Reports best first quarter net income ever of $78.2 million
HAMILTON, ON, April 27 /CNW/ - Dofasco Inc. reported its results for the
first quarter of 2005 today, crediting higher selling prices for its
much-improved earnings compared to the first quarter of 2004.
For the three months ended March 31, 2005, Dofasco's consolidated net
income was $78.2 million or $1.01 per common share, significantly higher than
the same quarter last year. For the first quarter of 2004, earnings were
$54.6 million, or $0.71 per share after deducting preferred share dividends.
Commenting on the quarter, Dofasco's President and CEO Don Pether said,
"Dofasco continues to post very good results in an ever-changing and
continuously challenging environment thanks to the contribution of its team of
employees in Canada, the United States and Mexico. These quarterly earnings,
the best first quarter ever, represent a continuation of the success that we
have achieved over the cycle and are evidence that we continue to deliver
long-term value to our customers and shareholders."
Dofasco's consolidated sales of $1,073.1 million in the first quarter of
2005 represent a 12% increase from the $961.2 million for the same period in
2004. Steel shipments, at 1.17 million tons, were down from the 1.32 million
tons shipped in the first quarter of 2004 due to higher customer inventories
at year end, which were driven by a surge in imports into North America in the
second half of 2004.
Dofasco's Steel Operations segment, which includes the company's Hamilton
operations, reported income before income taxes of $82.3 million for the
quarter, compared to $74.3 million for the first quarter of 2004, reflecting
the stronger pricing. Shipments from Hamilton were 972,000 tons in the first
quarter, a decrease from the record 1,125,000 tons in the same quarter of
2004. Higher selling prices on contract and spot business resulted in a $152
increase in the average revenue realized per ton of steel shipped from
Hamilton in the first quarter of 2005 compared to the same period in 2004.
Average cost per ton increased by $135 over the high levels experienced in
2004, driven primarily by higher prices for scrap and purchased slabs and
increased costs of other raw materials and energy.
Dofasco's 50% share of Gallatin Steel's income before taxes for the
quarter was $38.1 million, up from $10.5 million in the same quarter for 2004.
Significantly higher U.S. spot market selling prices drove Gallatin's
profitability in the first quarter. Shipments for the quarter were
388,000 tons, slightly higher than the 383,000 tons shipped in the first
quarter of 2004.
"Looking forward, Dofasco expects second quarter results to be similar to
the first quarter. For our Steel Operations segment, we expect flat rolled
steel demand to improve in the second quarter. At Gallatin, shipments are
expected to remain similar to the first quarter, however, North American hot
band spot market prices are anticipated to continue to ease," said Pether.
The No. 2 Blast Furnace rebuild in Hamilton is expected to be completed
late in the second quarter. After the startup of No. 2 Blast Furnace, the
No. 3 Blast Furnace will be removed from service.
On April 14th, Dofasco announced the first in a series of pledges that
will be made in 2005 to local organizations in the Hamilton area that will
exceed $8 million over a number of years. These donations are further evidence
of Dofasco's commitment to the principles of corporate social responsibility.
The first capital gift of $2.5 million, announced during the Hamilton Health
Sciences' campaign launch at Dofasco's Main Office, will support the new and
expanded Heart Investigation Unit at the Hamilton General Hospital. Dofasco
had previously donated $1 million to bring an MRI scanner to the Hamilton
General.
"We're sharing the rewards of our success with a community that's been
Dofasco's home for 93 years and home to generations of Dofasco people and
their families," said President and CEO Don Pether. "We're proud to be a part
of the community and we're committed to giving back."
Dave Borsellino, Dofasco's Vice President, Manufacturing recently
indicated his intention to retire in November, 2005. Mr. Borsellino's career
at Dofasco began in 1971, and he held several management positions in
Manufacturing and Technology at Dofasco before his appointment to the position
of Vice President, Manufacturing in 1994.
Dofasco's Board of Directors has appointed Andy Harshaw to the position
of Vice President, Manufacturing to succeed Mr. Borsellino, effective
November, 2005. Since joining Dofasco in 1978, Mr. Harshaw has held management
positions within the company's Research and Development, Commercial and
Manufacturing departments. He currently holds the position of Works Manager.
Don Pether remarked, "Dave Borsellino has made a remarkable contribution
to Dofasco for more than three decades, providing sound leadership to help
guide the organization to achieve many successes."
Mr. Pether added, "Andy Harshaw comes to the position of Vice President,
Manufacturing following years of varied experiences that have helped prepare
him for his new senior management role at Dofasco. These experiences, which
were part of our long-term succession planning process, have provided exposure
to different parts of Dofasco's business and direct leadership involvement in
several key projects."
