UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 40-F
[_] Registration Statement pursuant to section 12 of the Securities Exchange
Act of 1934
[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, 2003 Commission File Number: 0-19661
IPSCO INC.
(Exact name of Registrant as specified in its charter)
CANADA
(Province or other jurisdiction of incorporation or organization)
3310/3317/3390
(Primary Standard Industrial Classification Code Numbers)
98-0077354
(I.R.S. Employer Identification Number (if applicable))
P.O. BOX 1670, REGINA, SASKATCHEWAN, CANADA S4P 3C7
TELEPHONE: (306) 924-7700
(Address and telephone number of Registrant's principal executive offices)
MR. GEORGE VALENTINE, VICE PRESIDENT, GENERAL COUNSEL AND CORPORATE SECRETARY,
IPSCO INC. 650 WARRENVILLE ROAD, SUITE 500, LISLE,
ILLINOIS 60532, TELEPHONE: (630) 810-4800
(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: Common Shares
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS: None
SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(D)
OF THE ACT: None
FOR ANNUAL REPORTS, INDICATE BY CHECK MARK THE INFORMATION FILED WITH THIS FORM:
[X] Annual information form [X] Audited annual financial statements
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.
47,940,907 Common Shares outstanding as of December 31, 2003
Indicate by check mark whether the Registrant is furnishing the information
contained in this Form 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 filing 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 [_] No [X]
This Annual Report on Form 40-F shall be incorporated by reference into, or as
an exhibit to, as applicable, the registrant's Registration Statement on Form
S-8 (File No. 333-11732) under the Securities Act of 1933.
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CONTROLS AND PROCEDURES
IPSCO Inc. ("IPSCO") maintains disclosure controls and other procedures and
internal control over financial reporting designed to ensure that information
required to be disclosed in the reports filed under the Exchange Act, as
amended, is recorded, processed, summarized and reported within the time periods
specified in the U.S. Securities and Exchange Commission's (the "Commission")
rules and forms. IPSCO's principal executive and financial officers evaluated
the effectiveness of IPSCO's disclosure controls and procedures as of the end of
the period covered by this report and concluded that such disclosure controls
and procedures are effective for the purpose for which they were designed as of
the end of such period.
During the fiscal year ended December 31, 2003, there were no changes in IPSCO's
internal control over financial reporting that have materially affected, or are
reasonably likely to materially affect, IPSCO's internal control over financial
reporting.
AUDIT COMMITTEE FINANCIAL EXPERT
The Board of Directors of IPSCO has determined that IPSCO has more than one
"audit committee financial expert" serving on its Audit Committee and has named
Mr. D. Murray Wallace, Chairman of the Audit Committee, as its audit committee
financial expert. Mr. Wallace is, as are all members of the Board of Directors
of IPSCO other than the President and Chief Executive Officer, "independent" as
such term is defined in the New York Stock Exchange Listed Company Manual.
CODE OF ETHICS
IPSCO has a Code of Business Conduct as well as a Conflicts of Interest Policy
applicable to all directors, officers and employees of the Company that,
together, constitute a "code of ethics" as set forth in the Commission's rules.
Both the Code of Business Conduct and the Conflicts of Interest Policy may be
viewed on IPSCO's website (WWW.IPSCO.COM). During the period covered by this
report there have been no amendments to, nor waivers of, either the Code of
Business Conduct or the Conflicts of Interest Policy applicable to IPSCO's
principal executive officer, principal financial officer or principal accounting
officer. In the event IPSCO makes any amendment to, or grants any waiver of, a
provision of the Code of Business Conduct or the Conflicts of Interest Policy,
that applies to the noted officers and that requires disclosure under applicable
Commission rules, ISPCO intends to disclose such amendment or waiver, the nature
of and reasons for it, along with the name of the person to whom it was granted
and the date on its internet website.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Ernst & Young LLP ("E&Y") has served as the principal accountant for the audit
of IPSCO's annual financial statements since April 1991. The aggregate amounts
billed by E&Y to IPSCO for each of the last two fiscal years for audit fees,
audit-related fees, tax fees and all other fees, including expenses, are set
forth below.
AUDIT FEES: The aggregate fees billed for each of the last two fiscal years of
IPSCO, ending December 31, 2002 and December 31, 2003, for professional services
rendered by E&Y for the audit of its annual financial statements or services
that are normally provided by E&Y in connection with statutory and regulatory
filings or engagements for those fiscal years are $771,400 and $927,300,
respectively.
AUDIT-RELATED FEES: The aggregate fees billed for each of the last two fiscal
years of IPSCO, ending December 31, 2002 and December 31, 2003, for assurance
and related services by E&Y primarily in the nature of the audit of IPSCO
Enterprises Inc.'s Retirement Savings and Profit Sharing Plan (401K) and
assistance with IPSCO's Sarbanes-Oxley Act Section 404 Compliance Project were
$16,300 and $83,500 respectively. IPSCO's Audit Committee approved all of the
noted services.
3
TAX FEES: The aggregate fees billed for each of the last two fiscal years of
IPSCO, ending December 31, 2002 and December 31, 2003, for professional services
rendered by E&Y for tax compliance, tax advice and tax planning, primarily in
the nature of review of tax returns and audits, income tax research and
consultation with respect to tax restructuring and planning opportunities,
calculation of accounting method change, review of certain earnings and profit
calculations for 1992 to 2002 and other miscellaneous tax services were $738,800
and $381,900, respectively. IPSCO's Audit Committee approved all of the noted
services.
ALL OTHER FEES: Except as noted above, there were no other fees billed to IPSCO
for each of the last two fiscal years ending December 31, 2002 and December 31,
2003 by E&Y.
AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES: IPSCO's "Pre-Approval of
External Auditor Services" policy (the "Policy") describes the conditions upon
which IPSCO may engage its external auditors for audit, audit-related, tax and
other non-audit services. The Policy is reviewed and approved annually by
IPSCO's Audit Committee. All services provided by the external auditor must be
pre-approved by the Audit Committee prior to engagement. With respect to audit
services, in the normal course, the Chief Financial Officer (the "CFO") will
annually present proposed audit services and audit-related services to the Audit
Committee. Similarly, the CFO may annually present proposed, permissible
non-audit services for approval to the Audit Committee. Once the Audit Committee
has formally approved the proposed annual audit, audit-related and permissible
non-audit fees, the Audit Committee must further approve any increase to such
fees. Except as expressly permitted by the Commission's rules regarding auditor
independence, IPSCO will not engage the auditor to provide non-audit services in
the form of bookkeeping or other services relating to the accounting records or
financial statements of IPSCO; financial information systems design and
implementation; appraisal evaluation services, fairness opinions or
contribution-in-kind reports; actuarial services; internal auditing outsourcing
services; management functions or human resources; broker or dealer, investment
adviser or investment banking services; legal services and expert services
unrelated to the audit; or any other services that the United States Public
Company Accounting Oversight Board determines, by regulation, is impermissible.
Management is required to track total audit and non-audit service expenditures.
IPSCO's internal audit function provides semi-annual reports to the Audit
Committee that summarize the total budgeted audit fees, detail permissible
non-audit services over US$5,000 and note the total expenditures for permissible
non-audit services.
The Chair of the Audit Committee has the authority to pre-approve audit,
audit-related and non-audit services, other than the annual audit fee, on the
Audit Committee's behalf. All pre-approvals made by the Chair are presented to
the Audit Committee at its next meeting for ratification.
In the event the Audit Committee or its designate approves a permissible
non-audit service to be performed by the auditor, IPSCO will disclose such
approval in its period reports required by section 13(a) of the Exchange Act.
OFF-BALANCE SHEET ARRANGEMENTS
IPSCO's only off-balance sheet arrangements that have or are reasonably likely
to have a current or future effect on IPSCO's financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors are
related to the sale and leaseback of certain equipment and letters of credit.
The sale and leaseback arrangements originally totaled $173 million, the most
significant being the $150 million sale and leaseback of the Montpelier
Steelworks meltshop and caster, completed in 2000. IPSCO has an option, but is
not obligated, to purchase the equipment after seven and ten years for
predetermined amounts and at the end of the lease term for the fair market value
of the equipment, subject to a residual guarantee of $37.5 million. For Canadian
GAAP purposes this transaction was treated as a sale, and the subsequent lease
payments as operating expenses. For U.S. GAAP purposes this transaction was
recorded as a financing lease, with no recognition of the disposal of the
assets.
IPSCO has letters of credit outstanding totaling $13.3 million at December 31,
2003 and $12.1 million at December 31, 2002.
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CONTRACTUAL OBLIGATIONS
Contractual Obligations ($ millions) Payments Due by Period
Total Less than 1-3 years 4-5 years After 5
1 year years
Long-term debt 436 34 135 57 210
Operating leases 208 25 58 36 89
Service and supply contracts 298 63 118 51 66
---------------------------------------------------------------------
Total contractual cash obligations 942 122 311 144 365
=====================================================================
AUDIT COMMITTEE
IPSCO has a separately designated standing audit committee established in
accordance with section 3(a)(58)(A) of the Exchange Act. The members of the
Audit Committee are Ms. Juanita H. Hinshaw and Messrs. Michael A. Grandin, Allan
S. Olson, Arthur R. Price, D. Murray Wallace and John B. Zaozirny. Mr. Wallace
chairs the Audit Committee.
DISCLOSURE PURSUANT TO THE REQUIREMENTS OF THE NEW YORK STOCK EXCHANGE
PRESIDING DIRECTOR AT MEETINGS OF NON-MANAGEMENT DIRECTORS
IPSCO schedules regular executive sessions in which IPSCO's "non-management
directors" (as that term is defined in the rules of the New York Stock Exchange)
meet without management participation. The Chairman of IPSCO's board of
directors serves as the presiding director (the "Presiding Director") at such
sessions.
COMMUNICATION WITH NON-MANAGEMENT DIRECTORS
Shareholders may send communications to IPSCO's non-management directors by
writing to the Presiding Director, c/o George Valentine, Vice President, General
Counsel and Corporate Secretary, IPSCO Inc., P.O. Box 1670, Regina,
Saskatchewan, Canada S4P 3C7. Communications will be referred to the Presiding
Director for appropriate action. The status of all outstanding concerns
addressed to the Presiding Director will be reported to the board of directors
as appropriate.
CORPORATE GOVERNANCE GUIDELINES
In accordance with Section 303A.09 of the NYSE Listed Company Manual, IPSCO has
adopted a set of corporate governance guidelines, which are posted on IPSCO's
website (WWW.IPSCO.COM).
BOARD COMMITTEE CHARTERS
The charters of IPSCO's Audit Committee, Governance and Compliance Committee and
Management Resources and Compensation Committee are each available for viewing
on IPSCO's website (WWW.IPSCO.COM)., and are available in print to any
shareholder who requests them. Requests for copies of these documents should be
made by contacting: George Valentine, Vice President, General Counsel and
Corporate Secretary, IPSCO Inc., P.O. Box 1670, Regina, Saskatchewan, Canada S4P
3C7.
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UNDERTAKING AND CONSENT TO SERVICE OF PROCESS
UNDERTAKING
IPSCO undertakes to make available, in person or by telephone, representatives
to respond to inquiries made by 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.
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 IPSCO
shall be communicated promptly to the 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, IPSCO 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, thereto duly authorized.
Dated this 2nd day of April, 2004.
IPSCO Inc.
By: /s/ Robert L. Ratliff
Robert Ratliff,
Vice President and Chief Financial Officer
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Documents filed as part of this report:
1. Annual Information Form of IPSCO Inc. dated March 3, 2004
2. Management's Discussion and Analysis of Financial Condition and Results
of Operations for the fiscal year ended December 31, 2003
3. Consolidated Financial Statements for the fiscal years ended December
31, 2003 and 2002 including U.S. GAAP reconciliation note, together
with the auditors' report thereon
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
23.1 Consent of Independent Auditors
31.1 Certification of President and Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Vice President and Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of President and Chief Executive Officer and of
Vice President and Chief Financial Officer Pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
7
IPSCO INC.
ANNUAL INFORMATION FORM
(as of March 3, 2004)
[GRAPHIC OMITTED]
[LOGO - IPSCO]
Registered Head Office Operational Head Office
P.O. Box 1670, Armour Road 650 Warrenville Road, Suite 500
Regina, Saskatchewan S4P 3C7 Lisle, Illinois 60532
1-800-667-1616 1-877-594-7726
www.ipsco.com
THE COMPANY
NAME AND INCORPORATION
IPSCO Inc. (the "Company" or "IPSCO") was incorporated by certificate
of incorporation under the laws of Saskatchewan on July 13, 1956 and was
continued by articles of continuance under the Canada Business Corporations Act
on January 28, 1977. Originally known as Prairie Pipe Manufacturing Co. Ltd.,
the name of the Company was changed to Interprovincial Steel and Pipe
Corporation Ltd. on August 26, 1960. On April 2, 1984, the Company changed its
name to IPSCO Inc.
INTERCORPORATE RELATIONSHIPS
The following corporate organization chart shows IPSCO's principal
subsidiaries, each of which is 100% owned, and their jurisdictions of
incorporation.
[GRAPHIC OMITTED}
IPSCO INC.
(CANADA CORPORATION)
CANADIAN SUBSIDIARIES UNITED STATES SUBSIDIARIES
- --------------------- --------------------------
IPSCO Direct Inc. IPSCO Construction Inc.
(Alberta Corporation) (Alabama Corporation)
IPSCO Recycling Inc. IPSCO Enterprises Inc.
(Canada Corporation) (Delaware Corporation)
IPSCO Sales Inc. IPSCO Investments Inc.
(Canada Corporation) (Delaware Corporation)
IPSCO Saskatchewan Inc. IPSCO Minnesota Inc.
(Canada Corporation) (Delaware Corporation)
General Scrap Partnership IPSCO Sales Inc.
(Saskatchewan General Partnership) (Delaware Corporation)
Western Steel Limited IPSCO Steel Inc.
(British Columbia Corporation) (Delaware Corporation)
IPSCO Steel (Alabama) Inc.
(Alabama Corporation)
IPSCO Texas Inc.
(Delaware Corporation)
IPSCO Tubulars Inc.
(Delaware Corporation)
IPSCO Alabama Ltd.
(Alabama Limited
Partnership)
General Scrap Inc.
(Delaware Corporation)
2
In this Annual Information Form, unless otherwise indicated, a
reference to the "Company" or "IPSCO" includes IPSCO Inc. and its subsidiaries.
Reference to "dollars," "$" and "US$" are to United States dollars and reference
to "CDN$" are to Canadian dollars. Estimates of imports and other market
statistics are derived from a variety of external sources including the American
Iron and Steel Institute, the Canadian Steel Producers Association and certain
government agencies and should not be relied on as being fully accurate but
rather indicative of trends and relative sizes. When the United States and
Canada are referred to together, the import figures include amounts coming into
the two countries from other than the United States and Canada.
GENERAL DEVELOPMENT OF THE BUSINESS
THREE-YEAR HISTORY - SIGNIFICANT EVENTS OF 2001, 2002 AND 2003
2001
IPSCO achieved sales of $931 million including $27 million of revenue
recorded by the new Mobile Steelworks during start up. Sales were 2% lower than
the prior year primarily due to price attrition resulting from the prior year's
excess supply condition, including imports. Net income of $38.9 million dropped
33% and net income available to common shareholders of $27.4 million dropped 42%
from the prior year's results.
The Company produced 2,414,000 tons of liquid steel of which 379,000
tons were produced at the new Mobile Steelworks and 967,000 tons at Montpelier.
Total tons sold were a record 2,435,000, a 9% increase over 2000. Steel mill
products comprised 64% of the total shipped while energy tubulars, large
diameter pipe, and non-energy tubulars were 36% of shipments. IPSCO increased
its U.S. market penetration as shipments to U.S. customers climbed 21% to
1,570,000 and accounted for 64% of total tons shipped.
Since its startup in 1997, the Montpelier Steelworks has required
substantial modifications due to original equipment unreliability and the
plant's failure to meet contracted output. The non-performance of Montpelier's
equipment and turnkey contractor was the subject of a civil suit settled out of
court in mid-2001. IPSCO settled all claims and counter claims for $49 million,
paid by the contractor, of which $39 million was recorded to income as a
non-recurring item. Late in the year management undertook a 17-day maintenance
shutdown to modify original equipment and remedy turnkey deficiencies. Capital
spending for the year at Montpelier was $13.1 million.
In 2001, a non-cash charge of $10 million was recorded to adjust the
carrying value of assets held for sale to their estimated net realizable value.
The Company raised $15 million from the sale and leaseback of its coil
processing equipment in Houston, Texas. The sale-leaseback was completed in two
parts, with $10 million received in June and $5 million in September.
The average unit-selling price for IPSCO products dropped almost 10%
from $421 per ton in the prior year to $380 per ton in 2001. Fourth quarter
prices were $366 per ton and reflected the lowest prices in decades. The price
reductions were related to a general slowdown in the North American economy and
excess supply. The price and volume of imports and the subsequent injury to U.S.
producers became the subject of a U.S. Section 201 trade investigation.
The Company increased its reserve for bad debts by $4 million to
reflect conditions in the market.
3
2002
IPSCO achieved sales of $1.08 billion, which were 20% higher than the
prior year and reflect the significantly higher shipments made from the Mobile
Steelworks, as well as continued market penetration by IPSCO coil processing
facilities opened over the past few years. Net income of $20.3 million dropped
$18.6 million or 48% and net income available to common shareholders was $8.9
million, down 68% from the $27.4 million recorded in 2001. In 2002, the Company
successfully completed the sale of certain non-productive assets and recorded
associated pre-tax income of $6.5 million.
IPSCO's average unit selling price declined to $369 per ton in 2002
from $380 per ton in 2001, primarily due to changes in product mix (a higher
percentage of steel mill products compared to tubular products), but also due to
continued price competition.
The Company produced 3,007,000 tons of liquid steel of which 2,046,000
were produced in the United States. Total tons sold were a record 2,897,000, a
19% increase over 2001. Shipments of 2,115,000 tons of steel mill products were
73% of total tons sold and surpassed those of a year earlier by 35%.
Approximately 27% of the Company's total shipments in 2002 were tubular
products, down from about 36% in 2001, reflecting the impact of both the Mobile
Steelworks ramp-up and a slow market for many tubular product lines.
Shipments to U.S. customers reached 2,126,000 tons, over 73% of the
total, while Canadian based customers accounted for 771,000 tons, about 27%.
Despite growth in the Company's total shipments, Canadian shipments were 11%
below that of 2001, indicating that the U.S. market continued to provide the
growth in sales.
The Company completed two key financing initiatives in the year. In
February, the Company completed a common stock issue of 6.5 million shares for
net cash proceeds of $90.7 million. Proceeds were used to pay down revolving
bank line borrowings. In addition, the Company renegotiated an increase to its
debt ratio covenant from .45 to .50 under its bank facility and obtained a
committed $50 million, 364 day facility to improve its financial flexibility.
In March 2002, as a result of the Section 201 investigation, President
Bush announced tariffs (ranging from 8% to 30%) and quotas on many key steel
products. Canada was excluded from this action. Anticipating the diversion of
imported steel to Canada from countries affected by the remedies, the Company
and other Canadian steel producers began discussions with the Canadian
government regarding the implementation of a similar safeguard action.
Industry consolidation was accelerated with the emergence of
International Steel Group ("ISG"), which purchased the steelmaking assets of LTV
and Acme Steel out of Chapter 11 proceedings. ISG is currently pursuing
additional acquisitions in the sector. Other integrated producers may follow the
new business model used by ISG as a way to purchase assets cheaply, shed legacy
costs, and reduce manpower requirements to become more competitive.
2003
IPSCO achieved sales of $1.3 billion, which were 20% higher than 2002.
Net income of $12.4 million dropped $7.9 million or 39%. Net income attributable
to common shareholders was $0.3 million, down $8.6 million from $8.9 million.
IPSCO's average unit selling price increased to $413 per ton in 2003
from $369 per ton in 2002, primarily due to higher unit prices and an improved
product mix.
The Company produced 3,217,000 tons of liquid steel of which 2,214,000
were produced in the United States. Total tons sold were a record 3,137,000, an
8% increase over 2002. Steel mill products (discrete plate, cut plate and hot
rolled coil) comprised 70% of the total shipped. Energy tubulars, large diameter
pipe and non-energy tubulars were about 30% of shipments, reflecting stronger
western Canadian drilling activity. Shipments to U.S. customers were 2,199,000
tons, 70% of the total. Canadian based
4
customers accounted for 938,000 tons, or 30% of total tons shipped. Most of the
growth in shipments was in the tubular products lines.
In June the Company raised $200 million from the sale of senior
unsecured notes due June 1, 2013. The Company used a portion of the net proceeds
of this offering to repay debt under its credit facility, and will use the
remainder of the net proceeds to redeem certain notes and for general corporate
purposes.
SIGNIFICANT ACQUISITIONS AND DISPOSITIONS
The Company made no significant acquisitions or dispositions in 2003.
TRENDS
Risks and uncertainties applicable to the Company are discussed in
"Narrative Description of the Business" below and in the "Management Discussion
and Analysis" section of the Company's 2003 Annual Report.
NARRATIVE DESCRIPTION OF THE BUSINESS
GENERAL
The Company is a North American steel producer with facilities and
process equipment located at 12 sites throughout Canada and the United States.
IPSCO operates within a single business segment which is the production of steel
and sale of primary and secondary manufactured steel products such as carbon
steel slabs, discrete plate and coil, cut plate, and finished tubular products.
The bulk of IPSCO's capital is invested in steel mill and finishing facilities.
The output of the steel facilities is either sold directly to third
parties in the as-produced condition or used in IPSCO operations, which further
fabricate the steel for sale to third parties. As steelmaking facilities
comprise the bulk of the Company's capital investment, the Company attempts to
earn the best overall return on the available steel by allocating it to the
products that command the best return from the business. Shifts in the price,
cost and demand for specific products will affect their ability to contribute to
overall financial results. Swings in demand between products and product groups
may occur on a frequent basis as the Company adjusts its production and sales
plans to take these into account.
The Company produces steel in three North American steelworks: Regina,
Saskatchewan; Montpelier, Iowa; and Mobile, Alabama. All three steelworks use
electric arc furnace technology to convert scrap steel into liquid steel. Each
steelworks casts the liquid steel into slabs and hot rolls the slabs into
various grades of discrete plate or coil. The plate and coil can be sold
directly to customers or may be further processed within IPSCO's downstream
facilities. Five coil processing locations produce cut plate and sheet to
customer requirements. Pipe mills at six locations use coil feedstock to produce
tubular products that range from one and one-half inches up to 16 inches in
diameter ("small diameter"), and 16 inches through 80 inches in diameter ("large
diameter").
