EXHIBIT 99.2
Annual Report 2002
[GERDAU AMERISTEEL LOGO]
Vision, Mission and Values
VISION
To be recognized as the most successful company in the steel industry.
MISSION
To create value for our customers, employees, shareholders and communities
through the engagement of people and excellence of operations.
VALUES
- - Safety
- - Integrity
- - Customer Driven Culture
- - Investment in People, Processes, and Technology
- - Engaged Employees
- - Open Communication
- - Community and Environmental Awareness
- - Profitability
Financial Highlights
Year ended December 31, 2002
----------------------------
Pro Forma
Income Statement US$(000s except EPS)
Net Sales $1,676,176
Operating Profit 86,086
Net Income 33,131
EBITDA 175,408
EPS - Basic .16
EPS - Diluted .15
Balance Sheet US$(000s)
Net Working Capital $294,221
Cash 16,361
Debt 519,154
Book Value 626,410
Market Capitalization (based on US$1.46 per share) 289,291
Notes: Net Working Capital excludes cash and debt. Debt excludes Convertible
Debentures of $79.1 million. EBITDA includes non-recurring cash gain totaling
$9.1 million insurance and electrode settlements and excludes a non-recurring,
non-cash charge of $5.8 million relating to an investment write-down.
The table above summarizes the combined pro forma results of Gerdau
AmeriSteel, for the year ended December 31, 2002. The information has been
prepared as if the combination had taken place January 1, 2002.
About Gerdau AmeriSteel
Through a combined network of 11 mills with annual manufacturing capacity in
excess of 6.8 million tons of finished steel products, Gerdau AmeriSteel
services long product and flat rolled customers throughout the eastern half of
North America. Gerdau AmeriSteel's mini-mills are vertically integrated with 13
scrap recycling facilities, and 27 downstream businesses that produce specialty
steel products and fabricated steel mainly for use in the construction and
industrial markets. As of December 31, 2002, Gerdau AmeriSteel had approximately
185 million common shares outstanding (with an additional 13 million shares
issued to AmeriSteel minority shareholders in March 2003), and the shares are
traded on the Toronto Stock Exchange under the symbol GNA.TO. For additional
financial and investor information, visit www.gerdauameristeel.com
Gerdau AmeriSteel's financial results are presented in accordance with Canadian
GAAP. However, EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortization) is a non-GAAP measure that management believes is a useful
supplemental measure of cash available prior to debt service, capital
expenditures and income tax. For 2002, it includes non-recurring cash gains and
losses, and excludes non-recurring non-cash items. Investors are cautioned that
EBITDA should not be construed as an alternative to net income determined in
accordance with GAAP as an indicator of the company's performance or to cash
flows from operations as a measure of liquidity and cash flows. The company's
method of calculating EBITDA may differ from the methods used by other companies
and, accordingly, it may not be comparable to similarly titled measures used by
other companies.
The pro forma statements present combined pro forma financial information for
Co-Steel and the North American operations of Gerdau S.A. as if they were
combined at the beginning of the period indicated and at December 31, 2002 as
adjusted for the pro forma effects of the combination and related transactions.
Assumptions have been made in preparing these statements, and the results in
future periods may show that these assumptions were not correct. These
statements do not purport to represent what the actual operating results and
financial position of Gerdau AmeriSteel would have been had the combination of
Co-Steel and Gerdau S.A.'s North American operations actually taken place at the
beginning of the period indicated or on December 31, 2002. In addition, these
statements do not purport to project the company's results of operations for any
future periods or its financial position at any future date.
Gerdau AmeriSteel 3
To our Shareholders
For the third consecutive year, Gerdau AmeriSteel and the North American steel
industry faced extremely competitive market conditions and a challenging
business environment. As the year began, there was a general expectation that
the prospects for a slow economic recovery and government safeguard tariffs on
steel imports would afford long overdue margin relief and market stabilization.
In reality, the March 5, 2002 import tariffs provided only temporary margin
relief for the Company's flat rolled steel products and minimal influence on the
larger long products segment of our business. Improvement in domestic economic
prospects also proved to be elusive as the level of consumer confidence in
spending began to reflect the insecure realities of geopolitical events.
The original stimulus for the steel industry cyclical downturn was the
protracted surge of low priced steel imports from virtually every global region
where economic activity was anemic. The longevity and gravity of the decline was
amplified by the deterioration of the domestic economy and the fragmented nature
of domestic steel producer competition. This business environment has exerted
intense financial pressure on virtually every steel industry competitor.
Over the balance of the year, the deteriorating economic climate in the US and
the resulting decline in steel demand overshadowed the effects of import tariffs
and reductions in low priced steel imports. The continuing existence of surplus
steel capacity and the financial liquidity crisis among steel industry
competitors led to an acceleration of the long-anticipated consolidation phase
of the domestic industry. The strategic mergers and alliances within the major
integrated steel companies and the mini-mill sector were watershed events which
will have significant repercussions for years to come.
This environment gave birth to Gerdau AmeriSteel with the October 23, 2002
merger between Co-Steel and the North American affiliates of Gerdau S.A. The
logic for this strategic alliance was based on creating the critical mass for
competitive survival, the essential financial liquidity and balance sheet
strength, and the depth of talented employees.
In retrospect, the decisions of both boards and the shareholder approvals to
create the critical mass for competitive survival have proven to be correct. The
combination allowed the merged entities to weather a harsh winter and chilling
global political events that created intense inflationary pressures on energy
and scrap raw material costs. Attempts to recover these inflated costs have
encountered weak market demand and stiff customer resistance to price increases.
These conditions would have severely tested either entity had they stood alone.
In this challenging environment, Gerdau AmeriSteel realized 2002 pro forma net
income of $33.1 million and EBITDA cash flow of $175 million. Because of
substantial structural changes resulting from our merger, these financial
benchmarks are not readily comparable to prior periods. They do, however,
provide an initial basis for future comparisons as the merged entities begin to
realize the economic and strategic synergies from this combination. 2002 was
more significant as a defining moment in the eventual turnaround of Gerdau
AmeriSteel's financial outlook and the resurgence of a viable steel industry
segment in North America.
4 Annual Report 2002
CURRENT STATUS OF THE MERGER INTEGRATION
Despite the adverse economic and seasonal climate, the initial six month phase
of the merged entities has generated progressive improvements in the corporate
administrative infrastructure, the commercialization of a universal brand
identity and the operational integration of the manufacturing assets.
Acceptance of the combination by the customer base and the diverse employee
elements has been extremely positive. The signs of a unified corporate image are
becoming more prevalent with extensive knowledge sharing of best practices and
the network exchange of comparative benchmark information. Considerable time and
attention has been directed at effective internal and external communications.
These measures and the establishment of aggressive goals are generating tangible
results in the formulation of a common corporate culture.
The turbulence of recently-announced price changes and customer hedge buying has
created extreme volatility in order processing and inventory management. Despite
the disruptive surges in distribution patterns, we have managed to maintain a
high level of customer service and satisfaction. Successful integration of the
diverse independent order entry systems into a central commercial database also
provides consistent information on the availability of inventories and the
status of company wide customer inquiries and order activity.
Technological enhancements to this centralized commercial systems platform are
progressing, and the breadth of product knowledge within the combined marketing
resources is improving with experience. These marketing infrastructure
capabilities are facilitating the effective cross selling of our full product
offering to the consolidated customer base. The integrated customer base is
beginning to experience and appreciate the advantages of our expanded product
range, extended geographical coverage, logistical efficiencies and operational
flexibility of our combined resources.
From an operational perspective, we have reinforced the caliber of leadership
talent at all of the steel facilities and identified the technical skills and
training required to continuously improve the overall productivity of each mill
and downstream operation. Despite a short term environment of cost austerity, we
are focusing the necessary training and asset investment resources to insure the
long term competitive posture of our steel assets.
As we identify customer demand patterns and logistical distribution
efficiencies, we will continue to customize and optimize the product rolling
schedules for each manufacturing facility. Substantial savings in freight and
redundant inventories are anticipated as we proceed to fine tune the rolling
schedules of the diverse manufacturing operations. Product supply channels for
the scrap recycling operations and the internal downstream fabrication
facilities have also been revised for optimization of logistical savings.
OUTLOOK
The transparency of steel demand and market pricing continues to be clouded by
the uncertainties of the 201 safeguard tariffs, fluctuations in global economic
activity, continuing consolidation of the domestic competitive picture and
instability in energy and scrap raw material costs.
The adverse rulings of the World Trade Organization and the statutory progress
review of the 201 tariffs pose a serious threat to the retention of this import
deterrent. The domestic industry must submit a mid term progress report on its
restructuring activities. In September, the administration will determine if
termination, modification or continuance of the tariffs is appropriate.
The global supply and demand balance for steel has been favorably enhanced by
the economic boom and construction activity in China. If this Asian demand
outlet for steel weakens, there could be an immediate resurgence of foreign
steel into the North American market. The exchange valuation and further
weakening of the US dollar will also influence the international flow of global
excess steel production into the domestic market.
The consolidation and rationalization of the domestic steel industry will
perhaps exert the greatest impact on financial prospects for the foreseeable
future. As global events and steel trade patterns exert instability in the
domestic market, decreased industry fragmentation will limit the magnitude of
these disturbances. Over the next few months, the financial performance of the
domestic steel industry will be significantly dependent on pricing discipline
and support for the recent price increase announcements. General adherence to
these higher list prices will be challenged by the weak outlook for economic
growth and questionable levels of steel demand.
On a more positive note, there is general optimism for relief from inflated
energy and scrap raw material costs. Moderation in the winter weather demands
plus improved energy availability from political stabilization in Venezuela and
Iraq should lower overall energy cost levels. The recovery in supply of scrap
substitutes from Venezuela and increased seasonal collection flows of scrap
should also reverse the recent inflationary trends in scrap costs.
Gerdau AmeriSteel 5
Internally, the past six months have reaffirmed the expectations, rationale and
economic prospects for Gerdau AmeriSteel. We have secured a very competitive
position in the bar, rod, flat-rolled and downstream steel markets that we
serve. Considerable challenges and market uncertainties still lie ahead but the
execution risks and prospects for improvement in financial results are within
Management's control. We believe we are well positioned to capture attractive
shareholder returns as the economy and the steel markets improve.
One of the first things that we did shortly after the merger was to bring
together the Management group of Gerdau AmeriSteel to define the new
organization's Vision, Mission and Values that we have prominently displayed in
this annual report. The Vision, Mission and Values are designed to meet the
diverse expectations of our employees, shareholders, customers, suppliers and
communities.
Sincerely,
/s/ Jorge Gerdau Johannpeter /s/ Phillip E. Casey
Jorge Gerdau Johannpeter Phillip E. Casey
Chairman of the Board President and CEO
April 7, 2003
6 Annual Report 2002
Vision, Mission and Values
VISION
To be recognized as the most successful company in the steel industry.
MISSION
To create value for our customers, employees, shareholders and communities
through the engagement of people and excellence of operations.
VALUES
- - Safety
- - Integrity
- - Customer Driven Culture
- - Investment in People, Processes, and Technology
- - Engaged Employees
- - Open Communication
- - Community and Environmental Awareness
- - Profitability
Gerdau AmeriSteel 7
Pro Forma Financials
On October 23, 2002, Gerdau S.A. (NYSE: GGB) merged its North American
operations (Gerdau Canada and AmeriSteel Corporation, or "Gerdau North America")
with Co-Steel Inc. to form Gerdau AmeriSteel Corporation. Actual Canadian GAAP
results were net income of $11.1 million on net sales of $1,036.1 million for
the year ended December 31, 2002, or $.07 per share basic and fully diluted.
These actual results reflect full year operations for Gerdau North America, the
predecessor company for accounting purposes, with the former Co-Steel results
added for the period October 23 through December 31, the period since the
combination.
Gerdau AmeriSteel believes that the pro forma results, which reflect a full year
of Co-Steel operations, adjusted for the impact of purchase price allocations
and resulting acquisition accounting entries, are a more informative disclosure
on the combined operations.
Gerdau AmeriSteel's pro forma net income was $33.1 million, or $.15 per share
for the year ended December 31, 2002. Pro forma EBITDA was $175.4 million for
the year. Included in pro forma net income and EBITDA are non-recurring pretax
cash gains of $9.1 million for the full year period. All figures are in US
dollars and Canadian GAAP.
The tables below summarize the combined pro forma results of Gerdau AmeriSteel,
for the year ended December 31, 2002. The information has been prepared as if
the combination had taken place at the beginning of the period.
The following table reconciles actual net income to pro forma net income, and
pro forma net income to pro forma EBITDA for the year:
Year ended December 31, 2002
US$(000s)
Net Income, actual $ 11,132
Adjust Co-Steel for pre-acquisition period to
October 23, 2002 * 5,699
Adjust to reflect income impact of Co-Steel
purchase price allocations 3,731
Adjust interest for debt converted to equity 10,862
--------
Adjust for minority interest 1,707
Net Income, pro forma 33,131
Interest and foreign exchange 38,833
Income taxes 7,170
Depreciation and amortization 90,494
Non-cash write-down of investment 5,780
--------
EBITDA, pro forma $175,408
--------
* Includes pre-acquisition tax refund of $1.9 million received in the fourth
quarter but accounted for as a pre-acquisition receivable.
8 Annual Report 2002
Gerdau AmeriSteel and Subsidiaries
Consolidated Statements of Financial Position
(US$ in thousands)
December 31, 2002
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 16,361
Accounts receivable, net 172,745
Inventories 351,400
Deferred tax assets and recoverable 11,417
taxes
Other current assets 2,997
-----------
TOTAL CURRENT ASSETS 554,920
PROPERTY, PLANT AND EQUIPMENT
Fixed assets at cost 1,118,308
Less accumulated depreciation (219,360)
-----------
NET PROPERTY, PLANT AND EQUIPMENT 898,948
GOODWILL 114,374
OTHER ASSETS 3,159
-----------
TOTAL ASSETS $ 1,571,401
-----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable & accruals $ 214,266
Other current liabilities 30,072
Bank indebtedness 23,379
Current maturities of long-term borrowings 83,942
-----------
TOTAL CURRENT LIABILITIES 351,659
LONG-TERM BORROWINGS, LESS CURRENT PORTION 411,833
OTHER LIABILITIES 99,341
DEFERRED TAX LIABILITIES 82,158
MINORITY INTEREST 33,312
SHAREHOLDERS' EQUITY
Invested capital 513,400
Convertible debentures 79,134
Retained earnings 1,329
Cumulative foreign currency (765)
-----------
593,098
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,571,401
-----------
Gerdau AmeriSteel's financial results are presented in accordance with Canadian
GAAP. However, EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortization) is a non-GAAP measure that management believes is a useful
supplemental measure of cash available prior to debt service, capital
expenditures and income tax. For 2002, it includes non-recurring cash gains and
losses, and excludes non-recurring non-cash items. Investors are cautioned that
EBITDA should not be construed as an alternative to net income determined in
accordance with GAAP as an indicator of the company's performance or to cash
flows from operations as a measure of liquidity and cash flows. The company's
method of calculating EBITDA may differ from the methods used by other companies
and, accordingly, it may not be comparable to similarly titled measures used by
other companies.
The pro forma statements present combined pro forma financial information for
Co-Steel and the North American operations of Gerdau S.A. as if they were
combined at the beginning of the periods indicated and at December 31, 2002 as
adjusted for the pro forma effects of the combination and related transactions.
Assumptions have been made in preparing these statements, and the results in
future periods may show that these assumptions were not correct. These
statements do not purport to represent what the actual operating results and
financial position of Gerdau AmeriSteel would have been had the combination of
Co-Steel and Gerdau S.A.'s North American operations actually taken place at the
beginning of the periods indicated or on December 31, 2002. In addition, these
statements do not purport to project the company's results of operations for any
future periods or its financial position at any future date.
