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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2005
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 1-31926
MITTAL STEEL USA ISG INC.*
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 71-0871875
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
4020 Kinross Lakes Parkway,
Richfield, Ohio 44286-9000
(Address of Registrant's (Zip Code)
Principal Executive Offices)
(330) 659-9100
(Registrant's Telephone Number Including Area Code)
The Registrant meets the conditions set forth in General Instruction H(1)(a) and
(b) of Form 10-Q and is therefore filing this Form in the reduced disclosure
format as set forth in that instruction.
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 [ ] No [X]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of November 9, 2005, the Registrant had 100 shares of common stock, par value
$0.01 per share, all of which are ultimately owned by Mittal Steel Company N.V.,
a company organized under the laws of The Netherlands (Mittal Steel).
* On April 15, 2005, Mittal Steel USA ISG Inc. (formerly known as International
Steel Group Inc.), a Delaware corporation (the Company or Mittal Steel USA ISG),
merged with Park Acquisition Corp., a Delaware corporation and a wholly owned
subsidiary of Mittal Steel, with Mittal Steel USA ISG surviving the merger as a
wholly owned subsidiary of Mittal Steel (the Merger). In connection with the
Merger, International Steel Group Inc. was renamed Mittal Steel USA ISG Inc.
Pursuant to the Merger, Mittal Steel USA ISG Inc. no longer has a class of
equity securities registered under the Securities Exchange Act of 1934 (the
Exchange Act). However, pursuant to the terms of the Indenture, dated as of
April 14, 2004, by and between the Company and The Bank of New York, the Company
is obligated to continue filing periodic and other reports with the SEC.
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TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS..............................................3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS..............................13
ITEM 4. CONTROLS AND PROCEDURES..........................................17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS................................................18
ITEM 5. OTHER INFORMATION................................................22
ITEM 6. EXHIBITS.........................................................22
SIGNATURE.....................................................................23
2
PART I
ITEM 1. FINANCIAL STATEMENTS
MITTAL STEEL USA ISG INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in millions)
QUARTERLY YEAR - TO - DATE
--------------------------------- -------------------------------------------------
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY COMPANY COMPANY
PERIOD FROM PERIOD FROM
THREE MONTHS THREE MONTHS APRIL 16, 2005 JANUARY 1, 2005 NINE MONTHS
ENDED ENDED THROUGH THROUGH ENDED
SEPT. 30, 2005 SEPT. 30, 2004 SEPT. 30, 2005 APRIL 15, 2005 SEPT. 30, 2004
-------------- -------------- -------------- --------------- --------------
$ 2,104.6 $ 2,608.3 Net sales.............................. $ 4,043.6 $ 3,127.6 $ 6,462.4
Costs and expenses:
1,862.2 2,166.5 Cost of sales........................ 3,535.5 2,644.0 5,634.0
Marketing, administrative, and
58.1 64.4 other expenses..................... 111.5 158.6 173.7
51.7 37.0 Depreciation and amortization........ 86.8 48.3 98.3
-------------- -------------- -------------- --------------- --------------
1,972.0 2,267.9 Total costs and expenses............... 3,733.8 2,850.9 5,906.0
132.6 340.4 Income from operations................. 309.8 276.7 556.4
-- -- Loss (gain) on sale of assets.......... -- (9.6) --
14.9 -- Related party interest expense, net.... 27.9 -- --
Interest and other financing expense,
11.5 13.2 net................................ 20.2 14.8 48.1
-------------- -------------- -------------- --------------- --------------
106.2 327.2 Income before income taxes............. 261.7 271.5 508.3
42.5 70.8 Provision for income taxes............. 81.1 108.6 86.9
-------------- -------------- -------------- --------------- --------------
$ 63.7 $ 256.4 Net income ............................ $ 180.6 $ 162.9 $ 421.4
============== ============== ============== =============== ==============
See accompanying notes to consolidated financial statements.
3
MITTAL STEEL USA ISG INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
PREDECESSOR
SUCCESSOR COMPANY COMPANY
SEPT. 30, 2005 DECEMBER 31, 2004
------------------ ------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 59.1 $ 606.7
Receivables, less allowances of $49.8 and $50.1 ................................... 754.0 830.7
Inventories ....................................................................... 1,921.8 1,320.4
Assets held for sale .............................................................. 13.4 39.6
Deferred income taxes ............................................................. - 75.1
Prepaid and other current assets .................................................. 203.6 57.8
------------------ ------------------
Total current assets ............................................................ 2,951.9 2,930.3
Property, plant and equipment ....................................................... 3,759.8 1,314.9
Accumulated depreciation ............................................................ 79.0 210.0
------------------ ------------------
Property, plant and equipment, net ................................................ 3,680.8 1,104.9
Receivable from related parties ..................................................... 250.4 -
Deferred income taxes ............................................................... - 354.8
Investments in joint ventures ....................................................... 29.1 27.9
Other assets ........................................................................ 230.1 70.7
------------------ ------------------
Total assets $ 7,142.3 $ 4,488.6
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt and capital leases .............................. $ 25.9 $ 57.6
Accounts payable .................................................................. 631.3 758.9
Payables to related parties ....................................................... 84.6 -
Unfavorable contracts ............................................................. 423.2 -
Accrued compensation and benefits ................................................. 224.0 289.4
Deferred income taxes ............................................................. 137.9 -
Accrued income taxes .............................................................. 51.1 156.2
Other current liabilities ......................................................... 158.7 118.9
------------------ ------------------
Total current liabilities ...................................................... 1,736.7 1,381.0
Long term liabilities:
Debt .............................................................................. 675.0 637.2
Capital leases .................................................................... 31.1 169.6
Related party debt ................................................................ 1,700.0 -
Unfavorable contracts ............................................................. 377.0 -
Environmental liabilities ......................................................... 185.6 164.3
Pensions and other retiree benefits ............................................... 182.6 123.0
Deferred income tax liabilities ................................................... 52.9 -
Other obligations ................................................................. 13.4 9.4
------------------ ------------------
Total liabilities .............................................................. 4,954.3 2,484.5
Stockholders' equity:
Preferred Stock, $0.01 par value per share,authorized 5,000 shares, none issued ... - -
Common Stock, $0.01 par value per share, authorized 100 shares, 100 shares
issued and outstanding at September 30, 2005 and authorized 108,600,000
shares, 100,035,950 issued and outstanding at December 31, 2004 .................. - 1.0
Additional paid-in capital ........................................................ 2,003.6 1,023.3
Retained earnings ................................................................. 180.6 998.4
Accumulated other comprehensive income ............................................ 3.8 1.0
Treasury Stock, 641,089 shares at cost ............................................ - (19.6)
------------------ ------------------
Total stockholders' equity ..................................................... 2,188.0 2,004.1
------------------ ------------------
Total liabilities and stockholders' equity .......................................... $ 7,142.3 $ 4,488.6
================== ==================
See accompanying notes to consolidated financial statements.
