Item 1.
|
Financial Statements
|
WHEELING-PITTSBURGH CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales, including sales to affiliates of $71,616, $104,505, $193,447 and $287,751
|
|
$
|
393,028
|
|
|
$
|
482,731
|
|
|
$
|
1,257,726
|
|
|
$
|
1,413,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales, including cost of sales to affiliates of $76,995, $87,578, $207,631 and $264,513
|
|
|
409,573
|
|
|
|
427,401
|
|
|
|
1,300,129
|
|
|
|
1,280,903
|
|
Depreciation and amortization expense
|
|
|
9,985
|
|
|
|
9,315
|
|
|
|
28,801
|
|
|
|
26,452
|
|
Selling, general and administrative expense
|
|
|
18,860
|
|
|
|
20,755
|
|
|
|
62,511
|
|
|
|
61,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost and expenses
|
|
|
438,418
|
|
|
|
457,471
|
|
|
|
1,391,441
|
|
|
|
1,369,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income
|
|
|
(45,390
|
)
|
|
|
25,260
|
|
|
|
(133,715
|
)
|
|
|
44,449
|
|
Interest expense and other financing costs
|
|
|
(10,851
|
)
|
|
|
(6,788
|
)
|
|
|
(30,543
|
)
|
|
|
(19,963
|
)
|
Other (loss) income
|
|
|
(104
|
)
|
|
|
4,749
|
|
|
|
6,428
|
|
|
|
11,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes and minority interest
|
|
|
(56,345
|
)
|
|
|
23,221
|
|
|
|
(157,830
|
)
|
|
|
35,889
|
|
Income tax provision
|
|
|
196
|
|
|
|
6,341
|
|
|
|
196
|
|
|
|
11,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before minority interest
|
|
|
(56,541
|
)
|
|
|
16,880
|
|
|
|
(158,026
|
)
|
|
|
24,315
|
|
Minority interest
|
|
|
|
|
|
|
472
|
|
|
|
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(56,541
|
)
|
|
$
|
17,352
|
|
|
$
|
(158,026
|
)
|
|
$
|
24,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(3.68
|
)
|
|
$
|
1.18
|
|
|
$
|
(10.31
|
)
|
|
$
|
1.68
|
|
Diluted
|
|
$
|
(3.68
|
)
|
|
$
|
1.16
|
|
|
$
|
(10.31
|
)
|
|
$
|
1.66
|
|
Weighted average shares (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
15,354
|
|
|
|
14,752
|
|
|
|
15,325
|
|
|
|
14,600
|
|
Diluted
|
|
|
15,354
|
|
|
|
14,972
|
|
|
|
15,325
|
|
|
|
14,811
|
|
Note:
The
condensed consolidated statements of operations for the quarter and nine months ended September 30, 2007, the condensed consolidated balance sheet at September 30, 2007 and the condensed consolidated statement of cash flows for the nine
months ended September 30, 2007 do not include Mountain State Carbon, LLC (see Note 1).
The accompanying notes are an integral part of
the consolidated financial statements.
1
WHEELING-PITTSBURGH CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
|
December 31,
2006
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
10,375
|
|
|
$
|
21,842
|
|
Accounts receivables, less allowance for doubtful accounts of of $2,281 and $2,882
|
|
|
157,949
|
|
|
|
138,513
|
|
Inventories
|
|
|
241,387
|
|
|
|
212,221
|
|
Prepaid expenses and other current assets
|
|
|
11,641
|
|
|
|
27,911
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
421,352
|
|
|
|
400,487
|
|
Investment in and advances to affiliated companies
|
|
|
130,811
|
|
|
|
53,585
|
|
Property, plant and equipment, less accumulated depreciation of $127,504 and $114,813
|
|
|
444,869
|
|
|
|
626,210
|
|
Deferred income tax benefits
|
|
|
22,732
|
|
|
|
30,537
|
|
Restricted cash
|
|
|
|
|
|
|
2,163
|
|
Other intangible assets, less accumulated amortization of $2,165 and $2,136
|
|
|
30
|
|
|
|
255
|
|
Other assets
|
|
|
7,035
|
|
|
|
9,308
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,026,829
|
|
|
$
|
1,122,545
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable, including book overdrafts of $10,297 and $13,842
|
|
$
|
184,834
|
|
|
$
|
99,536
|
|
Short-term debt
|
|
|
165,900
|
|
|
|
110,000
|
|
Payroll and employee benefits payable
|
|
|
42,397
|
|
|
|
34,766
|
|
Accrued income and other taxes
|
|
|
7,648
|
|
|
|
10,333
|
|
Deferred income taxes payable
|
|
|
22,732
|
|
|
|
30,537
|
|
Accrued interest and other current liabilities
|
|
|
24,501
|
|
|
|
10,257
|
|
Convertible debt, net of discount of $6,341 (see Note 15)
|
|
|
66,659
|
|
|
|
|
|
Long-term debt due in one year (see Note 15)
|
|
|
232,567
|
|
|
|
32,119
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
747,238
|
|
|
|
327,548
|
|
Long-term debt, less amount due in one year
|
|
|
6,256
|
|
|
|
254,961
|
|
Employee benefits
|
|
|
123,380
|
|
|
|
121,953
|
|
Other liabilities
|
|
|
12,488
|
|
|
|
25,600
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
889,362
|
|
|
|
730,062
|
|
|
|
|
|
|
|
|
|
|
Minority interest in consolidated subsidiary
|
|
|
|
|
|
|
106,290
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity
|
|
|
|
|
|
|
|
|
Preferred stock - $.001 par value; 20,000,000 shares authorized; no shares issued or outstanding
|
|
|
|
|
|
|
|
|
Common stock - $.01 par value; 80,000,000 shares authorized; 15,364,382 and 15,274,796 issued; 15,357,716 and 15,268,130 shares outstanding
|
|
|
154
|
|
|
|
153
|
|
Additional paid-in capital
|
|
|
302,001
|
|
|
|
289,903
|
|
Accumulated deficit
|
|
|
(162,185
|
)
|
|
|
(4,159
|
)
|
Treasury stock, 6,666 shares, at cost
|
|
|
(100
|
)
|
|
|
(100
|
)
|
Accumulated other comprehensive (loss) income
|
|
|
(2,403
|
)
|
|
|
396
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
137,467
|
|
|
|
286,193
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
1,026,829
|
|
|
$
|
1,122,545
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
2
WHEELING-PITTSBURGH CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(158,026
|
)
|
|
$
|
24,571
|
|
Adjustments to reconcile net (loss) income to cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense
|
|
|
28,801
|
|
|
|
26,452
|
|
VEBA, profit sharing and other stock transactions
|
|
|
614
|
|
|
|
10,832
|
|
Other postretirement benefits
|
|
|
(1,265
|
)
|
|
|
(1,238
|
)
|
Deferred compensation and stock options
|
|
|
2,000
|
|
|
|
2,459
|
|
Amortization of debt discount
|
|
|
2,726
|
|
|
|
|
|
Dividends, net of equity income of affiliated companies
|
|
|
3,832
|
|
|
|
1,242
|
|
Interest paid in-kind
|
|
|
964
|
|
|
|
940
|
|
Loss (gain) on disposition of assets
|
|
|
500
|
|
|
|
(405
|
)
|
Deferred income taxes
|
|
|
196
|
|
|
|
11,458
|
|
Minority interest
|
|
|
|
|
|
|
(256
|
)
|
Other
|
|
|
31
|
|
|
|
42
|
|
Changes in current assets and current liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(23,674
|
)
|
|
|
(72,476
|
)
|
Inventories
|
|
|
(38,803
|
)
|
|
|
(47,406
|
)
|
Other current assets
|
|
|
14,107
|
|
|
|
1,003
|
|
Accounts payable
|
|
|
107,214
|
|
|
|
(4,717
|
)
|
Other current liabilities
|
|
|
20,809
|
|
|
|
2,105
|
|
Other assets and liabilities, net
|
|
|
2,185
|
|
|
|
6,466
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
|
(37,789
|
)
|
|
|
(38,928
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Payments from affiliates
|
|
|
4,773
|
|
|
|
1,875
|
|
Investment in affiliates
|
|
|
(24,887
|
)
|
|
|
(462
|
)
|
Cash transfer to deconsolidated affiliate (see Note 16)
|
|
|
(11,159
|
)
|
|
|
|
|
Capital expenditures
|
|
|
(21,388
|
)
|
|
|
(81,910
|
)
|
Change in restricted cash used to fund capital expenditures
|
|
|
|
|
|
|
7,027
|
|
Proceeds from sale of assets
|
|
|
1,210
|
|
|
|
522
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(51,451
|
)
|
|
|
(72,948
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Book overdraft
|
|
|
(2,293
|
)
|
|
|
(10,120
|
)
|
Net change in short-term debt
|
|
|
55,900
|
|
|
|
92,800
|
|
Borrowing of long-term debt
|
|
|
73,000
|
|
|
|
|
|
Repayment of long-term debt
|
|
|
(49,252
|
)
|
|
|
(22,473
|
)
|
Minority interest investment in subsidiary
|
|
|
|
|
|
|
60,000
|
|
Stock options exercised
|
|
|
418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
77,773
|
|
|
|
120,207
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(11,467
|
)
|
|
|
8,331
|
|
Cash and cash equivalents, beginning of period
|
|
|
21,842
|
|
|
|
8,863
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
10,375
|
|
|
$
|
17,194
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
3
WHEELING-PITTSBURGH CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Changes in Stockholders Equity
(Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compre-
hensive
(Loss)
Income
|
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Accumu-
lated
Deficit
|
|
|
Treasury
Stock
|
|
|
Accumu-
lated Other
Comprehen-
sive (Loss)
Income
|
|
|
Total
|
|
Balance, December 31, 2005
|
|
|
|
|
|
$
|
147
|
|
$
|
276,097
|
|
$
|
(10,640
|
)
|
|
$
|
(100
|
)
|
|
$
|
|
|
|
$
|
265,504
|
|
Net income
|
|
$
|
6,481
|
|
|
|
|
|
|
|
|
|
6,481
|
|
|
|
|
|
|
|
|
|
|
|
6,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee benefit plans
|
|
|
|
|
|
|
6
|
|
|
10,986
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,992
|
|
Stock options exercised
|
|
|
|
|
|
|
|
|
|
262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
262
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
2,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,232
|
|
Stock option grants
|
|
|
|
|
|
|
|
|
|
326
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
326
|
|
Adjustment to initially apply
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FASB Statement No. 158 without tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
396
|
|
|
|
396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
|
|
|
|
|
153
|
|
|
289,903
|
|
|
(4,159
|
)
|
|
|
(100
|
)
|
|
|
396
|
|
|
|
286,193
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(158,026
|
)
|
|
|
|
|
|
|
|
|
(158,026
|
)
|
|
|
|
|
|
|
|
|
|
|
(158,026
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss
|
|
|
710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
710
|
|
|
|
710
|
|
Prior service cost (benefit)
|
|
|
(3,509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,509
|
)
|
|
|
(3,509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(160,825
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee benefit plans
|
|
|
|
|
|
|
1
|
|
|
613
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
614
|
|
Stock options exercised
|
|
|
|
|
|
|
|
|
|
418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
418
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
1,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,806
|
|
Stock option grants
|
|
|
|
|
|
|
|
|
|
194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
194
|
|
Convertible debt - beneficial conversion feature
|
|
|
|
|
|
|
|
|
|
9,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2007
|
|
|
|
|
|
$
|
154
|
|
$
|
302,001
|
|
$
|
(162,185
|
)
|
|
$
|
(100
|
)
|
|
$
|
(2,403
|
)
|
|
$
|
137,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
Treasury
|
|
Outstanding
|
Share Activity:
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
14,686,354
|
|
6,666
|
|
14,679,688
|
Shares issued - employee benefit plans
|
|
559,477
|
|
|
|
559,477
|
Stock options exercised
|
|
28,965
|
|
|
|
28,965
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
15,274,796
|
|
6,666
|
|
15,268,130
|
Shares issued - employee benefit plans
|
|
68,184
|
|
|
|
68,184
|
Stock options exercised
|
|
21,402
|
|
|
|
21,402
|
|
|
|
|
|
|
|
Balance, September 30, 2007
|
|
15,364,382
|
|
6,666
|
|
15,357,716
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of the consolidated financial statements.
4
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Dollars
in thousands, except per share amounts)
The condensed consolidated
financial statements of Wheeling-Pittsburgh Corporation and subsidiaries (WPC or the Company) are unaudited. In the opinion of management, these financial statements reflect all recurring adjustments necessary to present fairly the consolidated
financial position of the Company and the results of its operations and the changes in its cash flows for the periods presented.
The
condensed consolidated financial statements of the Company have been prepared assuming that the Company will continue as a going concern. During the nine months ended September 30, 2007, the Company incurred an unexpected substantial net loss,
used a substantial amount of cash for operating and investing activities and had a working capital deficiency at September 30, 2007. Further, based on managements current projected results of operations, it is more likely than not that
the Company will not be able to comply with the fixed charge coverage ratio covenant under its term loan agreement, as amended, which will become effective again as of April 1, 2008. Management anticipates that the Company may require
additional liquidity in the foreseeable future. Additionally, the Companys independent registered public accounting firm included an explanatory paragraph in its report on the consolidated financial statements included in the Companys
Form 10-K/A for the year ended December 31, 2006 that indicated that there is substantial doubt about the Companys ability to continue as a going concern.
This situation could be mitigated if operating results improve as a result of higher sales volume and/or pricing, including the sale of processed purchased slabs at competitive costs, or through operating cost or
productivity improvements or if additional financing is obtained. Additional financing might include, but not be limited to, (i.) the proposed combination of the Company with Esmark Incorporated (Esmark), (ii.) amending the Companys revolving
credit facility to allow for access to additional availability, (iii.) refinancing of the Companys term loan agreement to eliminate or modify the existing financial covenant, (iv.) an equity or rights offering under the Companys existing
$125 million shelf registration statement, (v.) raising additional capital through a private placement offering, or (vi.) the sale of assets. Management cannot, at this time, give any assurance that the proposed combination with Esmark will be
approved, that operating results will improve or that the Company will be able to obtain additional financing.
The Company owns a 50%
voting and non-voting interest in Mountain State Carbon, LLC (MSC), a joint venture. From inception of the joint venture through December 31, 2006, the Company was identified as the primary beneficiary of the joint venture, and as such,
included the accounts of MSC in its consolidated financial statements. As a result of certain joint venture agreement provisions which became operative on January 1, 2007, the Companys variable interest in the joint venture will no longer
absorb a majority of the joint ventures expected losses or receive a majority of the joint ventures expected residual returns. As a result, the accounts of MSC were no longer included in the consolidated financial statements of the
Company effective January 1, 2007.
These financial statements, including notes thereto, have been prepared in accordance with
applicable rules of the Securities and Exchange Commission and do not include all of the information and disclosures required by generally accepted accounting principles in the United States of America for complete financial statements. The results
reported in these financial statements may not be indicative of the results that may be expected for the entire year. This Form 10-Q should be read in conjunction with the Companys Form 10-K and Form 10-K/A for the year ended December 31,
2006.
2.
|
New Accounting Standards
|
The Financial Accounting
Standards Board (FASB) issued FASB Staff Position (FSP) No. FIN 48-1, Definition of Settlement in FASB Interpretation No. 48, in May 2007. FSP No. 48-1 amended FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, to provide guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. This staff position had no material impact on the
Companys financial statements.
5
The FASB issued Statement of Financial Accounting Standards (FASB) No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities, in February 2007. FASB No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. FASB No. 159 is effective for the fiscal
years beginning after November 15, 2007. The Company is currently assessing the impact of this statement on its financial statements.