Consolidated Statements of Income
(US$ in thousands)
Pro forma
Year ended December 31, 2002
NET SALES $ 1,676,176
Operating Expenses:
Cost of sales 1,429,094
Selling and administrative 80,741
Depreciation 89,322
Other operating income (9,067)
1,590,090
-----------
INCOME FROM OPERATIONS 86,086
OTHER EXPENSES
Interest 39,039
Amortization of deferred financing costs 1,172
Foreign exchange gains (206)
Write-down portfolio investment 5,780
INCOME BEFORE INCOME TAXES 40,301
INCOME TAX (BENEFIT) EXPENSE 7,170
-----------
NET INCOME (LOSS) $ 33,131
-----------
Pro forma
Year ended December 31, 2002
Tons %
--------- -----
Total Finished Steel Shipments 5,152,530
---------
Rebar 1,275,267 24.8%
Merchant/Structural/Specials 1,859,020 36.1%
Rod 652,869 12.7%
Flat Rolled 709,835 13.8%
Fabricated Steel 655,539 12.7%
Weighted Average Selling Price US$/Ton
Mill External Shipments $ 283
Fabricated Steel Shipments $ 433
Scrap charged - US$/Ton $ 89
Metals Spread - US$/Ton (Mills External) $ 193
Production - Melt Shop 5,469,532 tons
Production - Rolling Mill 5,147,867 tons
US$ million US$/Ton
----------- -------
EBITDA
Operating $175.4 $34
Income
Interest $ 86.1 $17
Expense
Capital $ 39.0 $ 8
Expenditures
Total $ 44.7
Shares Outstanding 198,092,154
Gerdau AmeriSteel 9
Management's Discussion and Analysis of
Financial Condition and Results of Operations
This report contains certain forward-looking statements that are based on the
beliefs of our management, as well as assumptions made by, and information
currently available to our management. Such statements include, among others,
(i) the benefits anticipated to be realized from the merger with Co-Steel, Inc.
(ii) the highly cyclical nature and seasonality of the steel industry, (iii) the
fluctuations in the cost and availability of raw materials, (iv) the possibility
of excess production capacity, (v) the potential costs of environmental
compliance, (vi) the risks associated with potential and recent acquisitions,
(vii) further industry consolidation, (viii) the impact of inflation, (ix)
global economic factors and trade imbalances, and (x) the fluctuations in the
cost of electricity. Because such statements involve risks and uncertainties,
actual actions and strategies and the timing and expected results thereof may
differ materially from those expressed or implied by such forward-looking
statements, and our future results, performance or achievements could differ
materially from those expressed in, or implied by, any such forward-looking
statements. The following presentation of management's discussion and analysis
of our financial condition and results of operations should be read in
conjunction with our Consolidated Financial Statements and the Notes thereto.
All dollar amounts are reported in United States dollars unless otherwise
indicated.
ACQUISITION OF CO-STEEL, INC.
On October 23, 2002, Gerdau S.A., the ultimate parent company of Gerdau S.A.'s
operations in Canada and the United States (the "Gerdau North America Group")
completed a business combination with Co-Steel, Inc. ("Co-Steel") that resulted
in Co-Steel acquiring all of the issued and outstanding shares of the companies
included in the Gerdau North America Group, in exchange for Co-Steel common
shares representing approximately 74% of the combined entity's total common
shares. A portion of these shares were issued to minority shareholders of
AmeriSteel Corporation ("AmeriSteel"). In connection with the merger, Co-Steel's
name was changed to Gerdau AmeriSteel Corporation (the "Company" or "Gerdau
AmeriSteel"). Certain related party loans payable of the Gerdau North America
Group were converted into equity prior to the merger. The transaction was
accounted for using the reverse-take-over method of purchase accounting. Gerdau
North America Group is deemed to be the acquirer and is assumed to be purchasing
the assets and liabilities of Co-Steel, since the original shareholder of the
Gerdau North America Group, became the owner of more than 50 percent of the
voting shares of Co-Steel on a fully-diluted basis following the transaction. As
a result, the Gerdau North America Group's historical accounts became the
historical accounts of Gerdau AmeriSteel for all periods prior to the date of
merger. Consolidated financial statements include the accounts of the Company
and its subsidiaries. For the year ended December 31, 2002, they include full
year results for the Gerdau North America Group's operations, and results for
the period from October 23, 2002, through December 31, 2002, the period
subsequent to the acquisition, for the former Co-Steel operations.
IMPACT OF ACQUISITION BY GERDAU
As a result of the combination of Co-Steel with the Gerdau North America Group,
the combined company will realize several benefits. Economies of scale will
result from improved production scheduling at the mills. Geographic and product
diversification will result in Gerdau AmeriSteel being able to market a fully
competitive range of products to its North American customers. Downstream
operations will benefit from improved supply capabilities as well as being
captive markets for some of the Company's mill products. Cost savings are
expected primarily from savings in freight, improved production scheduling at
the mills, and scrap rationalization. Gerdau AmeriSteel will have an improved
leverage position compared to Co-Steel, greater earnings stability through
diversification, and strong sponsorship from its principal shareholder, Gerdau
S.A. This sponsorship will be reflected in greater sharing of knowledge in
engineering, operations and administration through best practices procedures.
10 Annual Report 2002
Although the combination has been completed, Gerdau AmeriSteel is currently
operating in the short term under the pre-existing debt arrangements and
associated covenants of the individual companies until the Company's
consolidated debt can be restructured and refinanced. The Company is currently
in compliance with the covenants, or has received waivers for non-compliance,
under its debt agreements and management believes its business fundamentals have
been enhanced as a result of the combination. In January and February 2003,
Gerdau S.A. made loans totaling $30 million to subsidiaries of Gerdau AmeriSteel
to increase liquidity within the group. These loans will be used for working
capital purposes and bear interest at the rate of 6.5%. The loans do not have a
stated maturity, but it is the intent of the Company to repay these loans as
soon as practicable. In order to improve the long-term financial flexibility of
Gerdau AmeriSteel, extend duration, ease administrative complexities and better
utilize its collateral the Company has embarked on a refinancing program which
is expected to be completed in the second quarter of 2003.
SELECTED COMBINED FINANCIAL DATA
The following table presents selected historical financial information for
Gerdau AmeriSteel as of and for each of the fiscal years in the four-year period
ended December 31, 2002. This information represents the historical financial
data of Gerdau AmeriSteel Corporation as successor to Co-Steel after the
combination with Co-Steel. Financial results prior to October 23, 2002 reflect
only the results of the Gerdau North America Group and do not include the
results of the former Co-Steel operations. The information has been prepared in
accordance with Canadian generally accepted accounting principles and, for the
years ended December 31, 2002 and 2001, has been derived from Gerdau
AmeriSteel's audited combined financial statements included in this document. We
encourage you to read this financial information in conjunction with the
combined financial statements, and related notes.
December 31, December 31, December 31, December 31,
2002 2001 2000 1999
($(000s) except per share data)
Sales $ 1,036,055 $ 840,836 $ 922,725 $ 401,429
Income from Operations 53,180 43,325 59,142 58,549
Net Income (Loss) 11,132 (6,066) 3,943 21,928
Net Income (Loss) per Share $ 0.08 $ (0.05) $ 0.03 $ 0.16
Total Assets 1,571,401 1,061,939 1,072,089 999,203
Shareholder's Equity 593,098 49,798 56,976 69,477
Number of Common Shares
Outstanding 184,892,360 133,388,400 133,388,400 133,388,400
RESULTS OF OPERATIONS
The results of operations are those of Gerdau AmeriSteel, Co-Steel's successor.
Gerdau AmeriSteel is comprised of operations in the Gerdau North America Group
whose main operations in Canada and the United States include Gerdau Ameristeel
Cambridge Inc., Gerdau AmeriSteel MRM Special Sections Inc., and AmeriSteel.
Since October 23, 2002, Gerdau AmeriSteel also includes the Co-Steel operations.
On December 31, 2002, AmeriSteel was an 87% owned subsidiary. The results of
operations of Gerdau AmeriSteel are largely dependent on the level of
construction and general economic activity in the North American market. Gerdau
AmeriSteel's sales are seasonal, with sales in the June and September quarters
generally being stronger than the rest of the year. Gerdau AmeriSteel's cost of
sales includes the cost of its primary raw material, steel scrap, the cost of
converting the scrap to finished steel products, and the cost of warehousing and
handling finished steel products.
Gerdau AmeriSteel 11
YEAR ENDED DECEMBER 31, 2002 VERSUS DECEMBER 31, 2001
The following table sets forth information regarding results of operations of
Gerdau AmeriSteel:
Year Ended Year Ended
--------------------- -----------------------
December 31, 2002 December 31, 2001
(In thousands, except percentages)
Sales $ 1,036,055 100.0% $ 840,836 100.0%
Cost of sales 867,091 83.70% 680,084 80.9%
Selling and administrative 62,173 6.0% 56,431 6.7%
Depreciation 58,683 5.7% 54,877 6.5%
Amortization of goodwill - -- 6,582 .8%
Other operating (income) expenses (5,072) (.5)% (463) (.1)%
Income from operations 53,180 5.1% 43,325 5.2%
Interest expense 38,598 3.7% 48,852 5.8%
Loss on interest derivatives - - 707 .1%
Amortization of def'd finance costs 1,172 .1% 1,180 .1%
Foreign Exchange Loss 230 .1% 249 .1%
Income (loss) before income tax 13,180 1.3% (7,663) (.9)%
Income tax expenses (benefit) 341 .1% (2,581) (.3)%
Income (loss) before minority interest 12,839 1.2% (5,082) (.6)%
Minority interest (1,707) (.2)% (984) (.1)%
Net income (loss) $ 11,132 1.1% $ (6,066) (.7)%
TONS SHIPPED AVERAGE NET SELLING PRICES
--------------------------------------- ----------------------------------------
Year Ended Year Ended Year Ended Year Ended
December 31, 2002 December 31, 2001 December 31, 2002 December 31, 2002
(Thousands) (Per Ton)
MILL FINISHED GOODS
Stock Rebar 839 784 $249 $250
Merchant Bar/Special Sections 1,424 1,061 304 310
Rods 166 62 284 275
Flat Rolled 120 -- 322 --
2,548 1,906 285 284
Fabricated Steel 566 588 440 430
Billets 75 22 194 188
Total 3,190 2,516
Sales:
Sales in the year ended December 31, 2002 were $1,036.1 million compared to
$840.8 million in the year ended December 31, 2001, an increase of $195.2
million. The acquisition of the Cartersville mill in December 2001 resulted in
additional sales of $84.1 million during the year ended December 31, 2002
compared to the year ended December 31, 2001. The merger with Co-Steel in
October 2002 resulted in additional sales of $122.4 million compared to the year
ended December 31, 2001. Excluding Cartersville and the former Co-Steel
operations, sales declined by $11.2 million, and finished tons shipped remained
relatively flat in the year ended December 31, 2002 compared to the year ended
December 31, 2001. Pricing of mill finished products in the fourth quarter
remained at roughly the same levels as the immediately preceding quarter, and
are up about 5% from the same period last year. Average merchant bar prices were
up almost 10% in the fourth quarter compared to the same prior year period while
rebar prices remained relatively flat. For the year, average mill finished goods
selling prices were $285 per ton, up by less than 2% from last year's average.
Fabricating sales were down approximately 5% in the fourth quarter from the same
period last year and ended the year down approximately 3%.
12 Annual Report 2002
COST OF SALES:
Cost of sales for the year ended December 31, 2002 was $867.1 million compared
to $680.1 million for the year ended December 31, 2001, an increase of $287
million. Compared to last year, the addition of the Cartersville mill in
December 2001 resulted in increased cost of sales of $78.9 million, while the
October 2002 merger with Co-Steel resulted in $110.5 million additional cost of
sales. Yielded scrap costs, which comprise approximately 35% to 40% of Gerdau
AmeriSteel's cost of sales, increased by approximately $8 per ton in the year
ended December 31, 2002 compared to the year ended December 31, 2001, with a
fourth quarter surge in scrap costs that resulted in an average $15 per ton
increase in the fourth quarter compared to last year. Costs have increased as a
result of higher demand for scrap in both export and other U.S. steel markets as
the Section 201 tariff relief has resulted in increased production at U.S.
mills, primarily in the flat rolled market.
SELLING AND ADMINISTRATIVE:
Selling and administrative expenses for the year ended December 31, 2002 were
$62.1 million compared to $56.4 million for the year ended December 31, 2001, an
increase of $5.7 million, due primarily to the addition of the Cartersville mill
($0.6 million) and Co-Steel ($3.8 million.) Higher professional fees relating to
consulting engagements for strategic development initiatives, improved
performance incentive pay, severance pay and the incremental costs associated
with the acquisition of AmeriSteel Bright Bar, Inc. ("ABB") account for the rest
of the increase.
DEPRECIATION:
Depreciation for the year ended December 31, 2002 was $58.7 million compared to
$54.9 million for the year ended December 31, 2001, an increase of $3.8 million
due primarily to the addition of Co-Steel operations ($7.0 million) and
Cartersville ($0.9 million) which was partially offset resulting by a change in
estimated useful lives of Gerdau Canada's property, plant and equipment.
GOODWILL AMORTIZATION:
Due to changes in accounting standards, goodwill is not subject to amortization
after fiscal 2001, therefore there was no goodwill amortization expense for the
year ended December 31, 2002 compared to $6.6 million for the year ended
December 31, 2001.
OTHER OPERATING INCOME:
Other operating income for the year ended December 31, 2002 relates to a $6.1
million insurance settlement in the fourth quarter of 2002 partially offset by
$1.0 million in costs associated with the closing of the Wilmington and St.
Albans fabricating plants. Other operating income for the year ended December
31, 2001 consists of a non-recurring net gain of $2.8 million from cash
settlements from graphite electrode suppliers and a prior year tax refund of
$0.7 million. These are partially offset by a charge of $2.6 million relating to
a loss on investment and a $0.4 million charge relating to insurance claims
deductibles.
INTEREST EXPENSE:
Interest expense was $38.6 million for the year ended December 31, 2002 compared
to $48.9 million for the year ended December 31, 2001, a decrease of $10.3
million, due primarily to the conversion of $325.8 million of related party debt
to equity in connection with the acquisition of Co-Steel. Related party interest
expense, net of interest income, was $14.0 million for the year ended December
31, 2002 compared to $25.0 million for the year ended December 31, 2001, a
decrease of $11 million, due primarily to the conversion of debt to equity. The
debt relating to the Co-Steel operations added $4.0 million interest expense
during the period October 23 through December 31, 2002. Lower interest rates on
the Company's LIBOR denominated debt and normal day-to-day fluctuations in
borrowings accounted for approximately $3.3 million of savings compared to the
prior year.
SEGMENTS:
Gerdau AmeriSteel has two primary business unit segments: (a) mills and (b)
downstream. Mill operation profits for the year ended December 31, 2002 were
$50.0 million compared to $42.9 million for the year ended December 31, 2001, an
increase of $7.1 million. The acquisition of the Cartersville mill in December
2001 resulted in increased volumes of approximately 283,000 tons of finished
steel in 2002 and essentially broke even at an operating income level. The
former Co-Steel mills included from October 23, 2002, resulted in increased
volumes of 370,000 tons of finished steel and also essentially broke even at an
operating level for the 2.25 month period from October 23 through December 31,
2002. AmeriSteel's mill operations improved from $19.7 million in the year ended
December 31, 2001 to $20.6 million in the year ended December 31, 2002, largely
due to improved pricing in its merchant bar products. Profits from Gerdau
Canada's mill segment increased from $23.2 million for the year ended December
31, 2001 to $28.9 million for the year ended December 31, 2002. Improved
merchant bar prices, and to a lesser extent rebar prices, combined to add
approximately $2.2 million to mill segment profits, and a change in estimated
useful lives of property plant and equipment in one of the Canadian mills
resulted in a $3.2 million reduction of depreciation expense.