4
MITTAL STEEL USA ISG INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
SUCCESSOR PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY
PERIOD FROM PERIOD FROM
APRIL 16, 2005 JANUARY 1, 2005 NINE MONTHS
THROUGH THROUGH ENDED
SEPT. 30, 2005 APRIL 15, 2005 SEPT. 30, 2004
--------------- --------------- ---------------
Cash flows from operating activities:
Net income ......................................................... $ 180.6 $ 162.9 $ 421.4
Adjustments for items not affecting cash from operating activities:
Depreciation and amortization .................................... 86.8 48.3 98.3
Deferred income taxes ............................................ 78.2 -- (36.6)
Net accretion of purchased intangibles ........................... (92.6) (1.8) (4.9)
Other ............................................................ (1.0) (5.3) 15.4
Changes in working capital and other items:
Receivables ...................................................... 126.8 (48.5) (271.7)
Inventories ...................................................... 197.3 (152.3) (173.1)
Prepaids and other assets ........................................ 2.3 24.7 (32.0)
Accounts payable ................................................. (229.3) 98.5 243.8
Accounts payable to related parties .............................. 83.2 -- --
Income taxes ..................................................... (65.9) 62.2 164.3
Accrued compensation and benefits ................................ (260.2) 80.3 103.4
Other ............................................................ 4.6 (36.8) 40.4
--------------- --------------- ---------------
Net cash provided by operating activities ...................... 110.8 232.2 568.7
--------------- --------------- ---------------
Cash flows from investing activities:
Capital expenditures and investments ............................... (98.5) (75.1) (150.7)
Acquisitions, net of cash received ................................. -- -- (222.1)
Proceeds from sales of assets ...................................... 14.4 14.0 16.1
Payments to former shareholders for acquisition .................... (2,071.7) -- --
--------------- --------------- ---------------
Net cash used in investing activities .......................... (2,155.8) (61.1) (356.7)
--------------- --------------- ---------------
Cash flows from financing activities:
Proceeds from borrowings from related parties ...................... 2,071.7 -- --
Proceeds from debt ................................................. -- -- 594.6
Payments on debt ................................................... (106.6) (3.8) (347.8)
Payments on related party debt ..................................... (371.7) -- --
Purchase of treasury stock ......................................... -- -- (19.6)
Payments on note receivable to related party, net .................. (249.0) -- --
Issuance of common stock, net ...................................... -- -- 9.6
Deferred financing fees ............................................ -- -- (11.7)
Payments on capital leases ......................................... (6.2) (8.1) (27.0)
--------------- --------------- ---------------
Net cash provided by (used in) financing activities ............ 1,338.2 (11.9) 198.1
--------------- --------------- ---------------
(Decrease) Increase in cash and cash equivalents ............... (706.8) 159.2 410.1
Cash and cash equivalents - beginning of period ...................... 765.9 606.7 193.6
--------------- --------------- ---------------
Cash and cash equivalents - end of period ............................ $ 59.1 $ 765.9 $ 603.7
=============== =============== ===============
Other information:
Interest paid ...................................................... $ 4.8 $ 5.8 $ 16.9
Interest capitalized ............................................... 1.1 0.5 0.6
Income taxes paid, net ............................................. 68.0 53.8 (40.7)
Capital lease obligation incurred .................................. -- -- 3.9
See accompanying notes to consolidated financial statements.
5
MITTAL STEEL USA ISG INC.
Notes to Consolidated Financial Statements
(Unaudited)
(1) MERGER
On April 15, 2005, International Steel Group Inc. (Predecessor Company or
ISG) merged with Park Acquisition Corporation (Park), a wholly owned
subsidiary of Mittal Steel Company N.V., and became a wholly owned
subsidiary of Mittal Steel (the Merger). International Steel Group Inc. was
renamed Mittal Steel USA ISG Inc. (Successor Company or the Company) on
April 15, 2005. In connection with the Merger, the Predecessor Company's
former stockholders received $2,100.8 million in cash of which $2,071.7
million was paid by the Company and $29.1 million by Mittal Steel. In
addition, 60,891,883 Mittal Steel Class A common shares were issued.
The Merger is being accounted for by the Company's parent under the
purchase method of accounting in accordance with Statement of Financial
Accounting Standards (SFAS) No. 141, Business Combinations. The Company has
"pushed down" the effect of the purchase method of accounting to these
financial statements. The allocation of the purchase price to assets
acquired and liabilities assumed are preliminary and subject to revision.
We have not received all information to determine the final values to be
assigned. Appraisals of property, plant and equipment and intangible assets
are currently underway. We are also evaluating information relating to
certain recorded liabilities. The following table presents the preliminary
amounts recorded for the net assets of the Company as a result of the
change in ownership (in millions):
Assets:
Receivables, net .......................... $ 880.1
Inventories ............................... 2,127.0
Assets held for sale ...................... 25.4
Prepaid and other current assets .......... 41.6
Intangible assets, current ................ 276.4
Property, plant and equipment ............. 3,666.6
Intangible assets, non-current ............ 226.6
Other non-current assets .................. 91.8
Liabilities:
Debt and capital lease obligations ........ 844.2
Accounts payable .......................... 860.6
Accrued expenses and other liabilities .... 702.6
Pension and retiree benefits .............. 210.0
Environmental liabilities ................. 232.7
Intangible liabilities .................... 1,065.7
Deferred taxes ............................ 110.3
----------
Net assets recorded ......................... $ 3,309.4
==========
Cash paid to stockholders ................... $ 2,100.8
Bankers' fees and other transaction costs ... 52.8
Cash acquired ............................... (765.9)
----------
Cash paid, net .............................. 1,387.7
Value of stock issued ....................... 1,921.7
----------
Total purchase price, net of cash acquired .. $ 3,309.4
==========
Intangible assets consist of $4.0 million assigned to patents and $499.0
million assigned to favorable supply and sales contracts that are being
amortized over the term of the associated contracts ranging from one to six
years. Intangible liabilities consist of $1,065.7 million assigned to
unfavorable supply and sales contracts that are being amortized over the
term of the associated contracts ranging from one to 15 years. Amortization
of these intangibles included expense of $178.9 million on favorable
contracts, expense of $.1 million on patent amortization and income of
$271.6 million on unfavorable contracts for a net of $92.6 million of
income recognized during the period.
6
MITTAL STEEL USA ISG INC.
Notes to Consolidated Financial Statements
(Unaudited)
(2) BASIS OF PRESENTATION
These financial statements and accompanying notes present historical cost
basis results of the Predecessor Company through April 15, 2005, and the
results of the Successor Company from April 16, 2005 through September 30,
2005. Accordingly, the Successor Company presentation is not comparable to
the Predecessor Company presentation due to the different basis of
accounting.
These interim financial statements are unaudited and include only selected
notes. They do not contain all information required for annual statements
under United States generally accepted accounting principles and should be
read together with the audited financial statements in the Company's Annual
Report on Form 10-K for the year ended December 31, 2004 and all other
reports on file with the Securities and Exchange Commission (SEC) during
the year 2005. In the opinion of management, these interim financial
statements reflect all adjustments that are necessary to fairly present the
results for the interim periods presented. Certain prior period amounts
have been reclassified to conform to the current presentation.
The preparation of financial statements in conformity with United States
generally accepted accounting principles requires that management make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. 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.
(3) RECENTLY ISSUED ACCOUNTING STANDARDS
In November 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 151, Inventory Costs, an amendment of Accounting Research Bulletin
(ARB) No. 43, Chapter 4. SFAS No. 151 clarifies the accounting for abnormal
amounts of idle facility expense, freight handling costs, and wasted
material (spoilage). SFAS No. 151 requires that those items be recognized
as current-period charges regardless of whether they meet the criterion of
"so abnormal." In addition, SFAS No. 151 requires that allocation of fixed
production overhead to the costs of conversion be based on the normal
capacity of the production facilities. The provisions of SFAS No. 151 will
be effective for fiscal years beginning after June 15, 2005. The Company is
currently evaluating the provisions of SFAS No. 151 and does not believe
that its adoption will have a material impact on the Company's financial
condition, results of operations and cash flows.
In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations. This interpretation requires
companies to recognize a liability for the fair value of a legal obligation
to perform asset retirement activities that are conditional on a future
event if the amount can be reasonably estimated. This statement is
effective for the year ending December 31, 2005. This statement will not
have an impact on our financial statements.
In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections. SFAS No. 154 requires that a voluntary change in accounting
principle be applied retrospectively with all prior period financial
statements presented on the new accounting principle. SFAS No. 154 also
requires that a change in method of depreciating or amortizing a long-lived
non-financial asset be accounted for prospectively as a change in estimate,
and correction of errors in previously issued financial statements should
be termed a restatement. SFAS No. 154 is effective for accounting changes
and correction of errors made in fiscal years beginning after December 15,
2005. The implementation of FAS No. 154 does not have an impact on the
Company's present consolidated financial statements and will only affect
future financial statements to the extent there are future accounting
changes or error corrections.