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 Report to Shareholders for the period ended
March 31, 2005. This press release has been reviewed by the Audit Committee of
Dofasco's Board of Directors.
Report to Shareholders
for the period ended March 31, 2005
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DOFASCO
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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 and in the 2004 Annual MD&A. 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 April 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 is
available in the Corporation's Annual Information Form, which can be accessed
from SEDAR at www.sedar.com.
RESULTS OF OPERATIONS
Consolidated Financial Results
Dofasco achieved very good results in the first quarter of 2005, the
highest first quarter net income in Dofasco's history, driven by a continued
high, although declining, North American pricing environment. However, high
customer inventories dampened demand, which led to lower shipments and a
decrease in net income from the excellent results achieved in the fourth
quarter of 2004.
Consolidated net income for the three months ended March 31, 2005 was
$78.2 million or $1.01 per common share, significantly higher than the same
quarter last year. In the first quarter of 2004, consolidated net income was
$54.6 million or $0.71 per share after deducting preferred share dividends.
Gross Income by Business Segment
Consolidated gross income for the first quarter of 2005 was
$175.9 million, a 16% increase over gross income of $151.9 million for the
same quarter of 2004. This increase was driven by improved results at Gallatin
Steel. Note 7 to the consolidated financial statements provides additional
financial information on the Corporation's reporting segments.
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 3 of this MD&A.
Steel Operations Gross Income
Steel Operations' gross income was $133.1 million in the quarter, a
slight decrease from the $136.1 million generated in the first quarter of
2004.
<<
Three months ended March 31 2005 2004 Change
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(in millions)
Net sales $ 921.2 $ 864.4 $ 56.8
Cost of sales 788.1 728.3 59.8
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Gross Income $ 133.1 $ 136.1 $ (3.0)
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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 March 31 2005 2004 Change
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Steel shipments (000's tons) 972 1,125 (153)
Raw steel production(1) (000's tons) 1,215 1,197 18
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Revenue per ton $ 864 $ 712 $ 152
Cost per ton 732 597 135
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Gross Income per ton $ 132 $ 115 $ 17
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(1) Raw steel production includes purchased semi-finished steel
Shipments from Hamilton in the quarter declined 14% from the record
levels shipped in the first quarter of 2004. First quarter shipments in 2005
were negatively impacted by the high level of customer inventories at the end
of 2004. In the first quarter of 2004, the record shipments reflected very
strong demand for steel, and were enabled by strong finishing production and a
drawdown of inventories.
The average realized revenue per ton shipped from Hamilton operations in
the quarter increased by $152 relative to the first quarter of 2004 due to the
stronger pricing environment. The higher revenue per ton in the first quarter
of 2005 reflected the impact of contract price increases on close to 45% of
shipments from Hamilton. In addition, sales to the spot market comprised
approximately 35% of total shipments at selling prices that were significantly
higher than in the same period last year. The benefit of the stronger market
prices was not fully realized in the first quarter of 2005, as close to 20% of
Hamilton sales are under long-term contracts that have not yet been
renegotiated. These factors were partially offset by the strengthening of the
Canadian dollar against the U.S. dollar from an average exchange rate of
76 cents in the first quarter of 2004 to an average of 82 cents in the first
quarter of 2005.
Hamilton operations' average cost per ton in the quarter increased by
$135 compared to the same period in 2004. This increase was mainly due to
significantly higher prices for scrap and purchased slabs, combined with
higher costs of other raw materials and energy. These factors were partially
offset by the strengthening of the Canadian dollar year over year and a
favourable adjustment to raw material inventory in the quarter.
Gallatin Steel Gross Income
Gallatin Steel contributed considerably improved gross income in the
first quarter of 2005 compared to the first quarter in 2004. Significantly
higher U.S. spot market selling prices, partially offset by a higher average
cost per ton and a weaker U.S. dollar, resulted in $43.0 million of gross
income in the first quarter compared to $15.8 million generated in the same
period in 2004.
Three months ended March 31 2005 2004 Change
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(50%, Cdn $ millions)
Net sales $ 154.7 $ 98.8 $ 55.9
Cost of sales 111.7 83.0 28.7
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Gross Income $ 43.0 $ 15.8 $ 27.2
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(000's tons at 100%)
Steel shipments 388 383 5
Raw steel production 398 387 11
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(US $)
Revenue per ton $ 650 $ 391 $ 259
Cost per ton 470 329 141
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Gross Income per ton $ 180 $ 62 $ 118
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Shipments were 388,000 tons in the first quarter, slightly higher than
the 383,000 tons shipped in the first quarter of 2004.
