HAMILTON, ON, Oct. 31 /CNW/ - Dofasco Inc. reported its results for the
third quarter of 2005 today. For the three months ended September 30, 2005,
Dofasco's consolidated net income was $5.2 million or $0.07 per common share,
compared to the record $115.0 million or $1.50 per share reported in the third
quarter of 2004. In the second quarter of 2005, Dofasco's net income was
$59.2 million or $0.77 per share.
The consolidated net income reflected good results at the company's
Mining Operations and Gallatin Steel segments offset by a loss at Dofasco's
Steel Operations business segment.
Commenting on the quarter, Dofasco's President and CEO Don Pether said,
"We are disappointed with the results achieved this quarter in Hamilton, which
were adversely impacted by difficult business conditions that hit both
revenues and costs. On the revenue side, there was a significant decline in
spot market pricing and the stronger Canadian dollar negatively impacted both
spot market and contract pricing. On the cost side, the premium that we paid
for slabs purchased late last year impacted costs in the third quarter by more
than $40 million over that experienced in the same quarter of 2004. This,
along with the high cost of other inputs including iron ore, coal and energy,
including the high cost of electricity in Ontario, also had a significant
negative impact."
Dofasco's consolidated sales of $1,104.5 million in the third quarter of
2005 were slightly higher than the $1,089.0 million achieved in the same
period in 2004. Steel shipments, at 1,219,000 tons, were up from the 1,194,000
tons shipped in the third quarter of 2004.
Dofasco's Steel Operations segment reported a pre-tax loss of $24.2
million for the quarter, compared to income before taxes of $114.9 million for
the third quarter of 2004, which has been restated for the reclassification of
Wabush Resources Inc.
At the company's Hamilton operations, shipments were 1,025,000 tons in
the third quarter, a slight increase from 1,004,000 tons shipped in the same
quarter of 2004. Average revenue per ton of steel shipped from Hamilton in the
third quarter of 2005 was considerably lower than in the same period of 2004.
The $89 decrease in revenue per ton reflects the significant decline in spot
market prices from the record levels of a year ago as well as the negative
impact of the stronger Canadian dollar. Average cost per ton increased by $46
over the levels experienced in 2004. This increase was mainly due to
significantly higher prices for purchased slabs, iron ore, coal, electricity
and other forms of energy as well as to the impact of lower production levels
on fixed operating costs, partially offset by lower scrap costs. The lower
than plan production levels in the quarter were a result of various short-term
operating interruptions which have been resolved.
Dofasco's 50% share of Gallatin Steel's income before taxes for the
quarter was $13.0 million, compared to $69.1 million in the same quarter for
2004. The decline was mainly a result of lower average revenue per ton and the
impact of a weaker U.S. dollar on the translation of Gallatin's results.
Shipments for the quarter were 388,000 tons, slightly higher than the 382,000
tons shipped in the third quarter of 2004.
During the quarter, on July 22, 2005, Dofasco completed the acquisition
of substantially all of the remaining equity interest that it did not already
own of Quebec Cartier Mining (QCM) for total consideration of $326.7 million
including acquisition costs. Dofasco now holds approximately 98.7% of the
common shares. QCM's results for the 71-day period that followed the
acquisition have been reflected in the consolidated results.
Effective July 1, 2005, Dofasco has commenced disclosure of a Mining
Operations segment in order to provide more useful information about the
company's distinct steel and mining businesses. To reflect this change,
Dofasco's Wabush Resources subsidiary has been reclassified from Steel
Operations and is now aggregated with QCM in the new segment.
Dofasco's Mining Operations contributed $39.8 million to the company's
net income before taxes in the third quarter of 2005 compared to a pre-tax
loss of $6.1 million in the same period of 2004. The 2005 pre-tax results are
net of non-cash purchase price allocation adjustments of $54.2 million related
to QCM. The good results for the third quarter of 2005 reflect excellent
market conditions for both iron ore producers in this segment. In 2004 the
results of this segment reflected only Wabush Resources. Dofasco's iron ore
shipments were 2,831,000 tonnes in the quarter compared to only 133,000 tonnes
in the third quarter of 2004, which was impacted by a strike at Wabush from
July 5 to October 10, 2004.
Looking forward, Dofasco expects its fourth quarter results to be
significantly better than the third quarter driven by its Mining Operations
segment, which will include a full quarter impact from QCM. Steel Operations
results in the fourth quarter of 2005 are expected to improve slightly
compared to the loss reported for the third quarter, reflecting an increase in
gross income at the Hamilton operations. Dofasco expects fourth quarter steel
shipments to be similar to the third quarter for both Hamilton operations and
at Gallatin Steel. Don Pether commented, "Spot prices began to recover in
September and we expect further recovery throughout the fourth quarter, which
will have a beneficial impact at both Hamilton and Gallatin. However, we
expect that this will be mitigated somewhat by scrap price increases and the
stronger Canadian dollar. In addition, the premiums paid on purchased slabs
will continue to work their way through inventory in the fourth quarter."
Dofasco successfully completed the acquisition of certain mechanical
tubing and automotive components assets of Copperweld Holding Company on
October 3, 2005. The acquisition was completed through a transaction with
Atlas Tube Inc. immediately following the acquisition of Copperweld by Atlas.
Dofasco's purchase price of US$177.8 million is expected to be reduced by post-
closing adjustments.
During the quarter, the company was named to the Dow Jones Sustainability
World Index (DJSI World) for 2006. Dofasco has been listed on the DJSI World
seven years in a row, and is one of 12 Canadian companies listed. The
sustainability ranking is based on a thorough assessment of general and
industry specific sustainability criteria covering economic, environmental and
social issues.
Dofasco has recently received recognition as one of Canada's top
employers. Dofasco has been selected by the editors of Canada's Top 100
Employers (Mediacorp Canada Inc. and the Financial Post) as one of the
Financial Post's 10 Best Companies to Work For - 2006. The list recognizes
exceptional employers that are growing quickly and that offer excellent career
prospects. In addition, for the fourth consecutive year, Dofasco has been
recognized by Maclean's magazine as a Top 100 Employer.
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, June 30, 2005 and September 30, 2005. This News Release has been
reviewed by the Audit Committee of Dofasco's Board of Directors.
Report to Shareholders
for the period ended September 30, 2005
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 periods ended March 31, 2005 and June 30, 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 October 28, 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, can be accessed on SEDAR
at www.sedar.com.
RESULTS OF OPERATIONS
Consolidated Financial Results
Dofasco experienced difficult business conditions in the third quarter,
including a significant decline in spot market pricing, the negative impact of
the stronger Canadian dollar and higher costs for purchased slabs and other
raw materials and energy. The excess cost of purchased slabs over internal
production cost in the third quarter was more than $40 million higher than in
the same period of last year. These conditions, together with lower production
levels, led to a quarterly loss in Hamilton and disappointing consolidated
results for the third quarter of 2005.
Consolidated net income for the three months ended September 30, 2005 was
$5.2 million or $0.07 per common share. These results were considerably lower
than the record earnings reported in the same quarter last year. In the third
quarter of 2004, Dofasco generated consolidated net income of $115.0 million
or $1.50 per share as record high spot market pricing, strong operating
performance and robust North American flat rolled steel demand resulted in the
most profitable quarter in Dofasco's history.
On July 22, 2005, Dofasco completed the acquisition of substantially all
of the remaining equity interest in Quebec Cartier Mining Company ("QCM") that
it did not previously own. The results of QCM's operations have been included
in the consolidated financial statements from the acquisition date. Details
regarding the purchase transaction and QCM's results in the quarter are
discussed below in the section "Mining Operations Gross Income".
In the nine months ended September 30, 2005, consolidated net income was
$142.6 million or $1.85 per share, down from $280.1 million or $3.66 per share
in the first nine months of last year.
These results reflect recent trends experienced in the North American
pricing environment. 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 a record level of US $740 per ton as published
by CRU International Inc. in September 2004. 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 more than US $200,
reaching a low of US $425 per ton in August before recovering to US $510 per
ton in September, as reported by CRU.
Subsequent to quarter end, the Corporation completed the acquisition of
certain assets related to Copperweld Holding Company's mechanical tubing and
automotive components businesses through a transaction with Atlas Tube Inc. of
Harrow, Ontario. Details regarding the purchase transaction are discussed
below in the section "Acquisition of Copperweld Assets".
Gross Income by Business Segment
Effective July 1, 2005, Dofasco's subsidiary, Wabush Resources Inc.,
which holds Dofasco's 28.6% interest in the Wabush Mines joint venture, has
been reclassified from Steel Operations and is now aggregated with QCM in a
new Mining Operations business segment. The change was made in order to
provide financial statement users with more useful information about the
Corporation's steel and mining businesses. The Corporation's Steel Operations
segment now includes its Hamilton operations, Dofasco USA, Powerlasers,
Dofasco de Mexico, Dofasco Marion 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,
accounted for using the proportionate consolidation method. The 2005 and 2004
comparative amounts have been reclassified to conform to the current period's
presentation. Additional information about the Corporation's three reporting
segments is provided in Note 10 to the consolidated financial statements.
