-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MQqzU5m1+p5JubWScWhRqo+zXcpbFUgft5exrpF3WmlMILr72OVEWfWZCCaqgpTh WNNtcmUbEwP1yvo00WX4ig== 0000950142-03-000588.txt : 20030402 0000950142-03-000588.hdr.sgml : 20030402 20030402150900 ACCESSION NUMBER: 0000950142-03-000588 CONFORMED SUBMISSION TYPE: 40-F PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030402 FILER: COMPANY DATA: COMPANY CONFORMED NAME: IPSCO INC CENTRAL INDEX KEY: 0000879933 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 40-F SEC ACT: 1934 Act SEC FILE NUMBER: 001-14568 FILM NUMBER: 03636566 BUSINESS ADDRESS: STREET 1: PO BOX 1670 REGINA CITY: SASKATCHEWAN S4P 3C7 STATE: A9 BUSINESS PHONE: 2123733000 MAIL ADDRESS: STREET 1: P O BOX 1670 REGINA CITY: SASKATCHEWAN STATE: A9 ZIP: S4P3C7 40-F 1 form40f_2002.txt ANNUAL REPORT ON FORM 40-F ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 40-F ANNUAL REPORT PURSUANT TO SECTION 13 (a) OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002 Commission File Number: 001-14568 IPSCO INC. (Exact name of Registrant as specified in its charter) CANADA (Province or other jurisdiction of incorporation or organization) 3312/3315/3317/3325/3399 (Primary Standard Industrial Classification Code Numbers) P.O. BOX 1670, REGINA, SASKATCHAWAN, CANADA TELEPHONE: (306) 924-7700 (Address and telephone number of Registrant's principal executive offices) MR. GEORGE VALENTINE, VICE PRESIDENT AND GENERAL COUNSEL, IPSCO INC. 650 WARRENVILLE ROAD, SUITE 500, LISLE, ILLINOIS 60532, TELEPHONE: (630) 810-4800 (Name, address (including zip code) and telephone number (including area code) of agent for service in the United States) SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Common Shares SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: TITLE OF EACH CLASS: None SECURITIES FOR WHICH THERE IS A REPORTING OBLIGATION PURSUANT TO SECTION 15(d) OF THE ACT: None FOR ANNUAL REPORTS, INDICATE BY CHECK MARK THE INFORMATION FILED WITH THIS FORM: [X] Annual information form [X] Audited annual financial statements NUMBER OF OUTSTANDING SHARES OF EACH OF THE ISSUER'S CLASSES OF CAPITAL OR COMMON STOCK AS OF THE CLOSE OF THE PERIOD COVERED BY THE ANNUAL REPORT. 47,667,487 Common Shares outstanding as of December 31, 2002 Indicate by check mark whether the Registrant is furnishing the information contained in this Form to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934 (the "Exchange Act"). If "Yes" is marked, indicate the filing number assigned to the Registrant in connection with such Rule. Yes [_] No [X] Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] UNDERTAKING IPSCO Inc. undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities. CONTROLS AND PROCEDURES IPSCO Inc. maintains disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in IPSCO Inc.'s filings under the Securities Exchange Act of 1934, as amended, is reported within the time periods specified in the Securities and Exchange Commission's rules and forms. IPSCO Inc.'s principal executive and financial officers have evaluated IPSCO Inc.'s disclosure controls and procedures within 90 days of the filing of this Annual Report on Form 40-F and have concluded that such disclosure controls and procedures are effective for the purpose for which they were designed. Subsequent to the date of such evaluation, there were no significant changes in internal controls or other factors that could significantly affect internal controls, including any corrective actions with regard to significant deficiencies and material weaknesses. SIGNATURES Pursuant to the requirements of the Exchange Act, IPSCO Inc. certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereto duly authorized. Dated this 1st day of April, 2003 IPSCO Inc. By: /s/ Robert L. Ratliff Robert Ratliff, Vice President and Chief Financial Officer CERTIFICATION (Section 302 - Sarbanes-Oxley Act of 2002) I, David Sutherland, President and Chief Executive Officer of IPSCO Inc., certify that: 1. I have reviewed this annual report on Form 40-F of IPSCO Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (and persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated this 1st day of April, 2003. /s/ David Sutherland David Sutherland President and Chief Executive Officer, IPSCO Inc. CERTIFICATION (Section 302 - Sarbanes-Oxley Act of 2002) I, Robert Ratliff, Vice President and Chief Financial Officer of IPSCO Inc., certify that: 1. I have reviewed this annual report on Form 40-F of IPSCO Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (and persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Dated this 1st day of April, 2003. /s/ Robert L. Ratliff Robert Ratliff Vice President and Chief Financial Officer, IPSCO Inc. Documents filed as part of this report: 1. Annual Information Form of IPSCO Inc. dated February 28, 2002 2. Consolidated Financial Statements for the fiscal years ended December 31, 2002 and 2001 including U.S. GAAP reconciliation note, together with the auditors' report thereon 3. Management's Discussion and Analysis of Financial Condition and Results of Operations for the year ended December 31, 2002 EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ----------- ----------- 23.1 Consent of Independent Auditors 99.1 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EX-99 3 exhibit191-form40f_2002.txt EXHIBIT 19.1 IPSCO INC. P.O. Box 