Gallatin's average realized revenue per ton in the first quarter of 2005
increased by US $259 compared to the same quarter of last year. This was
driven by the rapid escalation of U.S. spot market selling prices which
occurred in the first three quarters of 2004. Since virtually all of
Gallatin's shipments are to the spot market, Gallatin fully benefits from the
current high pricing environment.
The average cost per ton shipped in the quarter increased by US $141 over
the same period last year, driven by markedly higher scrap costs and higher
costs of alloys and energy. Despite a recent decline from record levels in the
fourth quarter of 2004, average scrap costs in the quarter were approximately
66% higher than one year ago.
Other Income Statement Items
Depreciation and Amortization
Consolidated depreciation and amortization decreased by $12.2 million in
the first quarter compared to the same period in 2004. The lower depreciation
reflects the impact of certain facilities in Hamilton becoming fully
depreciated during 2004, as well as a $7.0 million non-cash adjustment in the
first quarter of 2004 for certain obsolete computer equipment in Hamilton.
Income Taxes
The consolidated effective tax rate of 33.5% for the first quarter
approximates the Corporation's Canadian manufacturing and processing effective
statutory rate of 34%. In the first quarter of 2004, the consolidated
effective tax rate was 34.9%.
The following table reconciles consolidated gross income to net income in
accordance with GAAP.
Three months ended March 31 2005 2004 Change
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(in millions)
Gross income $ 175.9 $ 151.9 $ 24.0
Depreciation and amortization 48.9 61.1 (12.2)
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Operating income 127.0 90.8 36.2
Interest on long-term debt 9.0 10.1 (1.1)
Investment and other income (2.1) (2.4) 0.3
Foreign exchange gain (0.1) (1.7) 1.6
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Income before income taxes 120.2 84.8 35.4
Income tax expense 40.3 29.6 10.7
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79.9 55.2 24.7
Minority interest 1.7 0.6 1.1
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Net income $ 78.2 $ 54.6 $ 23.6
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Summary of Quarterly Results
The following table summarizes selected financial and non-financial
information for the nine most recent quarters.
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Steel Raw Steel Net Gross
Consolidated Shipments(1) Production(2) Sales Income
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(thousands (millions
of net tons) of dollars)
2005 -
First Quarter 1,166 1,414 $ 1,073.1 $ 175.9
2004 -
Fourth Quarter 1,207 1,288 $ 1,113.1 $ 219.7
Third Quarter 1,194 1,413 $ 1,089.0 $ 247.8
Second Quarter 1,284 1,409 $ 1,061.6 $ 216.8
First Quarter 1,317 1,390 $ 961.2 $ 151.9
2003 -
Fourth Quarter(3) 1,266 1,328 $ 871.2 $ 133.8
Third Quarter 1,174 1,345 $ 857.6 $ 119.4
Second Quarter 1,211 1,265 $ 923.2 $ 147.9
First Quarter 1,182 1,395 $ 902.9 $ 157.5
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Earnings Per Share
Net -------------------------
Consolidated Income Basic Diluted
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(millions (dollars
of dollars) per share)
2005 -
First Quarter $ 78.2 $ 1.01 $ 1.01
2004 -
Fourth Quarter $ 96.8 $ 1.26 $ 1.25
Third Quarter $ 115.0 $ 1.50 $ 1.49
Second Quarter $ 110.5 $ 1.45 $ 1.44
First Quarter $ 54.6 $ 0.71 $ 0.71
2003 -
Fourth Quarter(3) $ 2.4 $ 0.03 $ 0.03
Third Quarter $ 29.7 $ 0.39 $ 0.39
Second Quarter $ 38.7 $ 0.51 $ 0.51
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
In the first quarter of 2005, consolidated cash provided from operations
before changes in non-cash working capital was $154.6 million. This represents
a 26% increase over the $123.1 million generated in the first quarter of 2004,
reflecting the higher net income.
Non-cash working capital increased by $102.7 million in the first
quarter, largely due to a $127.9 million decrease in accounts payable and
accrued liabilities. This decrease was primarily attributable 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
$56.2 million reflecting payment of the final 2004 income tax installments in
the first quarter. Accounts receivable increased by $50.2 million, primarily
due to higher sales in March 2005 compared to December 2004. These factors
were partially offset by a $131.6 million decrease in inventories, mainly due
to a seasonal decrease in the levels of purchased slabs and raw materials,
partially offset by higher levels of finished goods inventories.
In the first quarter of 2004, an increase in accounts receivable of
$119.7 million was due to higher sales in March 2004 compared to
December 2003. This was offset by a $110.1 million decrease in inventories,
due mainly to seasonally lower levels of raw materials and a drawdown of
finished goods, resulting in $0.6 million of cash provided by changes in
non-cash working capital.
