment of joint ventures between Canadian GAAP
and U.S. GAAP as well as a difference in the treatment for accounting for
convertible debentures at the time of purchase, a permanent difference resulted
from the allocation of the purchase price. Under purchase accounting, the excess
of the value of the assets over the purchase price (negative goodwill) is
allocated to the long term assets acquired. Under Canadian GAAP, because the
joint venture assets are proportionately accounted for and therefore there is no
investment in subsidiary long term asset, the negative goodwill is allocated
only against property, plant and equipment. Under U.S. GAAP, the negative
goodwill is allocated to property, plant and equipment and investment in joint
ventures. As a result, there is a difference in depreciation expense. Also, due
to the difference in accounting for convertible debentures at the time of
purchase, there is a difference in interest expense.
(b) Comprehensive Income
United States accounting standards for reporting comprehensive income are
set forth in SFAS No. 130. Comprehensive income represents the change in equity
during a reporting period from transactions and other events and circumstances
from non-owner sources. Components of comprehensive income include items such as
net earnings (loss), changes in the fair value of investments not held for
trading, minimum pension liability adjustments, derivative instruments and
certain foreign currency translation gains and losses. Under Canadian GAAP,
there is no comprehensive income.
(c) Accumulated Unfunded Pension Liability
Under U.S. GAAP, the Company recognizes an additional minimum pension
liability charged to other comprehensive income in shareholders' equity to the
extent that the unfunded accumulated benefit obligation ("ABO") exceeds the fair
value of the plan assets and this amount is not covered by the pension liability
already recognized in the balance sheet. The calculation of the ABO is based on
the actuarial present value of the vested benefits to which the employee is
currently entitled, based on the employee's expected date of separation or
retirement. Canadian GAAP does not require the recognition of an additional
minimum liability.
(d) Maintenance shutdown accrual
Under U.S. GAAP, the Company accrues for scheduled annual maintenance
shutdowns. Canadian GAAP does not allow this accounting practice.
The following table indicates the cumulative effect of the above adjustments on
balance sheet accounts, displaying results under Canadian GAAP and U.S. GAAP:
CANADIAN GAAP UNITED STATES GAAP
--------------------------- ---------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
ASSETS
Current asset $1,646,042 $1,459,573 $1,551,103 $1,342,583
Property, plant and equipment 1,071,797 1,036,840 955,601 919,862
Goodwill 122,716 122,716 122,716 122,716
Other assets 32,741 26,280 200,031 207,370
LIABILITIES
Current liabilities (excluding indebtedness) 455,479 505,081 434,037 481,895
Current portion of long-term debt 1,084 4,713 1,014 4,644
Long-term debt 434,415 434,532 432,737 432,823
Other long-term liabilities 260,319 258,400 309,007 269,627
Deferred income taxes 89,481 55,681 68,637 38,778
SHAREHOLDERS' EQUITY
Invested capital 1,010,341 1,008,511 1,010,341 1,008,511
20
Retained earnings 553,830 318,770 540,415 311,853
Cumulative translation adjustment 68,347 59,721 -- --
Other comprehensive income (b) -- -- 33,263 44,400
Changes in shareholders' equity under Canadian GAAP were as follows:
YEAR ENDED DECEMBER 31, 2005 2004
- ----------------------- ---------- ----------
Shareholders' equity at beginning of year.................. $1,387,002 $ 548,156
Net earnings............................................... 301,995 341,536
Employee stock options..................................... 1,830 707
Stock issuance............................................. -- 460,203
Dividends.................................................. (66,935) --
Foreign currency translation adjustment.................... 8,626 36,400
---------- ----------
Shareholders' equity at end of period...................... $1,632,518 $1,387,002
========== ==========
The difference in consolidated shareholders' equity may be reconciled as
follows:
YEAR ENDED DECEMBER 31, 2005 2004
- ----------------------- ---------- ----------
Shareholders' equity based on U.S. GAAP .................. $1,584,019 $1,364,764
Adjust purchase price .................................... 7,031 4,410
Maintenance shutdown accrual ............................. 6,384 2,507
Additional minimum pension liability (d) ................. 35,084 15,321
---------- ----------
Cumulative increase in net earnings under Canadian GAAP .. 48,499 22,238
---------- ----------
Shareholders' equity based on Canadian GAAP .............. $1,632,518 $1,387,002
========== ==========
There are no significant differences with respect to the consolidated statement
of cash flows between U.S. GAAP and Canadian GAAP.