(4) INVENTORIES
Inventories are stated at the lower of cost or market. On December 31, 2004
approximately 80% of inventories were valued using the last-in first-out
(LIFO) method of accounting. Inventories at Weirton and Georgetown were
valued using the first-in first-out (FIFO) or average cost method. On
January 1, 2005, in accordance with ISG policy, the Company began
accounting for inventories at Weirton and Georgetown using the LIFO method.
7
MITTAL STEEL USA ISG INC.
Notes to Consolidated Financial Statements
(Unaudited)
As a result of the Merger, inventories were recorded at fair value on April
15, 2005 in accordance with purchase accounting guidelines. We established
fair values for finished goods and in-process inventory by reducing the
estimated selling prices of finished goods by cost to complete, selling
cost, and a reasonable profit for completion and selling efforts. Raw
materials were valued at replacement cost. These newly established fair
values also established the base year values for LIFO and therefore, the
LIFO reserve was zero at April 15, 2005. In addition, in accordance with
Mittal Steel's policies, the Company adopted full absorption costing
resulting in additional other costs such as depreciation and overhead items
being included in inventory valuation. As a result of these Merger related
accounting changes to inventory, the carrying values of the closing
inventory on April 15, 2005, increased by $654.3 million.
The LIFO benefit for the third quarter was $21.7 million. The following
table presents the components of inventories (in millions):
SUCCESSOR PREDECESSOR
COMPANY COMPANY
SEPT. 30, 2005 DEC. 31, 2004
-------------- --------------
Average cost:
Raw materials ........................ $ 773.2 $ 562.2
Finished and semi-finished goods ..... 1,095.6 1,156.8
-------------- --------------
1,868.8 1,719.0
LIFO reserve ........................... 53.0 (398.6)
-------------- --------------
Total .............................. $ 1,921.8 $ 1,320.4
============== ==============
(5) DEBT
On April 20, 2005, the Company entered into definitive agreements as
borrower with respect to a new $1.0 billion term loan facility and a new
$700.0 million term loan facility. Mittal Steel US Finance LLC (Finance) is
the lender under each of the term loan facilities. In addition, on April
20, 2005, the Company entered into a promissory note in the amount of
$425.0 million with Mittal Steel Holdings N.V. (Holdings). On April 27,
2005, the Company repaid $325.0 million of the promissory note. Park made
an additional $53.0 million payment on April 25, 2005 for the benefit of
the Company. The Company issued a new promissory note to Holdings on May
20, 2005 for the remaining $47.0 million balance. The Company paid this
note on June 20, 2005.
All three of these intercompany borrowings were entered into as part of the
financing arrangements previously announced by Mittal Steel to pay for the
cash portion of the Merger consideration paid to former stockholders of the
Company in conjunction with the recently completed Merger. The two term
loan facilities represent an intercompany loan to the Company that another
subsidiary of Mittal Steel borrowed under a credit agreement, dated as of
April 7, 2005, among Mittal Steel and certain subsidiaries of Mittal Steel
as original borrowers, the ABN AMRO Bank N.V., Citigroup Global Markets
Limited, Credit Suisse First Boston International, Deutsche Bank AG London,
HSBC Bank Plc and UBS Limited, as lead arrangers, certain other lenders
signatory to the Credit Agreement and HSBC Bank Plc, as facility agent. The
borrowing evidenced by the $425.0 million promissory note was extended to
the Company to provide the remainder of the cash portion of the Merger
consideration by another subsidiary of Mittal Steel. Therefore, neither the
term loan facilities nor the promissory note represent the incurrence of
additional indebtedness from external creditors outside Mittal Steel and
its subsidiaries.
The Company, Finance, and Holdings are wholly owned subsidiaries of Mittal
Steel and thus are affiliates of each other. Other than the term loan
facilities and their relationship as affiliates, there are no other direct
commercial relationships between Finance and the Company. Holdings was the
lender under the $425.0 million promissory note. Other than the promissory
note and their relationship as affiliates, there are no other direct
commercial relationships between Holdings and the Company.
8
MITTAL STEEL USA ISG INC.
Notes to Consolidated Financial Statements
(Unaudited)
The Company drew down on each of the term loan facilities in the principal
amounts of $1.0 billion and $700.0 million respectively on April 21, 2005.
Each of the term loan facilities will mature on April 21, 2010. Each term
loan facility contains customary covenants requiring all of the Company's
transactions with affiliates to be conducted on an arms length basis,
limits the Company's ability to incur additional indebtedness in excess of
$250.0 million and limits its ability to consummate certain extraordinary
business transactions such as mergers and create liens on its properties.
The Company is required to pay interest on each of the term loan facilities
at an annual rate for each applicable interest period equal to the sum of
(i) a margin, initially set at 0.475% and then subject to adjustment based
on Mittal Steel's unsubordinated unsecured debt rating, plus 0.125%, (ii)
the London Interbank Offering Rate for the applicable interest period and
(iii) a facility maintenance fee. The initial interest period for each of
the term loan facilities is six months and then shall be agreed between
borrower and lender for subsequent periods not to exceed six months.
The Company has $500.0 million of senior, unsecured debt securities due
2014 which reflects the Company's purchase of $100.0 million during the
quarter. The debt bears interest at a rate of 6.5% and is paid
semi-annually. In addition, the Company also has a $35.0 million
convertible note with the Pension Benefit Guaranty Corporation (PBGC) that
bears interest at 6.0% and requires semi-annual interest payments. The PBGC
note is convertible, at the PBGC's option, into 35,597.45 shares of Mittal
Steel common stock for each $1.0 million in principal and interest
outstanding at any time.
(6) INCOME TAXES
Based on our third quarter pretax income and forecasted pretax income for
the year 2005, we expect to pay income taxes for the year after recognizing
temporary differences that arise during the year and the benefit of net
operating loss (NOL) carryforwards available. The net effect of these items
results in an estimated effective income tax rate for 2005 of 38.5%. In the
second quarter, a one-time benefit of $19.5 million was recognized to
reflect the phase out of the Ohio Income Franchise Tax.
SFAS No. 109, Accounting for Income Taxes, requires that we record a
valuation allowance for a deferred tax asset when it is "more likely than
not" (a likelihood of more than 50%) that some portion or all of the
deferred tax asset will not be realized based on available "positive and
negative evidence." The realization of the deferred tax asset is ultimately
dependent upon the Company's generation of sufficient future taxable income
during periods in which those net temporary differences become deductible
and before the expiration of the NOL carryforwards. The valuation allowance
at the end of the third quarter is $24.0 million.
(7) COMPREHENSIVE INCOME
The following table presents the components of comprehensive income (in
millions):
QUARTERLY YEAR - TO - DATE
--------------------------------- -------------------------------------------------
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY COMPANY COMPANY
PERIOD FROM PERIOD FROM
THREE MONTHS THREE MONTHS APRIL 16, 2005 JANUARY 1, 2005 NINE MONTHS
ENDED ENDED THROUGH THROUGH ENDED
SEPT. 30, 2005 SEPT. 30, 2004 SEPT. 30, 2005 APRIL 15, 2005 SEPT. 30, 2004
-------------- -------------- -------------- --------------- --------------
Other comprehensive income:
Derivative financial instruments:
$ 15.9 $ 7.4 Change in value during the period.... $ 6.1 $ 8.2 $ 0.7
-- 5.1 Recognized in net income............. -- 1.6 3.7
(6.2) -- Income taxes *....................... (2.3) -- --
-------------- -------------- -------------- --------------- --------------
9.7 12.5 Total other comprehensive income....... 3.8 9.8 4.4
63.7 256.4 Net income ............................ 180.6 162.9 421.4
-------------- -------------- -------------- --------------- --------------
$ 73.4 $ 268.9 Total comprehensive income ............ $ 184.4 $ 172.7 $ 425.8
============== ============== ============== =============== ==============
9
MITTAL STEEL USA ISG INC.
Notes to Consolidated Financial Statements
(Unaudited)
* Prior to April 16, 2005, a valuation allowance was recorded on certain
temporary differences, resulting in no provision for income taxes on these
items. As a result of the Merger, all predecessor valuation allowances
related to other comprehensive income were eliminated through purchase
accounting adjustments.