The FASB issued FASB No. 157, Fair Value Measurement, in September 2006. FASB No. 157 defines fair value, established a framework for measuring fair value in accordance with existing generally accepted accounting
principles and expands disclosures about fair value measurements. FASB No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of this statement on its financial statements.
The Company is engaged in one
line of business and operates one business segment, the production, processing, fabrication and sale of steel and steel products. The Company has a diverse customer base, substantially all of which is located in the United States. All of the
Companys operating assets are located in the United States.
4.
|
Transactions with Affiliates and Related Parties
|
The Company owns 35.7% of the outstanding common stock of Wheeling-Nisshin, Inc. (Wheeling-Nisshin), which is accounted for using the equity method of accounting. The Company had sales to Wheeling-Nisshin of $43,950 and $81,211 during the
quarters ended September 30, 2007 and 2006, respectively, and $125,849 and $220,262 during the nine months ended September 30, 2007 and 2006, respectively. Management believes that sales to Wheeling-Nisshin are made at prevailing market
prices. During the nine months ended September 30, 2006, the Company purchased steel slabs from Wheeling-Nisshin, at prevailing market prices, in the amount of $28,585. The Company reported dividends from Wheeling-Nisshin of $7,500 and $10,715
during the nine months ended September 30, 2007 and 2006, respectively. At September 30, 2007 and December 31, 2006, the Company had accounts receivable due from Wheeling-Nisshin of $3,794 and $1,853, respectively, and had accounts
payable to Wheeling-Nisshin of $456 and $147, respectively.
The Company owns 50.0% of the outstanding common stock of Ohio Coatings
Corporation (OCC), which is accounted for using the equity method of accounting. The Company had sales to OCC of $22,105 and $20,905 during the quarters ended September 30, 2007 and 2006, respectively, and $49,712 and $64,481 during the nine
months ended September 30, 2007 and 2006, respectively. Management believes that sales to OCC are made at prevailing market prices. At September 30, 2007 and December 31, 2006, the Company had accounts receivable due from OCC of
$9,068 and $3,461, respectively, and had accounts payable to OCC of $99 at September 30, 2007. At September 30, 2007 and December 31, 2006, the Company had a loan receivable due from OCC of $5,375 and $5,625, respectively, which bears
interest at a variable rate, which currently approximates 7.7%. The Company recorded interest income on the loan receivable of $136 and $83 during the quarters ended September 30, 2007 and 2006, respectively, and $309 and $309 during the nine
months ended September 30, 2007 and 2006, respectively. The Company received principal payments on the loan receivable of $250 and $1,875 during the nine months ended September 30, 2007 and 2006, respectively.
The Company owns a 50% voting and non-voting capital interest in Mountain State Carbon, LLC (MSC), a joint venture, which is accounted for using the
equity method of accounting. Through December 31, 2006, the accounts of MSC were included in the consolidated financial statements of the Company (see Note 16). The Company acquired coke from MSC at cost, as defined by a coke supply agreement,
plus 5% through June 2007. Effective July 1, 2007, the Company acquires coke from MSC at cost, as defined by a coke supply agreement, without considering depreciation expense as a cost and without a 5% markup. During the quarter and nine months
ended September 30, 2007, the Company acquired coke and coke-related products from MSC in the amount of $31,168 and $90,791, respectively. The Company provides services to MSC under a management agreement and an operating agreement. During the
quarter and nine months ended September 30, 2007, the Company billed MSC $9,736 and $29,647, respectively, for such services. At September 30, 2007, the Company had accounts payable to MSC of $9,220 and had accounts receivable due from MSC
of $186. As of January 1, 2007, the Company had a note receivable of $4,523 due from MSC, which bore interest at the prime
6
rate, plus 1.25%. The Company recorded interest income on the note receivable of $66 and $206 during the quarter and nine months ended September 30,
2007. The Company received principal payments on the note receivable of $4,523 during the nine months ended September 30, 2007. During the nine months ended September 30, 2007, the Company received dividends from MSC of $2,000 and made
capital contributions to MSC of $24,223.
The Company owns 49% of the outstanding common stock of Feralloy-Wheeling Specialty Processing,
Co. (Feralloy), which is accounted for using the equity method of accounting. During the nine months ended
September 30, 2006, the
Company received dividends form Feralloy of $147.
The Company owns 50% of the outstanding common stock of Jensen Bridge & Roofing
Company, LLC (Jensen Bridge), a joint venture, and 50% of the outstanding common stock of Avalon Metal Roofing and Building Components, LLC (Avalon), a joint venture. These joint ventures are accounted for using the equity method of accounting. The
Company had sales to these joint ventures during the quarters ended September 30, 2007 and 2006 of $1,996 and $2,389, respectively, and $3,456 and $3,008 during the nine months ended September 30, 2007 and 2006, respectively. Management
believes that sales to these joint ventures are made at prevailing market prices. At September 30, 2007 and December 31, 2006, the Company had accounts receivable due from these joint ventures of $1,810 and $1,369, respectively. During the
nine months ended September 30, 2007 and 2006, the Company made capital contributions to these joint ventures of $1,062 (including $1,000 in the form of inventory) and $462, respectively.
During the quarter and nine months ended September 30, 2007, the Company had sales to its proposed business combination partner, Esmark and its
affiliates of $3,565 and $14,430, respectively. Management believes that sales to Esmark are made at prevailing market prices. The Company had accounts receivable due from Esmark of $1,004 at September 30, 2007 and had accounts payable to
Esmark of $3,196 at September 30, 2007 related to the purchase of steel slabs. During the quarter and nine months ended September 30, 2007, the Company incurred costs under a raw material guarantee agreement with Esmark of $770, which was
included in accrued other current liabilities at September 30, 2007.
During the
quarter ended September 30, 2007, the Company and Esmark each acquired an initial 50% interest in E
2
Acquisition Corporation. The Companys
interest was acquired in exchange for incremental costs incurred of $602 in connection with the formation of E
2
Acquisition Corporation. E
2
Acquisition Corporation conducted no operations through September 30, 2007. E
2
Acquisition Corporation, with substantial additional third party investment, anticipates acquiring the assets of the Sparrows Point steel-making facility during the fourth quarter of 2007. Upon the closing of the
Sparrows Point acquisition, it is anticipated that the Company and Esmark will individually and collectively have a small minority interest in E
2
Acquisition Corporation.
During the quarter ended
September 30, 2007, the Company received $9,500 in final settlement of a business interruption insurance claim relating to an insurable event that occurred in December 2004. This amount was accrued and recorded as a reduction of cost of goods
sold during the quarter ended June 30, 2007. In addition, $6,116 was received in partial settlement of this claim during the quarter ended March 31, 2007 which was recorded as a reduction of cost of goods sold in the fourth quarter of
2006. During the nine months ended September 30, 2006, the Company received $12,659 in partial settlement of the same insurance claim. Of this amount, $7,299 was recorded as a reduction of cost of goods sold during the quarter ended
March 31, 2006 and $5,360 was recorded as a reduction of cost of goods sold in the fourth quarter of 2005. Business interruption insurance recoveries are recorded in the period in which a sworn statement of proof of loss is received from the
insurance carriers or the insurance carrier otherwise acknowledges an obligation to pay and collectibility is assured.
The Company adopted FASB
No. 123 (revised 2004), Share-Based Payment, in the first quarter of 2005 and elected to apply the statement using the modified retrospective method.
7
Non-vested restricted stock:
The Company maintains a non-vested restricted stock plan pursuant to which it granted 500,000 shares of its common stock to selected key employees on
July 31, 2003. All shares granted under this plan, net of forfeitures, fully vested in August 2006. In March 2005, the Company granted 10,500 shares of common stock to certain employees under its management stock incentive plan, all of which
fully vested in August 2006. No non-vested restricted stock was outstanding at September 30, 2007 and December 31, 2006 and there was no activity relative to non-vested restricted stock during the nine months ended September 30, 2007.
Compensation expense under these plans is measured as being equal to the grant date fair value of the non-vested restricted stock issued,
amortized over the vesting or requisite service period for each grant. No compensation expense related to these plans was recognized during the quarter and nine months ended September 30, 2007. Compensation expense related to these plans
amounted to $228 and $1,609 during the quarter and six months ended September 30, 2006, respectively.
Stock options:
The Company maintains a management stock incentive plan pursuant to which it granted stock options to non-employee directors of the
Company for 6,424 and 5,747 shares of its common stock during the quarters ended September 30, 2007 and 2006, respectively, at an exercise price of $17.13 and $19.14 per share, respectively. The Company granted stock options for 15,655 and
15,947 shares of its of common stock during the nine months ended September 30, 2007 and 2006, respectively, at a weighted average exercise price of $21.09 and $20.40, respectively. The options were granted at a price equal to the average stock
price for a five-day period ending on the date of grant, vest upon receipt, are exercisable at the option of the holder and lapse ten years from the date of grant. If a non-employee director of the Company terminates association with the Company,
outstanding stock options expire within 90 days from the date of such termination if not otherwise exercised. During the nine months ended September 30, 2007, proceeds of $418 were received from the exercise of 21,402 stock options. No stock
options were exercised during the nine months ended September 30, 2006. During the nine months ended September 30, 2007, stock options for 15,564 shares of Company common stock expired.
The grant date fair value of stock options granted under the plan is estimated using the Black-Scholes pricing model. The grant date fair value of stock
options granted during the quarters ended September 30, 2007 and 2006 was $7.15 and $11.50 per share, respectively, and the weighted average grant date fair value of stock options granted during the nine months ended September 30, 2007 and
2006 was $12.39 and $14.97, respectively, determined using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Average risk-free interest rate
|
|
4.64
|
%
|
|
4.93
|
%
|
|
4.73
|
%
|
|
4.98
|
%
|
Expected dividend yield
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
Expected volatility
|
|
74.61
|
%
|
|
82.13
|
%
|
|
75.36
|
%
|
|
83.40
|
%
|
Expected life (years)
|
|
5
|
|
|
5
|
|
|
5
|
|
|
5
|
|
The Company previously used a ten-year expected life assumption relative to stock options, which
was equal to the term of the stock options issued. During the quarter ended September 30, 2006, the Company changed this expected life assumption to five years, which is a simple average of the vesting period and the term of the stock options
issued. The effect of this change on previously reported amounts was not material.
8
A summary of activity under this plan as of September 30, 2007 and changes during the nine months
then ended is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
Aggregate
Intrinsic
Value
|
Outstanding, December 31, 2006
|
|
56,187
|
|
|
$
|
20.58
|
|
|
|
Granted
|
|
15,655
|
|
|
|
21.09
|
|
|
|
Exercised
|
|
(21,402
|
)
|
|
|
19.53
|
|
|
|
Expired
|
|
(15,564
|
)
|
|
|
26.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2007
|
|
34,876
|
|
|
$
|
18.65
|
|
$
|
103
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2007
|
|
34,876
|
|
|
$
|
18.65
|
|
$
|
103
|
|
|
|
|
|
|
|
|
|
|
Compensation expense under this plan is equal to the fair value of the stock options granted on the
grant date. The Company recorded compensation expense relative to stock options of $46 and $66 during the quarters ended September 30, 2007 and 2006, respectively, and $194 and $239 during the nine months ended September 30, 2007 and 2006,
respectively.
Stock unit awards:
The Company grants stock unit service awards and stock unit performance awards under its management stock incentive plan. Stock unit service awards vest to each individual based solely on service, subject to
forfeiture. Stock unit performance awards vest to each individual based on a combination of service and market performance. In general, market performance is determined based on a comparison of the annualized total shareholder return of the
Companys stock, as defined by the plan, as compared to the percentage increase in the Dow Jones US Steel Index. Each stock unit award is equivalent to one share of common stock of the Company. The Company, at its sole discretion, has the
option of settling stock unit awards in cash or by issuing common stock or a combination of both. Stock unit awards granted under the plan are not subject to retirement eligible provisions.
The grant date fair value of stock unit service awards is measured as being equal to the fair value of the Companys common stock on the date of
grant. No stock unit service awards were granted during the quarters ended September 30, 2007 and 2006. The Company granted 212,635 and 145,998 stock unit service awards during the nine months ended September 30, 2007 and 2006,
respectively, at a weighted average grant date fair value of $19.52 and $18.86 per stock unit service award, respectively.
The grant date
fair value of stock unit performance awards is estimated using a lattice-based valuation model. No stock unit performance awards were granted during the quarters ended September 30, 2007 and 2006. The Company granted 103,339 stock unit
performance awards during the nine months ended September 30, 2006 at a weighted average grant date fair value of $21.67 per stock unit performance award, determined using the following assumptions:
|
|
|
|
Average risk-free interest rate
|
|
4.80
|
%
|
Expected dividend yield
|
|
0.00
|
%
|
Expected volatility
|
|
68.00
|
%
|
Expected life (years)
|
|
3
|
|
Expected turnover rate
|
|
10.00
|
%
|
9
A summary of activity under this plan as of September 30, 2007 and changes during the nine months
then ended is as follows:
|
|
|
|
|
|
|
|
|
Units/
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
Balance, December 31, 2006
|
|
282,061
|
|
|
$
|
18.82
|
Granted
|
|
212,635
|
|
|
|
19.52
|
Forfeited
|
|
(38,646
|
)
|
|
|
20.26
|
Vested
|
|
(69,458
|
)
|
|
|
18.60
|
|
|
|
|
|
|
|
Balance, September 30, 2007
|
|
386,592
|
|
|
$
|
19.10
|
|
|
|
|
|
|
|
Stock unit awards outstanding at September 30, 2007 vest, subject to forfeiture and certain
change of control transactions, as follows:
|
|
|
|
|
|
|
Quarter Ended
Grant Date
|
|
Stock Unit Type
|
|
Units
|
|
Vesting Date/Period
|
March 31, 2006
|
|
Service award
|
|
17,872
|
|
March 31, 2008
|
March 31, 2006
|
|
Service award
|
|
8,947
|
|
March 31, 2009
|
March 31, 2006
|
|
Performance award
|
|
26,814
|
|
March 31, 2009
|
December 31, 2006
|
|
Service award
|
|
171,000
|
|
Annually over three years
|
March 31, 2007
|
|
Service award
|
|
84,459
|
|
Quarterly through December 31, 2008
|
March 31, 2007
|
|
Service award
|
|
47,500
|
|
Annually over three years
|
June 30, 2007
|
|
Service award
|
|
30,000
|
|
Annually over three years
|
|
|
|
|
|
|
|
Total
|
|
|
|
386,592
|
|
|
|
|
|
|
|
|
|
Compensation expense for stock unit awards is equal to the grant date fair value of the stock unit
awards, amortized over the requisite service period for the entire award, using the straight-line method. Compensation expense relative to stock unit awards amounted to $829 and $323 for the quarters ended September 30, 2007 and 2006,
respectively, and $2,246 and $611 for the nine months ended September 30, 2007 and 2006, respectively. At September 30, 2007, deferred compensation expense relative to stock unit awards amounted to $5,895. This amount will be amortized to
expense over the requisite service period for each award.
The Company authorized and issued 500,000 shares of restricted stock under its
non-vested restricted stock plan of which 6,666 shares were forfeited and remain available for issuance under the plan. The Company authorized 1,000,000 shares of common stock for issuance under its management stock incentive plan. At
September 30, 2007, 10,500 restricted shares of common stock have been issued under the management stock incentive plan, 85,243 options to acquire
shares of common stock have been issued under the plan, net of expirations, and 456,050 stock unit awards have been issued under the plan, net of forfeitures.