1670 Regina, Saskatchewan, Canada S4P 3C7 Tel (306) 924-7700 as of February 28, 2003 ANNUAL INFORMATION FORM For the year ended December 31, 2002 THE COMPANY NAME AND INCORPORATION IPSCO Inc. (the "Company" or "IPSCO") was incorporated by certificate of incorporation under the laws of Saskatchewan on July 13, 1956 and was continued by articles of continuance under the Canada Business Corporations Act on January 28, 1977. Originally known as Prairie Pipe Manufacturing Co. Ltd., the name of the Company was changed to Interprovincial Steel and Pipe Corporation Ltd. on April 26, 1960. On April 2, 1984, the Company changed its name to IPSCO Inc. INTERCORPORATE RELATIONSHIPS The following corporate organization chart shows IPSCO's principal subsidiaries, each of which is 100% owned, and their jurisdictions of incorporation. [GRAPHIC OMITTED] [ORGANIZATION CHART] -------------------- IPSCO INC. (CANADA CORPORATION) -------------------- --------------------- -------------------------- Canadian Subsidiaries United States Subsidiaries --------------------- -------------------------- IPSCO Direct Inc. IPSCO Construction Inc. (Albert Corporation) (Alabama Corporation) IPSCO Ontario Inc. IPSCO Enterprises Inc. (Canada Corporation) (Delaware Corporation) IPSCO Recycling Inc. IPSCO Investments Inc. (Canada Corporation) (Delaware Corporation) IPSCO Sales Inc. IPSCO Minnesota Inc. (Canada Corporation) (Delaware Corporation) IPSCO Saskatchewan Inc. IPSCO Sales Inc. (Canada Corporation) (Delaware Corporation) General Scrap Partnership IPSCO Steel Inc. (Saskatchewan General Partnership) (Delaware Corporation) Western Steel Limited IPSCO Steel (Alabama) Inc. (British Columbia Corporation) (Alabama Corporation) IPSCO Texas Inc. (Delaware Corporation) IPSCO Tubulars Inc. (Delaware Corporation) IPSCO Alabama Ltd. (Alabama Limited Partnership) General Scrap Inc. (Delaware Corporation) 2 In this Annual Information Form, unless otherwise indicated, a reference to the "Company" or "IPSCO" includes IPSCO Inc. and its subsidiaries or other entities. Reference to "dollars", "$" and "US$" are to United States dollars and reference to "CDN$" are to Canadian dollars. Estimates of imports and other market statistics are derived from a variety of external sources including the American Iron and Steel Institute, the Canadian Steel Producers Association and certain government agencies and should not be relied on as being fully accurate but rather indicative of trends and relative sizes. When the United States and Canada are referred to together, the import figures include amounts coming into the two countries from other than the United States and Canada. GENERAL DEVELOPMENT OF THE BUSINESS THREE-YEAR HISTORY - SIGNIFICANT EVENTS OF 2000, 2001 AND 2002 2000 Sales revenues were $949 million, 17% higher than the prior year figure of $808 million. Net income fell to $57.7 million, a 22% decline from the prior year as average composite prices, impacted by surging low price imports and a lower mix of energy tubulars, fell by 3% to $421 per ton. The Company produced 2,021,000 tons of raw steel of which 980,000 were produced at the Montpelier Steelworks. Total tons sold were a record 2,233,000, a 22% increase over 1999. Steel mill products (discrete plate, coil and cut plate), comprised 62% of the total amount shipped while energy tubulars, large diameter pipe, and non-energy tubulars were 38% of the total shipped. For the first time in its history IPSCO's tons sold to U.S. customers comprised over half of shipments, reaching 1,303,000 tons or 58% of total tons shipped. Additions to capital assets were a record $370.3 million with over 90% of the spending concentrated on the new steelworks in Alabama. The Company met the financing needs generated by the construction of the Mobile Steelworks project by raising $158.0 million from the sale and leaseback of equipment at the Montpelier Steelworks and the St. Paul, Minnesota coil processing facility. An additional $89.8 million was raised from the issuance of junior subordinated notes previously arranged in 1998. In the fourth quarter IPSCO renegotiated existing bank lines and obtained a $200 million unsecured committed facility to March 2005. 2001 IPSCO achieved sales of $931 million including $27 million of revenue recorded by the new Mobile Steelworks during start up. Sales were 2% lower than the prior year primarily due to price attrition resulting from the prior year's excess supply condition, including imports. Net income of $38.9 million dropped 33% and net income available to common shareholders of $27.4 million dropped 42% from prior year results. The Company produced 2,414,000 tons of raw steel of which 379,000 tons were produced at the new Mobile Steelworks and 967,000 tons at Montpelier. Total tons sold were a record 2,435,000, a 9% increase over 2000. Steel mill products comprised 64% of the total shipped while energy tubulars, large diameter pipe, and non-energy tubulars were 36% of shipments. IPSCO increased its U.S. market penetration as shipments to U.S. customers climbed 21% to 1,570,000 and accounted for 64% of total tons shipped. Since its startup in 1997, the Montpelier Steelworks has required substantial modifications due to original equipment unreliability and the plant's failure to meet contracted output. The non-performance of Montpelier's equipment