<<
Consolidated Gross Income
Three months ended September 30 2005 2004(x) Change
-------------------------------------------------------------------------
(in millions)
Steel Operations $ 35.6 $ 178.8 $ (143.2)
Gallatin Steel 17.7 74.1 (56.4)
Mining Operations 56.0 (5.7) 61.7
Intersegment eliminations (17.2) 0.6 (17.8)
-------------------------------
Consolidated gross income $ 92.1 $ 247.8 $ (155.7)
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(x) Restated to reflect reclassification of Wabush Resources
Consolidated gross income for the third quarter of 2005 was $92.1
million, a 63% decline from record gross income of $247.8 million for the same
quarter of 2004. This decrease reflects significantly lower results at both
Steel Operations and Gallatin Steel, partially offset by improved results at
Wabush Resources and the impact of the acquisition of QCM. For the nine month
period ended September 30, 2005, consolidated gross income was $412.6 million
compared to $616.5 million in the same period last year.
Consolidated Gross Income
Nine months ended September 30 2005 2004(x) Change
-------------------------------------------------------------------------
(in millions)
Steel Operations $ 281.4 $ 481.0 $ (199.6)
Gallatin Steel 91.5 141.8 (50.3)
Mining Operations 69.8 (5.3) 75.1
Intersegment eliminations (30.1) (1.0) (29.1)
-------------------------------
Consolidated gross income $ 412.6 $ 616.5 $ (203.9)
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(x) Restated to reflect reclassification of Wabush Resources
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 6 of this MD&A.
Steel Operations Gross Income
Steel Operations gross income was $35.6 million in the quarter, an 80%
decrease from the $178.8 million generated in the third quarter of 2004.
Three months ended September 30 2005 2004(x) Change
-------------------------------------------------------------------------
(in millions)
Net sales $ 851.2 $ 917.4 $ (66.2)
Cost of sales 815.6 738.6 77.0
-------------------------------
Gross income $ 35.6 $ 178.8 $ (143.2)
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(x) Restated to reflect reclassification of Wabush Resources
For the nine months ended September 30, 2005, gross income from Steel
Operations was $281.4 million compared to $481.0 million gross income in the
first nine months of 2004.
Nine months ended September 30 2005 2004(x) Change
-------------------------------------------------------------------------
(in millions)
Net sales $2,696.0 $2,689.1 $ 6.9
Cost of sales 2,414.6 2,208.1 206.5
-------------------------------
Gross income $ 281.4 $ 481.0 $ (199.6)
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(x) Restated to reflect reclassification of Wabush Resources
As in previous quarters, the results of the Steel Operations segment were
largely driven by the Corporation's Hamilton operations.
Hamilton Operations Gross Income
Third quarter shipments in 2005 reflected the normal seasonal variation
due to planned customer shutdowns, primarily in the automotive sector.
Shipments from Hamilton in the third quarter were slightly higher than the
levels shipped in the same quarter of 2004. After a slow start, shipments in
the quarter finished strong reflecting improved demand from the construction
and distribution market segments.
Three months ended September 30 2005 2004 Change
-------------------------------------------------------------------------
Steel shipments (000s tons) 1,025 1,004 21
Raw steel production(1) (000s tons) 1,192 1,218 (26)
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Revenue per ton $ 768 $ 857 $ (89)
Cost per ton 739 693 46
-------------------------------
Gross income per ton $ 29 $ 164 $ (135)
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(1) Raw steel production includes purchased semi-finished steel
The average revenue per ton shipped from Hamilton operations in the
quarter was $89 lower than in the third quarter of 2004, reflecting the
significant decline in spot market prices from the record levels of a year ago
as well as the negative impact of the stronger Canadian dollar. In the third
quarter of 2005, the Canadian dollar averaged US $0.83, up from an average of
US $0.76 in the same period last year. In 2005, the stronger Canadian dollar
had a significant unfavourable impact on sales denominated in U.S. dollars as
well as on Canadian dollar-denominated contracts which reflect U.S. dollar
pricing.
Hamilton operations' average cost per ton in the quarter increased by $46
compared to the same period in 2004. This increase was mainly due to
significantly higher costs for purchased slabs, iron ore, coal and energy as
well as to the impact of lower production levels on fixed operating costs. The
lower production levels in the quarter were a result of various short-term
operating interruptions which have been resolved. Internal slab production, 7%
lower than the same period in 2004, was augmented by the increased use of
significantly higher cost purchased slabs. These factors were partially offset
by lower scrap prices in the third quarter of 2005 compared to extremely high
levels in 2004, as well as lower variable compensation expense and by the
strengthening of the Canadian dollar year over year.
Nine months ended September 30 2005 2004 Change
-------------------------------------------------------------------------
Steel shipments (000s tons) 3,027 3,225 (198)
Raw steel production(1) (000s tons) 3,539 3,626 (87)
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Revenue per ton $ 826 $ 781 $ 45
Cost per ton 740 642 98
-------------------------------
Gross income per ton $ 86 $ 139 $ (53)
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(1) Raw steel production includes purchased semi-finished steel
Hamilton shipments in the first nine months of 2005 declined 6% from last
year's level due to high customer inventories at the end of 2004 and lower
demand through the first half of 2005, primarily in the construction and
distribution market segments, which improved as the third quarter progressed.
In the first nine months of 2004, reported shipments reflected very strong
steel demand and were enabled by strong production and a drawdown of
inventories.
Hamilton operations' average revenue per ton shipped for the first nine
months of 2005 increased by $45 compared to the same period in 2004,
reflecting the impact of higher contract prices. These factors were partially
offset by a lower value product mix as well as the impact of the strengthening
of the Canadian dollar from an average of US $0.75 in the first nine months of
2004 to an average of US $0.82 in 2005.
The average cost per ton shipped from Hamilton operations increased by
$98 over the levels experienced in the first nine months of 2004. The higher
cost per ton was driven by significantly higher prices for purchased slabs,
iron ore, coal and energy, as well as the impact of lower production levels on
fixed operating costs. For the year to date, purchased slab consumption
exceeded last year's level by more than 250,000 tons, adding close to $100
million to production costs compared to the first nine months of 2004. These
factors were partially offset by significantly lower scrap prices, lower
variable compensation expense and the impact of the stronger Canadian dollar.
The average cost per ton in the first nine months of 2004 was impacted by
exceptionally high scrap prices and the high cost for other raw materials,
partially offset by the impact of high production levels.
Gallatin Steel Gross Income
Gallatin Steel contributed $17.7 million of gross income in the third
quarter of 2005, significantly lower than the record $74.1 million reported in
the third quarter of 2004. The decline in gross income generated in the
quarter was mainly a result of significantly lower average revenue per ton and
the impact of a weaker U.S. dollar on the translation of Gallatin's results.
Three months ended September 30 2005 2004 Change
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(50%, Cdn $ millions)
Net sales $ 107.2 $ 177.4 $ (70.2)
Cost of sales 89.5 103.3 (13.8)
-------------------------------
Gross income $ 17.7 $ 74.1 $ (56.4)
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(000s tons at 100%)
Steel shipments 388 382 6
Raw steel production 398 391 7
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(US $)
Revenue per ton $ 461 $ 711 $ (250)
Cost per ton 385 412 (27)
-------------------------------
Gross income per ton $ 76 $ 299 $ (223)
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Shipments were 388,000 tons in the third quarter, slightly higher than in
the third quarter of 2004. Steel production in the quarter was a near record
398,000 tons which was achieved despite a three-day planned production outage
taken in July in response to weak market demand, and was slightly above the
391,000 tons produced in the third quarter of 2004.
Gallatin's average revenue per ton in the third quarter of 2005 declined
by US $250 per ton from the very high levels in the same quarter last year
reflecting considerably lower U.S. spot market selling prices. In the third
quarter of 2005, spot market pricing continued to decline from the record
levels reached in September 2004. However, published U.S. spot market pricing
began to recover in September 2005 reflecting improving North American flat
rolled steel demand and the return of supply chain inventories to more normal
levels.
The average cost per ton shipped in the quarter decreased by US $27 over
the same period last year, primarily driven by lower average scrap costs
flowing through inventory in the quarter.
In the first nine months of 2005, higher average scrap costs, lower
shipments and the impact of the weaker U.S. dollar on the translation of
Gallatin's results led to gross income of $91.5 million compared to $141.8
million generated in the first nine months of 2004.
Nine months ended September 30 2005 2004 Change
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(50%, Cdn $ millions)
Net sales $ 383.8 $ 420.9 $ (37.1)
Cost of sales 292.3 279.1 13.2
-------------------------------
Gross income $ 91.5 $ 141.8 $ (50.3)
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(000s tons at 100%)
Steel shipments 1,123 1,141 (18)
Raw steel production 1,139 1,172 (33)
-------------------------------------------------------------------------
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(US $)
Revenue per ton $ 558 $ 556 $ 2
Cost per ton 425 368 57
-------------------------------
Gross income per ton $ 133 $ 188 $ (55)
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Shipments and slab production for the first nine months of 2005 were
1,123,000 tons and 1,139,000 tons respectively, both lower than the same
period in 2004, resulting from lower market demand primarily in the second
quarter of 2005.
