Reports second quarter net income of $59.2 million
HAMILTON, ON, July 27 /CNW/ - Dofasco Inc. reported its results for the
second quarter of 2005 today. For the three months ended June 30, 2005,
Dofasco's consolidated net income was $59.2 million or $0.77 per common share
compared to $110.5 million, or $1.45 per share after deducting preferred share
dividends, reported in the second quarter of 2004. The 2005 quarterly results
were driven by solid shipments and a continued high, although declining, North
American pricing environment.
Commenting on the quarter, Dofasco's President and CEO Don Pether said,
"We are coming off a record year in 2004, which was followed by our best first
quarter ever. The 2005 second quarter results, although lower than what we
have recently experienced, are good by historical standards and we are pleased
with the efforts of the people working at our operations in Canada, the United
States and Mexico."
Dofasco's consolidated sales of $1,061.0 million in the second quarter of
2005 are virtually unchanged from the same period in 2004. Steel shipments, at
1,204,000 tons, were down from the 1,284,000 tons shipped in the second
quarter of 2004 due mainly to weaker demand in the construction and
distribution market segments.
Dofasco's Steel Operations segment, which includes the company's Hamilton
operations, reported income before income taxes of $67.3 million for the
quarter, compared to $105.1 million for the second quarter of 2004. Shipments
from Hamilton were 1,030,000 tons in the second quarter, a decrease from
1,096,000 tons shipped in the same quarter of 2004. Average revenue realized
per ton of steel shipped from Hamilton in the second quarter of 2005 increased
by $64 compared to the same period in 2004 reflecting the impact of higher
prices on contract business. Average cost per ton increased by $103 over the
levels experienced in 2004, driven primarily by lower production levels,
significantly higher prices for purchased slabs, iron ore and coal, as well as
increased costs of other raw materials and energy.
Dofasco's 50% share of Gallatin Steel's income before taxes for the
quarter was $26.3 million, compared to $46.5 million in the same quarter for
2004. The decline was driven by lower shipments, a higher average cost per ton
and the impact of a weaker U.S. dollar on the translation of Gallatin's
results. Shipments for the quarter were 347,000 tons, significantly lower than
the 376,000 tons shipped in the second quarter of 2004.
Looking forward, Dofasco expects its third quarter results, excluding
Quebec Cartier Mining Company, to be significantly lower than the second
quarter, with results expected to be more favourable in the fourth quarter. At
its Hamilton operations, Dofasco expects third quarter steel shipments to be
similar to the second quarter. However, average revenue per net ton is
expected to decrease significantly, while average cost per net ton is expected
to remain at high levels albeit marginally lower than in the second quarter.
At Gallatin, shipments are expected to increase moderately from the low second
quarter levels. Don Pether commented, "Hot band spot prices are expected to
bottom out in the third quarter, as recent indicators suggest that demand is
beginning to recover."
The No. 2 Blast Furnace rebuild in Hamilton was successfully completed
late in June and the furnace was operating near capacity early in July. The
rebuilt blast furnace, used to reduce iron ore pellets into molten iron for
further processing in Dofasco's steelmaking facilities, features several
advancements over earlier designs that make it one of the safest and most
efficient furnaces in North America. Following the startup of No. 2 Blast
Furnace, the No. 3 Blast Furnace has been idled and removed from service.
On July 22, 2005, Dofasco successfully completed the acquisition of
Quebec Cartier Mining Company (QCM), a leading producer of iron ore products.
Dofasco effected the acquisition by purchasing all of the preferred shares of
QCM owned by CAEMI of Brazil and Investissement Quebec for total consideration
of $306 million. Dofasco already owned one third of the preferred shares.
Effective July 22, 2005, all of the preferred shares of QCM were converted
into common shares, resulting in Dofasco holding approximately 98.7% of the
outstanding common shares.
Dofasco is a leading North American steel solutions provider. Product
lines include hot rolled, cold rolled, galvanized, Extragal(TM), Galvalume(TM)
and tinplate flat rolled steels, as well as tubular products, laser-welded
blanks and Zyplex(TM), a proprietary laminate. Dofasco's wide range of steel
products is sold to customers in the automotive, construction, energy,
manufacturing, pipe and tube, appliance, packaging and steel distribution
industries.
This News Release contains forward-looking information with respect to
Dofasco's operations and future financial results. Actual results may differ
from expected results for a variety of reasons including the factors discussed
in the Management's Discussion and Analysis section of Dofasco's 2004 Annual
Report and the Quarterly Reports to Shareholders for the periods ended
March 31, 2005 and June 30, 2005. This News Release has been reviewed by the
Audit Committee of Dofasco's Board of Directors.
<<
- SUPPLEMENTARY INFORMATION -
Segmented Information (Unaudited)
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(in millions except shipments and
per ton amounts) 2005 2004
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Second First Second
Quarter Quarter Quarter
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Net Sales
Gallatin 121.9 154.7 144.7
Steel Operations(x) 942.9 921.2 919.6
Intercompany Elimination (3.8) (2.8) (2.7)
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Consolidated Net Sales $ 1,061.0 $ 1,073.1 $ 1,061.6
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Cost of Sales
Gallatin 91.1 111.7 92.8
Steel Operations(x) 828.9 788.1 754.7
Intercompany Elimination (3.6) (2.6) (2.7)
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Consolidated Cost of Sales $ 916.4 $ 897.2 $ 844.8
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Gross Income
Gallatin 30.8 43.0 51.9
Steel Operations(x) 114.0 133.1 164.9
Intercompany Elimination (0.2) (0.2) -
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Consolidated Gross Income $ 144.6 $ 175.9 $ 216.8
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Depreciation & Amortization
Gallatin 4.8 5.1 5.4
Steel Operations(x) 43.5 43.8 55.1
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Consolidated Depreciation &
Amortization $ 48.3 $ 48.9 $ 60.5
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Interest on Long-term Debt
Gallatin - - -
Steel Operations(x) 8.3 9.0 10.0
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Consolidated Interest on Long-term
Debt $ 8.3 $ 9.0 $ 10.0
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Investment and Other (Income)
Gallatin (0.3) (0.2) -
Steel Operations(x) (2.0) (1.9) (2.0)
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Consolidated Investment and Other
(Income) $ (2.3) $ (2.1) $ (2.0)
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Foreign Exchange (Gain)
Gallatin - - -
Steel Operations(x) (3.1) (0.1) (3.3)
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Consolidated Foreign Exchange (Gain) $ (3.1) $ (0.1) $ (3.3)
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Income Before Income Taxes
Gallatin 26.3 38.1 46.5
Steel Operations(x) 67.3 82.3 105.1
Intercompany Elimination (0.2) (0.2) -
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Consolidated Income Before Income
Taxes $ 93.4 $ 120.2 $ 151.6
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Shipments
Steel Shipments
Gallatin (000s net tons)(xx) 174 194 188
Hamilton & DSG Operations (000s net
tons) 1,030 972 1,096
Intercorporate (000s net tons) -
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Total Steel Shipments 1,204 1,166 1,284
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Sales Per Ton
Gallatin $ 700 $ 797 $ 770
Hamilton & DSG Operations $ 847 $ 864 $ 783
Gross Income Per Ton
Gallatin $ 178 $ 221 $ 277
Hamilton & DSG Operations $ 100 $ 132 $ 139
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Number of common shares outstanding:
Period-end (000s) 77,146 77,111 76,556
Year-to-date weighted average (000s) 77,113 77,108 76,225
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(x) Steel Operations include Hamilton operations, Dofasco USA,
Powerlasers, DoSol Galva, Dofasco de Mexico, Dofasco Marion and
Dofasco's share of Baycoat, DJ Galvanizing, Sorevco and Wabush.
(xx) Represents Dofasco's 50% share.
(xxx) Restated to reflect change in accounting policy for Wabush Asset
Retirement Obligation.
Report to Shareholders
for the period ended June 30, 2005
---------------------------------------------
DOFASCO
---------------------------------------------
Our product is steel. Our strength is people.