Cash Used for Investing Activities
Consolidated capital expenditures in the first quarter of 2005 were
$94.0 million compared to $63.5 million in the same quarter in 2004. 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 completion of the No. 2
Blast Furnace rebuild is scheduled for late in the second quarter of 2005.
After the startup of No. 2 Blast Furnace, the No. 3 Blast Furnace will be
removed 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), is scheduled
to begin production late in 2005. Phase II of FDIP, focusing on the
galvanizing operations, commenced during 2004. Capital expenditures for 2005
in total are expected to be approximately $450 million.
Short-term investments decreased by $106.0 million in the first quarter
of 2005 compared to a decrease of $54.5 million in the first quarter of 2004.
As in prior quarters, these variations reflect changes in the mix of
short-term investments and cash.
Cash Used for Financing Activities
Bank borrowings increased by $5.0 million in the first quarter as the
Corporation's Sorevco and DJ Galvanizing partnerships utilized existing lines
of credit to finance working capital requirements. This compared to a decrease
of $4.1 million in the first quarter of 2004, primarily attributable to
repayments by Gallatin.
Dofasco paid $25.4 million in dividends in the first quarter compared to
$22.9 million in the same period 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 April 20, 2005, there were
77,111,111 common shares outstanding.
Cash Requirements
Cash requirements in 2005 include scheduled payments under long-term debt
agreements, including $175.0 million of 7.5% Medium Term Notes maturing on
June 1, 2005. In addition, significant payments will be required for the
Corporation's continued investment in its major capital projects.
During the fourth quarter of 2004, Dofasco filed a $300 million Medium
Term Note program shelf prospectus, which will provide the flexibility of
issuing up to $300 million of notes over a two-year period. The proceeds from
the program will be used for general corporate and working capital purposes,
including the repayment of debt and funding of future capital expenditures.
During the first quarter, no debt was issued under this program.
Guarantees and Other Commitments
Dofasco continues to provide letters of credit in support of Quebec
Cartier Mining Company's (QCM) credit facility and equipment leases. The
amount of these guarantees was approximately $22.7 million at March 31, 2005,
and will continue to be reduced as QCM's underlying obligations are repaid by
2010.
Effective December 31, 2003, the capital restructuring of QCM was
finalized, resulting in Dofasco retaining an investment in preferred shares of
QCM. Pursuant to the restructuring, the Corporation may be required to provide
continuing support of future mine development at QCM, to a maximum of
$34.5 million between 2005 and 2010. To date, no support payments have been
required.
After the restructuring, the shareholders of QCM received various
expressions of interest from parties potentially interested in purchasing QCM.
Discussions with respect to the future ownership of QCM have been delayed
pending resolution of the current labour disruption discussed in the section
"Risks and Risk Management". It cannot be determined at this time whether a
transaction will occur or, if there is a transaction, the form it will take or
the value that will be generated.
Capital Resources
Dofasco's capital resources at March 31, 2005 included cash and cash
equivalents and short-term investments amounting to $305.9 million, compared
to $368.2 million at December 31, 2004. This solid cash position, together
with ongoing strong cash flow from operations and available credit facilities,
including the Medium Term Note program, is expected to enable the Corporation
to satisfy the anticipated cash requirements described above.
Dofasco's financial position remained strong in the first quarter of
2005, as evidenced by the ratio of debt to debt plus equity of 17.0% or 6.3%
net of cash and cash equivalents.
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. During the first quarter, the cumulative provision increased
from approximately $37 million at December 31, 2004 to approximately
$57 million as at March 31. 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.
BUSINESS CONDITIONS AND OUTLOOK
2005 Economic Outlook
The Canadian economy is expected to grow by 2% to 2.5% during 2005 led by
consumer spending and business investment, following growth of close to 3% in
2004. Export growth is expected to lag the overall economy due to the relative
strength of the Canadian dollar versus the U.S. dollar.
In the U.S., GDP growth is forecast to be 3% to 3.5% in 2005, down from
annual growth of close to 4.5% experienced in 2004. Economic growth in 2005 is
expected to be driven by consumer spending, business investment and exports.
However, expectations are being tempered due to higher oil and energy prices.
Input cost pressures will continue throughout 2005 as contract prices for
raw materials such as iron ore and coal have risen significantly. The strength
of the global steel market is expected to continue to support energy and raw
materials prices at historically high levels.
In North America, the very high year end customer inventories, driven by
a surge in imports in the second half of 2004, have dampened the demand for
flat rolled steel in early 2005 and will continue to impact demand in the
second quarter. However, lower imports into North America are expected to
moderate this impact on North American steel producers as the year progresses.