and turnkey contractor was the subject of a civil suit settled out of court in mid- 3 2001. IPSCO settled all claims and counter claims for $49 million, paid by the contractor, of which $39 million was recorded to income as a non-recurring item. Late in the year management undertook a 17-day maintenance shutdown to modify original equipment and remedy turnkey deficiencies. Capital spending for the year at Montpelier was $13.1 million. In 2001, a non-cash charge of $10 million was recorded to adjust the carrying value of assets held for sale to their estimated net realizable value. The Company raised $15 million from the sale and leaseback of its coil processing equipment in Houston, Texas. The sale-leaseback was completed in two parts, with $10 million received in June and $5 million in September. The average unit-selling price for IPSCO products dropped almost 10% from $421 per ton in the prior year to $380 per ton in 2001. Fourth quarter prices were $366 per ton and reflected the lowest prices in decades. The price reductions were related to a general slowdown in the North American economy and excess supply. The price and volume of imports and the subsequent injury to U.S. producers became the subject of a U.S. Section 201 trade investigation. The Company increased its reserve for bad debts by $4 million to reflect conditions in the market. 2002 IPSCO achieved sales of $1.08 billion, which were 20% higher than the prior year and reflect the significantly higher shipments made from the Mobile Steelworks, as well as continued market penetration by IPSCO coil processing facilities opened over the past few years. Net income of $20.3 million dropped $18.6 million or 48% and net income available to common shareholders was $8.9 million, down 68% from the $27.4 million recorded in 2001. In 2002, the Company successfully completed the sale of certain non-productive assets and recorded associated pre-tax income of $6.5 million. IPSCO's average unit selling price declined to $369 per ton in 2002 from $380 per ton in 2001, primarily due to changes in product mix (a higher percentage of steel mill products compared to tubular products), but also due to continued price competition. The Company produced 3,007,000 tons of raw steel of which 2,046,000 were produced in the United States. Total tons sold were a record 2,897,000, a 19% increase over 2001. Shipments of 2,115,000 tons of steel mill products were 73% of total tons sold and surpassed those of a year earlier by 35%. Approximately 27% of the Company's total shipments in 2002 were tubular products, down from about 36% in 2001, reflecting the impact of both the Mobile Steelworks ramp-up and a slow market for many tubular product lines. Shipments to U.S. customers reached 2,126,000 tons, over 73% of the total, while Canadian based customers accounted for 771,000 tons, about 27%. Despite growth in the Company's total shipments, Canadian shipments were 11% below that of 2001, indicating that the U.S. market continued to provide the growth in sales. The Company completed two key financing initiatives in the year. In February, the Company completed a common stock issue of 6.5 million shares for net cash proceeds of $90.7 million. Proceeds were used to pay down revolving bank line borrowings. In addition, the Company renegotiated an increase to its debt ratio covenant from .45 to .50 under its bank facility and obtained a committed $50 million, 364 day facility to improve its financial flexibility. In March 2002, as a result of the Section 201 investigation, President Bush announced tariffs (ranging from 8% to 30%) and quotas on many key steel products. Canada was excluded from this action. Anticipating the diversion of imported steel to Canada from countries affected by the remedies, the Company and other Canadian steel producers began discussions with the Canadian government regarding 4 the implementation of a similar safeguard action. The Canadian government conducted a safeguard investigation under section 20 of the Canadian International Trade Tribunal, however a remedy has not yet been imposed and discussions are continuing. Industry consolidation was accelerated with the emergence of International Steel Group ("ISG"), which purchased the steelmaking assets of LTV and Acme Steel out of Chapter 11 proceedings. ISG is currently pursuing additional acquisitions in the sector. Other integrated producers may follow the new business model used by ISG as a way to purchase assets cheaply, shed legacy costs, and reduce manpower requirements to become more competitive. SIGNIFICANT ACQUISITIONS AND DISPOSITIONS The Company made no significant acquisitions or dispositions in 2002. TRENDS In addition to the risks and uncertainties discussed in "Narrative Description of the Business" below, the Company is particularly sensitive to trends in the oil and gas exploration, oil and gas transmission, construction and heavy equipment industries, which are significant markets for the Company's products and are highly cyclical. In addition, as a result of the Company's substantial investments in facilities in both the U.S. and Canada, the Company transacts business in the currencies of both countries, with the ratio between the U.S. dollar and the Canadian dollar denominated sales and expenditures varying over time. The average value of the Canadian dollar