IPSCO currently has over 600 active customers spanning a large number
of applications. IPSCO produces steel plate and sheet in an assortment of
widths, lengths, gauges and grades used to make railroad cars, barges and ships;
industrial, construction and farm equipment; storage tanks, bridges, structural
poles and a host of additional products. Tubular products include oil and gas
well casing and tubing ("oil country tubular goods" or "OCTG"); pipe for
transporting oil and gas from wells, transmitting oil and/or gas long distances
and for final distribution to end-customers ("line pipe"); pipe for low pressure
water and air distribution; water and sewage transmission pipe; and tubular
products for building and construction
5
applications, most often in square or rectangular cross-sections ("hollow
structural sections", "HSS" or "structural tubing").
PRINCIPAL PRODUCTS AND SERVICES
The following chart describes the Company's principal products,
principal markets and methods of distribution:
- -------------------------------------------------------------------------------------------------------------
PRINCIPAL PRODUCT GROUPS PRINCIPAL MARKETS PRIMARY DISTRIBUTION METHODS
------------------------ ----------------- ----------------------------
- -------------------------------------------------------------------------------------------------------------
STEEL MILL PRODUCTS:
- -------------------------------------------------------------------------------------------------------------
Slabs, discrete plate, cut plate General manufacturing Majority through distributors
and coil construction, agricultural located throughout North America
equipment, oil field equipment,
transportation and others
- -------------------------------------------------------------------------------------------------------------
TUBULAR PRODUCTS:
- -------------------------------------------------------------------------------------------------------------
Large diameter line pipe Oil, natural gas and water Predominantly through the Company
transmission
- -------------------------------------------------------------------------------------------------------------
Energy tubulars Oil and natural gas exploration Predominantly through
and development distributors located throughout
North America
- -------------------------------------------------------------------------------------------------------------
Non-energy tubulars Manufacturing, construction and Predominantly through
other industrial product uses distributors located throughout
North America
- -------------------------------------------------------------------------------------------------------------
IPSCO sells its steel and tubular products through centrally controlled
field sales staff and supporting inside sales representatives. Based on
strategic direction and current market conditions, sales are solicited from
target customers both directly and through distributor networks. Technical and
product development experts also support the sales organization.
The following chart sets out the approximate percentages for the two
most recently completed fiscal years for sales of principal products of the
Company:
- -------------------------------------------------------------------------------------------------------------
PRINCIPAL PRODUCT GROUPS % OF REVENUES FOR 2003 % OF REVENUES FOR 2002
------------------------ ---------------------- ----------------------
- -------------------------------------------------------------------------------------------------------------
Steel Mill Products 58 64
- -------------------------------------------------------------------------------------------------------------
Tubular Products 42 36
- -------------------------------------------------------------------------------------------------------------
COMPETITIVE CONDITIONS
Competition in the steel industry is intense. The Company competes with
foreign and domestic steelmakers - several of which have emerged from bankruptcy
with significantly lower cost structures or remain in business only because
governments are guaranteeing their debts or paying pension and other benefits.
Competition also comes from manufacturers of concrete, plastic, aluminum and
other composite materials that can be substituted for steel.
World steelmaking capacity currently exceeds demand, which occasionally
has led to unfair trading of steel in the North American market. Accordingly,
the Company supports trade actions in the form of anti-dumping and
countervailing duty cases or other trade remedies where evidence suggests that
unfair trading is occurring. In recognition of an overwhelming surge of imported
steel, the U.S. government imposed significant sanctions in 2002 against sources
of steel imports. The action was taken as the result of the injury these imports
inflicted upon domestic producers and to allow domestic producers
6
an opportunity to recover economically. Those sanctions were lifted late in
2003, but a number of other trade remedies remain in place.
NEW PRODUCT INTRODUCTION
The Company has not issued any news releases on the introduction of new
products for 2003.
SOURCES, PRICING AND AVAILABILITY OF RAW MATERIALS
The major raw material used in the steelmaking process is scrap metal.
The Company's total annual consumption of iron and steel scrap is approximately
110% of its liquid steel production tonnage. The price and availability of scrap
are subject to several market forces, including global demand (most recently
affected by strong demand from China), freight costs and scrap market
speculation. 2003 saw unprecedented, unexpected increases in scrap and related
freight prices.
During 2003, IPSCO recycled 3.6 million tons of scrap, at an average
cost per ton about 17% percent higher than in 2002. IPSCO's General Scrap
Partnership and IPSCO Direct Inc., an Alberta scrap collection company, provided
11% of the Company's overall needs. The remainder was supplied from other
parties.
In 2003, a total of $604 million was spent on major raw materials and
consumables for the Company's three steelworks, up by 21% from the $500 million
spent in 2002. Included in the amount are expenditures for steel scrap, pig
iron, alloy materials, carbon electrodes, oxygen, refractories, limestone,
natural gas and electricity.
Electricity and natural gas are also important variable costs for
IPSCO. These are procured through different methods, including competitive
long-term supply contracts and an active natural gas purchase program designed
to reduce exposure to spot price fluctuations through forward-priced physical
gas purchases and financial hedging contracts.
IDENTIFIABLE INTANGIBLE PROPERTIES
The Company holds a variety of patents dealing with steelmaking
processes and has made application for a variety of patents dealing with casting
and rolling mill technology. The Company's operations are not dependent to any
significant extent on these or any other patent, license or franchise.
Similarly, the Company's operations are also not dependent upon any single
trademark, although certain trademarks are identified with several of the
Company's products, and are important in the marketing and sale of such
products.
All of IPSCO's operating facilities have received ISO 14001
certification of their environmental management systems.
BUSINESS CYCLE AND SEASONALITY
The steel industry is highly cyclical in nature and sensitive to
general economic conditions. The financial condition and results of operations
of companies in the steel industry are generally affected by macroeconomic
fluctuations in the U.S., Canadian and global economies. The Company's Canadian
energy tubular product lines are very seasonal, with sales strongest during the
winter and weakest during spring thaw.
RENEGOTIATION OR TERMINATION OF CONTRACTS
Given the purchase order nature of IPSCO's sales, it is not expected
that IPSCO's business will be materially affected in the current financial year
by the renegotiation or termination of contracts or sub-contracts.
7
ENVIRONMENT
IPSCO is subject to comprehensive and continuously evolving
environmental regulation of its operations. Management places a premium on sound
environmental practice and compliance and is committed to being an industry
leader on environmental issues. The Company's environmental management system
involves a number of activities including: environmental audits of operations,
projects and purchases; maintenance of emergency preparedness and environmental
action plans and systems; oversight of programs by the Board of Directors;
employee training; and active participation in industry associations and
initiatives to manage environmental performance. All of IPSCO's operating
facilities have received ISO 14001 certification of their environmental
management systems.
However, given the increasing stringency in environmental regulation
and its application to the steel industry, there is a risk that the Company may
not be in complete compliance with future environmental requirements or that the
Company will incur future environmental liability that could have a material
adverse effect on its operations.
Canadian operations could also be affected by the Kyoto Protocol, which
sets binding targets for the reduction of emissions of carbon dioxide, methane
and certain other "greenhouse gases." Although the Canadian government has
expressed its support for limiting the impact of the Kyoto Protocol on industry,
the specific processes for achieving the targets have yet to be determined. It
is too soon to know whether implementation of the Kyoto Protocol will have a
material adverse impact on the Company's Canadian operations. IPSCO's
environmental management group is developing a Canadian implementation plan,
through work with the Canadian Steel Producers Association and dialogue with
regulators, to try to ensure that the reduction targets imposed on the industry
are environmentally sustainable, economically achievable and technologically
feasible.
During 2003, non-routine project expense and capital spending on
programs aimed at environmental issues, amounted to $2.3 million, compared to
$2.7 million spent in 2002.
EMPLOYEES
As of December 31, 2003, the Company, directly and through its
subsidiaries, has approximately 2,445 fulltime employees of whom approximately
1,346 are non-unionized personnel and approximately 1,099, mainly in Canada, are
represented by trade unions. The Company also has 156 temporary employees.
Additional work was conducted on the Company's behalf by contractors and
consultants on a contract basis.
FOREIGN OPERATIONS
As disclosed above, the Company operates facilities in Canada and the
U.S. as a consolidated North American company.
BANKRUPTCY OR RECEIVERSHIP PROCEEDINGS
Neither the Company nor any of its subsidiaries are, nor have been, the
subject of any bankruptcy, receivership or similar proceedings within the three
most recently completed financial years or the current financial year.
MATERIAL REORGANIZATIONS
There has not been any material reorganization of the Company or any of
its subsidiaries within the three most recently completed financial years or the
current financial year.
8
ASSET-BACKED SECURITIES
The Company has no asset-backed securities outstanding that were
distributed under a prospectus or otherwise.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
ANNUAL INFORMATION
The following table sets out the consolidated financial results for
each of the last three fiscal years of the Company:
(In millions except per share amounts)
YEAR ENDED DECEMBER 31 2003 2002 2001
- ---------------------------------------------------------------------------------------------------
Sales $1,294.6 $ 1,081.7 $ 903.7
Net income 12.4 20.3 38.9
Net income available to common shareholders 0.3 8.9 27.4
EBITDA 114.9 106.7 103.5
Total Assets 1,940.0 1,739.7 1,724.1
Long-Term Debt (excluding Current Portion) 401.2 342.2 386.8
Net income per common share - Basic $ 0.01 $ 0.19 $ 0.67
Net income per common share - Diluted $ 0.01 $ 0.19 $ 0.66
Dividends declared per common share in CDN$ $ 0.20 $ 0.20 $ 0.425
Dividends declared per preferred share in CDN$ $ 1.375 $ 1.375 $ 1.375
EBITDA is defined as earnings before interest expense, income taxes,
depreciation and amortization. The Company believes that EBITDA is a standard
measure of performance that is commonly reported and widely used by analysts,
investors and other interested parties. Accordingly, this information has been
disclosed to permit a more complete comparative analysis of the Company's
operating performance and capitalization relative to other companies. This
indicator should not be considered as a substitute or alternative for, GAAP
measures such as net income, net income available to common shareholders or cash
flow.
DIVIDENDS
IPSCO has historically paid a dividend on its outstanding common
shares. The Board of Directors reviews the level of dividend payments regularly,
taking into consideration such factors as North American steel market conditions
and the economy in general. Cash conservation is a high priority in times of
uncertain market conditions and therefore IPSCO reduced its quarterly dividend
on Common Shares from CDN $0.125 per share to CDN $0.05 per share commencing in
the fourth quarter of 2001, and the dividend remained at this level throughout
2003.
For the six million 5.50% Cumulative Redeemable First Preferred Series
1 shares issued at a price of CDN $25 per share in November 1998, quarterly
dividends of CDN $0.34375 have been paid commencing February 15, 1999.
GAAP
The Company presents its consolidated financial information on the
basis of Canadian generally accepted accounting principles ("GAAP").
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following information contained in the Company's 2003 Annual Report
is incorporated herein by reference:
(a) Management's Discussion and Analysis for the year ended
December 31, 2003 as filed with various regulators in Canada
and the United States; and
(b) Audited Consolidated Financial Statements of the Company for
the year ended December 31, 2003, together with the auditors'
report thereon.
MARKET FOR SECURITIES
The common shares of the Company are listed for trading on the Toronto
Stock Exchange and New York Stock Exchange and trade under the symbol "IPS". The
rights of the holders of common shares of the Company are subject to the
provisions of a Shareholder Rights Agreement, dated March 14, 1990, as amended
on April 20, 1995 and May 2, 2001, between the Company and Computershare Trust
Company of Canada. Renewal of the Shareholder Rights Agreement will be
considered at the Company's 2004 Annual and Special Meeting of Shareholders.
DIRECTORS AND OFFICERS
NAMES, ADDRESSES AND OCCUPATIONS
The following is a list of directors and executive officers of IPSCO as
at the date hereof:
NAME, POSITION AND DIRECTOR OR OFFICER PRINCIPAL OCCUPATIONS FOR PAST FIVE YEARS
MUNICIPALITY OF RESIDENCE SINCE
Burton M. Joyce 1993 President and Chief Executive Officer and a
Chairman of the Board Director of Terra Industries (1991-2001), a
Penhook, Virginia fertilizer and methanol manufacturer. Mr.
Joyce retired from this position in 2001.
Michael A. Grandin 2003 Dean of Haskayne School of Business at the
Director University of Calgary; Chairman and Chief
Calgary, Alberta Executive Officer of the Fording Trust, a
metallurgical coal producer (2003-present);
former President of Pan Canadian Petroleum
Ltd. (2001-2002), an oil and gas company;
and former Chief Financial Officer of
Canadian Pacific Limited (1997-2001), an
operating conglomerate concentrating on
energy, transportation and hotels.
Juanita H. Hinshaw 2002 Senior Vice President and Chief Financial
Director Officer of Graybar Electric Company, Inc.
Chesterfield, Missouri (2000-present), an employee-owned
distributor of electrical telecommunications
and data products, and former Vice President
and Treasurer of Monsanto Company (1988-
1999), an agricultural inputs manufacturer.
10
NAME, POSITION AND DIRECTOR OR OFFICER PRINCIPAL OCCUPATIONS FOR PAST FIVE YEARS
MUNICIPALITY OF RESIDENCE SINCE
Jack D. Michaels 2000 Chairman and Chief Executive Officer and
Director former President of HON INDUSTRIES, an office
Muscatine, Iowa furniture and hearth products manufacturer,
for the preceding five years.
Bernard M. Michel 1998 Chairman of Bruce Power Inc. (2000-
Director present), an Ontario nuclear utility, and
Canmore, Alberta former President and Chief Executive Officer
of Cameco Corporation, a uranium
exploration, mining and conversion company,
gold producer and provider of energy through
Bruce Power Inc., for the preceding five
years.
Allan S. Olson 1989 President of First Industries Corporation, a
Director business management company, for the
Spruce Grove, Alberta preceding five years and former President and
Chief Executive Officer of Churchill
Corporation, an industrial construction
company.
Arthur R. Price 1979 Chairman and Chief Executive Officer of
Director Axia NetMedia Corporation, an IP network
Calgary, Alberta systems and media solutions company, for the
preceding five years and former Chief
Executive Officer of Husky Oil Ltd., an oil
and gas pipeline owner and producer.
Richard G. Sim 1994 Chairman, President and Chief Executive
Director Officer of APW Ltd., an integrated electronic
Dublin, Ireland enclosure systems company, for the preceding
five years. Mr. Sim retired from APW Ltd. in
April 2003.
David Sutherland 2002-Director President and Chief Executive Officer of
Director and President and 1992-Officer IPSCO Inc. (2002-present), former Executive
Chief Executive Officer of Vice President and Chief Operating Officer of
IPSCO Inc. IPSCO Inc. (2001) and former Vice President
Naperville, Illinois and General Manager, Raw Materials and Coil
Processing of IPSCO Inc. (1997-2001).
Roger E. Tetrault 1999 Member of NASA Advisory Council (2002-
Director present), a council established to provide the
Punta Gorda, Florida NASA Administrator with counsel and advice
on NASA programs and issues, and retired
Chairman of the Board and Chief Executive
Officer of McDermott International, Inc., a
world-wide energy services company, for the
preceding five years.
11
NAME, POSITION AND DIRECTOR OR OFFICER PRINCIPAL OCCUPATIONS FOR PAST FIVE YEARS
MUNICIPALITY OF RESIDENCE SINCE
Gordon Thiessen, O.C. 2001 Chair, Canadian Public Accountability Board
Director (2002-present), a public agency established
Ottawa, Ontario to oversee the auditors of public companies,
and former Governor of the Bank of Canada for
the five preceding years.
D. Murray Wallace 1974-1982 Chairman and Chief Executive Officer of Park
Director 1991 Street Capital Corporation (July London, Ontario
1998-present), President of Axia NetMedia
Corporation, an IP network systems and
media solutions company, since September 2000
and former President and CEO of Avco Financial
Services (1993-1998).
John B. Zaozirny, Q.C. 1987 Counsel to McCarthy Tetrault LLP
Director (1987-present), barristers and solicitors,
Calgary, Alberta Vice President of Canaccord Capital Corp., an
independent investment dealer, and former
Minister of Energy and Natural Resources for
the Province of Alberta (1982-1986).
David Britten 1999 Vice President and General Manager, Tubular
Vice President and General Products of IPSCO Inc. and has held other
Manager, Tubular Products executive positions with IPSCO Inc. for the
Naperville, Illinois preceding five years.
Barry Hodson 1999 Vice President and General Sales Manager of
Vice President and General IPSCO Inc. and has held other executive
Sales Manager positions with IPSCO Inc. for the preceding
Bragg Creek, Alberta five years.
Peter MacPhail 1996 Vice President of Primary Operations of IPSCO
Vice President of Primary Inc. and has held other executive positions
Operations with IPSCO Inc. for the preceding five years.
Regina, Saskatchewan
Greg Maindonald 2003 Vice President, Operations Services of IPSCO
Vice President, Operations Inc. and has held other executive positions
Services with the Company for the preceding five years.
Aurora, Illinois
Daniel Miksta 2000 Vice President and General Sales Manager of
Vice President and General IPSCO Inc. (2000-present) and former Director
Sales Manager of Commercial and Industrial Sales of Inland
Libertyville, Illinois Steel for the preceding five years.
Raymond Rarey 2000 Vice President and Chief Human Resources
Vice President and Chief Officer of IPSCO Inc. (2000-present) and
Human Resources Officer former Vice President, Human Resources for
Geneva, Illinois Berg Electronics Group (1996-1999).
12
NAME, POSITION AND DIRECTOR OR OFFICER PRINCIPAL OCCUPATIONS FOR PAST FIVE YEARS
MUNICIPALITY OF RESIDENCE SINCE
Robert Ratliff 2000 Vice President and Chief Financial Officer of
Vice President and Chief IPSCO Inc. (2000-present) and former
Financial Officer Corporate Controller of Nalco Chemical
Batavia, Illinois Company for the preceding five years.
Joseph Russo 1988 Senior Vice President and Chief Technical
Senior Vice President and Officer of IPSCO Inc. and has held other
Chief Technical Officer executive positions with IPSCO Inc. for the
Woodridge, Illinois preceding five years
John Tulloch 1986 Executive Vice President - Steel and Chief
Executive Vice President - Commercial Officer, former Senior Vice
Steel and Chief Commercial President and Chief Commercial Officer and
Officer Vice President, General Manager, Tubular
Naperville, Illinois Products of IPSCO Inc. for the preceding five
years.
George Valentine 2001 Vice President, General Counsel and Corporate
Vice President, General Secretary of IPSCO Inc. (2001-present) and
Counsel and Corporate Senior Vice President, General Counsel and
Secretary Corporate Secretary of Terra Industries Inc.
Chicago, Illinois for the preceding five years.
Philip Marusarz 2001 Treasurer of IPSCO Inc., former Vice
Treasurer President, Finance of Invensys Inc. (Oct.
Lemont, Illinois 2000-March 2001), former Vice President,
Controller of Netgov.com (April 2000-Oct.
2000), former Director of Finance of Pittway
Corporation (May 1999-April 2000) and former
Chief Financial Officer of Strategic Research
Inc. (April 1997-May 1999).
John Comrie, Q.C. 1983 Director of Trade Policy and Communications
Director of Trade Policy and (January 2003-present), Assistant Secretary
Communications and Assistant of IPSCO Inc. effective 2003 to present and
Secretary Secretary of IPSCO for the preceding five
Naperville, Illinois years.
Robert Eisner 1997 Assistant Treasurer of IPSCO Inc. and has
Assistant Treasurer held other executive positions with IPSCO
Regina, Saskatchewan Inc. for the preceding five years.
Directors are elected annually at the Company's annual general meeting
of shareholders. Each director's term of office will expire on the date of the
2004 Annual and Special Meeting.
COLLECTIVE SHAREHOLDINGS
As a group, the executive officers and directors of the Company
beneficially own, directly or indirectly, or exercise control or direction over
a total of 245,113 common shares, less than 1% of the issued shares of the
Company.
13
BOARD COMMITTEES
The following is a list of the Committees of the Board of Directors of
IPSCO as of the date hereof:
- --------------------------------------------------------------------------------
COMMITTEE MEMBERS
- --------------------------------------------------------------------------------
Management Resources and Compensation Committee Jack D. Michaels - Chairman
Burton M. Joyce
Bernard M. Michel
Richard G. Sim
Roger E. Tetrault
Gordon Thiessen
- --------------------------------------------------------------------------------
Audit Committee D. Murray Wallace - Chairman
Michael A. Grandin
Juanita H. Hinshaw
Allan S. Olson
Arthur R. Price
John B. Zaozirny
- --------------------------------------------------------------------------------
Governance and Compliance Committee Burton M. Joyce - Chairman
Jack D. Michaels
Allan S. Olson
John B. Zaozirny
- --------------------------------------------------------------------------------
CORPORATE CEASE TRADE ORDERS AND BANKRUPTCIES
None of the directors or officers of the Company, or, to IPSCO's
knowledge, shareholders holding sufficient shares to materially affect the
control of the Company is, or within the previous 10 years, has been, a director
or officer of any other issuer that, while acting in such capacity, (i) was
subject to a cease trade or similar order or an order that denied the issuer
access to any exemptions under Canadian securities legislation for a period of
more than 30 consecutive days, or (ii) became bankrupt, made a proposal under
any legislation relation to bankruptcy or insolvency or was subject to or
instituted any proceeding, arrangement or compromise with creditors or had a
receiver, receiver manager or trustee appointed to hold the assets of such
issuer, except for the following: Mr. M. Grandin was a director of Pegasus Gold
Inc. ("Pegasus") when it filed a voluntary petition for relief under Chapter 11
of the United States Bankruptcy Code in January of 1998. The United States
Bankruptcy Court, District of Nevada confirmed the joint liquidating plan of
reorganization filed by Pegasus in December 1998 and Pegasus' successor company
emerged from bankruptcy in 1999. Mr. R. Sim was a director of APW Ltd. ("APW")
when APW filed a voluntary petition for relief under Chapter 11 of the United
States Bankruptcy Code in the United States Bankruptcy Court for the Southern
District of New York in May 2002. In July 2002, the noted bankruptcy court
entered an order confirming APW's plan of reorganization and APW's successor
corporation emerged from bankruptcy on July 31, 2002. Mr. R. Tetrault was a
director of the Babcock & Wilcox Company ("B&W") when it filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the Eastern District of Louisiana in February
2000. In December 2002, B&W filed a substantially complete consensual plan of
reorganization and settlement agreement with the noted bankruptcy court, which
was approved by shareholders and certain personal injury claimants in December
2003.