For the year in total, North American flat rolled steel demand is expected to
be below the record level of close to 100 million tons experienced in 2004.
U.S. spot market selling prices for hot band steel, a benchmark for flat
rolled pricing, escalated through the first nine months of 2004 and reached a
record high in September before easing by approximately US $100 per ton during
the fourth quarter. In 2005, reported hot band spot prices have further
declined by approximately US $90 per ton, making the North American market
less attractive for foreign imports of flat rolled steel.
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.
Automotive
In 2004, North American vehicle production decreased by approximately
0.5%. For the first quarter of 2005, production was 3.8% below the same period
last year. For the year 2005, vehicle production is expected to be similar to
2004 levels, supported by strong consumer spending and fuelled by continuing
low interest rates and auto makers' sales incentives.
Dofasco's shipments to this segment in the first quarter increased
relative to 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
Steel inventories reported by Canadian service centres rose by almost 20%
in the fourth quarter of 2004, due in large part to the surge in imports
experienced through the second half of the year. The combination of flat
end-user demand and the need to reduce inventories from the very high year end
levels is believed to have resulted in lower flat rolled steel purchases by
service centres in the first quarter of 2005.
Construction
Canadian non-residential construction activity is expected to strengthen
from growth of 1% in 2004 to a 5.5% increase in 2005. Strong corporate
profits, relatively low interest rates and capacity expansion are expected to
drive increased investment. New housing starts are forecasted to be lower for
2005, while spending on renovations to existing residences should remain
strong. Current indicators of construction activity point to a seasonal
rebound for the second quarter of 2005 following a slow start to the year.
Outlook for Dofasco
Steel Operations' results in the second quarter of 2005 are expected to
improve over the first quarter's results. Shipment levels from Hamilton are
expected to be higher than in the first quarter, mainly driven by an increase
in sales to the construction market segment from seasonally lower first
quarter levels. Revenue per ton in the second quarter is expected to decrease
due to a decline in spot prices. A reduction in scrap prices is expected to
contribute to a decrease in cost per ton in the second quarter, compared to
the first quarter which was impacted by high cost opening inventories. The
full impact of higher iron ore and coal prices is not expected until the third
quarter as these costs flow through inventory. In addition, Steel Operations'
results will reflect the expected increase in profits from the Corporation's
Wabush Mines joint venture.
Gallatin's second quarter shipments are expected to remain at levels
similar to the first quarter. Gallatin's average revenue per ton in the second
quarter is expected to decrease, as a result of lower U.S. hot band spot
prices. This decrease reflects the high level of inventories in the supply
chain and lower North American flat rolled steel demand. Cost per ton is
expected to decrease marginally in the second quarter due primarily to lower
scrap prices. As a result, Gallatin's results in the second quarter of 2005
are expected to decline from the first quarter's results.
Overall, Dofasco's consolidated gross income in the second quarter is
expected to be similar to the results in the first quarter.
RISKS AND RISK MANAGEMENT
The Corporation's performance may be affected by a number of risk
factors. Dofasco senior management monitors, manages and mitigates key risks.
This process includes a review of Dofasco's Commodity Risk Management Policy
with the Audit Committee annually. The following discussion is an update to
certain risks identified in Dofasco's 2004 Annual MD&A.
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, euro-denominated
purchases and 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 and euro-denominated purchase transactions,
including committed purchases of steel slabs and major capital expenditures.
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 loss on unsettled foreign exchange forward purchase
contracts at March 31, 2005 was $4.2 million (December 31, 2004 - nil). Note 6
to the consolidated financial statements provides additional information
regarding Dofasco's financial instruments.
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 scrap steel, iron
ore and coal. Dofasco also purchases significant quantities of steel slabs.
Iron ore and coal are key inputs to Hamilton's integrated stream, which
provides approximately 60% of total slabs charged to the Hot Mill, with the
Electric Arc Furnace accounting for approximately 30%. Dofasco has long-term,
secure sources of iron ore, primarily from QCM, in which Dofasco holds a
preferred share investment. 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.
QCM's collective bargaining agreement with its unionized employees
expired on March 1, 2005. Following successful negotiations with three of the
four union locals, QCM management and union representatives reached a
resolution that was rejected by the unionized employees at QCM's Mont-Wright
mine, who went on strike on April 9. QCM management is continuing to negotiate
with the union to reach a resolution that is acceptable to all parties.
Dofasco's on-hand inventories and committed purchases from other sources are
sufficient to meet the Corporation's short-term requirements. The Corporation
is assessing the potential impacts of a long-term work disruption at QCM.