(8) PENSION AND OTHER POSTRETIREMENT BENEFIT PLANS
The Company has defined benefit retiree medical and death benefit plans
covering United Steelworkers (USW) employees who are eligible to retire
under the current labor agreements. We do not intend to provide similar
retiree medical benefits for employees who retire after the current labor
agreements expire. The Company is not required to pre-fund any benefits and
expects any benefits to be paid in 2005 to be minimal.
The Company owns a 62.3% interest in Hibbing Taconite Company (Hibbing).
The amounts included for employees at Hibbing reflect the effects of the
Medicare Prescription Drug Improvement and Modernization Act of 2003 (the
Act). Hibbing applied the retroactive transition method under FASB Staff
Position No. 106-2 during 2004. The effect was not material to the Company.
The amounts for other employees do not reflect the effects of the Act. We
have not yet determined if the plan meets the actuarial equivalent
requirement of the Act or if we will modify the plan but expect to complete
our determination during the fourth quarter of 2005. However, because the
plan requires that the plan beneficiaries pay premiums beginning in 2011 to
cover any cost per capita increases after 2008, the Act is not likely to
have any significant effect on our accumulated postretirement benefit
obligation nor our future net periodic benefit costs. In 2005, the Company
expects to contribute $1.4 million to the plan based on forecasted benefit
payments.
The obligations for pension and other postretirement benefit plans are
discounted at 5.5%. The following table presents the components of net
periodic pension and other post employment benefits costs (in millions):
QUARTERLY YEAR - TO - DATE
--------------------------------- -------------------------------------------------
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR PREDECESSOR
COMPANY COMPANY COMPANY COMPANY COMPANY
PERIOD FROM PERIOD FROM
THREE MONTHS THREE MONTHS APRIL 16, 2005 JANUARY 1, 2005 NINE MONTHS
ENDED ENDED THROUGH THROUGH ENDED
SEPT. 30, 2005 SEPT. 30, 2004 SEPT. 30, 2005 APRIL 15, 2005 SEPT. 30, 2004
-------------- -------------- -------------- --------------- --------------
NET PERIODIC PENSION:
$ 0.7 0.4 Service cost........................... $ 1.3 $ 0.7 $ 1.7
1.4 1.7 Interest cost.......................... 0.6 0.6 4.0
(1.4) (1.4) Expected return on plan assets......... (2.6) (1.6) (3.9)
Amortizations:
-- -- Unrecognized prior service costs....... 0.1 --
-------------- -------------- -------------- --------------- --------------
$ 0.7 $ 0.7 Total cost............................. $ 1.3 $ 0.8 $ 1.8
============== ============== ============== =============== ==============
OTHER POSTEMPLOYMENT BENEFIT:
$ 1.1 $ 1.0 Service cost........................... $ .9 $ 2.1 $ 2.9
2.2 2.2 Interest cost.......................... 0.1 1.5 6.3
(0.5) (0.4) Expected return on plan assets......... (0.8) (0.5) (0.9)
Amortizations:
-- 3.4 Unrecognized prior service............. -- 3.6 10.7
-- -- Net actuarial losses................... -- 0.9 --
-------------- -------------- -------------- --------------- --------------
$ 2.8 $ 6.2 Total cost............................. $ 5.2 $ 7.6 $ 19.0
============== ============== ============== =============== ==============
10
MITTAL STEEL USA ISG INC.
Notes to Consolidated Financial Statements
(Unaudited)
(9) CONTINGENCIES
The Company is subject to various legal actions and contingencies in the
normal course of conducting business. The Company accrues liabilities for
such matters when a loss is probable and the amount can be reasonably
estimated. The effect of the ultimate outcome of these matters on future
results of operations and liquidity cannot be predicted with any certainty.
While the resolution of these matters may have a material effect on the
results of operations of a particular future quarter or year, we believe
that the ultimate resolution of such matters in excess of liabilities
recorded will not have a material adverse effect on our competitive
position or financial position.
The Company is subject to changing and increasingly stringent environmental
laws and regulations concerning air emissions, water discharges and waste
disposal, as well as certain remediation activities that involve the clean
up of environmental media such as soils and groundwater. If, in the future,
the Company is required to investigate and remediate any currently unknown
contamination and wastes at plant sites, the Company could be required to
record additional liabilities. Events that could trigger recording these
additional liabilities are discussed in the Predecessor Company's Annual
Report filed on Form 10-K for the year ended December 31, 2004.
The following table presents the changes in the amounts recorded for
environmental liabilities discounted at appropriate interest rates
subsequent to the Merger on April 15, 2005 and 8% prior to the Merger (in
millions):
SUCCESSOR PREDECESSOR COMPANY
COMPANY
PERIOD FROM PERIOD FROM
APRIL 16, 2005 JANUARY 1, 2005 NINE MONTHS
THROUGH THROUGH ENDED
SEPT. 30, 2005 APRIL 15, 2005 SEPT. 30, 2004
-------------- --------------- --------------
Balance - beginning of period..................................... $ -- $ 205.3 $ 208.4
Liabilities recognized at acquisition *......................... 232.7 0.8 11.9
Accretion and changes in estimates and timing of spending....... 5.8 2.2 10.6
Liabilities related to properties sold.......................... -- (0.2) (12.6)
Spending for remediation........................................ (8.7) (5.4) (9.9)
-------------- --------------- --------------
Total **..................................................... 229.8 202.7 208.4
Amount included in other current liabilities - end of period...... (44.2) (40.4) (33.7)
-------------- --------------- --------------
Long term balance - end of period................................. $ 185.6 $ 162.3 $ 174.7
============== =============== ==============
* Successor Company reflects increase in environmental liability as of the
date of the Merger due to change in discount rate based on market
interest rates at the date of acquisition. Predecessor Company includes a
$6.9 million reduction in the first quarter of 2004 to amounts previously
recorded in the Bethlehem acquisition as a result of additional
information and analysis obtained during the period.
**The aggregate undiscounted amount of the environmental liabilities is
$363.1 million at September 30, 2005.
(10) RELATED PARTY TRANSACTIONS
Mittal Steel charged the Company $7.5 million for the quarter ended
September 30, 2005 and $7.5 million for the period April 16 through June
30, 2005 for management, financial and legal services. The Company
purchased $66.2 million and $43.7 million of inventory from subsidiaries of
Mittal Steel for the quarter ended September 30, 2005 and for the period
April 16 through June 30, 2005, respectively. The Company sold $17.2
million and $26.8 million of inventory to subsidiaries of Mittal Steel for
the quarter ended September 30, 2005 and for the period April 16 through
June 30, 2005, respectively.
See Note (5) Debt for a description of the Company's borrowings with
related parties.
11
MITTAL STEEL USA ISG INC.
Notes to Consolidated Financial Statements
(Unaudited)
On July 20, 2005, Ispat Inland Inc. (Inland) signed a Subordinated Note
promising to pay the Company the aggregate unpaid principal amount of loans
made from time to time. The Subordinated Note provides that Inland promises
to pay to the Company the principal amount together with interest accruing
at a rate equal to 120% of the Applicable Federal Rate in effect on the
date of such loan compounded annually. The principal amount under the
Subordinated Note, together with all accrued interest, is due and payable
on July 20, 2010, but may be prepaid, in part or in full, at any time prior
to the Maturity Date at the option of Inland. There was $179.0 million
outstanding under the Subordinated Note agreement and interest receivable
of $1.3 million as of September 30, 2005.
On September 27, 2005 the Company entered into a note receivable with
Mittal Steel Holdings N.V. for $70.0 million. The note is due September 26,
2010 with an interest rate of 4.1084%. The accrued interest receivable was
$0.1 million as of September 30, 2005.
The Company's net payable to related companies of $84.6 million at
September 30, 2005 consists of accrued interest on debt, inter company
purchases, management fees and other related party expenses.