10
7.
|
Pension and Other Postretirement Benefits
|
Net
periodic cost for pension and other postretirement benefits was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
September 30,
|
|
|
Nine Months Ended
September 30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Components of net periodic cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
405
|
|
|
$
|
495
|
|
|
$
|
1,215
|
|
|
$
|
1,345
|
|
Interest cost
|
|
|
1,515
|
|
|
|
1,456
|
|
|
|
4,547
|
|
|
|
4,368
|
|
Expected return on assets
|
|
|
(82
|
)
|
|
|
(102
|
)
|
|
|
(246
|
)
|
|
|
(307
|
)
|
Amortization of prior service credit
|
|
|
(1,170
|
)
|
|
|
(1,169
|
)
|
|
|
(3,509
|
)
|
|
|
(3,508
|
)
|
Recognized actuarial loss
|
|
|
237
|
|
|
|
272
|
|
|
|
710
|
|
|
|
814
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic cost
|
|
$
|
905
|
|
|
$
|
952
|
|
|
$
|
2,717
|
|
|
$
|
2,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company made payments of $1,209 and $1,093 for other postretirement benefits during the
quarters ended September 30, 2007 and 2006, respectively, and $3,542 and $3,498 during the nine months ended September 30, 2007 and 2006, respectively. Due to projected changes in the minimum funding standard, the Company currently expects
to make contributions to its defined benefit pension plan of $1,800 during 2007. The Company expects to make payments of $4,683 for other postretirement benefits during 2007.
8.
|
VEBA and Profit Sharing Expense
|
The Company
incurred no VEBA or profit sharing expense during the quarter and nine months ended September 30, 2007. The Company incurred VEBA and profit sharing expense of $7,440 during the quarter ended September 30, 2006, of which $5,788 was settled
by issuing common stock with the remaining portion being settled in cash. The Company incurred VEBA and profit sharing expense of $13,767 during the nine months ended September 30, 2006, of which $10,236 was settled by issuing common stock with
the remaining portion being settled in cash.
During the first quarter of
2007, the Company initiated a voluntary and involuntary termination plan to bring about an overall reduction in and reorganization of the salaried workforce. As a result, the Company incurred $4,363 for termination benefits under these plans during
the nine months ended September 30, 2007, of which $2,131 has been paid through September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2007
|
|
|
2006
|
|
2007
|
|
2006
|
Equity income from affiliates
|
|
$
|
(467
|
)
|
|
$
|
3,974
|
|
$
|
5,668
|
|
$
|
9,620
|
Other income
|
|
|
363
|
|
|
|
775
|
|
|
760
|
|
|
1,783
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(104
|
)
|
|
$
|
4,749
|
|
$
|
6,428
|
|
$
|
11,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity income from affiliates included an equity loss from MSC of $1,433 for the quarter ended
September 30, 2007 and included equity income from MSC of $3,446 for the nine months ended September 30, 2007. MSC was accounted for as a consolidated subsidiary of the Company prior to January 1, 2007 (see Note 1).
The provision for income taxes for
the quarter and nine months ended September 30, 2007 resulted from a return-to-accrual adjustment related to the year ended December 31, 2006. Under the provisions of Statement of Position 90-7, the utilization of pre-confirmation net
operating loss carryforwards resulted in a deferred tax provision of $196 and a corresponding credit to other intangible assets. Otherwise, no income tax benefit was
11
provided during the quarter and nine months ended September 30, 2007 as it was more likely than not that the losses incurred would not result in a
reduction of future income taxes payable.
The Company adopted FASB Interpretation No. (FIN) 48 on January 1, 2007. Based on an
analysis prepared by the Company, it was determined that the application of FIN 48 had no material effect on the recorded tax assets or liabilities of the Company. As a result, no cumulative effect adjustment was recorded as of January 1, 2007.
12.
|
(Loss) Earnings Per Share
|
For the quarters and
nine months ended September 30, 2007 and 2006, a reconciliation of the numerator and denominator for the calculation of basic and diluted (loss) earnings per share is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
|
2007
|
|
|
2006
|
|
2007
|
|
|
2006
|
(Loss) income available to common shareholders
|
|
$
|
(56,541
|
)
|
|
$
|
17,352
|
|
$
|
(158,026
|
)
|
|
$
|
24,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighed-average basic shares outstanding
|
|
|
15,354
|
|
|
|
14,752
|
|
|
15,325
|
|
|
|
14,600
|
Dilutive effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested restricted stock
|
|
|
|
|
|
|
74
|
|
|
|
|
|
|
101
|
Stock options
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
14
|
Stock unit awards
|
|
|
|
|
|
|
127
|
|
|
|
|
|
|
96
|
Convertible debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighed-average diluted shares outstanding
|
|
|
15,354
|
|
|
|
14,972
|
|
|
15,325
|
|
|
|
14,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss) earnings per share
|
|
$
|
(3.68
|
)
|
|
$
|
1.18
|
|
$
|
(10.31
|
)
|
|
$
|
1.68
|
Diluted (loss) earnings per share
|
|
$
|
(3.68
|
)
|
|
$
|
1.16
|
|
$
|
(10.31
|
)
|
|
$
|
1.66
|
For the quarters ended September 30, 2007 and 2006, stock options for 34,876 and 29,588 shares
of common stock, respectively, at a weighted average exercise price of $18.65 and $25.28 per share, respectively, were excluded from the computation of diluted earnings per share as their effect was anti-dilutive. For the nine months ended
September 30, 2007 and 2006, stock options for 71,842 and 29,588 shares of common stock, respectively, at a weighted average exercise price of $20.69 and $25.28 per share, respectively, were excluded from the computation of diluted earnings per
share as their effect was anti-dilutive. For the quarter and nine months ended September 30, 2007, 413,378 and 494,696 stock unit awards, respectively, were excluded from the computation of diluted earnings per share as their effect was
anti-dilutive. For the quarter and nine months ended September 30, 2007, 3,650,000 shares of common stock into which debt is convertible were excluded from the computation of diluted earnings per share as their effect was anti-dilutive.
Inventories are valued at the lower of
cost or market value. Cost is determined by the last-in first-out (LIFO) method for substantially all inventories. Approximately 99% of inventories are valued using the LIFO method. Inventory consisted of the following:
12
|
|
|
|
|
|
|
|
|
|
|
September 30,
2007
|
|
|
December 31,
2006
|
|
Raw materials
|
|
$
|
77,995
|
|
|
$
|
44,189
|
|
In-process
|
|
|
211,193
|
|
|
|
212,315
|
|
Finished products
|
|
|
42,684
|
|
|
|
58,606
|
|
Other materials and supplies
|
|
|
47
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
Total current cost
|
|
|
331,919
|
|
|
|
315,156
|
|
Excess of current cost over carrying cost
|
|
|
(90,532
|
)
|
|
|
(102,935
|
)
|
|
|
|
|
|
|
|
|
|
Carrying cost
|
|
$
|
241,387
|
|
|
$
|
212,221
|
|
|
|
|
|
|
|
|
|
|
During the quarters and nine months ended September 30, 2007 and 2006, certain inventory
quantities were reduced, resulting in liquidations of LIFO inventories carried at costs prevailing in prior periods. The effect was to decrease operating income by $781 and $404 for the quarters ended September 30, 2007 and 2006, respectively,
and to increase operating income by $1,672 and $1,499 for the nine months ended September 30, 2007 and 2006, respectively.
On March 16, 2007, the
Company issued convertible notes in the amount of $50,000 to certain institutional investors and certain stockholders of the Company. The notes are convertible into common stock of the Company upon consummation of a proposed business combination
between the Company and Esmark at a price of $20.00 per share. If the proposed combination with Esmark is not consummated, the notes are convertible, at the option of the holders, into common stock of the Company at any time after December 31,
2007 at an adjusted, fair value conversion price that will not be more than $20.00 per share or less than $15.00 per share. The convertible notes are otherwise payable on November 15, 2008, subject to limitations in the Companys term loan
agreement and revolving credit facility, and accrue interest at an annual rate of 6%, payable quarterly in arrears. If the notes are not converted into common stock of the Company prior to January 1, 2008, interest is retroactively adjusted
from the issuance date to 9% per annum. In June 2007, the Company adjusted the conversion price on $5,000 of these convertible notes to a fixed amount of $24.51, retroactively to March 16, 2007.
On the date of issuance of these convertible notes, the fair market value of the Companys common stock was $24.03 per share. As a result, the
beneficial conversion feature applicable to $45,000 of these convertible notes was computed to be $9,067. This amount was recorded as a discount against the face amount of the convertible notes and as a credit to additional paid-in capital. The debt
discount will be amortized to interest expense over the term of these convertible notes which amounted to $1,283 and $2,726 for the quarter and nine months ended September 30, 2007, respectively.
On May 8, 2007, the Company issued $23,000 of senior unsecured exchangeable promissory notes in a private placement to certain unrelated
institutional investors. Pursuant to the terms of the notes, the notes are exchangeable into the common stock of New Esmark upon consummation of a combination of the Company and Esmark at a price of $20.00 per share, or, if not
consummated, the notes are payable in cash on November 15, 2008. Interest is payable in cash at an annual rate of 6%, payable quarterly in arrears. In the event that the combination is not consummated by January 1, 2008 or extended under
the terms of the notes, the annual rate of interest will increase to 14% computed retroactively to the issuance date. If and when the combination of the Company and Esmark occurs, the beneficial conversion feature of these notes will be computed as
being equal to the difference between the per share value of New Esmark common stock on the date of the combination and the conversion price of $20.00 per share. This amount will be recorded as interest expense at that time.
15.
|
Short-term and Long-term Debt
|
During the nine
months ended September 30, 2007, the Company incurred an unexpected substantial net loss, used a substantial amount of cash for operating and investing activities and had a working capital deficiency at September 30, 2007. Further, based
on managements current projected results of operations, it is more likely than not that the Company will not be able to comply with the fixed charge coverage ratio covenant under its
13
term loan agreement, as amended, which will become effective again as of April 1, 2008. Management anticipates that the Company may require additional
liquidity in the foreseeable future. Additionally, the Companys independent registered public accounting firm included an explanatory paragraph in its report on the consolidated financial statements included in the Companys Form 10-K/A
for the year ended December 31, 2006 that indicated that there is substantial doubt about the Companys ability to continue as a going concern.
Due to the probability that the Company may not be able to comply with the financial covenant under its term loan facility in the future, amounts outstanding under the Companys term loan facility, amounting to
$149,900, have been reclassified from a long-term obligation and reflected as a short-term obligation in the condensed consolidated balance sheet as of September 30, 2007. Additionally, all other long-term debt subject to cross-default or
cross-acceleration provisions, amounting to $73,188, has been reclassified as a short-term obligation as of September 30, 2007, as well as all outstanding convertible debt, net of discount, amounting to $66,659.
The Companys management does not believe, after consultation with legal counsel, that a material adverse effect has occurred under its loan
agreements due to (i.) recent losses, (ii.) the going concern modification included as an explanatory paragraph in its independent registered public accounting firms opinion, and/or (iii.) its probable non-compliance with the fixed charge
coverage ratio under the term loan agreement, as amended, which will become effective again as of April 1, 2008. However, there can be no assurance that the lenders under the Companys loan agreements will not determine that one or more of
these developments, alone or in combination with future developments, constitute a material adverse effect under its loan agreements. Such a determination would restrict the Companys ability to borrow under its revolving credit facility and
adversely affect its liquidity and financial position. Additionally, the Companys management believes, after consultation with legal counsel, that no event of default has occurred due to the going concern modification included as an
explanatory paragraph in the Companys independent registered public accounting firms opinion.
16.
|
Supplemental Cash Flow Information
|
As a result of
the deconsolidation of MSC (see Note 1), the accounts of MSC were no longer included in the consolidated financial statements of the Company effective January 1, 2007. The Companys investment in MSC is accounted for using the equity
method of accounting.
The consolidated net assets of MSC as of January 1, 2007 were as follows:
|
|
|
|
Assets:
|
|
|
|
Cash and cash equivalents
|
|
$
|
11,159
|
Accounts receivable
|
|
|
4,238
|
Inventory
|
|
|
8,637
|
Prepaid and other current assets
|
|
|
2,163
|
Restricted cash
|
|
|
2,163
|
Property, plant and equipment, less accumulated depreciation of $11,113
|
|
|
172,247
|
|
|
|
|
Total
|
|
|
200,607
|
|
|
|
|
Liabilities:
|
|
|
|
Accounts payable, including book overdrafts of $1,252
|
|
|
19,623
|
Other current liabilities
|
|
|
1,619
|
Other liabilities
|
|
|
13,131
|
Minority interest
|
|
|
106,290
|
|
|
|
|
Total
|
|
|
140,663
|
|
|
|
|
Consolidated net assets
|
|
$
|
59,944
|
|
|
|
|
14
17.
|
Commitments and Contingencies
|
Litigation
Effective March 31, 2007, the Companys scrap processing and supply agreements with Herman Strauss, Inc. (Strauss) were
terminated as a result of a commercial dispute regarding Strauss performance under those agreements. Strauss subsequently invoked the arbitration provisions of those agreements, claiming damages of approximately $18,000 associated with the
dispute and termination of the agreements. The Company has asserted counter-claims against Strauss which significantly exceed the magnitude of the claims asserted by Strauss, based upon allegations that Strauss committed numerous material breaches
of the agreements resulting in significant damages to the Company. The Company is also involved in unrelated litigation with a second scrap supplier, Metal Management, Inc. (MMI), arising out of MMIs supply of scrap to the Company. Quality
issues associated with several grades of scrap supplied to the Company by MMI resulted in the Company rejecting a substantial quantity of shipments of those scrap grades and advising MMI that it would accept no further shipments. MMI immediately
commenced action in state court in New York alleging a right for payment of more than $31,000 (subsequently amended to $28,222) for all past and future deliveries of scrap under purchase orders issued by the Company. The Company continued to accept
delivery of scrap conforming to specification and has, since the filing of that action, issued payments in excess of $11,722 to MMI. As to MMIs assertion that it is entitled to payment for delivered and undelivered scrap products which the
Company asserts is not in compliance with specification, the Company is vigorously defending MMIs claim and will, in its responsive pleadings, assert counterclaims against MMI. In light of the nature of these disputes and the significant
counterclaims asserted by the Company, current information would suggest that it is neither probable nor reasonably possible that a liability has been incurred as of September 30, 2007. As a result, no amount has been accrued as of
September 30, 2007 relative to these suits.
On July 2, 2007, a jury awarded the Company and MSC $119,850 in compensatory damages
and $100,000 in punitive damages in a lawsuit the Company filed in Brooke County, West Virginia Circuit Court against Massey Energy Company (Massey) and its subsidiary, Central West Virginia Energy Company (CWVEC), seeking substantial monetary
damages for breach of a metallurgical coal supply contract between the Company and CWVEC. Post-trial motions were heard by the trial judge on July 30, 2007 and, by order dated August 2, 2007, the trial judge affirmed the jurys award
with respect to punitive damages and awarded pre-judgment interest totaling approximately $24,054 and subsequently, on September 4, 2007, the trial judge denied Masseys and CWVECs motion for a new trial and all other post-trial
motions. The court also granted judgment on a counterclaim by Massey, the value of which with pre-judgment interest totaled approximately $4,500. Taking into account both the pre-judgment interest and the award in favor of Massey on its
counterclaim, the amount of the judgment entered in the trial court totals approximately $239,404. Massey has stated publicly that it intends to appeal this verdict. No amounts have been accrued as of September 30, 2007 relative to this matter.
Environmental Matters
Prior to confirmation of the Companys plan of reorganization effective August 1, 2003, the Company settled all pre-petition environmental claims made by state (Ohio, West Virginia, Pennsylvania) and Federal (U.S. Environmental
Protection Agency (USEPA)) environmental regulatory agencies. Consequently, the Company believes that it has settled and/or discharged environmental liability for any known Comprehensive Environmental Response, Compensation, and Liability Act
(CERCLA or Superfund) sites, pre-petition stipulated penalties related to active consent decrees, or other pre-petition regulatory enforcement actions.