OTHER ANNOUNCEMENTS
Corporate Donations
On April 14th, Dofasco announced the first in a series of pledges to
local organizations in the Hamilton area that will exceed $8 million over a
number of years. The first capital gift of $2.5 million to Hamilton Health
Sciences will support a new and expanded Heart Investigation Unit.
Management Change
Dave Borsellino, Dofasco's Vice President, Manufacturing recently
indicated his intention to retire in November, 2005. Dofasco's Board of
Directors has appointed Andy Harshaw to the position of Vice President,
Manufacturing to succeed Mr. Borsellino, effective November, 2005. Mr. Harshaw
joined Dofasco in 1978 and currently holds the position of Works Manager.
B. F. MACNEILL D. A. PETHER
Chair of the Board President and Chief Executive Officer
April 26, 2005
Consolidated Statements of Income and Retained Earnings (Unaudited)
-------------------------------------------------------------------------
Three Months Ended
March 31
(in millions except per share amounts) 2005 2004
-------------------------------------------------------------------------
Income
Net sales $ 1,073.1 $ 961.2
Cost of sales 897.2 809.3
-------------------------
Gross income 175.9 151.9
Depreciation and amortization 48.9 61.1
-------------------------
Operating income 127.0 90.8
Interest on long-term debt 9.0 10.1
Investment and other income (2.1) (2.4)
Foreign exchange gain (0.1) (1.7)
-------------------------
Income before income taxes 120.2 84.8
Income tax expense 40.3 29.6
-------------------------
79.9 55.2
Minority interest 1.7 0.6
-------------------------
Net income 78.2 $ 54.6
-------------------------------------------------------------------------
Earnings per Common Share
Basic $ 1.01 $ 0.71
Diluted $ 1.01 $ 0.71
-------------------------------------------------------------------------
Retained Earnings
Opening balance $ 1,352.0 $ 1,072.2
Net income 78.2 54.6
-------------------------
1,430.2 1,126.8
-------------------------
Dividends declared:
Preferred shares - 0.1
Common shares 25.5 22.9
-------------------------
25.5 23.0
-------------------------
Ending balance $ 1,404.7 $ 1,103.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Consolidated Balance Sheets (Unaudited)
-------------------------------------------------------------------------
March 31 December 31
(in millions) 2005 2004
-------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 305.9 $ 262.2
Short-term investments - 106.0
Accounts receivable 552.6 502.4
Inventories (note 2) 929.2 1,060.4
Future income tax assets 15.0 11.1
-------------------------
1,802.7 1,942.1
-------------------------
Fixed and other assets:
Fixed assets 1,715.1 1,669.7
Accrued pension benefit 68.6 76.2
Investments and other assets 34.3 34.2
-------------------------
1,818.0 1,780.1
-------------------------------------------------------------------------
Total assets $ 3,620.7 $ 3,722.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Current liabilities:
Bank borrowings of joint ventures $ 9.9 $ 4.9
Accounts payable and accrued liabilities 369.3 498.7
Income and other taxes payable 7.5 61.8
Dividends payable 25.5 25.4
Current requirements on long-term debt 220.2 219.9
-------------------------
632.4 810.7
-------------------------
Long-term liabilities:
Long-term debt 225.1 224.6
Future income tax liabilities 66.8 56.5
Employee future benefits 412.1 402.5
Other long-term liabilities 25.2 26.2
-------------------------
729.2 709.8
-------------------------
Minority interest 37.5 35.8
-------------------------
Shareholders' equity:
Common shares (note 4) 850.8 850.6
Contributed surplus 10.4 9.2
Retained earnings 1,404.7 1,352.0
Currency translation adjustment (44.3) (45.9)
-------------------------
2,221.6 2,165.9
-------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 3,620.7 $ 3,722.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Consolidated Statements of Cash Flows (Unaudited)
-------------------------------------------------------------------------
Three Months Ended
March 31
(in millions) 2005 2004
-------------------------------------------------------------------------
Cash provided from (used for):
Operating activities:
Net income $ 78.2 $ 54.6
Add (deduct) items not affecting cash
Depreciation and amortization 48.9 61.1
Future income taxes 8.8 (7.9)
Employee future benefits 17.2 14.0
Stock-based compensation (0.3) 0.9
Other 1.8 0.4
-------------------------
154.6 123.1
Add (deduct) changes in non-cash components
of working capital
Accounts receivable (50.2) (119.7)
Inventories 131.6 110.1
Accounts payable and accrued liabilities (127.9) (3.7)
Income and other taxes (56.2) 13.9
-------------------------
(102.7) 0.6
-------------------------
51.9 123.7
-------------------------------------------------------------------------
Investment activities:
Capital expenditures (94.0) (63.5)