For the nine months ended September 30, 2005, average revenue per ton was
virtually unchanged compared to the same period last year, despite the
fluctuations in U.S. spot market prices over the past two years discussed
above.
The average cost per ton in the first nine months of 2005 increased by US
$57 over the same period last year, primarily due to considerably higher
average scrap costs compared to the average in the first nine months of 2004.
Mining Operations Gross Income
The Corporation's Mining Operations segment, consisting of QCM and Wabush
Resources, contributed $56.0 million of gross income in the third quarter of
2005, significantly higher than the $5.7 million loss posted in the third
quarter of 2004. The 2005 results reflect both Wabush Resources and QCM's
results net of consolidation adjustments for the 71-day period following the
acquisition date. The 2004 results reflect only Wabush Resources, which
reported a loss of $5.7 million at the gross income level in the third quarter
reflecting lower production and shipments at the mine as unionized employees
were on strike from July 5 to October 10, 2004.
Three months ended September 30 2005 2004 Change
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(in millions)
Net sales $ 226.9 $ 7.0 $ 219.9
Cost of sales 170.9 12.7 158.2
-------------------------------
Gross income $ 56.0 $ (5.7) $ 61.7
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(000s tonnes)
Pellet shipments 2,089 133 1,956
Concentrate shipments 742 - 742
-------------------------------
Total iron ore shipments 2,831 133 2,698
Concentrate production 2,767 23 2,744
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Revenue per tonne $ 80 $ 53 $ 27
Cost per tonne 60 96 (36)
-------------------------------
Gross income per tonne $ 20 $ (43) $ 63
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Of the Mining Operations gross income reported in the third quarter,
$17.2 million has been eliminated on consolidation, reflecting the unrealized
intercompany profit remaining in Dofasco's pellet and steel inventories at
September 30, 2005.
Nine months ended September 30 2005 2004 Change
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(in millions)
Net sales $ 274.8 $ 38.4 $ 236.4
Cost of sales 205.0 43.7 161.3
-------------------------------
Gross income $ 69.8 $ (5.3) $ 75.1
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(000s tonnes)
Pellet shipments 2,667 725 1,942
Concentrate shipments 742 - 742
-------------------------------
Total iron ore shipments 3,409 725 2,684
Concentrate production 3,483 766 2,717
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Revenue per tonne $ 81 $ 53 $ 28
Cost per tonne 61 61 -
-------------------------------
Gross income per tonne $ 20 $ (8) $ 28
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QCM Gross Income
On July 22, 2005, the Corporation completed the acquisition of
substantially all of the remaining equity interest that it did not previously
own in QCM for total consideration of $326.7 million including acquisition
costs. The acquisition has been accounted for using the purchase method of
accounting with the results of QCM's operations included in the consolidated
financial statements from the date of purchase. Additional information
regarding the purchase price allocation is provided in Note 2 to the
consolidated financial statements.
For the 71-day period following the acquisition date, QCM contributed
$35.6 million of gross income, net of non-cash purchase price allocation
adjustments. Total non-cash adjustments of $54.2 million recorded on
consolidation for the quarter included approximately $46.5 million before
income taxes related to the fair value of finished goods and work in process
inventories on hand at the acquisition date. These inventories, which are sold
under long-term take-or-pay contracts, were revalued at market value less
costs to sell and a reasonable profit margin for the future selling effort.
The fair value increment is recognized in cost of sales in the third quarter
as this inventory was shipped to customers subsequent to the acquisition date.
Excluding the non-cash inventory adjustment, QCM's gross income would have
been $82.1 million for the period from the acquisition date. In addition, the
non-cash adjustments included $4.3 million for additional depreciation and
amortization expense related to the fair value of fixed assets and intangible
assets at the acquisition date.
QCM's iron ore shipments in the 71-day period totaled 2,340,000 tonnes,
which was consistent with expectations for the partial quarter. Total iron ore
shipments were below the 2004 pace on a pro-rated basis due to the low
inventory levels in July 2005 following the settlement of a labour disruption
in the second quarter. On June 3, 2005, QCM and its unionized employees
reached a new six-year collective bargaining agreement, ending an eight-week
strike during which production was interrupted and all available inventories
were shipped to meet customer requirements.
Three months ended September 30 2005(x) 2004(xx) Change
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(in millions)
Net sales $ 179.4 $ - n/a
Cost of sales 143.8 - n/a
-------------------------------
Gross income $ 35.6 $ - n/a
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(000s tonnes)
Pellet shipments 1,598 2,635 (1,037)
Concentrate shipments 742 1,164 (422)
-------------------------------
Total iron ore shipments 2,340 3,799 (1,459)
Concentrate production 2,373 3,182 (809)
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Revenue per tonne $ 77 $ - n/a
Cost per tonne 61 - n/a
-------------------------------
Gross income per tonne $ 16 $ - n/a
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(x) For the 71-day period from the acquisition date
(xx) QCM was not controlled by Dofasco during this period
Average revenue per tonne in the period was $77, slightly lower than
expectations mainly due to the unfavourable impact of the stronger Canadian
dollar on sales which are denominated in U.S. dollars.
Average cost per tonne shipped in the quarter was $61, significantly
higher than normal levels due to the non-cash consolidation adjustments
described above which contributed $20 per tonne.
Wabush Resources Gross Income
Wabush Resources, which holds Dofasco's 28.6% interest in the Wabush
Mines joint venture, contributed $20.4 million of gross income in the third
quarter of 2005, a significant improvement over the $5.7 million loss in the
strike-impacted third quarter of 2004.
Three months ended September 30 2005 2004 Change
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(in millions)
Net sales $ 47.5 $ 7.0 $ 40.5
Cost of sales 27.1 12.7 14.4
-------------------------------
Gross income $ 20.4 $ (5.7) $ 26.1
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(000s tonnes)
Pellet shipments 491 133 358
Concentrate production 394 23 371
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Revenue per tonne $ 97 $ 53 $ 44
Cost per tonne 55 96 (41)
-------------------------------
Gross income per tonne $ 42 $ (43) $ 85
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Wabush Resources shipped 491,000 tonnes of iron ore pellets in the third
quarter of 2005, compared to 133,000 tonnes during the strike-impacted third
quarter in 2004. Concentrate production was also significantly higher in the
quarter than in the prior year period due to the labour disruption in 2004.
Average revenue per tonne in the third quarter of 2005 increased by
approximately 83% year over year, reflecting the unparalleled increase in iron
ore market prices due to global demand for the commodity, which was partially
offset by the impact of the stronger Canadian dollar. Average cost per tonne
declined by $41 from the unusually high level during the strike-impacted third
quarter of 2004, due to a return to normal production levels.
Nine months ended September 30 2005 2004 Change
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(in millions)
Net sales $ 95.4 $ 38.4 $ 57.0
Cost of sales 61.2 43.7 17.5
-------------------------------
Gross income $ 34.2 $ (5.3) $ 39.5
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(000s tonnes)
Pellet shipments 1,069 725 344
Concentrate production 1,110 766 344
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Revenue per tonne $ 89 $ 53 $ 36
Cost per tonne 57 60 (3)
-------------------------------
Gross income per tonne $ 32 $ (7) $ 39
-------------------------------------------------------------------------
For the nine month period ended September 30, 2005, Wabush Resources
shipped 1,069,000 tonnes of iron ore pellets. Both shipments and concentrate
production were 344,000 tonnes higher than the third quarter in 2004, which
was impacted by the fourteen-week strike.
Average revenue per tonne for the first nine months of 2005 increased by
$36 or 68% over the prior year period primarily due to the significant
increase in iron ore market prices due to increased global demand for the
commodity, partially offset by the impact of the stronger Canadian dollar.
Average cost per tonne declined by $3 from the first nine months of 2004
mainly due to the higher production and shipment levels in 2005.
Other Income Statement Items
Depreciation and Amortization
Consolidated depreciation and amortization increased by $5.3 million in
the third quarter of 2005 compared to the same period in 2004. The increase in
the third quarter of 2005 reflects depreciation of $9.9 million for QCM as
well as higher depreciation in Hamilton following the commissioning of the No.
2 Blast Furnace. These factors were partially offset by the impact of certain
facilities in Hamilton becoming fully depreciated during 2004.
For the year to date period ended September 30, 2005, consolidated
depreciation and amortization decreased by $19.1 million compared to the same
period in 2004, reflecting the impact of equipment that became fully
depreciated in 2004 as well as non-cash adjustments of $13.0 million for
obsolete computer equipment and assets no longer in service in 2004. These
factors were partially offset by the inclusion of depreciation at QCM since
the date of acquisition.
