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THIRD QUARTER - 2002
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE PERIOD ENDED SEPTEMBER 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 1-2438
I.R.S. EMPLOYER IDENTIFICATION NUMBER 36-1262880
ISPAT INLAND INC.
(a Delaware Corporation)
3210 Watling Street
East Chicago, Indiana 46312
Telephone: (219) 399-1200
Registrant meets the conditions set forth in General Instruction H(1)(a) and (b)
of Form 10-Q and is therefore filing this Form with the reduced disclosure
format.
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 100 shares of the Company's
Common Stock ($.01 par value per share) were outstanding as of October 24, 2002,
all of which were owned by Ispat Inland Holdings, Inc.
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. Condensed Consolidated Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations for the Three and Nine Months
Ended September 30, 2002 and 2001 2
Condensed Consolidated Statements of Comprehensive Income for the Three and Nine
Months Ended September 30, 2002 and 2001 2
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2002 and 2001 3
Condensed Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001 4
Notes to Condensed Consolidated Financial Statements 5 - 10
ITEM 2. Management's Narrative Analysis of Results of Operations 11
ITEM 4. Controls and Procedures 12
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 13
ITEM 5. Other 13
ITEM 6. Exhibits and Reports on Form 8-K 13
1
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------- ------------------------
2002 2001 2002 2001
-------- -------- ---------- ----------
NET SALES $ 597.3 $ 489.0 $ 1,718.3 $ 1,539.4
-------- -------- ---------- ----------
OPERATING COSTS AND EXPENSES
Cost of goods sold 525.2 466.7 1,574.4 1,528.8
Legal settlement -- -- -- (7.5)
Selling, general and
administrative expenses 7.0 7.6 20.3 24.6
Workforce reduction provision -- 11.0 -- 17.2
Depreciation 25.4 26.0 74.5 78.1
-------- -------- ---------- ----------
Total 557.6 511.3 1,669.2 1,641.2
-------- -------- ---------- ----------
OPERATING PROFIT (LOSS) 39.7 (22.3) 49.1 (101.8)
Other (income) expense, net (0.3) 0.3 (2.4) 0.8
Interest and other expense on debt 20.4 23.4 58.3 73.0
-------- -------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES 19.6 (46.0) (6.8) (175.6)
PROVISION (BENEFIT) FOR INCOME TAXES 6.6 (15.9) (4.1) (64.8)
-------- -------- ---------- ----------
NET INCOME (LOSS) BEFORE EXTRAORDINARY
GAIN 13.0 (30.1) (2.7) (110.8)
Extraordinary gain on early retirement
of debt, net of tax (Note 3) -- -- 18.6 3.1
-------- -------- ---------- ----------
NET INCOME (LOSS) $ 13.0 $ (30.1) $ 15.9 $ (107.7)
======== ======== ========== ==========
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(DOLLARS IN MILLIONS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2002 2001 2002 2001
-------- -------- ---------- ----------
Net income (loss) $ 13.0 $ (30.1) $ 15.9 $ (107.7)
Other comprehensive income, net of tax:
Reclassification adjustment for losses
included in net loss -- -- -- 0.3
-------- -------- ---------- ----------
COMPREHENSIVE INCOME (LOSS) $ 13.0 $ (30.1) $ 15.9 $ (107.4)
======== ======== ========== ==========
See notes to unaudited condensed consolidated financial statements
2
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN MILLIONS)
NINE MONTHS ENDED
SEPTEMBER 30
2002 2001
------- --------
OPERATING ACTIVITIES
Net income (loss) $ 15.9 $ (107.7)
------- --------
Adjustments to reconcile net income (loss) to net cash from operating
activities:
Gain on early extinguishment of debt (29.2) (4.8)
Loss on sale of available for sale securities -- 0.5
Depreciation 74.5 78.1
Amortization of debt premium (0.9) (1.0)