Gerdau AmeriSteel 13
The downstream segment is made up principally of rebar fabrication, merchant bar
value added businesses, and wire mesh and collated nails. Profits from the
downstream segment were $8.8 million for the year ended December 31, 2002
compared to $13.0 million for the year ended December 31, 2001, a decrease of
$4.2 million. The closure of two redundant rebar fabricating plants in the U.S.
resulted in a charge of $1.0 million in 2002. Rebar fabricating profits also
declined as a result of lower prices and higher material costs in the year ended
December 31, 2002. Because the fabricating division's backlog is approximately
nine months of shipments, rebar price increases are not immediately passed along
to customers. The combination of lower shipments and higher rebar costs resulted
in $5.6 million lower profits in the year ended December 31, 2002 compared to
the prior year. Partially offsetting rebar fabricating declines were improved
results in the other downstream operations which include rail spike operations,
a wire mesh and collated nail plant, and cold drawn merchant bar plants. These
business units added approximately $2.7 million to downstream segment profits in
2002 compared with 2001, through a combination of higher prices and volumes. See
"NOTE 18 TO GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES CONSOLIDATED
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2002 - SEGMENT INFORMATION"
FOR A RECONCILIATION OF SEGMENT SALES AND PROFITS TO CONSOLIDATED RESULTS.
LIQUIDITY AND CAPITAL RESOURCES
Please refer to "NOTE 7 TO GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2002 -
LONG-TERM DEBT" for a more detailed discussion of the Company's debt structure
and obligations. Gerdau AmeriSteel's liquidity is primarily dependent upon three
separate credit arrangements, one in the U.S. and two in Canada.
A) US CREDIT FACILITY
The main U.S. subsidiary, AmeriSteel, had as its primary financial
obligation outstanding on December 31, 2002 a Revolving Credit
Agreement. It is collateralized by first priority security interests in
substantially all accounts receivable and inventory of AmeriSteel as
well as a lien on AmeriSteel's Charlotte Mill property, plant and
equipment. The $285 million Revolving Credit Agreement includes a $100
million term loan that amortizes at the rate of 25% per year beginning
in December 2001. The loan matures in September 2005. The Revolving
Credit Agreement contains certain covenants including the requirement
to maintain financial ratios and limitations on indebtedness, liens,
investments and disposition of assets and dividends. AmeriSteel was in
compliance with the provisions of the Revolving Credit Agreement
through December 31, 2002. Loans under the Revolving Credit Agreement
bear interest at a per annum rate equal to one of several rate options
(LIBOR, Fed Funds, or prime rate) based on the facility chosen at the
time of borrowing plus an applicable margin determined by tests of
performance from time to time. The effective interest rate on the
Revolving Credit Agreement at December 31, 2002 was approximately 4.0%.
As of December 31, 2002, the Revolving Credit Agreement, including the
term loan component, had approximately $170.0 million outstanding of
which $44.8 million was allocated to letters of credit (most of which
are being provided as credit backing for AmeriSteel's outstanding
Industrial Revenue Bonds and insurance obligations). These Industrial
Revenue Bonds were issued to construct facilities in Jackson,
Tennessee; Charlotte, North Carolina; Jacksonville, Florida; and Plant
City, Florida. The latest bond is associated with the Cartersville cold
drawn facility, acquired from Republic Technologies in June 2002 in the
amount of $3.6 million. The interest rates on these bonds range from
50% to 75% of the prime rate. The Industrial Revenue Bonds mature in
2003, 2014, 2017 and 2018.
As of March 31, 2003 availability under the Revolving Credit Agreement
is approximately $37.1 million. In April 2003, AmeriSteel received a
waiver from its lenders as it expected to exceed its leverage ratio
covenant of 3.75 to one due to weak operating margins in the first
quarter. The Company believes AmeriSteel will be able to comply with
the covenants under the Revolving Credit Agreement during the remainder
of 2003.
B) CANADA CREDIT FACILITY
Gerdau Canada's primary financial obligation outstanding as of December
31, 2002 was a credit facility. The revolving component of this
facility has an amount authorized of Cdn$73 million with Cdn$43.2
borrowed at December 31, 2002. The revolving facility is secured with a
pledge of accounts receivable and inventory by Gerdau AmeriSteel MRM
Special Sections Inc. and Gerdau AmeriSteel Cambridge Inc. Loans
borrowed under the revolving facility carry interest at floating market
rates approximating the bank's prime rate plus 1.75%, or Bankers'
Acceptance plus 2.75%. The term component of the facility is Cdn$97.5
million at December 31, 2002 and is fully drawn. Loans borrowed under
the term facility carry interest at floating market rates approximating
the bank's prime rate plus 1.75%, or Banker's Acceptance
14 Annual Report 2002
plus 2.75%. Collateral for the credit facility includes: (i) Cdn$350
million demand debentures given by each of Gerdau Steel Inc., Gerdau
MRM Holdings Inc., Gerdau Ameristeel MRM Special Sections Inc. and
Gerdau AmeriSteel Cambridge Inc., each granting a first priority fixed
charge on real estate, machinery and equipment, a first priority
floating charge on all other assets and a first priority fixed charge
on inventory and accounts receivable to a maximum of Cdn$20 million,
(ii) pledges and guarantees of various subsidiaries of Gerdau
Ameristeel, and (iii) a guarantee by Gerdau S.A. In addition, an "all
risks" insurance policy for full insurable value on a replacement cost
basis has been pledged to the lenders. This credit facility contains
certain covenants, including the requirement to maintain financial
ratios and limitations on indebtedness, investments and disposition of
assets and dividends. Loans of this facility become due January 15,
2004. The Company was not in compliance with certain covenants under
this facility at December 31, 2002 and anticipates it may not be in
compliance in fiscal 2003. The Company has received waivers for
non-compliance with certain covenants from its lenders as of December
31, 2002 and for the remainder of fiscal 2003.
The term component of this facility is fully drawn as of March 31, 2003
with approximately Cdn$10 million currently available under the
revolver.
C) CO-STEEL CREDIT FACILITY
In addition to the U.S. and Canadian credit facilities, as a result of
the merger with Co-Steel, Gerdau AmeriSteel is subject to additional
credit facilities with lenders to the former Co-Steel. As of December
31, 2002, the Co-Steel credit facilities included a revolving credit
agreement with $90 million outstanding and notes payable totaling $97
million. The revolving facilities bear interest at the banker's
acceptance rate or LIBOR plus 2% to 5% depending on debt to EBITDA
ratios. The term loans bear interest at a fixed rate of 8.9% to 10.9%
depending on debt to EBITDA ratios. The revolving facilities expire on
January 15, 2004 and the term facilities reduce by $59 million on
January 15, 2004, and by $12.5 million on July 15th in each of the
years 2004 to 2006. The facilities are secured by a first charge
against substantially all assets of the former Co-Steel entities. As of
March 31, 2003 availability under the Co-Steel facilities is
approximately $6.0 million and $204 million is outstanding. The
Company's unsecured, subordinated convertible debentures in the
principal amount of Cdn$125 million bear interest at 6.5% per annum,
mature on April 30, 2007, and, at the holders' option, are convertible
into Common Shares of the Company at a conversion price of Cdn$26.25
per share. Under the terms of the Trust Indenture for the Convertible
Debentures, no adjustment to the conversion price is required if the
Company issues Common Shares in a customary offering. The debentures
are redeemable after April 30, 2002, at the option of the Company at
par plus accrued interest. The Company has the right to settle the
principal amount by the issuance of Common Shares based on their market
value at the time of redemption.
As the convertible debentures can be redeemed by the Company by the
issuance of Common Shares, the debenture obligations are classified as
shareholders' equity. Interest on the shareholders' equity component,
net of related income taxes, has been charged to reinvested earnings,
and was deducted from the net earnings or added to net loss in
calculating basic earnings per share.
As a result of operating under three separate and distinct credit
arrangements, Gerdau AmeriSteel is required to maintain "status quo"
segregation of operations as if the business combination had not
taken place in order to satisfy lenders' lien rights. Under the
status-quo agreement, the Company may not be able to manage treasury
functions, including cash management, in the most efficient manner,
and available cash, while adequate under one credit arrangement, may
not be available to offset a shortfall under one of the other credit
arrangements.
Interest payments on the outstanding debt are payable monthly,
quarterly or semi-annually depending on the individual debt
agreements. Interest on the Company's convertible debentures is due
semi-annually. Interest on the revolving credit agreements is due
monthly or quarterly as required of each borrowing tranche. Total
cash interest payments are approximately $40 million per year. Except
for interest payments due in April and October of Cdn$4.1 million
each, interest payments are made relatively equally throughout the
year based on the borrowing tranches selected. Gerdau AmeriSteel has
discretion in selecting borrowing tranches and therefore has the
ability to manage, in part, when payments are made.
Each of the three credit facilities has separate financial ratios which
must be maintained or met. AmeriSteel reports quarterly to its lenders
the following items: debt to EBITDA ratio, consolidated net worth,
interest coverage ratio, and capital expenditures. It also must comply
with other covenant ratios including EBITDA to cash interest expense.
Gerdau Canada also reports quarterly to its lenders on the following
Gerdau AmeriSteel 15
items: current ratio, debt service coverage ratio, interest coverage
ratio, debt to EBITDA, debt to net worth, and tangible net worth.
Gerdau AmeriSteel reports monthly to its lenders under the facility
that was originally with Co-Steel and must comply with the covenants
including the following: current ratio, debt to EBITDA, free cash flow,
tangible net worth, and other tests against forecasted results. In the
first quarter of 2003, Gerdau S.A. made loans totaling $30 million to
subsidiaries of the Company to increase liquidity within the group.
These loans will be used for working capital purposes and bear interest
at the rate of 6.5%. The loans do not have a stated maturity, but it is
the intent of the Company to repay these loans as soon as practicable.
In order to improve the long-term financial flexibility of Gerdau
AmeriSteel, extend duration, ease administrative complexities and
better utilize its collateral the Company has embarked on a refinancing
program which is expected to be completed in the second quarter of
2003. The Company is optimistic that it will complete the refinancing
on favorable terms and conditions within the second quarter; however if
it is unable to do so, the Company would be required to extend and
negotiate substantive amendments to its existing credit agreements
and/or obtain additional capital or financing from other sources.
The Company spent $33.4 million on capital projects for the year ended
December 31, 2002 and $28.4 million for the year ended December 31,
2001, an increase of $5.0 million. $2.8 million of these capital
expenditures were made at Co-Steel operations after October 23, 2002
and $3.5 million was spent during the year on Cartersville which was
acquired in December 2001. The Company anticipates spending
approximately $75 million on capital projects in 2003 of which $16
million will be spent by the Co-Steel operations. Also for fiscal 2003,
$29 million of capital expenditures relates to projects committed to in
2002. These carryover projects include rolling mill electrical control
system upgrades at the Charlotte mill; an additional warehouse at the
Cartersville mill; a new baghouse at the Cambridge mill; and a caster
upgrade at the Jackson mill. New capital expenditure projects for
fiscal 2003 are approximately $60 million of which $17 million is
expected to carryover to fiscal 2004. The largest of these projects is
a warehouse at the Whitby mill ($7 million) with no other single
project estimated to be more than $2.3 million. Approximately $3.5
million of the anticipated capital expenditures is related to safety
projects across several operations, with the remaining projects being
largely discretionary.
RISK AND UNCERTAINTIES
The following is a discussion of some of the risks and uncertainties that relate
to Gerdau AmeriSteel and its business. In this section, "we", "us", and "our"
refer to Gerdau AmeriSteel and its subsidiaries.
The global steel industry is highly competitive and capital intensive which may
cause our production or sales to decline. We compete with numerous foreign and
domestic producers, including both integrated and minimill producers. Some of
our competitors have greater financial and capital resources than we do, and
some continue to invest heavily to achieve increased production efficiencies and
improved product quality. Competition is based on price, quality, and the
ability to meet customers' product specifications and delivery schedules. In
addition, in the case of certain product applications, steel competes with a
number of other materials such as plastic, aluminum, and composite materials. We
may be adversely affected by excess industry capacity, the potential for
currently idled facilities to be restarted, and excess supply of some products
and a number of potential steel substitutes. The highly competitive nature of
the industry may in the future exert downward pressure on prices for certain of
our products, which could adversely affect our sales.
All of our steel making production facilities are minimills -- production
facilities that produce steel by melting scrap metal in electric arc furnaces.
The competitiveness of minimills relative to integrated mills (production
facilities that produce steel from coke and iron ore) is influenced somewhat by
the cost of scrap, which represents a significant production cost for minimills.
If scrap prices were to increase significantly without a commensurate increase
in finished steel selling prices, the competitive position of minimills compared
to integrated mills could be materially adversely affected. Future increases in
the prices paid for scrap and other inputs could cause our production to
decline.
Despite recent industry developments and trade regulation efforts, we may not
be able to successfully reduce imports of steel or improve steel prices.
Due to unfavorable foreign economic conditions and excess capacity, imports of
steel bar products to the U.S. and Canadian markets are at historically high
levels and often at prices below their production and export costs, with a
corresponding negative impact on domestic prices. Despite favorable anti-dumping
rulings on rebar from several countries early in 2001 by the United States
International Trade Commission, imports of rebar into the U.S. have continued at
very high levels.
Canada and Mexico have been excluded from tariffs imposed by the
16 Annual Report
U.S. Canada and Mexico are now concerned that steel imports initially destined
to the U.S. may now be rerouted to Canada and Mexico. Such rerouting could
result in a substantial surge of imports into Canada and Mexico, causing a
further price depression in these countries. In 2002, the Canadian International
Trade Tribunal (the "CITT") made a finding of serious injury in respect of rebar
and structural shapes and recommended that Canada impose a 15% declining tariff
on rebar and a tariff rate quota on structural shapes. The tariffs imposed by
the U.S. and CITT findings may not reduce imports or result in improved prices.
In addition, the U.S. and Canadian safeguard remedies have limited time
horizons. It therefore is possible that unfairly priced imports could enter into
the North American markets at a future date, resulting in further price
depressions, which would adversely affect our ability to compete and our sales
levels.
The cyclical nature of the steel industry and negative economic conditions in
North America and worldwide may cause fluctuations in our revenue and
profitability. The steel industry is highly cyclical in nature and is affected
significantly by prevailing economic conditions in the major world economies. We
are particularly sensitive to trends in cyclical industries such as the
construction, appliance, machinery and equipment, and transportation industries,
which are significant markets for our products. In addition, certain of our
customers have been adversely affected by the recent North American and
worldwide recession, particularly following the events of September 11, 2001,
which has resulted in and which may in the future result in defaults in the
payment of accounts receivable owing to us. Market conditions for steel products
in the North American market have fluctuated over the years and have been
difficult since the third quarter of 2000. A significant portion of our products
is destined for the construction industry and the steel service industry. Both
of these markets have experienced lower demand in recent periods. Demand for our
finished steel products, notably rebar, light structural shapes, and flat rolled
steel, will be significantly affected by the relative strength of the
construction sector in North America. Events or conditions having an adverse
effect on the steel industry generally or on our markets in particular could
occur or continue. Such events or conditions could include, for example, a
further economic downturn, an increase in steel imports, an increase in
production resulting in over-supply in the markets in which we will operate, an
increase in the strength of the U.S. dollar or Canadian dollar relative to other
currencies, or an increase in North American or international competition, or
other events or conditions that we cannot predict. Any such event or condition
could have a material adverse effect on our financial condition or results of
operations. Our profit margins could be adversely affected by a significant
increase in our raw material and energy costs.
All of our production facilities are minimills -- production facilities that
produce steel by melting scrap metal in electric arc furnaces. Our operating
results are strongly linked to the cost of steel scrap and scrap substitutes,
which are the primary input for our minimill facilities. Steel scrap prices are
relatively higher during the winter months due to the impact of weather on
collection and supply efforts. Realized selling prices for our end products
cannot always be adjusted in the short-term to recover the cost of increases in
steel scrap prices, but generally tend to reflect increases or decreases in
these prices.
Approximately half of all steel products in North America currently are made in
electric arc furnaces that utilize steel scrap. The increasing rate of steel
scrap consumption has placed upward pressure on the price of steel scrap. The
availability of and prices for scrap are subject to market forces and
governmental regulation largely beyond our control, including demand by North
American and international steel producers, freight costs, and speculation. If
scrap prices were to increase significantly without a commensurate increase in
finished steel selling prices, profit margins could be materially adversely
affected. Future increases in the prices paid for scrap and other inputs could
materially adversely affect our operating margins and our results of operations.