14
PENALTIES OR SANCTIONS
None of the directors or officers of the Company, or, to IPSCO's
knowledge, shareholders holding sufficient shares to materially affect the
control of the Company, has been subject to (i) any penalties or sanctions
proposed by a court relating to Canadian securities legislation or by a Canadian
securities regulatory authority or have entered into a settlement agreement with
a Canadian securities regulatory authority, or (ii) any other penalties or
sanctions imposed by a court or regulatory body that would likely be considered
important to a reasonable investor in making an investment decision.
PERSONAL BANKRUPTCIES
None of the directors or officers of the Company, or, to IPSCO's
knowledge, shareholders holding sufficient shares to materially affect the
control of the Company, or a personal holding company of any such persons, has
become, within the previous 10 years of this annual information form, bankrupt,
made a proposal under any legislation relating to bankruptcy or insolvency or
was subject to or instituted any proceedings, arrangement or compromise with
creditors or had a receiver, receiver manager or trustee appointed to hold their
assets.
CONFLICTS OF INTEREST
To IPSCO's knowledge, there are no existing or potential material
conflicts of interest between the Company or a subsidiary of the Company and a
director or officer of the Company or a subsidiary of the Company.
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Information contained in this document and in the documents
incorporated or deemed to be incorporated by reference herein, other than
historical information, may be considered forward-looking. Forward-looking
information reflects Management's current views of future events and financial
performance that involve a number of risks and uncertainties. The factors that
could cause actual results to differ materially include, but are not limited to,
the following: general economic conditions, changes in financial markets,
political conditions and developments, including conflict in the Middle East and
the war on terrorism, changes in the supply, demand and pricing for steel and
specific steel products of the Company, the level of demand outside of North
America for steel and steel products, equipment performance at the Company's
manufacturing facilities, the progress of any material lawsuits, the
availability of capital, the ability to properly and efficiently staff the
Company's manufacturing facilities, domestic and international competitive
factors, including the level of steel imports into the Canadian and United
States markets, economic conditions in steel exporting nations, trade sanction
activities and the enforcement of trade sanction remedies, supply, demand, and
pricing for scrap steel and iron, alloys and other raw materials, supply, demand
and pricing for the electricity and natural gas used by the Company, changes in
environmental and other regulations, including regulations arising from the
Canadian Parliament's ratification of the Kyoto Protocol, and the magnitude of
future environmental expenditures, inherent uncertainties in the development and
performance of new or modified equipment or technologies, North American
interest rates, exchange rates and other risks detailed in the Company's
Management Discussion and Analysis. This list is not exhaustive of the factors
that may impact the Company's forward-looking statements. These and other
factors should be considered carefully and readers should not place undue
reliance on the Company's forward-looking statements. As a result of the
foregoing and other factors, no assurance can be given as to any such future
results, levels of activity or achievements and neither the Company nor any
other person assumes responsibility for the accuracy and completeness of these
forward-looking statements. The Company undertakes no obligation to update
forward-looking statements contained in this document.
15
ADDITIONAL INFORMATION
Additional information, including particulars of directors' and
officers' remuneration and indebtedness, principal holders of the Company's
securities, options to purchase securities and interest of insiders in material
transactions, where applicable, is contained in the Management Proxy Circular of
the Company for the Annual and Special Meeting of the Shareholders of the
Company to be held on Thursday, April 29, 2004. Additional financial information
is provided in the Company's Audited Consolidated Financial Statements for the
year ended December 31, 2003.
The Company will provide to any person, on request to the Secretary of
the Company:
(a) when the Company's securities are in the course of a distribution
pursuant to a short form prospectus or a preliminary short form
prospectus:
(i) one copy of this annual information form, together with one
copy of any document, or the pertinent pages of any document,
incorporated by reference herein;
(ii) one copy of the comparative financial statements of the
Company for its most recently completed financial year,
together with the accompanying report of the Company's auditor
and one copy of the most recent interim financial statements
of the Company that have been filed, if any, for the period
after the end of the most recently completed financial year;
(iii) one copy of the management proxy circular of the Company in
respect of its most recent annual meeting of shareholders that
involved the election of directors or of any annual filing
prepared in lieu of that management proxy circular; and
(iv) one copy of any documents that are incorporated by reference
into the preliminary short form prospectus or the short form
prospectus and are not required to be provided under (i)
through (iii) above; or
(b) at any other time, one copy of any other documents referred to in
(a)(i), (ii) and (iii) above, for which the Company may require the
payment of a reasonable charge if the request is made by a person who
is not a security holder of the Company.
For copies of documents, please check the Company's website
(www.ipsco.com) or contact:
Mr. John Comrie, Q.C.
Director of Trade Policy and Communications and Assistant Secretary
650 Warrenville Road, Suite 500
Lisle, Illinois 60532
Telephone: (630) 810-4800
Facsimilie: (630) 810-4602
16
MANAGEMENT'S DISCUSSION AND ANALYSIS
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
IPSCO is a North American steel producer incorporated in Canada with
facilities and process equipment located at 12 sites throughout Canada and
the United States. These facilities produce carbon steel slabs, hot rolled
discrete plate and coil, and finished tubular products. IPSCO also has
several metal scrap collection sites located principally in Western Canada.
The Company produces steel in three North American steelworks: Regina,
Saskatchewan; Montpelier, Iowa; and Mobile, Alabama. All three steelworks
use electric arc furnace technology to convert scrap steel and other iron
sources into liquid steel. Alloys are added at ladle metallurgy stations to
create a wide variety of grades of steel for various customer applications.
Each steelworks casts the liquid steel into slabs and hot rolls the slabs
into discrete plate or coil. The plate and coil may be sold directly to
customers or may be further processed at IPSCO's downstream facilities.
Five coil processing locations produce cut-to-length plate and sheet to
customer requirements. Eight pipe mills at six locations use coil ("skelp")
to produce tubular products that range from 1.5 inches up to 14 inches in
diameter ("small diameter") and from 16 inches through 80 inches in
diameter ("large diameter").
The Company competes with many steel and pipe manufacturers from North
America and significantly with producers throughout the rest of the world.
Competition also comes from other materials that can be used in some steel
and pipe applications.
IPSCO currently has over 600 active customers using steel and pipe in a
wide variety of applications. IPSCO produces steel plate and sheet in an
assortment of widths, lengths, gauges, and grades used to make industrial,
construction and farm equipment such as railroad cars, barges, ships,
storage tanks, bridges, structural poles, and a host of additional
products. Tubular products include pipe for low pressure distribution; oil
and gas well casing and tubing ("oil country tubular goods" or "OCTG");
pipe for gathering oil and gas from wells, transmitting these products long
distances, and for final distribution to end-customers ("line pipe"); and
tubular products for building, manufacturing and construction applications,
most often in square or rectangular cross-sections ("hollow structural
sections" or "HSS").
IPSCO sells its steel and tubular products through centrally controlled
field sales staff and supporting inside sales representatives. Based on
strategic direction and current market conditions, sales are solicited from
target customers both directly and through distributor networks. Technical
and product development experts also support the sales organization.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
World steel making capacity currently exceeds demand, which occasionally
has led to unfair trading of steel in the North American market.
Accordingly, the Company supports trade actions in the form of anti-dumping
and countervailing duty cases or other trade remedies where evidence
suggests that unfair trading is occurring. In recognition of an
overwhelming surge of imported steel, the U.S. government imposed
significant sanctions in 2002 against sources of steel imports. The action
was taken as the result of the injury these imports inflicted upon domestic
producers and to allow domestic producers an opportunity to recover
economically. Those sanctions were lifted late in 2003, but a number of
other trade remedies remained in place.
IPSCO, over the last decade, has invested heavily to construct modern,
highly efficient facilities while continuing to reinvest in existing
facilities such as the Regina Steelworks. The Company built two steelworks
in the U.S.: the Montpelier, Iowa Steelworks opened in 1997, and the
Mobile, Alabama Steelworks opened in 2001. New pipe making capacity was
also built. These investments resulted in 2.5 million tons of additional
plate and coil capacity, more than tripling IPSCO's capacity. All
facilities have modern, efficient production equipment and highly
motivated, well-trained work forces. The two new U.S. steelworks were sited
close to end users and raw material sources to minimize freight costs, a
significant cost of doing business. In addition, all three of the Company's
steelworks manufacture similar products, providing increased flexibility,
versatility and efficiency in supplying customer orders, which allows for
lower cost and better service.
The Company's major investments were based on long-range estimates of
financial return spanning a variety of market conditions in a highly
cyclical industry. Market conditions can and have varied significantly in
the short-term. In the future IPSCO may pursue a number of additional
strategic initiatives such as acquisitions, joint ventures and/or
alliances, and new projects that would allow the Company to better serve
customers and improve shareholder value.
IPSCO has approximately 2,400 employees and uses performance incentives to
reward them for safety as well as cost, efficiency, service and quality
improvements that lead to increased profitability and customer
satisfaction. Management's incentive benefits also include programs that
are subject to a minimum return on equity and an increase in IPSCO's common
stock value. With world-class facilities and an effective workforce,
IPSCO's keys to operational success include cost containment, increasing
operating efficiency and maximizing capacity utilization.
IPSCO's major variable costs are steel scrap and alloys for the three
steelworks, and hot rolled coil for the pipe mills and coil processing
facilities. Higher plate and coil prices are generally associated with
higher scrap prices. Likewise, prices for industrial pipe products track
coil prices. That historical correlation was strained during 2003 because
end product demand for IPSCO's industrial products was low, while stronger
offshore demand for raw materials drove up scrap costs, resulting in lower
product margins.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS
IPSCO manages these variable costs using a number of strategies. For
example, we enjoy partial vertical integration through ownership of General
Scrap Partnership, a Canadian scrap metal operation with seven collection
sites in Western Canada and two in the north central U.S. In addition,
IPSCO cultivates strong business relationships with most major scrap yards
and brokers throughout mid-America. Finally, IPSCO purchases steel from
other steel manufacturers. Skelp and coil for further processing can either
be sourced internally or purchased from third party vendors, thereby
optimizing IPSCO's steelworks' utilization rates.
Electricity and natural gas are also important variable costs for IPSCO.
IPSCO enters into long-term supply contracts for electricity and futures
contracts for natural gas to help manage its requirements and stabilize
prices.
Economic success also rests in large part with the efficient absorption of
the very substantial fixed costs at each facility. Optimum absorption
requires producing prime products at maximum throughput rates. Optimum
performance requires high utilization rates, high yields and superior
quality. IPSCO increased the number of tons it produced and shipped again
in 2003 as a result of continued market penetration and higher production
rates. Our newer facilities, such as the Mobile Steelworks and the
Blytheville Pipeworks, were also able to increase output as production
teams gained more experience.
Still another key performance driver is management's ability to effectively
control working capital, primarily customer receivables, inventory levels
and vendor payables. Most products from the three steelworks are
manufactured only when a firm order is received, either from a customer or
due to an internal requirement to provide coil for IPSCO's own downstream
processing lines. Production based on demand helps minimize finished
inventory levels. However, some pipe products such as OCTG may be produced
in advance of orders and made available at sites that are convenient for
the customer. This is especially important given the seasonal well drilling
cycle for the western Canadian energy market, as well as the short time
interval between order dates and required delivery. Canadian well drilling
is usually most active in the late fall and winter and slowest during the
early spring thaw.
Prudent accounts receivable management is also critical given the cyclical
nature of the steel business. IPSCO uses a number of techniques to minimize
credit risk starting with a thorough knowledge of the customers who request
credit. That, combined with variable payment terms and close attention to
account detail, helps minimize losses.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS
2003 STEEL INDUSTRY EVENTS
Several developments in the steel industry this past year have had an
impact on IPSCO's business or have the potential to affect future
conditions. The more important events included industry restructuring in
North America; increased demand for steel and related raw materials, most
notably in China and in other international markets; the weaker U.S. dollar
relative to most other major currencies; and the cancellation of tariffs
established by the 2002 Section 201 ruling.
Industry restructuring continued during 2003, as several more steel
companies filed for bankruptcy. At the same time, new investors or
competitors acquired older equipment and facilities through the bankruptcy
process. One significant new competitor, International Steel Group acquired
operations from three bankrupt corporations: Bethlehem Steel, LTV
Corporation and Acme Metals. Other restructuring events included Nucor
acquiring bankrupt operations from Birmingham Steel and Trico Steel, and
U.S. Steel acquiring operations from the bankrupt National Steel. We
believe that IPSCO will continue to be very competitive against these new
or combined operations, and that the new management of these operations
will be held to higher financial performance standards than past management
who operated under protection of bankruptcy laws.
Continued strong growth in demand for steel in China affected virtually
every steel company in North America. China was one of the world's leading
importers of steel and steel making raw materials during 2003. That strong
demand resulted in significantly higher prices for iron ore, coke, scrap,
alloys and other metals. Freight costs for transporting these commodities
also increased significantly.
The U.S. dollar weakened against the Euro (20%), the Japanese yen (10%) and
the Canadian dollar (18%) during 2003. That increased the U.S. cost of
imported steel and decreased the price offshore buyers had to pay for U.S.
exports. IPSCO has operations in both the U.S. and Canada, and uses the
U.S. dollar as its reporting currency. In general, IPSCO benefits modestly
from a stronger Canadian dollar and a weaker U.S. dollar. However, during
2003 the weaker U.S. dollar resulted in more exported scrap and this led to
higher scrap costs for IPSCO.
IPSCO supported the 2002 trade sanctions imposed by the U.S. government
under Section 201, as previously discussed. The tariffs helped stem the
surge of low priced steel. Those sanctions were revoked late in 2003, more
than a year ahead of schedule. We are encouraged that steps will continue
to be taken which will monitor import activity. For that and other reasons,
IPSCO does not believe that the Section 201 revocation will have a material
adverse effect on the Company.
We have seen improved demand for steel as well as a movement toward higher
prices over the past few months. Raw material costs, however, have also
moved up rapidly and for that reason a raw material surcharge was
implemented by IPSCO and others early in 2004. Management expects improved
financial results (as discussed in the "Outlook" section of the MD&A) if
North American
20
MANAGEMENT'S DISCUSSION AND ANALYSIS
industrial markets continue to improve, and if drilling activity remains
strong as widely forecast. Higher demand would support improved pricing and
lower unit costs resulting from higher plant utilization.
RESULTS OF OPERATION
2003 COMPARED TO 2002
SALES
We manage our business to maximize total corporate returns, not individual
facility profitability. This is done by optimizing steel making capacity,
and augmenting steel production with coil and skelp purchases. A drop in
the sales of one particular product line may indicate a fall in demand or a
deliberate decision to sell less of that product in order to generate a
more profitable product mix. Decisions are made on the basis of:
1) marginal production costs and revenues,
2) freight rates on raw material and/or steel movements between
plants, and
3) the cost of delivering products to customers,
all balanced by longer-term strategic requirements.
In reading individual product commentaries, it is useful to bear in mind
that the comments reflect the result of corporate profit maximization
activities.
The following table details tons shipped by major product line.
- ------------------------------------------------------------------------
Tons Shipped
- ------------------------------------------------------------------------
(in thousands) 2003 2002 2001
----------------------------------
Coil and discrete plate 1,620 1,543 1,071
Processed coil and plate 576 572 490
----------------------------------
2,196 2,115 1,561
----------------------------------
Energy tubulars 583 382 445
Non-energy tubulars 245 271 295
Large diameter pipe 113 129 134
----------------------------------
941 782 874
----------------------------------
Total 3,137 2,897 2,435
==================================
For a seventh consecutive year, IPSCO shipped record tonnage, amounting to
3,137,100 tons, 8% more than a year earlier. This was achieved during a
year when North American apparent steel consumption declined.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS
Revenue of $1.3 billion in 2003 resulted from significantly higher sales of
energy tubular products, improved pricing for all product lines and
slightly higher shipments from the Mobile Steelworks. Higher sales of
energy tubular products resulted from significantly higher drilling
activity in Western Canada, and continued strong market penetration with
this product line in the U.S. where drilling activity also increased.
IPSCO's average unit selling price increased to $413 per ton in 2003 from
$369 per ton in 2002, due to both higher unit prices and an improved
product mix. The stronger Canadian dollar also increased sales by $54
million over 2002.
Shipments to U.S. customers were 2,198,700 tons, 70% of the total, while
Canadian based customers accounted for 938,400 tons, or 30%. Most of the
growth in shipments was in the tubular product lines.
STEEL MILL PRODUCTS
Shipments of 2,196,500 tons of discrete plate, cut plate and hot rolled
coil ("steel mill products") were 4% higher than a year earlier. U.S.
destined tons increased by 2% while Canadian tons increased 10%.
IPSCO's average unit selling price for steel mill products improved about
5% on a year-over-year basis primarily due to modest price increases and
selective commercial practices offset by regional pricing differences.
Market conditions did not improve appreciably year-over-year, but did
gradually strengthen toward the end of 2003.
IPSCO's coil processing facilities in Houston, St. Paul, and Toronto all
make temper-leveled plate products which offer superior flatness, surface
quality, and higher strengths without furnace treatment. Shipments from
coil processing facilities were 576,700 tons, basically comparable to the
year earlier. Canadian destined shipments dropped 5% compared to 2002
levels while U.S. shipments rose 3%. The average unit selling price
increased 5% year-over-year.
TUBULAR PRODUCTS
About 30% of the Company's total shipments in 2003 were tubular products,
up from 27% in 2002, reflecting the impact of stronger western Canadian
drilling activity. IPSCO produces tubular products from coil at six
locations. By adding value to the basic steel mill product, profitability
is enhanced. Further, because a number of these products involve some
degree of customization, they are often less susceptible to unfair price
competition from generic imported steel.
Tubular product volume increased 20% over 2002 levels to 940,600 tons.
Shipments of these products to U.S. customers increased 8% while shipments
to Canadian customers increased 34%. OCTG sales increased due to stronger
oil and gas drilling activity. Total shipments of large diameter
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
pipe fell 13% to 112,600 tons from 129,400 tons. Shipments of OCTG and
small diameter line pipe increased 53% from 381,300 tons to 582,700 tons.
The average number of active drilling rigs increased on a year-over-year
basis from 831 to 1,032 in the U.S. and from 266 to 372 in Canada for a
combined increase of 28%. Shipments of non-energy tubulars dropped from
271,200 tons to 245,300 tons, or 10%, primarily because management diverted
production capacity in response to higher demand in small diameter energy
markets.
IPSCO's average unit selling price of energy tubular products increased
about 9% while nonenergy tubular prices increased about 11% over 2002.
Large diameter pipe pricing, which can vary significantly based on project
specifications and mix, was unchanged year-over-year. The selling price
increase experienced by energy tubulars reflected improved market
conditions as evidenced by higher drilling rates as well as a stronger
Canadian dollar. The increase in average pricing for non-energy tubulars,
however, was primarily the result of significantly higher coil costs, some
of which were passed on to the customer.
COST OF SALES
Cost of sales increased 22% to $1.2 billion compared to $980 million in
2002. Gross margin decreased to 7.9% of sales from 9.4% in 2002, reflecting
significantly higher raw material costs. This trend was partially offset by
improved production costs at both U.S. steelworks, the result of higher
production levels and therefore better utilization rates.
RAW MATERIALS
In 2003, a total of $604 million was spent on major raw materials and
consumables for the Company's three steelworks, up by 21% over the $500
million spent in 2002. Included in the amount are expenditures for steel
scrap, pig iron, alloy materials, carbon electrodes, oxygen, refractories,
limestone, natural gas, and electricity.
The procurement of ferrous scrap, our largest input, is done monthly
largely through an auction process. Changes in the cost of scrap are paid
immediately and reflected in cost of goods sold very quickly. These and
other raw material costs increased rapidly during the second half of 2003,
reaching historically high levels.
Pricing for our products, however, is more stable and subject to
negotiation based on demand and competitive factors. In addition, about one
third of our business in steel mill products and some tubular product sales
are under contract with prices fixed for a number of months. Consequently,
while IPSCO attempted to raise prices over the course of the year, price
realization lagged raw material cost increases, resulting in lower gross
margins. The Company implemented a raw material surcharge effective with
2004 shipments in an attempt to mitigate the negative effects of these
unprecedented cost increases.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS
During 2003, IPSCO recycled 3.6 million tons of scrap, the principal raw
material for its steel mills, at an average cost per ton about 17% higher
than the previous year. IPSCO's General Scrap Partnership and IPSCO Direct
Inc., an Alberta scrap collection company, provided 11% of the Company's
overall needs. The remainder was available from other parties.
Energy constitutes a significant portion of an electric furnace steel
maker's costs. In 2003 IPSCO's cost per kilowatt-hour was virtually
unchanged compared to 2002, because savings realized through improved
practices offset slightly higher costs due to escalation clauses in
long-term supply contracts. Natural gas costs per millions of British
Thermal Units increased by about 29%.
IPSCO's coil processing and tubular operations consumed 198,300 tons of hot
rolled coil purchased from third parties, supplementing the Company's own
production. This was 68% more than the 118,200 tons consumed a year
earlier. The principal reason for the increase was improved demand for
energy tubular products.
MAINTENANCE AND OTHER EXPENSES
Maintenance is a very important cost factor for IPSCO. With newer
facilities, IPSCO enjoys lower maintenance cost relative to some
competitors with older facilities. IPSCO has separate maintenance reserve
accounts for every major production segment of the three steelworks as well
as each coil processing and tubular facility. IPSCO provides for the
anticipated costs of maintaining these segments (relining furnaces,
replacing motors, etc.) based on maintenance schedules and past experience.
When IPSCO does have scheduled maintenance shutdowns, most costs to
complete the work are charged against the reserves. However, fixed costs,
which are not absorbed into inventory as the result of the shutdown, are
expensed as incurred.
Pension expenses, principally for the defined benefit plans under Canadian
labor contracts, increased $5.8 million compared to 2002. Most of the
increase was attributable to benefit improvements granted as part of
previous labor agreements, as well as other actuarial factors detailed in
Note 7 of the consolidated financial statements. Future annual pension
expenses are not expected to increase significantly.