Decrease in short-term investments 106.0 54.5
Other - (0.2)
-------------------------
12.0 (9.2)
-------------------------------------------------------------------------
Financing activities:
Increase (decrease) in bank borrowings of
joint ventures 5.0 (4.1)
Repayment of long-term debt (0.1) (2.4)
Common shares issued 0.2 1.5
Dividends paid (25.4) (22.9)
-------------------------
(20.3) (27.9)
-------------------------------------------------------------------------
Effect of exchange rate changes on cash and
cash equivalents 0.1 0.5
-------------------------------------------------------------------------
Cash and cash equivalents:
Increase in period 43.7 87.1
Balance at beginning of period 262.2 346.1
-------------------------
Balance at end of period $ 305.9 $ 433.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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
March 31, December 31,
(in millions) 2005 2004
---------------------------------------------------------------------
Raw materials and other inventories $ 267.3 $ 339.4
Semi-finished and finished steel products 661.9 721.0
---------------------------------------------------------------------
$ 929.2 $ 1,060.4
---------------------------------------------------------------------
---------------------------------------------------------------------
Note 3 - Employee Future Benefits
In the three months ended March 31, 2005 and March 31, 2004, the
Corporation recognized in cost of sales the following net benefit cost
for employee future benefits:
Three Months Ended
March 31
(in millions) 2005 2004
---------------------------------------------------------------------
Defined contribution plans $ 0.4 $ 0.5
Defined benefit plans 9.1 8.0
---------------------------
Total pension plans 9.5 8.5
Total other post-employment benefit plans 13.0 11.3
---------------------------
Total net benefit cost $ 22.5 $ 19.8
---------------------------------------------------------------------
---------------------------------------------------------------------
Note 4 - Capital Stock
The following table summarizes information on share capital and related
matters at March 31, 2005:
Outstanding Exercisable
---------------------------------------------------------------------
Common shares 77,111,111 -
Common shares - year-to-date
weighted average 77,108,394 -
Common share stock options 1,936,600 339,550
---------------------------------------------------------------------
---------------------------------------------------------------------
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.
During the quarter, common share stock options exercised and forfeited
were 7,300 and 1,100 respectively.
Note 5 - 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. During the first quarter,
the cumulative provision increased from approximately $37 million at
December 31, 2004 to approximately $57 million as at March 31. 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 6 - Financial Instruments
Foreign Exchange Rate Risk
In order to manage the risk associated with fluctuations in foreign
exchange rates, the Corporation has entered into foreign exchange forward
purchase contracts for an aggregate amount of US $256.4 million
(December 31, 2004 - nil) and euro 0.4 million (December 31, 2004 -
euro 0.5 million) as at March 31, 2005. The US dollar contracts mature at
various dates between April 1, 2005 and September 26, 2005 at a weighed
average exchange rate of $1.2258. As at March 31, 2005, there were
unrealized losses on the US dollar contracts of $4.2 million. The euro
contracts mature at various dates between April 29, 2005 and
January 31, 2006 at a weighted average exchange rate of US $1.3493. There
was no significant unrealized gain or loss on the euro contracts as at
March 31, 2005.
Note 7 - Segmented Information
Three Months Ended March 31, 2005
---------------------------------------------------
Steel Intercompany Consol.
(in millions) Operations(x) Gallatin Elimination Total
---------------------------------------------------------------------
Sales to external
customers $ 921.2 $ 151.9 $ - $ 1,073.1
Inter-segment sales - 2.8 (2.8) -
---------------------------------------------------
Net sales $ 921.2 $ 154.7 $ (2.8) $ 1,073.1
---------------------------------------------------------------------
Gross income $ 133.1 $ 43.0 $ (0.2) $ 175.9
Depreciation and
amortization 43.8 5.1 - 48.9
Interest on
long-term debt 9.0 - - 9.0
Investment and
other income (1.9) (0.2) - (2.1)
Foreign exchange
gain (0.1) - - (0.1)
---------------------------------------------------
Income before
income taxes $ 82.3 $ 38.1 $ (0.2) $ 120.2
---------------------------------------------------------------------
Capital
expenditures $ 92.2 $ 1.8 $ - $ 94.0
Three Months Ended March 31, 2004
---------------------------------------------------
Steel Intercompany Consol.