During the second quarter of 2006, the Company received notification from the USEPA advising that the USEPA and the Ohio Environmental Protection Agency (Ohio EPA) will conduct an inquiry aimed at resolving various
environmental matters, all of which are identified, discussed and reserved for as noted below. These inquiries commenced during the third quarter of 2006.
The Company estimates that demands for stipulated penalties and fines for post-petition events and activities through September 30, 2007 could total up to $3,098, which has been fully reserved by the Company.
These claims arise from instances in which the Company exceeded post-petition consent decree terms, including: (a) $2,244 related to a January 30, 1996 USEPA consent decree for the Companys coke oven gas desulphurization facility
contributed to MSC; (b) $618 related to a July 1991 USEPA consent decree for water discharges into
15
the Ohio River; (c) $101 related to a September 20, 1999 Ohio EPA consent decree for the Companys coke oven gas desulphurization facility
contributed to MSC; and (d) $135 related to a 1992 USEPA consent order for other water discharges issues. The Company may have defenses to certain of these exceedances.
In September 2000, the Company entered into a consent order with the West Virginia Department of Environmental Protection wherein the Company agreed to
remove contaminated sediments from the bed of the Ohio River. The Company estimates the cost of removal of the remaining contaminated sediments to be $1,397 at September 30, 2007, which has been fully reserved by the Company. The Company
currently expects this work to be substantially complete by the end of 2007.
The Company is under a final administrative order issued by
the USEPA in June 1998 to conduct a Resource Conservation and Recovery Act Facility Investigation to determine the nature and extent of soil and groundwater contamination at its coke plant in Follansbee, West Virginia. The USEPA approved the
Companys investigation work plan and field activities were completed in 2004. The Company submitted the results of this investigation to the USEPA in the third quarter of 2005. It is expected that some remediation measures will be necessary
and could commence within the next three to five years. Based on an initial estimate of the range of the possible cost to remediate, the Company has reserved $4,611 for such remediation measures.
The Company also accrued $400 related to a 1989 consent order issued by the USEPA for surface impoundment issues at a coke plant facility contributed to
MSC.
In July 2005, an environmental liability was identified regarding the potential for migration of subsurface oil from historical
operations into waters in the Commonwealth of Pennsylvania. A remediation plan was developed in 2005 and a revised remediation plan was submitted to the Commonwealth of Pennsylvania during the third quarter of 2006. An estimated expenditure of $962
is expected to be made during 2007 to address this environmental liability, which has been fully reserved by the Company.
Total accrued
environmental liabilities amounted to $10,468 and $10,511 at September 30, 2007 and December 31, 2006, respectively. These accruals were based on all information available to the Company. As new information becomes available, whether from
third parties or otherwise, and as environmental regulations change, the liabilities are reviewed and adjusted accordingly. Unless stated above, the time-frame over which these liabilities will be satisfied is presently unknown. Further, the Company
considers it reasonably possible that it could ultimately incur additional liabilities relative to the above exposures of up to $5,000.
Commitments
In June 2005, the Company entered into a contract to purchase up to 20,000 tons of metallurgical coal on behalf
of MSC each month for the period from August 2006 through May 2007 at a price of $94.50 per ton. MSC reimburses the Company for the cost of coal delivered under the contract. Payments for delivery of coal under this contract totaled $1,672 during
the quarter ended September 30, 2006 and $12,720 and $4,785 during the nine months ended September 30, 2007 and 2006, respectively.
The Company entered into a 15-year take-or-pay contract in 1999, which was amended in 2003 and requires the Company to purchase oxygen, nitrogen and argon each month with a minimum monthly charge of approximately $600, subject to escalation
clauses. Payments for deliveries under this contract totaled $2,613 and $3,660 during the quarters ended September 30, 2007 and 2006, respectively, and $7,807 and $9,470 during the nine months ended September 30, 2007 and 2006,
respectively.
The Company entered into a 20-year contract in 1999, which was amended in 2003 and requires the Company to purchase steam and
electricity each month or pay a minimum monthly charge of approximately $500, subject to increases for inflation, and a variable charge calculated at a minimum of $3.75 times the number of tons of iron produced each month, with an agreed-to minimum
of 3,250 tons per day, regardless of whether any tons are produced. Payments for delivery of steam and electricity under this contract totaled $3,398 and $3,526 during the quarters ended September 30, 2007 and 2006, respectively, and $10,537
and $9,695 during the nine
16
months ended September 30, 2007 and 2006, respectively. At September 30, 2007, a maximum termination payment of approximately $27,750 would have
been required to terminate the contract.
Under terms of MSCs joint venture agreement, the Company and SNA Carbon have agreed to
refurbish a coke plant facility owned by MSC. The Company is committed to make additional capital contributions of $777 to MSC in years subsequent to 2007.
Other
The Company is the subject of, or party to, a number of other pending or threatened legal
actions involving a variety of matters. However, based on information currently available, management believes that the disposition of these matters will not have a material adverse effect on the business, results of operations or the financial
position of the Company.
On October 31, 2007, the
Company amended its revolving credit agreement to provide for, among other things, access to up to an additional $10.0 million of borrowing availability, provided that there is sufficient excess collateral to support such borrowings. The amendment
reinstates access to an additional $10.0 million of excess collateral, which by previous agreement was reduced by that amount effective October 1, 2007. Such additional access is available through December 14, 2007 or five business days
after completion of the combination with Esmark, whichever occurs first. The amendment also provides authorization for the Company to complete the Esmark transaction, provided that such transaction occurs on or before November 30, 2007 and
requires that substantially all net proceeds from the purchase and put rights features of the combination be used to repay the Companys revolving credit facility. Upon completion of the combination, the commitment termination date of the
agreement would be reset to December 31, 2007.
19.
|
Summarized Combined Financial Information
|
Wheeling-Pittsburgh Steel Corporation (WPSC), a wholly-owned subsidiary of the Company, is the issuer of the outstanding $40,000 Series A notes and $20,000 Series B notes. The Series A and Series B notes were not registered under the
Securities Act of 1933 or the Securities Act of 1934. The Series A notes and Series B notes are each fully and unconditionally guaranteed, jointly and severally, by the Company and its present and future subsidiaries. WPSC and each subsidiary
guarantor of the Series A and Series B notes are 100%-owned by the Company. Because the subsidiary guarantors are not material, individually and in the aggregate, the consolidating financial information for the Company and the subsidiary guarantors
has been combined below in the column entitled WPC and Subsidiary Guarantors.
17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING BALANCE SHEET
September 30, 2007
|
|
|
|
|
|
|
|
WPC and
Subsidiary
Guarantors
|
|
WPSC
|
|
Consolidating
and
Eliminating
Entries
|
|
|
WPC
Consolidated
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
$
|
10,375
|
|
$
|
|
|
|
$
|
10,375
|
Trade accounts receivables
|
|
|
|
|
|
157,949
|
|
|
|
|
|
|
157,949
|
Inventories
|
|
|
|
|
|
241,387
|
|
|
|
|
|
|
241,387
|
Other current assets
|
|
|
122
|
|
|
11,519
|
|
|
|
|
|
|
11,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
122
|
|
|
421,230
|
|
|
|
|
|
|
421,352
|
Intercompany receivables
|
|
|
50,000
|
|
|
11,366
|
|
|
(61,366
|
)
|
|
|
|
Investments and advances in affiliates
|
|
|
142,059
|
|
|
130,811
|
|
|
(142,059
|
)
|
|
|
130,811
|
Property, plant and equipment, net
|
|
|
2,255
|
|
|
442,614
|
|
|
|
|
|
|
444,869
|
Other non-current assets
|
|
|
896
|
|
|
28,901
|
|
|
|
|
|
|
29,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
195,332
|
|
$
|
1,034,922
|
|
$
|
(203,425
|
)
|
|
$
|
1,026,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
|
|
$
|
184,834
|
|
$
|
|
|
|
$
|
184,834
|
Short-term debt, including current portion
|
|
|
|
|
|
398,467
|
|
|
|
|
|
|
398,467
|
Convertible debt
|
|
|
43,659
|
|
|
23,000
|
|
|
|
|
|
|
66,659
|
Other current liabilities
|
|
|
2,718
|
|
|
94,560
|
|
|
|
|
|
|
97,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
46,377
|
|
|
700,861
|
|
|
|
|
|
|
747,238
|
Intercompany payable
|
|
|
11,366
|
|
|
50,000
|
|
|
(61,366
|
)
|
|
|
|
Long-term debt
|
|
|
|
|
|
6,256
|
|
|
|
|
|
|
6,256
|
Other non-current liabilities
|
|
|
122
|
|
|
135,746
|
|
|
|
|
|
|
135,868
|
Stockholders equity
|
|
|
137,467
|
|
|
142,059
|
|
|
(142,059
|
)
|
|
|
137,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
195,332
|
|
$
|
1,034,922
|
|
$
|
(203,425
|
)
|
|
$
|
1,026,829
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING BALANCE SHEET
December 31, 2006
|
|
|
|
|
|
|
|
WPC and
Subsidiary
Guarantors
|
|
WPSC
|
|
Consolidating
and
Eliminating
Entries
|
|
|
WPC
Consolidated
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
$
|
21,842
|
|
$
|
|
|
|
$
|
21,842
|
Trade accounts receivables
|
|
|
|
|
|
138,513
|
|
|
|
|
|
|
138,513
|
Inventories
|
|
|
|
|
|
212,221
|
|
|
|
|
|
|
212,221
|
Other current assets
|
|
|
122
|
|
|
27,789
|
|
|
|
|
|
|
27,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
122
|
|
|
400,365
|
|
|
|
|
|
|
400,487
|
Intercompany receivables
|
|
|
|
|
|
10,778
|
|
|
(10,778
|
)
|
|
|
|
Investments and advances in affiliates
|
|
|
295,914
|
|
|
53,585
|
|
|
(295,914
|
)
|
|
|
53,585
|
Property, plant and equipment, net
|
|
|
2,255
|
|
|
623,955
|
|
|
|
|
|
|
626,210
|
Restricted cash
|
|
|
|
|
|
2,163
|
|
|
|
|
|
|
2,163
|
Other non-current assets
|
|
|
896
|
|
|
39,204
|
|
|
|
|
|
|
40,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
299,187
|
|
$
|
1,130,050
|
|
$
|
(306,692
|
)
|
|
$
|
1,122,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
|
|
$
|
99,536
|
|
$
|
|
|
|
$
|
99,536
|
Short-term debt
|
|
|
|
|
|
110,000
|
|
|
|
|
|
|
110,000
|
Other current liabilities
|
|
|
2,094
|
|
|
115,918
|
|
|
|
|
|
|
118,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,094
|
|
|
325,454
|
|
|
|
|
|
|
327,548
|
Intercompany payable
|
|
|
10,778
|
|
|
|
|
|
(10,778
|
)
|
|
|
|
Long-term debt
|
|
|
|
|
|
254,961
|
|
|
|
|
|
|
254,961
|
Other non-current liabilities
|
|
|
122
|
|
|
147,431
|
|
|
|
|
|
|
147,553
|
Minority interest
|
|
|
|
|
|
106,290
|
|
|
|
|
|
|
106,290
|
Stockholders equity
|
|
|
286,193
|
|
|
295,914
|
|
|
(295,914
|
)
|
|
|
286,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity
|
|
$
|
299,187
|
|
$
|
1,130,050
|
|
$
|
(306,692
|
)
|
|
$
|
1,122,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
Quarter Ended September 30, 2007
|
|
|
|
|
|
|
|
|
WPC and
Subsidiary
Guarantors
|
|
|
WPSC
|
|
|
Consolidating
and
Eliminating
Entries
|
|
|
WPC
Consolidated
|
|
Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
393,028
|
|
|
$
|
|
|
|
$
|
393,028
|
|
Cost of sales
|
|
|
|
|
|
|
409,573
|
|
|
|
|
|
|
|
409,573
|
|
Depreciation and amortization expense
|
|
|
|
|
|
|
9,985
|
|
|
|
|
|
|
|
9,985
|
|
Selling, administrative and general expense
|
|
|
786
|
|
|
|
18,074
|
|
|
|
|
|
|
|
18,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(786
|
)
|
|
|
(44,604
|
)
|
|
|
|
|
|
|
(45,390
|
)
|
Interest expense
|
|
|
(1,941
|
)
|
|
|
(9,568
|
)
|
|
|
658
|
|
|
|
(10,851
|
)
|
Other (loss) income, including equity earnings of affiliates
|
|
|
(53,814
|
)
|
|
|
(347
|
)
|
|
|
54,057
|
|
|
|
(104
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(56,541
|
)
|
|
|
(54,519
|
)
|
|
|
54,715
|
|
|
|
(56,345
|
)
|
Income tax benefit
|
|
|
|
|
|
|
196
|
|
|
|
|
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(56,541
|
)
|
|
$
|
(54,715
|
)
|
|
$
|
54,715
|
|
|
$
|
(56,541
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Quarter Ended September 30, 2006
|
|
|
|
|
|
|
|
|
WPC and
Subsidiary
Guarantors
|
|
|
WPSC
|
|
|
Consolidating
and
Eliminating
Entries
|
|
|
WPC
Consolidated
|
|
Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
482,731
|
|
|
$
|
|
|
|
$
|
482,731
|
|
Cost of sales
|
|
|
|
|
|
|
427,401
|
|
|
|
|
|
|
|
427,401
|
|
Depreciation and amortization expense
|
|
|
|
|
|
|
9,315
|
|
|
|
|
|
|
|
9,315
|
|
Selling, administrative and general expense
|
|
|
1,390
|
|
|
|
19,365
|
|
|
|
|
|
|
|
20,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
(1,390
|
)
|
|
|
26,650
|
|
|
|
|
|
|
|
25,260
|
|
Interest expense
|
|
|
|
|
|
|
(6,788
|
)
|
|
|
|
|
|
|
(6,788
|
)
|
Other income, including equity earnings of affiliates
|
|
|
18,742
|
|
|
|
4,749
|
|
|
|
(18,742
|
)
|
|
|
4,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
17,352
|
|
|
|
24,611
|
|
|
|
(18,742
|
)
|
|
|
23,221
|
|
Income tax provision
|
|
|
|
|
|
|
6,341
|
|
|
|
|
|
|
|
6,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
|
|
|
17,352
|
|
|
|
18,270
|
|
|
|
(18,742
|
)
|
|
|
16,880
|
|
Minority interest
|
|
|
|
|
|
|
472
|
|
|
|
|
|
|
|
472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
17,352
|
|
|
$
|
18,742
|
|
|
$
|
(18,742
|
)
|
|
$
|
17,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
WPC and
Subsidiary
Guarantors
|
|
|
WPSC
|
|
|
Consolidating
and
Eliminating
Entries
|
|
|
WPC
Consolidated
|
|
Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
1,257,726
|
|
|
$
|
|
|
|
$
|
1,257,726
|
|
Cost of sales
|
|
|
|
|
|
|
1,300,129
|
|
|
|
|
|
|
|
1,300,129
|
|
Depreciation and amortizaton expense
|
|
|
|
|
|
|
28,801
|
|
|
|
|
|
|
|
28,801
|
|
Selling, administrative and general expense
|
|
|
3,005
|
|
|
|
59,506
|
|
|
|
|
|
|
|
62,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating loss
|
|
|
(3,005
|
)
|
|
|
(130,710
|
)
|
|
|
|
|
|
|
(133,715
|
)
|
Interest expense
|
|
|
(4,351
|
)
|
|
|
(27,817
|
)
|
|
|
1,625
|
|
|
|
(30,543
|
)
|
Other income including equity earnings of affiliates
|
|
|
(150,670
|
)
|
|
|
6,185
|
|
|
|
150,913
|
|
|
|
6,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(158,026
|
)
|
|
|
(152,342
|
)
|
|
|
152,538
|
|
|
|
(157,830
|
)
|
Income tax benefit
|
|
|
|
|
|
|
196
|
|
|
|
|
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(158,026
|
)
|
|
$
|
(152,538
|
)
|
|
$
|
152,538
|
|
|
$
|
(158,026
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
Nine Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
WPC and
Subsidiary
Guarantors
|
|
|
WPSC
|
|
|
Consolidating
and
Eliminating
Entries
|
|
|
WPC
Consolidated
|
|
Income Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
|
|
|
$
|
1,413,634
|
|
|
$
|
|
|
|
$
|
1,413,634
|
|
Cost of sales
|
|
|
|
|
|
|
1,280,903
|
|
|
|
|
|
|
|
1,280,903
|
|
Depreciation and amortizaton expense
|
|
|
|
|
|
|
26,452
|
|
|
|
|
|
|
|
26,452
|
|
Selling, administrative and general expense
|
|
|
3,885
|
|
|
|
57,945
|
|
|
|
|
|
|
|
61,830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
(3,885
|
)
|
|
|
48,334
|
|
|
|
|
|
|
|
44,449
|
|
Interest expense
|
|
|
|
|
|
|
(19,963
|
)
|
|
|
|
|
|
|
(19,963
|
)
|
Other income including equity earnings of affiliates
|
|
|
28,571
|
|
|
|
11,403
|
|
|
|
(28,571
|
)
|
|
|
11,403
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
24,686
|
|
|
|
39,774
|
|
|
|
(28,571
|
)
|
|
|
35,889
|
|
Income tax provision
|
|
|
115
|
|
|
|
11,459
|
|
|
|
|
|
|
|
11,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interest
|
|
|
24,571
|
|
|
|
28,315