(11) SUBSEQUENT EVENTS
On October 3, 2005, Mittal Steel Holdings N.V. repaid $28.0 million on the
inter company note receivable. On November 3, 2005, Mittal Steel Holdings
N.V. borrowed $50.0 million under the note receivable agreement.
On October 3 and October 5, 2005, Inland borrowed $6.0 million and $20.0
million from the Company under the subordinated note agreement between the
two related companies.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
The Company and its representatives may from time to time make
forward-looking statements in reports filed with the Securities and Exchange
Commission (SEC), reports to stockholders, press releases, other written
documents and oral presentations. These forward-looking statements may be
identified by the use of predictive, future-tense or forward-looking
terminology, such as "believes," "anticipates," "expects," "estimates,"
"intends," "may," or similar terms. These statements speak only as of the date
of such statements and the Company will undertake no ongoing obligation, other
than that imposed by law, to update these statements. These statements appear in
a number of places in this report and include statements regarding the Company's
intent, belief or current expectations of its directors, officers or advisors
with respect to, among other things:
o trends affecting the Company's financial condition, results of
operations or future prospects;
o business and growth strategies;
o operating culture and philosophy; and
o financing plans and forecasts.
Any such forward-looking statements are not guarantees of future performance
and involve significant risks and uncertainties, and actual results may differ
materially from those contained in the forward-looking statements as a result of
various factors, some of which are unknown. The factors that could adversely
affect the Company's actual results and performance include, without limitation:
o negative overall economic conditions or conditions in the markets
served;
o competition within the steel industry;
o legislation or regulatory changes including changes in U.S. or foreign
trade policy affecting steel imports or exports;
o changes in foreign currencies affecting the strength of the U.S. dollar;
o actions by domestic and foreign competitors;
o the inability to achieve our anticipated growth objectives;
o changes in availability or cost of raw materials, energy or other
supplies;
o labor issues affecting the Company's workforce or the steel industry
generally; and
o the extent to which the management of Mittal Steel and the Company is
successful integrating and managing the operations of the Company with
the rest of Mittal Steel.
MITTAL STEEL PURCHASE OF ISG
In October 2004, Mittal Steel Company N.V., Park Acquisition Corporation
(Park), a wholly owned subsidiary of Mittal Steel, and International Steel Group
(ISG) entered into a merger agreement pursuant to which ISG (Predecessor
Company) would merge (the Merger) with Park and become a wholly owned subsidiary
of Mittal Steel. The Merger was approved by the shareholders of ISG and Mittal
Steel on April 12, 2005 and was completed on April 15, 2005. ISG was renamed
Mittal Steel USA ISG Inc. (Successor Company or the Company) on April 15, 2005.
In connection with the Merger, ISG's former stockholders received $2,100.8
million in cash of which $2,071.7 million was paid by the Company and $29.1
million by Mittal Steel. In addition, 60,891,883 Mittal Steel Class A common
shares were issued. Pursuant to the Merger, the Predecessor Company no longer
has a class of equity securities registered under the Securities Exchange Act of
1934 (Exchange Act).
13
The capital structure and accounting basis of the assets and liabilities of
the Company as of April 16, 2005 and thereafter differ from those of the
Predecessor Company in prior periods as a result of the Merger. Financial data
of the Predecessor Company for periods prior to April 16, 2005 are presented on
a historical cost basis. Financial data of the Company as of April 16, 2005 and
thereafter reflect the Merger under the purchase method of accounting, under
which the purchase price has been allocated to assets acquired and liabilities
assumed based upon their estimated fair values with information currently
available. Appraisals of long-lived assets and identifiable intangible assets
are currently underway. The amounts are subject to adjustment based on the
completion of the valuations and appraisals. We are also evaluating information
relating to certain liabilities. Accordingly, the preliminary purchase price
allocation is subject to revision.
CONSOLIDATED RESULTS OF OPERATIONS FOR THE QUARTERS AND THREE QUARTERS ENDED
SEPTEMBER 30, 2005 AND 2004
To facilitate the discussion below of the three and nine month periods ended
September 30, 2005 against the results of operations for the same time periods
in 2004, the historical operations of the Successor Company and the Predecessor
Company have been combined.
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
($ in millions) SEPT. 30, 2005 SEPT. 30, 2004 SEPT. 30, 2005 SEPT. 30, 2004
-------------------------------------------------- --------------- --------------- --------------- ---------------
Net sales ........................................ $ 2,104.6 $ 2,608.3 $ 7,171.2 $ 6,462.4
Costs and expenses:
Cost of sales .................................. 1,862.2 2,166.5 6,179.2 5,634.0
Marketing, administrative, and other expenses .. 58.1 64.4 270.1 173.7
Depreciation and amortization .................. 51.7 37.0 135.1 98.3
--------------- --------------- --------------- ---------------
Total costs and expenses ......................... 1,972.0 2,267.9 6,584.4 5,906.0
Income from operations ........................... 132.6 340.4 586.8 556.4
Loss(gain) on sale of assets ..................... -- -- (9.3) --
Interest and other financing expense, net ........ 26.4 13.2 62.9 48.1
--------------- --------------- --------------- ---------------
Income before income taxes ....................... 106.2 327.2 533.2 508.3
Provision for income taxes ....................... 42.5 70.8 189.7 86.9
--------------- --------------- --------------- ---------------
Net income ....................................... $ 63.7 $ 256.4 $ 343.5 $ 421.4
=============== =============== =============== ===============
The table below shows shipments by product and certain other data for the
periods shown.
Third Quarter First Nine Months
--------------------------------- ---------------------------------
2005 2004 2005 2004
--------------- --------------- --------------- ---------------
Hot Rolled ............................. 36% 42% 38% 42%
Cold Rolled ............................ 15 18 16 19
Coated ................................. 24 21 22 21
Plate .................................. 12 9 11 10
Tin Plate .............................. 7 6 7 5
Rail and Other ......................... 6 4 6 3
Net sales (dollars in millions) ........ $ 2,104.6 $ 2,608.3 $ 7,171.2 $ 6,462.4
Average net sales per ton shipped ...... $ 639 $ 646 $ 671 $ 552
Shipments (tons in thousands) .......... 3,294 4,039 10,694 11,715
Raw steel production (tons in thousands) 3,542 4,718 11,532 13,099
For the third quarter 2005, we reported net income of $63.7 million on net
sales of $2,104.6 million and shipments of 3,294,000 net tons, compared to net
income of $256.4 million for the Predecessor Company on net sales of $2,608.3
million and shipments of 4,039,000 net tons in the third quarter 2004. Shipments
were lower due to weaker market demand precipitated by high customer inventory
levels. Our average net sales per ton shipped was $639 compared to $646 for the
comparable period in 2004. Realized prices were lower as a result of market
conditions, but this was largely offset by an improvement in mix. Prices had
peaked during the third quarter 2004 and have trended downward ever since. In
response to market conditions, we have cut production and have focused on higher
margin business by shipping a higher percent of coated and plate products and
reducing lower margin hot and cold rolled products.
14
For the nine months ended September 30, 2005, which includes the Predecessor
Company, we reported net income of $343.5 million on net sales of $7,171.2
million and shipments of 10,694,000 net tons, compared to net income of $421.4
million on net sales of $6,462.4 million and shipments of 11,715,000 net tons
for the same period in 2004. Our average net sales per ton shipped was $671
compared to $552 for the comparable period in 2004. The increase in realized
prices was due to higher contract and spot prices as well as an improvement in
mix due to an increase in higher margin coated, tin and plate products and
reducing lower margin hot and cold rolled products.
Cost of sales for the third quarter 2005 were lower than the comparable 2004
period reflecting significantly lower operating levels, variable compensation
costs including hourly profit sharing and required contributions to the United
Steelworkers (USW) and Independent Steelworkers Union (ISU) voluntary employee
beneficiary association (VEBA) welfare benefit trust and net accretion of
purchased intangibles or contract amortization for contracts that were above or
below market rates at the date of acquisition partially offset by higher energy
costs(primarily natural gas). Costs were higher on a per ton basis due to lower
operating rates, improved product mix and higher energy costs (primarily natural
gas). Operating rates were reduced as part of Mittal Steel's plan to lower
global steel production to help reduce excess inventory and restore equilibrium
to supply and demand in the market place.