(in millions) Operations(x) Gallatin Elimination Total
---------------------------------------------------------------------
Sales to external
customers $ 864.4 $ 96.8 $ - $ 961.2
Inter-segment sales - 2.0 (2.0) -
---------------------------------------------------
Net sales $ 864.4 $ 98.8 $ (2.0) $ 961.2
---------------------------------------------------------------------
Gross income $ 136.1 $ 15.8 $ - $ 151.9
Depreciation and
amortization 56.0 5.1 - 61.1
Interest on
long-term debt 10.0 0.1 - 10.1
Investment and
other income (2.4) - - (2.4)
Foreign exchange
(gain) loss (1.8) 0.1 - (1.7)
---------------------------------------------------
Income before
income taxes $ 74.3 $ 10.5 $ - $ 84.8
---------------------------------------------------------------------
Capital
expenditures $ 61.5 $ 2.0 $ - $ 63.5
(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
March 31, December 31,
(in millions) 2005 2004
---------------------------------------------------------------------
Steel operations $ 3,349.8 $ 3,452.4
Gallatin 271.6 269.9
Intercompany elimination (0.7) (0.1)
-------------------------
Consolidated total $ 3,620.7 $ 3,722.2
---------------------------------------------------------------------
---------------------------------------------------------------------
Consolidated Geographic Information
Net Sales Fixed Assets
---------------------------------------------------
Three Months Ended
March 31, March 31, December 31,
(in millions) 2005 2004 2005 2004
---------------------------------------------------------------------
Canada $ 655.1 $ 644.6 $ 1,486.6 $ 1,437.9
United States 368.7 287.7 184.1 186.4
Other countries 49.3 28.9 44.4 45.4
---------------------------------------------------
Total $ 1,073.1 $ 961.2 $ 1,715.1 $ 1,669.7
---------------------------------------------------------------------
---------------------------------------------------------------------
- SUPPLEMENTARY INFORMATION -
Segmented Information (Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions except shipments
and per ton amounts) 2005 2004
-------------------------------------------------------------------------
First Fourth First
Quarter Quarter Quarter
------------------------------------
Sales
Gallatin 154.7 156.0 98.8
Steel Operations(x) 921.2 958.1 864.4
Intercompany Elimination (2.8) (1.0) (2.0)
-------------------------------------------------------------------------
Consolidated Sales $ 1,073.1 $ 1,113.1 $ 961.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cost of Sales
Gallatin 111.7 105.9 83.0
Steel Operations(x) 788.1 788.5 728.3
Intercompany Elimination (2.6) (1.0) (2.0)
-------------------------------------------------------------------------
Consolidated Cost of Sales $ 897.2 $ 893.4 $ 809.3
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross Income
Gallatin 43.0 50.1 15.8
Steel Operations(x) 133.1 169.6 136.1
Intercompany Elimination (0.2) - -
-------------------------------------------------------------------------
Consolidated Gross Income $ 175.9 $ 219.7 $ 151.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation & Amortization
Gallatin 5.1 5.3 5.1
Steel Operations(x) 43.8 52.3 56.0
-------------------------------------------------------------------------
Consolidated Depreciation &
Amortization $ 48.9 $ 57.6 $ 61.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest on Long-term Debt
Gallatin - - 0.1
Steel Operations(x) 9.0 9.5 10.0
-------------------------------------------------------------------------
Consolidated Interest on
Long-term Debt $ 9.0 $ 9.5 $ 10.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Investment and Other (Income) Loss
Gallatin (0.2) (0.1) -
Steel Operations(x) (1.9) (2.9) 2.4
-------------------------------------------------------------------------
Consolidated Investment and Other
(Income) Loss $ (2.1) $ (3.0) $ 2.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Foreign Exchange (Gain) Loss
Gallatin - - 0.1
Steel Operations(x) (0.1) 4.8 (1.8)
-------------------------------------------------------------------------
Consolidated Foreign Exchange
(Gain) Loss $ (0.1) $ 4.8 $ (1.7)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income Before Income Taxes
Gallatin 38.1 44.9 10.5
Steel Operations(x) 82.3 105.9 74.3
Intercompany Elimination (0.2) - -
-------------------------------------------------------------------------
Consolidated Income Before
Income Taxes $ 120.2 $ 150.8 $ 84.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Shipments
Steel Shipments
Gallatin (000's net tons)(xx) 194 188 192
Hamilton & DSG Operations
(000's net tons) 972 1,019 1,125
Intercorporate (000's net tons) - -
-------------------------------------------------------------------------
Total Steel Shipments 1,166 1,207 1,317
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sales Per Ton
Gallatin $ 797 $ 834 $ 516
Hamilton & DSG Operations $ 864 $ 870 $ 712
Gross Income Per Ton
Gallatin $ 221 $ 267 $ 82
Hamilton & DSG Operations $ 132 $ 153 $ 115
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of common shares outstanding:
Period-end (000's) 77,111 77,105 76,180
Year-to-date weighted
average (000's) 77,108 76,589 76,154
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(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.
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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