|
|
|
|
(28,571
|
)
|
|
|
24,315
|
|
Minority interest
|
|
|
|
|
|
|
256
|
|
|
|
|
|
|
|
256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
24,571
|
|
|
$
|
28,571
|
|
|
$
|
(28,571
|
)
|
|
$
|
24,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2007
|
|
|
|
|
|
|
WPC and
Subsidiary
Guarantors
|
|
|
WPSC
|
|
|
Consolidating
and
Eliminating
Entries
|
|
|
WPC
Consolidated
|
|
Net cash used in operating activities
|
|
$
|
(418
|
)
|
|
$
|
(37,371
|
)
|
|
$
|
|
|
|
$
|
(37,789
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(21,388
|
)
|
|
|
|
|
|
|
(21,388
|
)
|
Investment and advances to affiliates
|
|
|
|
|
|
|
(36,046
|
)
|
|
|
|
|
|
|
(36,046
|
)
|
Loan to subsidiary
|
|
|
(50,000
|
)
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
5,983
|
|
|
|
|
|
|
|
5,983
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(50,000
|
)
|
|
|
(51,451
|
)
|
|
|
50,000
|
|
|
|
(51,451
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings
|
|
|
50,000
|
|
|
|
79,648
|
|
|
|
(50,000
|
)
|
|
|
79,648
|
|
Change in book overdraft
|
|
|
|
|
|
|
(2,293
|
)
|
|
|
|
|
|
|
(2,293
|
)
|
Issuance of common stock
|
|
|
418
|
|
|
|
|
|
|
|
|
|
|
|
418
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
50,418
|
|
|
|
77,355
|
|
|
|
(50,000
|
)
|
|
|
77,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
|
|
|
|
(11,467
|
)
|
|
|
|
|
|
|
(11,467
|
)
|
Cash and cash equivalents, beginning of period
|
|
|
|
|
|
|
21,842
|
|
|
|
|
|
|
|
21,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
|
|
|
$
|
10,375
|
|
|
$
|
|
|
|
$
|
10,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2006
|
|
|
|
|
|
|
WPC and
Subsidiary
Guarantors
|
|
|
WPSC
|
|
|
Consolidating
and
Eliminating
Entries
|
|
|
WPC
Consolidated
|
|
Net cash used in operating activities
|
|
$
|
|
|
|
$
|
(38,928
|
)
|
|
$
|
|
|
|
$
|
(38,928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
(81,910
|
)
|
|
|
|
|
|
|
(81,910
|
)
|
Change in restricted cash used to fund capital expenditures
|
|
|
|
|
|
|
7,027
|
|
|
|
|
|
|
|
7,027
|
|
Other
|
|
|
|
|
|
|
1,935
|
|
|
|
|
|
|
|
1,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
|
|
|
|
(72,948
|
)
|
|
|
|
|
|
|
(72,948
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net borrowings
|
|
|
|
|
|
|
70,327
|
|
|
|
|
|
|
|
70,327
|
|
Change in book overdraft
|
|
|
|
|
|
|
(10,120
|
)
|
|
|
|
|
|
|
(10,120
|
)
|
Minority interest investment in subsidiary
|
|
|
|
|
|
|
60,000
|
|
|
|
|
|
|
|
60,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by financing activities
|
|
|
|
|
|
|
120,207
|
|
|
|
|
|
|
|
120,207
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
|
|
|
|
|
|
8,331
|
|
|
|
|
|
|
|
8,331
|
|
Cash and cash equivalents, beginning of period
|
|
|
|
|
|
|
8,863
|
|
|
|
|
|
|
|
8,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
|
|
|
$
|
17,194
|
|
|
$
|
|
|
|
$
|
17,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
Item 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
FORWARD-LOOKING STATEMENTS CAUTIONARY LANGUAGE
Certain sections of Managements Discussion and Analysis of
Financial Condition and Results of Operations relate to future events and expectations and, as such, constitute forward-looking statements. These statements often include words such as anticipate, believe,
estimate, expect, intend, plan, project, target, can, could, may, should, will, would or similar
expressions. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to be different form those expressed or implied in the forward-looking
statements. For a discussion of some of the risk factors that may cause such a difference, see Note 17 to the Condensed Consolidated Financial Statements, the disclosures included below under Quantitative and Qualitative Disclosures About Market
Risk, and Item 1, Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.
OVERVIEW
We, through WPSC, our wholly-owned principal operating subsidiary, produce
flat rolled steel products for converters and processors and steel service centers, and the construction, agriculture and container industries. Our product offerings are focused predominantly on higher value-added finished steel products such as
cold rolled products, fabricated products and tin and zinc coated products. Higher value-added products comprised 56.4% of our shipments during the first nine months of 2007. In addition, we produce hot rolled steel products, which represent the
least processed of our finished goods. The commissioning of our Consteel
®
electric arc furnace (EAF), along with the de-commissioning of one of our two blast furnaces, has transformed our
operations from an integrated producer of steel to a hybrid producer with characteristics of both an integrated producer and a mini-mill.
WCC, an
operating division of WPSC, manufactures our fabricated steel products for the construction, agricultural and highway industries. WCC products represented 21.9% of our steel tonnage shipped during the first nine months of 2007. WPSC also has
ownership interests in three significant joint ventures. Wheeling-Nisshin and OCC, which together consumed 16.4% of our steel tonnage shipped during the first nine months of 2007, in the aggregate represented 14.0% of our net sales for the first
nine months of 2007. Wheeling-Nisshin and OCC produce value-added steel products from materials and products primarily supplied by us. MSC owns and operates the coke plant facility that we contributed to it. MSC sells the coke produced by the coke
plant to us and our joint venture partner.
We are engaged in one line of business and operate in one business segment, the production, processing,
fabrication and sale of steel and steel products. Our sales are made to customers, substantially all of which are located in the United States. All of our operating assets are located in the United States.
Prior to August 1, 2003, we were a wholly-owned subsidiary of WHX Corporation. On November 16, 2000, we and eight of our then-existing wholly-owned
subsidiaries, which represented substantially all of our business, filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code, and emerged from bankruptcy on August 1, 2003.
Recent Developments
Operating Loss and Liquidity
We incurred an operating loss of $45.4 million during the third quarter of 2007. At September 30, 2007, $165.9 million was outstanding under our revolving credit
agreement and we had outstanding letters of credit of $25.9 million. At September 30, 2007, we had liquidity and capital resources of $38.6 million, consisting of cash and cash equivalents of $10.4 million and $28.2 million of availability
under our revolving credit facility.
During the nine months ended September 30, 2007, we incurred an unexpected substantial net loss, used a
substantial amount of cash for operating and investing activities and had a working capital deficiency at September 30, 2007. In addition, restrictions in our revolving credit agreement prevent us from making full use of our available inventory
and receivables as eligible collateral. Management anticipates that we may require additional financing in the foreseeable future. Further, based on managements current projected results of operations, it is more likely than not that we will
not be able to comply with the fixed charge coverage ratio covenant under our
23
term loan agreement, as amended, which will become effective again as of April 1, 2008. In the past, we have been able to obtain relief from such
covenants. At this time, however, management cannot assure that it will be able to obtain such covenant relief or that we will be able to improve our results of operations or obtain additional financing. In the event the combination with Esmark is
consummated, the term loan must be paid-off by April 1, 2008 and such covenant would no longer be applicable. Additionally, our independent registered public accounting firm included an explanatory paragraph in its report on the consolidated
financial statements included in our Form 10-K/A for the year ended December 31, 2006 that indicated that there is substantial doubt about our ability to continue as a going concern.
Management expects to resolve these issues through the proposed business combination with Esmark or through other actions. The Esmark combination would provide, as a
result of a planned purchase rights feature, additional liquidity of between $50 and $200 million, depending on the exercise of the planned put rights feature. Additional liquidity may also be available as a result of a new revolving credit facility
which is expected to be entered into by the combined company (New Esmark). In addition, if our operating results improve through higher sales volume and/or pricing, including the sale of products processed from slabs purchased at competitive costs,
or through operating cost or productivity improvements, our need for additional financing could be mitigated. Also, management believes additional financing could be obtained which might include, but not be limited to, (i.) amending our revolving
credit facility to allow for access to additional availability, (ii.) refinancing of our term loan agreement to eliminate or modify the existing financial covenant, (iii.) an equity or rights offering under our existing $125 million shelf
registration statement, (iv.) raising additional capital through a private placement offering, or (v.) the sale of assets. Management cannot, at this time, give any assurance that the proposed combination with Esmark will be approved, that operating
results will improve or that we will be able to obtain additional financing.
Production, Shipments and Pricing
Our EAF produced 298,874 tons of liquid steel during the third quarter of 2007 and our basic oxygen furnace produced 276,759 tons of liquid steel during the third quarter
of 2007, yielding 557,484 tons of steel slab production. During the third quarter of 2007, we purchased 43,540 tons of steel slabs and 18,500 tons of hot and cold-rolled steel coils. Our steel shipments during the third quarter of 2007 totaled
557,809 tons. Steel prices decreased during the third quarter of 2007, with the average per ton selling price of our hot-rolled steel decreasing from $529 per ton in June 2007 to $504 per ton in September 2007.
Raw Materials
Critical raw material inputs, principally iron ore, pig iron and purchased slabs reflected price increases during the third quarter of 2007 as
compared to the second quarter of 2007. The cost of coke, scrap and natural gas decreased during the third quarter of 2007 as compared to the second quarter of 2007.
Credit Arrangements and Covenant Compliance
On October 31, 2007, we amended our revolving credit agreement to
provide for, among other things, access to up to an additional $10.0 million of borrowing availability, provided that there is sufficient excess collateral to support such borrowings. The amendment reinstates access to an additional $10.0 million of
excess collateral, which by previous agreement was reduced by that amount effective October 1, 2007. Such additional access is available through December 14, 2007 or five business days after completion of the combination with Esmark,
whichever occurs first. The amendment also provides authorization for us to complete the Esmark transaction, provided that such transaction occurs on or before November 30, 2007 and requires that substantially all net proceeds from the purchase
and put rights features of the combination be used to repay our revolving credit facility. Upon completion of the combination, the commitment termination date of the agreement would be reset to December 31, 2007. We and Esmark expect to arrange
for permanent financing for New Esmark prior to December 31, 2007 that will replace our current revolving credit agreement and our term loan agreement.
Under the terms of our revolving credit agreement, as amended, we are required to maintain a consolidated fixed charge coverage ratio of at least 1.0:1 (computed based on the four most recently completed quarters) or maintain minimum
borrowing availability of $50.0 million at all times for quarters ending through September 30, 2008 and for periods after October 1, 2008. We were in compliance with the financial covenant under our revolving credit agreement, as amended,
as of September 30, 2007.
24
Under the terms of our term loan agreement, as amended, we are required to maintain a consolidated fixed charge coverage
ratio, effective as of the first day following the end of the period of four consecutive quarters of at least (i) 1.1:1 for quarters ending March 31, 2008 through September 30, 2009, (ii) 1.2:1 for quarters ending
December 31, 2008 through September 30, 2008, and (iii) 1.3:1 for quarters ending December 31, 2009 through June 30, 2010. We were not required to comply with any financial covenant under our term loan agreement, as amended,
as of September 30, 2007.
During the nine months ended September 30, 2007, we incurred an unexpected substantial net loss, used a substantial
amount of cash for operating and investing activities and had a working capital deficiency at September 30, 2007. In addition, restrictions in our revolving credit agreement prevent us from making full use of our available inventory and
receivables as eligible collateral. Management anticipates that we may require additional financing in the foreseeable future. Further, based on managements current projected results of operations, it is more likely than not that we will not
be able to comply with the fixed charge coverage ratio covenant under our term loan agreement, as amended, which will become effective again as of April 1, 2008.
Merger Proposal
On March 16, 2007, we entered into a definitive agreement and plan of merger and combination
with Esmark. On October 22, 2007, the agreement was amended to adjust the timing of the put rights and the purchase rights called for in the agreement so that the exercise and election of such rights occurs prior to the closing of the
combination. As amended, the agreement provides that our stockholders as of the election deadline will have the option to elect to receive one of the following for their shares of our common stock: (1) the right to elect to receive $20.00 per
share in cash (a put right) subject to a maximum of $150.0 million being paid for all exercised put elections; (2) a share for share exchange in the parent company of us and Esmark after the combination (New Esmark) plus a right to
purchase newly issued shares of New Esmark common stock at $19.00 per share (a purchase right) subject to a maximum of $200.0 million worth of New Esmarks common stock (at such $19.00 price) being purchased under the purchase
rights; or (3) a share for share exchange for New Esmark common stock. As a condition to the closing of the combination, Franklin Mutual Advisers, LLC (Franklin) and New Esmark will enter into a standby purchase agreement that will require
Franklin to purchase any of the foregoing unexercised purchase rights (up to a maximum of $200.0 million) and that, in any event, will obligate New Esmark to provide Franklin a minimum of $50.0 million in purchase rights. In each case,
Franklins purchase rights are exercisable at a $19.00 per share price. Both the put and purchase rights elections are subject to pro ration if the elections exceed the specified amounts.
The transactions contemplated by the definitive agreement are subject to stockholder approval at a stockholders meeting scheduled to take place November 27,
2007.
RESULTS OF OPERATIONS
Quarter ended
September 30, 2007 versus quarter ended September 30, 2006
Net sales for the third quarter of 2007 totaled $393.0 million as compared to net
sales of $482.7 million for the third quarter of 2006. Net sales for the third quarter of 2007 included $5.6 million from the sale of excess raw materials and net sales for the third quarter of 2006 included $15.7 million from the sale of coke to
our joint venture partner. Net sales of steel products for the third quarter of 2007 totaled $387.4 million on steel shipments of 557,809 tons, or $695 per ton. Net sales of steel products for the third quarter of 2006 totaled $467.0 million on
steel shipments of 609,730 tons, or $766 per ton. The decrease in net sales was due to a decrease in the average selling price of steel products of $71 per ton, a decrease in sales volume and a decrease in the sale of non-steel products.