We do not have long term contracts for natural gas and oxygen and are therefore
subject to market variables and pricing swings that could materially adversely
affect our operating margins and our results of operations.
Most of our operations have long-term electricity supply contracts with either
major utilities or energy suppliers. These contracts typically have two
components to them: a firm portion and an interruptible portion. The firm
portion supplies a base load for each plant's rolling mill and auxiliary
services. The interruptible portion supplies the electric arc furnace load. The
interruptible portion of the contract represents up to 60% to 70% of the total
load and, for the most part, is based on a spot market price of electricity at
the time it is being used. We therefore have significant exposure to the
variances of the electricity spot market.
We may not be able to pass on increases in the price of steel scrap or other raw
materials and, consequently, any such increases may adversely impact our
profitability.
Although each of our plants can use oil as an alternate fuel when natural gas
has been interrupted, any interruption in the supply of energy, whether
scheduled or unscheduled, could materially adversely affect our costs, sales and
earnings.
Gerdau AmeriSteel 17
Our pension plans are currently underfunded and continued adverse market
conditions may require us to make cash payments and reduce the cash available
for our business.
The Lasco Hourly-Rated Employees' Pension Plan, a benefit plan maintained by a
division of Gerdau AmeriSteel, had an excess of actuarially computed benefits
over plan assets of approximately Cdn$7.3 million as of January 1, 2002. Funding
of this plan was approximately Cdn$12.2 million in 2002 and is expected to be
approximately Cdn$8.6 million in 2003. We have an unfunded liability in respect
of the Group Supplementary Retirement Plans for Senior Management Employees of
Gerdau AmeriSteel in the estimated amount of Cdn$10.1 million. This amount takes
into consideration the change of control provisions contained in the employment
arrangements of certain of our senior executives. This liability is secured by a
letter of credit. The projected benefit obligations under the Lasco benefit
plans and the Group Supplementary Retirement Plans for Senior Management
Employees of Gerdau AmeriSteel in excess of the fair value of the plans' assets
have been recorded as a liability in connection with the purchase accounting for
the reverse acquisition of Co-Steel by Gerdau S.A.
The defined benefit AmeriSteel Retirement Plan had a deficiency of approximately
$9.7 million as of December 31, 2002. We have an unfunded liability in respect
of the Pension Plan for Union Employees of Mandak Metal Processors in the
estimated amount of Cdn$120 thousand.
We anticipate the above deficiencies to be larger at this time based on the
recent performance of the North American equity markets. Our pension and
retirement plans are in compliance with applicable Canadian and U.S. regulatory,
funding requirements and filings. It is expected that cash funding requirements
in 2003 will be in the range of $10 million to $20 million which is comparable
to the funding requirements in 2002.
The Co-Steel operations recorded a fair valuation acquisition pre-tax adjustment
of $36.8 million. This charge did not result in loan covenant violations.
The primary rate used to measure Gerdau AmeriSteel's post-retirement benefit
obligation is the discount rate. For year-end purposes, and for the above
valuation purposes, Gerdau AmeriSteel used a 6.5% discount factor for Canadian
plans and a 6.75% discount factor for U.S. plans. Each half percentage change in
the discount factor corresponds to an approximate 7%-9% change in the
post-retirement benefit obligations, which was approximately $300 million at
December 31, 2002. A half percentage change in the rate of return on plan assets
corresponds to a change in pension expense of approximately $1.1 million. We may
have to make substantial cash payments to fund our underfunded pension
plans if market conditions do not improve over the next fiscal year, which would
reduce the cash available for our business.
We may not be able to successfully renegotiate collective bargaining agreements
when they expire and our financial results may be adversely affected by labor
disruptions.
We have approximately 4,800 employees, of which approximately 1,300 are
represented by the United Steelworkers of America under four collective
bargaining agreements. These agreements have different expiration dates
beginning February 2004. Certain recycling facilities have approximately 60
employees represented by three different unions under collective agreements that
expire in the first half of 2003 and are currently being renegotiated. We may be
unable to successfully negotiate new collective bargaining agreements for these
employees without any labor disruption. Labor organizing activities could occur
at one or more of our other facilities. Other labor difficulties could arise at
our facilities or at other companies upon which we are dependent for raw
materials, transportation, or other services. Any such activities or
difficulties could result in a significant loss of production and revenue and
have a material adverse effect on our financial condition, or results of
operations.
Compliance with environmental laws is costly and onerous and may reduce our
profitability.
As the Company is involved in the manufacture of steel, it produces and uses
certain substances that may pose environmental hazards. The principal hazardous
waste generated by current and past operations is electric arc furnace ("EAF")
dust, a residual from the production of steel in electric arc furnaces.
Environmental legislation and regulation at the federal, state and provincial
levels over EAF dust is subject to change, which may change the cost of
compliance. While EAF dust is generated in current production processes, such
EAF dust is being collected, handled and disposed of in a manner that management
believes meets all current federal, state and provincial environmental
regulations. The costs of collection and disposal of EAF dust are being expensed
as operating costs when incurred. In addition, the Company has handled and
disposed of EAF dust in other manners in previous years, and is responsible for
the remediation of certain sites where such EAF dust was generated and/or
disposed.
In general, the Company's estimate of remediation costs is based on its review
of each site and the nature of the anticipated remediation activities to be
undertaken. The Company's process for estimating such remediation costs includes
determining for each site the expected remediation methods, and the estimated
cost for
18 Annual Report 2002
each step of the remediation. In such determinations, the Company may employ
outside consultants and providers of such remedial services to assist in making
such determinations. Although the ultimate costs associated with the remediation
are not known precisely, the Company estimated the total remaining costs as of
December 31, 2002 to be approximately $6.3 million, with these costs recorded as
a liability in the Company's financial statements, of which the Company expects
to pay approximately $5.1 million during the year ended December 31, 2003. An
additional liability of $8.6 million was recorded in 2002 with respect of
certain environmental obligations which were triggered by the change in control
of Co-Steel in certain jurisdictions in which Co-Steel operated. This liability
was recorded in the Company's financial statements at the present value of the
estimated future costs of these obligations.
Based on past use of certain technologies and remediation methods by third
parties, evaluation of those technologies and methods by the Company's
consultants and third-party estimates of costs of remediation-related services
provided to the Company of which the Company and its consultants are aware, the
Company and its consultants believe that the Company's cost estimates are
reasonable. Considering the uncertainties inherent in determining the costs
associated with the clean-up of such contamination, including the time periods
over which such costs must be paid, the extent of contribution by parties which
are jointly and severally liable, and the nature and timing of payments to be
made under cost sharing arrangements, there can be no assurance the ultimate
costs of remediation will not differ from the estimated remediation costs.
In April 2001, the Company was notified by the United States Environmental
Protection Agency (the "EPA") of an investigation that identifies the Company as
a potential responsible party ("PRP") in a Superfund Site in Pelham, Georgia.
The Pelham site was a fertilizer manufacturer in operation from 1910 through
1992, lastly operated by Stoller Chemical Company, a now bankrupt corporation.
The EPA offered a settlement to the named PRPs under which the Company's
allocation was approximately $1.8 million. The Company objects to its inclusion
as a PRP in this site and is pursuing legal alternatives, including the addition
to the allocation of larger third parties which the Company believes were
incorrectly excluded from the original settlement offer. The EPA has filed suit
with the Company named as a defendant. As the ultimate exposure to the Company,
if any, is uncertain, no liability has been established for this site.
Carbon monoxide emissions at Gerdau Ameristeel Perth Amboy exceeded permitted
levels on several occasions during 2001 and early 2002. These episodes were
promptly reported to the New Jersey Department of Environmental Protection
(NJDEP). Gerdau Ameristeel is conducting investigations to determine the cause
of these episodes, what steps can be taken to reduce emissions and whether the
Gerdau Ameristeel Perth Amboy environmental permits require modification.
Discussions with the NJDEP regarding permit and compliance issues are in a
preliminary stage. Penalty assessments expected to total approximately $400
thousand, have been accrued.
Inflation may affect our profitability.
Gerdau AmeriSteel's primary costs include ferrous scrap, energy and labor, all
of which can be affected by inflationary conditions. Gerdau Ameristeel has
generally been able to pass on cost increases through price adjustments.
However, the ability to pass on these increases depends on market conditions
which are driven primarily by the level of construction activity. Other factors
that may limit Gerdau AmeriSteel's ability to pass on cost increases in
materials is over-capacity in the North American steel industry and dumping of
foreign produced steel.
We are exposed to fluctuations in interest rates.
The interest rates charged on our debt are predominantly variable, the majority
of which is based on LIBOR (London Interbank Offered Rate). In November 1999,
Gerdau Canada hedged $68 million of its debt (the "notional amount") via
interest rate swaps that in effect resulted in fixed interest rates on the
notional amount. Under two separate swap arrangements, the notional amounts
declined on predetermined dates by predetermined amounts. The first swap ran for
a period of three years and terminated on November 4, 2002. The second swap
terminates September 2004. The notional amount swapped is currently $17 million.
In late 2001, Gerdau USA hedged $55 million of its debt via interest rate swaps
that in effect result in a fixed interest rate on $55 million for a period of
four to five years. As a result, Gerdau USA has reduced its exposure to
fluctuations in interest rates with the result being that approximately 33% of
the US operations' debt is subject to changes in interest expense due to
fluctuations of interest rates in the markets. A 10% change in interest rates
would result in a change in annual interest expense of less than $0.5 million.
The value of our interest rate swaps changes from period to period due to
changes in the swap yield curve relative to the swap yield curve on the date it
was entered into, and adjusted for the shortening duration. Generally the market
value of the swap instrument will decline if interest rates remain lower than
forecasted and will increase in value if interest rates rise faster than
anticipated.
Gerdau AmeriSteel 19
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND
SHAREHOLDERS OF GERDAU AMERISTEEL CORPORATION:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings(loss), of shareholders' equity, and of cash
flows present fairly, in all material respects, the financial position of Gerdau
Ameristeel Corporation and its subsidiaries (the Company) at December 31, 2002
and 2001, and the results of their operations and their cash flows for the years
then ended, in conformity with accounting principles which, as described in Note
2, are generally accepted in Canada. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of Gerdau Canada Group, a company under common control, as
of December 31, 2001 and for the year then ended, which statements reflect total
assets of $330,463,000 and total revenues of $237,442,000. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for Gerdau Canada Group,
is based solely on the report of the other auditors. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the Consolidated Financial Statements, the Company
adopted the provisions of CICA Handbook Section 3062, Goodwill and Other
Intangible Assets, on January 1, 2002.
/s/ PricewaterhouseCoopers LLP
January 24, 2003 except for certain information contained
in Notes 3 and 20, as to which the date is April 4, 2003
Orlando, Florida
20 Annual Report 2002
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002 and 2001 (Canadian GAAP/U.S. Dollar)
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet
(US$ in thousands)
DECEMBER 31, DECEMBER 31,
2002 2001
----------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 16,361 $ 5,087
Accounts receivable, net of allowance for
doubtful accounts of $4,688 (2001 - $2,210) 172,745 97,327
Inventories (note 4) 351,400 211,420
Future tax assets (note 10) 11,417 5,320
Other current assets 2,997 1,096
----------- -----------
TOTAL CURRENT ASSETS 554,920 320,250
PROPERTY, PLANT AND EQUIPMENT (NOTE 5) 898,948 530,885
GOODWILL 114,374 114,374
OTHER ASSETS (NOTE 8) 3,159 96,430
----------- -----------
TOTAL ASSETS $ 1,571,401 $ 1,061,939
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 170,334 $ 99,647
Accrued salaries, wages and employee benefits 43,932 16,826
Other current liabilities (note 12) 20,110 9,453
Taxes payable 6,567 --
Interest payable 3,395 6,563
Bank Indebtedness (note 7) 23,379 4,083
Current portion of long-term borrowings (note 7) 83,942 62,977
----------- -----------
TOTAL CURRENT LIABILITIES 351,659 199,549
LONG-TERM BORROWINGS, LESS CURRENT PORTION (NOTE 7) 411,833 251,346
RELATED PARTY BORROWINGS (NOTE 8) -- 405,227
ACCRUED BENEFIT OBLIGATION (NOTE 11) 70,166 20,746
OTHER LIABILITIES (NOTE 12) 29,175 5,530
FUTURE TAX LIABILITIES (NOTE 10) 82,158 99,109
MINORITY INTEREST 33,312 30,634
----------- -----------
978,303 1,012,141
----------- -----------
TOTAL LIABILITIES
SHAREHOLDERS' EQUITY
Capital stock (note 14) 513,400 58,364
Convertible debentures (note 9) 79,134 --
Retained earnings (deficit) 1,329 (7,622)
Cumulative translation adjustment (765) (944)
----------- -----------
TOTAL SHAREHOLDERS' EQUITY 593,098 49,798
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,571,401 $ 1,061,939
=========== ===========
See notes to consolidated financial statements.
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Earnings (Loss)
(US$ in thousands, except earnings per share data)
Year Ended Year Ended
----------------- -----------------
December 31, 2002 December 31, 2001
NET SALES $1,036,055 $840,836
OPERATING EXPENSES
Cost of sales 867,091 680,084
Selling and administrative 62,173 56,431
Depreciation 58,683 54,877
Amortization of goodwill -- 6,582
Other operating income (note 17) (5,072) (463)
982,875 797,511
========== --------
INCOME FROM OPERATIONS 53,180 43,325
OTHER EXPENSES
Interest, net 38,598 48,852
Foreign exchange loss 230 249
Loss on marketable securities -- 707
Amortization of deferred financing costs 1,172 1,180
40,000 50,988
---------- --------
INCOME (LOSS) BEFORE INCOME TAXES 13,180 (7,663)
INCOME TAX EXPENSE (RECOVERY) 341 (2,581)
---------- --------
INCOME (LOSS) BEFORE MINORITY INTEREST 12,839 (5,082)
MINORITY INTEREST (1,707) (984)
NET INCOME (LOSS) $ 11,132 $ (6,066)
EARNINGS PER COMMON SHARE- BASIC (note 14) $ 0.07 $ (0.05)
EARNINGS PER COMMON SHARE - DILUTED $ 0.07 $ (0.05)
See notes to consolidated financial statements.
22 Annual Report 2002
Gerdau AmeriSteel Corporation and Subsidiaries
Consolidated Statements of Shareholders' Equity
(US$ in thousands, except share data)
Cumulative
Invested Convertible Retained Translation Deferred
Shares Capital Debentures Earnings Adjustment Compensation Total
Balance -
December 31, 2000 $133,388,400 $ 58,619 $ -- $(1,556) $ (11) $(76) $ 56,976
Net income (loss) -- -- (6,066) -- -- (6,066)
Subsidiary stock activity (255) -- -- -- -- (255)
Foreign exchange -- -- -- (933) -- (933)
Reduction in deferred
compensation 76 76
Balance -
December 31, 2001 133,388,400 58,364 -- (7,622) (944) -- 49,798
Net income -- -- 11,132 -- -- 11,132
Subsidiary stock activity (187) -- -- -- -- (187)
Foreign exchange -- -- -- 179 -- 179
Debt converted to equity 325,948 -- -- -- -- 325,948
(note 8)
Acquisition (note 3) 51,503,960 129,275 79,134 -- -- -- 208,409
Dividends paid -- -- (2,181) -- -- (2,181)
Balance -
December 31, 2002 184,892,360 $513,400 $79,134 $ 1,329 $(765) -- $593,098
See notes to consolidated financial statements.