Undistributed earnings from joint ventures (5.0) (23.5)
(Gain) loss on sale of property, plant & equipment (0.3) 0.4
Deferred income taxes 6.5 (63.1)
Change in:
Receivables (40.1) 7.1
Inventories (12.3) 81.5
Other assets (2.5) 48.2
Accounts payable 2.3 (28.4)
Payables to/receivables from related companies (0.4) 5.6
Other accrued liabilities 7.9 (8.0)
Deferred employee benefit cost (1.1) (103.6)
Other items 3.4 2.1
------- --------
Net adjustments 2.8 (8.9)
------- --------
Net cash from operating activities 18.7 (116.6)
INVESTING ACTIVITIES
Capital expenditures (31.2) (22.5)
Proceeds from sale of available for sale securities -- 4.0
Proceeds from sale of property, plant & equipment 0.3 0.5
Investments in and advances to joint ventures, net of distributions 0.7 5.7
------- --------
Net cash from investing activities (30.2) (12.3)
FINANCING ACTIVITIES
Payments on long-term debt (16.3) (12.4)
Dividends paid -- (5.4)
Proceeds from note receivable from related company, net (3.2) 2.0
Proceeds from note payable to related company 1.6 129.8
Bank overdrafts (2.6) (0.5)
Proceeds from revolver borrowings, net 35.0 8.0
------- --------
Net cash from financing activities 14.5 121.5
------- --------
Net decrease in cash and cash equivalents 3.0 (7.4)
Cash and cash equivalents - beginning of period 24.2 24.0
------- --------
Cash and cash equivalents - end of period $ 27.2 $ 16.6
======= ========
Non-cash activity:
Receipt of available for sale securities $ -- $ 56.8
See notes to unaudited condensed consolidated financial statements
3
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN MILLIONS)
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 27.2 $ 24.2
Receivables, less provision for allowances, claims and 234.3 194.2
doubtful accounts of $16.0 and $16.7
Receivables from related companies 4.2 3.3
Inventories 425.4 413.1
Deferred income taxes 35.2 35.2
---------- ----------
Total current assets 726.3 670.0
INVESTMENTS IN AND ADVANCES TO JOINT VENTURES 250.0 245.7
PROPERTY, PLANT AND EQUIPMENT, NET 1,762.1 1,805.4
NOTE RECEIVABLE FROM RELATED COMPANIES 6.1 2.9
DEFERRED INCOME TAXES 168.2 174.7
PENSION INTANGIBLE ASSET 81.2 81.2
OTHER ASSETS 57.9 55.4
---------- ----------
Total Assets $ 3,051.8 $ 3,035.3
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 172.4 $ 170.1
Bank overdrafts 20.2 22.8
Payables to related companies 12.5 12.0
Pension contribution 54.5 --
Accrued expenses and other liabilities 143.9 136.0
Long-term debt due within one year
Related companies 7.0 7.0
---------- ----------
Total current liabilities 410.5 347.9
LONG-TERM DEBT
Related companies (Note 5) 819.0 822.7
Other 418.5 424.6
DEFERRED EMPLOYEE BENEFITS 1,313.0 1,368.6
OTHER LONG-TERM OBLIGATIONS 52.6 49.2
---------- ----------
Total liabilities 3,013.6 3,013.0
COMMITMENTS AND CONTINGENCIES (NOTE 6)
STOCKHOLDERS' EQUITY
Preferred stock 90.0 90.0
Common stock 320.0 320.0
Accumulated deficit (139.2) (155.1)
Accumulated other comprehensive loss (232.6) (232.6)
---------- ----------
Total stockholders' equity 38.2 22.3
---------- ----------
Total Liabilities and Stockholders' Equity $ 3,051.8 $ 3,035.3
========== ==========
See notes to unaudited condensed consolidated financial statements
4
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements of Ispat Inland Inc. (the
"Company") are unaudited, but in the opinion of management, contain all
adjustments necessary to present fairly the financial position and results of
operations and cash flows for the periods presented. All significant
intercompany accounts and transactions have been eliminated. These financial
statements should be read in conjunction with the financial statements and
related notes contained in the Annual Report on Form 10-K for the year ended
December 31, 2001.