Management's Discussion and Analysis:
The following discussion and analysis should be read in conjunction with
the accompanying unaudited consolidated financial statements and notes, and
with the Management's Discussion and Analysis (MD&A) and the annual audited
consolidated financial statements and notes contained in Dofasco's 2004 Annual
Report. This MD&A contains certain forward-looking statements with respect to
Dofasco's operations and future financial results that are subject to risks
and uncertainties including the factors discussed in the Risks and Risk
Management section in this report, in the 2004 Annual MD&A and in the Interim
MD&A for the period ended March 31, 2005. These statements reflect
management's current beliefs and are based on information currently available
to management. However, the results or events predicted or implied in this
discussion may differ materially from actual results or events. Consequently,
all forward-looking statements made in this MD&A or Dofasco's documents
referred to herein are qualified by this cautionary statement and there can be
no assurance that actual results or developments anticipated by Dofasco will
be realized.
This document has been reviewed by the Audit Committee of Dofasco's Board
of Directors and contains information that is current as of July 26, 2005.
Events occurring after that date could render the information contained herein
inaccurate or misleading in a material respect. Dofasco may, but is not
obligated to, provide updates to its forward-looking statements, including in
subsequent news releases and its interim management's discussion and analyses
filed with regulatory authorities. Additional information about Dofasco Inc.,
including the Corporation's Annual Information Form, which can be accessed on
SEDAR at www.sedar.com.
RESULTS OF OPERATIONS
Consolidated Financial Results
Dofasco's results in the second quarter of 2005 were driven by solid
shipments and a continued high, although declining, North American pricing
environment. However, the lower pricing, together with lower production levels
and increasing costs for raw materials, led to a decrease in net income from
the very good results reported in the first quarter of 2005.
Consolidated net income for the three months ended June 30, 2005 was
$59.2 million or $0.77 per common share, significantly lower than the same
quarter last year. In the second quarter of 2004, Dofasco generated
consolidated net income of $110.5 million or $1.45 per share as the rapid
strengthening in the North American flat rolled steel markets resulted in the
most profitable second quarter in Dofasco's history.
In the six months ended June 30, 2005, consolidated net income was
$137.4 million or $1.78 per share, down from $165.1 million or $2.16 per share
in the first half of last year.
These results reflect recent trends experienced in the North American
steel industry. In 2004, robust global flat rolled steel demand led to a rapid
escalation of U.S. spot market selling prices over the first three quarters of
the year, reaching record levels in September. Increased levels of imports
into North America in the second half of 2004 resulted in higher inventories
throughout the supply chain which led to a decline in industry-reported prices
of approximately US $100 per ton during the fourth quarter. In 2005, the high
inventory levels, combined with softening end-user demand, resulted in a
further decline in published hot band spot prices of approximately US $200.
Subsequent to quarter end, the Corporation completed the acquisition of
substantially all of the remaining equity interest in Quebec Cartier Mining
Company (QCM) that it did not previously own. Details regarding the purchase
transaction are discussed below in the section "Acquisition of Quebec Cartier
Mining Company".
Gross Income by Business Segment
Consolidated gross income for the second quarter of 2005 was
$144.6 million, a 33% decline from gross income of $216.8 million for the same
quarter of 2004. This decrease reflects lower results at both Steel Operations
and Gallatin Steel. For the six month period ended June 30, 2005, consolidated
gross income was $320.5 million compared to $368.7 million in the same period
last year.
Dofasco currently has two business segments for reporting purposes, Steel
Operations and Gallatin Steel. The Corporation's Steel Operations segment
includes its Hamilton operations, Dofasco USA, Powerlasers, the Tubular
Products Division, Wabush Resources and Dofasco's share of its Baycoat, DJ
Galvanizing and Sorevco joint ventures. The Gallatin Steel segment represents
Dofasco's 50% ownership in the minimill joint venture located in Kentucky.
Additional information about the Corporation's reporting segments is provided
in Note 10 to the consolidated financial statements and in Dofasco's 2004
Annual MD&A.
Gross income is used by management to analyze the margins of its
reporting segments. Gross income is a financial measure that is not recognized
by generally accepted accounting principles (GAAP) in Canada. This measure,
presented in respect of Dofasco and its business segments, may not be
comparable to similar measures presented by other companies. A reconciliation
of gross income to net income in accordance with GAAP is presented in a table
on page 4 of this MD&A.
Steel Operations Gross Income
Steel Operations' gross income was $114.0 million in the quarter, a 31%
decrease from the $164.9 million generated in the second quarter of 2004.
Three months ended June 30 2005 2004 Change
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(in millions)
Net sales $ 942.9 $ 919.6 $ 23.3
Cost of sales 828.9 754.7 74.2
----------------------------------
Gross Income $ 114.0 $ 164.9 $ (50.9)
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For the six months ended June 30, 2005, gross income from Steel
Operations was $247.1 million compared to $301.0 million gross income in the
first half of 2004.
Six months ended June 30 2005 2004 Change
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(in millions)
Net sales $ 1,864.1 $ 1,784.0 $ 80.1
Cost of sales 1,617.0 1,483.0 134.0
----------------------------------
Gross Income $ 247.1 $ 301.0 $ (53.9)
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As in previous quarters, the results of the Steel Operations segment were
largely driven by the Corporation's Hamilton operations.
Hamilton Operations Gross Income
Three months ended June 30 2005 2004 Change
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Steel shipments (000s tons) 1,030 1,096 (66)
Raw steel production(1) (000s tons) 1,132 1,211 (79)
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Revenue per ton $ 847 $ 783 $ 64
Cost per ton 747 644 103
----------------------------------
Gross Income per ton $ 100 $ 139 $ (39)
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(1) Raw steel production includes purchased semi-finished steel
Shipments from Hamilton in the quarter declined 6% from the excellent
levels shipped in the second quarter of 2004. Second quarter shipments in 2005
were negatively impacted by weaker market demand, primarily in the
construction and distribution market segments.
The average realized revenue per ton shipped from Hamilton operations in
the quarter increased by $64 relative to the second quarter of 2004. The
higher revenue per ton in the second quarter of 2005 reflected the impact of
higher prices on contract business, partially offset by the impact of the
stronger Canadian dollar. In the second quarter of 2005, the Canadian dollar
averaged US $0.80, up from an average of US $0.74 in the same period last
year.
Hamilton operations' average cost per ton in the quarter increased by
$103 compared to the same period in 2004. This increase was mainly due to
lower production levels and significantly higher prices for purchased slabs,
iron ore and coal, as well as higher costs of other raw materials and energy.
The lower production levels in the quarter included outages taken in response
to the weaker market demand. These factors were partially offset by lower
scrap prices in the second quarter of 2005 and by the strengthening of the
Canadian dollar year over year.
Six months ended June 30 2005 2004 Change
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Steel shipments (000s tons) 2,002 2,221 (219)
Raw steel production(1) (000s tons) 2,347 2,408 (61)
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Revenue per ton $ 855 $ 747 $ 108
Cost per ton 740 620 120
----------------------------------
Gross Income per ton $ 115 $ 127 $ (12)
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(1) Raw steel production includes purchased semi-finished steel
Hamilton shipments in the first half of 2005 declined 10% from last year
due to high customer inventories at the end of 2004 and lower demand,
primarily in the construction and distribution market segments. In the first
half of 2004, the shipments reflected very strong demand for steel, and were
enabled by strong production and a drawdown of inventories.
Hamilton operations' average realized revenue per ton shipped for the
first six months of 2005 increased by $108 compared to the first half of 2004,
reflecting the impact of higher contract and spot market prices. These factors
were partially offset by the strengthening of the Canadian dollar from an
average of US $0.77 in 2004 to an average of US $0.81 in 2005.
The average cost per ton shipped from Hamilton operations increased by
$120 over the levels experienced in the first half of 2004. The higher cost
per ton was driven by significantly higher prices for purchased slabs, iron
ore, coal and other raw materials, as well as the impact of lower production
levels on fixed operating costs. These factors were partially offset by lower
scrap prices and the impact of the stronger Canadian dollar. The average cost
per ton in the same period in 2004 was impacted by the escalating costs of
scrap and other raw materials, partially offset by the high production levels.