Cost of sales for the nine months ended September 30, 2005 were higher than
the comparable 2004 period reflecting significantly lower operating rates,
improved product mix, higher energy costs (primarily natural gas) and variable
compensation costs including profit sharing and required contributions to the
USW and ISU VEBA welfare benefit trust partially offset by net accretion of
purchased intangibles or contract amortization from contracts that were above or
below market rates at the date of acquisition. Operating rates were reduced as
part of Mittal Steel's plan to lower global steel production to help reduce
excess inventory and restore equilibrium to supply and demand in the market
place.
Marketing, administrative and other costs in the third quarter 2005 are
lower than the comparable 2004 period as higher professional fees as well as
management fees from Mittal Steel were more than offset by lower variable
compensation costs including salaried profit sharing and bonuses.
Marketing, administrative and other costs for the nine months ended
September 30, 2005 were higher than the comparable 2004 period due primarily to
$64 million in Merger related costs including stock options, severance and
bonuses to former officers of ISG as well as payments to investment bankers for
transaction success fees. In addition, higher professional fees as well as
management fees from Mittal Steel were partially offset by lower variable
compensation costs including salaried profit sharing and bonuses.
Depreciation expense increased due to the write up to fair value of assets
under purchase accounting. Net financing expense for the third quarter 2005 and
nine months ended September 30, 2005 increased because of higher average debt
outstanding including the $1,700 million intercompany borrowings with Mittal
Steel US Finance LLC, a wholly owned subsidiary of Mittal Steel. The
intercompany borrowings were entered into as part of the financing arrangements
previously announced by Mittal Steel to pay for the cash portion of the Merger
consideration paid to former stockholders of the Company in conjunction with the
recently completed Merger.
Based on our third quarter pretax income and forecasted pretax income for
the year 2005, we expect to pay income taxes for the year after recognizing
temporary differences that arise during the year and the benefit of net
operating loss (NOL) carryforwards available. The net effect of these items
results in an estimated effective income tax rate for 2005 of 38.5%. In the
second quarter, a one-time benefit of $19.5 million was recognized to reflect
the phase out of the Ohio Income Franchise Tax. The income tax rate for 2004 was
significantly lower than the 2005 rate due to tax benefits that were recognized
for certain temporary differences and from utilization of a NOL carry forward
from 2003.
LIQUIDITY
Prior to the Merger, we defined liquidity as our cash position and remaining
availability under revolving credit facilities. At December 31, 2004, ISG had
liquidity of $848.1 million consisting of cash of $606.7 million and
$241.4 million of available borrowing capacity under their revolving credit
facility. In conjunction with the
15
completion of the Merger of the Company and Mittal Steel on April 15, 2005, this
revolving credit facility was terminated. Cash at September 30, 2005 was
$59.1 million. We expect to generate sufficient cash from operations to fund our
operating needs over the next twelve months. We may, however, seek additional
liquidity through borrowings from our parent or its affiliates or through other
means.
Cash decreased for the period April 16, 2005 through September 30, 2005 by
$706.8 million. Cash provided by operating activities increased by $110.8
million due to changes in working capital partially offset by Merger related
payments and amortization of purchased intangibles. Inventory declined as we
reduced raw steel production in response to weaker demand. Receivables also
declined due to lower shipments. Payments of $163.0 million were made to former
ISG officers for stock options, severance and bonuses as well as $26.0 million
to investment bankers for transaction success fees.
Cash flows from financing activities increased by $1,338.2 million as the
Company drew down on term loan facilities in the principal amounts of $1,700
million and a promissory note in the amount of $425.0 million. These inter
company borrowings were entered into as part of the financing arrangements to
pay for the cash portion of the Merger consideration paid to former stockholders
of ISG. The Company repaid $371.7 million on the promissory note, transferred
$249.0 million to related parties including Mittal Steel Holdings N.V. and Ispat
Inland under note receivable agreements, and repurchased $100.0 million in
outstanding senior unsecured debt securities during the period.
SUBSEQUENT EVENTS
On October 3, 2005, Mittal Steel Holdings N.V. repaid $28.0 million on the inter
company note receivable. On November 3, 2005, Mittal Steel Holdings N.V.
borrowed $50.0 million under the note receivable agreement.
On October 3 and October 5, 2005, Ispat Inland, Inc. borrowed $6.0 million and
$20.0 million, respectively from the Company under a subordinated note agreement
between the two related companies. The note is due on July 20, 2010 with
interest at 120% of the applicable monthly federal rates as published by the
Internal Revenue Service.
16
ITEM 4. CONTROLS AND PROCEDURES
In our Annual Report on Form 10-K for the year ended December 31, 2004, we
had identified the following three material weaknesses in internal control over
financial reporting.
o Deficiencies in policies and procedures relating to the inadequate review of
information associated with the accumulation of various costs incurred for
raw material, semi-finished and finished inventories, including the
accounting for inter-company profit and inclusion of all appropriate costs
in ending inventory balances. These deficiencies could result in material
errors in the Company's accounting for inventories and cost of sales.
o Deficiencies in policies and procedures associated with a lack of access
controls and security of certain computer systems, including electronic
spreadsheets used in the compilation and presentation of the Company's
financial information, which could result in material errors in a
significant number of account balances and disclosures due to a lack of
integrity of the data used in preparing the Company's consolidated financial
statements.
o Deficiencies in policies and procedures associated with the Company's fraud
risk prevention controls related to adequate segregation of duties in the
recording of revenue and the related accounts receivable, including
verification of customer invoice pricing and approval of credit memos, which
could result in material errors in the Company's accounting for revenue
transactions and related accounts receivable.
As a result of the aforementioned material weaknesses, the Company concluded
that the Company's system of internal control over financial reporting was not
effective as of December 31, 2004.
In response, the Company has put together a Sarbanes-Oxley project
organization with a steering committee, sponsors, project-management team and an
extended team of process owners and external consultants for testing. The roles
and responsibilities have been clearly defined, challenges in terms of material
weaknesses and deficiencies identified and updated with issues in rectifying the
same defined. The significant locations have been scoped, key controls within
significant processes identified and documentation updated with the project
divided into different work streams for focus. On a parallel basis, work is
planned to start on entity level controls including fraud related controls.
One work stream addresses remediation of material weaknesses, while another
does testing and documentation of controls. We will assess risk and remediation
by the end of December 2005. Significant resources have been committed to the
project. As of the date of this report, the progress of the project has been
reviewed and is generally on track.
Because of its inherent limitations, a system of internal control over
financial reporting can provide only reasonable assurance and may not prevent or
detect misstatements. Further, because of changes in conditions, effectiveness
of internal controls over financial reporting may vary over time.
Under the supervision and with the participation of our management,
including our chief executive officer and chief financial officer, we conducted
an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act as of September 30, 2005 (Evaluation Date).
In preparing our Exchange Act filings, we utilized processes and procedures
to provide reasonable assurance that information relating to the Company that
was required to be disclosed in such filings was recorded, processed, summarized
and reported within the time periods specified by applicable SEC rules and was
accumulated and communicated to the Company's management as appropriate to allow
timely decisions regarding required disclosure. These processes and procedures
are designed to, among other things, mitigate the effect of the aforementioned
material weaknesses in our internal control over financial reporting on
information relating to the Company that is required to be disclosed in our
Exchange Act filings. Our management and accounting staff has devoted
significant time and attention in support of these efforts in addition to
substantial involvement of accounting resources from other Mittal Steel
subsidiaries.
17
We believe that these efforts and additional resources, which are
encompassed in our current disclosure controls, mitigated the potential effect
of the identified material weaknesses in internal control over financial
reporting on the disclosure that was ultimately included in our Exchange Act
filings. As a result of these disclosure controls, we believe, and our chief
executive officer and chief financial officer have certified to their knowledge
that, this quarterly report on Form 10-Q does not contain any untrue statements
of material fact or omit to state any 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 in this report.