The results of operations for the interim periods shown in this report are not
necessarily indicative of the results to be expected for a full year.
Certain amounts in the 2001 Condensed Consolidated Financial Statements have
been reclassified to conform with current year presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations", which is effective for all fiscal years beginning after
June 15, 2002. SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company is evaluating this pronouncement
to determine its impact, if any, on the consolidated financial statements.
On October 3, 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment
or Disposal of Long-Lived Assets", which is effective for all fiscal years
beginning after December 15, 2001. SFAS No. 144 addresses accounting and
reporting for the impairment or disposal of long-lived assets, including
discontinued operations, and establishes a single accounting model for
long-lived assets to be disposed of by sale. The Company has determined that the
adoption of SFAS No. 144 had no current impact on the consolidated financial
statements.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
Among other items, this statement rescinds SFAS No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and an amendment of that Statement, SFAS No.
64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. Upon
adoption of SFAS No. 145 on January 1, 2003, any gain or loss on extinguishment
of debt that was classified as an extraordinary item in prior periods presented
that does not meet the criteria in APB Opinion No. 30, Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
classification as an extraordinary item shall be reclassified.
5
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
NOTE 2 - INVENTORIES
Inventories consist of the following:
SEPTEMBER 30, 2002 DECEMBER 31, 2001
------------------ -----------------
In process and finished steel $ 309.9 $ 270.4
Raw materials and supplies:
Iron ore 43.8 64.6
Scrap and other raw materials 42.4 46.3
Supplies 29.3 31.8
-------- --------
115.5 142.7
-------- --------
Total $ 425.4 $ 413.1
======== ========
NOTE 3 - LONG-TERM DEBT
In connection with the financing of the acquisition of Ispat Inland, an
affiliate of the Company and wholly owned indirect subsidiary of Ispat, , Ispat
Inland, L.P. (the "Borrower"), entered into a Credit Agreement dated July 16,
1998 (the "Credit Agreement") for a senior secured term credit facility and
letter of credit with a syndicate of financial institutions for whom Credit
Suisse First Boston is the agent. The Credit Agreement consists of a $350
Tranche B Term Loan due July 16, 2005, a $350 Tranche C Term Loan due July 16,
2006 and a $160 letter of credit extending to July 9, 2003. The LC has not been
drawn upon.
Under terms of the Credit Agreement, the Company must maintain a minimum
Consolidated EBITDA (as defined in the Credit Agreement). The Company amended
the Credit Agreement, effective March 30, 2001, which eliminated the minimum
Consolidated EBITDA requirement for 2001. The Company was in compliance with
this covenant at September 30, 2002. The Credit Agreement also contains other
covenants that, among other things, prohibit or limit the ability of the Company
or the Borrower to pay dividends and other restricted payments, incur
indebtedness, create liens, engage in transactions with affiliates, sell assets
and engage in mergers and consolidations.
Ispat Inland Administrative Service Company ("IIASC"), a wholly owned subsidiary
of the Company established to provide a supplemental source of funds to the
Company, has a $165 committed revolving credit facility with a group of banks,
extending to November of 2005. The Company has agreed to sell substantially all
of its receivables to IIASC to secure this facility. Provisions of the credit
agreement limit or prohibit the Company from merging, consolidating, or selling
its assets and require IIASC to meet minimum net worth and leverage ratio tests.
Under terms of the secured revolving credit agreement, based on the level of the
leverage ratio and net worth calculations of the Company at December 31, 2001,
the trustee retains initial control over cash lockbox receipts effective in
early February of 2002. On a daily basis, the trustee will remit the remaining
cash to the Company after first using the receipts to make any payments
prescribed by the secured revolving credit agreement. This change in practice
does not have an impact on cash available to the Company under the facility. At
September 30, 2002 and December 31, 2001, $147 and $155, respectively, was
borrowed under the facility.