The under-funded status of the Company's Canadian defined benefit plans,
while not material relative to the statement of financial position,
increased to $47.3 million at December 31, 2003, $10.2 million higher than
the December 31, 2002 balances of $37.1 million. A number of conditions
caused this increase, but two of the more significant factors were, the
effects of a lower assumed discount rate on the projected benefit
obligation and the much stronger Canadian dollar. The actual return on plan
assets during 2003 exceeded the long-term assumed rate. Near-term funding
requirements are not expected to change significantly from the 2003 level.
Amortization of capital assets increased by 20% to $61.1 million in 2003
from $51.0 million in 2002. This reflects higher amortization of equipment
at the Mobile Steelworks as well as the effect of new assets being placed
into service during 2003.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS
Capacity utilization is a key driver of performance for IPSCO. Tons of
output are in part a function of the number of production turns at each
facility. Theoretically, all production equipment is available for 168
hours a week, less operating downtime for routine maintenance. Therefore,
to maximize plant and equipment utilization and minimize absorbed cost per
ton of output, optimum cost performance occurs when four crews run the
facilities around the clock. Optimum utilization after routine maintenance
is therefore about 95%.
Capacity, utilization and production by facilities are as follows:
- -----------------------------------------------------------------------------------------
Capacity
Facilities (tons)(1) Utilization (2) Production (tons)(3)
- -----------------------------------------------------------------------------------------
2003 2002 2001 2003 2002 2001
Regina 1,000 92% 89% 94% 1,003 961 1,068
Montpelier 1,250 95% 91% 87% 1,103 1,114 967
Mobile 1,250 89% 80% -- 1,111 932 379
Coil Processing 1,200 37% 37% 38% 558 559 502
Small Diameter 1,125 69% 58% 68% 739 588 660
Large Diameter 600 34% 34% 45% 141 142 189
1) In thousands of tons of finished product.
2) Mobile was not in commercial production until fourth quarter 2001;
therefore, a comparison is not included for 2001.
3) In thousands; based upon liquid steel for steelworks; finished
products for other facilities.
STEEL MAKING
Production at the Regina Steelworks increased 4% to 1,003,000 liquid tons
in 2003, primarily because of a 14 day scheduled maintenance outage in 2002
(which is also reflected in the increase in capacity utilization). The
Montpelier Steelworks recorded production of 1,103,200 liquid tons of
steel, comparable to 2002. Utilization increased to 95% reflecting a
different product mix and two events in 2002, a mechanical failure on its
static shear as well as an eight-day scheduled maintenance outage. The
Mobile Steelworks produced 1,111,000 tons of liquid steel in 2003 versus
932,100 tons in 2002. The percentage of prime production continued to
increase as the operation matured.
The number of man-hours required to produce a ton of discrete plate or coil
averaged 0.72 for the combined steelworks.
A total of 558,300 tons of coil were processed by IPSCO's downstream coil
processing facilities, comparable to 558,700 tons in 2002.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
TUBULAR OPERATIONS
IPSCO pipe mills produced 21% more tons than a year earlier due to the
impact of higher drilling activity on demand for OCTG. The man-hours
required to convert finished steel to one ton of finished pipe averaged
2.36, down slightly from 2.44 man-hours in 2002. Production of large
diameter gas transmission pipe was comparable to 2002. Shipments decreased
13% to 112,600 tons, reflecting a limited number of projects in the
transmission industry. The large diameter mills in Regina experienced a 34%
utilization rate, identical to the rate recorded a year earlier.
SELLING, RESEARCH AND ADMINISTRATION EXPENSE
Selling, research and administrative expenses of $54.7 million were 6%
higher than $51.4 million for 2002. About $2.0 million of the increase
resulted from the stronger Canadian dollar. Canadian capital taxes were
also up $1.5 million year over year. Salaries and wages increased by less
than 3%. An expense for stock based incentive awards also contributed to
the increase. These grants of restricted stock and performance units
replaced IPSCO's stock option grants in 2003.
INTEREST ON LONG-TERM DEBT
Interest expense on long-term debt increased to $30.6 million in 2003, up
28% over 2002. This was primarily a result of increased borrowing levels in
2003 related to the June 2003 $200 million bond issue discussed on page 30.
INCOME BEFORE TAXES, NET INCOME AND NET INCOME AVAILABLE
TO COMMON SHAREHOLDERS
Income before income taxes decreased by 22% (2% excluding non-recurring
items) to $24.8 million in 2003 as a result of the changes described in the
previous sections. The 2002 results include one non-recurring transaction
-- the sale of idle assets for $6.5 million.
Income tax expense totaled $12.4 million in 2003, up over the $11.4 million
reported in 2002. The effective tax rate increased from 36% to 50%
primarily because IPSCO did not recognize net tax benefits on the 2003
operating losses in the U.S. See the discussion on page 37 related to
deferred income tax assets and on page 40 related to net operating loss
carry-forwards for more detail.
Net income fell by 39% (23% excluding non-recurring items) to $12.4 million
in 2003. The net income available to common shareholders was $0.3 million
or 1 cent per diluted share compared to $8.9 million or 19 cents per
diluted share in 2002.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS
2002 COMPARED TO 2001
SALES
Revenue of $1.08 billion in 2002 reflected the significantly higher
shipments made by the Mobile Steelworks, as well as continued market
penetration by coil processing facilities opened over the past few years.
Production capabilities generally improved each quarter following the
Mobile commissioning process which concluded in September of 2001.
IPSCO's average unit selling price declined slightly to $369 per ton in
2002 from $380 per ton in 2001, primarily due to changes in product mix (a
higher percentage of steel mill products compared to tubular products) but
also due to continued price competition.
Shipments to U.S. customers reached 2,125,800 tons, over 73% of the total,
while Canadian based customers accounted for 771,100 tons, about 27%.
Despite growth in the Company's total shipments, Canadian shipments were
11% below that of 2001, as the U.S. market continued to provide the growth
in sales.
STEEL MILL PRODUCTS
Shipments of 2,115,000 tons of discrete plate, cut plate and hot rolled
coil (steel mill products) surpassed those of 2001 by 35%. U.S. destined
tons increased by 50% while Canadian tons fell 5%.
IPSCO's average unit selling price for steel mill products rose about 4% on
a year-over-year basis primarily as the result of modest price increases
and selective commercial practices offset by regional pricing differences.
Market conditions in 2002 did not improve appreciably from 2001.
Shipments from coil processing facilities were 572,100 tons, 17% higher
than 2001. Canadian destined shipments were virtually identical to 2001
levels while U.S. shipments rose 26%. The average unit selling price
increased 3%.
TUBULAR PRODUCTS
About 27% of the Company's total shipments in 2002 were tubular products,
down from about 36% in 2001, reflecting the impact of the Mobile Steelworks
ramp-up and a slow market for many tubular product lines.
Tubular product volume fell 11% from 2001 levels to 781,900 tons. Shipments
of these products to U.S. customers fell 4% while shipments to Canadian
customers fell 16%. Pipe sales declined due to the soft economy and slow
activity within the oil and gas industry. Total shipments of large diameter
pipe fell 4% to 129,400 tons from 134,400 tons. Shipments of OCTG and small
diameter line pipe fell 14% from 445,000 tons to 381,300 tons. The average
number of active drilling rigs declined on a year-over-year basis from
1,156 to 831 in the U.S. and from 341 to 266 in Canada
27
MANAGEMENT'S DISCUSSION AND ANALYSIS
for a combined decrease of 27%. Shipments of non-energy tubulars dropped
from 294,800 tons to 271,200 tons, or 8%, primarily because of slower sales
of both standard pipe and hollow structural pipe in the U.S.
IPSCO's 2002 average unit selling price of energy tubular products fell
about 3% while non-energy tubular prices increased about 8% over 2001.
Large diameter pipe pricing, which can vary significantly based on project
specifications and mix, fell about 2% year-over-year. Lower prices for
energy tubulars reflected softer market conditions as evidenced in the 27%
drop in drilling rates. Higher average prices for non-energy tubulars,
however, were primarily the result of much higher coil costs, some of which
were passed on to the customer, even though market conditions were not
appreciably better in 2002 than 2001.
COST OF SALES
Cost of sales increased 21% to $980.2 million compared to $809.6 million in
2001. Gross margin decreased slightly to 9.4% of sales from 10.4% in 2001,
reflecting increased sales of lower margin products from the Mobile
Steelworks, and decreased tubular product sales, which generate higher
margins. This trend was partially offset by higher pricing for steel mill
products and improved production costs at both U.S. steelworks, the result
of higher production levels and better utilization rates.
RAW MATERIALS
In 2002, a total of $500 million was spent on major raw materials and
consumables for the Company's three steelworks, up by 27% over $395 million
in 2001. Included in the amount are expenditures for steel scrap, pig iron,
alloy materials, carbon electrodes, oxygen, refractories, limestone,
natural gas, and electricity.
During 2002, IPSCO recycled 3.3 million tons of scrap, the principal raw
material for its steel mills, at an average cost per ton about 15% higher
than in 2001. IPSCO's General Scrap Partnership and IPSCO Direct Inc., an
Alberta scrap collection company, provided 12% of the Company's overall
needs.
In 2002, IPSCO's electricity cost per kilowatt-hour increased slightly more
than 4% due to escalation clauses in long term supply contracts. Natural
gas costs per millions of British Thermal Units fell by about 26% compared
to 2001. The combination had a negligible impact on the bottom line.
IPSCO's coil processing and tubular operations consumed 118,200 tons of hot
rolled coil purchased from third parties, supplementing the Company's own
production. This was 70% less than the 389,900 tons consumed in 2001 as
there was more supply available from our steelworks and restricted supply
from third parties.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS
OTHER EXPENSES
Pension expenses, principally for defined benefit plans under Canadian
labor contracts, increased $2.0 million compared to 2001. Most of the
increase was attributable to benefit improvements granted as part of the
labor agreements reached in 2002.
Amortization of capital assets increased by 38% to $51.0 million in 2002
from $37.1 million in 2001. Most of the increase reflects a full year's
amortization of the Mobile Steelworks with just a minor increase from other
assets placed into service in 2002.
STEEL MAKING
Production at the Regina Steelworks during 2002 dropped to 961,200 liquid
tons, about 10% less than 2001, primarily because of a 14-day scheduled
maintenance outage in September (which is also reflected in the decline in
capacity utilization). The Montpelier Steelworks produced 1,114,400 liquid
tons of steel during 2002, 15% more than in 2001. Utilization increased to
91% reflecting product mix considerations. This rate was achieved despite a
mechanical failure on the facility's static shear and an eight-day
scheduled maintenance outage. The Mobile Steelworks produced 932,100 tons
of liquid steel in 2002 versus 379,000 tons in 2001.
The number of man-hours required to produce a ton of coil or discrete plate
averaged 0.78 for the combined steelworks.
A total of 558,700 tons of coil were processed by IPSCO's downstream coil
processing facilities, up 11% over 2001's 501,400 tons, reflecting market
share improvements as customers sought higher quality products.
TUBULAR OPERATIONS
IPSCO pipe mills produced 14% fewer tons than in 2001 due to the impact of
lower drilling activity on demand for energy tubulars and the negative
impact of a slow economy on demand for non-energy tubulars. Production of
large diameter gas transmission pipe was down 25%, and shipments fell 4% to
129,300 tons, reflecting a limited number of projects in the transmission
industry. The large diameter mills in Regina experienced a 34% utilization
rate, lower than the 45% recorded a year earlier.
The man-hours required to convert finished steel to one ton of finished
pipe averaged 2.44 which was identical to the 2.44 man-hours in 2001. This
was despite the commissioning of new welding equipment on the mid-size mill
in Regina.
SELLING, RESEARCH AND ADMINISTRATION EXPENSE
Selling, research and administrative expenses of $51.4 million were 8%
lower than the $55.8 million reported in 2001. Bad debt expense was down
$5.1 million reflecting the unusually high provisions recorded in 2001.
Administrative expenses for the Mobile Steelworks were up $6.1 million
reflecting the first full year of operation for that facility.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS
INTEREST ON LONG-TERM DEBT
Interest expense on long-term debt increased to $23.8 million in 2002
compared to $6.6 million in the prior year. Most interest on long-term debt
was capitalized to the Mobile Steelworks project during 2000 and 2001,
under Canadian Generally Accepted Accounting Principles.
INCOME BEFORE TAXES, NET INCOME AND NET INCOME AVAILABLE TO COMMON
SHAREHOLDERS
Income before income taxes decreased by 48% (20% excluding non-recurring
items) to $31.7 million in 2002. These results included one non-recurring
transaction during 2002 and two non-recurring transactions during 2001. In
2002, the Company successfully completed the sale of certain assets held
for sale and recorded associated pretax income of $6.5 million. In 2001,
the Company settled a lawsuit against the turnkey contractor of the
Montpelier Steelworks for $49 million. A total of $39 million represented
claims for lost business and reimbursement of legal costs and was recorded
in other income, and the $10 million balance was used to replace equipment.
In addition, a non-cash charge of $10 million was recorded in 2001 to
adjust the carrying value of assets held for sale to their estimated net
realizable value.
Net income decreased by 48% (20% excluding non-recurring items) to $20.3
million in 2002, after having decreased 33% to $38.9 million in 2001. Net
income available to common shareholders declined 68% (46% excluding
non-recurring items) to $8.9 million in 2002 from $27.4 million in 2001.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Working capital provided by operations in 2003 was $104.0 million compared
to $72.4 million in 2002. Most of the $31.6 million change reflects higher
amortization expense and increased deferred tax benefits.
Working capital was a $4.2 million use of cash in 2003, but was a $59.8
million use of cash during 2002. Higher receivables reflected higher sales,
and inventories were up slightly as a result of higher unit costs and sales
volumes, and were offset by increased accounts payable and accrued charges.
Cash used for working capital in 2002 was primarily comprised of increased
receivables due to higher sales levels and higher inventory levels.
IPSCO borrowed $200 million in a private offering placed with about 120
institutions principally based in the U.S. in June 2003. Senior Unsecured
Notes were issued at par with an 8.75% coupon, and are due in 2013. The net
proceeds were used to repay all debt under the revolving term credit
facility, as well as other small notes, and the balance is reflected in the
increased cash position.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS
In 2002, the Company issued 6.5 million shares of common stock for net cash
proceeds of $90.7 million. The proceeds were used to pay down debt. The
Company also renegotiated the terms of its $200 million revolving term
facility.
Interest paid on the Junior Subordinated Notes in 2003 amounted to $8.5
million, the same as in 2002. Dividends to holders of common shares and
Series 1 preferred shares amounted to $7.0 million and $5.9 million,
respectively, during 2003 compared to $6.1 million and $5.3 million in
2002. In 2003, $2.6 million was raised from common shares issued under the
share option plan compared with $3.0 million in 2002. The effect of
exchange rate changes resulted in an increase in cash of $1.6 million in
2003, compared to a $0.5 million decrease in 2002.
CAPITAL INVESTMENTS
Capital investment for the past two years was kept to minimum levels
consistent with the slow demand within the North American steel market.
Total capital expenditures for 2003 were $13.5 million, down considerably
from $34.2 million in 2002. Spending in both 2003 and 2002 was down
significantly from the $155.8 million invested in 2001. Most of the 2001
investment was for the Mobile Steelworks, which completed commissioning in
September 2001. The Mobile construction contract included a
guaranteed-not-to-exceed cost provision. The contractual amount was
exceeded and damages of over $60 million are being sought by IPSCO in a
court action that began in 2001. The defendant has denied liability and
asserted certain counterclaims which the Company believes are without
merit. The case is scheduled for trial in 2004.
LIQUIDITY
The principal indicators of IPSCO's liquidity are its cash position and
amounts available under its bank line of credit.
The Company has a committed revolving term facility of $200 million that
expires on March 4, 2005. This line of credit can be drawn at spreads over
the Canadian prime rate, the U.S. base rate, Canadian Bankers' Acceptances
Reference Discount Rate or U.S. dollar denominated LIBOR, in either
Canadian or U.S. funds, subject to maintaining a prescribed working capital
ratio and meeting certain other financial covenants. At December 31, 2003,
the Company had not drawn on its term bank lines. Letters of credit of U.S.
$13.3 million were outstanding. In 2004, $34.3 million of long-term debt
will mature, $1.1 million less than the amount which matured in 2003.
During 2003, IPSCO's cash position increased by $108.7 million to $131.6
million while the working capital ratio remained unchanged at 2.9:1.0. This
much higher level of cash provides management with flexibility to redeem
IPSCO's Series 1 Preferred Shares, if it so chooses. These shares may be
redeemed in whole or in part on or after May 15, 2004. Redemption of all
outstanding shares would require CDN $150 million.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS
At December 31, 2003, the committed cost to complete in-process capital
projects was $3.7 million. At the end of 2002, this amount was $5.0
million. Management plans to limit 2004 investment to about $30 million for
new and existing capital programs.
Assuming continuing profitability, IPSCO expects that it will be able to
finance future expenditures from its cash position, cash from operations,
and its bank line of credit. It may also consider operating lease financing
as well as additional debt or equity financing as appropriate.
The Company utilizes fixed price physical delivery contracts and hedge
contracts to manage the variability of the cost of purchasing natural gas.
The Company has designated as cash flow hedge instruments certain
agreements matched against variable price forecasted natural gas purchases
through March 31, 2006. At December 31, 2003, the unrealized loss under the
agreements was $44,000 compared to an unrealized loss of $78,000 at the end
of 2002.
Late in 2003 the Company also entered into a series of foreign exchange
forward contracts to hedge the margin on products with Canadian dollar
costs that are sold under contracts denominated in U.S. dollars. The
contracts fix the Canadian dollar amounts to be received, and the U.S.
dollar amounts to be delivered, on a series of dates beginning January 29,
2004, and ending August 30, 2004. At December 31, 2003, the unrealized gain
under these contracts was $0.2 million.
DEBT RATINGS
IPSCO maintains ratings with three of North America's rating agencies to
comply with various debt covenants. Moody's Investor Service assigned a Ba3
senior implied rating in June 2003, in conjunction with the $200 million
Senior Unsecured Notes discussed above. Dominion Bond Rating Service (DBRS)
lowered their rating on these debt securities from BBB to BBB (low) with a
stable outlook. DBRS continues to regard IPSCO as investment grade, based
in large part on a strong balance sheet and sufficient access to liquidity.
Early in 2004, Standard & Poor's Ratings Service (S&P) changed its rating
of BB+ to BB with a stable outlook, based on past results. At the same
time, however, S&P stated that strong prices in 2004 should improve the
Company's profitability and cash flow protection which, combined with the
completion of its capital expenditure program, should result in positive
free cash generation.
CAPITAL STRUCTURE
IPSCO strives to maintain a strong balance sheet and a flexible capital
structure. The Company believes that the principal indicators of its
creditworthiness are its ability to generate cash from operations, its debt
to total capitalization percentage and the degree to which covenants in its
existing lending agreements may affect its future ability to access debt
markets.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company's most restrictive covenant at December 31, 2003 with respect
to funded debt requires that funded debt not exceed 50.0% of consolidated
tangible net worth.
For purposes of this covenant, funded debt includes:
a) long-term debt (including the current portion),
b) the Junior Subordinated Notes,
c) the lease of the meltshop and caster equipment at the Montpelier
Steelworks, and
d) certain letters of credit.
At December 31, 2003, the percentage of funded debt, so calculated, to
tangible net worth was 39.6% compared to 38.7% at the end of 2002.
Based only on the funded debt to tangible net worth covenant, the Company
estimates that at December 31, 2003 up to $354 million in additional funded
debt could have been raised while still complying with this covenant. This
compares to $363 million at the end of 2002. This does not include amounts
that may be available to the Company under other methods of financing which
would not constitute funded debt as defined in the Company's lending
agreements or that were available for draw under the Company's operating
line at December 31, 2002.
The ratio of the Company's long-term debt to total capitalization, based on
Canadian GAAP financial statements at the end of 2003 increased to 26% from
24% at the end of 2002. The difference between the ratio of the Company's
long-term debt to total capitalization and the ratio of the Company's
funded debt to tangible net worth is primarily due to the differences in
the accounting treatment given to the Company's Junior Subordinated Notes
and the Montpelier Steelworks meltshop and slab caster lease under the
relevant lending agreement and under Canadian GAAP.
IPSCO's most restrictive covenant with respect to equity maintenance
requires that tangible net worth according to the relevant lending
agreement (which excludes the Junior Subordinated Notes), be maintained at
a minimum of $570 million, plus 50% of net income earned after December 31,
1998. The Company's equity exceeded this requirement by $357 million or 53%
at December 31, 2003, and by $317 million or 48% at the end of 2002.
As part of regular reviews of the dividend level on common shares, IPSCO's
Board of Directors decided to change the quarterly dividend from CDN $0.125
per share to CDN $0.05 per share in the fourth quarter of 2001. This was
done to conserve cash because of short-term uncertainty in the North
American steel industry. This rate has been maintained due to continued
uncertainty.
Even though there are no maintenance interest coverage restrictions related
to IPSCO's current revolving term agreement, the number of times that the
Company's earnings before interest and taxes can cover its interest
payments on long-term debt ("interest coverage") is an important indication
of its ability to issue additional long-term debt.
33
MANAGEMENT'S DISCUSSION AND ANALYSIS
Interest on long-term debt charged to earnings is described on page 26.
Interest incurred, capitalized and charged to earnings in 2003, 2002, and
2001 are as follows:
---------------------------------------------------------------------------
Interest 2003 2002 2001
---------------------------------------------------------------------------
($ millions)
Incurred $30.6 $23.8 $26.1
Capitalized -- -- 19.5
------------------------------------
Charged to Earnings $30.6 $23.8 $06.6
====================================
IPSCO's interest coverage in 2003 was 1.8 times, down from 2.3 times in
2002, on an interest-incurred basis. The Mobile commissioning phase was
completed in 2001 and no new major projects have been initiated. Therefore,
no interest expense was capitalized in 2003 and 2002.
The most restrictive covenant in the Company's lending agreements regarding
working capital requires that the Company maintain a working capital ratio
of 1.5:1.0. The Company comfortably exceeded this requirement with working
capital ratios of 2.9:1 at the end of both 2003 and 2002.