NOTE 19 -- RECENT ACCOUNTING PRONOUNCEMENTS
During December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 123 (Revised 2004), "Share-Based
Payment" (SFAS 123(R)). SFAS 123(R) replaces FASB Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123), supersedes Accounting Principles Board (APB) Opinion No. 25, "Accounting
for Stock issued to Employees" (APB 25), and amends FASB Statement of Financial
Accounting Standards No. 95, "Statement of Cash Flows" (SFAS 95). Statement
123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values and eliminates the pro forma disclosures that were permitted
as an alternative to financial statement recognition. Statement 123(R) was
originally effective the beginning of the first interim or annual period
beginning after June 15, 2005. However, on April 14, 2005, the Securities and
Exchange Commission (SEC) issued a new rule amending the effective date of SFAS
123(R) to the first fiscal year beginning after June 15, 2005. Accordingly, the
Company will implement the revised standard in the first quarter of fiscal year
2006, under the "modified prospective" method. The Company is currently
assessing the implications of this revised standard and the effect it will have
on its results of operations in the first quarter of 2006 and thereafter.
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs". This statement
clarifies the accounting for the abnormal amount of idle facilities expense,
freight, handling costs and wasted material. This statement requires that those
items be recognized as current-period expense. In addition the statement
requires that allocation of fixed overhead to the cost of conversion be based on
the normal capacity of the production facilities. This statement is effective
for fiscal years beginning after June 15, 2005. The Company's current inventory
accounting policy follows SFAS 151; therefore, the adoption of SFAS 151 will not
have any impact on the consolidated results of operations.
21
NOTE 20 -- FINANCIAL INFORMATION RELATED TO SUBSIDIARY GUARANTORS
Consolidating financial information related to the Company and its Subsidiary
Guarantors and non-Guarantors as of December 31, 2005 and December 31, 2004 and
for the years ended December 31, 2005 and December 31, 2004 is disclosed to
comply with the reporting requirements of the Company's Subsidiary Guarantors.
The Subsidiary Guarantors are wholly-owned subsidiaries of the Company which
have fully and unconditionally guaranteed the Company's 10 3/8% Senior Notes due
2011. The non-Guarantors are subsidiaries of the Company, and non wholly-owned
subsidiaries like AmeriSteel Bright Bar, which have not fully and
unconditionally guaranteed the Company's 10 3/8% Senior Notes due 2011.
Consolidating financial information follows:
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2005
(US$ IN THOUSANDS)
GERDAU
AMERISTEEL NON-
GUSAP CORPORATION GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ----------- ----------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,413 $ 21,233 $ 386,995 $ 618 $ -- $ 414,259
Restricted cash and cash equivalents -- -- 473 -- -- 473
Accounts receivable, net -- 55,717 287,298 1,743 -- 344,758
Inventories -- 107,584 634,749 2,832 -- 745,165
Deferred tax assets -- -- 23,212 -- -- 23,212
Other current assets 2 5,775 17,343 116 -- 23,236
-------- ---------- ---------- --------- ----------- ----------
TOTAL CURRENT ASSETS 5,415 190,309 1,350,070 5,309 -- 1,551,103
INVESTMENT IN SUBSIDIARIES 445,946 1,201,423 719,544 8,785 (2,222,259) 153,439
PROPERTY, PLANT AND EQUIPMENT -- 204,092 748,385 3,124 -- 955,601
GOODWILL -- -- 118,029 4,687 -- 122,716
DEFERRED FINANCING COSTS 10,923 568 2,931 29 -- 14,451
DEFERRED TAX ASSETS -- 28,937 (5,513) -- -- 23,424
OTHER ASSETS -- 8,301 416 -- -- 8,717
-------- ---------- ---------- --------- ----------- ----------
TOTAL ASSETS $462,284 $1,633,630 $2,933,862 $ 21,934 $(2,222,259) $2,829,451
======== ========== ========== ========= =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ -- $ 56,894 $ 227,490 $ 635 $ -- $ 285,019