In 1999, the Company established a five-year $120 revolving credit facility with
a group of banks. The Company has agreed to sell substantially all of its raw
material, in-process and finished goods inventory to Ispat Inland Inventory, LLC
("III"), a wholly owned subsidiary of the Company, to secure this facility.
Provisions of the credit agreement require III to maintain a minimum net worth.
At September 30, 2002 and December 31, 2001, $69 and $26, respectively, was
borrowed under this facility.
At September 30, 2002 and December 31, 2001, the amounts outstanding under both
the IIASC and III revolving credit facilities were shown as a long term
obligation. The Company has the ability and intent to refinance these
obligations as they mature under the respective credit agreements.
6
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
NOTE 3 - LONG-TERM DEBT (CONT.)
In the first quarter of 2002, the Company purchased $14.3 of its Pollution
Control Series 1993, $3.8 of its Pollution Control Series 1995 and $0.7 of its
Series R Bonds at discounts from face value. As a result of these early
redemptions, the Company recognized an extraordinary gain of $14.0 ($9.1 after
tax). In the second quarter of 2002, the Company purchased $0.2 of its Series R
Bonds, $0.1 of its Pollution Control Series 1977, $1.4 of its Pollution Control
Series 1993, $0.8 of its Pollution Control Series 1995, $9.4 of its Pollution
Control Series 13, and $6.2 of its Pollution Control Series 15 at discounts from
face value. As a result of these early redemptions, the Company recognized an
extraordinary gain of $15.2 ($9.5 after tax).
In the second quarter of 2001, the Company purchased $11.7 of its Series R Bonds
at a discount from face value. As a result of this early redemption, the Company
recognized an extraordinary gain of $4.8 ($3.1 after tax).
NOTE 4 - EQUITY
Common Stock
On September 30, 2002 and December 31, 2001, the Company had 1,000 shares
authorized of common stock, $.01 par value ("Common Stock"), of which 100 shares
were issued, outstanding and owned by a wholly owned subsidiary of Ispat
International N.V. ("Ispat").
Cumulative Preferred Stock
On September 30, 2002 and December 31, 2001, the Company had 100 shares
authorized, issued and outstanding of Series A 8% Cumulative Preferred Stock,
$.01 par value ("Preferred Stock"), which is owned by a wholly owned subsidiary
of Ispat. The Preferred Stock has liquidation preference over the Common Stock.
NOTE 5 - RELATED PARTY TRANSACTIONS
The Company was charged $0.9 and $2.6 by Ispat and its subsidiaries for the
three and nine months ended September 30, 2002 and $1.5 and $4.6 by Ispat and
its subsidiaries for the three and nine months ended September 30, 2001
respectively, for management, financial and legal services provided to the
Company.
The Company purchased $79.2 and $120.4 of inventory from subsidiaries of Ispat
during the three and nine months ended September 30, 2002 and $17.6 and $30.7
during the three and nine months ended September 30, 2001, respectively. The
Company sold $1.8 and $5.0 of inventory to subsidiaries of Ispat for the three
and nine months ended September 30, 2002 and $1.6 and $3.8 for the three and
nine months ended September 30, 2001, respectively.
I/N Tek is a joint venture which owns and operates a cold-rolling facility and
is 60% owned by a wholly owned subsidiary of the Company. Under a tolling
arrangement between the Company and I/N Tek, the Company was charged $34.3 and
$108.8 for such tolling services for the three and nine months ended September
30, 2002 and $36.2 and $108.0 for the three and nine months ended September 30,
2001, respectively.
I/N Kote is a joint venture that owns and operates an electrogalvanizing line
and hot-dip galvanizing line which is 50% owned by a wholly owned subsidiary of
the Company. The Company recorded sales of cold-rolled steel to I/N Kote of
$87.5 and $253.6 for the three and nine months ended September 30, 2002 and
$67.4 and $203.0 for the three and nine months ended September 30, 2001,
respectively.