There may be deemed to be an inconsistency between our conclusion as to
material weaknesses in our internal control over financial reporting and our
view as to our disclosure controls. However, as explained above, based on their
evaluation of our disclosure controls and procedures, our chief executive
officer and chief financial officer concluded as of the Evaluation Date that our
disclosure controls and procedures were effective such that the information
relating to the Company and its consolidated subsidiaries required to be
disclosed in Exchange Act filings is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms, and is
accumulated and communicated to the Company's management, including our chief
executive officer and chief financial officer, as appropriate to allow timely
decisions regarding this disclosure. Our chief executive officer and chief
financial officer reached this conclusion notwithstanding the existence of
material weaknesses in the Company's internal control over financial reporting,
because they believe that the processes and procedures described above mitigated
the potential effect of the identified material weaknesses in internal control
over financial reporting on the Company's disclosure controls and procedures. We
note that the scope of, and interrelation between, disclosure controls and
internal control over financial reporting is not yet well defined by law,
regulation or interpretation. We believe that there are significant differences
between disclosure controls and procedures and internal control over financial
reporting. If, however, disclosure controls and procedures and internal control
over financial reporting are ultimately determined to effect substantially the
same standard under these circumstances, then in such case, the Company's
disclosure controls and procedures also would have been ineffective as of the
Evaluation Date for the same reasons that we have concluded that the Company's
system of internal control over financial reporting was not effective as of the
Evaluation Date.
While our efforts to address the deficiencies in our internal control over
financial reporting are continuing, there have been no changes in our internal
control over financial reporting during the period covered that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II
ITEM 1. LEGAL PROCEEDINGS
Environmental Matters
The Company's operations are subject to a broad range of laws and
regulations relating to the protection of human health and the environment. The
prior owners of the Company's facilities expended in the past, and the Company
expects to expend in the future, substantial amounts to achieve or maintain
ongoing compliance with U.S. federal, state, and local laws and regulations,
including the Resource Conservation and Recovery Act (RCRA), the Clean Air Act,
and the Clean Water Act. These environmental expenditures are not projected to
have a material adverse effect on the Company's consolidated financial position
or on the Company's competitive position with respect to other similarly
situated U.S. steelmakers subject to the same environmental requirements.
RCRA and other remediation matters
Under RCRA and similar U.S. state programs, the owners of certain facilities
that manage hazardous wastes are required to investigate and, if appropriate,
remediate historic environmental contamination found at such facilities. All of
the Company's major operating and inactive facilities are or may be subject to a
corrective action program or other laws and regulations relating to
environmental remediation, including projects relating to the reclamation of
industrial properties, also known as brownfield projects.
At the Company's properties in Lackawanna, New York, a RCRA Facility
Investigation (RFI) is complete. A report was submitted to the U.S.
Environmental Protection Agency (EPA), and the New York State Department of
Environmental Conservation (NYDEC), for approval on December 17, 2004. NYDEC and
the Company executed an order on consent to perform interim corrective measures
at the former benzol storage tank area. This order was executed on November 26,
2004. The Company and NYDEC will be discussing additional corrective measures
18
following the agency's review of the site RFI. The Company has estimated that
the undiscounted future cost of performing anticipated remediation and post
remediation activities will be about $66 million and will be completed over a
period of 15 years or more. The estimate is based on the extent of soil and
groundwater contamination identified by the RFI and likely remedial alternative;
including excavation and consolidation of containments in an on-site landfill
and continuation of a benzol groundwater pump and treat system.
Bethlehem Steel Corporation, the U.S. EPA and the Maryland Department of the
Environment agreed to a phased RFI as part of a comprehensive multimedia
pollution consent decree with respect to the Company's Sparrows Point, Maryland
facility, which was entered by the U.S. District Court for Maryland on October
8, 1997. The Company has assumed Bethlehem's ongoing obligations under the
consent decree. The consent decree requires the Company to address compliance,
closure and post-closure care matters and implement corrective measures
associated with two onsite landfills (Gray's Landfill and Coke Point Landfill),
perform a site-wide investigation required by Section 3008(h) of RCRA, continue
the operation and maintenance of a remediation system at an idle rod and wire
mill, and address several pollution prevention items, such as, reducing the
generation of iron kish, and recycling blast furnace water treatment slurry and
an onsite wastewater treatment plant sludge. The potential costs, as well as the
time frame for the complete implementation of possible remediation activities at
Sparrows Point, cannot be reasonably estimated until more of the investigations
required by the decree have been completed and the data analyzed.
Notwithstanding the above, it is probable, based on currently available data,
that remediation will be required at the former coke plant. In addition,
pursuant to the order of the U.S. District Court for Maryland, the Company also
must implement corrective measures at the Gray's Landfill and Coke Point
Landfill and post-closure care at the former Rod and Wire Mill Area. The total
undiscounted cost of these related matters is estimated to be approximately $42
million.
The Company is required to prevent acid mine drainage from discharging to
surface waters at closed mining operations in southwestern Pennsylvania. The
Company entered into a Consent Order and Agreement with the Pennsylvania
Department of Environmental Protection (PaDEP) in May 2003 addressing the
transfer of required permits from Bethlehem to the Company and financial
assurance for long-term operation and maintenance of the wastewater treatment
facilities associated with these mines. As required by this Consent Order and
Agreement, the Company submitted an Operational Improvement Plan to improve
treatment facility operations and lower long-term wastewater treatment costs.
The Consent Order and Agreement also required the Company to propose a long-term
financial assurance mechanism. PaDEP approved the Company's cost reduction plan.
On May 9, 2004, the Company entered into a revised Consent Order and Agreement
outlining a schedule for implementation of capital improvements and requiring
the establishment of a treatment trust that the PaDEP has estimated to be the
net present value of all future treatment cost. The Company expects to fund the
treatment trust over a period of up to ten years at a current target value of
about $20 million. Until the improvements are made and the treatment trust is
fully funded, the Company expects to spend about $1 to $2 million per year for
the operation of treatment plants for acid mine drainage from these closed
mines. After the treatment trust is fully funded, the treatment trust will then
be utilized to fund the cost of treatment of acid mine drainage. Although
remote, the Company could be required to make up any deficiency in the treatment
trust in the future.
The Company owns a large former integrated steelmaking site in Johnstown,
Pennsylvania. The site has been razed and there are a number of historic waste
disposal units, including solid and hazardous waste landfills located at the
site that are subject to closure and other regulation by PaDEP. There are also
historic steel and coke-making operating locations at the Johnstown site that
may have caused groundwater contamination. Although potentially subject to RCRA
corrective action or similar state authority, no comprehensive environmental
investigations have been performed at this site to date. The Company estimates
that the undiscounted costs associated with future landfill closure, site
investigations and probable remediation at this facility that presently can be
estimated to be approximately $20 million.
The Company's facility at Indiana Harbor, Indiana is subject to a U.S. EPA
3013 Administrative Order investigation plan to assess soil and groundwater
conditions associated with 14 solid waste management units approved on January
12, 2005. Although localized remediation activities have been conducted at this
facility, additional remediation may be required after the investigation of
these solid waste management units has been completed. It is not possible to
estimate the cost of required remediation or monitoring, if any, that may result
from this investigation at this time. An area of subsurface fuel oil
contamination exists and is currently the subject of remediation actions. The
U.S. EPA and the Company are discussing a draft administrative order with
respect to the oil issue. In addition, a solid waste landfill at Indiana Harbor
will require closure via an engineered capping system and post-closure care
including groundwater monitoring. The total estimated undiscounted cost related
to these matters that can presently be estimated is approximately $16 million.