COMMITMENTS
The Company has ongoing commitments under various contractual and
commercial obligations at December 31, 2003, as follows:
---------------------------------------------------------------------------------------------
Contractual Obligations Payments Due by Period
---------------------------------------------------------------------------------------------
($ millions) Less than 1 to 3 4 to 5 After
Total 1 year years years 5 years
-------------------------------------------------------
Long-term debt $436 34 135 57 210
Operating leases 208 25 58 36 89
Service and supply contracts 298 63 118 51 66
-------------------------------------------------------
Total contractual cash obligations $942 122 311 144 365
=======================================================
OFF-BALANCE SHEET ARRANGEMENTS
IPSCO's only off-balance sheet arrangements that have, or are reasonably
likely to have, current or future effect on IPSCO's financial condition,
changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors are related to the sale and leaseback of certain
equipment and letters of credit. The sale and leaseback arrangements
originally totaled $173 million, the most significant being the $150
million sale and leaseback of the Montpelier Steelworks meltshop and
caster, completed in 2000. IPSCO has an option, but is not obligated, to
purchase the equipment after seven and ten years for predetermined amounts
and at the end of the lease term for the fair market value of the
equipment, subject to a residual guarantee of $37.5 million. For Canadian
GAAP purposes, this transaction was treated as a sale and the subsequent
lease payments as operating expenses. For U.S. GAAP purposes, this
transaction was recorded as a financing lease, with no recognition of the
disposal of the assets. See Note 18 and Note 20 of the 2003 financial
statements for further information. The Company's letters of credit have
been previously referred to.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ---------------------------------------------------------------------------------------------------------
Quarterly Results 2003 2002 2001*
- ---------------------------------------------------------------------------------------------------------
TONS SHIPPED (thousands)
(*including Mobile shipments during commissioning)
1st Quarter 674.2 749.5 583.6
2nd Quarter 748.8 810.9 587.7
3rd Quarter 817.3 697.8 659.0
4th Quarter 896.8 638.7 604.8
------------------------------------------------
Total 3,137.1 2,896.9 2,435.1
================================================
SALES (millions)
(*excluding Mobile sales during commissioning)
1st Quarter $ 279.9 $ 271.1 $ 232.5
2nd Quarter 298.2 287.6 219.6
3rd Quarter 335.0 266.9 229.1
4th Quarter 381.5 256.1 222.5
------------------------------------------------
Total $ 1,294.6 $ 1,081.7 $ 903.7
================================================
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS (millions)
1st Quarter $ 1.5 $ (3.4) $ 5.7
2nd Quarter (6.5) 1.2 28.7
3rd Quarter (2.0) 1.1 8.5
4th Quarter 7.3 10.0 (15.5)
------------------------------------------------
Total $ 0.3 $ 8.9 $ 7.4
================================================
BASIC EARNINGS (LOSS)
PER COMMON SHARE
1st Quarter $ 0.03 $ (0.08) $ 0.14
2nd Quarter (0.14) 0.03 0.70
3rd Quarter (0.04) 0.02 0.21
4th Quarter 0.15 0.21 (0.38)
Year 0.01 0.19 0.67
================================================
DILUTED EARNINGS (LOSS)
PER COMMON SHARE
1st Quarter $ 0.03 $ (0.08) $ 0.14
2nd Quarter (0.14) 0.03 0.57
3rd Quarter (0.04) 0.02 0.20
4th Quarter 0.15 0.19 (0.38)
Year 0.01 0.19 0.66
================================================
Note - The change in the Company's effective tax rate recorded in the
fourth quarter of 2003 had the effect of increasing net income for the
quarter by approximately $1.3 million or $0.03 per diluted common share.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS
ANALYSIS OF IPSCO'S TOTAL CAPITALIZATION
The return on shareholders' equity for 2003 decreased to 0% from 1% in
2002. This was below the 2003 inflation rates of 2.0% in Canada and 1.9% in
the U.S. Inflation rates in Canada and the U.S. in 2002 were 3.9% and 2.4%,
respectively.
During 2003, IPSCO reduced borrowings under the $200 million revolving term
bank line by $118.0 million and had no outstanding balance at December 31,
2003. However, because of the new senior notes issued in June 2003,
long-term debt, excluding the current portion, increased to $401.2 million
at December 31, 2003 compared to $342.2 million at the end of 2002.
SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND U.S. GENERALLY ACCEPTED
ACCOUNTING PRINCIPLES (GAAP)
IPSCO, a Canadian company, uses U.S. dollars as the basis for its financial
statement reporting, and follows Canadian Generally Accepted Accounting
Principles (GAAP) in presenting financial results. The U.S./Canadian GAAP
differences generally relate to timing issues for expense recognition. The
2001 differences were more significant than normal primarily because of the
treatment of major transactions associated with the start-up and
commissioning of the new Mobile Steelworks. The differences in the reported
results arising from using U.S. as opposed to Canadian GAAP are summarized
in Note 20 to the 2003 financial statements.
CRITICAL ACCOUNTING POLICIES
IPSCO prepares its financial statements in conformity with Canadian GAAP.
The Company's significant accounting polices are discussed in the notes to
the consolidated financial statements. The application of these policies
requires important judgments or estimations that can affect financial
position, results of operations and cash flows. The Company believes the
accounting principles chosen are appropriate under its circumstances, and
that the estimates, judgments and assumptions involved in its financial
reporting are reasonable.
Accounting estimates made by management are based on an analysis of
historical experience and information on current events that is available
to management at the time the estimate is made. If circumstances on which
estimates were based change, the impact is included in the results of
operations for the period in which the change occurs. Critical accounting
policies for the Company that are subject to significant estimates and
assumptions are summarized below.
VALUATION OF LONG-LIVED ASSETS
The Company reviews long-lived assets for impairment whenever events or
changes in circumstances indicate the carrying amount of these assets may
not be recoverable. Impairment losses are recorded on long-lived assets
used in operations when indicators of impairment are
36
MANAGEMENT'S DISCUSSION AND ANALYSIS
present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amounts. The impairment loss is
measured by comparing the fair value of the asset to its carrying amount.
Factors that could affect IPSCO's estimate of undiscounted cash flows
include, among other things, technological changes, economic conditions or
changes in operating performance, resulting in the need to write-down those
assets to fair value.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company has established an allowance for doubtful accounts for losses
resulting from the potential risk that some customers may be unable to make
payments. Management continually monitors payment patterns of customers,
investigates past-due accounts to assess likelihood of collection and
monitors industry and economic trends to estimate required allowances.
INVENTORY VALUATION
Inventories are valued at the lowest of average cost, replacement cost or
net realizable value. Every month IPSCO performs an analysis to determine
whether any reduction in the average cost of inventory is necessary to
record inventory at the lowest value. In addition, an analysis is regularly
performed to determine whether saleable products on hand need to be written
down to reflect their estimated net realizable value given the intended
sales channel for the product. Writedowns to secondary grade are recognized
based on this analysis. If the products do not achieve this lower net
realizable value, further losses in their disposition would be recognized.
DEFERRED INCOME TAX ASSETS
As part of the process of preparing consolidated financial statements,
IPSCO is required to estimate income taxes in each jurisdiction. This
involves estimating actual current tax exposure together with assessing
temporary differences resulting from differing treatment of items for tax
and accounting purposes. These differences result in deferred tax assets
and liabilities which are included within the consolidated balance sheet.
An assessment is made of the likelihood that the deferred tax assets will
be recovered from future taxable income. To the extent recovery is not
likely, a valuation allowance is established.
The Company has recorded a valuation allowance to reduce the recorded
deferred tax assets to an amount that is more likely than not to be
realized. In determining the valuation allowance, management utilizes
certain tax planning strategies considered to be prudent and feasible to
allow for the realization of the deferred tax assets. In the event the
probability of realizing the deferred tax asset does not meet the more
likely than not threshold, the valuation allowance would be increased and a
corresponding charge against income would be recorded.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS
OBLIGATIONS RELATING TO EMPLOYEE PENSION PLANS
The Company provides retirement benefits for almost all of its employees
under several defined benefit and defined contribution plans. The defined
benefit plans provide benefits that are based on a combination of years of
service and an amount that is either fixed or based on final earnings. The
Company's policy regarding the defined benefit plans is to fund the amount
that is required by governing legislation. Independent actuaries perform
the required calculations to determine pension expense in accordance with
GAAP. Several statistical and other factors which attempt to anticipate
future events are used in calculating the expense and liabilities related
to the plans. The actuarial assumptions used by the Company may differ from
actual results due to changing market and economic conditions, higher or
lower withdrawal rates or longer or shorter life spans of participants.
These differences may affect the net pension expense and liability recorded
by the Company.
BUSINESS RISKS AND UNCERTAINTIES
Management believes the following principal risks and uncertainties should
be taken into consideration by prudent investors.
INDUSTRY COMPETITION
The global steel industry remains highly competitive. IPSCO competes with
foreign and domestic steel makers and steel converters -- several of which
have recently emerged from bankruptcy with significantly lower cost
structures. Competition in the industry is not only based on price, quality
and ability to meet customers' product specifications and delivery
schedules; steel products must also compete with concrete, plastic,
aluminum and other composite materials for many product applications. The
highly competitive nature of the industry may affect the Company's results.
EXCESS GLOBAL CAPACITY AND UNFAIR TRADE
The effect of excess global capacity on North American steel prices remains
a significant risk for IPSCO. Excess global supply of steel has
occasionally resulted in surges of low-priced steel into North American
markets and in recent years has driven prices to historic lows. In its
March 2002 Section 201 ruling, the U.S. International Trade Commission
concluded that, for the majority of products reviewed, imported steel had
seriously injured domestic producers. That ruling was revoked in November
2003. The remaining current remedies beneficial to the North American steel
industry may not be sustained in the long-term, and this could affect the
domestic industry's ability to fully recover. IPSCO will continue to work
closely with industry groups as well as the governments of Canada and the
U.S. towards a long-term solution to excess global capacity and unfair
international steel trade.
38
MANAGEMENT'S DISCUSSION AND ANALYSIS
ECONOMIC CYCLES AND INCREASED CREDIT RISK
The steel industry is highly cyclical in nature and sensitive to general
economic conditions. While IPSCO is generally affected by macroeconomic
fluctuations in the Canadian, U.S. and global economies, it is particularly
sensitive to trends in oil and gas exploration and transmission as well as
trends in the construction, agricultural, and heavy equipment industries,
which are important markets for IPSCO's products. In addition, some of the
Company's customers were adversely affected by the recent U.S. economic
recession, which has resulted in, and which may continue to result in,
defaults in the payment of accounts receivables owed to the Company.
Although the Company uses a variety of techniques to manage this exposure,
including thorough credit checks and in some cases requiring security for
credit, material losses due to economic downturns and customer defaults are
possible.
WEAKNESS IN THE OIL AND GAS INDUSTRY AND FEWER LARGE DIAMETER PIPE PROJECTS
Sales of energy tubular products (including large diameter pipe) represent
an important portion of IPSCO's total sales tonnage. The oil and gas
industry is cyclical and sensitive to oil and natural gas prices and
weather conditions, among other things. The tubular products business
(excluding large diameter pipe) is dependent on the number of rigs drilling
in both Canada and the U.S. The large diameter pipe business is dependent
on the existence of large pipeline projects. During times of lower demand
from the oil and gas industry, the Company endeavors to shift steel
production from tubular products towards steel mill products or
cut-to-length products. However, prolonged weakness in the oil and gas
industry and the existence of fewer large diameter pipe projects could
adversely affect the Company.
INPUT COSTS
IPSCO's principal raw material input is scrap metal. The price and
availability of scrap are subject to several market forces, including
demand by global steel producers (most recently affected by strong demand
from China), freight costs and scrap market speculation. Company operations
also require substantial amounts of other inputs, such as alloys,
electricity, natural gas and oxygen -- the price and availability of which
are also subject to market forces and government regulation. Significant
input cost increases, without a commensurate increase in finished product
selling prices, hurts IPSCO's financial results. Similarly, if the Company
were unable to receive sufficient inputs on a timely basis, production
could be compromised and business results could be negatively affected.
The Company does not have long-term supply contracts for scrap metal and
instead manages scrap cost volatility primarily by using two strategies.
The first is its ownership of the General Scrap Partnership in Canada and
the second is the cultivation of close business relationships with major
scrap yards and brokers throughout mid-America. To manage the volatility of
other input costs, IPSCO has long-term electricity contracts for the
Regina, Montpelier and Mobile Steelworks, and an active natural gas
purchase program designed to reduce its exposure to fluctuations in spot
prices through forward-priced physical gas purchases and financial hedging
contracts.
39
MANAGEMENT'S DISCUSSION AND ANALYSIS
NET OPERATING LOSS CARRY-FORWARDS
IPSCO has accumulated large net operating loss carry-forwards on its U.S.
operations for which it has recorded future tax benefits. The ability to
realize these future tax benefits depends on the Company's future
profitability. Although 99% of these net operating loss carry-forwards do
not begin to expire until 2018, there is a risk that previously recognized
tax benefits will not be realized prior to their expiration and that the
Company may be required to expense these tax benefits in the future.
DEBT COVENANTS
The Company's debt covenants could adversely affect its ability to finance
future operations or capital needs or to pursue business opportunities.
There is a risk that a breach of these covenants could result in a default
of the Company's related indebtedness. If a default occurs and is not
appropriately remedied, the Company's lenders could declare the
indebtedness, with interest and other fees, to be immediately due and
payable.
ENVIRONMENTAL LAWS AND REGULATIONS
IPSCO is subject to comprehensive and continuously evolving environmental
regulation of its operations. Management places a premium on sound
environmental practice and compliance and is committed to being an industry
leader on environmental issues. The Company's environmental management
system involves a number of activities including: environmental audits of
operations, projects and purchases; maintenance of emergency preparedness
and environmental action plans and systems; oversight of programs by the
Board of Directors; employee training; and active participation in industry
associations and initiatives to manage environmental performance. All of
IPSCO's operating facilities have received ISO 14001 certification of their
environmental management systems.
However, given the increasing stringency in environmental regulation and
its application to the steel industry, there is a risk that the Company may
not be in complete compliance with future environmental requirements or
that the Company will incur future environmental liability that could have
a material adverse effect on its operations.
Canadian operations could also be affected by the Kyoto Protocol, which
sets binding targets for the reduction of emissions of carbon dioxide,
methane and certain other "greenhouse gases." Although the Canadian
government has expressed its support for limiting the impact of the Kyoto
Protocol on industry, the specific processes for achieving the targets have
yet to be determined. It is too soon to know whether implementation of the
Kyoto Protocol will have a material adverse impact on the Company's
Canadian operations. IPSCO's environmental management group is
40
MANAGEMENT'S DISCUSSION AND ANALYSIS
developing a Canadian implementation plan, through work with the Canadian
Steel Producers Association and dialogue with regulators, to try to ensure
that the reduction targets imposed on the industry are environmentally
sustainable, economically achievable and technologically feasible.
PRODUCT DEMAND, MARKET SHARE
Weakness in the Canadian and/or U.S. industrial economies could result in
reduced demand for IPSCO's steel products. The Company must achieve and
maintain certain sales volumes for the various products manufactured at its
facilities for these facilities to be economically viable over the long
term. A reduction in market demand that results in a reduction of sales of
IPSCO's products could have a material adverse effect on the Company's
earnings. Management continues to focus on gathering superior market
intelligence about customer requirements and product alternatives,
supporting its marketing operations and sales personnel with highly trained
research and technical experts, and optimizing throughput rates, yields and
quality as part of its efforts to increase product demand and maintain
satisfactory market share.
POTENTIAL EQUIPMENT FAILURE
The Company uses a systematic approach to routinely maintain all facilities
and equipment. Nonetheless, there is risk of plant equipment failure,
either because of maintenance issues or as the result of operational
errors. Any such failure could adversely affect the Company.
LABOR ACTIVITIES
About 45% of IPSCO's employees are represented by trade unions. Contract
expiration dates vary between 2006 and 2007. Future labor negotiations and
future union activities at other locations could have an adverse effect on
the Company. Similarly, union activities and labor disruptions involving
the Company's suppliers could disrupt IPSCO business.
BANKRUPTCY LAWS, GOVERNMENT SUBSIDIES TO NORTH AMERICAN STEEL PRODUCERS
AND DIMINISHED ENTRY AND PARTICIPATION BARRIERS
Management believes that the combination of bankruptcy protection and
continued government subsidies to weaker, inefficient North American
producers has hurt IPSCO's results. Several companies in Canada and the
U.S., which would otherwise be uncompetitive because of old, inefficient
high-cost operations, have nonetheless remained in business under the
protection of bankruptcy laws. In some instances, these competitors have
emerged from bankruptcy or remained in business only because governments
are guaranteeing their debt or paying their obligations for pension and
other benefits. In other instances, this has resulted in the reconstitution
of existing participants with more competitive cost structures. The
substantial capital costs to
41
MANAGEMENT'S DISCUSSION AND ANALYSIS
construct steelworks, coupled with expensive labor contracts, traditionally
posed a barrier to entry into the steel industry. Recent events, such as
the emergence of International Steel Group Inc., demonstrate the ability of
prospective investors to secure plants and equipment, especially from those
in financial distress, for significantly less capital than historically
required. This, combined with the replacement of traditional labor
contracts and new technology, could lead to new entrants to the steel
industry or the reconstruction of existing participants with more
competitive cost structures.
OUTLOOK
As 2004 begins, the outlook for IPSCO and the steel industry in general is
brighter than it has been in a number of years. This renewed optimism is
based on healthier demand and pricing, combined with continued improvements
in the North American industrial economy and the impact of buoyant offshore
markets, most notably those serving China.
However, there are some counterbalances to this optimism, primarily in the
threat posed to IPSCO and our customers by high and rising raw materials
prices. We know, too, that a year is a long time in the steel business. We
have been surprised not by the fact of a steel industry adjustment, but by
its extent and speed. Because of the current volatility in the marketplace,
there is the possibility of further unexpected developments as 2004
unfolds.
That said, a number of important business fundamentals at IPSCO have
changed for the better. Our order books have strengthened significantly as
demand for pipe and plate is strong. Key indicators of industrial
production and consumer confidence are positive. The decline in the value
of the U.S. dollar against other leading currencies has made exports to the
U.S. less attractive for foreign steel companies. At the same time, growing
demand in China and elsewhere has provided new markets for manufactured
exports.
For IPSCO specifically, a few domestic suppliers of plate have recently
exited, or reduced their commitment to this business after years of poor
returns. This industry rationalization will benefit IPSCO. In the tubular
business, rig counts are at all time highs in Canada and remain strong in
the United States. Pricing in this market remains competitive.
Two concerns we have are the raw materials price increases and, not
unrelated, the market's ability to sustain higher prices without reducing
demand. Like other industry participants, IPSCO has recently imposed
surcharges to cover the extraordinary increases in raw materials costs,
particularly scrap, which have occurred through the end of 2003 and into
2004. These surcharges will be reviewed regularly and will be eliminated
when raw material prices revert to more sustainable levels.
42
MANAGEMENT'S DISCUSSION AND ANALYSIS
Because of the substantial investments we have made over the past few
years, IPSCO's capital spending requirements are modest. In 2004,
forecasted capital investments of $30 million are only about 50% of
expected depreciation, freeing up additional cash flows to improve our
balance sheet.
Longer-term, IPSCO continues to position itself in the tubular market to
take advantage of expected large northern pipeline projects over the next
few years.
In conclusion, IPSCO expects stronger profitability in 2004. We are
targeting further productivity improvements and are making further
improvements in our product mix, resulting in margin improvement.
43
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
The accompanying consolidated financial statements of IPSCO Inc., and all
information in this report, were prepared by management, which is responsible
for its integrity and objectivity.
The financial statements have been prepared in accordance with Canadian
generally accepted accounting principles and necessarily include some estimates
based upon management's judgments. The significant accounting policies, which
management believes appropriate for the Company, are described in Note 2 to the
financial statements. Financial and operating data presented elsewhere in the
annual report are consistent with the information contained in the financial
statements.
The integrity and reliability of IPSCO's reporting systems are achieved through
the use of formal policies and procedures, the careful selection of employees
and an appropriate division of responsibilities. Internal accounting controls
are continually monitored by an internal audit staff through ongoing reviews and
comprehensive audit programs. IPSCO regularly communicates throughout the
organization the requirement for employees to maintain high ethical standards in
their conduct of the Company's affairs.
The Board of Directors is responsible for ensuring that management fulfills its
responsibilities for financial reporting and internal control and exercises this
responsibility principally through the Audit Committee of the Board. The Board
of Directors annually appoints this Audit Committee which is comprised of
directors who are neither employees of IPSCO nor of companies affiliated with
the Company. This Committee meets regularly with management, the head of the
internal audit department, and the shareholders' auditors to review significant
accounting, reporting and internal control matters. Both the internal and
shareholders' auditors have unrestricted access to the Audit Committee.
Following its review of the financial statements and annual report and
discussions with the shareholders' auditors, the Audit Committee reports to the
Board of Directors prior to the Board's approval of the financial statements and
annual report. The Audit Committee recommends the appointment of the Company's
external auditors, who are appointed by the Company's shareholders at its annual
meeting.
Ernst & Young LLP, the shareholders' auditors, have performed an independent
audit in accordance with Canadian generally accepted auditing standards and have
attested to the fairness, in all material respects, of the presentation of the
financial statements. Their report follows.
/s/ David Sutherland /s/ Robert Ratliff
- ------------------------- -------------------------
David Sutherland Robert Ratliff
President and Chief Executive Officer Vice President and Chief Financial
Officer
January 28, 2004
44
AUDITORS' REPORT
To the Shareholders of IPSCO Inc.
We have audited the consolidated statements of financial position of IPSCO Inc.
as at December 31, 2003 and 2002 and the consolidated statements of income,
shareholders' equity, and cash flows for each of the years in the three year
period ended December 31, 2003. 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 conducted our audits in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 2003
and 2002 and the results of its operations and its cash flows for each of the
years in the three year period ended December 31, 2003 in accordance with
Canadian generally accepted accounting principles.