The Company's debt due to related companies of $826.0 and $829.7 as of September
30, 2002 and December 31, 2001, respectively, consists of $670.2 and $675.5,
respectively, payable to Ispat Inland Finance LLC, a wholly owned subsidiary of
the Borrower and Ispat and of $155.8 and $154.2, respectively, advances from
other subsidiaries of Ispat. Under the Credit Agreement, these advances cannot
be repaid until the Company's leverage
7
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
NOTE 5 - RELATED PARTY TRANSACTIONS (CONT.)
falls to specified levels. At September 30, 2002, the Company has both the
ability and the intent to refinance the advances and related unpaid interest as
the obligations mature, therefore the amounts have been shown as long-term.
The Company's note receivable from a related company of $6.1 and $2.9 at
September 30, 2002 and December 31, 2001, respectively is due from Ispat Inland,
L.P. Amounts relate to costs associated with the financing of the acquisition of
the Company by Ispat and costs incurred in relation to settlement of the
interest collar (Note 7). Payment is due on July 16, 2006 unless Ispat Inland,
L.P. chooses to prepay.
The Company's receivable from related companies of $4.2 and $3.3 at September
30, 2002 and December 31, 2001, respectively, consists of trade and other
intercompany receivables. The Company's payable to related companies of $12.5
and $12.0 at September 30, 2002 and December 31, 2001, respectively, consists of
trade and other intercompany expenses.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
At September 30, 2002, the Company guaranteed $67.1 of long-term debt
attributable to I/N Kote, one of its equity investments.
The Company entered into an agreement with the Pension Benefit Guaranty Company
(the "PBGC") in 1998 to provide certain financial assurances with respect to the
Company's Pension Plan. In accordance with this agreement, the Company provided
the PBGC a letter of credit in the amount of $160, made cash contributions of
$108.6 in 2001 and $30.7 in 2000 to the Pension Trust and committed to certain
minimum funding requirements, including to fund normal cost of the Pension Plan
plus, through 2003, an additional $5 per year. Included in the 2001 payments was
a prepayment of the entire 2002 obligation and a portion of the 2003 obligation.
Accordingly, no further contribution under this agreement is required for 2002.
The Company is obligated to make a payment during the first quarter of 2003. In
addition, the Company granted to the PBGC a first priority lien on selected
assets. Also, Ryerson Tull, Inc., the former parent of the Company, was required
to provide a $50 guarantee of the Company's payment obligations with respect to
its pension plan. This guarantee expires on July 16, 2003, at which time the
Company is required to provide a first priority lien on assets or a letter of
credit valued at $50 as replacement security. The Agreement has a term of at
least five years or until certain financial tests are met, whichever is later;
however, the agreement could terminate within five years if the Pension Plan is
terminated or the Company is sold and the purchaser meets certain tests.
In 1998, the Company entered into an agreement with a third party to purchase
1.2 million tons of coke annually for approximately 15 years on a take-or-pay
basis at prices determined by certain cost factors from a heat recovery coke
battery facility located on land leased from the Company. Under a separate
tolling agreement with another third party, the Company has committed to pay
tolling charges over approximately 15 years to desulphurize flue gas from the
coke battery and to convert the heat output from the coke battery to electrical
power and steam. As of September 30, 2002 and December 31, 2001, the estimated
minimum tolling charges remaining over the life of this agreement were
approximately $160.6 and $182.6, respectively.
As part of the agreement covering the 1990 sale of the Inland Lime & Stone
Company division assets, the Company agreed, subject to certain exceptions, to
purchase, at prices which approximate market, the annual limestone needs of the
Indiana Harbor Works through 2002.
On June 10, 1993, the U.S. District Court for the Northern District of Indiana
entered a consent decree that resolved all matters raised by a lawsuit filed by
the EPA in 1990 (the "Consent Decree") against, among others, Ispat Inland Inc.