Intercompany 1,707 12,512 (28,461) (129,609) 143,851 --
Accrued salaries, wages and employee
benefits -- 7,129 59,541 74 -- 66,744
Accrued Interest 19,259 1,303 441 -- -- 21,003
Other current liabilities (164) 8,999 51,022 1,414 -- 61,271
Current portion of long-term borrowings -- 146 421 447 -- 1,014
-------- ---------- ---------- --------- ----------- ----------
TOTAL CURRENT LIABILITIES 20,802 86,983 310,454 (127,039) 143,851 435,051
LONG-TERM BORROWINGS 398,780 304 31,705 1,948 -- 432,737
CONVERTIBLE DEBENTURE -- 96,594 -- -- -- 96,594
RELATED PARTY BORROWINGS 4,385 66,930 72,025 511 (143,851) --
ACCRUED BENEFIT OBLIGATION -- 94,575 52,592 -- -- 147,167
OTHER LIABILITIES -- 7,451 57,795 -- -- 65,246
22
DEFERRED TAX LIABILITIES -- -- 67,804 833 -- 68,637
-------- ---------- ---------- --------- ----------- ----------
TOTAL LIABILITIES 423,967 352,837 592,375 (123,747) -- 1,245,432
SHAREHOLDERS' EQUITY
Capital Stock 61,109 1,306,675 1,937,484 35,136 (2,330,063) 1,010,341
Retained earnings (accumulated deficit) (13,161) 36,301 408,113 137,316 (28,154) 540,415
Accumulated other comprehensive income (9,631) (62,183) (4,110) (26,771) 135,958 33,263
-------- ---------- ---------- --------- ----------- ----------
TOTAL SHAREHOLDERS' EQUITY 38,317 1,280,793 2,341,487 145,681 (2,222,259) 1,584,019
-------- ---------- ---------- --------- ----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $462,284 $1,633,630 $2,933,862 $ 21,934 $(2,222,259) $2,829,451
======== ========== =========== ========== ============ ==========
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2004
(US$ IN THOUSANDS)
GERDAU
AMERISTEEL NON-
GUSAP CORPORATION GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------- ----------- ----------- ---------- ------------ ------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ -- $ 51,212 $ 36,020 $ 900 $ -- $ 88,132
Restricted cash and cash equivalents -- -- 465 -- -- 465
Accounts receivable, net -- 65,972 292,766 1,641 -- 360,379
Inventories -- 128,942 721,036 3,177 -- 853,155
Deferred tax assets -- -- 8,754 -- -- 8,754
Other current assets -- 2,453 29,176 69 -- 31,698
-------- ---------- ---------- --------- ----------- ----------
TOTAL CURRENT ASSETS -- 248,579 1,088,217 5,787 -- 1,342,583
INVESTMENT IN SUBSIDIARIES 445,946 768,071 230,954 8,786 (1,275,962) 177,795
PROPERTY, PLANT AND EQUIPMENT -- 192,887 723,805 3,170 -- 919,862
GOODWILL -- -- 118,029 4,687 -- 122,716
DEFERRED FINANCING COSTS 9,557 109 3,916 34 -- 13,616
DEFERRED TAX ASSETS -- 21,570 (13,336) -- -- 8,234
OTHER ASSETS -- (21) 7,746 -- -- 7,725
-------- ---------- ---------- --------- ----------- ----------
TOTAL ASSETS $455,503 $1,231,195 $2,159,331 $ 22,464 $(1,275,962) $2,592,531
======== ========== ========== ========= =========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ -- $ 75,200 $ 219,513 $ 288 $ -- $ 295,001
Intercompany 5,076 (315,055) 433,695 (123,716) -- --
Accrued salaries, wages and employee
benefits -- 6,465 52,851 2 -- 59,318
Accrued Interest 19,259 1,177 635 -- -- 21,071
Other current liabilities (447) 9,687 44,582 893 -- 54,715
Accrued acquisition costs -- -- 51,790 -- -- 51,790
Current portion of long-term borrowings -- 104 4,092 448 -- 4,644
-------- ---------- ---------- --------- ----------- ----------
TOTAL CURRENT LIABILITIES 23,888 (222,422) 807,158 (122,085) -- 486,539
LONG-TERM BORROWINGS 397,986 1,518 31,032 2,287 -- 432,823
CONVERTIBLE DEBENTURE -- 86,510 -- -- -- 86,510
RELATED PARTY BORROWINGS -- 11,702 (11,702) -- -- --
ACCRUED BENEFIT OBLIGATION -- 59,393 55,399 -- -- 114,792
OTHER LIABILITIES -- 1,062 67,263 -- -- 68,325
DEFERRED TAX LIABILITIES -- -- 37,850 928 -- 38,778
-------- ---------- ---------- --------- ----------- ----------
TOTAL LIABILITIES 421,874 (62,237) 987,000 (118,870) -- 1,227,767
SHAREHOLDERS' EQUITY
23
Capital Stock 61,109 1,264,920 1,020,001 30,471 (1,367,990) 1,008,511
Retained earnings (accumulated deficit) (17,849) 54,899 154,982 116,325 3,496 311,853