Foreign Exchange
The consolidated foreign exchange loss was $12.1 million in the third
quarter of 2005 compared to a loss of $6.1 million in the same period last
year. The higher loss in the third quarter of 2005 was driven by the weakening
of the U.S. dollar on the value of Dofasco's consolidated net U.S. dollar
working capital which was higher in the third quarter following the
acquisition of QCM's assets and liabilities. For the nine-month period ended
September 30, 2005 the consolidated foreign exchange loss was $8.9 million,
including $6.3 million at QCM, compared to a consolidated foreign exchange
loss of $1.1 million in the comparative period.
Income Taxes
The consolidated effective tax rate of 47% for the third quarter was
higher than the Corporation's Canadian manufacturing and processing effective
tax rate of 34% and higher than the effective tax rate of 35% for the same
period last year. The increase was primarily due to the effects of the Large
Corporation Tax and certain non-deductible expenses on the lower income before
taxes.
For the year to date period ended September 30, 2005 the consolidated
effective tax rate of 35% was consistent with the Corporation's Canadian
manufacturing and processing effective statutory rate of 34% and slightly
higher than the effective tax rate of 32% for the same period last year. The
lower effective rate in 2004 was 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 tables reconcile consolidated gross income to net income in
accordance with GAAP.
Three months ended September 30 2005 2004 Change
-------------------------------------------------------------------------
(in millions)
Gross income $ 92.1 $ 247.8 $ (155.7)
Depreciation and amortization 61.9 56.6 5.3
-------------------------------
Operating income 30.2 191.2 (161.0)
Interest on long-term debt 8.4 9.7 (1.3)
Investment and other income (1.7) (3.1) 1.4
Foreign exchange loss 12.1 6.1 6.0
-------------------------------
Income before income taxes 11.4 178.5 (167.1)
Income tax expense 5.4 62.0 (56.6)
-------------------------------
6.0 116.5 (110.5)
Minority interest 0.8 1.5 (0.7)
-------------------------------------------------------------------------
Net income $ 5.2 $ 115.0 $ (109.8)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Nine months ended September 30 2005 2004 Change
-------------------------------------------------------------------------
(in millions)
Gross income $ 412.6 $ 616.5 $ (203.9)
Depreciation and amortization 159.1 178.2 (19.1)
-------------------------------
Operating income 253.5 438.3 (184.8)
Interest on long-term debt 25.7 29.8 (4.1)
Investment and other income (6.1) (7.5) 1.4
Foreign exchange loss 8.9 1.1 7.8
-------------------------------
Income before income taxes 225.0 414.9 (189.9)
Income tax expense 78.1 131.0 (52.9)
-------------------------------
146.9 283.9 (137.0)
Minority interest 4.3 3.8 0.5
-------------------------------------------------------------------------
Net income $ 142.6 $ 280.1 $ (137.5)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Summary of Quarterly Results
The following table summarizes selected financial and non-financial
information for the eleven most recent quarters.
-------------------------------------------------------------------------
Raw Steel
Steel Produc-
Shipments(1) tion(2) Net Gross
Consolidated (000s (000s Sales Income
tons) tons) (millions) (millions)
-------------------------------------------------------------------------
2005 - Third Quarter 1,219 1,391 $1,104.5 $ 92.1
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
-------------------------------------------------------------------------
--------------------------------------------------------------
Net Earnings Per Share
Consolidated Income --------------------
(millions) Basic Diluted
--------------------------------------------------------------
2005 - Third Quarter $ 5.2 $ 0.07 $ 0.07
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
--------------------------------------------------------------
(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.
-------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES
Statement of Cash Flows
The consolidated balance sheet at September 30, 2005 and consolidated
statement of cash flows for the quarter and nine month period ended September
30, 2005, respectively, include QCM's assets and liabilities, and cash flows
for the period from the July 22, 2005 acquisition date. Since the Corporation
did not have a common share investment in QCM during 2004, the consolidated
financial statements for the comparative periods do not include any share of
QCM's assets, liabilities or cash flows.
Cash Provided from Operating Activities
In the third quarter of 2005, consolidated cash provided from operations
before changes in non-cash working capital was $61.4 million, representing a
69% decrease from the $200.1 million generated in the third quarter of 2004,
reflecting the significantly lower net income in the third quarter of 2005.
The $24.1 million decrease in non-cash working capital in the third quarter of
2005 was primarily due to the decrease in inventories partially offset by an
increase in accounts receivable. The change in inventories of $43.3 million is
attributable to the impact of the non-cash adjustment to QCM inventory
acquired. The $19.6 million increase in accounts receivable is due to an
increase in accounts receivable of QCM from the date of acquisition to the
period ended September 30, 2005.
In the third quarter of 2004, a $148.8 million increase in non-cash
working capital was attributable to an increase in inventories and accounts
receivable that was partially offset by an increase in accounts payable and
income and other taxes. The significant increase in inventories was due to
seasonal increases in the quantities of raw materials and purchased slabs as
well as an increase in work in process and finished goods inventories. The
increase in accounts receivable resulted from higher sales in the third
quarter compared to the second quarter of 2004, while the increase in accounts
payable was attributable to the timing of accounts payable and payroll, and
higher capital expenditures.
For the nine months ended September 30, 2005, the Corporation generated
$331.4 million of cash from operations before changes in working capital, a
decrease of 34% from the amount generated in the same period of 2004, driven
by the significantly lower net income in 2005.
Non-cash working capital increased by $251.9 million for the year to date
2005, due to considerable increases in inventories and accounts receivable
combined with significant decreases in accounts payable and accrued
liabilities and income and other taxes payable. The increase in inventories of
$43.7 million for the year to date is the result of the higher cost of raw
materials and purchased slabs, an increase in work in process and finished
goods combined with the increase in QCM inventories from the date of
acquisition, net of the non-cash adjustment recorded on acquisition. These
factors are partially offset by a seasonal decrease in the quantities of major
raw materials and purchased slabs. Accounts receivable increased by $47.8
million, the result of higher sales in the third quarter compared to the
latter half of the fourth quarter of 2004 as well as the impact of higher QCM
accounts receivable from the date of acquisition to the period ended September
30, 2005. The $88.4 million decrease in accounts payable and accrued
liabilities was primarily due to annual payments for 2004 profit sharing and
employee variable compensation made in the first quarter of 2005. Income and
other taxes decreased by $72.0 million reflecting payment of the final 2004
income tax installments in the first quarter of 2005.
In the nine months ended September 30, 2004, non-cash working capital
increased by $139.4 million. This was the result of a significant increase in
accounts receivable of $204.2 million caused by higher sales in the third
quarter of 2004 compared to the fourth quarter of 2003 as well as an increase
in inventories at both Hamilton and Gallatin. These factors were partially
offset by increases in both accounts payable and income taxes payable.
Cash Used for Investing Activities
In the third quarter of 2005 consolidated capital expenditures were $91.4
million compared to $83.3 million in the same quarter in 2004, reflecting the
inclusion of QCM in 2005. For the year to date, consolidated capital
expenditures were $298.0 million, a 48% increase over the $201.9 million spent
in the first nine months of last year. The increase in capital spending is
mainly due to the continued investment in the Finishing Division Improvement
Program (FDIP) in Hamilton and the No. 2 Blast Furnace rebuild, which was
completed late in the second quarter of 2005.
The final activity in Phase I of FDIP, the coupling of a new pickle line
to an existing upgraded cold rolling mill (No. 2 CPCM), is now scheduled to be
completed in the first quarter of 2006.
Consolidated capital expenditures for 2005 in total are expected to be
approximately $375 million, including capital spending at QCM. This revised
projection reflects the deferral of certain capital projects including most of
Phase II of FDIP as resources in Hamilton are focused on the completion of
Phase I.
Cash used for investing activities included $227.2 million related to the
acquisition of QCM in the third quarter, consisting of the $306.7 million cash
purchase price less $79.5 million of QCM cash acquired.
Short-term investments decreased by $106.0 million in the year to date
2005 with no change in the third quarter. As at September 30, and June 30,
2005, the Corporation did not hold any term deposits with maturities greater
than 90 days at acquisition. In 2004, short-term investments decreased by
$95.4 million in the third quarter and by $60.9 million for the year to date
September 30, 2004. As in prior quarters, these variations reflect changes in
the mix of short-term investments and cash.
Cash Provided from / Used for Financing Activities
In the three months and nine months ended September 30, 2005 short-term
borrowings increased by $270.5 million and $274.7 million, respectively. The
increase was mainly due to borrowing on available credit facilities including
$237.0 million at Hamilton and $34.8 million at QCM. The short-term borrowings
at Hamilton were primarily used to fund the acquisition of QCM.
In the second quarter of 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
repayable 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 second quarter, to fund capital expenditures and for general
corporate and working capital purposes.
Scheduled repayments of long-term debt were $0.5 million in the third
quarter and $199.5 million for the nine months ended September 30 2005,
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 $4.1 million and $30.3 million, respectively.