/s/ Ernst & Young, LLP
Chicago, Illinois
January 28, 2004
45
IPSCO INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As at December 31 (thousands of United States dollars)
2003 2002
--------------------------
CURRENT ASSETS
Cash and cash equivalents $ 131,567 $ 22,859
Accounts receivable
Trade, less allowances 168,956 135,421
Other, including current portion of mortgages receivable 45,722 18,331
Inventories (Note 3) 286,159 255,410
Prepaid expenses 2,833 2,847
Future income taxes (Note 4) 22,976 41,402
--------------------------
658,213 476,270
--------------------------
NON-CURRENT ASSETS
Capital assets (Note 5) 1,109,418 1,129,716
Mortgages receivable (Note 6) 10,882 5,403
Deferred financing costs, less amortization 8,107 2,785
Deferred pension asset (Note 7) 3,964 3,911
Future income taxes (Note 4) 149,430 121,586
--------------------------
1,281,801 1,263,401
--------------------------
TOTAL ASSETS $1,940,014 $1,739,671
==========================
CURRENT LIABILITIES
Accounts payable and accrued charges (Note 9) $ 162,812 $ 101,514
Accrued payroll and related liabilities 15,624 13,775
Current portion of long-term debt (Note 8) 34,286 35,386
Other current liabilities 10,515 16,142
--------------------------
223,237 166,817
--------------------------
LONG-TERM LIABILITIES
Long-term debt (Note 8) 401,244 342,202
Future income taxes (Note 4) 181,643 143,229
--------------------------
582,887 485,431
--------------------------
SHAREHOLDERS' EQUITY
Preferred shares (Note 10) 98,695 98,553
Common shares (Note 11) 354,095 351,311
Subordinated notes (Note 12) 104,250 104,250
Retained earnings (Note 13) 487,924 494,599
Cumulative translation adjustment 88,926 38,710
--------------------------
1,133,890 1,087,423
--------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,940,014 $1,739,671
Commitments and contingencies (Notes 18 & 21) ==========================
The accompanying notes are an integral part of the consolidated financial
statements.
On behalf of the Board
/s/ Burton Joyce /s/ David Sutherland
- ------------------------- -----------------------------
Burton Joyce, Director David Sutherland, Director
46
IPSCO INC. CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31
(thousands of United States dollars except per share data)
2003 2002 2001
------------------------------------------
SALES $ 1,294,566 $ 1,081,709 $ 903,743
------------------------------------------
Cost of sales
Manufacturing and raw material 1,130,886 929,140 772,516
Amortization of capital assets 61,138 51,049 37,107
------------------------------------------
1,192,024 980,189 809,623
------------------------------------------
Gross income 102,542 101,520 94,120
Selling, research and administration 54,683 51,358 55,799
------------------------------------------
Operating income 47,859 50,162 38,321
Other expenses (income)
Interest on long-term debt (Note 8) 30,583 23,821 6,634
Other interest (income) expense, net (1,625) 174 (928)
Foreign exchange (gain) loss (5,170) 938 882
Other (720) -- --
Gain on sale of assets held for sale (Note 6) -- (6,464) --
Litigation settlement (Note 21) -- -- (39,000)
Provision for loss on assets held for sale (Note 5) -- -- 10,000
------------------------------------------
Income before income taxes 24,791 31,693 60,733
Income taxes (Note 4) 12,429 11,414 21,865
------------------------------------------
NET INCOME 12,362 20,279 38,868
Dividends on preferred shares, including
part VI.I tax (Note 10) 6,304 5,608 5,692
Interest on subordinated notes, net of
income tax (Note 12) 5,771 5,771 5,771
------------------------------------------
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 287 $ 8,900 $ 27,405
==========================================
EARNINGS PER COMMON SHARE
Basic (Note 14) $ 0.01 $ 0.19 $ 0.67
==========================================
Diluted (Note 14) $ 0.01 $ 0.19 $ 0.66
==========================================
The accompanying notes are an integral part of the consolidated financial
statements.
47
IPSCO INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31 (thousands of United States dollars)
PREFERRED SHARES COMMON SHARES SUBORDINATED
NUMBER AMOUNT NUMBER AMOUNT NOTES
------------------------------------------------------------------------
Balance at January 1, 2001 6,000,000 $ 98,572 40,812,936 $ 255,772 $ 104,250
Net income -- -- -- -- --
Dividends on preferred shares,
including part VI.I tax -- -- -- -- --
Interest on subordinated notes,
net of income tax -- -- -- -- --
Dividends on common shares -- -- -- -- --
Issue of common shares -- -- 30,600 391 --
Foreign currency translation
adjustment -- -- -- -- --
Other -- (27) -- -- --
------------------------------------------------------------------------
Balance as at December 31, 2001 6,000,000 98,545 40,843,536 256,163 104,250
Net income -- -- -- -- --
Dividends on preferred shares,
including part VI.I tax -- -- -- -- --
Interest on subordinated notes,
net of income tax -- -- -- -- --
Dividends on common shares -- -- -- -- --
Issue of common shares -- -- 6,823,951 95,148 --
Foreign currency translation
adjustment -- -- -- -- --
Other -- 8 -- -- --
------------------------------------------------------------------------
Balance as at December 31, 2002 6,000,000 8,553 47,667,487 351,311 104,250
Net income -- -- -- -- --
Dividends on preferred shares,
including part VI.I tax -- -- -- -- --
Interest on subordinated notes,
net of income tax -- -- -- -- --
Dividends on common shares -- -- -- -- --
Issue of common shares -- -- 273,420 2,784 --
Foreign currency translation
adjustment -- -- -- -- --
Other -- 142 -- -- --
------------------------------------------------------------------------
Balance as at December 31, 2003 6,000,000 $ 98,695 47,940,907 $ 354,095 $ 104,250
========================================================================
CUMULATIVE
RETAINED TRANSLATION
EARNINGS ADJUSTMENT TOTAL
---------------------------------------------
Balance at January 1, 2001 $ 475,551 $ 50,489 $ 984,634
Net income 38,868 -- 38,868
Dividends on preferred shares,
including part VI.I tax (5,692) -- (5,692)
Interest on subordinated notes,
net of income tax (5,771) -- (5,771)
Dividends on common shares (11,179) -- (11,179)
Issue of common shares -- -- 391
Foreign currency translation
adjustment -- (15,686) (15,686)
Other -- -- (27)
---------------------------------------------
Balance as at December 31, 2001 491,777 34,803 985,538
Net income 20,279 -- 20,279
Dividends on preferred shares,
including part VI.I tax (5,608) -- (5,608)
Interest on subordinated notes,
net of income tax (5,771) -- (5,771)
Dividends on common shares (6,078) -- (6,078)
Issue of common shares -- -- 95,148
Foreign currency translation
adjustment -- 3,907 3,907
Other -- -- 8
---------------------------------------------
Balance as at December 31, 2002 494,599 38,710 1,087,423
Net income 12,362 -- 12,362
Dividends on preferred shares,
including part VI.I tax (6,304) -- (6,304)
Interest on subordinated notes,
net of income tax (5,771) -- (5,771)
Dividends on common shares (6,962) -- (6,962)
Issue of common shares -- -- 2,784
Foreign currency translation
adjustment -- 50,216 50,216
Other -- -- 142
---------------------------------------------
Balance as at December 31, 2003 $ 487,924 $ 88,926 $ 1,133,890
=============================================
The accompanying notes are an integral part of the consolidated financial
statements.
48
IPSCO INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 (thousands of United States dollars)
2003 2002 2001
-------------------------------------
CASH DERIVED FROM (APPLIED TO)
Operating activities
Working capital provided by operations
Net income $ 12,362 $ 20,279 $ 38,868
Amortization of capital assets 61,138 51,049 37,107
Amortization of deferred charges 1,216 813 549
Change in deferred pension asset 638 (4,168) (3,958)
Future income taxes 28,661 10,888 (13,656)
Gain on sale of assets held for sale -- (6,464) --
Non-cash portion of litigation settlement -- -- (11,000)
Non-cash provision for loss on assets held for sale -- -- 10,000
Other -- -- (144)
-------------------------------------
104,015 72,397 57,766
-------------------------------------
Change in non-cash operating working capital
Trade receivables (23,185) (28,651) 28,642
Other receivables (23,875) (7,439) 21,099
Inventories (9,035) (16,016) (13,436)
Prepaid expenses 264 (816) 600
Accounts payable and accrued charges 55,452 (8,168) 6,916
Accrued payroll and related liabilities 469 (1,540) (1,523)
Income and other taxes payable 2,730 619 4,841
Other current liabilities (6,983) 2,216 3,418
-------------------------------------
(4,163) (59,795) 50,557
-------------------------------------
99,852 12,602 108,323
-------------------------------------
Financing activities
Proceeds from issuance of common shares,
net of issue costs (Note 11) -- 90,670 --
Proceeds from issuance of common shares
pursuant to share option plan (Note 11) 2,581 2,953 391
Common share dividends (6,962) (6,078) (11,179)
Preferred share dividends (5,902) (5,254) (5,337)
Subordinated notes interest (8,500) (8,500) (8,500)
Proceeds from issuance of long-term debt (Note 8) 264,114 83,300 120,000
Repayment of long-term debt (Note 8) (225,586) (114,400) (73,100)
Proceeds from sale-leaseback of capital assets (Note 18) -- -- 15,000
-------------------------------------
19,745 42,691 37,275
-------------------------------------
Investing activities
Expenditures for capital assets (Note 15) (13,528) (34,211) (155,775)
Proceeds from sale of assets held for sale (Note 6) 1,022 1,466 --
Proceeds from collection of mortgages receivable 2,174 -- --
Investments (Note 16) (2,171) (1,706) (1,993)
-------------------------------------
(12,503) (34,451) (157,768)
-------------------------------------
Effect of exchange rate changes on cash
and cash equivalents 1,614 (475) (3,489)
-------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 108,708 20,367 (15,659)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 22,859 2,492 18,151
-------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 131,567 $ 22,859 $ 2,492
=====================================
The accompanying notes are an integral part of the consolidated financial
statements.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IPSCO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31
(thousands of United States dollars except per share data)
1 NATURE OF OPERATIONS
IPSCO Inc. is a producer of steel products. The Company's products are sold
primarily in Canada and the United States.
The Company currently employs approximately 2,400 people, of whom
approximately 56% are non-unionized personnel and approximately 44% are
represented by trade unions. The Company is a party to separate collective
bargaining agreements with a term to July 31, 2006 with locals of the
United Steelworkers of America (USWA) which represent unionized employees
in Regina and Calgary. These employees account for approximately 87% of the
Company's unionized employees.
In 2003, 2002 and 2001, no individual customer accounted for 10% or more of
sales. At December 31, 2003 and 2002, no customer represented 10% or more
of the accounts receivable balance.
2 SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles, and include certain
estimates based on management's judgments. These estimates affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
year. Actual results may differ from those estimates. The accounting
policies followed by the Company also conform in all material respects with
accounting principles generally accepted in the United States, except as
described in Note 20.
REPORTING CURRENCY
Assets and liabilities of the Company's operations having a functional
currency other than the U.S. dollar are translated into U.S. dollars using
the exchange rate in effect at the year-end and revenues and expenses are
translated at the average rate during the year. Exchange gains or losses on
translation of the Company's net equity investment in these operations are
deferred as a separate component of shareholders' equity.
The change in the cumulative translation adjustment results primarily from
fluctuations of the Canadian dollar against the U.S. dollar.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company,
its subsidiaries and the Company's proportionate interest of investment in
a jointly controlled enterprise. Significant inter-company balances and
transactions are eliminated on consolidation.
CASH EQUIVALENTS
Cash equivalents are securities of the government of Canada and its
provinces, the government of the United States, banks, and other
corporations, with a maturity of less than three months when purchased.
These highly liquid securities are short-term and have fixed interest
rates.
INVENTORIES
Inventories are valued at the lowest of average cost, replacement cost and
net realizable value.
INCOME TAXES
The Company follows the liability method of tax allocation in accounting
for income taxes. Under this method, future tax assets and liabilities are
determined based on differences between the financial reporting and tax
bases of assets and liabilities, and measured using the substantially
enacted tax rates and laws that will be in effect when the differences are
expected to reverse.
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CAPITAL ASSETS
Capital assets are stated at cost. For major projects under construction,
the Company capitalizes interest based on expenditures incurred to a
maximum of interest costs on debt.
Amortization is provided on the straight-line basis at the following annual
rates:
Buildings 4%
Machinery and equipment 4% to 33%
Amortization is provided on all assets acquired as they come into
production. In 2002 and 2001, the units-of-production method was used until
a substantial level of production was sustained at the Mobile Steelworks.
REPAIR AND MAINTENANCE COSTS
Repair and maintenance costs are expensed as incurred except for the
estimated cost of major overhauls and repairs which are accrued over the
period between the major overhauls and repairs.
DEFERRED FINANCING COSTS
Financing costs relating to long-term debt are deferred and amortized into
interest expense over the term of the related debt.
PENSION EXPENSE AND DEFERRED PENSION BALANCE
The cost of pension benefits earned by the employees covered by defined
benefit plans is actuarially determined using the projected benefit method
prorated on service and management's best estimate of expected plan
investment performance, salary escalation, terminations, and retirement
ages of plan members. Adjustments for plan amendments, changes in
assumptions and actuarial gains and losses are charged to operations over
the expected average remaining service life of the employee group which is
approximately 12 years. The costs of pension benefits for defined
contribution plans are charged to operations as contributions are earned.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instrument:
CASH AND CASH EQUIVALENTS
The carrying value of cash and cash equivalents approximates its fair
value.
MORTGAGES RECEIVABLE
The fair value of mortgages receivable has been estimated based on
current rates for similar instruments with similar maturities. At
December 31, 2003, the estimated fair value of mortgages receivable is
$12,053 (2002 - $6,332).
LONG-TERM DEBT
The fair value of the Company's long-term debt has been estimated
based on current market prices. Where no market price is available, an
estimate based on current rates for similar instruments with similar
maturities has been used to approximate fair value.
NATURAL GAS HEDGE
The Company utilizes fixed price physical delivery contracts and hedge
contracts to manage the variability of the cost of purchasing natural gas.
The Company has designated as cash flow hedge instruments certain
agreements matched against variable price forecasted natural gas purchases
through March 31, 2006. The instruments will reduce or increase costs as
the underlying physical transaction occurs. As at December 31, 2003, the
unrealized loss under the agreements was $44 (2002 - $78).
51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOREIGN CURRENCY HEDGE
In 2003, the Company entered into a series of foreign exchange forward
contracts to manage its exposure on certain sales contracts to fluctuations
in the relationship between the Canadian and U.S. dollars. As at December
31, 2003, the unrealized gain under the contracts was $180.
STOCK BASED COMPENSATION
The Company has a share option plan as described in Note 11 (c). Under the
terms of the plan, common shares may be granted as options, performance
units, restricted stock or restricted shares. Effective January 1, 2003,
the Company prospectively adopted the fair value method of accounting under
Section 3870 of the CICA Handbook for all awards granted, modified or
settled after that date. Under this method the fair value of the grant of
options, performance units, restricted stock and restricted shares is
amortized to compensation expense over the vesting period. Any
consideration paid by employees on exercise of share options is credited to
share capital.
The Company has a deferred share unit plan as described in Note 11 (d).
Compensation expense equal to the amount deferred is recorded. The
liability relating to the deferred share units is revalued quarterly based
on the market value of the Company's common shares and the resulting
adjustment recorded in income.
Section 3870 of the CICA Handbook requires the disclosure of pro forma
information regarding net income and earnings per share using option
valuation models that calculate the fair value of employee stock options
granted.
The fair value for the stock options was estimated at the date of grant
using a Black-Scholes option pricing model using the following
weighted-average assumptions for 2003, 2002 and 2001 respectively:
risk-free interest rates of 3.1%, 3.6% and 4.8%; dividend yields of 1.3%,
0.9% and 2.5%; volatility factors of the expected market price of the
Company's common stock of .44, .44 and .40; and a weighted-average expected
life of the options of 2 years, 1 year and 1 year. The weighted-average
grant-date fair value of the options granted during 2003 was $3.92 (2002 -
$4.05, 2001 - $3.33).
The Black-Scholes option valuation model was developed for use in
estimating fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require
the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized over the options vesting period. The Company's pro
forma net income (loss) information follows:
2003 2002 2001
------------------------------------
Pro forma net income $12,049 $19,304 $37,391
====================================
Pro forma net income (loss)
available to common shareholders $ (26) $ 7,925 $25,928
====================================
Pro forma earnings per common share:
Basic $ -- $ 0.17 $ 0.64
====================================
Diluted $ -- $ 0.17 $ 0.63
====================================
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REVENUE RECOGNITION
Sales and related costs are recognized upon transfer of ownership which
coincides with shipment of products to customers or specific terms included
in customer contracts.
CREDIT RISK
Credit is extended by the Company based upon an evaluation of the
customer's financial position; generally advance payment is not required.
The Company provides for doubtful accounts equal to estimated collection
losses that will be incurred in the collection of receivables. Estimated
losses are based on a review by management of the current status of
receivables, as well as historical collection experience.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company enters into hedging transactions in order to manage its
exposure to changes in energy commodity prices and the relationship between
the Canadian and U.S. dollars. The derivative transactions are evaluated as
effective or ineffective at inception and quarterly thereafter based on
various factors including the creditworthiness of the counterparty and
expectation of achieving forecast activity. For effective hedges, gains or
losses relating to derivative instruments are deferred and recognized in
the same period and in the same financial statement category as the gains
or losses on the corresponding hedged transactions. Any ineffectiveness is
recorded in income as identified. Premiums paid with respect to derivatives
are deferred and amortized to income over the term of the hedge.
RECENT ACCOUNTING STANDARDS
The impact on the Company of accounting standards adopted in 2003 and
accounting standards which have not been adopted due to delayed effective
dates follows:
In September 2002, the CICA decided to defer the effective date of
Accounting Guideline 13, Hedging Relationships, (AcG-13) by a year
to fiscal years beginning on or after July 1, 2003. AcG-13
establishes conditions for applying hedge accounting, but does not
specify hedge-accounting methods, although it provides criteria
which must be met in order for hedge accounting to be used and
requires that entities should disclose their accounting policy for
hedging relationships. The Company adopted AcG-13 effective January
1, 2003; the effect of such adoption was not material.
In December 2002, the CICA issued Section 3063, Impairment of
Long-Lived Assets and Section 3475, Disposal of Long-Lived Assets
and Discontinued Operations. These standards largely harmonize
Canadian practice with that in the U.S. as stipulated by SFAS 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. The
recommendations are effective for fiscal years beginning on or
after April 1, 2003. The Company will adopt Section 3063 and
Section 3475 effective January 1, 2004 and believes that the effect
of such adoption will not be material.
In 2003, the CICA issued Section 3110, Asset Retirement
Obligations, to replace the current guidance on future removal and
site restoration costs. The new standard is consistent with SFAS
143, Accounting for Asset Retirement Obligations, and will be
effective for fiscal years beginning on or after January 1, 2004.
The Company will adopt Section 3110 effective January 1, 2004 and
believes that the effect of such adoption will not be material.
In June 2003, the CICA issued Accounting Guideline 15,
Consolidation of Variable Interest Entities (VIE's), (AcG-15) which
is consistent with FASB FIN 46 (Note 20). AcG-15 will be effective
for all annual and interim periods beginning on or after November
1, 2004, except for certain disclosure requirements, including the
requirement to disclose VIE's in which the enterprise holds
significant variable interests which is effective for periods
beginning on or after January 1, 2004. The Company will adopt
AcG-15 effective January 1, 2004 and believes that the effect of
such adoption will not be material.
53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 2003, the CICA issued a revision to Section 3860,
Financial Instruments - Disclosure and Presentation, which will
require obligations that may be settled at the issuer's option by
a variable number of the issuer's own equity instruments to be
presented as liabilities. Such instruments are currently
presented as equity. The new standard is consistent with SFAS No.
150 and will be effective for fiscal years beginning on or after
November 1, 2004. Any accounting change necessary for initial
application should be recognized and disclosed as an accounting
policy change under Section 1506. The Company will adopt Section
3860 effective January 1, 2005 and believes that the effect of
such adoption will be material, as it will require the Company's
obligations under its Series 1 Preferred Shares and Subordinated
Notes to be classified as liabilities in the Company's
consolidated balance sheet, with the associated dividends and
interest accounted for in determining the Company's net income.
RECLASSIFICATION
Certain of the prior year amounts have been reclassified to conform
with the presentation adopted for the current year.
3. INVENTORIES
2003 2002
-----------------------------
Finished goods $106,310 $ 99,489
Work-in-process 85,790 70,492
Raw materials 35,780 31,831
Supplies 58,279 53,598
-----------------------------
$286,159 $255,410
=============================
4. INCOME TAXES
a) The components of income (loss) before income taxes are
summarized below:
2003 2002 2001
---------------------------------------------
Canada $ 18,475 $ 48,452 $ 61,033
United States 6,316 (16,759) (300)
---------------------------------------------
$ 24,791 $ 31,693 $ 60,733
=============================================
b) The provision for income taxes is summarized as follows:
2003 2002 2001
--------------------------------------------
Current
Canada $(13,921) $ 3,695 $ 30,501
United States (2,311) (3,169) 5,020
--------------------------------------------
(16,232) 526 35,521
--------------------------------------------
Future
Canada 22,478 14,642 (5,995)
United States 6,183 (3,754) (7,661)
--------------------------------------------
28,661 10,888 (13,656)
--------------------------------------------
$ 12,429 $ 11,414 $ 21,865
============================================
54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
c) Income tax expense differs from the amount computed by
applying the corporate income tax rates (Canadian Federal
and Provincial) to income before income taxes. The reasons
for this difference are as follows:
2003 2002 2001
----------------------------------
Corporate income tax rate 42.7% 41.1% 45.9%
----------------------------------
Provision for income taxes based
on corporate income tax rate $ 10,576 $ 13,026 $ 27,870
Increase (decrease) in taxes resulting from
Manufacturing and processing profit (4,539) (6,604) (6,748)
Large corporation tax 1,048 895 880
Income taxed at different rates
in the United States (10,877) (2,377) (11,952)
Valuation allowance 11,349 3,000 10,800
Other 4,872 3,474 1,015
----------------------------------
$ 12,429 $ 11,414 $ 21,865
==================================
d) Future income taxes are comprised of the following:
2003 2002
-----------------------
Future tax assets
Accounting provisions not currently
deductible for tax purposes $ 19,631 $ 37,100
Costs capitalized to inventory for tax purposes 3,362 4,296
Net operating loss carry-forwards 180,139 141,852
Foreign exchange losses on debt 887 --
Other 1,536 1,540
-----------------------
Total future tax assets 205,555 184,788
-----------------------
Future tax liabilities
Tax depreciation in excess of
accounting amortization 179,503 133,671
Pension contributions in excess of expense 1,886 1,420
Foreign exchange gain on debt -- 3,414
Other 254 4,724
-----------------------
Total future tax liabilities 181,643 143,229
-----------------------
Valuation allowance 33,149 21,800
-----------------------
Net future income tax asset (liability) $ (9,237) $ 19,759
=======================
e) At December 31, 2003, United States subsidiaries of the
Company had accumulated net operating losses carried forward
of $448,166 for which a portion of future tax benefits have
been recorded. The related tax benefits can be carried
forward and, subject to certain limitations, offset against
income tax expense arising in future periods up to the year
2022. In determining the valuation allowance for net future
income taxes at December 31, 2003, the Company has
considered existing temporary differences that will reverse
in the carryforward period and certain tax planning
strategies that it considers to be prudent and feasible.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. CAPITAL ASSETS
2003 2002
ACCUMULATED ACCUMULATED
COST AMORTIZATION NET COST AMORTIZATION NET
--------------------------------------------------------------------------------------------
Land and land improvements $ 56,621 $ -- $ 56,621 $ 55,789 $ -- $ 55,789
Buildings 149,382 50,423 98,959 132,724 38,775 93,949
Machinery and equipment 1,286,455 347,035 939,420 1,213,168 257,450 955,718
Construction in progress 10,775 -- 10,775 14,085 -- 14,085
--------------------------------------------------------------------------------------------
1,503,233 397,458 1,105,775 1,415,766 296,225 1,119,541
Assets held for sale 14,839 11,196 3,643 20,290 10,115 10,175
--------------------------------------------------------------------------------------------
$1,518,072 $ 408,654 $1,109,418 $1,436,056 $ 306,340 $1,129,716
============================================================================================
During the year, $nil (2002 - $nil, 2001 - $20,523) of interest costs were
capitalized in connection with major capital asset projects.