Accumulated other comprehensive income (9,631) (26,387) (2,652) (5,462) 88,532 44,400
-------- ---------- ---------- --------- ----------- ----------
TOTAL SHAREHOLDERS' EQUITY 33,629 1,293,432 1,172,331 141,334 (1,275,962) 1,364,764
-------- ---------- ---------- --------- ----------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $455,503 $1,231,195 $2,159,331 $ 22,464 $(1,275,962) $2,592,531
======== ========== ========== ========= =========== ==========
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 2005
(US$ IN THOUSANDS)
GERDAU
AMERISTEEL NON-
GUSAP CORPORATION GUARANTORS GUARANTORS CONSOLIDATED
-------- ----------- ----------- ---------- ------------
NET SALES $ -- $578,008 $3,293,657 $25,478 $3,897,143
OPERATING EXPENSES
Cost of sales (exclusive of depreciation) -- 507,879 2,723,417 22,569 3,253,865
Selling and administrative -- 16,179 108,051 1,328 125,558
Depreciation -- 21,064 81,772 199 103,035
Other operating (income) expense -- (537) 14,776 (59) 14,180
-------- -------- ---------- ------- ----------
-- 544,585 2,928,016 24,037 3,496,638
INCOME FROM OPERATIONS -- 33,423 365,641 1,441 400,505
EARNINGS FROM JOINT VENTURES -- -- 91,201 -- 91,201
-------- -------- ---------- ------- ----------
INCOME BEFORE OTHER EXPENSES & INCOME TAXES -- 33,423 456,842 1,441 491,706
OTHER EXPENSES
Interest, net 43,147 1,172 5,935 166 50,420
Foreign exchange loss (gain) 12 (391) (1,190) 15 (1,554)
Amortization of deferred financing costs 1,558 45 1,048 5 2,656
-------- -------- ---------- ------- ----------
44,717 826 5,793 186 51,522
(LOSS) INCOME BEFORE TAXES & MINORITY INTEREST (44,717) 32,597 451,049 1,255 440,184
INCOME TAX EXPENSE 1,114 8,397 134,076 1,100 144,687
-------- -------- ---------- ------- ----------
(LOSS) INCOME BEFORE DIVIDEND INCOME (45,831) 24,200 316,973 155 295,497
STOCK DIVIDENDS (35,240) (18,868) 54,108 -- --
-------- -------- ---------- ------- ----------
NET (LOSS) INCOME $(10,591) $ 43,068 $ 262,865 $ 155 $ 295,497
======== ======== ========== ======= ==========
24
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 2004
(US$ IN THOUSANDS)
GERDAU
AMERISTEEL NON-
GUSAP CORPORATION GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED
-------- ----------- ---------- ---------- ----------- ------------
NET SALES $ -- $601,196 $2,387,684 $20,974 $ -- $3,009,854
OPERATING EXPENSES
Cost of sales (exclusive of depreciation) -- 503,954 1,930,478 16,513 -- 2,450,945
Selling and administrative -- 12,538 95,834 1,012 -- 109,384
Depreciation -- 17,941 61,166 204 -- 79,311
Other operating expense (income) -- 143 (3,205) -- -- (3,062)
-------- -------- ---------- ------- -------- ----------
-- 534,576 2,084,273 17,729 -- 2,636,578
INCOME FROM OPERATIONS -- 66,620 303,411 3,245 -- 373,276
EARNINGS FROM JOINT VENTURES -- -- 141,474 -- -- 141,474
-------- -------- ---------- ------- -------- ----------
INCOME BEFORE OTHER EXPENSES & INCOME TAXES -- 66,620 444,885 3,245 -- 514,750
OTHER EXPENSES
Interest, net 42,715 5,930 7,528 157 -- 56,330
Foreign exchange loss (gain) 26 9,683 (1,581) (5) -- 8,123
Amortization of deferred financing costs 1,463 45 1,043 -- -- 2,551
-------- -------- ---------- ------- -------- ----------
44,204 15,658 6,990 152 -- 67,004
(LOSS) INCOME BEFORE TAXES & MINORITY (44,204) 50,962 437,895 3,093 -- 447,746
INTEREST
INCOME TAX EXPENSE 777 18,960 90,189 151 -- 110,077
-------- -------- ---------- ------- -------- ----------
(LOSS) INCOME BEFORE DIVIDEND INCOME (44,981) 32,002 347,706 2,942 -- 337,669
STOCK DIVIDENDS (44,119) -- -- -- 44,119 --
-------- -------- ---------- ------- -------- ----------
NET(LOSS) INCOME $ (862) $ 32,002 $ 347,706 $ 2,942 $(44,119) $ 337,669
======== ======== ========== ======= ======== ==========
25
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2005
(US$ IN THOUSANDS)
GERDAU
AMERISTEEL NON-
OPERATING ACTIVITIES GUSAP CORPORATION GUARANTORS GUARANTORS CONSOLIDATED
-------- ----------- ---------- ---------- ------------
Net (loss) income $(10,591) $ 43,068 $ 262,865 $ 155 $ 295,497
Adjustment to reconcile net