Cost of sales for the third quarter of 2007 totaled $409.6 million as compared to cost of sales of $427.4 million for the third quarter of 2006. Cost of sales for the
third quarter of 2007 included the cost of excess raw materials sold of $6.1 million and cost of sales for the third quarter of 2006 included the cost of coke sold of $14.1million.
Cost of sales of steel products sold during the third quarter of 2007 totaled $403.5 million, or $723 per ton. Cost of sales of steel products sold during the third quarter of 2006 totaled $413.3 million, or $678 per
ton. The overall decrease in the cost of steel products sold of $9.8 million resulted principally from an increase in the cost of steel products sold of $45 per ton, offset by a decrease in sales volume. The increase in the per ton cost to produce
steel
25
products resulted principally from a decrease in volume, costs associated with a planned outage in July 2007 and changes in the cost of certain raw materials
and fuels used in our steelmaking process. The cost of iron ore and pig iron increased during the third quarter of 2007 as compared to the third quarter of 2006, offset, in part, by a decrease in the cost of coke during the third quarter of 2007 as
compared to the third quarter of 2006.
Depreciation expense for the third quarter of 2007 amounted to $10.0 million as compared to $9.3 million for the
third quarter of 2006.
Selling, general and administrative expense for the third quarter of 2007 amounted to $18.9 million as compared to $20.8 million
for the third quarter of 2006. Selling, general and administrative costs decreased principally due to a decrease in real and personal property taxes resulting from changes in local tax law and the deconsolidation of MSC.
Interest expense for the third quarter of 2007 amounted to $10.9 million as compared to $6.8 million for the third quarter of 2006. Average indebtedness outstanding for
the third quarter of 2007 approximated $467.6 million as compared to $398.6 million for the third quarter of 2006, and the average rate of interest on all debt outstanding approximated 7.7% during the third quarter of 2007 as compared to 6.8% during
the third quarter of 2006. Interest expense increased due to an increase in the amount of debt outstanding, an increase in the average rate of interest on debt outstanding and the amortization of debt discount on convertible debt during the third
quarter of 2007 as compared to the third quarter of 2006.
Other loss for the third quarter of 2007 totaled $0.1 million as compared to other income of
$4.7 million for the third quarter of 2006. Other income consists primarily of equity earnings from affiliates and interest and other income. Equity earnings from affiliates decreased $4.4 million during the third quarter of 2007 as compared to the
third quarter of 2006. Interest and other income decreased $0.4 million during the third quarter of 2007 as compared to the third quarter of 2006, principally due to the deconsolidation of MSC.
A provision for income taxes of $0.2 million was provided during the third quarter of 2007 resulting from a return-to-accrual adjustment related to the year ended
December 31, 2006. Otherwise, no benefit for income taxes was provided during the third quarter of 2007 as it was not more likely than not that the tax benefit associated with the losses incurred would result in a reduction of future income
taxes payable. The provision for income taxes for the third quarter of 2006 totaled $6.3 million.
As of January 1, 2007, the accounts of MSC were no
longer included in our consolidated financial statements. As a result, no minority interest was recorded during the third quarter of 2007. The minority interest in the loss of MSC for the third quarter of 2006 totaled $0.5 million.
The net loss for the third quarter of 2007 amounted to $56.5 million as compared to net income of $17.4 million for the third quarter of 2006. The basic and diluted loss
per share was $3.68 for the third quarter of 2007 as compared to basic and diluted earnings per share of $1.18 and $1.16 for the third quarter of 2006, respectively.
Nine months ended September 30, 2007 versus nine months ended September 30, 2006
Net sales for the nine
months ended September 30, 2007 totaled $1,257.7 million as compared to net sales of $1,413.6 million for the nine months ended September 30, 2006. Net sales for the nine months ended
September 30, 2007 included $5.6 million from the sale of excess raw materials and net sales for the nine months ended September 30, 2006 included $45.5 million from the
sale of coke to our joint venture partner. Net sales of steel products for the nine months ended September 30, 2007 totaled $1,252.1 million on steel shipments of 1,846,294 tons, or $678 per ton. Net sales of steel products for the nine months
ended September 30, 2006 totaled $1,368.1 million on steel shipments of 1,898,342 tons, or $721 per ton. The decrease in net sales was due to a decrease in the average selling price of steel products of $43 per ton, a decrease in sales volume
and a decrease in the sale of non-steel products.
Cost of sales for the nine months ended September 30, 2007 totaled $1,300.1 million as compared to
cost of sales of $1,280.9 million for the nine months ended September 30, 2006. Cost of sales for the nine months ended September 30, 2007 included the cost of excess raw materials sold of $6.1 million and was reduced by insurance
26
recoveries of $9.5 million related to prior year claims. Cost of sales for the nine months ended September 30, 2006 included the cost of coke sold of
$38.8 million and was reduced by insurance recoveries of $7.9 million related to prior year claims.
Cost of sales of steel products sold during the nine
months ended September 30, 2007 totaled $1,303.5 million, or $706 per ton. Cost of sales of steel products sold during the nine months ended September 30, 2006 totaled $1,250.0 million, or $658 per ton. The overall increase in the cost of
steel products sold of $53.5 million resulted principally from an increase in the cost of steel products sold of $48 per ton, offset by a decrease in sales volume. The increase in the per ton cost to produce steel products resulted principally from
a decrease in volume, planned and unplanned outages during 2007 and from changes in the cost of certain raw materials and fuels used in our steelmaking process. The cost of iron ore, scrap, pig iron and zinc increased during the nine months ended
September 30, 2007 as compared to the nine months ended September 30, 2006, offset, in part, by a decrease in the cost of natural gas during the nine months ended September 30, 2007 as compared to the nine months ended
September 30, 2006. We also incurred $1.7 million in charges related to severance costs during the nine months ended September 30, 2007.
Depreciation expense for the nine months ended September 30, 2007 amounted to $28.8 million as compared to $26.5 million for the nine months ended September 30, 2006.
Selling, general and administrative expense for the nine months ended September 30, 2007 amounted to $62.5 million as compared to $61.8 million for the nine months ended September 30, 2006. Selling, general
and administrative costs increased principally due to an increase of $2.9 million in severance costs during the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006, offset by a decrease in
share-based compensation and a reduction in real and personal property taxes resulting from changes in local tax law and the deconsolidation of MSC.
Interest expense for the nine months ended September 30, 2007 amounted to $30.5 million as compared to $20.0 million for the nine months ended September 30, 2006. Average indebtedness outstanding for the nine months ended
September 30, 2007 approximated $441.6 million as compared to $396.0 million for the nine months ended September 30, 2006, and the average rate of interest on all debt outstanding approximated 7.3% during the nine months ended
September 30, 2007 as compared to 6.7% during the nine months ended September 30, 2006. Interest expense increased due to an increase in the amount of debt outstanding, an increase in the average rate of interest on debt outstanding and
the amortization of debt discount on convertible debt during the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006. Interest expense for the nine months ended September 30, 2007 also included
a $1.5 million charge for costs incurred in connection with a product financing arrangement.
Other income for the nine months ended September 30,
2007 totaled $6.4 million as compared to $11.4 million for the nine months ended September 30, 2006. Other income consists primarily of equity earnings from affiliates and interest and other income. Equity earnings from affiliates decreased
$4.0 million during the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006. Interest and other income decreased $1.0 million during the nine months ended September 30, 2007 as compared to the
nine months ended September 30, 2006, principally due to the deconsolidation of MSC.
A provision for income taxes of $0.2 million was provided during
the third quarter of 2007 resulting from a return-to-accrual adjustment related to the year ended December 31, 2006. Otherwise, no benefit for income taxes was provided during the nine months ended September 30, 2007 as it was not more
likely than not that the tax benefit associated with the losses incurred would result in a reduction of future income taxes payable. The provision for income taxes for the nine months ended September 30, 2006 totaled $11.6 million.
As of January 1, 2007, the accounts of MSC were no longer included in our consolidated financial statements. As a result, no minority interest was recorded
during the nine months ended September 30, 2007. The minority interest in the loss of MSC for the nine months ended September 30, 2006 totaled $0.3 million.
27
The net loss for the nine months ended September 30, 2007 amounted to $158.0 million as compared to net income of
$24.6 million for the nine months ended September 30, 2006. The basic and diluted loss per share was $10.31 for the nine months ended September 30, 2007 as compared to basic and diluted earnings per share of $1.68 and $1.66 for the nine
months ended September 30, 2006, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow from Operating Activities
During the nine months ended September 30, 2007, we used $37.8 million of
cash flow from operating activities, consisting of a net loss of $158.0 million, offset by non-cash items of $38.4 million, a $79.6 million decrease in working capital and a $2.2 million change in non-current items.
Working capital decreased as the result of a $107.2 million increase in accounts payable, a $20.8 million increase in other current liabilities and a $14.1 million
decrease in other current assets, offset by a $23.7 million increase in accounts receivable and a $38.8 million increase in inventory at September 30, 2007 as compared to December 31, 2006. Accounts payable increased principally due to our
obtaining payment terms on scrap purchases from our new scrap suppliers, terms on purchased slabs and coils and an increase in raw material purchases during September 2007 as compared to December 2006. Other current liabilities increased principally
as the result of an increase in accrued severance costs and other payroll costs at September 30, 2007 as compared to December 31, 2006 and a $7.1 million obligation related to the settlement of an unfavorable sales contract. Other current
assets decreased as a result of the receipt of a business interruption claim accrued at December 31, 2006 and received during the first quarter of 2007 and a decrease in prepaid raw material balances. Accounts receivable increased principally
due to an increase in sales for September 2007 as compared to December 2006. Inventory increased principally due to an increase in scrap inventory during the nine months ended September 30, 2007, principally as a result of the termination of
our previous scrap supply agreement which provided for vendor stocking of this raw material and an increase in slab inventory.
During the nine months
ended September 30, 2006, we used $38.9 million in cash flow from operating activities consisting of $121.5 million from changes in working capital, offset by net income of $24.6 million, non-cash items of $51.5 million and a $6.5 million
change in non-current items.
Cash Flow from Investing Activities
During the nine months ended September 30, 2007, capital expenditures used $21.4 million in cash flow, investments in affiliates used $24.9 million in cash flow, cash transferred to MSC upon deconsolidation used
$11.2 million in cash flow and other investing activities provided $6.0 million in cash flow.
During the nine months ended September 30, 2006,
capital expenditures and changes in restricted cash used to fund capital expenditures used $74.8 million in cash flow and other investing activities provided $1.9 million in cash flow.
Cash Flow from Financing Activities
During the nine months ended September 30, 2007, net borrowings, including
book overdrafts, provided $77.4 million in cash flow and the issuance of common stock provided $0.4 million in cash flow.
During the nine months ended
September 30, 2006, the minority interest in MSC provided $60.0 million in cash flow and net borrowings, including book overdrafts, provided $60.2 million in cash flow.
Liquidity and Capital Resources
Liquidity is provided under our amended and restated $225.0 million revolving credit
facility. At September 30, 2007, we had liquidity and capital resources of $38.6 million, consisting of cash and cash equivalents of $10.4 million and $28.2 million of availability under our revolving credit facility.
Liquidity and capital resources decreased by $4.9 million during the nine months ended September 30, 2007. As a result of amendments to our revolving credit
facility during 2007, our borrowing availability increased by $45.0
28
million. This increase was offset by an increase in borrowings and letters of credit outstanding under our revolving credit facility of $49.7 million and a
decrease in cash and cash equivalents of $0.2 million. Borrowings under our revolving credit facility increased principally due to cash flow used in operating and investing activities, including capital expenditures and capital contributions to MSC.
Under the terms of our amended and restated revolving credit facility, we are obligated to meet a consolidated fixed charge coverage ratio of 1.0:1
(computed based on the four most recently completed calendar quarters). If we meet the consolidated fixed charge coverage ratio at the end of the preceding quarter, we are not required to maintain any amount of minimum borrowing availability during
the succeeding quarter.
If we fail to meet the consolidated fixed charge coverage ratio at the end of the preceding quarter, we are required to maintain
minimum borrowing availability of $50.0 million at all times during the succeeding quarter. However, if the consolidated fixed charge coverage ratio is not met at the end of the preceding quarter, we are allowed to access excess collateral, if
available, as additional borrowing availability under the revolving credit agreement. Such excess collateral, if available, is limited to $50.0 million through December 14, 2007 or five business days after our combination with Esmark, whichever
occurs first, $40.0 million during the remaining portion of 2007, with such $40.0 million amount decreasing by $5.0 million per quarter thereafter through the third quarter of 2008 with no access to excess collateral being available after
November 1, 2008.
At September 30, 2007, $165.9 million was outstanding under our revolving credit agreement and we had outstanding letters of
credit of $25.9 million. As of September 30, 2007, we failed to meet the consolidated fixed charge coverage ratio of 1.0:1. We were in compliance with the financial covenant under our amended and restated revolving credit facility as of
September 30, 2007 as a result of maintaining minimum borrowing availability of $50.0 million. As a result, we will be required to maintain $50.0 million of minimum borrowing availability during the fourth quarter of 2007 and our maximum
borrowing capacity under the facility, including outstanding letters of credit, will be limited to $225.0 million through December 14, 2007 or five business days after our combination with Esmark, whichever occurs first, and will be limited to
$215.0 million for the remaining portion of 2007.
At October 31, 2007, $150.0 million was outstanding under our revolving credit agreement and we had
outstanding letters of credit of $25.2 million. At October 31, 2007, we had estimated liquidity and capital resources of $53.8 million, consisting of cash and cash equivalents of $4.5 million and $49.3 million of estimated availability under
our revolving credit facility.
Under the terms of our term loan agreement, as amended, we are required to meet a consolidated fixed charge coverage ratio
commencing with the second quarter of 2008 and for all quarters thereafter.
If an event of default results in the acceleration of our amended and restated
revolving credit agreement or our term loan agreement, as amended, such event will also result in the acceleration of substantially all of our other indebtedness pursuant to cross-default or cross-acceleration provisions.
Management anticipates that unless our operating results are better than currently forecast, we may require additional liquidity in the foreseeable future. Additionally,
our independent registered public accounting firm included an explanatory paragraph in its report on the consolidated financial statements included in our Form 10-K/A for the year ended December 31, 2006 that indicated that there is substantial
doubt about our ability to continue as a going concern. This situation could be mitigated if operating results improve as a result of higher sales volume and/or pricing, including the sale of purchased slabs at competitive costs, or through
operating cost or productivity improvements. Also, additional financing might include, but not be limited to, (i.) the proposed combination of us with Esmark, (ii.) amending our revolving credit facility to allow for access to additional
availability, (iii.) refinancing of our term loan agreement to eliminate or modify the existing financial covenant, (iv.) an equity or rights offering under our existing $125 million shelf registration statement, (v.) raising additional capital
through a private placement offering, or (vi.) the sale of assets. Management cannot, at this time, give any assurance that the proposed combination with Esmark will be approved, that operating results will improve or that we will be able to obtain
additional financing.