declined slightly from $0.6460 U.S. in fiscal 2001 to $0.6369 U.S. in fiscal 2002. In addition, the strength of both the Canadian and U.S. dollars relative to other foreign currencies influences import and export activity. Both currencies weakened against the Euro and other major currencies in fiscal 2002. Future fluctuations in the exchange rate between the Canadian and U.S. dollars and other foreign currencies could have a material effect on the Company. NARRATIVE DESCRIPTION OF THE BUSINESS GENERAL The Company is a North American steel producer with facilities and process equipment located at 12 sites throughout Canada and the United States. IPSCO operates within a single business segment which is the production of steel and sale of primary and secondary manufactured steel products such as carbon steel slabs, discrete plate and coil, cut plate, and finished tubular products. The bulk of IPSCO's capital is invested in steel mill and finishing facilities. The output of the steel facilities is either sold directly to third parties in the as-produced condition or used in IPSCO operations, which further fabricate the steel for sale to third parties. As steelmaking facilities comprise the bulk of the Company's capital investment, the Company attempts to earn the best overall return on the available steel by allocating it to the products that command the best return from the business. Shifts in the price, cost and demand for specific products will affect their ability to contribute to overall financial results. Swings in demand between products and product groups may occur on a frequent basis as the Company adjusts its production and sales plans to take these into account. The Company produces steel in three North American steelworks: Regina, Saskatchewan; Montpelier, Iowa; and Mobile, Alabama. All three steelworks use electric arc furnace technology to convert scrap steel into liquid steel. Each steelworks casts the liquid steel into slabs and hot rolls the slabs into various grades of discrete plate or coil. The plate and coil can be sold directly to customers or may be further processed within IPSCO's downstream facilities. Five coil processing locations produce cut plate and sheet to customer requirements. Pipe mills at six locations use coil feedstock to produce tubular 5 products that range from one and one-half inches up to 16 inches in diameter ("small diameter"), and 16 inches through 80 inches in diameter ("large diameter"). IPSCO currently has over 600 active customers spanning a large number of applications. IPSCO produces steel plate and sheet in an assortment of widths, lengths, gauges and grades used to make railroad cars, barges and ships; industrial, construction and farm equipment; storage tanks, bridges, structural poles and a host of additional products. Tubular products include oil and gas well casing and tubing ("oil country tubular goods" or "OCTG"); pipe for transporting oil and gas from wells, transmitting oil and/or gas long distances and for final distribution to end-customers ("line pipe"); pipe for low pressure water and air distribution; water and sewage transmission pipe; and tubular products for building and construction applications, most often in square or rectangular cross-sections ("hollow structural sections", "HSS" or "structural tubing"). PRINCIPAL PRODUCTS AND SERVICES The following chart describes the Company's principal products, principal markets and methods of distribution:
- ------------------------------------------------------------------------------------------------------------- PRINCIPAL PRODUCT GROUPS PRINCIPAL MARKETS PRIMARY DISTRIBUTION METHODS ------------------------ ----------------- ---------------------------- - ------------------------------------------------------------------------------------------------------------- STEEL MILL PRODUCTS: - ------------------------------------------------------------------------------------------------------------- Slabs, discrete plate, cut plate General manufacturing Majority through distributors and coil construction, agricultural located throughout North America equipment, oil field equipment, transportation and others - ------------------------------------------------------------------------------------------------------------- TUBULAR PRODUCTS: - ------------------------------------------------------------------------------------------------------------- Large diameter line pipe Oil, natural gas and water Predominantly through the Company transmission - ------------------------------------------------------------------------------------------------------------- Energy Tubulars Oil and natural gas exploration Predominantly through and development distributors located throughout North America - ------------------------------------------------------------------------------------------------------------- Non-Energy Tubulars Manufacturing, construction and Predominantly through other industrial product uses distributors located throughout North America - -------------------------------------------------------------------------------------------------------------