income to net cash (used in)
provided by operating activities:
Depreciation -- 21,064 81,772 199 103,035
Amortization 1,558 45 1,048 5 2,656
Deferred income taxes -- (8,005) 25,261 -- 17,256
Loss on disposition of property, plant and -- -- 3,328 -- 3,328
equipment
Income from joint ventures -- -- (91,201) -- (91,201)
Distributions from joint ventures -- -- 115,828 -- 115,828
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable -- 12,336 6,705 (143) 18,898
Inventories -- 23,943 88,768 345 113,056
Other assets -- (2,748) 1,469 (5) (1,284)
Liabilities 13,652 356,451 (368,079) (637) 1,387
-------- --------- --------- ----- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 4,619 446,154 127,764 (81) 578,456
INVESTING ACTIVITIES
Intercompany investments -- (385,320) 385,029 291 --
Additions to property, plant and equipment -- (24,809) (110,903) (152) (135,864)
Proceeds received from disposition of property,
plant and equipment -- -- 6,444 -- 6,444
Acquisitions -- -- (49,654) -- (49,654)
Sales of short term investments -- -- 140,950 -- 140,950
Purchases of short term investments -- -- (140,950) -- (140,950)
-------- --------- --------- ----- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES -- (410,129) 230,916 139 (179,074)
FINANCING ACTIVITIES
Payments on term loans 794 (125) (4,721) (340) (4,392)
Additions to deferred financing costs -- (515) (2,976) -- (3,491)
Cash dividends -- (66,935) -- -- (66,935)
Change in restricted cash -- -- (8) -- (8)
Proceeds from issuance of employee stock purchases -- 1,830 -- -- 1,830
-------- --------- --------- ----- ---------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 794 (65,745) (7,705) (340) (72,996)
Effect of exchange rate changes -- (259) -- -- (259)
-------- --------- --------- ----- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,413 (29,979) 350,975 (282) 326,127
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD -- 51,212 36,020 900 88,132
-------- --------- --------- ----- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,413 $ 21,233 $ 386,995 $ 618 $ 414,259
======== ========= ========= ===== =========
26
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2004
(US$ IN THOUSANDS)
GERDAU
AMERISTEEL NON-
OPERATING ACTIVITIES GUSAP CORPORATION GUARANTORS GUARANTORS ELIMINATION CONSOLIDATED
------- ----------- ---------- ---------- ----------- ------------
Net (loss) income $ (862) $ 32,002 $ 347,706 $ 2,942 $(44,119) $ 337,669
Adjustment to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation -- 17,941 61,166 204 -- 79,311
Amortization 1,463 45 1,043 -- -- 2,551
Deferred income taxes -- 14,115 (6,652) -- -- 7,463
Income from joint ventures -- -- (141,474) -- -- (141,474)
Distributions from joint ventures -- -- 82,803 -- -- 82,803
Changes in operating assets and liabilities, net
of acquisitions:
Accounts receivable -- (15,430) 2,352 (277) -- (13,355)
Inventories -- (49,523) (227,368) (1,788) -- (278,679)
Other assets -- 354 (9,883) (2) -- (9,531)
Liabilities (1,316) (294,647) 355,124 (939) -- 58,222
------- --------- --------- ------- -------- ---------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES (715) (295,143) 464,817 140 (44,119) 124,980
INVESTING ACTIVITIES
Intercompany investments -- -- (44,119) -- 44,119 --
Additions to property, plant and equipment -- (28,457) (53,690) (2) -- (82,149)
Acquisitions -- (21,316) (277,106) -- -- (298,422)
Sales of short term investments -- -- 60,051 -- -- 60,051
Purchases of short term investments -- -- (60,051) -- -- (60,051)
------- --------- --------- ------- -------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES -- (49,773) (374,915) (2) 44,119 (380,571)
FINANCING ACTIVITIES
Proceeds from issuance of new debt -- -- 25,000 -- -- 25,000
Revolving credit borrowings (payments) 715 (71,509) (84,434) (402) -- (155,630)
Change in restricted cash -- -- (465) -- -- (465)
Proceeds from issuance of employee stock -- 698 9 -- 707
Proceeds from issuance of common stock -- 460,203 -- -- -- 460,203