The Consent Decree assessed a $3.5 cash fine, required $7 in environmentally
beneficial projects at the Indiana Harbor Works, and required that $19, plus
interest, be spent in assessing and remediating sediment in portions of the
Indiana Harbor Ship Canal and Indiana Harbor Turning Basin ("Sediment
Remediation"). In addition, the Consent
8
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONT.)
Decree required remediation of the Company's Indiana Harbor Works (the
"Corrective Action"). The Corrective Action liability is a distinct and separate
responsibility under the Consent Decree. The Consent Decree establishes a
three-step process for the Corrective Action, each of which requires approval by
the EPA, consisting of: (1) assessment of the site in two separate phases
(including stabilization measures), (2) evaluation of remediation alternatives
and (3) remediation of the site where required. The Company is presently working
on the assessment step of the Corrective Action. At the completion of the second
phase of assessments, the Company will be able to estimate the required
Corrective Action cleanup costs. The Company currently expects to expend $2 to
$4 per year over the next several years to perform the required Assessments. The
Company paid the $3.5 fine on July 9, 1993 and recognized the fine in the early
1990s prior to Ispat's acquisition. In addition, pursuant to the Consent Decree,
the Company completed $14, more than the required $7, in environmentally
beneficial projects at the Indiana Harbor Works. The environmentally beneficial
projects consisted of the installation of sludge dewatering and sludge
briquetting and recycling equipment which have allowed the re-use of these
former waste products into the process. The required environmentally beneficial
projects have been fully completed and no additional beneficial projects are
required. The Sediment Remediation is currently in the assessment phase. The
Company's reserve for the remaining environmental obligations under the Consent
Decree totaled $27.6 as of September 30, 2002, reflecting the $19 plus interest
for the Sediment Remediation liabilities, and amounts for the Corrective Action
assessments.
Because the nature and extent of the contamination and the required remedial
actions cannot be determined until the two phases of assessments have been
completed, the Company cannot presently reasonably estimate the costs of or the
time required to satisfy its Corrective Action obligations under the Consent
Decree. It is expected that assessment and remediation of the site will require
significant expenditures over the next several years that may be material to the
Company's financial position and results of operations. Insurance coverage with
respect to work required under the Consent Decree is not significant.
It is anticipated that the Company will make capital expenditures of $2 to $5
annually in each of the next five years for the construction, and have ongoing
annual expenditures (non-capital) of $35 to $45 for the operation of air and
water pollution control facilities to comply with current federal, state and
local laws and regulations. The Company is involved in various environmental and
other administrative or judicial actions initiated by governmental agencies.
While it is not possible to predict the results of these matters, the Company
does not expect environmental expenditures, excluding amounts that may be
required in connection with the 1993 consent decree in the 1990 EPA lawsuit, to
materially affect the Company's results of operations or financial position.
Corrective actions relating to the EPA consent decree may require significant
expenditures over the next several years that may be material to the results of
operations or financial position of the Company. At September 30, 2002 and
December 31, 2001, the Company's reserves for environmental liabilities totaled
$27.6, $21.6 of which is related to the sediment remediation under the 1993 EPA
consent decree.
The total amount of firm commitments of the Company and its subsidiaries to
contractors and suppliers, primarily in connection with additions to property,
plant and equipment, was $12.8 and $3.3 at September 30, 2002 and December 31,
2001, respectively.
On May 29, 2001, the Company settled a number of disputes with Ryerson Tull,
Inc. that had arisen under the May 27, 1998 Merger Agreement among Ispat
International N.V., Inland Merger Sub, Inc., Inland Steel Industries (the
predecessor to Ryerson Tull and former owner of the Company), and Inland Steel
Company (the predecessor of the Company), as amended. The settled disputes
included the Company's claim against Ryerson Tull for indemnification in
connection with the resolution of a federal lawsuit and investigation relating
to the sale of polymer-coated steel by the Company to a culvert fabricator for
use in highway construction projects in Louisiana and other claims, but excluded
environmental claims, for which the Company may make claims until July 2003.
Pursuant to the May 29, 2001 settlement, Ryerson Tull paid $7.5 million to the
Company and the parties released certain claims each had against the other.