In the three-month and nine-month periods ended September 30, 2005,
proceeds of $7.8 million and $8.9 million, respectively, were received on the
exercise of common share stock options. In the comparative periods in 2004,
proceeds of $14.3 million and $25.6 million were received on the exercise of a
greater number of stock options.
Dofasco paid $25.4 million in dividends in the third quarter and $76.3
million in the first nine months of the year compared to $23.1 million and
$69.0 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 October 25, 2005, there were
77,419,849 common shares outstanding.
Cash Requirements
Cash requirements in the fourth quarter of 2005 are expected to include
US $177.8 million, subject to post-closing adjustments, to fund the
acquisition of the Copperweld mechanical and automotive components tubing
assets which was completed early in the fourth quarter. In addition, cash
requirements in the fourth quarter include scheduled repayments under long-
term debt agreements as well as funding for the Corporation's continued
investment in its capital projects.
Capital Resources
Dofasco's capital resources at September 30, 2005 included cash and cash
equivalents of $171.4 million compared to $162.9 million at June 30, 2005,
both considerably lower than the $368.2 million including short-term
investments at December 31, 2004. This cash position, together with available
credit facilities and anticipated cash flow from operations is expected to
enable the Corporation to satisfy its actual and anticipated cash
requirements.
As at September 30, 2005, Dofasco's credit facilities included $305.5
million remaining under available revolving operating lines, including a new
revolving term facility of $250.0 million which was entered into in the third
quarter for the purpose of funding the Copperweld acquisition that was
completed in early October. An additional $87.9 million is available to its
subsidiaries and joint ventures under existing and renewed credit facilities,
including $51.7 million available to QCM.
Dofasco's financial position remained strong in the third quarter of
2005, as evidenced by the ratio of debt to debt plus equity of 25.9% or 21.4%
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 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 through 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 third quarter, the cumulative provision increased by approximately $9
million to approximately $85 million as at September 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 COPPERWELD ASSETS
On October 3, 2005, the Corporation completed the acquisition of certain
assets related to Copperweld Holding Company's mechanical tubing and
automotive components businesses through a transaction with Atlas Tube Inc.
("Atlas") of Harrow, Ontario for total cash consideration of US $177.8
million, subject to post-closing adjustments, which are expected to reduce the
total purchase price. The post-closing adjustments include an adjustment for
working capital as at the acquisition date and contingent consideration
related to a tax indemnification clause in the asset purchase agreement.
Under the agreement announced on August 17, 2005, Dofasco purchased the
Copperweld assets from Atlas immediately following their acquisition of
Copperweld. The assets acquired include manufacturing facilities in Woodstock,
Brantford, London, Brampton and Mississauga, Ontario, as well as Shelby, Ohio
and Elizabethtown, Kentucky. In addition, the purchase includes a 50% interest
in Copperweld's bimetallic business which is being held for sale.
The acquisition of the Copperweld assets was funded by short-term bank
borrowings. The acquisition is expected to be accretive to consolidated net
income and cash flows in 2006. As at the reporting date, the allocation of the
purchase price to the fair value of assets acquired and liabilities assumed
has not yet been finalized.
BUSINESS CONDITIONS AND OUTLOOK
Economic Outlook
The Canadian economy grew at an annual rate of 3.2% in the second quarter
of 2005, driven by consumer spending and business investment in machinery and
equipment and non-residential structures. Early indications are that the
overall growth in the economy during the third quarter was less robust than in
the second quarter.
Looking forward, consumer spending is projected to grow at more moderate
levels in the second half of 2005 and through 2006, as the Bank of Canada
gradually increases interest rates and consumers begin to increase savings.
Business investment is forecast to continue to strengthen due to near double-
digit profit growth in 2005. Spending on machinery and equipment is expected
to remain strong while investment in non-residential building construction is
headed for its best level in five years. Export growth in 2005 and 2006 will
be helped by continued economic growth in the U.S., high energy prices and an
expected stabilizing of the Canadian dollar near its current level.
Residential investment is expected to ease through the end of 2006 as housing
starts decline from their lofty 2004 levels and renovation expenditures are
not able to offset the entire shortfall. Overall, Canadian real GDP is
expected to grow by 2.9% this year and by 3.1% in 2006.
Flat rolled steel demand in Canada declined by 4.5% through the first
eight months of 2005, mainly attributable to the drawdown of customer
inventories that had been accumulated in the second half of 2004. Imports
increased by 19% over the same period, contributing to a 13% decline in
shipments from domestic producers. As supply chain inventories have recently
returned to more normal levels, flat rolled steel demand through the balance
of 2005 and in 2006 is expected to more closely reflect actual steel use.
For 2005 in total, flat rolled steel demand is expected to be about 3% to
4% below last year's level due to the reduction in customer inventories that
has occurred this year. A further decline in flat rolled steel demand of about
2.5% is anticipated for 2006, driven by somewhat lower automotive production
and a general slowing of manufacturing activity in Canada due to competitive
issues around the stronger Canadian dollar. Domestic deliveries by Canadian
steel mills are projected to recover somewhat in 2006, as steel imports share
of Canada's steel demand next year is expected to move back below 30%, from
the very high 34% share currently enjoyed by imports.
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 periods ended March 31, 2005 and June 30, 2005.
Automotive
North American vehicle production for the first nine months of 2005 was
1.3% below the same period in 2004. However, third quarter production was 2.4%
higher than in 2004. Production levels for 2005 in total are expected to be
1.2% below last year's level. Strong sales in the second and third quarter
boosted year-to-date sales 2.9% above year earlier levels. With vehicle sales
expected to be much lower in the fourth quarter, the year is predicted to end
with only a slight gain on 2004 levels. Labour negotiations in the Canadian
industry were successfully concluded without any production disruptions.
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
Reported flat rolled shipments by Canadian steel service centres were 6%
below their year earlier levels through the first eight months of 2005.
Service centre inventories continued to be reduced through September from the
excessively high levels in place at the start of the year. With service centre
inventories currently at more normal levels, Dofasco anticipates improved
demand for the fourth quarter.
Construction
Non-residential building construction activity remained at high levels
through the third quarter of 2005. Conditions remain favourable to achieve an
increase of about 5% in total construction activity this year, despite some
slowing in new housing starts in the second half of the year. However, this
increase is not expected to 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 fourth quarter of 2005 are expected to
improve slightly compared to the loss reported for the third quarter,
reflecting an increase in gross income at Hamilton operations. Shipment levels
from Hamilton are projected to be similar to those in the third quarter.
Hamilton operations' average revenue per ton in the fourth quarter is expected
to increase moderately due to the recent increase in spot market prices
partially offset by a stronger Canadian dollar. The cost per ton shipped from
Hamilton operations in the fourth quarter is predicted to increase marginally
from the high levels experienced in the third quarter. Higher scrap prices and
high cost opening inventories are expected to be partially offset by the
impact of higher production levels. The opening inventories include the high
cost of purchased slabs, which will continue to impact costs in the fourth
quarter as these slabs are processed. In addition, outside processing costs
will be higher in the fourth quarter for cold rolling in preparation of the
shutdown to complete the coupling of No. 2 CPCM in the first quarter of 2006.
Gallatin's fourth quarter shipments are expected to be similar to the
strong third quarter level. Gallatin's average revenue per ton is expected to
increase substantially in the fourth quarter as a result of the improvement in
U.S. hot band spot market prices. Gallatin's cost per ton is also predicted to
increase in the fourth quarter, mainly due to higher scrap prices. Overall,
Gallatin's results in the fourth quarter of 2005 are expected to improve
slightly from third quarter levels.
Mining Operations results in the fourth quarter are expected to increase
substantially from the third quarter levels, primarily due to the inclusion of
QCM's results for the full quarter. Total iron ore shipments from QCM and
Wabush are expected to be close to 4.0 million tonnes in the fourth quarter,
with average revenue per tonne expected to be similar to the third quarter.
Mining Operations average cost per tonne in the fourth quarter is expected to
be significantly lower than in the third quarter which was impacted by the non-
cash adjustment related to the fair value of QCM inventory on hand at the
acquisition date.
Consolidated depreciation is expected to increase in the fourth quarter,
mainly due to an increase at Hamilton operations and the inclusion of QCM for
a full quarter. In Hamilton, the increase is due the completion of certain
capital projects under Phase I of FDIP.
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 the "Risks and Risk Management" section as disclosed in Dofasco's
2004 Annual MD&A and Interim MD&A for the periods ended March 31 and June 30,
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 and other
currency-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's Hamilton operations has both sales and purchases denominated in
U.S. dollars, which are relatively in balance over the short term. 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. 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.
In addition, QCM regularly enters into foreign currency forward sales
contracts for the purpose of limiting exposure to exchange rate fluctuations
on its U.S. dollar-denominated sales of iron ore, based on anticipated sales
transactions. These contracts provide for a fixed rate conversion of
approximately 20% to 60% of its anticipated sales denominated in U.S. dollars
over a three year period.