------- --------- --------- ------- -------- ---------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES 715 389,392 (59,890) (402) -- 329,815
Effect of exchange rate changes
-- 3,703 195 60 -- 3,958
------- --------- --------- ------- -------- ---------
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
-- 48,179 30,207 (204) -- 78,182
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
-- 3,033 5,813 1,104 -- 9,550
------- --------- --------- ------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ -- $ 51,212 $ 36,020 $ 900 $ -- $ 88,132
======= ========= ========= ======= ======== =========
27
ADDITIONAL DISCLOSURE
CERTIFICATIONS AND DISCLOSURE REGARDING CONTROLS AND PROCEDURES.
(a) Certifications. See Exhibits 99.1 and 99.2 to this Annual Report on Form
40-F.
(b) Disclosure Controls and Procedures. As of the end of the registrant's
fiscal year ended December 31, 2005, an evaluation of the effectiveness of
the registrant's "disclosure controls and procedures" (as such term is
defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")) was carried out by the registrant's
principal executive officer and principal financial officer. Based upon
that evaluation, the registrant's principal executive officer and principal
financial officer have concluded that as of the end of that fiscal year,
the registrant's disclosure controls and procedures are effective to ensure
that information required to be disclosed by the registrant in reports that
it files or submits under the Exchange Act is (i) recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms and (ii) accumulated and communicated
to the registrant's management, including its principal executive officer
and principal financial officer, to allow timely decisions regarding
required disclosure.
It should be noted that while the registrant's principal executive officer
and principal financial officer believe that the registrant's disclosure
controls and procedures provide a reasonable level of assurance that they
are effective, they do not expect that the registrant's disclosure controls
and procedures or internal control over financial reporting will prevent
all errors and fraud. A control system, no matter how well conceived or
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met.
(c) Internal Controls and Changes in Internal Control Over Financial Reporting.
During the fiscal year ended December 31, 2005, there were no changes in
the registrant's internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, the
registrant's internal control over financial reporting.
NOTICES PURSUANT TO REGULATION BTR.
None.
AUDIT COMMITTEE FINANCIAL EXPERT.
The required disclosure is included under the heading "Audit Committee" in the
registrant's Annual Information Form for the fiscal year ended December 31,
2005, filed as part of this Annual Report on Form 40-F.
CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to its senior executive
officers, including its chief executive officer, chief financial officer, the
controller and all of the other persons employed by the registrant or its
subsidiaries who have significant responsibility for preparing or overseeing the
preparation of the registrant's financial statements and other financial data
included in the registrant's periodic reports to the Canadian securities
regulatory authorities and the U.S. Securities and Exchange Commission and in
other public communications made by the registrant ("Code of Ethics Applicable
to Senior Executives"). The registrant has also adopted a code of ethics and
business conduct ("Code of Ethics and Business Conduct") that is applicable to
all directors, officers and employees. You can view our Code of Ethics
Applicable to Senior Executives and Code of Ethics and Business Conduct on our
website at www.gerdauameristeel.com
PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The required disclosure is included under the heading "Audit Fees" in the
registrant's Annual Information Form for the fiscal year ended December 31,
2005, filed as part of this Annual Report on Form 40-F.