Gallatin Steel Gross Income
Gallatin Steel contributed $30.8 million of gross income in the second
quarter of 2005 compared to $51.9 million in the second quarter in 2004. The
decline in gross income generated in the quarter was mainly a result of lower
shipments, a higher average cost per ton and the impact of a weaker U.S.
dollar on the translation of Gallatin's results.
Shipments were 347,000 tons in the second quarter, 8% lower than in the
second quarter of 2004. Hot band production in the quarter was 344,000 tons,
significantly lower than 396,000 tons in the second quarter of 2004, the
result of planned production outages taken in response to weaker U.S. market
demand.
Three months ended June 30 2005 2004 Change
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(50%, Cdn $ millions)
Net sales $ 121.9 $ 144.7 $ (22.8)
Cost of sales 91.1 92.8 (1.7)
----------------------------------
Gross Income $ 30.8 $ 51.9 $ (21.1)
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(000s tons at 100%)
Steel shipments 347 376 (29)
Raw steel production 344 396 (52)
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(US $)
Revenue per ton $ 565 $ 566 $ (1)
Cost per ton 421 363 58
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Gross Income per ton $ 144 $ 203 $ (59)
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Gallatin's average realized revenue per ton in the second quarter of 2005
was virtually unchanged from the same quarter last year as U.S. spot market
selling prices remained strong compared to historical averages. However, spot
market pricing continued to decline from the record levels reached in the
second half of 2004.
The average cost per ton shipped in the quarter increased by US $58 over
the same period last year, driven by significantly higher scrap costs flowing
through inventory, the impact of lower production levels and higher costs of
alloys and electricity.
In the first half of 2005, stronger average U.S. spot market selling
prices, partially offset by higher scrap costs, resulted in gross income of
$73.8 million contributed by Gallatin Steel compared to $67.7 million
generated in the first half of 2004.
Six months ended June 30 2005 2004 Change
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(50%, Cdn $ millions)
Net sales $ 276.6 $ 243.5 $ 33.1
Cost of sales 202.8 175.8 27.0
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Gross Income $ 73.8 $ 67.7 $ 6.1
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(000s tons at 100%)
Steel shipments 735 759 (24)
Raw steel production 742 781 (39)
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(US $)
Revenue per ton $ 610 $ 478 $ 132
Cost per ton 447 346 101
----------------------------------
Gross Income per ton $ 163 $ 132 $ 31
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Shipments and hot band production for the first half of 2005 were 735,000
tons and 742,000 tons respectively, both lower than the same period in 2004,
resulting from a decline in market demand from the high 2004 levels.
For the six months ended June 30, 2005, average revenue per ton increased
by US $132 compared to the same period last year, reflecting the higher
average U.S. spot market prices in the first half of 2005.
The average cost per ton in the first half of 2005 also increased by
US $101 over the same period last year, primarily due to considerably higher
scrap costs. Other factors contributing to the increased cost per ton include
the impact of lower production and the higher cost of alloys and electricity.
Other Income Statement Items
Depreciation and Amortization
Consolidated depreciation and amortization decreased by $12.2 million in
the second quarter and $24.4 million in the first half of the year compared to
the corresponding periods in 2004. The lower depreciation reflects the impact
of certain facilities in Hamilton becoming fully depreciated during 2004, as
well as non-cash adjustments for obsolete computer equipment and other assets
no longer in service, which totaled $13.0 million for the six-month period in
2004.
Income Taxes
The consolidated effective tax rate of 35% for the second quarter and 34%
for the year to date were consistent with the Corporation's Canadian
manufacturing and processing effective statutory rate of 34%. The consolidated
effective tax rate of 26% for the second quarter of 2004 and 29% for the first
six months of 2004 were lower than the Corporation's manufacturing and
processing effective tax rate of 34%, largely due to an $11.6 million
reduction of income tax expense due to the reversal of the valuation allowance
against U.S. future income tax assets.
The following table reconciles consolidated gross income to net income in
accordance with GAAP.
Three months ended June 30 2005 2004 Change
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(in millions)
Gross income $ 144.6 $ 216.8 $ (72.2)
Depreciation and amortization 48.3 60.5 (12.2)
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Operating income 96.3 156.3 (60.0)
Interest on long-term debt 8.3 10.0 (1.7)
Investment and other income (2.3) (2.0) (0.3)
Foreign exchange gain (3.1) (3.3) 0.2
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Income before income taxes 93.4 151.6 (58.2)
Income tax expense 32.4 39.4 (7.0)
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61.0 112.2 (51.2)
Minority interest 1.8 1.7 0.1
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Net income $ 59.2 $ 110.5 $ (51.3)
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Six months ended June 30 2005 2004 Change
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(in millions)
Gross income $ 320.5 $ 368.7 $ (48.2)
Depreciation and amortization 97.2 121.6 (24.4)
----------------------------------
Operating income 223.3 247.1 (23.8)
Interest on long-term debt 17.3 20.1 (2.8)
Investment and other income (4.4) (4.4) -
Foreign exchange gain (3.2) (5.0) 1.8
----------------------------------
Income before income taxes 213.6 236.4 (22.8)
Income tax expense 72.7 69.0 3.7
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140.9 167.4 (26.5)
Minority interest 3.5 2.3 1.2
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Net income $ 137.4 $ 165.1 $ (27.7)
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Summary of Quarterly Results
The following table summarizes selected financial and non-financial
information for the ten most recent quarters.
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Steel Raw Steel Net Gross
Shipments(1) Production(2) Sales Income
Consolidated (000s tons) (000s tons) (millions) (millions)
-------------------------------------------------------------------------
2005 - Second Quarter 1,204 1,304 $ 1,061.0 $ 144.6
2005 - First Quarter 1,166 1,414 $ 1,073.1 $ 175.9
2004 - Fourth Quarter 1,207 1,288 $ 1,113.1 $ 219.7
2004 - Third Quarter 1,194 1,413 $ 1,089.0 $ 247.8
2004 - Second Quarter 1,284 1,409 $ 1,061.6 $ 216.8
2004 - First Quarter 1,317 1,390 $ 961.2 $ 151.9
2003 - Fourth Quarter(3) 1,266 1,328 $ 871.2 $ 133.8
2003 - Third Quarter 1,174 1,345 $ 857.6 $ 119.4
2003 - Second Quarter 1,211 1,265 $ 923.2 $ 147.9
2003 - First Quarter 1,182 1,395 $ 902.9 $ 157.5
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Earnings Per Share
Net ------------------------
Income Basic Diluted
Consolidated (millions)
------------------------------------------------------------
2005 - Second Quarter $ 59.2 $ 0.77 $ 0.77
2005 - First Quarter $ 78.2 $ 1.01 $ 1.01
2004 - Fourth Quarter $ 96.8 $ 1.26 $ 1.25
2004 - Third Quarter $ 115.0 $ 1.50 $ 1.49
2004 - Second Quarter $ 110.5 $ 1.45 $ 1.44
2004 - First Quarter $ 54.6 $ 0.71 $ 0.71
2003 -
Fourth Quarter(3) $ 2.4 $ 0.03 $ 0.03
2003 - Third Quarter $ 29.7 $ 0.39 $ 0.39
2003 - Second Quarter $ 38.7 $ 0.51 $ 0.51
2003 - First Quarter $ 46.9 $ 0.62 $ 0.62
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(1) Shipments from Hamilton operations plus 50% of Gallatin
Steel shipments.
(2) Raw steel production includes purchases of semi-finished
steel processed.
(3) 2003 Fourth Quarter results included a $27.9 million loss
on disposal of QCM.
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LIQUIDITY AND CAPITAL RESOURCES
Statement of Cash Flows
Cash Provided from Operating Activities
Consolidated cash provided from operations before changes in non-cash
working capital was $115.4 million in the second quarter of 2005, a 37%
decrease from $181.8 million generated in the second quarter of 2004,
reflecting the lower net income in the second quarter of 2005 and lower
non-cash expenses. Non-cash working capital increased by $173.3 million in the
second quarter, driven by a $218.6 million increase in inventories. This
increase was mainly due to a $125.0 million increase in purchased slabs and
higher quantities of higher-cost raw materials at Hamilton operations.