Neither the Corporation nor any of its subsidiaries or joint venture
operations holds or issues derivative financial instruments for trading or
speculative purposes.
Under Canadian 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 of Dofasco's 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. With respect to the QCM
foreign currency forward sales contracts, any gains or losses arising from
settled hedge transactions are recorded in sales since the hedged item is a
forecasted sale in a foreign currency.
The net unrealized gain on unsettled foreign exchange forward purchase
contracts at September 30, 2005 was $24.1 million (December 31, 2004 - nil).
Of this amount, QCM gains of $8.7 million are included in accounts receivable
and $1.4 million are included in investments and other assets. These amounts,
included on the consolidated balance sheet at September 30, 2005 represent the
remaining balances of the fair value of the U.S. dollar forward sales contract
assets included in the purchase price allocation at the acquisition date of
QCM. Note 8 to the consolidated financial statements provides additional
information regarding Dofasco's financial instruments.
B. F. MACNEILL D. A. PETHER
Chair of the Board President and Chief
Executive Officer
October 28, 2005
Consolidated Statements of Income and Retained Earnings (Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
(in millions except per share
amounts) 2005 2004 2005 2004
-------------------------------------------------------------------------
Income
Net sales $1,104.5 $1,089.0 $3,238.6 $3,111.8
Cost of sales 1,012.4 841.2 2,826.0 2,495.3
------------------------------------------
Gross income 92.1 247.8 412.6 616.5
Depreciation and
amortization 61.9 56.6 159.1 178.2
------------------------------------------
Operating income 30.2 191.2 253.5 438.3
Interest on long-term debt 8.4 9.7 25.7 29.8
Investment and other income (1.7) (3.1) (6.1) (7.5)
Foreign exchange loss 12.1 6.1 8.9 1.1
------------------------------------------
Income before income taxes 11.4 178.5 225.0 414.9
Income tax expense 5.4 62.0 78.1 131.0
------------------------------------------
6.0 116.5 146.9 283.9
Minority interest 0.8 1.5 4.3 3.8
------------------------------------------
Net income $ 5.2 $ 115.0 $ 142.6 $ 280.1
-------------------------------------------------------------------------
Earnings per Common Share
Basic $ 0.07 $ 1.50 $ 1.85 $ 3.66
Diluted $ 0.07 $ 1.49 $ 1.84 $ 3.65
-------------------------------------------------------------------------
Retained Earnings
Opening balance $1,438.5 $1,191.2 $1,352.0 $1,072.2
Net income 5.2 115.0 142.6 280.1
------------------------------------------
1,443.7 1,306.2 1,494.6 1,352.3
------------------------------------------
Dividends declared:
Preferred shares - 0.1 - 0.4
Common shares 25.5 25.3 76.4 71.1
------------------------------------------
25.5 25.4 76.4 71.5
------------------------------------------
Ending balance $1,418.2 $1,280.8 $1,418.2 $1,280.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Consolidated Balance Sheets (Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
September December
(in millions) 30 2005 31 2004
-------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 171.4 $ 262.2
Short-term investments - 106.0
Accounts receivable 647.4 502.4
Inventories (note 3) 1,271.0 1,060.4
Future income tax assets 22.1 11.1
--------------------
2,111.9 1,942.1
--------------------
Fixed and other assets:
Fixed assets 2,118.4 1,669.7
Accrued pension benefit 85.4 76.2
Future income tax assets 63.1 -
Investments and other assets 28.4 34.2
--------------------
2,295.3 1,780.1
-------------------------------------------------------------------------
Total assets $4,407.2 $3,722.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Current liabilities:
Short-term borrowings (note 4) $ 279.6 $ 4.9
Accounts payable and accrued liabilities 461.2 498.7
Income and other taxes payable 35.2 61.8
Dividends payable 25.5 25.4
Current requirements on long-term debt 46.0 219.9
--------------------
847.5 810.7
--------------------
Long-term liabilities:
Long-term debt 454.8 224.6
Future income tax liabilities 81.3 56.5
Employee future benefits 678.6 402.5
Other long-term liabilities 67.2 26.2
--------------------
1,281.9 709.8
--------------------
Minority interest 42.3 35.8
--------------------
Shareholders' equity:
Common shares (note 6) 861.0 850.6
Contributed surplus 11.4 9.2
Retained earnings 1,418.2 1,352.0
Currency translation adjustment (55.1) (45.9)
--------------------
2,235.5 2,165.9
-------------------------------------------------------------------------
Total liabilities and shareholders' equity $4,407.2 $3,722.2
-------------------------------------------------------------------------
-------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
Consolidated Statement of Cash Flows (Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Three Months Ended Nine Months Ended
September 30 September 30
(in millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
Cash provided from (used for):
Operating activities:
Net income $ 5.2 $ 115.0 $ 142.6 $ 280.1
Add (deduct) items not
affecting cash
Depreciation and
amortization 61.9 56.6 159.1 178.2
Future income taxes (23.6) 7.8 (2.8) (9.8)
Employee future benefits 11.3 16.0 19.1 45.7
Stock-based compensation 2.9 2.8 5.4 6.5
Minority interest 0.8 1.5 4.3 5.1
Other 2.9 0.4 3.7 (0.8)
------------------------------------------
61.4 200.1 331.4 505.0
Add (deduct) changes in
non-cash components of
working capital
Accounts receivable (19.6) (50.9) (47.8) (204.2)
Inventories 43.3 (165.7) (43.7) (83.9)
Accounts payable and
accrued liabilities 11.6 24.7 (88.4) 66.2
Income and other taxes (11.2) 43.1 (72.0) 82.5
------------------------------------------
24.1 (148.8) (251.9) (139.4)
------------------------------------------
85.5 51.3 79.5 365.6
-------------------------------------------------------------------------
Investment activities:
Capital expenditures (91.4) (83.3) (298.0) (201.9)
Acquisition of Quebec
Cartier Mining Company,
net of cash acquired
(note 2) (227.2) - (227.2) -
Decrease (increase) in
short-term investments - (95.4) 106.0 (60.9)
Other (6.6) - (6.7) (0.2)
------------------------------------------
(325.2) (178.7) (425.9) (263.0)
-------------------------------------------------------------------------
Financing activities:
Increase (decrease) in
short-term borrowings 270.5 (1.5) 274.7 (6.0)
Issuance of long-term debt - - 250.0 -
Repayment of long-term debt (0.5) (4.1) (199.5) (30.3)
Distribution to minority
interest (1.3) - (1.3) -
Common shares issued 7.8 14.3 8.9 25.6
Dividends paid (25.4) (23.1) (76.3) (69.0)
------------------------------------------
251.1 (14.4) 256.5 (79.7)
-------------------------------------------------------------------------
Effect of exchange rate
changes on cash and cash
equivalents (2.9) (4.5) (0.9) (3.9)
-------------------------------------------------------------------------
Cash and cash equivalents:
(Decrease) increase in the
period 8.5 (146.3) (90.8) 19.0
Balance at beginning of
period 162.9 511.4 262.2 346.1
------------------------------------------
Balance at end of period $ 171.4 $ 365.1 $ 171.4 $ 365.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 Dofasco Inc. (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 - 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 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. As of this date, the results of QCM's operations have been
included in the consolidated financial statements.
The Corporation, which prior to this transaction held 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, plus approximately
$0.7 million of acquisition costs. Immediately following the closing of
the transaction, all of the preferred shares of QCM were converted into
common shares, resulting in the Corporation now holding approximately
98.7% of the outstanding common shares.
The acquisition of QCM was funded through a combination of short-term
bank borrowings of $237.0 million and cash on hand of $69.7 million. The
total purchase consideration is composed of the following:
(in millions)
-------------------------------------------------------------------------
Cash $ 306.0
Value of preferred shares converted (previously accounted at
cost) 20.0
Acquisition costs 0.7
-------------------------------------------------------------------------
Total purchase consideration $ 326.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The acquisition of QCM has been accounted for using the purchase method
of accounting in accordance with the recommendations of Section 1581,
Business Combinations, of the CICA Handbook. The purchase price has been
allocated to the tangible and intangible assets acquired and the
liabilities assumed based on management's estimates of their fair values
as at the date of acquisition and is summarized as follows:
(in millions)
-------------------------------------------------------------------------
Assets acquired:
Cash and cash equivalents $ 79.5
Inventories 168.4
Accounts receivable and other current assets 104.0
Fixed assets and mine resources 325.2
Future income tax and mining duty assets 33.9
Investments and other assets 8.9
---------
719.9
-------------------------------------------------------------------------
Less liabilities assumed:
Current liabilities 104.2
Employee future benefits 247.8
Other long-term liabilities 37.7
---------
389.7
-------------------------------------------------------------------------
Fair value of net assets acquired 330.2
Less minority interest 3.5
---------
Total purchase consideration $ 326.7
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Included in accounts receivable and other current assets and investments
and other assets are $9.2 million and $3.5 million respectively
reflecting the fair value of U.S. currency forward contracts outstanding
at the acquisition date.