Gerdau AmeriSteel 23
GERDAU AMERISTEEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (US$ in thousands)
Year Ended Year Ended
----------------- -----------------
December 31, 2002 December 31, 2001
OPERATING ACTIVITIES
Net income (loss) $ 11,132 $ (6,066)
Adjustment to reconcile net income to net cash
provided by operating activities:
Depreciation 58,683 54,877
Amortization 1,172 7,762
Deferred income taxes (10,428) (2,284)
Loss (Gain) on disposition of property, plant and equipment 1,044 (17)
Unrealized foreign exchange on related party loans 436 (6,253)
Accrued interest on related party loans (2,561) 14,144
Loss on sale of marketable securities -- 3,658
Deferred compensation -- 76
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable 21,433 12,159
Inventories (17,991) 18,640
Other assets (9,061) 6
Liabilities (19,791) 5,878
NET CASH PROVIDED BY OPERATING ACTIVITIES 34,068 102,580
INVESTING ACTIVITIES
Additions to property, plant and equipment (33,482) (28,419)
Purchase price for acquisitions (6,856) (51,184)
Cash acquired in acquisition 18,465 --
Proceeds from dispositions 489 811
NET CASH USED IN INVESTING ACTIVITIES (21,384) (78,792)
FINANCING ACTIVITIES
Term debt payments (29,503) (58,906)
Revolving credit borrowings (payments) 27,273 (31,279)
Increase in related party loans payable -- 64,638
Reductions (additions) to deferred financing costs 705 (4)
Foreign exchange (loss) gain (195) 142
Changes in minority interest 2,678 984
Subsidiary stock activity (187) (232)
Dividends paid (2,181) --
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,410) (24,657)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 11,274 (869)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,087 5,956
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,361 $ 5,087
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 57,610 $ 45,882
Cash paid for income taxes $ 2,289 $ 690
See notes to consolidated financial statements.
24 Annual Report
Notes to the Consolidated Financial Statements (US$ In Thousands)
NOTE 1 - BASIS OF PRESENTATION
The 2001 consolidated financial statements include the results and accounts of
companies controlled by Gerdau AmeriSteel Corporation, a Canadian corporation,
whose ultimate parent is Gerdau S.A., a Brazilian Company. The financial
statements include the accounts of Gerdau Ameristeel Cambridge Inc. and Gerdau
MRM Holdings Inc. and their consolidated subsidiaries Gerdau Ameristeel MRM
Special Sections Inc., Gerdau MRM America Holding Corp., Porter Bros.
Corporation, GUSAP Partners, Mandak Car Crusher Inc., MFT Acquisition Corp.,
3038482 Nova Scotia Company, PASUG Inc., (combined, referred to as Gerdau Canada
Group), and Gerdau USA, Inc. and its consolidated subsidiaries FLS Holdings
Inc., AmeriSteel Corporation and AmeriSteel Bright Bar, Inc. ("GUSA"),
collectively, the "Gerdau North America Group". All significant intercompany
transactions and accounts have been eliminated in consolidation. On October 23,
2002, the ultimate parent company of the Gerdau North America Group entered into
a transaction agreement with Co-Steel Inc. ("Co-Steel"), a Canadian public
company. This transaction agreement resulted in Co-Steel acquiring all of the
issued and outstanding shares of the companies included in the Gerdau North
America Group, in exchange for Co-Steel common shares representing approximately
74% of Co-Steel's total common shares. As part of this transaction, certain
related party loans payable of the Gerdau North America Group were converted
into equity in October 2002. The transaction was accounted for using the
reverse-take-over method of purchase accounting. The Gerdau North America Group
is deemed to be the acquirer and is assumed to be purchasing the assets and
liabilities of Co-Steel, since the original shareholder of the Gerdau North
America Group became owner of more than 50 percent of the voting shares of
Co-Steel on a fully-diluted basis following the transaction. As a result, the
Gerdau North America Group's historical accounts became the historical accounts
of Co-Steel for all periods prior to the date of merger. In connection with the
merger, Co-Steel's name was changed to Gerdau AmeriSteel Corporation (the
"Company" or "Gerdau AmeriSteel"). The Company operates steel mini-mills,
producing primarily steel bars and special sections for commercial and
industrial building construction and original equipment manufacturers. Its
principal market area is the eastern United States and Canada. Principal
suppliers to the Company include scrap metal producers and electric utilities.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements are presented by management in
accordance with accounting principles generally accepted in Canada. All dollar
amounts are reported in United States dollars unless otherwise indicated.
CONSOLIDATION:
These consolidated financial statements include the accounts of the Company and
its subsidiaries. They include full year results for the Gerdau North America
operations, and results for the Co-Steel operations for the period from October
23, 2002 through December 31, 2002, which represents the period subsequent to
the date of acquisition.
JOINT VENTURES AND OTHER INVESTMENTS:
The Company's investments in Gallatin Steel Company, Bradley Steel Processors
and MRM Guide Rail are 50% joint ventures, and are proportionately consolidated.
Other investments where the Company does not exercise significant influence are
accounted for by the cost method. The Company evaluates the carrying value of
the investments to determine if there has been an impairment in value considered
other than temporary, which is assessed by review of cash flows, operating
income and takes into consideration trading values on recognized stock
exchanges. If impairment is considered other than temporary, a provision is
recorded.
Gerdau AmeriSteel 25
REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS:
The Company recognizes revenues from sales and the allowance for estimated costs
associated with returns from these sales when the product is shipped and title
transferred to the buyer. Provisions are made for estimated product returns and
customer claims based on estimates and actual historical experience. If the
historical data used in the estimates does not reflect future returns and claims
trends, additional provisions may be necessary. An allowance for doubtful
accounts is maintained for estimated losses resulting from the inability of
customers to make required payments. If the financial condition of customers was
to deteriorate, resulting in the impairment of their ability to make payments,
additional allowance may be required.
CASH AND CASH EQUIVALENTS:
The Company considers all cash on deposit and term deposits with original
maturities of three months or less, to be cash equivalents. Cash held in the
joint venture operations are for the sole use of the joint ventures.
INVENTORIES:
Billets and finished goods are valued at the lower of cost or market value.
Scrap, consumables and spare parts are valued at the lower of cost (calculated
on an average basis) or replacement value. Consumables include rolls, which are
recorded at cost and amortized based on usage.
PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment are recorded at cost. Major renewals and
betterments are capitalized and depreciated over their estimated useful lives.
Maintenance and repairs are charged against operations as incurred. Upon
retirement or other disposition of property, plant and equipment, the cost and
related allowances for depreciation are removed from the accounts and any
resulting gain or loss is recorded in the statement of operations.
Interest incurred in connection with significant capital projects is
capitalized. Interest costs for property, plant and equipment construction
expenditures of approximately $100 thousand was capitalized for the year ended
December 31, 2002 (2001 - $800 thousand). For financial reporting purposes,
the Company provides for depreciation of property, plant and equipment using
the straight-line method over the estimated useful lives of 15 to 30 years for
buildings and improvements and 4 to 15 years for other equipment. During 2002,
the Company changed the depreciable lives of certain buildings and equipment
to reflect their updated estimated economic lives. The effect of this change
in accounting estimate reduced depreciation expense in 2002 by approximately
$3.2 million.
Property, Plant & Equipment Held for Sale is carried at the lower of cost or net
realizable value.
GOODWILL:
Goodwill represents the cost of investments in operating companies in excess of
the fair value of the net identifiable assets acquired. On January 1, 2002, the
Company adopted CICA Handbook Section 3062, Goodwill and Other Intangible
Assets. This section requires that goodwill and intangible assets with
indefinite lives are not amortized, but rather their fair value be assessed at
least annually and written down for any impairment in value. For acquisitions
made subsequent to July 1, 2001, and as of January 1, 2002 for all existing
goodwill and intangible assets with indefinite lives, such assets will no longer
be amortized, but will be evaluated annually for impairment. There was
amortization of goodwill and intangible assets recorded under the prior
accounting standard for 2001. In 2001, goodwill resulting from acquisitions was
amortized over 20 to 25 years, the estimated lives of the related benefit.
Had goodwill not been amortized in 2001, net loss in 2001 would have been $2.1
million (versus a loss of $6.1 million), or $(0.02) per share.
DEFERRED FINANCING COSTS:
Deferred financing costs were incurred in relation to long term debt and are
reflected net of accumulated amortization and are amortized over the term of the
respective debt instruments, which range from 5 to 22 years from the debt
inception date.
FUTURE INCOME TAXES:
The liability method of accounting for income taxes is used whereby future
income taxes arise from temporary differences between the book value of assets
and liabilities and their respective tax value. Future income tax assets and
liabilities are measured using substantially enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on future income tax assets and
liabilities of a change in tax rates is recognized in operations in the period
that includes the substantive enactment date. A valuation allowance is recorded
to the extent the recoverability of future income tax assets is considered more
likely than not.
PENSIONS AND POST-RETIREMENT BENEFITS:
The Company accrues its obligations under employee benefit plans and the related
costs, net of plan assets. The Company has adopted the following policies:
- - The cost of pensions and other retirement benefits earned by employees
is actuarially determined using the projected
26 Annual Report 2002
benefit method prorated on service and management's best estimate of
expected plan investment performance for funded plans, salary
escalation, retirement ages of employees and expected health care
costs. The discount rate used for determining the liability for future
benefits is the current interest rate at the balance sheet date on high
quality fixed income investments with maturities that match the
expected maturity of the obligations.
- - Pension assets are valued at fair market value.
- - Past service costs from plan amendments are amortized on a
straight-line basis over the average remaining service period of
employees active at the date of amendment.
- - The excess of the net actuarial gain or loss over 10% of the greater of
the benefit obligation and the fair value of plan assets is amortized
over the average remaining service period of the active employees.
- - A plan curtailment will result if there has been a significant
reduction in the expected future service of present employees. A net
curtailment loss is recognized when the event is probable and can be
estimated, a net curtailment gain is deferred until realized.
ENVIRONMENTAL LIABILITIES:
The Company has reserved for potential environmental liabilities based on the
best estimates of potential clean-up and remediation estimates for known
environmental sites. The Company employs a staff of environmental experts to
administer all phases of its environmental programs, and uses outside experts
where needed. These professionals develop estimates of potential liabilities at
these sites based on projected and known remediation costs. This analysis
requires the Company to make significant estimates, and changes in facts and
circumstances could result in material changes in the environmental accrual.
REPORTING CURRENCY AND FOREIGN CURRENCY TRANSLATION:
Operating revenue and expenses arising from foreign currency transactions are
translated into U.S. dollars at exchange rates in effect on the date of the
transactions. Monetary assets and liabilities are translated into U.S. dollars
at the exchange rate in effect at the balance sheet date. Gains or losses
arising from these translations are included in earnings, with the exception of
unrealized foreign exchange gains or losses on long-term monetary items that
hedge net investments in foreign operations which are accumulated in the foreign
currency translation adjustment account in shareholders' equity, until there is
a reduction in the net investment in the foreign operation. Assets and
liabilities of self-sustaining foreign operations are translated into U.S.
dollars at the exchange rate in effect at the balance sheet date. Operating
revenue and expense items are translated at average exchange rates prevailing
during the year. Any corresponding foreign exchange gains and losses are
deferred and disclosed separately as part of shareholders' equity and are
recognized in earnings when the ownership interest in the foreign operations
is reduced.
The consolidated financial statements have been prepared in U.S. dollars as
the majority of the Company's transactions occur in this currency.
EARNINGS PER SHARE:
The Company's diluted earnings per share is determined using the treasury stock
method for the effect of outstanding share purchase options and the dilution
impact of the convertible debenture at the stated conversion price.
STOCK OPTION PLAN:
The Company has a stock option plan described in Note 15. No compensation
expense is recognized when stock options are issued to employees as the option
price is equivalent to the market value of the shares at the date of grant.
Consideration paid on exercise of stock options is credited to share capital. No
options have been granted in 2002.
DEFERRED SHARE UNIT PLAN:
The Corporation offers a Deferred Share Unit Plan (DSUP) for members of the
Board of Directors. Under the DSUP each director receives a percentage of their
annual compensation in the form of deferred share units (DSUs) which are
notional Common Shares of the Company. The issue price of each DSU is based on
the closing trading value of the Common Shares on the meeting dates and an
expense is recognized at that time. The DSU account of each director includes
the value of dividends, if any, as if reinvested in additional DSUs. The
director is not permitted to convert DSUs into cash until retirement from the
Board. The value of the DSUs, when converted to cash, will be equivalent to the
market value of the Common Shares at the time the conversion takes place. The
value of the outstanding DSUs as at December 31, 2002 was $141 thousand (2001 -
$67 thousand).
USE OF ESTIMATES:
The preparation of financial statements in conformity with Canadian generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Gerdau AmeriSteel 27
NOTE 3 - ACQUISITIONS
On October 23, 2002, Brazilian Steelmaker Gerdau S.A. and Canadian steelmaker
Co-Steel combined their North American operations. In the transaction, Co-Steel
acquired all of the issued and outstanding shares of the Gerdau North America
Group in exchange for shares of Co-Steel representing approximately 74% of the
shares of the combined entity. A portion of these shares will be issued to
minority shareholders of AmeriSteel Corporation on March 31, 2003, as described
below. The name of Co-Steel was changed to Gerdau AmeriSteel Corporation as part
of the transaction. For accounting purposes, the business combination of the
Gerdau North America Group and Co-Steel has been accounted for using the reverse
take-over method of purchase accounting. Gerdau North America is deemed to be
the acquirer and is assumed to be purchasing the assets and liabilities of
Co-Steel, since the original shareholders of the Gerdau North America Group have
become owners of more than 50% of the voting shares of Co-Steel on a fully
diluted basis. The results of the operations of Co-Steel are included from the
date of the transaction. The following table summarizes the fair value of assets
and liabilities acquired at the date of the acquisition ($000s):
NET ASSETS (LIABILITIES) ACQUIRED
Current assets $ 242,252
Current liabilities (130,345)
Property, plant and equipment 389,915
Other assets (177)
Long-term debt (219,969)
Other long-term liabilities (81,386)
Net future income taxes 15,768
Convertible debenture (recorded as equity) (80,113)
------------
$ 135,945
------------
Purchase consideration, representing
51,503,960 Co-Steel shares at
$2.51 per share $ 129,275
Plus transaction costs 6,670
------------
$ 135,945
------------
Effective March 31, 2003, non-controlling shareholders holding, in the
aggregate, approximately 13% of the issued and outstanding shares of AmeriSteel
Corporation ("AmeriSteel"), will have their holdings exchanged for Gerdau
AmeriSteel common shares in a ratio of 9.4617 Gerdau AmeriSteel shares for each
common share of AmeriSteel exchanged. The acquisition of the minority interest
of AmeriSteel will be accounted for as a step acquisition under the purchase
method of accounting, whereby the purchase price of the shares will be allocated
to the net assets acquired based upon their relative fair values. The exchange
will result in the issuance of an additional 13,199,260 shares of Gerdau
AmeriSteel (see Note 20). On June 24, 2002, the Company acquired certain assets
and assumed certain liabilities of Republic Technologies' cold drawn plant in
Cartersville, Georgia. The purchase price was $8.4 million and the transaction
was accounted for as a business combination. The plant commenced operations
under Gerdau AmeriSteel ownership on July 2, 2002.
On December 28, 2001, AmeriSteel acquired certain assets and assumed certain
liabilities of the Cartersville, Georgia mill ("Cartersville"), a producer of
structural steel products, from Birmingham Steel Corporation. In a separate
transaction on the same date, AmeriSteel acquired certain assets that were being
leased by Cartersville from the existing lessor group for cash and negotiated a
new operating lease. The two transactions are being accounted for as a business
combination for financial reporting purposes. The results of operations for
Cartersville have been included in the accompanying combined statement of
financial position as of December 31, 2001, but had no significant impact on the
results of operations for the year ended December 31, 2001. The aggregate
purchase price was $49.4 million, including $41.5 million cash, $0.2 million
marketable securities and $7.7 million assumed liabilities.
The following table summarizes the estimated fair values of the assets acquired
and liabilities assumed at the date of acquisition ($000s).
AT DECEMBER 28, 2001
Inventory $ 20,674
Property, plant and equipment 28,757
Total assets 49,431
Accounts payable (6,756)
Accrued liabilities (959)
--------
Total liabilities assumed (7,715)
--------
Net assets acquired $ 41,716
--------
On March 13, 2001, AmeriSteel acquired 80% of the operations of American Bright
Bar of Orrville, Ohio, a producer of cold drawn flat bar, for total
consideration of $4.2 million cash and $5.3 million of debt. The transaction was
accounted for as a purchase and goodwill of approximately $4.8 million was
recorded.