IPSCO markets steel through two separate sales channels. One sells steel mill products such as discrete plate, cut plate and coil. The second sells tubular products. Each marketing operation is disciplined with regard to the products it sells and the markets it pursues, and each continually enhances its diversified product lines. Although sales personnel are located to maximize customer service, each channel is centrally managed. Members of the sales teams are experienced and well trained to deal with customer requirements. A pool of highly trained research and technical experts also supports both sales organizations. The following chart sets out the approximate percentages for the two most recently completed fiscal years for sales of principal products of the Company:
- ------------------------------------------------------------------------------------------------------------- PRINCIPAL PRODUCT GROUPS % OF REVENUES FOR 2002 % OF REVENUES FOR 2001 ------------------------ ---------------------- ---------------------- - ------------------------------------------------------------------------------------------------------------- Steel Mill Products 64 51 - ------------------------------------------------------------------------------------------------------------- Tubular Products 36 49 - -------------------------------------------------------------------------------------------------------------
6 COMPETITIVE CONDITIONS Competition in the steel industry is intense. The Company faces significant competition from steel manufacturers in North America as well as the rest of the world. Competition also comes from manufacturers of other materials that can be substituted for steel. World steelmaking capacity currently exceeds demand, which has led to unfair trading of steel into the North American market. Because of these conditions, the Company supports trade actions in the form of anti-dumping and countervailing duty cases or other trade remedies. In recognition of the overwhelming surge of imported steel, the U.S. government imposed significant Section 201 sanctions in 2002 against many offshore sources. The action was taken as the result of the injury these imports inflicted on domestic producers and to allow domestic producers an opportunity to recover as provided for in U.S. Section 201 legislation. A similar Canadian action has been proposed and is under consideration. NEW PRODUCT INTRODUCTION The Company has not issued any news releases on the introduction of new products for 2002. SOURCES, PRICING AND AVAILABILITY OF RAW MATERIALS The major raw material used in the steelmaking process is scrap metal. The Company's total annual consumption of iron and steel scrap is approximately 110% of its liquid steel production tonnage. In 2002, a total of $500 million was spent on major raw materials and consumables for the Company's three steelworks, up by 27% from the $395 million spent in 2001. Included in the amount are expenditures for steel scrap, pig iron, alloy materials, carbon electrodes, oxygen, refractories, limestone, natural gas and electricity. During 2002, IPSCO recycled 3.3 million tons of scrap, the principal raw material for its steelmills, at an average cost per ton about 15% percent higher than the previous year. IPSCO's General Scrap Partnership and IPSCO Direct Inc., an Alberta scrap collection company, provided 12% of the Company's overall needs. The remainder was readily available from other parties. Electricity and natural gas are also important variable costs for IPSCO. These are procured through different methods, including competitive long-term supply contracts. IDENTIFIABLE INTANGIBLE PROPERTIES The Company holds a variety of patents dealing with steelmaking processes and has made application for a variety of patents dealing with casting and rolling mill technology. The Company's operations are not dependent to any significant extent on these or any other patent, license or franchise. Similarly, the Company's operations are also not dependent upon any single trademark, although certain trademarks are identified with several of the Company's products, and are important in the marketing and sale of such products. All of IPSCO's operating facilities have received ISO 14001 certification of their environmental management systems. 7 BUSINESS CYCLE AND SEASONALITY The steel industry is highly cyclical in nature and sensitive to general economic conditions. The financial condition and results of operations of companies in the steel industry are generally affected by macroeconomic fluctuations in the U.S., Canadian and global economies. The Company's Canadian energy tubular product lines are very seasonal, with sales strongest during the winter and weakest during spring thaw. RENEGOTIATION OR TERMINATION OF CONTRACTS Given the purchase order nature of IPSCO's sales, it is not expected that IPSCO's business will be affected in the current financial year by the renegotiation or termination of contracts or sub-contracts. ENVIRONMENT The Company's operations are subject to environmental regulation in the various jurisdictions in which it operates. Environmental legislation is evolving in a manner that requires stricter standards and enforcement, increased fines and penalties for non-compliance, more stringent environmental assessments and a heightened degree of responsibility for corporations, their officers, directors and employees. During 2002, non-routine project expense and capital spending on programs aimed at environmental issues, amounted to $ 2.7 million, compared to $11.4 million