Included in investments and other assets are $5.4 million of acquired
intangible assets, consisting of in-place operating leases that are below
current market rental rates and a long-term customer contract for
transportation services. Both intangible assets are subject to
amortization over their estimated remaining economic lives.
Included in other long-term liabilities are $25.3 million of asset
retirement obligations as at the acquisition date.
The purchase price and related allocations for this acquisition are
preliminary. Adjustments to the purchase price and related preliminary
allocations may occur as a result of obtaining more information regarding
asset valuations, liabilities assumed and revisions to preliminary
estimates of fair value made at the date of acquisition.
Note 3 - Inventories
September December
(in millions) 30, 2005 31, 2004
-------------------------------------------------------------------------
Raw materials and other inventories $ 532.5 $ 339.4
Semi-finished and finished steel products 738.5 721.0
--------------------
$1,271.0 $1,060.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 4 - Short-Term Borrowings
During the quarter, the Corporation extended its $100.0 million one-year
revolving facility to August 31, 2006. The $150.0 million three-year
revolving line that expires December 31, 2007 and the $50.0 million
operating line that expires upon notice of either party also remain in
place. As of September 30, 2005, there was remaining availability on
these facilities of $55.5 million (December 31, 2004 - $269.7 million).
Also during the quarter, the Corporation entered into a 120-day revolving
term loan in the amount of $250.0 million for the purpose of acquiring
certain assets related to Copperweld's mechanical tubing and automotive
components businesses in October 2005 (Note 9). The credit facility bears
interest at a variable rate and expires December 31, 2005. As of
September 30, 2005, the Corporation had not drawn upon this facility.
QCM has a $90.0 million one-year revolving credit facility at a variable
rate, expiring December 31, 2005. At September 30, 2005 there was
remaining availability on the facility of $51.7 million.
The Corporation's other subsidiaries and joint ventures had remaining
availability of $36.2 million on renewed and existing credit facilities
(December 31, 2004 - $30.6 million).
Note 5 - Employee Future Benefits
In the three months and nine months ended September 30, 2005 and
September 30, 2004, the Corporation recognized in cost of sales the
following net benefit cost for employee future benefits:
Three Months Ended Nine Months Ended
September 30 September 30
(in millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
Defined contribution plans $ 0.5 $ 0.4 $ 1.4 $ 1.3
Defined benefit plans 4.6 10.7 21.0 28.7
------------------------------------------
Total pension plans 5.1 11.1 22.4 30.0
Total other post-employment
benefit plans 14.0 11.3 40.0 33.9
------------------------------------------
Total net benefit cost $ 19.1 $ 22.4 $ 62.4 $ 63.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Note 6 - Capital Stock
The following table summarizes information on share capital and related
matters as at September 30, 2005:
Exer-
Outstanding cisable
-------------------------------------------------------------------------
Common shares 77,416,611 -
Common shares - year-to-date weighted average 77,166,600 -
Common share stock options 2,356,900 814,900
-------------------------------------------------------------------------
-------------------------------------------------------------------------
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 nine month
period were 275,100 and 321,700, respectively.
Common share stock options forfeited for the three month and nine month
period were nil and 1,100, respectively. Notes to Interim Consolidated
Financial Statements (Unaudited)
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 through 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 $85 million as at September 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 on anticipated transactions, the Corporation has one U.S.
dollar foreign exchange forward purchase contract for US $9.0 million
outstanding as at September 30, 2005. The contract matures on October 3,
2005 at an exchange rate of $1.2348. As at September 30, 2005, there was
an unrealized loss on this contract of $0.7 million.
The Corporation also periodically enters into forward purchase contracts
for other currencies including euros, Swiss francs and Japanese yen. As
at September 30, 2005 and December 31, 2004 the aggregate amount and
unrealized gain or loss were not significant.
The Corporation's subsidiary, QCM, regularly enters into U.S. dollar
foreign exchange forward sales contracts in order to manage the risk
associated with fluctuations in the exchange rate on anticipated U.S.
dollar denominated sales. The outstanding contracts at September 30, 2005
have an aggregate amount of US $271.0 maturing at various dates between
October 11, 2005 and March 30, 2007 at a weighted average exchange rate
of $1.2470. At September 30, 2005 there were unrealized gains on these
contracts of $24.8 million of which $8.7 million are included in accounts
receivable and $1.4 million are included in investments and other assets.
These amounts represent the September 30, 2005 remaining balances of the
fair value U.S. dollar forward sales contracts included in the purchase
price allocation at the date of the Corporation's acquisition of QCM
(Note 2).
Note 9 - Subsequent Event
Acquisition of Copperweld Assets
On October 3, 2005, the Corporation completed the acquisition of certain
assets related to Copperweld Holding Company's mechanical tubing and
automotive components businesses through a transaction with Atlas Tube
Inc. ("Atlas") of Harrow, Ontario for total cash consideration of US
$177.8 million, subject to post-closing adjustments. The post-closing
adjustments include an adjustment for working capital as at the
acquisition date and contingent consideration related to a tax
indemnification clause in the asset purchase agreement.
Under the agreement announced on August 17, 2005, Dofasco purchased the
Copperweld assets from Atlas immediately following Atlas' acquisition of
Copperweld. The assets acquired include manufacturing facilities in
Woodstock, Brantford, London, Brampton and Mississauga, Ontario, as well
as Shelby, Ohio and Elizabethtown, Kentucky. In addition, the purchase
includes a 50% interest in Copperweld's bimetallic business which is
being held for sale.
The acquisition of the Copperweld assets was funded through a combination
of short-term bank borrowings and cash on hand. As at the reporting date,
the allocation of the purchase price to the fair value of assets acquired
and liabilities assumed has not yet been finalized.
Note 10 - Segmented Information
Three Months Ended September 30, 2005
-----------------------------------------------------
Inter-
Steel Mining company
Oper- Gallatin Oper- Elimi- Consol.
(in millions) ations(x) Steel ations nation Total
-------------------------------------------------------------------------
Sales to external
customers $ 851.2 $ 105.6 $ 147.7 $ - $1,104.5
Inter-segment sales - 1.6 79.2 (80.8) -
-----------------------------------------------------
Net sales $ 851.2 $ 107.2 $ 226.9 $ (80.8) $1,104.5
-------------------------------------------------------------------------
Gross income $ 35.6 $ 17.7 $ 56.0 $ (17.2) $ 92.1
Depreciation and
amortization 46.6 4.8 10.5 - 61.9
Interest on
long-term debt 8.3 0.1 - - 8.4
Investment and
other income (0.9) (0.2) (0.6) - (1.7)
Foreign exchange
loss 5.8 - 6.3 - 12.1
-----------------------------------------------------
Income (loss)
before income
taxes $ (24.2) $ 13.0 $ 39.8 $ (17.2) $ 11.4
-------------------------------------------------------------------------
Capital
expenditures $ 69.0 $ 3.5 $ 18.9 $ - $ 91.4
Three Months Ended September 30, 2004
-----------------------------------------------------
Inter-
Steel Mining company
Oper- Gallatin Oper- Elimi- Consol.
(in millions) ations(x) Steel ations nation Total
-------------------------------------------------------------------------
Sales to external
customers $ 917.4 $ 171.8 $ (0.2) $ - $1,089.0
Inter-segment
sales - 5.6 7.2 (12.8) -
-----------------------------------------------------
Net sales $ 917.4 $ 177.4 $ 7.0 $ (12.8) $1,089.0
-------------------------------------------------------------------------
Gross income
(loss) $ 178.8 $ 74.1 $ (5.7) $ 0.6 $ 247.8
Depreciation and
amortization 50.7 5.4 0.5 - 56.6
Interest on
long-term debt 9.6 0.1 - - 9.7
Investment and
other income (2.5) (0.5) (0.1) - (3.1)
Foreign exchange
loss 6.1 - - - 6.1
-----------------------------------------------------
Income (loss)
before income
taxes $ 114.9 $ 69.1 $ (6.1) $ 0.6 $ 178.5
-------------------------------------------------------------------------
Capital
expenditures $ 80.4 $ 2.0 $ 0.9 $ - $ 83.3
Segment assets
September December
(in millions) 30, 2005 31, 2004
----------------------------------------
Steel Operations(x) $3,475.8 $3,424.8
Gallatin Steel 231.4 269.9
Mining Operations 737.0 54.0
Intercompany
elimination (37.0) (26.5)
--------------------
Consolidated total $4,407.2 $3,722.2
----------------------------------------
----------------------------------------
(x) Steel Operations includes Hamilton operations, Dofasco USA,
Powerlasers, DoSol Galva, Dofasco de Mexico, Dofasco Marion and
Dofasco's share of Baycoat, DJ Galvanizing and Sorevco. Segmented
information relating to 2004 has been restated to reclassify Wabush
Resources from Steel Operations to Mining Operations. The Gallatin
Steel segment represents Dofasco's 50% ownership in the minimill
joint venture located in Kentucky, accounted for using the
proportionate consolidation method. Mining Operations includes Wabush
Resources and QCM.