28 Annual Report 2002
NOTE 4 - INVENTORIES
Inventories consist of the following ($000s):
At December 31,
2002 2001
------------ ------------
Ferrous and non-ferrous scrap $ 40,983 $ 18,999
Work in-process 33,701 19,077
Finished goods 195,893 127,818
Raw materials (excluding
scrap) and operating
supplies 80,823 45,526
------------ ------------
$ 351,400 $ 211,420
------------ ------------
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following ($000s):
At December 31, 2002
----------------------------------------------
Accumulated Net
Cost Depreciation Book Value
------------ ------------ ------------
Land and improvements $ 65,021 $ 1,769 $ 63,252
Buildings and improvements 142,971 14,472 128,499
Machinery & equipment 889,779 203,119 686,660
Construction in progress 14,315 -- 14,315
Property plant and
equipment held for sale 6,222 -- 6,222
------------ ------------ ------------
$ 1,118,308 $ 219,360 $ 898,948
------------ ------------ ------------
At December 31, 2001
----------------------------------------------
Accumulated Net
Cost Depreciation Book Value
------------ ------------ ------------
Land and improvements $ 31,098 $ 1,177 $ 29,921
Buildings and 84,545 10,011 74,534
improvements
Machinery & equipment 562,151 154,995 407,157
Construction in progress 12,724 -- 12,724
Property plant and
equipment held for sale 6,550 -- 6,550
------------ ------------ ------------
$ 697,068 $ 166,183 $ 530,885
------------ ------------ ------------
NOTE 6-JOINT VENTURES
The Company's investments in Gallatin Steel Company, Bradley Steel Processors
and MRM Guide Rail are 50% joint ventures. The Company's interests in the joint
ventures have been accounted for using the proportional consolidation method
under which the Company's proportionate share of assets, liabilities, revenues
and expenses of the joint ventures have been included in these consolidated
financial statements.
The Company's interest in the joint ventures is as follows ($000s):
At December 31,
2002 2001
------------ ------------
Balance Sheet
Current assets(1)(2) $ 45,234 $ 3,984
Property, plant and equipment(3)
Land 4,525 --
Buildings 19,740 38
Machinery and equipment 81,378 2,519
Construction-in-progress 1,778 --
Current liabilities 26,505 88
Long-term debt 3,415 --
Statement of Earnings
Sales $ 53,591 $ 14,141
Operating earnings 6,836 1,833
Earnings before income taxes 6,275 1,774
Changes in Cash Flows
Cash provided from (used in)
Operating activities $ 6,098 $ 973
Investing activities (1,809) (738)
Financing activities (17,026) (198)
------------ ------------
Proportionate share of
increase (decrease) in cash $ (12,737) $ 37
------------ ------------
(1) Includes $4.8 million (2001 - $1.5 million) of cash and cash
equivalents.
(2) Current assets are net of allowance for doubtful accounts of $2.2
million (2001 - $9 thousand).
(3) Net of accumulated depreciation of $5.9 million (2001 - $2.6 million).
Gerdau AmeriSteel 29
NOTE 7 - LONG-TERM DEBT
The Company has debt agreements that are specific to the Gerdau Canada Group,
GUSA and former Co-Steel entities. Gerdau AmeriSteel debt includes the following
($000s):
At December 31,
2002 2001
------------ ------------
Gerdau Canada Group:
Bank indebtedness $ 17,243 $ 4,083
U.S. Dollar Floating Rate Term 61,743 85,855
Loan
Canadian dollar revolving loan
(Cdn $35.0 million) 22,157 15,068
Other 1,444 1,458
GUSA:
AmeriSteel Revolving Credit 100,800 80,000
Agreement
AmeriSteel Term Loan 68,750 93,750
Industrial Revenue Bonds 36,795 33,195
AmeriSteel Bright Bar 3,522 3,867
Other 809 1,130
Co-Steel Group:
Bank Indebtedness 6,136 --
Canadian dollar revolving loan
(Cdn$48.3 million) 30,577 --
U.S. Dollar Fixed Rate Reducing 96,784 --
Term Loan
Fair value of early payment
penalty of fixed rate reducing term
loans 9,065 --
U.S. dollar revolving loan 59,768 --
Other 3,561 --
------------ ------------
519,154 318,406
Less current portion (107,321) (67,060)
------------ ------------
$ 411,833 $ 251,346
------------ ------------
GERDAU CANADA GROUP
The Gerdau Canada Group has a total authorized revolver facility of Cdn $73
million ($46 million) that bears interest at floating market rates approximating
the bank's prime rate (as defined in the agreement) plus 1.75% (2001 - 2.25%) or
Bankers' Acceptance plus 2.75% (2001 - 3.25%). Companies in the Gerdau Canada
Group have pledged accounts receivable and inventory as collateral. The revolver
facility expires on September 30, 2003 and is renewable through January 15,
2004.
The total authorized Canadian term facility is Cdn $97.5 million [$61.7 million]
(2001 - Cdn$135 million [$84.8 million]) with a due date of January 15, 2004,
bearing interest at floating market rates approximating the bank's prime rate
(as defined in the agreement) plus 1.75% (2001 - 2.25%). Interest rate swap
agreements related to this facility were entered into with the Gerdau Canada
Group's bank as the counterparty in November, 1999 that effectively fixes the
rate of interest on approximately 50% of the balance. The agreement is for $17
million and bears interest at 6.425% for a term of five years expiring in 2004.
The aggregate fair value of the interest rate swap agreements, which represents
the amount that would be paid by the Gerdau Canada Group if the agreements were
terminated at December 31, 2002, was $1.2 million (2001 - $2.2 million).
The Canadian banking agreement, which includes Gerdau Steel Inc. (the
controlling shareholder of Gerdau AmeriSteel), contains various restrictive
covenants with respect to maintenance of certain financial ratios. At December
31, 2002, the Company was not in compliance with certain covenants and requested
and received a waiver of compliance (see Note 20).
In addition, the Gerdau Canada Group banking agreement requires additional
principal repayments of 50% of surplus combined cash flow as defined by the
banking agreement for years 2001 - 2003. Based on the cash flows recorded in
2002, Gerdau Canada will be required to make an additional principal repayment
of $4.1 million in 2003.
Collateral for the Canadian credit facility includes: (i) Cdn$350 million demand
debentures given by each of Gerdau Steel Inc., Gerdau MRM Holdings Inc., Gerdau
AmeriSteel MRM Special Sections Inc. and Gerdau AmeriSteel Cambridge Inc.,
granting a first priority fixed charge on real estate, machinery and equipment,
a first priority floating charge on all other assets and a first priority fixed
charge on inventory and accounts receivable to a maximum of $20 million, (ii)
pledges and guaranties of various Gerdau Canada Group members, and (iii) a
guaranty by Gerdau SA. In addition, an "all risks" insurance policy for full
insurable value on a replacement cost basis has been pledged to the lenders.
At December 31, 2002 Gerdau Canada Group was not in compliance with certain
covenants and requested and received a waiver of compliance from its lenders.
GUSA
GUSA's primary financial obligation outstanding as of December 31, 2002 is a
$285 million credit facility (the "Revolving Credit Agreement"). It is
collateralized by first priority security interests in substantially all
accounts receivable and inventories of GUSA as well as a lien on the Company's
Charlotte Mill property, plant and equipment. The Revolving Credit Agreement was
amended in September 2000 and increased the total facility from $150 million to
$285 million, of which $100 million is a term loan that amortizes at the rate of
25% per year beginning in December 2001. The Revolving Credit Agreement matures
in September 2005. Loans under the Revolving Credit Agreement bear interest at a
per annum rate equal to one of several rate options (LIBOR, Fed Funds or Prime
Rate, as defined in the agreement) based on the facility chosen at the time of
borrowing plus an applicable margin determined by tests of performance from time
to time. The effective interest rate at December 31, 2002 and 2001 was
approximately 3.8% and 4.2%, respectively. The Revolving Credit Agreement
contains certain
30 Annual Report 2002
covenants including the requirement to maintain financial ratios and limitations
on indebtedness, liens, investments and disposition of assets and dividends.
Letters of credit are subject to an aggregate sublimit of $50 million.
GUSA's industrial revenue bonds ("IRBs") were issued to obtain funding to
construct facilities in Jackson, Tennessee; Charlotte, North Carolina;
Jacksonville, Florida; and Plant City, Florida. GUSA incurred an additional $3.6
million IRB with the acquisition of the Cartersville cold drawn facility in June
2002. The interest rates on these bonds range from 50% to 75% of the prime rate
(3.8% to 4.3% at December 31, 2002); $9.4 million of the IRBs mature in 2003,
$3.8 million matures in 2015, $20.0 million matures in 2017, and $3.6 million
matures in 2018. Irrevocable letters of credit issued pursuant to the Revolving
Credit Agreement back the IRBs. As of December 31, 2002, GUSA had approximately
$44.8 million of outstanding letters of credit, primarily for IRBs and
insurance.
The AmeriSteel Bright Bar Loan represents a bank loan of GUSA's majority-owned
subsidiary, secured by machinery and equipment. The loan matures in 2011 with
amortization payments that began in July 2001. The loan currently bears interest
at a rate of approximately 6.0% per year with the rate having been reset in June
2002 and every three years thereafter based on prime plus 1%. AmeriSteel is a
guarantor of the loan.
In order to reduce its exposure to interest-rate fluctuations, GUSA entered into
interest-rate swap agreements in August and September 2001. The interest-rate
swaps have a notional value of $55 million, with the Company paying a fixed
interest rate and receiving a variable interest rate based on three-month LIBOR.
The underlying hedged instruments are specific tranches of LIBOR-based revolving
credit and term loan borrowings under the Company's Revolving Credit Agreement.
The aggregate fair value of the effective portion of the interest rate
agreements, which represents the amount that would be paid by GUSA if the
agreements were terminated at December 31, 2002, was approximately $4.6 million.
As the hedged transaction occurs, this amount will be charged as interest
expense.
CO-STEEL GROUP
The Co-Steel entities at December 31, 2002, have revolving facilities of
Cdn$133.9 million and Cdn$22.2 million which can be drawn in either Canadian or
U.S. dollars. These facilities come due on January 15, 2004 and bear interest at
the bankers' acceptance rate or LIBOR plus 2% to 5% depending on debt to EBITDA
(earnings before interest, taxes, depreciation and amortization) ratios.
The fixed rate reducing term loan at December 31, 2002 was $96.8 million. This
facility is reduced by $59.3 million on January 15, 2004 and then reduces by
$12.5 million on July 15 in each of the years 2004 to 2006 and bears interest at
a fixed rate of 8.9% to 10.9% depending on debt to EBITDA ratios. The terms of
this facility include a make-whole provision (in the event of prepayment) that
requires the Company to pay a penalty if interest rates had decreased since the
original inception of the loan. At December 31, 2002, the amount of the
make-whole provision (which was included in the fair value adjustments related
to the acquisition of Co-Steel) was $9.1 million. The facilities are secured by
a first charge against substantially all assets of the former Co-Steel entities.
The maturities of borrowings for the years subsequent to December 31, 2002 are
as follows ($000s):
AMOUNT
--------
2003 $107,321
2004 233,056
2005 133,188
2006 13,483
2007 730
Thereafter 31,376
--------
$519,154
NOTE 8 - RELATED PARTY TRANSACTIONS
Amounts due from (to) related companies at December 31, 2001 are as follows
($000's):
2001
------------
NOTES RECEIVABLE FROM GERDAU STEEL INC.
Interest ranging from 0.0% - 10.25%
(included in Other Assets) $ 90,682
NOTES PAYABLE TO GERDAU STEEL INC.
Interest ranging from 0.0% - 9.775% $ (213,516)
NOTES PAYABLE TO GTL FINANCIAL CORPORATION B.V.
Interest ranging from 0.0% - 9.10% (156,071)
NOTES PAYABLE BY GUSA TO GERDAU STEEL INC.
Interest rate of 9.23% (35,640)
------------
LONG-TERM RELATED PARTY LOANS PAYABLE $ (405,227)
The Company is affiliated with a group of companies controlled by Gerdau S.A.
The related parties noted in the table above are related to Gerdau S.A. Related
party loans bear interest that is expensed but is not payable on a current
basis. Except for the $35.6 million debt of GUSA to Gerdau Steel Inc., interest
is added to the loan balance. All advances were repayable on demand with no
collateral. The related parties indicated that it was not their intent to demand
repayment during 2002 and, as a result, the amounts were classified as
long-term. Intercompany charges for interest income (expense) of $4.3
million/($18.3 million) and $6.6 million/($31.6 million) in 2002 and 2001,
respectively. Intercompany charges for management fees and royalties from
related parties were $2.1 million and $2.8 million for the years ended December
31, 2002 and 2001, respectively. The $35.6 million note payable by GUSA to
Gerdau Steel Inc related to the September 2000 acquisition by Gerdau of the
outstanding
Gerdau AmeriSteel 31
common stock of FLS formerly owned by Kyoei Steel Ltd. The loan accrued interest
at the rate of 9.23% and had no stated maturity date. Gerdau Steel Inc. had
represented that no repayments are required prior to December 31, 2003, and
therefore the loan was classified as long-term.
As part of the Co-Steel transaction (see Note 1), all of the related party notes
payable, net of the notes receivable from Gerdau Steel Inc., were converted to
equity in October 2002.
NOTE 9 - CONVERTIBLE DEBENTURES
The Company's unsecured, subordinated convertible debentures bear interest at
6.5% per annum, mature on April 30, 2007, and, at the holders' option, are
convertible into Common Shares of the Company at a conversion price of Cdn$26.25
per share. Under the terms of the Trust Indenture for the Convertible
Debentures, no adjustment to the conversion price is required if the Company
issues Common Shares in a customary offering. The debentures are redeemable
after April 30, 2002, at the option of the Company at par plus accrued interest.
The Company has the right to settle the principal amount by the issuance of
Common Shares based on their market value at the time of redemption.
As the convertible debentures can be redeemed by the Company by the issuance of
Common Shares, the debenture obligations are classified as shareholders' equity.
Interest on the shareholders' equity component, net of related income taxes, has
been charged to retained earnings, and was deducted from the net earnings or
added to net loss in calculating basic earnings per share.
NOTE 10- INCOME TAXES
The effective income tax rate on earnings (loss) is influenced by the geographic
mix of the consolidated earnings (loss), as well as various tax incentives
introduced by governments from time to time to encourage investment. The
following table reconciles income tax recovery (expense) calculated at a
combined U.S. federal/state and Canadian federal/provincial tax rate with the
income tax provision ($000s):
2002 2001
------------ ------------
Income (loss) before provision for income taxes $ 13,180 $ (7,663)
------------ ------------
Tax provision at Canadian statutory rates of 38.62% 5,091 (2,402)
Increased (decreased) by the tax effect of:
Foreign earnings (losses) taxed at lower rates (4,437) (9,933)
Canadian manufacturing and processing credit (215) 532
Capital losses not tax affected 4,719
Goodwill amortization -- 2,531
Other items, net (98) 1,972
------------ ------------
Income Tax Expense (Recovery) $ 341 $ (2,581)
The components of the future tax assets and liabilities consisted of the
following:
2002 2001
------------ ------------
Current Assets
Allowance for doubtful accounts $ 3,716 $ 497
Liabilities not currently deductible for tax purposes 7,701 4,823
------------ ------------
Gross current future tax assets $ 11,417 $ 5,320
------------ ------------
Non-Current Assets
Operating loss carry forwards $ 37,244 $ --
Recycling and AMT credits 6,694 --
Pension and retirement accruals 23,722 9,461
Long-term liabilities not currently deductible 25,171 2,605
------------ ------------
Gross non-current future tax assets $ 92,831 $ 12,066
------------ ------------
Non-Current Liabilities
Property, plant and equipment (164,406) $ (109,715)
Assets held for sale (2,161) (2,183)
Other $ (8,422) 723
------------ ------------
Gross future tax liabilities $ (174,989) $ (111,175)
------------ ------------
Net long-term future tax liability $ (82,158) $ (99,109)
------------ ------------
The provision for income tax recovery (expense) by jurisdiction is as follows:
2002 2001
------------ ------------
Earnings (loss) before income taxes
Canada $ 4,863 $ 46,788
U.S. 4,691 (54,451)
Other 3,626 --
------------ ------------
$ 13,180 $ (7,663)
------------ ------------
Current income tax recovery (expense)
Canada $ 2,890 $ 20
U.S. 8,255 (317)
Other (375) --
------------ ------------
10,769 (297)
------------ ------------
Future income tax recovery (expense)
Canada (830) (1,201)
U.S. (9,598) (1,083)
Other -- --
------------ ------------
(10,428) (2,284)
------------ ------------
Net income tax expense (recovery) $ 341 $ (2,581)
------------ ------------
NOTE 11 - POST RETIREMENT BENEFITS
The Company maintains a defined benefit pension plan covering the majority of
employees. The benefits are based on years of service and compensation during
the period of employment. Annual contributions are made in conformity with
minimum funding requirements and maximum deductible limitations. The remaining
employees are covered by defined contribution retirement plans for which Company
contributions and expense amounted to approximately $8.2 million (2001 - $1.1
million).