Certain capital assets, which are not employed in production, have been
segregated pending their ultimate disposition and are carried at an amount
not exceeding management's best estimate of net realizable value. During
2001, the Company wrote down the carrying value of these assets by $10,000
to reflect the Company's valuation. The Company's valuation includes
significant estimates concerning the cost to complete environmental
remediation activities, as well as the ultimate net recovery value of the
property. The estimated environmental costs could change depending on the
remediation method used. The Company's estimates of net sales value could
be impacted by the prevailing economic conditions and the Company's ability
to obtain necessary zoning and other approvals. See Note 6 for discussion
of asset sales.
6. MORTGAGES RECEIVABLE AND SALES OF ASSETS HELD FOR SALE
In 2003 and 2002, the Company sold certain of its assets held for sale for
cash of $1,022 and $1,466 and mortgages of $6,261 and $6,338, respectively.
The transactions resulted in gains of $nil and $6,464, in 2003 and 2002,
respectively. The mortgages bear interest at rates from 5% to 5.75%.
Minimum principal payments due in each of the next five years are as
follows:
2004 $ 1,157
2005 1,157
2006 1,157
2007 3,084
2008 5,485
---------
12,039
Current portion, included in other accounts receivable 1,157
---------
$10,882
=========
7. PENSION PLANS
The Company provides retirement benefits for substantially all of its
employees under several defined benefit and defined contribution pension
plans. The defined benefit plans provide benefits that are based on a
combination of years of service and an amount that is either fixed or based
on final earnings. The defined contribution plans restrict the Company's
matching contributions to 5% of each participating employee's annual
earnings. The Company's benefit plans do not provide for post-retirement
health care benefits.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's policy with regard to the defined benefit plans is to fund
the amount that is required by governing legislation. Pension plan assets
are invested in Canadian and U.S. equities and Canadian fixed income
instruments with no investment in securities of the Company. During 2002,
amendments were made to increase benefits payable under plans for the
Company's Canadian unionized employees.
Net pension expense attributable to the Company's pension plans for the
years ended December 31 includes the following components:
2003 2002 2001
--------------------------------
Defined benefit plans
Service cost for benefits earned $ 4,410 $ 3,288 $ 2,966
Interest cost on benefit obligations 8,935 7,029 6,389
Expected return on plan assets (6,733) (6,993) (7,303)
Net amortization 2,816 443 --
--------------------------------
9,428 3,767 2,052
Defined contribution plans 3,224 3,050 2,743
--------------------------------
Net pension expense $ 12,652 $ 6,817 $ 4,795
================================
The following table sets forth the defined benefit plans' funded status and
amount included in the deferred pension balance in the Company's statement
of financial position at December 31:
2003 2002
------------------------
Benefit obligation at beginning of year $ 121,897 $ 97,449
Service cost for benefits earned 4,613 3,440
Interest cost on benefit obligation 8,935 7,029
Plan amendments 610 8,344
Actuarial losses 8,758 11,076
Benefit payments (7,728) (6,603)
Currency translation 27,152 1,162
------------------------
Benefit obligation at end of year 164,237 121,897
------------------------
Market value of plan assets at beginning of year 84,777 87,554
Actual return on plan assets 11,955 (5,328)
Employer contributions 8,346 7,809
Plan participants' contributions 521 253
Benefit payments (7,728) (6,603)
Currency translation 19,086 1,092
------------------------
Market value of plan assets at end of year 116,957 84,777
------------------------
Funded status at end of year (47,280) (37,120)
Unamortized actuarial losses, (gains) and plan amendments 51,244 41,031
------------------------
Deferred pension asset $ 3,964 $ 3,911
========================
Amounts applicable to the Company's pension plans with an accumulated
benefit obligation in excess of plan assets are:
2003 2002
------------------------
Projected benefit obligation $ 163,241 $ 116,727
========================
Accumulated benefit obligation $ 155,900 $ 111,783
========================
Market value of plan assets $ 115,884 $ 79,702
========================
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The significant actuarial assumptions adopted in measuring the Company's
accrued benefit obligations as at December 31, 2003 and 2002 follow.
Variances between such estimates and actual experience, which may be
material, are amortized over the employees' average remaining service life.
2003 2002
--------------------
Weighted average discount rate 6.1% 6.6%
Expected long-term rate of return on plan assets 7.0% 7.0%
Weighted average rate of compensation increase 3.2% 3.8%
8. DEBT
CARRYING VALUE FAIR VALUE
2003 2002 2003 2002
--------------------------------------------------------------
6.94% Unsecured notes, payable in one
remaining installment due April 1, 2004 $ 20,000 $ 40,000 $ 20,111 $ 40,541
7.32% Unsecured notes, payable in six equal
annual installments commencing April 1, 2004 85,714 100,000 89,077 104,230
7.80% Unsecured debentures, (CDN $100,000)
maturing and payable December 1, 2006 77,101 63,573 75,808 63,605
6.00% Unsecured loan, maturing and payable
June 1, 2007. The Company has the option
at maturity to extend the term of the loan
to no later than June 1, 2027 at an interest
rate to be negotiated 14,715 14,715 14,461 14,566
8.11% Unsecured financing, maturing and payable
November 1, 2009. The Company has the option
at maturity to extend the term of the loan to
no later than November 1, 2029 at an interest
rate to be negotiated 28,000 28,000 28,817 29,459
6.875% Unsecured financing, maturing and payable
May 1, 2010. The Company has the option at
maturity to extend the term of the loan to
no later than May 1, 2030 at an interest
rate to be negotiated 10,000 10,000 9,546 9,797
8.75% Unsecured notes, maturing and payable
June 1, 2013. The Company has the option
to redeem the notes after June 1, 2008 for
a premium declining ratably to par at
June 1, 2011 200,000 -- 222,240 --
10.58% Unsecured note, repaid 2003 -- 3,300 -- 3,576
Various Bank lines of credit (b) -- 118,000 -- 118,000
--------------------------------------------------------------
435,530 377,588 460,060 383,774
Less current portion of long-term debt (34,286) (35,386) (34,957) (41,330)
--------------------------------------------------------------
$401,244 $342,202 $425,103 $342,444
==============================================================
Fair value of debt has been estimated on the basis described in Note 2.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
b) Bank lines of credit
At December 31, 2003, the Company had bank lines of credit
aggregating U.S. $200,000 and CDN $14,000 (2002 - U.S.
$250,000, CDN $16,652), which can be drawn in Canadian or
U.S. currency, of which U.S. $nil and CDN $50 (2002 - U.S.
$118,000, CDN - $nil) had been drawn down other than letters
of credit of CDN $12,304, U.S. $3,775 (2002 - CDN $13,049,
U.S. $3,775). Bank lines of credit are comprised of a U.S.
$200,000 (2002 - U.S. $200,000) revolving term facility that
expires March 4, 2005 and CDN $14,000 short-term bank lines
of credit. The revolving term facility bears interest at
spreads over the Canadian prime rate, the U.S. base rate,
Canadian Bankers' Acceptances Reference Discount Rate or
U.S. dollar LIBOR and is unsecured. The CDN $14,000
short-term bank lines of credit are reviewed at least
annually and are revolving operating and term facilities
that bear interest at either the Canadian prime rate or the
U.S. base rate and are secured by certain assets of a
subsidiary.
Minimum payment requirements on long-term debt arrangements,
without exercising the options to extend the terms
outstanding, are as follows:
2004 $ 34,286
2005 14,286
2006 91,387
2007 29,001
2008 14,286
----------
183,246
2009 - 2013 252,284
----------
$435,530
==========
9. ACCOUNTS PAYABLE AND ACCRUED CHARGES
Included in accounts payable and accrued charges is an
accrual to cover the costs of major overhauls and repairs.
Timing of these expenditures is dictated by future events
and market conditions. At December 31, 2003 and 2002, the
amounts accrued are $25,056 and $16,115 respectively.
10. PREFERRED SHARES
The Company is authorized to issue unlimited first and
second preferred shares. The first preferred shares rank in
priority to the second preferred shares and the common
shares as to payment of dividends and the distribution of
assets. The first and second preferred shares may be issued
in series and the directors of the Company may fix, before
issuance, the further rights, privileges, restrictions and
conditions attached thereto.
The Company has issued first preferred shares, Series 1 (the
Series 1 Preferred Shares) at a price of CDN $25.00 per
Series 1 Preferred Share with a fixed cumulative
preferential dividend as and when declared by the directors
equal to 5.50% per annum payable quarterly on the 15th of
February, May, August and November of each year.
The Series 1 Preferred Shares are non-voting. However, if
the Company fails to declare and pay eight quarterly
dividends, consecutive or otherwise, and so long as any of
those dividends are in arrears, the Series 1 Preferred
Shares become voting.
The Series 1 Preferred Shares may be redeemed in whole or in
part by the Company at any time on or after May 15, 2004 for
CDN $25.00 per share plus accrued and unpaid dividends. On
or after May 15, 2004, the Company may elect to convert each
Series 1 Preferred Share into that number of common shares
determined by dividing CDN $25.00 plus accrued and unpaid
dividends by the greater of CDN
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$3.00 and 95% of the market price of the common shares. In addition,
on or after August 15, 2004, the holders have the option to convert
each Series 1 Preferred Share into that number of common shares
determined by dividing CDN $25.00 plus accrued and unpaid dividends by
the greater of CDN $3.00 and 95% of the market price of the common
shares subject to the Company's right to redeem the Series 1 Preferred
Shares, arrange sales to substitute purchasers or a combination
thereof.
Unless all dividends are paid to the most recent dividend date, the
Company may not 1) pay cash dividends on shares ranking junior to the
Series 1 Preferred Shares; 2) redeem, purchase or otherwise retire
shares ranking on parity with or junior to the Series 1 Preferred
Shares; or 3) redeem, purchase or otherwise retire less than all of
the Series 1 Preferred Shares.
The Series 1 Preferred Shares, including accrued and unpaid cumulative
dividends, have been classified as equity since the Company has the
unrestricted ability to settle the Series 1 Preferred Shares and
related dividends by issuing its own common shares.
11. COMMON SHARES
a) Authorized
The Company is authorized to issue unlimited common shares.
b) Issued
In 2003, the Company granted 10,417 (2002 - 4,400) shares of
restricted stock to an officer of the Company in addition to his
cash based compensation. Compensation expense of $100 (2002 -
$61) was recorded. The rights of the recipient to dispose of the
shares are restricted for three years from the date of the grant.
During 2003, the Company granted 76,500 restricted shares to
officers of the Company. The shares vest at the end of three
years based on continued employment and achievement of certain
Company performance objectives. During the vesting period the
holders of the restricted shares are entitled to all the rights
of a common shareholder including dividends and voting. The
rights of the holders to dispose of the shares are restricted for
three years from the date of the grant. Compensation expense of
$110 was recorded in 2003 based on the fair value at the date of
grant of CDN $13.38 per share.
In February 2002, the Company issued, for cash, 6,500,000 common
shares at an issue price of CDN $23.25. Gross proceeds of U.S.
$94,761 have been reduced by the related share issue expenses of
$4,073, net of income taxes of $1,507.
c) Share Option Plan
The Company has a share option plan under which common shares are
reserved for directors, officers and employees. Under the terms
of the plan, reserved common shares may be granted as options,
performance units, restricted stock or restricted shares.
Following is the continuity of common shares reserved for future
option grants under the share option plan:
2003 2002 2001
-------------------------------------
Balance at beginning of year 263,158 696,558 203,154
Common shares reserved -- -- 750,000
Grants (157,460) (443,900) (284,885)
Cancellations 266,998 10,500 28,289
-------------------------------------
Balance at end of year 372,696 263,158 696,558
=====================================
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
i) Share options
The options, which are exercisable within ten years, are granted
at a price established by the Board of not less than the last
Toronto Stock Exchange board lot trading price on the day of the
grant. The options vest over one to three years. Outstanding
options at December 31, 2003 expire between 2004 and 2013.
Following is the continuity of granted options outstanding in Canadian
dollars:
2003 2002 2001
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
NUMBER PRICE NUMBER PRICE NUMBER PRICE
--------------------------------------------------------------------------------------------
Balance at beginning of year 3,421,404 $23.18 3,311,955 $22.47 3,085,959 $22.70
Options granted 5,000 15.81 439,500 22.22 284,885 20.00
---------- ----------- ----------
3,426,404 23.17 3,751,455 22.44 3,370,844 22.48
Options exercised (186,503) (17.44) (319,551) 14.28 (30,600) 19.71
Options cancelled (266,650) (25.65) (10,500) 27.98 (28,289) 26.76
---------- ----------- ----------
Balance at end of year 2,973,251 23.31 3,421,404 23.18 3,311,955 22.47
========== =========== ==========
Following is the range of exercise prices and contractual life of
outstanding options under the plan in Canadian dollars as at December 31,
2003:
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE CONTRACTUAL
NUMBER PRICE LIFE
----------------------------------------
Balance of options outstanding at year
end within the following ranges:
$10.00 to $19.99 1,129,076 $16.81 4.6
$20.00 to $29.99 1,103,050 21.83 4.4
$30.00 to $50.00 741,125 35.40 3.9
----------
2,973,251 23.31 4.4
==========
Following is the range of exercise prices of options currently exercisable
under the plan in Canadian dollars as at December 31, 2003:
WEIGHTED
AVERAGE
EXERCISE
NUMBER PRICE
---------------------------
Balance of options exercisable at
year end within the following ranges:
$10.00 to $19.99 1,122,408 $16.81
$20.00 to $29.99 1,085,217 21.77
$30.00 to $50.00 734,225 35.30
-----------
2,941,850 23.26
===========
61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ii) Performance units
The performance units, which require no payment by the holder,
vest at the end of three years based on continued employment and
achievement of certain Company performance objectives. Upon
vesting, holders of performance units are entitled to payment of
an amount equal to dividends declared during the vesting period.
The fair value of the grant is being amortized to compensation
expense over the vesting period. Compensation expense of $95 was
recorded in 2003 based on the fair value at the date of grant of
CDN $13.38 per unit. The weighted average contractual life of the
performance units at December 31, 2003 is 2.5 years.
Following is the continuity of granted performance units outstanding:
2003
--------
Balance at beginning of year --
Performance units granted 65,543
Performance units cancelled (348)
--------
Balance at end of year 65,195
========
d) Deferred Share Unit Plan
The Company has a deferred share unit plan into which directors must
defer at least half of their annual retainer. Such deferrals are
converted to deferred share units, each of which has a value equal to
the value of one common share. On retirement from the Board, directors
may receive payment of their deferred share units in cash, shares
purchased on the open market or shares issued by the Company. The
liability for deferred share units is included in accrued payroll and
related liabilities.
2003 2002 2001
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT
----------------------- -------------------------- ------------------------
Balance at beginning of year 55,088 $ 555 41,352 $ 494 22,191 $ 204
Granted 36,418 456 18,796 228 19,161 227
Redeemed (4,239) (38) (5,060) (86) -- --
Revaluation 645 (81) 63
----------------------- -------------------------- ------------------------
Balance at end of year 87,267 $ 1,618 55,088 $ 555 41,352 $ 494
======================= ========================== ========================
12. SUBORDINATED NOTES
The Company has outstanding $100,000 incremental rate junior subordinated
notes maturing December 31, 2038. The incremental rate junior subordinated
notes bear interest in arrears payable semi-annually at 8.5% for the
ten-year period ending December 10, 2008, 9.5% for the eleventh to
fifteenth year and increasing by an additional 2% every five years
thereafter. The incremental rate junior subordinated notes are redeemable,
in whole or in part, by the Company, at any time, at the principal amount
plus accrued and unpaid interest to the date of redemption (the "Redemption
Amount") and at maturity at the principal amount plus accrued and unpaid
interest to the date of maturity (the "Maturity Amount").
The Company may, at its option, pay the Redemption Amount, Maturity Amount
or any interest payment in cash or by delivering common shares with an
equivalent market value to a trustee. The trustee would sell the Company's
common shares and remit the proceeds to the holders of the incremental rate
junior subordinated notes in payment of the Redemption Amount, the Maturity
Amount or the accrued interest.
62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company may, at its option, defer payment of interest on the
incremental rate junior subordinated notes by extending the interest
payment date for up to four consecutive semi-annual periods. Interest
continues to accrue during the extension periods, but does not
compound. An interest deferral can only commence if there have been no
dividends paid on common or preferred shares during the preceding six
months. Should the Company pay any dividends on common or preferred
shares during the interest deferral period, the deferral period ceases
and the payment of deferred interest is required.
The principal amount of the incremental rate junior subordinated notes
is classified as equity and accrued interest, on an after tax basis,
is classified as a charge to retained earnings since the Company has
the ability to settle the amounts by issuing its own common shares.
13. DIVIDENDS
The most restrictive covenant pertaining to dividend payments in the
Company's financing agreements requires consolidated shareholders'
equity, excluding the balance of outstanding subordinated notes, to be
maintained at a minimum of $570,000 plus 50% of net income earned
after December 31, 1998. At December 31, 2003, the Company's
shareholders' equity exceeded this requirement by $356,928.
Dividends on common shares totaled CDN $0.20 per share in 2003 (2002 -
CDN $0.20 per share, 2001 - CDN $0.425 per share).
14. EARNINGS PER COMMON SHARE
Basic earnings per common share is calculated by dividing net income
available to common shareholders by the weighted average number of
common shares outstanding. Diluted earnings per share is calculated by
dividing net income by the weighted average shares outstanding plus
share equivalents that would arise from a) the exercise of share
options, deferred share units, restricted shares and performance
units, and b) the conversion of preferred shares and subordinated
notes. Out-of-the-money share options, those with an exercise price
greater than market price, are excluded from the calculation as they
are anti-dilutive. Conversion of preferred shares and subordinated
notes have been excluded from the calculation in 2003 and 2002 as they
are anti-dilutive. The per share amounts disclosed in the Consolidated
Statements of Income are based on the following:
2003 2002 2001
-----------------------------------------------------------
Numerator for basic earnings
per share - Net income available
to common shareholders $ 287 $ 8,900 $ 27,405
Dividends on preferred shares,
including part VI.I tax -- -- 5,692
Interest on subordinated notes,
net of income tax -- -- 5,771
-----------------------------------------------------------
Numerator for diluted earnings per share $ 287 $ 8,900 $ 38,868
===========================================================
Common shares outstanding - January 1 47,667,487 40,843,536 40,812,936
Additional shares issued 19,637 5,638,318 19,282
-----------------------------------------------------------
Denominator for basic earnings per share 47,687,124 46,481,854 40,832,218
Adjustment for share options 528 366,999 231,360
Adjustment for deferred share units 68,667 44,176 29,435
Adjustment for restricted shares 16,372 -- --
Adjustment for performance units 10,057 -- --
Adjustment for preferred shares -- -- 8,841,623
Adjustment for subordinated notes -- -- 8,971,601
-----------------------------------------------------------
Denominator for diluted earnings per share 47,782,748 46,893,029 58,906,237
===========================================================
63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. EXPENDITURES FOR CAPITAL ASSETS
2003 2002 2001
-------------------------------------------
Additions to capital assets $ 9,425 $ 28,265 $ 155,007
Decrease in accounts payable
and accrued charges for capital
expenditures 4,103 5,946 768
-------------------------------------------
$ 13,528 $ 34,211 $ 155,775
===========================================
16. INVESTMENTS
During 2003, the Company made an initial investment of $2,000 for a
50% joint venture interest in Blastech Mobile LLC, a blast and paint
line located adjacent to the Mobile Steelworks. The Company has
committed up to an additional $400 to relocate production equipment
and $300 for the initial working capital requirements of the joint
venture. As of December 31, 2003, the joint venture had not commenced
operations and accordingly did not have a significant effect on the
Company's consolidated financial statements as at and for the year
ended December 31, 2003.
17. SEGMENTED INFORMATION
The Company is organized and managed as a single business segment,
being steel products, and the Company is viewed as a single operating
segment by the chief operating decision maker for the purposes of
resource allocation and assessing performance.
Financial information on the Company's geographic areas follows. Sales
are allocated to the country in which the third party customer
receives the product.
2003 2002 2001
--------------------------------------------
Sales
Canada $ 504,346 $ 365,854 $ 395,841
United States 790,220 715,855 507,902
--------------------------------------------
$1,294,566 $1,081,709 $ 903,743
============================================
Capital Assets
Canada $ 200,854 $ 181,736
United States 908,564 947,980
----------------------------
$1,109,418 $1,129,716
============================
Sales information by product group is as follows:
2003 2002 2001
--------------------------------------------
Steel mill products $ 756,048 $ 687,439 $ 458,625
Tubular products 538,518 394,270 445,118
--------------------------------------------
$1,294,566 $1,081,709 $ 903,743
============================================
18. COMMITMENTS
a) The Company and its subsidiaries have lease commitments on
property for the period to 2015. The payments required by these
leases, including the sale-leaseback transactions discussed
below, are as follows:
2004 $ 25,338
2005 20,042
2006 18,232
2007 19,530
----------
2008 18,968
----------
102,110
2009 - 2015 106,475
----------
$208,585
==========
64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Rental expenses incurred under operating leases during 2003, 2002
and 2001 were $24,885, $24,450 and $26,342 respectively.