spent in 2001 (including $7.5 million spent on the Mobile Steelworks in 2001). Canada is a signatory to the United Nations Framework Convention on Climate Change. On December 10, 2002, Parliament ratified the Kyoto Protocol, which sets binding targets to reduce national emissions of carbon dioxide, methane and a number of other gases collectively referred to as greenhouse gases. With ratification completed, focus has shifted to future federal and provincial legislation to implement programs with industry-specific numerical goals to meet the reductions set by the Protocol. The Canadian Government has issued a Climate Change Plan that identifies groups of large industrial emitters, which will be required to reduce emissions in an effort to meet the Protocol targets. "Iron and Steel Production Facilities" is one of the sectors included in this effort. While the Canadian Government has expressed its support for limiting the impact of the Kyoto Protocol on industry, the specific processes for achieving the targets have yet to be determined. It is too early to speculate whether implementation of required processes will have a material adverse impact on the Company's Canadian operations. The U.S. is not currently a signator of the Kyoto Protocol. There is no assurance that future changes in environmental regulation, if any, will not adversely affect the Company's operations, including its capital expenditures, earnings and competitive position. EMPLOYEES As of December 31, 2002, the Company, directly and through its subsidiaries, has approximately 2,300 fulltime employees of whom approximately 1,300 are non-unionized personnel and approximately 1,000, mainly in Canada, are represented by trade unions. The Company also has 32 temporary employees. Additional work was conducted on the Company's behalf by contractors and consultants on a contract basis. FOREIGN OPERATIONS As disclosed above, the Company operates facilities in Canada and the U.S. as a consolidated North American company. 8 BANKRUPTCY OR RECEIVERSHIP PROCEEDINGS Neither the Company nor any of its subsidiaries are, nor have been, the subject of any bankruptcy, receivership or similar proceedings within the three most recently completed financial years or the current financial year. MATERIAL REORGANIZATIONS There has not been any material reorganization of the Company or any of its subsidiaries within the three most recently completed financial years or the current financial year. ASSET-BACKED SECURITIES The Company has no asset-backed securities outstanding that were distributed under a prospectus or otherwise. SELECTED CONSOLIDATED FINANCIAL INFORMATION ANNUAL INFORMATION The following table sets out the consolidated financial results for each of the last three fiscal years of the Company:
(In millions except per share amounts) YEAR ENDED DECEMBER 31 2002 2001 2000 - ------------------------------------------------------------------------------------------------- Sales $ 1,081.7 $ 903.7 $ 949.3 Net income 20.3 38.9 57.7 Net income available to common shareholders 8.9 27.4 46.8 EBIT 55.7 66.4 86.9 EBITDA 106.7 103.5 122.2 Free Cash Flow 72.3 (54.3) (248.1) Total Assets 1,744.3 1,724.1 1,622.7 Long-Term Debt 342.2 386.8 343.8 Net income per common share - Basic $ 0.19 $ 0.67 $ 1.15 Net income per common share - Diluted $ 0.19 $ 0.66 $ 0.91 Dividends declared per common share in CDN$ $ 0.20 $ 0.425 $ 0.50 Dividends declared per preferred share in CDN$ $ 1.375 $ 1.375 $ 1.375
EBIT is defined as earnings before interest expense and income taxes. EBITDA is defined as earnings before interest expense, income taxes, depreciation and amortization. Free cash flow is defined as EBITDA less net capital expenditures. The Company believes that EBIT, EBITDA, and free cash flow are standard measures of performance that are commonly reported and widely used by analysts, investors and other interested parties. Accordingly, this information has been disclosed to permit a more complete comparative analysis of the Company's operating performance and capitalization relative to other companies. These indicators should not be considered as a substitute or alternative for net income, net income available to common shareholders or cash flow. DIVIDENDS IPSCO has historically paid a dividend on its outstanding common shares. The Board of Directors reviews the level of dividend payments regularly, taking into consideration such factors as North American 9 steel market conditions and the economy in general. Cash conservation is a high priority in times of uncertain market conditions and therefore IPSCO reduced its quarterly dividend on Common Shares from CDN $0.125 per share to CDN $0.05 per share commencing in the fourth quarter of 2001, and the dividend remained at this level throughout 2002. For the six million 5.50% Cumulative Redeemable First Preferred Series 1 shares issued at a price of CDN $25 per share in November 1998, quarterly dividends of CDN $0.34375 have been paid commencing February 15, 1999. GAAP The Company presents its consolidated financial information on the basis of Canadian generally accepted accounting principles ("GAAP"). MANAGEMENT'S DISCUSSION AND ANALYSIS The following information contained in the Company's 2002 Annual Report is incorporated herein by reference: (a) Management's Discussion and Analysis for the year ended December 31, 2002 as filed with various regulators in Canada and the United States; and (b) Audited Consolidated Financial Statements of the Company for the year ended December 31, 2002, together with the auditors' report thereon. MARKET FOR SECURITIES The common shares of the Company are listed for trading on the Toronto Stock Exchange and New York Stock Exchange and trade under the symbol "IPS". The rights of the holders of common shares of the Company are subject to the provisions of a Shareholder Rights Agreement, dated March 14, 1990, as amended on April 20, 1995 and May 2, 2001, between the Company and Computershare Trust Company of Canada. DIRECTORS AND OFFICERS NAMES, ADDRESSES AND OCCUPATIONS The following is a list of directors and executive officers of IPSCO as at the date hereof:
NAME, POSITION AND DIRECTOR OR OFFICER PRINCIPAL OCCUPATIONS FOR PAST FIVE YEARS MUNICIPALITY OF RESIDENCE SINCE Burton M. Joyce 1993 President and Chief Executive Officer and a Chairman of the Board Director of Terra Industries (1991-2001). Penhook, Virginia Mr. Joyce retired from this position in 2001 Michael A. Grandin 2003 Chairman and Chief Executive Officer of the Director Fording Canadian Coal Trust (2003-present), Calgary, Alberta former President of Pan Canadian Petroleum Ltd. (2001-2002) and former Chief Financial Officer of Canadian Pacific Limited (1997- 2001)
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NAME, POSITION AND DIRECTOR OR OFFICER PRINCIPAL OCCUPATIONS FOR PAST FIVE YEARS MUNICIPALITY OF RESIDENCE SINCE Juanita H. Hinshaw 2002 Senior Vice President and Chief Financial Director Officer of Graybar Electric Company, Inc. Chesterfield, Missouri (2000-present) and former Vice President and Treasurer of Monsanto Company (1988-1999) Thomas E. Kierans, O.C. 1989 Chairman, the Canadian Institute of Advanced Director Research (September 1999-present) and former Toronto, Ontario President and Chief Executive Officer of C. D. Howe Institute for the preceding five years Jack D. Michaels 2000 Chairman and Chief Executive Officer of Director HON INDUSTRIES and former President of Muscatine, Iowa HON INDUSTRIES in excess of five years Bernard Michel 1998 Chairman of Cameco Corporation and former Director President and Chief Executive Officer of Saskatoon, Saskatchewan Cameco Corporation for the preceding five years Allan S. Olson 1989 President of First Industries Corporation Director Spruce Grove, Alberta Arthur R. Price 1979 Chairman and Chief Executive Officer of Director Axia NetMedia Corporation for the preceding Calgary, Alberta five years Richard G. Sim 1994 Chairman, President and Chief Executive Director Officer of APW Ltd. for the preceding five Dublin, Ireland years David Sutherland 2002 - Director President and Chief Executive Officer of Director and President and 1992 - Officer IPSCO Inc. (2002-present), former Executive Chief Executive Officer of Vice President and Chief Operating Officer of IPSCO Inc. IPSCO Inc. (2001) and former Vice President Naperville, Illinois and General Manager, Raw Materials and Coil Processing of IPSCO Inc. (1997-2001) Roger E. Tetrault 1999 In August 2000, Mr. Tetrault retired from his Director position as Chairman of the Board and Chief Punta Gorda, Florida Executive Officer of McDermott International, Inc. which he held for the preceding four years Gordon Thiessen, O.C. 2001 Chair, Canadian Public Accountability Board Director (2002-present) and former Governor of the Ottawa, Ontario Bank of Canada for the five preceding years D. Murray Wallace 1975 - 1983 Chairman and Chief Executive Officer of Director 1991 Park Street Capital Corporation (July 1998 - London, Ontario present), President of Axia NetMedia Corporation since September 2000 and former President and CEO of Avco Financial Services (1993-1998)
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NAME, POSITION AND DIRECTOR OR OFFICER PRINCIPAL OCCUPATIONS FOR PAST FIVE YEARS MUNICIPALITY OF RESIDENCE SINCE John B. Zaozirny, Q.C. 1987 Counsel to McCarthy Tetrault LLP for the Director preceding five years Calgary, Alberta Charles Backman 1983 Senior Vice President and Chief Senior Vice President and Administrative and Engineering Officer of Chief Administrative and IPSCO Inc. for the preceding five years Engineering Officer Regina, Saskatchewan David Britten 1999 Vice President and General Manager, Tubular Vice President and General Products of IPSCO Inc. and has held other Manager, Tubular Products executive positions with IPSCO Inc. for the Naperville, Illinois preceding five years Barry Hodson 1999 Vice President and General Sales Manager of Vice President and General IPSCO Inc. and has held other executive Sales Manager positions with IPSCO Inc. for the preceding Bragg Creek, Alberta five years Peter MacPhail 1996 Vice President of Primary Operations of Vice President of Primary IPSCO Inc. and has held other executive Operations positions with IPSCO Inc. for the preceding Regina, Saskatchewan five years Daniel Miksta 2000 Vice President and General Sales Manager of Vice President and General IPSCO Inc. (2000-present) and former Sales Manager Director of Commercial and Industrial Sales Libertyville, Illinois of Inland Steel for the preceding five years Raymond Rarey 2000 Vice President and Chief Human Resources Vice President and Chief Officer of IPSCO Inc. (2000-present) and