29
Management does not believe, after consultation with legal counsel, that a material adverse effect has occurred under our
loan agreements due to (i.) recent losses, (ii.) the going concern modification included as an explanatory paragraph in our independent registered public accounting firms opinion, and/or (iii.) our probable non-compliance with the fixed charge
coverage ratio under the term loan agreement, as amended, which will become effective again as of April 1, 2008. However, there can be no assurance that the lenders under our loan agreements will not determine that one or more of these
developments, alone or in combination with future developments, constitute a material adverse effect under our loan agreements. Such a determination would restrict our ability to borrow under our revolving credit facility and adversely affect our
liquidity and financial position. Additionally, management believes, after consultation with legal counsel, that no event of default has occurred due to the going concern modification included as an explanatory paragraph in our independent
registered public accounting firms opinion.
The terms of our revolving credit facility and other significant debt obligations are discussed more
fully below.
$250 Million Term Loan Agreement
In
August 2003, WPSC entered into a $250.0 million senior secured term loan agreement due August 1, 2014 with a bank group led by Royal Bank of Canada as administrative agent, which is guaranteed, in part, by the Emergency Steel Loan Guarantee
Board (Loan Board) and the West Virginia Housing Development Fund as described below. However, if the agent for the term loan lenders is unable or unwilling, in its sole discretion, to re-offer certain tranches of the term loan as of
November 1, 2008, the maturity date for each tranche of the term loan will be November 1, 2008. The agent is required to provide us notice on or before May 1, 2008 as to whether it will undertake to re-offer certain tranches of the
term loan. If the agent does not re-offer such tranches, we must repay an amount equal to all outstanding amounts under the term loan agreement on August 1, 2008.
Effective March 16, 2007, the term loan agreement was amended to waive compliance with the requirement to maintain minimum borrowing availability of $50.0 million at all times or to maintain a minimum fixed
charge coverage ratio. The agreement was further amended to eliminate the leverage and interest coverage ratios for the duration of the agreement. In place of these covenants, a standalone fixed charge coverage ratio will take effect as of
April 1, 2008 and for each quarter thereafter. To effect the amendment, we agreed to use the proceeds from the issuance of $50.0 million of convertible debt to make a principal prepayment of $37.5 million under our term loan agreement,
representing satisfaction of the next six quarterly principal payments due under the term loan agreement and to use the remaining proceeds for general corporate purposes. We also agreed to amend the existing $12.5 million standby letter of credit,
previously posted in favor of the term loan lenders, to $11.0 million to cover interest payment obligations to April 1, 2008. The letter of credit will decline as such interest payments are made. The term loan lenders and Loan Board also agreed
to waive the excess cash flow mandatory repayment provisions of the agreement, increase the annual amount of permitted capital expenditures for 2007 and 2008, increase the amount of permitted indebtedness, and provide various administrative
amendments with regard to activities related to MSC. The amendment also provides authorization for us to complete the Esmark transaction. As part of the amendment, we also agreed, subject to consummation of the combination with Esmark, to repay or
refinance the term loan in full on the later of April 1, 2008 or the date of such consummation and to release the Loan Board of any further obligation under the Federal guarantee as well as the West Virginia Housing Development Fund, the State
guarantor, of any further obligation under the state guarantee. In the event that the combination with Esmark is not consummated, we agreed to change the final maturity date of the loan from August 1, 2014 to August 1, 2010.
Interest on borrowings is calculated based on either LIBOR or the prime rate using varying spreads as defined for each of the three tranches in the agreement. The
blended rate of interest was approximately 6.5% at September 30, 2007. At September 30, 2007, $149.9 million was outstanding under the term loan. The term loan, as amended, is payable in quarterly installments of $6.25 million, commencing
with the third quarter of 2008. However, we are obligated to make a final payment to the agent of the outstanding balance of the term loan on August 1, 2008 if such loan is not re-offered. Additionally, subject to consummation of the
combination with Esmark, we are obligated to repay or refinance the term loan in full on the later of April 1, 2008 or the date of such consummation.
Pursuant to the provisions of our term loan agreement, we are subject to, and are currently in compliance with, various covenants, including compliance with the terms and conditions of the guarantee of the Loan Board and the
30
related guarantee of the West Virginia Housing Development Fund, limitations on indebtedness, guarantee obligations, liens, sales of subsidiary stock,
dividends, distributions and investments.
The amended term loan agreement also limits our ability to incur certain capital expenditures, including
obligations under capital leases and capitalized repairs and replacements, not to exceed in the aggregate specified maximums for each calendar year.
$225 Million Revolving Credit Facility
In July 2005, we entered into an amended and restated revolving credit facility with a bank group
arranged by Royal Bank of Canada and General Electric Capital Corporation. The new credit facility amended and restated our $225.0 million revolving credit facility entered into in August 2003, which was scheduled to mature on August 1, 2006.
The amended and restated revolving credit facility, among other things, extended the maturity date to July 8, 2009, increased borrowing availability and lowered borrowing costs.
On March 16, 2007, the revolving credit agreement was amended to allow us to access collateral in excess of the $225.0 million commitment under the facility. If the minimum fixed charge coverage ratio is not met
by us at the end of any quarter and excess collateral, as defined by the agreement, is available, we will be able to access up to $45.0 million of such excess collateral as additional borrowing availability over and above the $225.0 million
commitment amount and we will be required to maintain at least $50.0 million of borrowing availability at all times. The incremental amount of borrowing availability of up to $45.0 million will decrease by $5.0 million each quarter commencing with
the fourth quarter of 2007 through the third quarter of 2008, and will be limited, thereafter, to up to $25.0 million through, but not beyond, November 1, 2008. On that date and thereafter, the previous requirement that we maintain minimum
borrowing availability of $50.0 million at all times without access to collateral beyond the $225.0 million amount of the facility, or to maintain a minimum fixed charge coverage ratio, will again be applicable. As a result, we will be able to
access up to $40.0 million of such excess collateral as additional borrowing availability over and above the $225.0 million commitment amount through the fourth quarter of 2007. Provided that sufficient collateral will support such borrowings, we
will be permitted to borrow up to $215.0 million under the facility during the fourth quarter of 2007 and at reduced amounts thereafter. The amendment also provided for lender approval for the issuance of $50.0 million of convertible debt and an
increase in the annual amount of permitted capital expenditures.
On May 9, 2007, the revolving credit agreement was further amended to allow us to
access an additional $5.0 million of collateral in excess of the $225.0 million commitment under the facility through the third quarter of 2007.
On
October 31, 2007, we amended our revolving credit agreement to provide for, among other things, access to up to an additional $10.0 million of borrowing availability, provided that there is sufficient excess collateral to support such
borrowings. The amendment reinstates access to an additional $10.0 million of excess collateral, which by previous agreement was reduced by that amount effective October 1, 2007. Such additional access is available through December 14,
2007 or five business days after completion of the combination with Esmark, whichever occurs first. The amendment also provides authorization for us to complete the Esmark transaction, provided that such transaction occurs on or before
November 30, 2007 and requires that substantially all net proceeds from the purchase and put rights features of the combination be used to repay our revolving credit facility. Upon completion of the combination, the commitment termination date
of the agreement would be reset to December 31, 2007. We and Esmark expect to arrange for permanent financing for New Esmark prior to December 31, 2007 that will replace our current revolving credit agreement and our term loan agreement.
Interest on borrowings is calculated based on either LIBOR or the prime rate using spreads based on facility borrowing availability as defined in the
agreement. The blended rate of interest was approximately 7.7% at September 30, 2007. At September 30, 2007, $165.9 million was outstanding under our revolving credit agreement, and we had outstanding letters of credit of $25.9 million.
Convertible Debt
On March 16, 2007, we issued
convertible notes in the amount of $50,000 to certain institutional investors and certain stockholders of us and Esmark, as well as to affiliates of James P. Bouchard, our Chairman and Chief Executive Officer, and Craig T. Bouchard, our Vice
Chairman. The notes are convertible into our common stock
31
upon consummation of a proposed business combination between us and Esmark at a price of $20.00 per share. If the proposed combination with Esmark is not
consummated, the notes are convertible, at the option of the holders, into our common stock at any time after December 31, 2007 at an adjusted, fair value conversion price that will not be more than $20.00 per share or less than $15.00 per
share. The convertible notes are otherwise payable on November 15, 2008, subject to limitations in our term loan agreement and revolving credit facility, and accrue interest at an annual rate of 6%, payable quarterly in arrears. If the notes
are not converted into our common stock prior to January 1, 2008, interest is retroactively adjusted from the issuance date to 9% per annum. In June 2007, we adjusted the conversion price on $5,000 of these convertible notes to a fixed
amount of $24.51, retroactively to March 16, 2007.
On May 8, 2007, we issued $23.0 million of senior unsecured exchangeable promissory notes in
a private placement to certain unrelated institutional investors. Pursuant to the terms of the notes, the notes are exchangeable into the common stock of New Esmark upon consummation of a combination of us and Esmark at a price of $20.00
per share, or, if not consummated, the notes are payable in cash on November 15, 2008. Interest is payable in cash at an annual rate of 6%, payable quarterly in arrears. In the event that the combination is not consummated by January 1,
2008 or extended under the terms of the notes, the annual rate of interest will increase to 14% computed retroactively to the issuance date.
$40
Million Series A Notes
In August 2003, WPSC issued Series A secured notes in the aggregate principal amount of $40.0 million in settlement of claims
under our bankruptcy proceedings. The Series A notes were issued under an indenture among WPSC, us, WP Steel Venture Corporation and The Bank of New York Mellon, the successor trustee to J. P. Morgan Trust Company, National Association and Bank One,
N.A., respectively The Series A notes mature on August 1, 2011 and have no fixed amortization, meaning that except for mandatory prepayments, based on excess cash flow or proceeds from the sale of certain joint venture interests, no payment of
principal shall be required until such notes become due. The Series A notes bear interest at a rate of 5% per annum until August 1, 2008. Thereafter, such notes bear interest at a rate of 8% per annum. In the event that at any time
the distributions from Wheeling-Nisshin and OCC to WPSC are not adequate to pay all of the interest then due under the Series A notes or WPSC is not in compliance with the terms of the term loan agreement or revolving credit facility, WPSC must
pay both cash interest and payment-in-kind interest at rates set forth in the Series A notes. OCC is restricted from declaring dividends under the terms of its credit agreement with Bank of America, N.A. However, OCC is permitted to make
distributions of interest and principal in respect of its indebtedness to us, subject to certain limitations set forth in its credit agreement and its subordination agreement. We are subject to, and are currently in compliance with, various
covenants set forth in the Series A note indenture, including payment of principal and interest on the Series A notes, and limitations on additional indebtedness, creation of liens, disposition of interests in Wheeling-Nisshin or OCC, and payments
of dividends and distributions.
$20 Million Series B Notes
In August 2003, WPSC issued Series B secured notes in the aggregate principal amount of $20.0 million in settlement of claims under our bankruptcy proceedings. The Series B notes were issued under an indenture among WPSC, us, WP Steel
Venture Corporation and The Bank of New York Mellon, the successor trustee to J. P. Morgan Trust Company, National Association, and Bank One, N.A., respectively. The Series B notes mature on August 1, 2010 and have no fixed amortization,
meaning that no payment of principal shall be required until such notes become due. The Series B notes bear interest at a rate of 6% per annum to the extent interest is paid in cash. In the event that WPSC is not in compliance with the terms of
the term loan agreement, the revolving credit facility or the Series A notes or WPSCs excess cash flow (as defined in the Series B indenture) is insufficient to cover any or all interest payments then due under the Series B notes, WPSC
must pay both cash interest and payment-in-kind interest at rates set forth in the Series B notes. We are subject to, and are currently in compliance with, various covenants under the Series B note indenture, which are substantially similar to many
of those contained in the Series A note indenture.
$10 Million Unsecured Note
In August 2003, WPSC issued an unsecured note in the aggregate principal amount of $10.0 million to WHX Corporation. In July 2004, the WHX note was sold by WHX to a third party. The unsecured note bears interest at
32
6% per annum, matures in 2011 and has no fixed amortization, meaning that no payment of principal shall be required until such note becomes due. If cash
interest is not paid, WPSC must pay payment-in-kind interest. Such note is subordinated in right of payment to our credit agreements, the Series A notes and the Series B notes.
OFF-BALANCE SHEET ARRANGEMENTS
As of September 30, 2007, we had no off-balance sheet transactions,
arrangements, or other relationships with unconsolidated entities or persons that are reasonably likely to adversely affect liquidity, availability of capital resources, financial position or results of operations. Our investments in six of our
joint ventures, Wheeling-Nisshin, OCC, MSC, Feralloy, Jensen Bridge and Avalon, are each accounted for under the equity method of accounting. Pursuant to agreements with Wheeling-Nisshin and OCC, we have an obligation to support their working
capital requirements. However, we believe it is unlikely that those joint ventures will require our working capital support in the foreseeable future based upon the present financial condition, capital resource needs and/or operations of these
entities.
CONTRACTUAL OBLIGATIONS
As of
September 30, 2007, the total of our future contractual obligations, including the repayment of debt obligations, is summarized below.
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|
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Contractual Payments Due
(Dollars in millions)
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Total
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Remainder
of 2007
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2008 to
2009
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|
2010 to
2011
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Thereafter
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Long-term debt
|
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$
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299.9
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(1)
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$
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2.1
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$
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225.7
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$
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72.1
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$
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Interest on long-term debt
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|
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47.3
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(2)
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5.6
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|
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35.2
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|
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6.5
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Capital leases
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|
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5.6
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(3)
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|
|
0.1
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|
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1.7
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|
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1.4
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|
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2.4
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Long-term operating leases
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|
|
18.2
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|
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1.0
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|
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6.8
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|
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5.3
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|
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5.1
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Other long term liabilities:
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Steelworker Pension Trust
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|
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11.2
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(4)
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|
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3.0
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|
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8.2
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OPEB
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|
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27.8
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(5)
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|
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1.2
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|
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11.7
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|
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14.9
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|
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Coal miner retiree medical
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|
|
1.5
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|
|
|
|
|
|
0.2
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|
|
0.1
|
|
|
1.2
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Workers compensation
|
|
|
24.6
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(6)
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|
|
1.4
|
|
|
11.6
|
|
|
11.6
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|
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Purchase commitments:
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|
|
|
|
|
|
|
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Oxygen supply
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|
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86.0
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(7)
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|
|
2.7
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|
|
20.0
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|
|
23.2
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|
|
40.1
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Electricity
|
|
|
78.1
|
(8)
|
|
|
1.9
|
|
|
15.0
|
|
|
14.0
|
|
|
47.2
|
Coal
|
|
|
2.1
|
(9)
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
Capital commitments
|
|
|
12.9
|
(10)
|
|
|
4.4
|
|
|
8.5
|
|
|
|
|
|
|
Capital contribution - MSC
|
|
|
0.8
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
616.0
|
|
|
$
|
25.5
|
|
$
|
345.4
|
|
$
|
149.1
|
|
$
|
96.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.
|
Represents scheduled principal payments on existing indebtedness (excluding short-term debt), without giving consideration to the reclassification of certain long-term debt as
current obligations as discussed in Note 15.
|
2.
|
Represents estimated interest payments on existing long-term debt, including amortization of debt discount of $6.3 million on convertible debt.
|
3.
|
Represents scheduled principal payments on existing capital lease obligations.
|
4.
|
Amount represents estimated payments to the Steelworkers Pension Trust, pursuant to our labor agreement with the USW, through the end of the labor contract, which expires on
September 1, 2008.
|
5.
|
Amounts reflect our current estimate of corporate cash outflows for other post employment benefits and includes the impact of assumed mortality, medical inflation and the aging
of the population. No estimate has been made beyond 2011.
|
6.
|
Amounts reflect our current estimate of corporate cash outflows for workers compensation and excludes the impact of interest and mortality. The forecast of cash outflows is
estimated based on historical cash payment information. No estimate has been made beyond 2011.
|
33
7.
|
We entered into a 15-year take-or-pay contract in 1999 that was amended in 2003. The contract requires us to purchase oxygen, nitrogen and argon each month with a minimum monthly
charge of approximately $0.7 million, subject to escalation clauses.
|
8.
|
We entered into a 20-year take-or-pay contract in 1999, which was amended in 2003. The contract requires us to purchase steam and electricity each month or pay a minimum monthly
charge of approximately $0.5 million, subject to increases for inflation, and a variable charge calculated at a minimum of $3.75 times the number of tons of iron produced each month with an agreed-to minimum of 3,250 tons per day, regardless of
whether any tons are produced. At September 30, 2007, a maximum termination payment of $27.7 million would have been required to terminate the contract.
|
9.
|
In 2004, we amended our contract to purchase coal each month to a minimum monthly charge of approximately $0.7 million. The term of the contract expires on December 31,
2007.
|
10.
|
Amounts reflect contractual commitments for capital expenditures as of September 30, 2007.
|
Planned Capital Expenditures
Currently, our planned capital expenditures for the three-year period 2007 through 2009
total approximately $147.1 million. Major capital expenditures for the three-year period 2007 through 2009 include, but are not limited to, the following capital projects:
|
|
$69.6 million for improvements to our primary production facility;
|
|
|
$36.3 million for improvements of our finishing facilities;
|
|
|
$4.2 million for improvements of our corrugating facility; and
|
|
|
$28.1 million for environmental projects.
|
For the
nine months ended September 30, 2007, we spent $21.4 million on capital expenditures and we expect to spend approximately $3.6 million on capital expenditures during the remaining portion of 2007.