Hamilton inventories of iron ore, coal and purchased slabs typically reach
seasonally low levels at the end of the first quarter due to the closure of
the St. Lawrence Seaway during the winter months. In addition, the iron ore
inventories were lower than normal attributable to the impact of the strikes
at two of the Corporation's suppliers in 2004.
Partially offsetting the increase in inventories was a decrease in
accounts receivable and an increase in accounts payable in the second quarter.
These changes resulted from lower sales and higher purchases, respectively, in
the latter part of the second quarter compared to the end of the first
quarter.
In the second quarter of 2004, increases in accounts payable and income
and other taxes payable more than offset increases in accounts receivable and
inventories, resulting in a net decrease in non-cash working capital of
$8.8 million.
In the six months ended June 30, 2005, the Corporation generated
$270.0 million of cash from operations before changes in working capital, 11%
lower than the amount generated in the first half of 2004, mainly due to the
lower net income in the second quarter of 2005.
Non-cash working capital increased by $276.0 million in the first half of
2005, due to increases in inventories and accounts receivable combined with
decreases in accounts payable and accrued liabilities and income and other
taxes payable. Inventories increased by $87.0 million in the first half of the
year, caused by an increase in purchased slabs, a higher cost of raw materials
and an increase in work in process and finished goods, partially offset by a
seasonal decrease in the quantities of major raw materials. The $100.0 million
decrease in accounts payable and accrued liabilities was primarily due to
annual payments for 2004 profit sharing and employee performance-based
compensation made in the first quarter of 2005. Income and other taxes
decreased by $60.8 million reflecting payment of the final 2004 income tax
installments in the first quarter of 2005. Accounts receivable increased by
$28.2 million, attributable to higher sales in the latter part of the second
quarter compared to the end of the fourth quarter of 2004.
In the first six months of 2004, an increase in accounts receivable, due
to higher sales in June 2004 compared to December 2003, was partially offset
by increases in accounts payable and income taxes payable. In addition, a
decrease in raw material inventories and a drawdown of finished goods resulted
in a $9.4 million increase in non-cash working capital in the first half of
2004.
Cash Used for Investing Activities
Consolidated capital expenditures in the second quarter of 2005 were
$112.6 million compared to $55.1 million in the same quarter in 2004. For the
year to date, consolidated capital expenditures were $206.6 million,
considerably higher than the $118.6 million spent in the first half of last
year. The increase in capital spending is mainly due to the continued
investment in two major capital projects: the No. 2 Blast Furnace rebuild and
the Finishing Division Improvement Program (FDIP) in Hamilton.
The rebuild of the No. 2 Blast Furnace was successfully completed late in
the second quarter and was operating near capacity early in July, 2005. The
rebuilt blast furnace, used to reduce iron ore pellets into molten iron for
further processing in Dofasco's steelmaking facilities, features several
advancements over earlier designs that make it one of the safest and most
efficient furnaces in North America. Following the startup of No. 2 Blast
Furnace, the No. 3 Blast Furnace has been idled and retired from service.
The major project in Phase I of FDIP, a new pickle line coupled to an
existing upgraded cold rolling mill (No. 2 CPCM), continues to progress and is
scheduled to be completed in the fourth quarter of this year.
Consolidated capital expenditures for 2005 in total are expected to be
approximately $400.0 million, excluding QCM capital spending. This estimate is
$50.0 million lower than the Corporation's previous guidance, reflecting the
deferral of certain capital projects.
Short-term investments decreased by $106.0 million in the first half of
2005 with no change in the second quarter. As at June 30 and March 31, 2005,
the Corporation did not hold any term deposits with maturities greater than
90 days at acquisition. In 2004, short-term investments increased by
$20.0 million in the second quarter and decreased by $34.5 million in the
first six months. As in prior quarters, these variations reflect changes in
the mix of short-term investments and cash.
Cash Provided from/Used for Financing Activities
On June 15, 2005, Dofasco issued $250.0 million of 4.961% Series A senior
unsecured, non-redeemable notes under its $300.0 million Medium Term Note
program pursuant to a Short Form Shelf Prospectus dated November 24, 2004. The
notes will mature on June 15, 2017, with the principal repaid over four years
in equal amounts commencing June 15, 2014. The proceeds from the Series A note
issue have been used to repay long-term debt maturing in the quarter, to fund
capital expenditures and for general corporate and working capital purposes.
Scheduled repayments of long-term debt were $198.9 million in the second
quarter and $199.0 million for the year to date, including a $175.0 million
repayment of the 7.5%, 5-year Medium Term Notes that matured on June 1, 2005.
Over the same periods in 2004, scheduled debt repayments totaled $23.8 million
and $26.2 million, respectively.
In the three-month and six-month periods ending June 30, 2005, proceeds
of $0.9 million and $1.1 million, respectively, were received on the exercise
of common share stock options. In the comparative periods in 2004, proceeds of
$9.8 million and $11.3 million were received on the exercise of a greater
number of stock options.
Dofasco paid $25.5 million in dividends in the second quarter and
$50.9 million in the first six months of the year compared to $23.0 million
and $45.9 million in the same periods of 2004. The increase reflects the 10%
increase in the dividend payable on common shares to 33 cents per share per
quarter, effective October 1, 2004. As at July 21, 2005, there were 77,225,711
common shares outstanding.
Cash Requirements
Cash requirements in the second half of 2005 include $306.0 million to
fund the acquisition of QCM, as well as scheduled payments under long-term
debt agreements. In addition, significant payments will be required to fund
the Corporation's continued investment in its capital projects.
Capital Resources
Dofasco's cash and cash equivalents remained strong at $162.9 million at
June 30, 2005, although considerably lower than the $305.9 million at
March 31, 2005 and $368.2 million including short-term investments at
December 31, 2004. This solid cash position, together with cash flow from
operations and available credit facilities, is expected to enable the
Corporation to satisfy the actual and anticipated cash requirements described
above.
As at June 30, 2005, Dofasco's unused credit facilities included
$300.0 million under revolving operating lines and an additional $36.9 million
available to its subsidiaries and joint ventures under existing and renewed
credit facilities.
Dofasco's financial position remained strong in the second quarter of
2005, as evidenced by the ratio of debt to debt plus equity of 18.4% or 13.3%
net of cash and cash equivalents.
Guarantees and Other Commitments
Subsequent to quarter end, Dofasco was released from its obligation to
provide $17.5 million of letters of credit in support of QCM's credit facility
as the underlying obligation has been fully repaid by QCM. Letters of credit
in the amount of US $4.0 million in support of QCM's equipment leases have
been extended to September 12, 2005 pending the conclusion of discussions with
the vendor, which is expected to result in the release and cancellation of the
remaining letters of credit.
In addition, the Corporation has been released from its contingent
obligation to provide continuing support of future mine development at QCM to
a maximum of $34.5 million between 2005 and 2010. No support payments have
been required under this arrangement pursuant to the capital restructuring of
QCM effective December 31, 2003.
Contingent Gain
Effective August 30, 2004, the Corporation gave notice to a customer of
the termination of a contractual steel supply arrangement, in accordance with
the terms of the supply agreement. The 2004 annual results reflected the
$10 million liquidation payment related to the termination of this contract.
To ensure that the supply chain is not disrupted, Dofasco is continuing to
ship steel to the customer at a price that is reflective of current market
conditions. The right of Dofasco to terminate the arrangement is being
disputed by the customer pursuant to arbitration proceedings, which were
initiated in the fourth quarter of 2004. As a result of the dispute, a
provision against sales and accounts receivable has been recorded as the
amount equal to the difference between the invoice price and the original
contract price. During the second quarter, the cumulative provision increased
by approximately $19 million and $39 million in the first half of 2005, to
approximately $76 million as at June 30. The amount and timing of realization
of the potential gain to date, if any, is not determinable at this time as it
is dependent on the resolution of the dispute with the customer. Future
revenues will be impacted by such resolution, by future market conditions and
by the volume of future purchases by the customer.