The Company currently provides specified health care benefits to
32 Annual Report 2002
retired employees. Employees who retire after a certain age with specified years
of service become eligible for benefits under this unfunded plan. The Company
has the right to modify or terminate these benefits.
The following tables summarize the accumulated pension benefits and
postretirement medical benefit obligations included in the Company's
consolidated statements of financial position ($000s):
Pension Benefits Other Benefit Plans
------------------------------ ------------------------------
Year Ended Year Ended Year Ended Year Ended
December December December December
31, 2002 31, 2001 31, 2002 31, 2001
------------ ------------ ------------ ------------
Components of net periodic benefit cost
Service cost $ 5,606 $ 4,947 $ 341 $ 247
Interest cost 12,830 10,921 876 586
Expected return on plan assets (13,536) (12,258) -- --
Amortization of prior service cost 388 282 -- --
Recognized actuarial gain 4 (134) -- --
------------ ------------ ------------ ------------
Net periodic benefit cost $ 5,292 $ 3,758 $ 1,217 $ 833
------------ ------------ ------------ ------------
Change in benefit obligations
Benefit obligation at beginning of period $ 164,260 $ 146,934 $ 9,068 $ 7,858
Acquisition of Co-Steel 111,531 -- 22,048 --
Service cost 5,606 4,947 341 247
Interest cost 12,829 10,921 876 585
Plan participants' contributions 532 466
Amendments 2,232 973 - 135
Actuarial loss 13,659 7,777 444 1,180
Benefits and administrative expenses paid (8,765) (7,292) (1,331) (1,403)
------------ ------------ ------------ ------------
Benefit obligation at beginning of period $ 301,352 $ 164,260 $ 31,978 $ 9,068
------------ ------------ ------------ ------------
Change in plan assets
Fair value of plan assets at beginning of period $ 133,827 $ 140,599 $ -- $ --
Acquisition of Co-Steel 79,628 -- -- --
Actual return on plan assets (8,762) (1,390) -- --
Employer contribution 10,142 1,910 799 937
Plan participants' contributions -- -- 532 466
Benefits and administrative expenses paid (8,765) (7,292) (1,331) (1,403)
------------ ------------ ------------ ------------
Fair value of plan assets at end of period $ 206,070 $ 133,827 $ -- $ --
------------ ------------ ------------ ------------
Reconciliation of funded status - End of Period
Funded status $ (95,282) $ (30,433) $ (31,979) $ (9,068)
Unrecognized Transition Liability 1,702 1,845 -- --
Unrecognized prior service cost 2,564 578 -- --
Unrecognized actuarial loss 52,139 16,086 690 246
------------ ------------ ------------ ------------
Net amount recognized $ (38,877) $ (11,924) $ (31,289) $ (8,822)
------------ ------------ ------------ ------------
Assumptions
Rate of return on plan assets 7.5% -9.25% 7.0%-9.25%
Discount rate 6.5%-6.75% 7%-7.25% 6.5%-6.75% 7.25%
Rate of compensation increases 4.25%-4.5% 2.5%-4.5%
Trend rate - beginning next year 10.0%-12.0% 8.6%
Trend rate - ending year 2008 5.5% 5.5%-6.0%
The Company also has a voluntary savings plan available to substantially all of
its employees. Under this plan, the Company contributes amounts based upon a
percentage of the savings paid into the plan by employees. The Company matches
50% of the employees' contributions up to 4% of employees' salaries. Costs under
this plan for the period ended December 31, 2002 were $1.9 million (2001- $1.8
million).
NOTE 12 - OTHER LIABILITIES
Other liabilities consist of the following ($000s)
At December 31,
2002 2001
---------- ----------
Unfavorable long-term lease obligations (a) $ 18,510 $ --
Environmental remediation costs (note 16) 14,900 1,755
Royalties and management fees payable to parent 6,410 11,024
Other 9,465 2,204
---------- ----------
49,295 14,983
Less current portion (20,110) (9,453)
---------- ----------
$ 29,175 $ 5,530
---------- ----------
(a) Certain of the operating lease commitments of the former Co-Steel entities
were at lease rates in excess of fair value as of the acquisition date.
Accordingly, a purchase accounting liability has been recorded by the Company
for the present value of the unfavorable lease commitments.
NOTE 13 - FINANCIAL INSTRUMENTS
The Company's use of derivative instruments is limited. Derivative instruments
are not used for speculative purposes but they are used to manage well-defined
foreign exchange and interest rate risks arising out of the normal course of
business.
At certain times throughout the year the Company enters into forward foreign
exchange contracts and put and call options (collectively "foreign exchange
contracts") to hedge accounts receivable and future revenues denominated in US
dollars. At December 31, 2002, the Company had no forward foreign exchange
contracts outstanding. Unrealized gains and losses on outstanding forward
foreign exchange contracts are recorded in the financial statements for accounts
receivable and not recorded in the financial statements for hedges against
future foreign currency revenue. The Company's estimate of the fair value of the
financial instruments, which include receivables, accounts payable, long-term
debt and the liability component of the convertible debentures, approximates
their carrying value due to their short maturity.
Gerdau AmeriSteel 33
NOTE 14-CAPITAL STOCK
Capital stock consists of the following shares:
Authorized Issued Invested Capital
Number Number (in thousands)
----------- ----------- ----------------
December 31, 2001
Common Unlimited 133,388,400 $ 58,364
Preferred Unlimited -- --
----------- --------
133,388,400 $ 58,364
----------- --------
December 31, 2002
Common Unlimited 184,892,360 $513,400
Preferred Unlimited -- --
----------- --------
184,892,360 $513,400
----------- --------
The predecessor of the Company is the Gerdau North America Group, which was not
a legal entity but a combination of Gerdau companies in North America and
therefore had no capital structure of its own. The 133,388,400 issued shares as
of December 31, 2001 represent those shares issued to Gerdau as a result of the
acquisition which occurred on October 23, 2002.
The Company has two stock options plans; one, the former Co-Steel Stock-Based
Option Plan, and the other, a plan administered by the AmeriSteel subsidiary.
The following discussion relates to the former Co-Steel Stock-Based Option Plan.
Please see Note 15 - Subsidiary Stock Compensation Plans for details regarding
the AmeriSteel plans. Under the Company's Stock-Based Option Plan, the Company
was permitted to grant options to employees and directors to acquire up to a
maximum of 3,041,335 Common Shares. The exercise price was based on the closing
price of Common Shares on the trading date previous to the date the options are
issued. The options have a maximum term of 10 years, have a vesting term of
various periods as determined by the Plan administrator at the time of grant,
and are exercisable in installments.
A summary of all share purchase options is as follows:
Weighted Aggregate
Number of Average Option Price
Shares Exercise Price (in thousands)
---------- --------------- ----------------
Balance -
December 31, 2002 1,367,400 Cdn$ 14.69 Cdn$ 20,092
The following table summarizes information about share purchase options
outstanding at December 31, 2002:
Number Weighted Avg Weighted Avg Number
Exercise Price Outstanding at Remaining Exercise Price Exercisable at
Range Cdn$ Dec 31, 2002 Contractual Life Cdn$ Dec 31, 2002
-------------- -------------- ---------------- -------------- ---------------
18.60 to 19.75 295,500 4.5 years 19.07 295,500
22.00 to 30.625 1,071,900 3.2 years 24.35 1,071,900
The options expire on various dates up to April 13, 2008. On October 23, 2002,
the Gerdau companies in North America, consisting of GUSA, Gerdau Courtice Steel
Inc. and Gerdau MRM Steel Inc., among other holding companies, were combined
with Co-Steel Inc., a Canadian minimill steel producer. The combined entity was
renamed Gerdau AmeriSteel Corporation and is publicly traded on the Toronto
Stock Exchange under the ticker symbol GNA.TO. As part of this transaction,
minority shareholders of AmeriSteel, consisting primarily of management and
other employees, are required to exchange their shares of AmeriSteel stock for
shares of Gerdau AmeriSteel. Gerdau AmeriSteel has filed Form F-4 with the
Securities and Exchange Commission and the exchange of shares is expected to be
completed on or about March 31, 2003. As a result, an additional 13,199,794
shares of Gerdau AmeriSteel will be issued. On October 23, 2002, the sole owner
(Gerdau U.S.A., Inc., or "GUSA1") of AmeriSteel's parent (FLS Holdings, Inc., or
"FLS") was merged into FLS, which then changed its name to Gerdau USA Inc. As a
result, AmeriSteel is a majority-owned subsidiary of GUSA whose only business is
to own common stock of AmeriSteel. GUSA, which owns 87% of the common stock of
AmeriSteel, is an indirect majority owned subsidiary of Gerdau AmeriSteel
Corporation, a Canadian corporation. GUSA acquired 88% of FLS in September 1999,
and the remaining 12% in September 2000, in each instance from Kyoei Steel Ltd.
An institutional investor owns approximately 4% of the common stock of
AmeriSteel. Executives, other employees and related persons own the remaining 9%
of AmeriSteel's common stock.
34 Annual Report 2002
Earnings per share:
The following table identifies the components of basic and diluted earnings per
share ($000s except per share data):
2002 2001
------------- -------------
Net income (loss)
Less interest on equity $ 11,132 $ (6,066)
component of convertible
debentures (631) --
------------- -------------
Adjusted net income (loss) $ 10,501 $ (6,066)
------------- -------------
Weighted average
shares outstanding - Basic 143,045,393 133,388,400
------------- -------------
Earnings per share - Basic $ 0.07 $ (0.05)
------------- -------------
Weighted average
shares outstanding - Diluted 143,045,393 133,388,400
------------- -------------
Earnings per share - Diluted $ 0.07 $ (0.05)
------------- -------------
At December 31, 2002, options to purchase 1,367,400 (2001 -1,801,209) common
shares were not included in the computation of diluted earnings (loss) per share
because the options' exercise price was greater than the market price of the
common shares. The conversion into common shares of the convertible debentures
has not been included in the diluted earnings (loss) per share calculations as
the conversion rate of Cdn$26.25 per share is antidilutive.
NOTE 15 - SUBSIDIARY STOCK COMPENSATION PLANS
A subsidiary of the Company, AmeriSteel Corporation, has a number of stock
compensation plans for its employees. Under the terms of the Transaction
Agreement relating to the acquisition of Co-Steel, minority shareholders of
AmeriSteel will exchange shares of AmeriSteel stock and options for stock and
options of Gerdau AmeriSteel at an exchange rate of 9.4617 Gerdau AmeriSteel
shares and options for each AmeriSteel share or option. This exchange is
scheduled to occur by March 31, 2003.
In March 2000, AmeriSteel's Board of Directors approved a long-term incentive
plan available to executive management (the "Stakeholder Plan") to ensure
AmeriSteel's senior management's interest is congruent with AmeriSteel's
shareholders. Awards are determined by a formula based on AmeriSteel's return on
capital employed in a given plan year. Earned awards vest and are paid out over
a period of four years. Participants may elect cash payout or investments in
phantom stock of AmeriSteel and Gerdau, for which a 25% premium is earned if
elected. Benefits charged to expense under this plan for the years ended
December 31, 2002 and 2001, were $90 thousand and $257 thousand, respectively.
In July 1999, AmeriSteel's Board of Directors approved a Stock Purchase/SAR Plan
(the "SAR Plan") available to essentially all employees. The SAR Plan authorizes
100,000 shares of common stock to be sold to employees during three offering
periods, July through September in each of 1999, 2002 and 2005. Employees who
purchase stock are awarded stock appreciation rights ("SARs") equal to four
times the number of shares purchased. In the 1999 offering period, a total of
42,321 shares were sold under the SAR Plan at a purchase price of $15.30 per
share, with 28,683 of these shares outstanding as of December 31, 2002. SARs
were granted at fair value at the date of the grant, determined based on an
independent appraisal as of the previous year-end. In the 1999 offering period,
a total of 169,284 SARs were granted under the SAR Plan, with 114,451 of these
rights outstanding as of December 31, 2002. In the 2002 offering period, a total
of 44,299 shares were sold under the SAR Plan at a purchase price of $14.45 per
share, with 44,299 of these shares outstanding as of December 31, 2002. SARs
were granted at fair value at the date of the grant, determined based on an
independent appraisal as of the previous year-end. In the 2002 offering period,
a total of 177,196 SARs were granted under the SAR Plan, with 177,048 of these
rights outstanding as of December 31, 2002. The SARs become exercisable at the
rate of 25% annually from the grant date and may be exercised for 10 years from
the grant date.
In September 1996, AmeriSteel's Board of Directors also approved the AmeriSteel
Corporation Equity Ownership Plan (the "Equity Ownership Plan"), which provides
for grants of common stock, options to purchase common stock and SARs. The
maximum number of shares that can be issued under the plan is 438,852. The
Company has granted 493,350 incentive stock options and 52,100 shares of common
stock under the Equity Ownership Plan through December 31, 2002, with 279,553
incentive stock options and 22,006 shares of common stock outstanding at
December 31, 2002. All issued options and shares of issued common stock become
one-third vested two years from the grant date, and one third in each of the
subsequent two years from the grant date. All grants were at the fair market
value of the common stock on the grant date, determined based on an independent
appraisal as of the end of the previous year-end. Options may be exercised for
10 years from the grant date. In May 1995, AmeriSteel's Board of Directors
approved a Stock Purchase/Option Plan (the "Purchase Plan") available to
essentially all employees. Employees who purchased stock were awarded stock
options equal to six times the number of shares purchased. A total of 37,689
shares were sold under the Purchase Plan at a purchase price of $10.63 per
share, with 397 of these shares outstanding as of December 31, 2002. The options
were granted at fair value at the date of the grant, determined based on an
independent appraisal as of the end of the previous year-end. A total of 226,134
options were granted under the Purchase Plan, with 1,644 of these options
outstanding as of December 31, 2002. No options remain available for future
grant. All options outstanding are currently vested. Options
Gerdau AmeriSteel 35
may be exercised for 10 years from the grant date. The following tables
summarize AmeriSteel's stock option activity for the years ended December 31,
2002 and 2001:
Equity Ownership Plan
------------------------------------------------------------------
Year Ended Year Ended
December 31, 2002 December 31, 2001
------------------------------- -------------------------------
Weighted- Weighted-
Number Average Number Average
of Shares Exercise Price of Shares Exercise Price
------------ -------------- ------------ --------------
Outstanding, beginning of period 305,840 $ 19.22 204,006 $ 19.22
Granted 58,650 17.00 121,000 13.00
Exercised (17,053) 12.75 (9,631) 13.42
Forfeited (67,884) 14.02 (9,535) 19.31
------------ ------------ ------------ ------------
Outstanding, end of period 279,553 $ 17.91 305,840 $ 16.94
------------ ------------ ------------ ------------
Options vested at end of period 115,395 $ 18.29 92,977 $ 15.57
------------ ------------ ------------ ------------
Weighted-average fair value
of options granted during
the period $ 3.22 $ 2.87
------------ ------------
Purchase Plan
-------------------------------------------------------------------
Purchase Plan
Year Ended Year Ended
December 31, 2002 December 31, 2001
------------------------------ --------------------------------
Weighted- Weighted-
Number Average Number Average
of Shares Exercise Price of Shares Exercise Price
------------ -------------- ------------ --------------
Outstanding, beginning of period 1,824 $ 12.50 3,468 $ 12.50
Granted -- -- -- --
Exercised (180) 12.50 (1,644) 12.50
Forfeited -- 12.50 -- 12.50
------------ ------------ ------------ ------------
Outstanding, end of period 1,644 $ 12.50 1,824 $ 12.50
------------ ------------ ------------ ------------
Options vested at end of period 1,644 $ 12.50 1,824 $ 12.50
------------ ------------ ------------ ------------
The weighted-average remaining contractual life of the options under the Equity
Ownership Plan and the Purchase Plan as of December 31, 2002, is 4.1 years for
options granted through 1997 at a price between $12.50 and $13.50 per share, and
6.6 years for those options granted between 1998 and 2000 at a price between
$20.00 and $28.00 per share, and 8.9 years for options granted between 2001 and
2002 at a price between $13.00 and $17.00 per share. The weighted-average
exercise price of the options under the Equity Ownership Plan as of December 31,
2002 is $13.21 for options granted through 1997 at a price between $12.50 and
$13.50 per share, $22.17 for those options granted between 1998 and 2000 at a
price between $20.00 and $28.00 per share, and $14.95 for options granted in
2001 and 2002 at a price between $13.00 and $17.00 per share. The
weighted-average exercise price of the options under the Purchase Plan as of
December 31, 2002 is $12.50.