9
ISPAT INLAND INC. AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - (CONTINUED)
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
NOTE 6 - COMMITMENTS AND CONTINGENCIES (CONT.)
On July 2, 2002, the Company received a notice of violation ("NOV") issued by
the US Environmental Protection Agency against the Company, Indiana Harbor Coke
Company, L.P. ("IHCC") and Cokenergy, Inc., alleging violations of air quality
and permitting regulations for emissions from the Heat Recovery Coal
Carbonization facility which is operated by IHCC. An amended NOV stating similar
allegations was issued on August 8, 2002. Ispat and the Company have notified
Ryerson Tull, Inc. of their intention to seek indemnification and other remedies
under the May 27, 1998 Merger Agreement among Ispat, the Company, Inland Merger
Sub, Inc. and Inland Steel Industries, Inc. (the predecessor company to Ryerson
Tull, Inc.), as amended, and other grounds, for any losses in connection with
this matter. At this time, it is not possible to predict whether the Company
will be found liable for any violation and, if, in fact, there were to be such a
finding, the amount of the Company's potential liability or whether this
potential liability could materially affect the financial position of the
Company.
In addition to the foregoing, the Company is a party to a number of legal
proceedings arising in the ordinary course of its business. The Company does not
believe that the adverse determination of any such pending routine litigation,
either individually or in the aggregate, will have a material adverse effect on
our business, financial condition, results of operations, cash flows or
prospects.
NOTE 7 - DERIVATIVES
The Company uses futures and swap contracts to manage fluctuations in the cost
of natural gas and certain nonferrous metals, primarily zinc which is used in
the coating of steel. Timing of these transactions corresponds to the expected
need for the underlying physical commodity and is intended as a hedge (not as
defined by SFAS No. 133) against the cost volatility of these commodities. The
counterparties of these contracts are internationally recognized companies which
are not considered a credit risk by the Company. Contracts generally do not
extend out beyond three years. At September 30, 2002, the Company had entered
into contracts for these commodities for notional amounts of $19.6. For the
quarter and nine months ended September 30, 2002, the Company recorded gains of
$1.5 and $3.0, respectively, for changes in the fair value of derivative
instruments not designated as a hedge (as defined by SFAS No. 133). Under terms
of the futures and swap contracts, the Company had approximately $1.5 on deposit
with counterparties at September 30, 2002 that was classified as an other asset
on the balance sheet.
A portion of the floating rate debt used in connection with the financing of the
acquisition of the Company was hedged by the Borrower through the use of an
interest collar. Due to the decline in interest rates during fiscal year 2002,
the fair value of the collar represented a derivative liability to the Borrower
of approximately $16.1 at September 30, 2002.
NOTE 8 - WORKFORCE REDUCTION
For the year ended December 31, 2001, the Company recorded charges of $18.2 for
severance and termination benefit cost related to voluntary and involuntary
workforce reductions of approximately 250 salaried non-represented employees. Of
the amounts recorded, $11.1 is included in Deferred Employee Benefits. During
the first nine months of 2002, the Company paid $0.2 related to the 2001
workforce reductions, in addition to the $6.3 previously paid in 2001. The
Company's accrual for the remaining workforce reductions totaled $0.6 as of
September 30, 2002 and is included in "Accrued expenses and other liabilities"
in the consolidated balance sheets.
10
ITEM 2.
MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
RESULTS OF OPERATIONS
Comparison of Third Quarter 2002 to Third Quarter 2001
Net sales of $597.3 for the third quarter of 2002 increased by 22.2 percent from
$489.0 in the year-ago quarter as shipments increased by 9.6 percent and average
selling price per ton increased 11.4 percent. Steel shipments were 1,422,999 net
tons for the third quarter of 2002 compared to 1,298,007 net tons for the third
quarter of 2001.
Cost of goods sold of $525.2 increased 12.5 percent from $466.7 in the year-ago
quarter due to the above mentioned increase in shipments.