ACQUISITION OF QUEBEC CARTIER MINING COMPANY
On July 22, 2005, the Corporation completed the acquisition of
substantially all of the remaining equity interest that it does not currently
own in Quebec Cartier Mining Company (QCM).
QCM is a leading producer of iron ore products with facilities in
Northern Quebec and executive offices in Montreal. The company operates an
open pit mine, crusher/concentrator facility, pellet plant, deep-water harbour
and a railway linking the mine to the harbour in Quebec's North Shore region.
Under the agreement announced on June 9, 2005, Dofasco, which previously
owned 20,000,000 preferred shares of QCM, acquired 20,000,000 preferred shares
of QCM from each of CAEMI MineraEcFao E Metalurgia S.A. of Brazil and
Investissement Quebec for total cash consideration of $306.0 million,
excluding acquisition costs. Immediately following the closing of the
transaction, all of the preferred shares of QCM were converted into common
shares, resulting in Dofasco now holding approximately 98.7% of the
outstanding common shares.
The acquisition of QCM was funded through a combination of short-term
bank borrowings and cash on hand. The acquisition is expected to be accretive
to consolidated net income and cash flows. As at the reporting date, the
allocation of the purchase price to QCM's assets and liabilities has not yet
been finalized.
With regard to its interest in QCM, Dofasco is currently reviewing its
strategic options which include monetizing a significant portion of its
investment through an offering of QCM securities in the public markets. The
Corporation intends to retain an equity position in QCM sufficient to act as a
natural hedge of its annual iron ore purchase requirements.
BUSINESS CONDITIONS AND OUTLOOK
2005 Economic Outlook
The Canadian economy experienced growth of 2.3% in the first quarter of
2005, as consumer spending and business investment more than offset a
deterioration in Canada's trade performance due to the strong Canadian dollar.
Economic growth in Canada of about 2.5% is expected for the full year.
The U.S. economy grew at a 3.8% annual rate in the first quarter, as a
result of growth in consumer spending, business investment, residential
investment and exports. Despite the dampening effects of recent high oil
prices, the U.S. economy is anticipated to grow by about 3.5% in 2005.
Global steel demand eased during the first half of the year as Europe,
Asia and North America experienced softer demand due to lower than expected
steel end-user consumption and the impact of excessively high inventories at
the end of 2004. Global steel prices weakened considerably through the first
half of 2005, while steel input cost pressures remained high due to much
higher prices for iron ore, coal and energy.
In North America, the high inventory levels throughout the supply chain
have taken longer than anticipated to be absorbed. Despite good economic
activity to date in Canada and the U.S., flat rolled steel demand after five
months was down by approximately 1% in Canada and by approximately 4% in the
United States. Flat rolled steel demand in 2005 is projected to be lower than
the record level set in 2004.
Softer demand and weaker steel scrap prices in the U.S. have resulted in
close to a US $300 per ton decline in published U.S. spot market steel prices
from their peak level of September 2004. Spot prices are expected to bottom
out in the third quarter as recent indicators suggest that demand is beginning
to recover.
Market Segments
Dofasco markets its products to customers in the automotive,
distribution, construction, packaging, manufacturing and pipe and tube
segments. The following discussion is an update to the outlook for certain
market segments discussed in Dofasco's 2004 Annual MD&A and in Dofasco's
Interim MD&A for the period ended March 31, 2005.
Automotive
Vehicle production in North America for the first half of 2005 was 2.8%
below first half 2004 levels. Production levels for 2005 in total are still
expected to be similar to 2004. Strong consumer spending with low interest
rates and generous sales incentives are expected to continue to support strong
auto sales in the months ahead. Negotiations involving the Canadian operations
of DaimlerChrysler, Ford and General Motors for labour contracts expiring late
in the third quarter add a degree of uncertainty to the outlook.
Dofasco shipments to the automotive market segment remained above the
same period in 2004, contrary to the industry downturn. Dofasco is
well-diversified across the automotive sector by customer and by auto
platform.
Distribution
Canadian steel service centres reported a 10% drop in their 5-month flat
rolled steel shipments compared to the same period last year. Service centre
inventories continue to be reduced from excessively high levels at the end of
2004. Dofasco expects an increase in orders from service centres reflecting
projections for improved end-user demand.
Construction
Non-residential building construction activity reached record high levels
in the second quarter of 2005. Conditions remain favourable to achieve an
overall increase of about 5% in construction activity this year, despite some
slowing in new housing starts. However, this increase did not result in a
comparable increase in Dofasco's shipments to the segment due to high
inventories throughout the construction industry supply chain at the start of
the year.
Outlook for Dofasco
Steel Operations' results in the third quarter of 2005 are expected to
decline significantly from the results reported for the second quarter.
Shipment levels from Hamilton are projected to be similar to those in the
second quarter, as a seasonal decrease in sales to the automotive market
segment is expected to be offset by higher shipments to the distribution
segment. Hamilton operations revenue per ton in the third quarter is expected
to decrease considerably due to the recent decline in spot market prices as
well as the expected impact of lower surcharges on some contract business. The
cost per ton shipped from Hamilton operations in the third quarter is
predicted to remain high, but slightly lower than levels experienced in the
second quarter. The high cost of slabs purchased earlier in the year, combined
with a higher average cost of iron ore, coal and electricity, are expected to
be more than offset by lower scrap prices and the impact of higher production
levels.
Gallatin's third quarter shipments are expected to increase moderately
over the low second quarter level. Gallatin's average revenue per ton is
expected to decrease substantially in the third quarter as a result of lower
U.S. hot band spot market prices. This decrease reflects the continuing high
level of inventories in the supply chain and anticipated lower North American
flat rolled steel demand. Gallatin's cost per ton is also predicted to
decrease somewhat in the third quarter, primarily due to lower scrap prices.
As a result, Gallatin's results in the third quarter of 2005 are expected to
decline from second quarter levels.
QCM's results will be consolidated effective on the completion of the
acquisition on July 22. QCM expects to ship a total of 3.0 to 3.5 million
metric tonnes of pellets and concentrate in the third quarter at prices in
line with current global iron ore prices. Cash production costs are expected
to be similar to the first half of the year, although the reported cost of
sales in the third quarter will largely depend on the allocation of the
purchase price to the fair value of QCM's assets and liabilities, which has
not yet been finalized. For this reason, QCM's net income for the third
quarter cannot be predicted at this time.
Excluding QCM, Dofasco's consolidated gross income in the third quarter
is expected to be significantly lower than the results achieved in the second
quarter. Looking forward to the fourth quarter, the anticipated improvement in
market conditions should contribute to improved margins at both Hamilton
operations and Gallatin compared to the third quarter. In addition, QCM is
projected to have a more pronounced impact on consolidated results in the
fourth quarter.
RISKS AND RISK MANAGEMENT
The Corporation's future performance may be affected by a number of risk
factors. Dofasco senior management actively monitors, manages and mitigates
key risks. This process includes an annual review of Dofasco's Commodity Risk
Management Policy with the Audit Committee. The following discussion is an
update to certain risks identified in Dofasco's 2004 Annual MD&A and in
Dofasco's Interim MD&A for the period ended March 31, 2005.
Foreign exchange rates
Dofasco is exposed to foreign exchange risk due to the impact of rate
fluctuations on U.S. dollar-denominated sales and purchases, on
euro-denominated purchases and on Canadian dollar transactions influenced by
U.S. dollar pricing. In addition, the Corporation is exposed to foreign
exchange rate risk on the translation of its U.S. dollar working capital and
its net investments in U.S. and Mexican operations.
Dofasco has both sales and purchases denominated in U.S. dollars, which
are relatively in balance at this time. However, over the longer term,
Dofasco's revenue per ton reflects U.S. dollar pricing, thereby increasing the
Corporation's exposure to currency fluctuations.