NOTE 16 - CONTINGENCIES AND COMMITMENTS
ENVIRONMENTAL
As the Company is involved in the manufacture of steel, it produces and uses
certain substances that may pose environmental hazards. The principal hazardous
waste generated by current and past operations is electric arc furnace ("EAF")
dust, a residual from the production of steel in electric arc furnaces.
Environmental legislation and regulation at both the federal and state level
over EAF dust is subject to change, which may change the cost of compliance.
While EAF dust is generated in current production processes, such EAF dust is
being collected, handled and disposed of in a manner that the Company believes
meets all current federal, state and provincial environmental regulations. The
costs of collection and disposal of EAF dust are being expensed as operating
costs when incurred. In addition, the Company has handled and disposed of EAF
dust in other manners in previous years, and is responsible for the remediation
of certain sites where such dust was generated and/or disposed. In general, the
Company's estimate of remediation costs is based on its review of each site and
the nature of the anticipated remediation activities to be undertaken. The
Company's process for estimating such remediation costs includes determining for
each site the expected remediation methods, and the estimated cost for each step
of the remediation. In such determinations, the Company may employ outside
consultants and providers of such remedial services to assist in making such
determinations. Although the ultimate costs associated with the remediation are
not known precisely, the Company estimated the total remaining costs as at
December 31, 2002 to be approximately $6.3 million (2001 - $2.9 million), with
these costs recorded as a liability at December 31, 2002, of which the Company
expects to pay approximately $5.1 million within the year ended December 31,
2003.
36 Annual Report 2002
An additional liability of $8.6 million has been recorded in respect of certain
environmental obligations which were triggered by the change in control of
Co-Steel in certain jurisdictions in which Co-Steel operated. This liability was
recorded at the present value of the estimated future costs of these
obligations.
Based on past use of certain technologies and remediation methods by third
parties, evaluation of those technologies and methods by the Company's
consultants and third-party estimates of costs of remediation-related services
provided to the Company or which the Company and its consultants are aware, the
Company and its consultants believe that the Company's cost estimates are
reasonable. Considering the uncertainties inherent in determining the costs
associated with the clean-up of such contamination, including the time periods
over which such costs must be paid, the extent of contribution by parties which
are jointly and severally liable, and the nature and timing of payments to be
made under cost sharing arrangements, there can be no assurance the ultimate
costs of remediation may not differ from the estimated remediation costs. In
April 2001, the Company was notified by the United States Environmental
Protection Agency (the "EPA") of an investigation that identifies the Company as
a potential responsible party ("PRP") in a Superfund Site in Pelham, Georgia.
The Pelham site was a fertilizer manufacturer in operation from 1910 through
1992, lastly operated by Stoller Chemical Company, a now bankrupt corporation.
The EPA offered a settlement to the named PRPs under which the Company's
allocation was approximately $1.8 million. The Company objects to its inclusion
as a PRP in this site and is pursuing legal alternatives, including the addition
to the allocation of larger third parties which the Company believes were
incorrectly excluded from the original settlement offer. The EPA has filed suit
with the Company named as a defendant. As the ultimate exposure to the Company,
if any, is uncertain, no liability has been established for this site. Carbon
monoxide emissions at Gerdau Ameristeel Perth Amboy exceeded permitted levels on
several occasions during 2001 and early 2002. These episodes were promptly
reported to the New Jersey Department of Environmental Protection (NJDEP).
Gerdau AmeriSteel is conducting investigations to determine the cause of these
episodes, what steps can be taken to reduce emissions and whether the Gerdau
AmeriSteel Perth Amboy environmental permits require modification. Discussions
with the NJDEP regarding permit and compliance issues are in a preliminary
stage. Penalty assessments of approximately $400 thousand have been accrued.
OTHER CLAIMS
In the normal course of its business, various lawsuits and claims are brought
against the Company. The Company vigorously contests any claim which it believes
is without merit. Management believes that any settlements will not have a
material effect on the financial position or the consolidated earnings of the
Company.
OPERATING LEASE COMMITMENTS
The Company leases certain equipment and real property under non-cancelable
operating leases. Aggregate future minimum payments under these leases are as
follows ($000s):
Year Ending December 31, Amount
------------------------ ---------
2003 $ 13,242
2004 10,757
2005 9,417
2006 6,859
2007 5,981
Thereafter 38,095
--------
$ 84,351
--------
SERVICE COMMITMENTS
The Company has long-term contracts with several raw material suppliers. The
Company typically realizes lower costs and improved service from these
contracts. The Company believes these raw materials would be readily available
in the market without such contracts.
Gerdau AmeriSteel 37
NOTE 17 - OTHER INCOME
Other income, net of other expenses for the year ended December 31, 2002
consists of $6.1 million proceeds from an insurance settlement relating to
environmental costs incurred by the Company in prior years, partially offset by
$1.0 million relating to the closing of the Wilmington, Delaware and St. Albans,
West Virginia fabricating plants.
Other income, net of other expenses for the year ended December 31, 2001
includes prior year tax refunds ($.7 million income), expenses relating to the
melting of a small amount of cesium at the Jacksonville mill ($.4 million
expense), a settlement with electrode suppliers ($2.8 million income), and the
loss on sale of marketable securities ($2.6 million expense.)
NOTE 18 - SEGMENT INFORMATION
The Company is organized into two primary business segments: (a) Mills and (b)
Downstream. Steel products sold to the downstream divisions are sold at market
prices with intracompany transactions eliminated upon consolidation. Performance
is evaluated and resources allocated based on specific segment requirements and
measurable factors. Segment assets are those assets that are specifically
identified with the operations in each operational segment. Corporate assets
include primarily: cash; assets held for sale; some property, plant and
equipment; deferred income taxes; and deferred financing costs. Corporate
expense includes: corporate headquarters staff, including executive management;
human resources; finance and accounting; procurement and environmental; and
management information systems. Included in these respective areas are payroll
costs, travel and entertainment, professional fees and other costs that may not
be directly attributable to either specific segment.
Operational results and other financial data for the geographic and two business
segments for years ended December 31 are presented below ($000s):
MILLS DOWNSTREAM TOTAL
---------- ---------- ----------
2002
Revenue from external customers $ 771,906 $264,149 $1,036,055
Intrasegment revenues 159,027 - 159,027
Depreciation and amortization expense 46,460 3,775 50,235
Segment profit 49,973 8,842 58,815
Total Assets 1,424,363 122,425 1,546,788
Expenditures for long-lived assets 24,581 7,131 31,712
---------- -------- ----------
2001
Revenue from external customers $ 562,216 $278,620 $ 840,836
Intrasegment revenues 176,846 - 176,846
Depreciation and amortization expense 44,842 4,650 49,492
Segment profit 42,852 13,008 55,860
Total Assets 1,052,211 113,531 1,165,742
Expenditures for long-lived assets 24,176 3,748 27,924
---------- -------- ----------
Geographic data is as follows:
UNITED STATES CANADA TOTAL
------------- ------ -----
2002
Revenue from external customers $862,300 $173,754 $1,036,055
Long-lived assets 665,055 233,251 898,948
2001
Revenue from external customers $704,474 $136,362 $ 840,836
Long-lived assets 395,844 135,041 530,885
38 Annual Report 2002
The reconciliation of reportable segments to combined totals is as follows
($000's):
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
2002 2001
------------ ------------
Revenue
Total segments revenue $ 1,195,082 $ 1,017,682
Elimination of intersegment revenues (159,027) (176,846)
------------ ------------
Combined revenues $ 1,036,055 $ 840,836
------------ ------------
Depreciation and Amortization
Total segments depreciation and amortizations 50,235 $ 49,492
Corporate depreciation and amortization 9,620 13,147
------------ ------------
Combined depreciation and amortization $ 59,855 $ 62,639
------------ ------------
Profit
Total segments profit $ 58,815 $ 55,860
Other income 5,072 1,079
Elimination of intersegment profits 899 (480)
Unallocated amounts:
Corporate expense (11,606) (13,134)
Interest expense (39,770) (50,032)
Foreign exchange loss (230) (249)
Taxes (expense) benefit (341) 2,581
Loss on investment -- (707)
Minority interest (1,707) (984)
------------ ------------
Consolidated profit (loss) $ 11,132 $ (6,066)
------------ ------------
Assets
Total segments assets $ 1,546,788 $ 1,165,742
Elimination of intersegment assets (133,085) (241,726)
Other unallocated assets 157,698 137,923
------------ ------------
Combined assets $ 1,571,401 $ 1,061,939
------------ ------------
Expenditures for long-lived assets
Total segments expenditures $ 31,712 $ 27,924
Corporate expenditures 1,770 495
------------ ------------
Combined expenditures for long-lived assets $ 33,482 $ 28,419
------------ ------------
Revenues by product lines
Mill finished goods :
Stock rebar $ 198,460 $ 185,032
Merchant bar/special sections 440,909 338,218
Rods 47,060 16,925
Flat rolled 38,572 --
------------ ------------
Total mill finished goods: 725,001 540,175
Billets 15,313 5,790
------------ ------------
Total mill products 740,314 545,965
Other mill segments 31,101 15,913
Fabricating and downstream 264,640 278,958
------------ ------------
Total segment revenues $ 1,036,055 $ 840,836
============ ============
NOTE 19 - LIQUIDITY
The Company's Canadian credit facilities are scheduled to be reduced by
approximately $120 million on January 15, 2004 and total debt to be repaid under
existing repayment terms in fiscal 2004 totals $233 million. In March 2003, the
Company commenced a $750 million refinancing program which the Company expects
to complete in the second quarter of 2003. If successful, the proceeds from the
refinancing program will be used to repay existing revolving credit facilities
and term loans.
NOTE 20 - SUBSEQUENT EVENTS
In the first quarter of 2003, Gerdau S.A. made loans totaling $30 million to
GUSA to increase liquidity within Gerdau AmeriSteel. These loans will be used
for working capital purposes and bear interest at the rate of 6.5%. The loans do
not have a stated maturity, but it is the intent of the Company to repay these
loans as soon as practicable.
In April 2003, AmeriSteel received a waiver from its lenders as it expected to
exceed its leverage ratio covenant of 3.75 to one due to weak operating margins
in the first quarter. The Company believes AmeriSteel will be able to comply
with the covenants during the remainder of 2003.
In April 2003, the Gerdau Canada Group requested and received waivers for
non-compliance with certain covenants for the December quarter and expected
non-compliance for fiscal 2003. On March 31, 2003, under the terms of the
Transaction Agreement relating to the acquisition of Co-Steel, the Company
completed an exchange of minority shares of subsidiary AmeriSteel for shares of
Gerdau AmeriSteel. Minority shareholders of AmeriSteel, mostly executives and
employees, exchanged 1,395,041 shares of AmeriSteel for 13,199,260 shares of
Gerdau AmeriSteel, an exchange ratio of 9.4617 to one. As a result, AmeriSteel
became a wholly owned subsidiary of Gerdau AmeriSteel.
Gerdau AmeriSteel 39
Corporate Officers
- -------------------------------------------------------------------------------
CORPORATE OFFICES
Phillip E. Casey
President and CEO
Andre B. Johannpeter
Vice President, COO Canada
Mike Mueller
Vice President, US Steel Operations
Tom J. Landa
Vice President, Finance, and Chief Financial Officer
Corporate Secretary
Andre Beaudry
Vice President, Steel Product Sales
Robert P. Muhlhan
Vice President, Procurement, Logistics and
Government Affairs
James F. Oliver
Vice President, Strategic Development
James S. Rogers
Vice President, Human Resources
Glen A. Beeby
Vice President Administration, Canada
George Beck
Treasurer
OPERATIONS
J. Neal McCullohs
Vice President, Fabricated Reinforcing Steel Products
Garry A. Leach
President, MRM Special Sections, Inc.
Robert L. Bullard
Vice President, Perth Amboy Mill
Glen A. Beeby
Vice President, Cambridge Mill
Wib G. Manuel
Vice President, Jackson Mill
Roger Paiva
Vice President, Whitby Mill
Arlan Piepho
Vice President, Knoxville Mill
Anthony S. Read
Vice President, Charlotte Mill
William E. Rider
Vice President, Sayreville Mill
Donald R. Shumake
Vice President, Jacksonville Mill
Edward C. Woodrow
Vice President, Cartersville Mill
Matthew C. Yeatman
Vice President, Canadian Recycling Operations
Richard E. Danhoff
Assistant Vice President, Rail Products
Steve Higley
Assistant Vice President, Cold Drawn Products
Al J. Theriot
Assistant Vice President, Atlas Steel & Wire
40 Annual Report 2002
Corporate Information
- -------------------------------------------------------------------------------
Listing of Capital Stock
and Convertible Debentures
The shares and convertible debentures of the Company are listed on the Toronto
Stock Exchange under the ticker symbols GNA.TO and GNAdb.TO respectively.
Transfer Agent and Registrar
The transfer agent and registrar for the shares of the Company is The CIBC
Mellon Trust Company at its offices in Toronto, Montreal, Winnipeg, Calgary,
Regina, Vancouver and Halifax.
Shareholder Information
Shareholders seeking information or Assistance concerning their accounts may
contact The CIBC Mellon Trust Company through the Shareholder Inquiry Line.
Toronto: (416) 643-5500 Outside Toronto and US: 1-800-387-0825
Financial Calendar
Fiscal year end: December 31
Annual Meeting: May 6, 2003
Annual Meeting of the Shareholders
The Annual Meeting of the Shareholders of Gerdau AmeriSteel Corporation will be
held at the Hilton Toronto, 145 Richmond St. West, on Tuesday May 6, 2003, at 10
a.m.
Investor Information
Shareholders or other interested parties seeking assistance or information about
the Company are invited to contact Tom Landa, Vice President and Chief Financial
Officer at the Executive Offices or via email: IR@gerdauameristeel.com Web site:
www.gerdauameristeel.com
Gerdau AmeriSteel 41
Gerdau AmeriSteel Corporation
Executive Office
5100 W. Lemon St., Suite 312
Tampa, FL 33609
Phone: (813) 286.8383
www.gerdauameristeel.com
Gerdau AmeriSteel - Investor Relations
Phone: (813) 207.2300
Fax: (813) 207.2328
ir@gerdauameristeel.com
Gerdau
Av. Farrapos, 1811 - 90220-005
Porto Alegre - RS - Brasil
Phone: +55 (51) 3323.2000
www.gerdau.com.br
Gerdau - Investor Relations
Phone: +55 (51) 3323.2703
Fax: +55 (51) 3323.2281
inform@gerdau.com.br
[GERDAU AMERISTEEL LOGO]
www.gerdauameristeel.com
- -------------------------------------------------------------------------------