VEBA TRUST AND PROFIT SHARING PLANS
Below are summaries of our
contribution obligations to the Wheeling-Pittsburgh Steel Corporation Retiree Benefits Plan Trust (VEBA trust) and our two profit sharing plans, one for our USW-represented employees and the other for our salaried employees, excluding our officers.
Our future obligations, if any, to the VEBA trust and these plans are subject to and based on the level of our profitability (as described below) for each completed quarter. In addition, we have discretion, to the extent provided by the terms of the
agreement establishing the VEBA trust and the terms of the profit sharing plans, to satisfy some or all of our funding obligations with shares of our common stock or cash.
During the nine months ended September 30, 2007, we incurred no VEBA or profit sharing obligation.
VEBA Trust
In connection with our plan of reorganization and our collective bargaining agreement with the USW, we established a plan to provide health care and life
insurance benefits to certain retirees and their dependents. The collective bargaining agreement also required us to create and make contributions to a trust to fund the payment of these retiree benefits. The VEBA trust is designed to constitute a
tax-exempt voluntary employee beneficiary association under Section 501(c)(9) of the Internal Revenue Code. The agreement provides for contributions based on our profitability, payable within 45 days of the end of each fiscal quarter, under the
following formula (collectively, the Variable Contributions):
(i)
|
40% of operating cash flow, between $16 and $24 of operating cash flow per ton of steel products sold to third parties, payable in cash;
|
(ii)
|
12% of operating cash flow, between $24 and $65 of operating cash flow per ton of steel products sold to third parties, payable at our discretion in cash or common stock of WPC;
|
34
(iii)
|
25% of operating cash flow, above $65 of operating cash flow per ton of steel products sold to third parties, payable in cash; and
|
(iv)
|
15% of operating cash flow below $30 of operating cash flow per ton of steel products sold to third parties, payable at our discretion in cash or common stock of WPC, subject to
compliance with dilution limitations.
|
Upon establishment of the plan, we contributed 4,000,000 shares of common stock to the VEBA trust
(Initial Shares). Of these shares, 2,000,000 shares of common stock were designated as being creditable against any future contributions due under clause (ii) of the Variable Contribution formula described above to the extent that we elect to
make the variable contribution in our common stock. The number of creditable shares of common stock was subsequently reduced from 2,000,000 shares to 1,600,000 shares as the result of the sale by the VEBA trust of an aggregate of 400,000
shares in 2004. As of September 30, 2007, 1,289,158 shares of common stock remain creditable to reduce future contributions of common stock due under clause (ii) of the Variable Contributions formula described above. The number of shares
of our common stock creditable against contributions due under clause (ii) of the Variable Contribution formula is determined by dividing the amount of the contribution due by the average closing price of our common stock for the 10 trading
days immediately preceding the date the contribution is due.
In the event that we do not contribute a total of 400,000 shares of common stock to the VEBA
trust under clause (ii) of the Variable Contribution formula described above by February 14, 2008, we are required to contribute 400,000 shares of our common stock to the VEBA trust, minus any shares of our common stock contributed prior
to that date, no later than February 14, 2008. Any shares of common stock contributed to the VEBA in February 2008 will be creditable shares as discussed above.
Operating cash flow, for purposes of determining Variable Contributions, is defined as our earnings before interest and taxes, adjusted for certain amounts as set forth in the agreement with the USW
(primarily unusual, extraordinary or non-recurring items).
During the nine months ended September 30, 2007, no variable contributions were incurred.
Pursuant to a Stock Transfer Restriction and Voting Agreement, the trustee of the VEBA trust has agreed to limit the number of shares of WPC common stock
that it may sell during the four years following the effective date of our plan of reorganization. During each of the two years following August 1, 2005, the VEBA trust has agreed not to sell more than 50% of the remaining Initial Shares within
any consecutive 12-month period. These restrictions will not apply to any additional shares that we may contribute to the VEBA trust in satisfaction of our Variable Contribution obligation, if any. In connection with the stock transfer restrictions,
the VEBA trust has also agreed that it will abstain from voting 1.3 million shares of common stock, or such lesser number of shares as it may hold from time to time, for the election of our directors.
Pursuant to a Registration Rights Agreement we entered into with the VEBA trust in 2003, the VEBA trust has the right to request that we register with the Securities and
Exchange Commission (SEC) for sale on a delayed or continuous basis certain shares of our common stock held by the VEBA trust. We will cooperate with the VEBA trustee to register shares eligible for sale, and possibly assist in the orderly marketing
of such shares. Alternatively, without registration, the VEBA trustee could sell such shares subject to the limitations set forth in SEC Rule 144.
Profit Sharing Plans
Pursuant to the collective bargaining agreement with the USW, and in addition to our obligations to make contributions
to the VEBA trust based on our profitability as described under VEBA Trust above, we have an obligation to make quarterly profit sharing payments to or for the benefit of our active USW employees in an amount equal to 15% of our profits for the
quarter, if any, in excess of $30 profit per ton of steel shipped to third parties. For this purpose, profits are defined as earnings before interest and taxes, calculated on a consolidated basis, excluding effects of certain amounts as set forth in
the collective bargaining agreement. We have the discretion to make future payments, if any, in cash or in our common stock. Under the terms of the plan, we must satisfy any profit sharing obligation with respect to the first, second and third
fiscal quarters within 45 days after the end of the quarter, while any obligation with respect to the fourth fiscal quarter must be satisfied within 15 days after the date of the opinion of our independent registered public accounting firm with
respect to our annual audited financial
35
statements. All payments in stock will be contributed to the participants 401(k) account, while payments in cash, if any, will be made directly to plan
participants. To the extent that contributions of stock under this plan in any fiscal year, together with stock contributions to the VEBA trust under (iv) of the Variable Contribution formula described under VEBA trust above, exceed
10% of our common stock, on a fully diluted basis, we may satisfy our contribution obligation in the form of profit sharing notes. All profit sharing payments that become due are considered 100% vested when made.
During the nine months ended September 30, 2007, no profit sharing obligation was incurred.
In addition, we have adopted a profit sharing plan for salaried employees under which we have an obligation to make quarterly profit sharing payments to or for the benefit of our salaried employees in an amount equal
to 5.0% of our profits for the quarter, if any, in excess of $30 profit per ton of steel shipped to third parties. For this purpose, profits are defined as earnings before interest and taxes, calculated on a consolidated basis, excluding effects of
certain amounts as set forth in the plan. The profit sharing pool will be divided among all salaried employees, excluding officers. Under the terms of the plan, we must satisfy any profit sharing obligations with respect to the first, second and
third fiscal quarters within 45 days after the end of the quarter, while any obligation with respect to the fourth quarter must be satisfied within 15 days after the date of the opinion of our independent registered public accounting firm with
respect to our annual audited financial statements. If profit sharing payments are made in company stock instead of cash, the shares of company stock will be contributed to the company stock fund under our salaried 401(k) savings plan. All profit
sharing payments that become due are considered 100% vested when made.
During the nine months ended September 30, 2007, no profit sharing obligation
was incurred.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make judgments, estimates and assumptions that affect reported amounts of assets and liabilities
at the balance sheet date and the reported revenues and expenses for the period. Our judgments and estimates are based on both historical experience and our expectations for the future. As a result, actual results may differ materially from current
expectations.
We believe that the following are the more significant judgments and estimates used in the preparation of the financial statements.
Fresh Start Reporting
In accordance with SOP 90-7,
effective as of July 31, 2003, we adopted Fresh Start Reporting for our reorganized company and recorded assets and liabilities at their fair values. Enterprise value was estimated using discounted cash flow methodologies and
analysis of comparable steel companies.
Pension Benefits
We maintain a supplemental defined benefit pension plan for all salaried employees employed as of January 31, 1998, which provides a guaranteed minimum benefit based on years of service and compensation. Certain hourly employees who
elected to retire under a job buyout program are also covered under this plan. Because benefits provided by this plan will be paid in the future over what could be many years, we estimate the accrued liability at each year-end balance sheet date
using actuarial methods. The two most significant assumptions used in determining the liability under this plan are the discount rate and the expected return on plan assets.
The discount rate applied to our pension benefit obligation is based on high quality bond rates and the expected payout period of our pension benefit obligation. The discount rate used to measure our benefit
obligation at December 31, 2006 was 5.9%. Management believes this rate to be appropriate based on the demographics of the employee group covered under the plan. A 1% increase in the discount rate would decrease the pension benefit obligation
by approximately $0.4 million and a 1% decrease in the discount rate would increase the pension benefit obligation by approximately $0.4 million. A 1% increase in the discount rate would decrease periodic pension
36
benefit costs by approximately $0.1 million annually and a 1% decrease in the discount rate would increase periodic pension benefit costs by approximately
$0.1 million annually.
We have assumed an expected return on plan assets of 8.5% at December 31, 2006. A 1% increase in the expected return on plan
assets would decrease periodic pension benefit costs by approximately $0.1 million annually and a 1% decrease in the expected return on plan assets would increase periodic pension benefit costs by approximately $0.1 million annually.
We adopted Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Plans and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106 and 132(R) as of December 31, 2006.
Other Postretirement Benefits (OPEB)
The traditional medical and life insurance benefits that were provided to past hourly retirees were terminated effective October 1, 2003. Pursuant to our labor
agreement, which we entered into in connection with our plan of reorganization, past retirees will receive medical and life insurance benefits under a VEBA trust. Future retirees under the labor agreement will be covered by a medical and life
insurance program similar to that of active employees. All retirees and their surviving spouses shall be required to make monthly contributions for medical and prescription drug coverage, which, in the case of those covered under the VEBA trust, are
made directly to the trust. Because these benefits provided by us will be paid in the future over what could be many years, we estimate the accrued liability at each year-end balance sheet date using actuarial methods. The two most significant
assumptions used in determining the liability are the projected medical cost trend rate and the discount rate.
We estimate the escalation trend in medical
costs based on historical rate experience in our plans and through consultation with health care specialists. We have assumed an initial escalation rate of 10% in 2007. This rate is assumed to decrease gradually to an ultimate rate of 5% in 2014 and
remain at that level for all future years. The health care cost trend rate assumption has a significant effect on the costs and obligation reported. A 1% increase in the health care cost trend rate would increase the postretirement benefit
obligation by approximately $0.1 million and a 1% decrease in the health care cost trend rate would decrease the postretirement benefit obligation by approximately $0.1 million. A 1% increase in the health care cost trend rate would increase
periodic post-retirement benefit costs by approximately $0.1 million annually and a 1% decrease in the health care cost trend rate would decrease periodic post-retirement benefit costs by approximately $0.1 million annually.
The discount rate applied to our OPEB obligations is based on high quality bond rates and the expected payout period of our OPEB obligations. The discount rate used to
measure our OPEB obligation at December 31, 2006 was 5.9%. Management believes this rate to be appropriate based on the demographics of the employee group covered under the plan, which does not include hourly employees who retired prior to
October 1, 2003. A 1% increase in the discount rate would decrease the postretirement benefit obligation by approximately $8.6 million and a 1% decrease in the discount rate would increase the postretirement benefit obligation by approximately
$10.2 million. A 1% increase in the discount rate would decrease periodic post-retirement benefit costs by approximately $0.5 million annually and a 1% decrease in the discount rate would increase periodic post-retirement benefit costs by
approximately $0.6 million annually.
We adopted Financial Accounting Standards No. 158, Employers Accounting for Defined Benefit Plans
and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R) as of December 31, 2006.
Asset impairments
We periodically evaluate property, plant and equipment for impairment whenever events or changes in circumstances indicate that the carrying amount may
not be recoverable. Recoverability is determined based on an estimate of the expected future undiscounted cash flows of the assets. If the carrying value of the assets exceeds the undiscounted cash flows of the assets, an impairment loss is
recognized. The impairment loss is measured as the excess of the carrying value of the assets over the fair value of the assets. Fair value is estimated using discounted future cash flows and, if available, comparable market values. Considering the
Companys integrated operations, asset impairment evaluations are performed on a group basis, which represents the lowest level of independent cash flows. Undiscounted cash flows are based on longer-term projections that consider projected
market conditions and the performance and ultimate use of the assets. If future demand and market conditions are less favorable than those
37
projected by management, or if the probability of disposition of the assets differs from that previously estimated by management, asset impairments may be
required.
Deferred taxes
Full realization of net
deferred tax assets is largely dependent on our ability to generate future taxable income and to maintain our existing ownership. An ownership change, as defined in Section 382 of the Internal Revenue Code of 1986, could impose annual
limitations on utilization of our net operating loss carryovers. We record a valuation allowance to reduce deferred tax assets to an amount that is more likely than not to be realized. On August 1, 2003, upon emergence from bankruptcy, we
recorded a full valuation allowance against our net deferred tax assets due to the uncertainties surrounding realization as a result of the bankruptcy and our ability to generate future taxable income. Deferred tax assets that have arisen since that
time, which principally consist of net operating losses, have also been fully reserved. However, as our operations continue, we will be required to periodically reevaluate the tax treatment of these deferred tax assets in light of actual operating
results.
Environmental and legal contingencies
We
provide for remediation costs, environmental penalties and legal contingencies when the liability is probable and the amount of the associated costs is reasonably determinable. We regularly monitor the progress of environmental remediation and legal
contingencies, and revise the amounts recorded in the period in which changes in estimate occur.
RECENT ACCOUNTING STANDARDS
The Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) No. FIN 48-1, Definition of Settlement in FASB Interpretation No. 48, in
May 2007. FSP No. 48-1 amended FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, to provide guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of
recognizing previously unrecognized tax benefits. This staff position had no material impact on the Companys financial statements.
The FASB issued
Statement of Financial Accounting Standards (FASB) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, in February 2007. FASB No. 159 permits entities to choose to measure many financial instruments
and certain other items at fair value. FASB No. 159 is effective for the fiscal years beginning after November 15, 2007. The Company is currently assessing the impact of this statement on its financial statements.
The FASB issued FASB No. 157, Fair Value Measurement, in September 2006. FASB No. 157 defines fair value, established a framework for measuring
fair value in accordance with existing generally accepted accounting principles and expands disclosures about fair value measurements. FASB No. 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently
assessing the impact of this statement on its financial statements.