Dofasco periodically enters into foreign currency forward purchase
contracts for the purpose of limiting exposure to exchange rate fluctuations
on certain U.S. dollar-denominated purchase transactions, including committed
purchases of steel slabs and major capital expenditures, as well as on
purchases denominated in euros and other currencies. The Corporation does not
hold or issue derivative financial instruments for trading or speculative
purposes. In accordance with the Corporation's Commodity Risk Management
Policy, the maximum period for these contracts cannot exceed twenty-four
months, except as specifically approved by Dofasco's Commodity Risk Oversight
Committee.
Under GAAP, qualifying derivative financial instruments designated as
effective hedges are not recorded on the balance sheet. Consequently,
unsettled forward contracts are not recognized in Dofasco's consolidated
financial statements, as these instruments are designated as cash flow hedges
for accounting purposes. Any gains or losses arising from settled hedge
transactions related to slab or commodity purchases are deferred as a
component of inventory until the product containing the hedged item is sold,
at which time both the underlying hedged item and the related hedge deferral
are recorded as cost of goods sold.
The net unrealized gain on unsettled foreign exchange forward purchase
contracts at June 30, 2005 was $1.5 million (December 31, 2004 - nil). Note 8
to the consolidated financial statements provides additional information
regarding Dofasco's financial instruments.
Steel Trade
Dofasco faces the risk of injury due to the pricing impact of steel
traded in violation of international trade rules. High volumes of steel
imports have historically entered North American markets, often in surges that
tend to destabilize and disrupt markets. Dofasco relies on the application of
Canadian trade laws to prevent imports of "dumped" steel -- steel sold at a
price below either the cost of production or the selling price in the
producer's home market -- from injuring Canadian steel producers. However,
there can be no assurance the trade laws will be applied in a manner that
provides Dofasco with adequate protection.
Dofasco continues to participate in ongoing discussions relating to
domestic and international steel trade issues.
In June, Dofasco welcomed the announcement of a North American Steel
Strategy by NAFTA Ministers as part of the Security and Prosperity Partnership
presented to heads of state from Canada, the United States and Mexico.
Recognizing the strategic value of the steel industry, the North American
Steel Strategy is focused on growth, competitiveness and the long-term
sustainability of North American steel production. The strategy is designed to
benefit North American steel manufacturers by reducing distortions,
facilitating trade and enhancing steel market stability. Dofasco is looking
forward to working in partnership with government and industry representatives
through the North American Steel Trade Committee to develop and implement the
North American Steel Strategy.
In the United States, where Dofasco has been subject to a dumping action
on corrosion-resistant steel since 1993, Dofasco continues to participate in
the reviews conducted by the U.S. Department of Commerce. In April 2005, a
NAFTA Binational Panel ruled against Dofasco's appeal of the U.S.
International Trade Commission's 2001 injury determination in the sunset
review of corrosion-resistant carbon steel flat products from Canada.
Commodities
Dofasco's steelmaking operations in Hamilton and at Gallatin Steel
consume large quantities of raw materials and other commodities. As a result,
the Corporation's performance could be adversely impacted by changes in the
price or availability of such raw materials and commodities.
The Corporation has procurement strategies to ensure security of supply,
price competitiveness and quality assurance of its raw materials and other
commodities. Dofasco's largest raw material requirements are iron ore, scrap
steel and coal. Dofasco also purchases significant quantities of steel slabs,
a form of semi-finished steel which is further processed in Dofasco's Hot
Mill.
Iron ore and coal are key inputs to Hamilton's integrated stream, which
provides approximately 60% of total slabs charged to the Hot Mill. Dofasco has
long-term, secure sources of iron ore, primarily from QCM. Dofasco also
secures approximately 30% of its iron ore pellets from Wabush Mines, in which
it has an ownership interest. The Iron Ore Company of Canada supplies the
remainder, approximately 8% of the Corporation's iron ore pellets. With the
acquisition of QCM on July 22, 2005, Dofasco's current equity ownership of
iron ore producers is much greater than its annual requirements, a positive
factor in the current iron ore pricing environment.
On June 3, QCM and its unionized employees reached a new collective
bargaining agreement, ending an eight-week strike which began on April 9. The
new six-year agreement replaces the contract that expired on March 1, 2005.
Dofasco's on-hand inventories and committed purchases from other sources were
sufficient to meet the Corporation's short-term requirements during the
strike, ensuring that Hamilton production was not impacted by the work
disruption.
B. F. MACNEILL D. A. PETHER
Chair of the Board President and Chief Executive Officer
July 26, 2005
Consolidated Statements of Income and Retained Earnings (Unaudited)
-------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
(in millions except
per share amounts) 2005 2004 2005 2004
-------------------------------------------------------------------------
Income
Net sales $ 1,061.0 $ 1,061.6 $ 2,134.1 $ 2,022.8
Cost of sales 916.4 844.8 1,813.6 1,654.1
------------------------------------------------
Gross income 144.6 216.8 320.5 368.7
Depreciation and
amortization 48.3 60.5 97.2 121.6
------------------------------------------------
Operating income 96.3 156.3 223.3 247.1
Interest on long-term
debt 8.3 10.0 17.3 20.1
Investment and other
income (2.3) (2.0) (4.4) (4.4)
Foreign exchange gain (3.1) (3.3) (3.2) (5.0)
------------------------------------------------
Income before income
taxes 93.4 151.6 213.6 236.4
Income tax expense 32.4 39.4 72.7 69.0
------------------------------------------------
61.0 112.2 140.9 167.4
Minority interest 1.8 1.7 3.5 2.3
------------------------------------------------
Net income $ 59.2 $ 110.5 $ 137.4 $ 165.1
-------------------------------------------------------------------------
Earnings per Common Share
Basic $ 0.77 $ 1.45 $ 1.78 $ 2.16
Diluted $ 0.77 $ 1.44 $ 1.77 $ 2.15
-------------------------------------------------------------------------
Retained Earnings
Opening balance $ 1,404.7 $ 1,103.8 $ 1,352.0 $ 1,072.2
Net income 59.2 110.5 137.4 165.1
------------------------------------------------
1,463.9 1,214.3 1,489.4 1,237.3
------------------------------------------------
Dividends declared:
Preferred shares - 0.2 - 0.3
Common shares 25.4 22.9 50.9 45.8
------------------------------------------------
25.4 23.1 50.9 46.1
------------------------------------------------
Ending balance $ 1,438.5 $ 1,191.2 $ 1,438.5 $ 1,191.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Consolidated Balance Sheets (Unaudited)
-------------------------------------------------------------------------
June 30 December 31
(in millions) 2005 2004
-------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 162.9 $ 262.2
Short-term investments - 106.0
Accounts receivable 531.7 502.4
Inventories (note 2) 1,148.4 1,060.4
Future income tax assets 21.0 11.1
--------------------------
1,864.0 1,942.1
--------------------------
Fixed and other assets:
Fixed assets 1,777.4 1,669.7
Accrued pension benefit 86.1 76.2
Investments and other assets 35.4 34.2
--------------------------
1,898.9 1,780.1
-------------------------------------------------------------------------
Total assets $ 3,762.9 $ 3,722.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Current liabilities:
Bank borrowings of joint ventures $ 9.1 $ 4.9
Accounts payable and accrued liabilities 390.6 498.7
Income and other taxes payable 7.9 61.8
Dividends payable 25.4 25.4
Current requirements on long-term debt (note 4) 45.9 219.9
--------------------------
478.9 810.7
--------------------------
Long-term liabilities:
Long-term debt (note 4) 454.7 224.6
Future income tax liabilities 80.4 56.5
Employee future benefits 420.2 402.5
Other long-term liabilities 27.0 26.2
--------------------------
982.3 709.8
--------------------------
Minority interest 39.3 35.8
--------------------------
Shareholders' equity:
Common shares (note 5) 851.9 850.6
Contributed surplus 11.5 9.2
Retained earnings 1,438.5 1,352.0
Currency translation adjustment (39.5) (45.9)
--------------------------
2,262.4 2,165.9
-------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 3,762.9 $ 3,722.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Consolidated Statement of Cash Flows (Unaudited)