Nine Months Ended September 30, 2005
-----------------------------------------------------
Inter-
Steel Mining company
Oper- Gallatin Oper- Elimi- Consol.
(in millions) ations(x) Steel ations nation Total
-------------------------------------------------------------------------
Sales to external
customers $2,696.0 $ 375.6 $ 167.0 $ - $3,238.6
Inter-segment sales - 8.2 107.8 (116.0) -
-----------------------------------------------------
Net sales $2,696.0 $ 383.8 $ 274.8 $ (116.0) $3,238.6
-------------------------------------------------------------------------
Gross income $ 281.4 $ 91.5 $ 69.8 $ (30.1) $ 412.6
Depreciation and
amortization 132.7 14.7 11.7 - 159.1
Interest on
long-term debt 25.5 0.1 0.1 - 25.7
Investment and
other income (4.6) (0.7) (0.8) - (6.1)
Foreign exchange
loss 2.6 - 6.3 - 8.9
-----------------------------------------------------
Income before
income taxes $ 125.2 $ 77.4 $ 52.5 $ (30.1) $ 225.0
-------------------------------------------------------------------------
Capital
expenditures $ 267.5 $ 10.0 $ 20.5 $ - $ 298.0
Nine Months Ended September 30, 2004
-----------------------------------------------------
Inter-
Steel Mining company
Oper- Gallatin Oper- Elimi- Consol.
(in millions) ations(x) Steel ations nation Total
-------------------------------------------------------------------------
Sales to external
customers $2,689.1 $ 410.6 $ 12.1 $ - $3,111.8
Inter-segment sales - 10.3 26.3 (36.6) -
-----------------------------------------------------
Net sales $2,689.1 $ 420.9 $ 38.4 $ (36.6) $3,111.8
-------------------------------------------------------------------------
Gross income
(loss) $481.0 $ 141.8 $ (5.3) $ (1.0) $ 616.5
Depreciation and
amortization 160.9 15.9 1.4 - 178.2
Interest on
long-term debt 29.5 0.2 0.1 - 29.8
Investment and
other income (6.8) (0.5) (0.2) - (7.5)
Foreign exchange
loss 1.0 0.1 - - 1.1
-----------------------------------------------------
Income (loss)
before income
taxes $ 296.4 $ 126.1 $ (6.6) $ (1.0) $ 414.9
-------------------------------------------------------------------------
Capital
expenditures $ 195.3 $ 4.8 $ 1.8 $ - $ 201.9
(x) Steel Operations includes Hamilton operations, Dofasco USA,
Powerlasers, DoSol Galva, Dofasco de Mexico, Dofasco Marion and
Dofasco's share of Baycoat, DJ Galvanizing and Sorevco. Segmented
information relating to 2004 has been restated to reclassify Wabush
Resources from Steel Operations to Mining Operations. The Gallatin
Steel segment represents Dofasco's 50% ownership in the minimill
joint venture located in Kentucky, accounted for using the
proportionate consolidation method. Mining Operations includes Wabush
Resources and QCM.
Consolidated Geographic Information
Net Sales
------------------------------------------
Three Months Ended Nine Months Ended
September 30, September 30,
(in millions) 2005 2004 2005 2004
-------------------------------------------------------------------------
Canada $ 616.2 $ 721.5 $1,949.2 $2,087.4
United States 362.7 332.8 1,062.2 919.5
Other countries 125.6 34.7 227.2 104.9
------------------------------------------
Total $1,104.5 $1,089.0 $3,238.6 $3,111.8
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Fixed Assets
--------------------
September December
(in millions) 30, 2005 31, 2004
---------------------------------------------------
Canada $1,897.8 $1,437.9
United States 177.7 186.4
Other countries 42.9 45.4
--------------------
Total $2,118.4 $1,669.7
---------------------------------------------------
---------------------------------------------------
- SUPPLEMENTARY INFORMATION -
Segmented Information (Unaudited)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(in millions except shipments and per
ton amounts) 2004(++) 2005
-------------------------------------------------------------------------
Third Second Third
Quarter Quarter Quarter
-------------------------------
Net Sales
Mining Operations(xx) $ 7.0 $ 40.0 $ 226.9
Gallatin(xxx) $ 177.4 $ 121.9 $ 107.2
Steel Operations(x) $ 917.4 $ 931.5 $ 851.2
Intercompany Elimination $ (12.8) $ (32.4) $ (80.8)
-------------------------------------------------------------------------
Consolidated Sales $1,089.0 $1,061.0 $1,104.5
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Cost of Sales
Mining Operations(xx) $ 12.7 $ 24.1 $ 170.9
Gallatin(xxx) $ 103.3 $ 91.1 $ 89.5
Steel Operations(x) $ 738.6 $ 820.8 $ 815.6
Intercompany Elimination $ (13.4) $ (19.6) $ (63.6)
-------------------------------------------------------------------------
Consolidated Cost of Sales $ 841.2 $ 916.4 $1,012.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Gross Income
Mining Operations(xx) $ (5.7) $ 15.9 $ 56.0
Gallatin(xxx) $ 74.1 $ 30.8 $ 17.7
Steel Operations(x) $ 178.8 $ 110.7 $ 35.6
Intercompany Elimination $ 0.6 $ (12.8) $ (17.2)
-------------------------------------------------------------------------
Consolidated Gross Income $ 247.8 $ 144.6 $ 92.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Depreciation & Amortization
Mining Operations(xx) $ 0.5 $ 0.6 $ 10.5
Gallatin(xxx) $ 5.4 $ 4.8 $ 4.8
Steel Operations(x) $ 50.7 $ 42.9 $ 46.6
-------------------------------------------------------------------------
Consolidated Depreciation & Amortization $ 56.6 $ 48.3 $ 61.9
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Interest on Long-term Debt
Mining Operations(xx) $ - $ 0.1 $ -
Gallatin(xxx) $ 0.1 $ - $ 0.1
Steel Operations(x) $ 9.6 $ 8.2 $ 8.3
-------------------------------------------------------------------------
Consolidated Interest on Long-term Debt $ 9.7 $ 8.3 $ 8.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Investment and Other Income
Mining Operations(xx) $ (0.1) $ (0.1) $ (0.6)
Gallatin(xxx) $ (0.5) $ (0.3) $ (0.2)
Steel Operations(x) $ (2.5) $ (1.9) $ (0.9)
-------------------------------------------------------------------------
Consolidated Investment and Other Income $ (3.1) $ (2.3) $ (1.7)
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Foreign Exchange Loss (Gain)
Mining Operations(xx) $ - $ - $ 6.3
Gallatin(xxx) $ - $ - $ -
Steel Operations(x) $ 6.1 $ (3.1) $ 5.8
-------------------------------------------------------------------------
Consolidated Foreign Exchange Loss
(Gain) $ 6.1 $ (3.1) $ 12.1
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Loss on disposal of QCM $ - $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Income Before Income Taxes
Mining Operations(xx) $ (6.1) $ 15.3 $ 39.8
Gallatin(xxx) $ 69.1 $ 26.3 $ 13.0
Steel Operations(x) $ 114.9 $ 64.6 $ (24.2)
Intercompany Elimination $ 0.6 $ (12.8) $ (17.2)
-------------------------------------------------------------------------
Consolidated Income Before Income Taxes $ 178.5 $ 93.4 $ 11.4
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Shipments
Mining Operations (000's tonnes)(xx) 133 437 2,831
-------------------------------------------------------------------------
Steel Shipments
Gallatin (000's net tons)(xxx) 190 174 194
Hamilton & DSG Operations (000's net
tons) 1,004 1,030 1,025
-------------------------------------------------------------------------
Total Steel Shipments 1,194 1,204 1,219
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Sales Per Ton
Mining Operations ($/MT)(xx) $ 53 $ 91 $ 80
Gallatin $ 930 $ 700 $ 553
Hamilton & DSG Operations $ 857 $ 847 $ 768
Gross Income Per Ton
Mining Operations($/MT)(xx) $ (43) $ 36 $ 20
Gallatin $ 392 $ 178 $ 91
Hamilton & DSG Operations $ 164 $ 100 $ 29
-------------------------------------------------------------------------
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of common shares outstanding:
Period-end (000's) 77,083 77,146 77,417
Year-to-date weighted average (000's) 76,423 77,113 77,167
-------------------------------------------------------------------------
-------------------------------------------------------------------------
(x) Steel Operations include Hamilton operations, Dofasco USA,
Powerlasers, DoSol Galva, Dofasco de Mexico, Dofasco Marion and
Dofasco's share of Baycoat, DJ Galvanizing, and Sorevco.
(xx) Mining Operations include Wabush Resources Inc. and Quebec Cartier
Mining
(xxx) Represents Dofasco's 50% share.
(++) Reclassified to conform to current years presentation
>>