Selling, general and administrative expenses of $7.0 decreased 7.9 percent from
$7.6 in the year-ago quarter due to decreased spending during the current
quarter.
Depreciation expense of $25.4 for the current quarter decreased 2.3 percent from
$26.0 in the year-ago quarter.
An operating profit of $39.7 was reported for the current quarter compared to an
operating loss of $22.3 in the year-ago quarter as a result of the items noted
above.
Other (income) expense, net of $0.3 of income increased by $0.6 from $0.3 of
expense due to a decrease in corporate expenses.
Interest and other expense on debt of $20.4 in the current quarter decreased
12.8 percent from $23.4 in the year ago quarter due to a reduction in interest
rates.
Comparison of First Nine Months of 2002 to First Nine Months of 2001
Net sales of $1,718.3 for the first nine months of 2002 increased by 11.6
percent from $1,539.4 in the year-ago period as shipments increased by 8.2
percent and average selling price per ton increased 3.1 percent. Steel shipments
were 4,313,362 net tons for the first nine months of 2002 compared to 3,984,950
net tons for the first nine months of 2001.
Cost of goods sold of $1,574.4 increased 3.0 percent from $1,528.8 in the
year-ago period due to the above mentioned increase in shipments.
Depreciation expense of $74.5 for the current period decreased 4.6 percent from
$78.1 in the year-ago period.
Selling, general and administrative expenses of $20.3 decreased 17.5 percent
from $24.6 in the year-ago period due to decreased spending during the current
period.
Operating profit increased to a profit of $49.1 for the current period compared
to a loss of $101.8 in the year-ago period as a result of the items noted above.
Other (income) expense, net of $2.4 of income increased by $3.2 from $0.8 of
expense in the year-ago period due to a decrease in corporate expenses. The
first nine months of 2001 also included a loss on disposed property of $0.4 and
a loss on the sale of stock and securities of $0.7 while the first nine months
of 2002 included a gain on disposed property of $0.3.
Interest and other expense on debt of $58.3 in the current period decreased 20.1
percent from $73.0 in the year ago period due to a reduction in interest rates.
11
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this report, evaluations were
carried out under the supervision and with the participation of the Company's
management, including our Chief Operating Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of
1934). Based upon those evaluations, the Chief Operating Officer and Chief
Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective. No significant changes have been made in
our internal controls or in other factors that could significantly affect these
controls subsequent to the date of the evaluations.
12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 5. OTHER
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The exhibits required to be filed by Item 601 of Regulation
S-K are listed in the Exhibit Index which is attached hereto, and
incorporated by reference herein.
(b) REPORTS ON FORM 8-K.
The Company did not file any reports on Form 8-K during the quarter
ended September 30, 2002.
13
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ISPAT INLAND INC.
By /s/ Michael G. Rippey
----------------------------
Michael G. Rippey
Vice President -
Finance & Administration
and CFO
Principal Financial Officer
Principal Accounting Officer
and Director
Date: October 24, 2002
CERTIFICATION
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Peter D. Southwick, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Ispat Inland Inc.
(the "Registrant")
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
1
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 24, 2002
-------------------------
/s/ PETER D. SOUTHWICK
-----------------------------
Name: Peter D. Southwick
Title: President & Chief
Operating Officer
2
CERTIFICATION
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Michael G. Rippey, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Ispat Inland Inc.
(the "Registrant")
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
3
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: October 24, 2002
--------------------------
/s/ MICHAEL G. RIPPEY
-----------------------------
Name: Michael G. Rippey
Title: Vice President,
Finance &
Administration and
Chief
Financial Officer
4
INDEX TO EXHIBITS
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NO.
------- ---------------------------------------------------- ----------
99.1 Certification of Peter D. Southwick, President &
Chief Operating Officer of Ispat Inland Inc.
Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 Certification of Michael G. Rippey, Vice President,
Finance & Administration and Chief Financial Officer
of Ispat Inland Inc. Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002.
5