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At the Company's Burns Harbor, Indiana facility, an RFI was completed in
accordance with a U.S. EPA approved work plan. Based on the results of the
investigation, the Company does not believe there will be any substantial
remediation required to complete the corrective action process at the facility;
however, it is likely that the Company will incur future costs primarily related
to long term post-closure care including groundwater monitoring. In addition,
Bethlehem managed approximately one million net tons of air pollution control
dusts and sludges in piles on the ground at the Burns Harbor site. While an
alternative means of handling this material continues to be evaluated, it is
probable that the Company will incur future costs to manage this material. The
Company also has a continuing obligation pursuant to a consent order issued by
the U.S. District Court in Indiana to operate a collection and treatment system
to control contaminated groundwater seeps from the face of a dock wall at the
site. The total undiscounted costs related to these matters are estimated to be
approximately $23 million.
The Company's Cleveland, Ohio facilities may be subject to RCRA corrective
action or remediation under other environmental statutes. An integrated steel
facility has operated on the property since the early part of the 20th century.
As a result, soil and groundwater contamination may exist that might require
remediation pursuant to the RCRA corrective action program or similar state
programs. No RCRA corrective action has been demanded at any of the Cleveland
facilities by either U.S. federal or state authorities and no comprehensive
investigation of any of the facilities has been performed. However, certain
limited and localized remediation activities have been or will be conducted at
these sites. These remediation activities include a large permitted solid waste
landfill at the site that will require installation of an engineered capping
system for closure and post-closure care including groundwater monitoring in the
future. The undiscounted cost of closure and post-closure care for this landfill
is estimated to be approximately $13 million.
The Company's Weirton, West Virginia facility has been subject to a RCRA
corrective action related consent decree since 1996. The Order requires the
facility to conduct investigative activities to determine the nature and extent
of hazardous substances that may be located on the facility's property and to
evaluate and propose corrective measures needed to abate unacceptable risks.
Areas within the facility's property have been prioritized. Investigation of the
two highest priority areas has been completed. Investigation of the remaining
areas and some remediation is underway. In addition, the Company is required to
excavate and dispose off-site contaminates as closure of a surface impoundment
pursuant to the RCRA corrective action and a 1996 consent decree. The Company is
in communication with the U.S. EPA and West Virginia Department of Environmental
Protection regarding other potential RCRA concerns at the site. The undiscounted
cost of investigative and closure activities at the site are estimated to be
about $12 million.
At a site of the former steelmaking facilities in Bethlehem, Pennsylvania,
in lieu of a RCRA corrective action program, a remedial investigation is being
performed pursuant to the Pennsylvania Land Recycling (Brownfield) Program in
conjunction with comprehensive redevelopment plans. These investigations are
continuing to be performed with input and oversight from both the PaDEP, and the
EPA Region III corrective action staff to ensure that the actions taken are
acceptable to both state and federal regulatory authorities. The majority of the
site was sold by the Company during 2004. Under the sales agreement, the buyers
assumed financial responsibility for environmental obligations on the acquired
and certain associated properties and purchased an insurance policy sufficient
to cover certain remediation risk. The Company is named as a beneficiary to the
insurance policy. The undiscounted cost associated with anticipated
environmental remediation actions on property the Company continues to own is
estimated to be about $4 million.
The Company's facility at Riverdale, Illinois may be subject to RCRA
corrective action or remediation under other environmental statutes. The
facility has produced steel since the early part of the 20th century. As a
result, soil and groundwater contamination may exist that might require
remediation under the RCRA corrective action program or similar state programs.
Certain localized remediation activities have been conducted at this facility;
however, there is no present U.S. federal or state demand for a RCRA corrective
action program at the facility. No comprehensive environmental investigation of
the facility has been performed.
Clean Air Act
The Company's facilities are subject to a variety of permitting requirements
under the Clean Air Act that restricts the type and amount of air pollutants
that may be emitted from regulated emission sources. On February 28, 2003,
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the U.S. EPA issued a final rule to reduce hazardous air pollutant (HAP)
emissions from integrated iron and steel manufacturing facilities. The final
rule will require affected facilities to meet standards reflecting the
application of maximum achievable control technology (MACT), standards. Many of
the Company's facilities are subject to the new MACT standards, and compliance
with such standards will be required starting May 20, 2006. The Company
anticipates installing controls at facilities to comply with the new MACT
standards with capital expenditures of about $135 million through 2006.
Other Clean Air Act requirements, such as revisions to national ambient air
quality standards for ozone and particulate matter, may have significant impacts
on the Company in the future, although whether and how it will be affected will
not be determined for years. The Company also may be affected if the U.S.
federal government or the states in which it operates begin to regulate
emissions of mercury or greenhouse gases such as carbon dioxide. However,
because the Company cannot predict what requirements will be imposed on it or
the timing of such requirements, it is unable to evaluate the ultimate future
cost of compliance with respect to these potential developments.
Clean Water Act
The Company's facilities also are subject to a variety of permitting
requirements under the Clean Water Act, which restricts the type and amount of
pollutants that may be discharged from regulatory sources into receiving bodies
of waters, such as rivers, lakes and oceans. On October 17, 2002, the U.S. EPA
issued regulations that require existing wastewater dischargers to comply with
new effluent limitations. Several of the Company's facilities are subject to the
new regulations, and compliance with such regulations will be required as new
discharge permits are issued for continued operation.
The Company's Weirton facility will be subject to stipulated penalties for
national pollution discharge elimination system permit excursions under a 1996
Multimedia Consent Decree. At September 30, 2005, the Company has accrued
$394,000 for probable penalties related to such excursions in 2004 since the
facility was acquired. However it is possible that additional penalties may be
sought but such penalties are not expected to be material.
Other
The Company anticipates spending approximately $48 million over the next 40
years, including $11 million during the next twelve months, to address the
removal and disposal of PCB equipment and asbestos material encountered during
the operation of our facilities.
There are a number of other facilities and properties, which the Company
owns across the United States, which may present incidental environmental
liabilities. The majority of these sites were former pipe coating operations
which may have impacted soils or groundwater. The estimated cost of future
investigations and probable remediation at these sites is estimated to be about
$10 million.
In addition to the above matters, the Company receives notices of violation
relating to environmental matters from time to time in the ordinary course of
business. The Company does not expect any material unrecorded reclamation
requirements, fines or penalties to arise from these items and none of these
involve potential individual monetary sanctions in excess of $100,000.
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ITEM 5. OTHER INFORMATION
Subordinated Note Receivable
On July 20, 2005, Ispat Inland Inc. (Borrower) signed a Subordinated Note
promising to pay the Company (Lender) the aggregate unpaid principle amount of
all loans made from time to time by Lender to Borrower, as reflected in the
records of the Lender.
The Subordinated Note provides that Ispat Inland Inc. promises to pay the
Company the principal amount together with interest accruing at a rate equal to
120% of the Applicable Federal Rate in effect on the date of such loan
compounded annually. The principal amount under the Subordinated Note, together
with all accrued interest, is due and payable on July 20, 2010, but may be
prepaid, in part or in full (together with any accrued interest), at any time
prior to the maturity date at the option of Ispat Inland, Inc.
This Subordinated Note is subject to the terms and conditions of (i) a
Subordination Agreement dated as of April 30, 2003, as amended, among Borrower,
Ispat International Group Finance Limited Liability Company (IIGF), Mittal Steel
Company N.V.(formerly, Ispat International N.V.) (IINV), Lender, and General
Electric Capital Corporation, as Agent, and (ii) a Subordination Agreement dated
as of March 25, 2004, as amended, among Borrower, IIGF, IINV, Lender and LaSalle
Bank National Association, as Trustee.
On July 29, 2005, Ispat Inland Inc. borrowed $150.0 million under the
Subordinated Note Agreement. This should have been filed under Item 1.01 of 8-K
and is incorporated herein.
ITEM 6. EXHIBITS
Exhibit
Number Description of Document
-------- --------------------------------------------------------------------
10.1 Subordinated note receivable with Ispat Inland Inc
31.1 Certification by the Chief Executive Officer pursuant to
Rules 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2 Certification by the Chief Financial Officer pursuant to Rules
13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1 Certifications pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MITTAL STEEL USA ISG INC.
Date: November 9, 2005 /s/ Vaidya Sethuraman
--------------------------
By: Vaidya Sethuraman
Vice President Finance and
Chief Accounting Officer
Mittal Steel USA ISG Inc.
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