-------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
(in millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
Cash provided from (used for):
Operating activities:
Net income $ 59.2 $ 110.5 $ 137.4 $ 165.1
Add (deduct) items not
affecting cash
Depreciation and
amortization 48.3 60.5 97.2 121.6
Future income taxes 12.0 (9.7) 20.8 (17.6)
Employee future
benefits (9.4) 15.7 7.8 29.7
Stock-based
compensation 2.8 2.8 2.5 3.7
Other 2.5 2.0 4.3 2.4
------------------------------------------------
115.4 181.8 270.0 304.9
Add (deduct) changes in
non-cash components of
working capital
Accounts receivable 22.0 (33.6) (28.2) (153.3)
Inventories (218.6) (28.3) (87.0) 81.8
Accounts payable and
accrued liabilities 27.9 45.2 (100.0) 41.5
Income and other taxes (4.6) 25.5 (60.8) 39.4
------------------------------------------------
(173.3) 8.8 (276.0) 9.4
------------------------------------------------
(57.9) 190.6 (6.0) 314.3
-------------------------------------------------------------------------
Investment activities:
Capital expenditures (112.6) (55.1) (206.6) (118.6)
Decrease (increase) in
short-term investments - (20.0) 106.0 34.5
Other (0.1) - (0.1) (0.2)
------------------------------------------------
(112.7) (75.1) (100.7) (84.3)
-------------------------------------------------------------------------
Financing activities:
(Decrease) increase in
bank borrowings of
joint ventures (0.8) (0.4) 4.2 (4.5)
Issuance of long-term
debt 250.0 - 250.0 -
Repayment of long-term
debt (198.9) (23.8) (199.0) (26.2)
Common shares issued 0.9 9.8 1.1 11.3
Dividends paid (25.5) (23.0) (50.9) (45.9)
------------------------------------------------
25.7 (37.4) 5.4 (65.3)
-------------------------------------------------------------------------
Effect of exchange rate
changes on cash and cash
equivalents 1.9 0.1 2.0 0.6
-------------------------------------------------------------------------
Cash and cash equivalents:
(Decrease) increase in the
period (143.0) 78.2 (99.3) 165.3
Balance at beginning of
period 305.9 433.2 262.2 346.1
------------------------------------------------
Balance at end of period $ 162.9 $ 511.4 $ 162.9 $ 511.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Notes to Interim Consolidated Financial Statements (Unaudited)
-------------------------------------------------------------------------
Note 1 - Accounting Policies
The accompanying unaudited consolidated financial statements have been
prepared by the Corporation in accordance with Canadian generally
accepted accounting principles on a basis consistent with those followed
in the most recent audited financial statements. These unaudited
consolidated financial statements do not include all the information and
footnotes required by generally accepted accounting principles for annual
financial statements and therefore should be read in conjunction with the
audited consolidated financial statements and notes included in the
Corporation's Annual Report for the year ended December 31, 2004.
Note 2 - Inventories
June 30, December 31,
(in millions) 2005 2004
---------------------------------------------------------------------
Raw materials and other inventories $ 350.6 $ 339.4
Semi-finished and finished steel products 797.8 721.0
----------------------
$ 1,148.4 $ 1,060.4
---------------------------------------------------------------------
Note 3 - Employee Future Benefits
In the three months and six months ended June 30, 2005 and June 30, 2004,
the Corporation recognized in cost of sales the following net benefit
cost for employee future benefits:
Three Months Ended Six Months Ended
June 30 June 30
(in millions) 2005 2004 2005 2004
---------------------------------------------------------------------
Defined contribution
plans $ 0.5 $ 0.4 $ 0.9 $ 0.9
Defined benefit plans 7.3 10.0 16.4 18.0
----------------------------------------------
Total pension plans 7.8 10.4 17.3 18.9
Total other post-
employment benefit
plans 13.0 11.3 26.0 22.6
----------------------------------------------
Total net benefit cost $ 20.8 $ 21.7 $ 43.3 $ 41.5
---------------------------------------------------------------------
Note 4 - Long Term Debt
On June 1, 2005, the Corporation fully repaid the $175.0 million balance
on the maturity of its 7.5% Medium Term Notes.
On June 15, 2005, pursuant to the Short Form Shelf Prospectus dated
November 24, 2004, the Corporation issued $250.0 million of 4.961%
Series A Medium Term Notes. The unsecured, non-redeemable notes will
mature June 15, 2017 with interest payable semi-annually on June 15 and
December 15. The principal will be repaid in four equal annual
installments of $62.5 million commencing June 15, 2014.
In the second quarter of 2005, the maximum availability of credit
facilities of the Corporation's joint ventures and subsidiaries increased
from $35.6 million at December 31, 2004 to $48.5 million at June 30,
2005, of which $36.9 million was available (December 31, 2004 -
$30.7 million).
Note 5 - Capital Stock
The following table summarizes information on share capital and related
matters at June 30, 2005:
Outstanding Exercisable
---------------------------------------------------------------------
Common shares 77,145,711 -
Common shares - year-to-date
weighted average 77,112,636 -
Common share stock options 2,632,000 1,090,000
---------------------------------------------------------------------
---------------------------------------------------------------------
In October 2004, the Corporation filed a normal course issuer bid which
entitles the Corporation to acquire up to 3,800,000 of its common shares
between November 1, 2004 and October 31, 2005. All purchases are to be
made on the open market at the market price at the time of a particular
transaction. Any shares acquired pursuant to the bid will be cancelled.
To date, no common shares have been repurchased under this program in
2004 or 2005.
Common share stock options exercised for the three month and six month
period were 39,300 and 46,600, respectively.
Common share stock options forfeited for the three month and six month
period were nil and 1,100, respectively.
Note 6 - Stock-based Compensation
On June 23, 2005 the Corporation granted 734,700 options (June 24, 2004 -
756,000 options) to officers and certain employees to purchase common
shares at an exercise price of $37.75 per share (2004 - $39.89). These
options vest equally on the first, second and third anniversary date of
the grant and have a term not to exceed ten years.
The estimated fair value of the options has been determined using the
widely-used Black-Scholes option-pricing model. The estimated fair values
and assumptions are as follows:
2005 2004
---------------------------------------------------------------------
Fair value per option $ 6.57 $ 7.32
Risk-free interest rate 3.00% 4.25%
Expected time until exercise 5 years 5 years
Expected volatility in stock price 26% 25%
Expected annual dividend yield 3.95% 4.05%
---------------------------------------------------------------------
Note 7 - Contingent Gain
Effective August 30, 2004, the Corporation gave notice to a customer of
the termination of a contractual steel supply arrangement, in accordance
with the terms of the supply agreement. The 2004 annual results reflect
the $10 million liquidation payment related to the termination of this
contract. To ensure that the supply chain is not disrupted, Dofasco is
continuing to ship steel to the customer at a price that is reflective of
current market conditions. The right of Dofasco to terminate the
arrangement is being disputed by the customer pursuant to arbitration
proceedings, which were initiated in the fourth quarter of 2004. As a
result of the dispute, a provision against sales and accounts receivable
has been recorded as the amount equal to the difference between the
invoice price and the original contract price. In 2005, the cumulative
provision increased from approximately $37 million at December 31, 2004
to approximately $76 million as at June 30. The amount and timing of
realization of the potential gain to date, if any, is not determinable at
this time as it is dependent on the resolution of the dispute with the
customer. Future revenues will be impacted by such resolution, by future
market conditions and by the volume of future purchases by the customer.
Note 8 - Financial Instruments
Foreign Exchange Rate Risk
In order to manage the risk associated with fluctuations in foreign
exchange rates, the Corporation has entered into US dollar foreign
exchange forward purchase contracts for an aggregate amount of
US $133.2 million outstanding as at June 30, 2005. The contracts mature
at various dates between July 11, 2005 and October 3, 2005 at a weighted
average exchange rate of $1.2146. As at June 30, 2005, there were
unrealized gains on these contracts of $1.5 million.
The Corporation also enters into forward purchase contracts for other
currencies including euros and Swiss francs. As at June 30, 2005 and
December 31, 2004 the aggregate amount and unrealized gain or loss were
not significant.