In 2001, the Company concluded the sale and leaseback of the
temper mill at its coil processing facility in Houston for cash
proceeds of $15,000. The sale resulted in no gain or loss. The
Company has the option, but not the obligation, to purchase the
equipment for a predetermined amount after seven years of the
7.5-year lease term.
In October 2000, the Company concluded the sale and leaseback of
certain of its Montpelier Steelworks production equipment for
cash proceeds of $150,000. The Company has options, but is not
obligated, to purchase the equipment after seven and ten-years
for predetermined amounts and at the end of the 15-year lease
term for the fair market value of the equipment, subject to a
residual guarantee of $37,500.
In December 2000, the Company concluded the sale and leaseback of
the temper mill at its coil processing facility in St. Paul for
cash proceeds of $8,251. The Company has the option, but not the
obligation, to purchase the equipment for a predetermined amount
after four years of the five-year lease term.
b) The Company and its subsidiaries have commitments under service
and supply contracts for the period to 2018. Payments required
under these contracts are as follows:
2004 $ 63,052
2005 47,506
2006 37,754
2007 32,402
2008 29,432
----------
210,146
2009 - 2018 87,460
----------
$297,606
==========
c) At December 31, 2003, commitments to complete capital programs in
progress total $3,678.
19. SUPPLEMENTAL INFORMATION
2003 2002 2001
------------------------------------
Allowance for doubtful accounts $ 3,214 $ 9,170 $10,326
====================================
Doubtful accounts charged to expense $ 259 $ (706) $ 4,435
====================================
Interest income $ 1,860 $ 819 $ 1,561
====================================
Other interest expense $ 235 $ 993 $ 633
====================================
Miscellaneous income $ 1,512 $ 1,391 $ 1,477
====================================
Research and development expense $ 1,542 $ 1,391 $ 1,306
====================================
Interest paid $26,993 $20,856 $25,466
====================================
Income tax installments paid $12,800 $12,289 $26,304
====================================
65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. Significant Differences Between Canadian and United States Generally
Accepted Accounting Principles (GAAP)
a) Reconciliation of net income (loss) between accounting principles
generally accepted in Canada and the United States:
2003 2002 2001
-------------------------------------------------------------
Net income as reported under
Canadian GAAP $ 12,362 $ 20,279 $ 38,868
Adjustments relating to the
capitalization of interest (i) -- -- (8,908)
Adjustments relating to
commissioning costs (ii) -- -- (22,776)
Adjustments relating to amortization
of capital assets (iii) 2,536 (1,839) (4,126)
Adjustments relating to subordinated
notes (iv) (5,771) (5,771) (5,771)
Adjustments relating to sale-
leaseback (v) (777) (1,404) (1,014)
Adjustments relating to natural
gas hedge (vi) (407) 736 (8)
Adjustments relating to valuation
allowance on net future income
tax asset (vii) -- 26,700 (37,200)
-------------------------------------------------------------
Net income (loss) in accordance
with U.S. GAAP 7,943 38,701 (40,935)
Dividends on preferred shares
including part VI.I tax (6,304) (5,608) (5,692)
-------------------------------------------------------------
Net income (loss) available to
common shareholders in accordance
with U.S. GAAP $ 1,639 $ 33,093 $ (46,627)
=============================================================
Earnings (loss) per common share:
Basic $ 0.03 $ 0.71 $ (1.14)
=============================================================
Diluted (viii) $ 0.03 $ 0.66 $ (1.14)
=============================================================
Net income (loss) available to
common shareholders in accordance
with U.S. GAAP $ 1,639 $ 33,093 $ (46,627)
Dividends on preferred shares
including part VI.I tax -- 5,608 --
Interest on subordinated notes -- 5,771 --
-------------------------------------------------------------
Numerator for diluted earnings per share $ 1,639 $ 44,472 $ (46,627)
=============================================================
Common shares outstanding - January 1 47,667,487 40,843,536 40,812,936
Additional shares issued 19,637 5,638,318 19,282
-------------------------------------------------------------
Denominator for basic earnings per share 47,687,124 46,481,854 40,832,218
Adjustment for share options 528 366,999 --
Adjustment for deferred share units 68,667 44,176 --
Adjustment for restricted shares 16,372 -- --
Adjustment for performance units 10,057 -- --
Adjustment for preferred shares -- 10,328,336 --
Adjustment for subordinated notes -- 10,373,134 --
-------------------------------------------------------------
Denominator for diluted earnings per share 47,782,748 67,594,499 40,832,218
=============================================================
66
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
i) United States GAAP requires interest to be capitalized on
the expenditures incurred for all major projects under
construction to a maximum of all interest costs during the
year or until the assets are placed into production.
Commissioning and start-up costs are not included in the
calculation of interest to be capitalized. For Canadian
GAAP, commissioning and start-up costs are included in the
calculation.
ii) United States GAAP requires commissioning or start-up costs
to be expensed as incurred. For Canadian GAAP, these costs
are capitalized.
iii) United States GAAP requires amortization of capital assets
to commence when the capital assets are available for use.
Under Canadian GAAP, amortization commences when the assets
are placed into production which occurs at the end of the
commissioning or start-up period. Further, the amount
capitalized to capital assets under United States GAAP
differs from the amount capitalized under Canadian GAAP (see
i and ii above).
iv) United States GAAP requires that the subordinated notes be
classified as long-term debt, the related accrued interest
to be classified as a liability, the related issue costs to
be recorded as an asset which is amortized to interest
expense over the term of the debt, the related pre-tax
interest to be deducted in determining income and the
related income tax benefit to be recorded as part of income
tax expense. Under Canadian GAAP, as disclosed in Note 12,
the Company has classified the subordinated notes as part of
shareholders' equity and the interest, net of related tax
effects, and the issue costs have been classified as charges
to retained earnings.
v) United States GAAP requires the financing method of
accounting for a 2000 sale and leaseback transaction which
involves real property. Under Canadian GAAP, the transaction
has been afforded operating lease treatment. U.S. GAAP gives
rise to interest expense on the obligation and amortization
of the capital asset. Under Canadian GAAP, a lease expense
is incurred.
vi) United States GAAP requires recording of the ineffective
portion of cash flow hedges in the income statement
including the mark-to-market adjustment of the natural gas
contract and the amortization of the effective portion
(prior to the counterparty bankruptcy) of the natural gas
hedge over the remaining life of the contract. Canadian GAAP
allows for probable hedged transactions to be accounted for
off-balance sheet.
vii) This adjustment represents the change in the valuation
allowance provided on the net tax asset allocated to future
years for United States GAAP as a result of differences in
accounting practices between United States and Canadian
GAAP. See i), ii), and iii) above for explanation of the
principal differences.
In early 2002, the Company restructured its Alabama operations
such that the tax status changed from a corporation to a
partnership. The majority partner is a taxable Canadian
subsidiary of the Company, which is not part of the consolidated
U.S. tax group. The restructuring resulted in significant
recapture causing taxable income to be generated in the U.S. In
evaluating the future realization of deferred tax assets
following the restructuring, it was determined that the change in
the valuation allowance required for U.S. GAAP purposes was $26.7
million lower than the change in the valuation allowance required
for Canadian GAAP purposes.
viii) In 2003, no adjustment was made for conversion of preferred
shares or subordinated notes as they are anti-dilutive. Due
to the net loss in 2001, no adjustment was made for any
potentially dilutive instruments as the impact was
anti-dilutive.
67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
b) Comprehensive income (loss):
2003 2002 2001
-----------------------------------
Net income (loss) in accordance with U.S. GAAP $ 7,943 $ 38,701 $(40,935)
-----------------------------------
Other comprehensive income
Foreign currency translation adjustments 50,216 3,907 (15,686)
Adjustments relating to minimum pension liability (7,935) (25,366) (3,853)
Tax effect 3,968 9,436 1,433
Fair value adjustment for foreign exchange hedge 180 -- --
Tax effect (90) -- --
Fair value adjustment for natural gas hedge -- -- (1,991)
Tax effect -- -- 717
Amortization of natural gas hedge to income 664 664 111
Tax effect (332) (239) (40)
-----------------------------------
46,671 (11,598) (19,309)
-----------------------------------
Comprehensive income (loss) in accordance
with U.S. GAAP $ 54,614 $ 27,103 $(60,244)
===================================
c) Reconciliation of the statement of financial position between
accounting principles generally accepted in Canada and the United
States:
2003 2002
------------------------------
i) Cash
Balance under Canadian GAAP $ 131,567 $ 22,859
Adjustment relating to investment in joint venture (208) --
------------------------------
Balance under U.S. GAAP $ 131,359 $ 22,859
==============================
ii) Fair market value of derivatives
Balance under Canadian GAAP $ -- $ --
Adjustment relating to fair value of foreign exchange hedge 180 --
------------------------------
Balance under U.S. GAAP $ 180 $ --
==============================
iii) Investments
Balance under Canadian GAAP $ -- $ --
Adjustment relating to investment in joint venture 2,401 --
------------------------------
Balance under U.S. GAAP $ 2,401 $ --
==============================
iv) Capital assets
Balance under Canadian GAAP $ 1,109,418 $ 1,129,716
Adjustments relating to the capitalization of interest (13,902) (13,902)
Adjustments relating to commissioning costs (112,233) (112,233)
Adjustments relating to amortization of capital assets (3,547) (8,619)
Adjustments relating to 2000 sale-leaseback transaction 130,594 136,432
Adjustment relating to investment in joint venture (2,193) --
------------------------------
Balance under U.S. GAAP $ 1,108,137 $ 1,131,394
==============================
v) Deferred pension liability (asset)
Balance under Canadian GAAP $ (3,964) $ (3,911)
Adjustments relating to minimum pension liability 40,016 32,081
------------------------------
Balance under U.S. GAAP $ 36,052 $ 28,170
==============================
68
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
vi) Future income taxes - long-term asset
Balance under Canadian GAAP $ 149,430 $ 121,586
Adjustments relating to 2000 sale-leaseback transaction 2,629 1,853
Adjustments relating to valuation allowance on net
future income tax asset (10,500) (10,500)
------------------------
Balance under U.S. GAAP $ 141,559 $ 112,939
========================
vii) Accounts payable and accrued charges
Balance under Canadian GAAP $ 162,812 $ 101,514
Adjustments relating to subordinated notes 4,250 4,250
Adjustments relating to 2000 sale-leaseback transaction 5,740 51
Adjustments relating to natural gas contract 44 78
------------------------
Balance under U.S. GAAP $ 172,846 $ 105,893
========================
viii) Current portion of long-term debt
Balance under Canadian GAAP $ 34,286 $ 35,386
Adjustments relating to 2000 sale-leaseback transaction 6,968 9,973
------------------------
Balance under U.S. GAAP $ 41,254 $ 45,359
========================
ix) Long-term debt
Balance under Canadian GAAP $ 401,244 $ 342,202
Adjustments relating to subordinated notes 100,000 100,000
Adjustments relating to 2000 sale-leaseback transaction 124,419 131,388
------------------------
Balance under U.S. GAAP $ 625,663 $ 573,590
========================
x) Future income taxes - long-term liability
Balance under Canadian GAAP $ 181,643 $ 143,229
Adjustments relating to the capitalization of interest (5,172) (5,172)
Adjustments relating to commissioning costs (41,751) (41,751)
Adjustments relating to amortization of capital assets (670) (3,206)
Adjustments relating to minimum pension liability (15,902) (11,934)
Adjustments relating to foreign exchange contract 90 --
Adjustments relating to natural gas contract 82 (28)
------------------------
Balance under U.S. GAAP $ 118,320 $ 81,138
========================
xi) Preferred shares
Balance under Canadian GAAP $ 98,695 $ 98,553
Adjustment relating to translation of convenience method (1,024) (1,024)
------------------------
Balance under U.S. GAAP $ 97,671 $ 97,529
========================
xii) Common shares
Balance under Canadian GAAP $ 354,095 $ 351,311
Adjustment relating to translation of convenience method 40,733 40,733
------------------------
Balance under U.S. GAAP $ 394,828 $ 392,044
========================
xiii) Subordinated notes
Balance under Canadian GAAP $ 104,250 $ 104,250
Adjustments relating to subordinated notes (104,250) (104,250)
------------------------
Balance under U.S. GAAP $ -- $ --
========================
69
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
xiv) Retained earnings
Balance under Canadian GAAP $ 487,924 $ 494,599
Adjustments relating to the capitalization of interest (8,730) (8,730)
Adjustments relating to commissioning costs (70,482) (70,482)
Adjustments relating to amortization of capital assets (2,877) (5,413)
Adjustments relating to 2000 sale-leaseback transaction (3,904) (3,127)
Adjustments relating to natural gas hedge 323 729
Adjustment relating to translation of convenience method 47,700 47,700
Adjustments relating to valuation allowance on net future
income tax asset (10,500) (10,500)
-----------------------
Balance under U.S. GAAP $ 439,454 $ 444,776
=======================
xv) Accumulated Other Comprehensive Income
Balance under Canadian GAAP $ 88,926 $ 38,710
Adjustments relating to minimum pension liability (24,114) (20,147)
Adjustments relating to foreign currency hedge 90 --
Adjustments relating to natural gas hedge (447) (779)
Adjustment relating to translation of convenience method (87,409) (87,409)
-----------------------
Balance under U.S. GAAP $ (22,954) $ (69,625)
=======================
Under Canadian GAAP, the Company has followed the proportionate
consolidation method of accounting for its investment in a jointly
controlled enterprise. Under U.S. GAAP, as the investment is not
controlled, the equity method of accounting for the investment has
been followed.
In accordance with FASB Statement No. 133, the Company has recorded
the changes in the fair value of the effective portion of derivatives
qualifying as cash flow hedges, net of tax, in accumulated other
comprehensive income.
In accordance with FASB Statement No. 87, the Company has recorded an
additional minimum pension liability for underfunded plans
representing the excess of unfunded accumulated benefit obligations
over previously recorded pension cost liabilities. A corresponding
amount is recognized as a deferred charge except to the extent that
these additional liabilities exceed the related unrecognized prior
service cost and net transition obligation, in which case the increase
in liabilities is charged directly to shareholders' equity, net of
related deferred income taxes.
When the Company changed reporting currencies effective January 1,
1999, the translation of convenience method was used for Canadian
GAAP. United States GAAP requires that the United States dollar
amounts be determined using the historical rates in effect when the
underlying transactions occurred.
d) Following is a roll-forward of shareholders' equity in accordance
with U.S. GAAP:
2003 2002 2001
-------------------------------------
Balance at beginning of year $ 864,724 $ 754,152 $ 830,902
Net income (loss) for the year 7,943 38,701 (40,935)
Dividends on preferred shares (6,304) (5,608) (5,692)
Dividends on common shares (6,962) (6,078) (11,179)
Other comprehensive income 46,671 (11,598) (19,309)
Issue of common shares 2,784 95,148 391
Other 143 7 (26)
-------------------------------------
Balance at end of year $ 908,999 $ 864,724 $ 754,152
=====================================
70
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
e) United States GAAP defines cash position to be cash and cash
equivalents. Under Canadian GAAP, cash position, in certain
circumstances, can be defined as cash and cash equivalents less
bank indebtedness. This difference and the above U.S. GAAP
adjustments result in the following statements of cash flows for
the Company:
2003 2002 2001
-------------------------------------
Cash derived from operating activities $ 99,852 $ 12,602 $ 58,260
Cash derived from financing activities $ 19,745 $ 7,691 $ 72,275
=====================================
Cash applied to investing activities $ (12,711) $ (34,451) $(107,705)
=====================================
Effect of exchange rate changes on cash
and cash equivalents $ 1,614 $ (475) $ (3,489)
=====================================
Cash position at December 31 $131,359 $ 131,359 $ 22,859 $ 37,492
=====================================
f) Stock Based Compensation Prior to 2003, the Company accounted for
stock based compensation plans under the recognition and
measurement provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations. No stock
based employee compensation cost is reflected in 2001 or 2002 net
income, as all options granted had an exercise price equal to the
market value of common shares on the date of grant. Effective
January 1, 2003, the Company adopted the fair value provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation,
prospectively for all employee awards granted, modified or
settled after January 1, 2003. Awards vest over periods ranging
from one to three years, therefore, the cost related to stock
based employee compensation included in the determination of net
income for 2003 is less than that which would have been
recognized if the fair value based method had been applied to all
awards since the original effective date of Statement 123. The
following table illustrates the effect on net income and earnings
per share if the fair value based method had been applied to all
outstanding and unvested awards in each period.
2003 2002 2001
----------------------------------
Net income (loss) in accordance with U.S. GAAP $ 7,943 $ 38,701 $(40,935)
Compensation expense determined under fair value
based method for all awards, net of tax (313) (975) (1,477)
----------------------------------
Pro forma net income (loss) in accordance with U.S. GAAP 7,630 37,726 (42,412)
Dividends on preferred shares including part VI.I tax (6,304) (5,608) (5,692)
----------------------------------
Pro forma net income (loss) available to common
shareholders in accordance with U.S. GAAP $ 1,326 $ 32,118 $(48,104)
==================================
Pro forma earnings per common share:
Basic $ 0.03 $ 0.69 $ (1.18)
==================================
Diluted $ 0.03 $ 0.64 $ (1.18)
==================================
g) Additional disclosure required under U.S. GAAP:
i) The total interest paid, including interest on the
subordinated notes, was $45,396, $39,707 and $41,961 in
2003, 2002 and 2001 respectively.
The total fair market value of the Company's long-term debt,
including the subordinated notes, was $689,605 (2002 -
$658,156) and the current portion was $43,385 (2002 -
$48,003).
71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ii) The Company's natural gas hedge contract was designated as a
hedge against volatility in the price of natural gas purchased
for consumption in the steel production process. The bankruptcy
of the counterparty's parent company, as guarantor of the
contract, has caused the contract to be deemed ineffective. As a
result, the unrealized liability recorded in other comprehensive
income at the time of the bankruptcy is being amortized to income
over the remaining life of the contract. The fair value of the
contract liability is marked-to-market each reporting period with
the change being recorded to income in the period.
iii) A summary of the impact of accounting standards adopted in 2003
and accounting standards which have not yet been adopted due to
delayed effective dates follows:
In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations, which addresses the accounting for
tangible long-lived asset retirements and their associated costs.
The Company has assessed the impact of adopting SFAS No. 143 and
determined that adoption of the standard did not have a material
impact on operating results or financial position.
In April 2003, the FASB issued SFAS No. 149, Amendment of
Statement 133 on Derivative Instruments and Hedging Activities
(SFAS 149). SFAS 149 amends SFAS No. 133, Accounting for
Derivative Instruments and Hedging Activities (SFAS 133), to
clarify accounting and financial reporting for derivative
instruments embedded in other contracts. SFAS 149 is effective
for contracts entered into or modified, and for hedging
relationships designated after June 30, 2003. The Company adopted
SFAS 149 effective January 1, 2003, and the effect of such
adoption was not material.
In November 2002, the FASB issued Interpretation No. 45,
Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of
Others (FIN 45). FIN 45 includes additional disclosure provisions
as well as recognition and measurement provisions, which require
a liability to be recorded for certain guarantees at fair value.
The initial recognition and initial measurement provisions of FIN
45 are applicable on a prospective basis to guarantees issued or
modified after December 31, 2002, irrespective of the guarantor's
fiscal year-end. The disclosure requirements of FIN 45 were
effective for financial statements of the Company for fiscal
years ending after December 15, 2002. The Company adopted FIN 45
effective January 1, 2003, and the effect of such adoption was
not material.
In January 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities, an interpretation of
Accounting Research Bulletin (ARB) No. 51, Consolidated Financial
Statements (FIN 46). FIN 46 introduces a new consolidation model,
the variable interests model, which determines control (and
consolidation) based on potential variability in gains and losses
of the entity being evaluated for consolidation. FIN 46 was
effective for fiscal years ending after December 15, 2003.
However, in December 2003, the FASB issued a revision, FIN 46-R,
which both supercedes the original FIN 46, and codifies both
certain modifications to FIN 46 and other decisions previously
issued through certain FASB Staff Positions. Application of FIN
46-R is required in financial statements of public entities that
have interests in structures that are commonly referred to as
special-purpose entities for periods ending after December 15,
2003, and all other types of variable interest entities in
financial statements for periods ending after March 15, 2004.
The Company will adopt FIN 46-R effective January 1, 2004. The
Company expects that the effect of such adoption will not be
material to the consolidated financial statements.
72
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In December 2003, the FASB issued SFAS No. 132-R, a revision of
SFAS No. 132, EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS, to include increased disclosure as to
the plan assets, benefit obligations, cash flows, benefit costs
and other relevant information. The provisions of SFAS No. 132
remain in effect until the provisions of this Statement are
adopted, with SFAS 132-R becoming effective for fiscal years
ending after December 15, 2003, except for disclosure of
information about foreign plans, and future benefit payments,
which is effective for fiscal years ending after June 15, 2004.
As the Company has defined benefit plans only in Canada, the
Company will adopt the disclosure requirements SFAS 132-R for the
year ended December 31, 2004.
21. CONTINGENCIES AND ENVIRONMENTAL EXPENDITURES
The major raw material used in the steelmaking process is
reclaimed iron and steel scrap. This recycling has made a
significant contribution to protecting the environment. As an
ongoing commitment to the environment, the Company continues to
monitor emissions, perform site clean-up, and invest in new
equipment and processes. Nevertheless, rapidly changing
environmental legislation and regulatory practices are likely to
require future expenditures to modify operations, install
pollution control equipment, dispose of waste products, and
perform site clean-up and site management. The magnitude of
future expenditures cannot be determined at this time. However,
management is of the opinion that under existing legislation and
regulatory practices, expenditures required for environmental
compliance will not have a material adverse effect on the
Company's results of operations, financial position or net cash
flows. Environmental expenditures that relate to ongoing
environmental and reclamation programs are charged against
earnings as incurred or capitalized and amortized depending on
the future economic benefits.
The Company settled the litigation with the turnkey contractors
of the Montpelier Steelworks on April 27, 2001 for cash of
$28,000 and retainage of construction holdbacks of $21,000. As a
result of the settlement, the Company recorded income of $39,000
representing claims for lost business and reimbursement of legal
costs and approximately $10,000 was recorded to cover the
necessary cost of capital asset improvements to bring the
Montpelier Steelworks to original contract specifications.
The Company is involved in various other legal actions and
claims, including environmental matters, arising from the normal
course of business. It is the opinion of management that the
ultimate resolution of these matters will not have a material
adverse effect on the results of operations, financial position
or net cash flows of the Company.
73