PRE-APPROVAL POLICIES AND PROCEDURES.
The required disclosure is included under the heading "Audit
Committee--Pre-Approval Policies and Procedures" in the registrant's Annual
Information Form for the fiscal year ended December 31, 2005, filed as part of
this Annual Report on Form 40-F.
OFF-BALANCE SHEET ARRANGEMENTS.
The required disclosure is included under the heading "Off-Balance Sheet
Arrangements" in the registrant's Management's Discussion and Analysis of
Financial Condition and Results of Operations for the fiscal year ended December
31, 2005, filed as part of this Annual Report on Form 40-F.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS.
The required disclosure is included under the heading "Contractual Obligations"
in the registrant's Management's Discussion and Analysis of Financial Condition
and Results of Operations for the fiscal year ended December 31, 2005, filed as
part of this Annual Report on Form 40-F.
IDENTIFICATION OF THE AUDIT COMMITTEE.
The required disclosure is included under the heading "Audit Committee" in the
registrant's Annual Information Form for the fiscal year ended December 31,
2005, filed as part of this Annual Report on Form 40-F.
ADDITIONAL DISCLOSURE REQUIRED BY THE NEW YORK STOCK EXCHANGE
Director Independence
The required disclosure is included under the heading "Director Independence" in
the registrant's Annual Information Form for the fiscal year ended December 31,
2005, filed as part of this Annual Report on Form 40-F.
Presiding Director at Meetings
The required disclosure is included under the heading "Presiding Director at
Meetings" in the registrant's Annual Information Form for the fiscal year ended
December 31, 2005, filed as part of this Annual Report on Form 40-F.
Communication with Non-Management Directors
The required disclosure is included under the heading "Communication with
Non-Management Directors" in the registrant's Annual Information Form for the
fiscal year ended December 31, 2005, filed as part of this Annual Report on Form
40-F.
Corporate Governance
The required disclosure is included under the heading "Corporate Governance" in
the registrant's Annual Information Form for the fiscal year ended December 31,
2005, filed as part of this Annual Report on Form 40-F.
Board Committee Mandates
The required disclosure is included under the heading "Board Committee Mandates"
in the registrant's Annual Information Form for the fiscal year ended December
31, 2005, filed as part of this Annual Report on Form 40-F.
UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
A. UNDERTAKING.
The registrant undertakes to make available, in person or by telephone,
representatives to respond to inquiries made by the Securities and Exchange
Commission (the "Commission") staff, and to furnish promptly, when requested to
do so by the Commission staff, information relating to: the securities
registered pursuant to Form 40-F; the securities in relation to which the
obligation to file an annual report on Form 40-F arises; or transactions in said
securities.
B. CONSENT TO SERVICE OF PROCESS.
The Company has previously filed a Form F-X in connection with the class of
securities in relation to which the obligation to file this report arises.
Any change to the name or address of the agent for service of process of
the registrant shall be communicated promptly to the Securities and Exchange
Commission by an amendment to the Form F-X referencing the file number of the
relevant registration statement.
SIGNATURES
Pursuant to the requirements of the Exchange Act, the registrant certifies
that it meets all of the requirements for filing on Form 40-F and has duly
caused this annual report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 29, 2006.
GERDAU AMERISTEEL CORPORATION
By /s/ Mario Longhi
-------------------------------------
Name: Mario Longhi
Title: Chief Executive Officer
EXHIBIT INDEX
Exhibit Description
- ------- -----------
99.1 Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or
15d-14 of the Securities Exchange Act of 1934
99.2 Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or
15d-14 of the Securities Exchange Act of 1934
99.3 Section 1350 Certification of Chief Executive Officer
99.4 Section 1350 Certification of Chief Financial Officer
99.5 Opinion of Ernst & Young LLP
99.6 Consent of Ernst & Young LLP
99.7 Consent of PricewaterhouseCoopers LLP