Note 9 - Subsequent Event
On July 22, 2005, the Corporation completed the acquisition of
substantially all of the remaining equity interest that it did not
previously own in Quebec Cartier Mining Company (QCM), a leading producer
of iron ore products with facilities located in Quebec's North Shore
region.
Under the agreement announced on June 9, 2005, Dofasco, which previously
owned 20,000,000 preferred shares of QCM, acquired 20,000,000 preferred
shares of QCM from each of CAEMI MineraEcFao E Metalurgia S.A. of Brazil
and Investissement Quebec for total cash consideration of $306.0 million,
excluding acquisition costs. Immediately following the closing of the
transaction, all of the preferred shares of QCM were converted into
common shares, resulting in Dofasco now holding approximately 98.7% of
the outstanding common shares.
The acquisition of QCM was funded through a combination of short-term
bank borrowings and cash on hand. The acquisition is expected to be
accretive to consolidated net income and cash flows. As at the reporting
date, the allocation of the purchase price to the fair value of QCM's
assets and liabilities has not yet been finalized.
With regard to its interest in QCM, Dofasco is currently reviewing its
strategic options which include monetizing a significant portion of its
investment through an offering of QCM securities in the public markets.
The Corporation intends to retain an equity position in QCM sufficient to
act as a natural hedge of its annual iron ore purchase requirements.
Note 10 - Segmented Information
Three Months Ended June 30, 2005
----------------------------------------------
Steel Intercompany Consol.
(in millions) Operations(x) Gallatin Elimination Total
---------------------------------------------------------------------
Sales to external
customers $ 942.9 $ 118.1 $ - $ 1,061.0
Inter-segment sales - 3.8 (3.8) -
----------------------------------------------
Net sales $ 942.9 $ 121.9 $ (3.8) $ 1,061.0
---------------------------------------------------------------------
Gross income $ 114.0 $ 30.8 $ (0.2) $ 144.6
Depreciation and
amortization 43.5 4.8 - 48.3
Interest on long-term
debt 8.3 - - 8.3
Investment and other
income (2.0) (0.3) - (2.3)
Foreign exchange gain (3.1) - - (3.1)
----------------------------------------------
Income before income
taxes $ 67.3 $ 26.3 $ (0.2) $ 93.4
---------------------------------------------------------------------
Capital expenditures $ 107.9 $ 4.7 $ - $ 112.6
Three Months Ended June 30, 2004
----------------------------------------------
Steel Intercompany Consol.
(in millions) Operations(x) Gallatin Elimination Total
---------------------------------------------------------------------
Sales to external
customers $ 919.6 $ 142.0 $ - $ 1,061.6
Inter-segment sales - 2.7 (2.7) -
----------------------------------------------
Net sales $ 919.6 $ 144.7 $ (2.7) $ 1,061.6
---------------------------------------------------------------------
Gross income $ 164.9 $ 51.9 $ - $ 216.8
Depreciation and
amortization 55.1 5.4 - 60.5
Interest on long-term
debt 10.0 - - 10.0
Investment and other
income (2.0) - - (2.0)
Foreign exchange gain (3.3) - - (3.3)
----------------------------------------------
Income before income
taxes $ 105.1 $ 46.5 $ - $ 151.6
---------------------------------------------------------------------
Capital expenditures $ 54.3 $ 0.8 $ - $ 55.1
(x) Steel Operations include Hamilton operations, Dofasco USA,
Powerlasers, DoSol Galva, Dofasco de Mexico, Dofasco Marion and
Dofasco's share of Baycoat, DJ Galvanizing, Sorevco and Wabush.
Segment assets
June 30, December 31,
(in millions) 2005 2004
---------------------------------------------------------------------
Steel operations $ 3,502.6 $ 3,452.4
Gallatin 260.8 269.9
Intercompany elimination (0.5) (0.1)
----------------------
Consolidated total $ 3,762.9 $ 3,722.2
---------------------------------------------------------------------
---------------------------------------------------------------------
Six Months Ended June 30, 2005
----------------------------------------------
Steel Intercompany Consol.
(in millions) Operations(x) Gallatin Elimination Total
---------------------------------------------------------------------
Sales to external
customers $ 1,864.1 $ 270.0 $ - $ 2,134.1
Inter-segment sales - 6.6 (6.6) -
----------------------------------------------
Net sales $ 1,864.1 $ 276.6 $ (6.6) $ 2,134.1
---------------------------------------------------------------------
Gross income $ 247.1 $ 73.8 $ (0.4) $ 320.5
Depreciation and
amortization 87.3 9.9 - 97.2
Interest on long-term
debt 17.3 - - 17.3
Investment and other
income (3.9) (0.5) - (4.4)
Foreign exchange gain (3.2) - - (3.2)
----------------------------------------------
Income before income
taxes $ 149.6 $ 64.4 $ (0.4) $ 213.6
---------------------------------------------------------------------
Capital expenditures $ 200.1 $ 6.5 $ - $ 206.6
Six Months Ended June 30, 2004
----------------------------------------------
Steel Intercompany Consol.
(in millions) Operations(x) Gallatin Elimination Total
---------------------------------------------------------------------
Sales to external
customers $ 1,784.0 $ 238.8 $ - $ 2,022.8
Inter-segment sales - 4.7 (4.7) -
----------------------------------------------
Net sales $ 1,784.0 $ 243.5 $ (4.7) $ 2,022.8
---------------------------------------------------------------------
Gross income $ 301.0 $ 67.7 $ - $ 368.7
Depreciation and
amortization 111.1 10.5 - 121.6
Interest on long-term
debt 20.0 0.1 - 20.1
Investment and other
income (4.4) - - (4.4)
Foreign exchange (gain)
loss (5.1) 0.1 - (5.0)
----------------------------------------------
Income before income
taxes $ 179.4 $ 57.0 $ - $ 236.4
---------------------------------------------------------------------
Capital expenditures $ 115.8 $ 2.8 $ - $ 118.6
(x) Steel Operations include Hamilton operations, Dofasco USA,
Powerlasers, DoSol Galva, Dofasco de Mexico, Dofasco Marion and
Dofasco's share of Baycoat, DJ Galvanizing, Sorevco and Wabush.
Consolidated Geographic Information
Net Sales Fixed Assets
------------------------------------------ ---------------------
Three Months Ended Six Months Ended December
(in June 30, June 30, June 30, 31,
millions) 2005 2004 2005 2004 2005 2004
--------------------------------------------------- ---------------------
Canada $ 677.9 $ 721.3 $ 1,333.0 $ 1,365.9 $ 1,547.0 $ 1,437.9
United
States 330.8 299.0 699.5 586.7 187.0 186.4
Other
countries 52.3 41.3 101.6 70.2 43.4 45.4
------------------------------------------- ---------------------
Total $ 1,061.0 $ 1,061.6 $ 2,134.1 $ 2,022.8 $ 1,777.4 $ 1,669.7
--------------------------------------------------- ---------------------
--------------------------------------------------- ---------------------
Corporate information
-------------------------------------------------------------------------
For information concerning share ownership or dividends,
please contact our transfer agent:
CIBC Mellon Trust Company
320 Bay Street
P.O. Box 1
Toronto, Ontario
M5H 4A6
Answerline 416-643-5500
Toll Free in Canada and the U.S. 1-800-387-0825
E-Mail Address inquiries(at)cibcmellon.ca
When contacting Dofasco, please direct inquiries to:
The Corporate Secretary
Dofasco Inc.
P.O. Box 2460
Hamilton, Ontario
L8N 3J5
905-544-3761 or 1-800-DOFASCO (363-2726)
E-Mail Address: corpsec(at)dofasco.ca
Website: www.dofasco.ca
Copies of Dofasco's investor Quarterly Fact Book can be obtained on the
Dofasco website or, upon request, by telephone or e-mail.
Dofasco offers electronic delivery of shareholder documents such as
quarterly and annual reports. Please contact the Office of the Corporate
Secretary at 1-800-363-2726 for further details.
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