Human Resources Officer former Vice President, Human Resources for Geneva, Illinois Berg Electronics Group (1996-1999) Robert Ratliff 2000 Vice President and Chief Financial Officer of Vice President and Chief IPSCO Inc. (2000-present) and former Financial Officer Corporate Controller of Nalco Chemical Batavia, Illinois Company for the preceding five years Joseph Russo 1988 Senior Vice President and Chief Technical Senior Vice President and Officer of IPSCO Inc. and has held other Chief Technical Officer executive positions with IPSCO Inc. for the Aurora, Illinois preceding five years John Tulloch 1986 Senior Vice President and Chief Commercial Senior Vice President and Officer and former Vice President, General Chief Commercial Officer Manager, Tubular Products of IPSCO Inc. for Naperville, Illinois the preceding five years George Valentine 2001 Vice President and General Counsel of Vice President and General IPSCO Inc. (2001-present) and Senior Vice Counsel President, General Counsel and Corporate Chicago, Illinois Secretary of Terra Industries Inc. for the preceding five years
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NAME, POSITION AND DIRECTOR OR OFFICER PRINCIPAL OCCUPATIONS FOR PAST FIVE YEARS MUNICIPALITY OF RESIDENCE SINCE John Comrie, Q.C. 1983 Secretary of IPSCO Inc. for the preceding Secretary five years Naperville, Illinois Philip Marusarz 2001 Treasurer of IPSCO Inc., former Vice Treasurer President, Finance of Invensys Inc. (Oct. Lemont, Illinois 2000-March 2001), former Vice President, Controller of Netgov.com (April 2000-Oct. 2000), former Director of Finance of Pittway Corporation (May 1999-April 2000) and former Chief Financial Officer of Strategic Research Inc. (April 1997 to May 1999) Robert Eisner 1997 Assistant Treasurer of IPSCO Inc. and has Assistant Treasurer held other executive positions with IPSCO Regina, Saskatchewan Inc. for the preceding five years
Directors are elected annually at the Company's annual general meeting of shareholders. Each director's term of office will expire on April 30, 2003. COLLECTIVE SHAREHOLDINGS As a group, the executive officers and directors of the Company beneficially own, directly or indirectly, or exercise control or direction over a total of 151,737 common shares, less than 1% of the issued shares of the Company. BOARD COMMITTEES The following is a list of the Committees of the Board of Directors of IPSCO as at the date hereof: - -------------------------------------------------------------------------------- COMMITTEE MEMBERS - -------------------------------------------------------------------------------- Management Resources and Compensation Burton M. Joyce - Chairman Committee Thomas E. Kierans Bernard Michel Jack Michaels Richard G. Sim Roger E. Tetrault - -------------------------------------------------------------------------------- Audit Committee D. Murray Wallace - Chairman Juanita Hinshaw Allan S. Olson Arthur R. Price John B. Zaozirny - -------------------------------------------------------------------------------- Governance and Compliance Committee Burton M. Joyce - Chairman Allan S. Olson Jack Michaels John B. Zaozirny - -------------------------------------------------------------------------------- CORPORATE CEASE TRADE ORDERS AND BANKRUPTCIES None of the directors or officers of the Company, or, to IPSCO's knowledge, shareholders holding sufficient shares to materially affect the control of the Company is, or within the previous 10 years, has been a director or officer of any other issuer that, while acting in such capacity, (i) was subject to a cease 13 trade or similar order or an order that denied the issuer access to any exemptions under Canadian securities legislation for a period of more than 30 consecutive days, or (ii) became bankrupt, made a proposal under any legislation relation to bankruptcy or insolvency or was subject to or instituted any proceeding, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold the assets of such issuer except for the following: Mr. M. Grandin was a director of Pegasus Gold Inc. ("Pegasus") when it filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in January of 1998. The United States Bankruptcy Court, District of Nevada confirmed the joint liquidating plan of reorganization filed by Pegagsus in December 1998 and Pegasus' successor company emerged from bankruptcy in 1999. Mr. R. Sim was a director of APW Ltd. ("APW") when APW filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York in May 2002. In July 2002, the noted bankruptcy court entered an order confirming APW's plan of reorganization and APW's successor corporation emerged from bankruptcy on July 31, 2002. Mr. R. Tetrault was a director of the Babcock & Wilcox Company ("B&W") when it filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Louisiana in February 2000. In December 2002 B&W filed a substantially complete consensual plan of reorganization and settlement agreement with the noted bankruptcy court and is awaiting such court's confirmation of the plan. PENALTIES OR SANCTIONS None of the directors or officers of the Company, or, to IPSCO's knowledge, shareholders holding sufficient shares to materially affect the control of the Company has been subject to (i) any penalties or sanctions proposed by a court relating to Canadian securities legislation or by a Canadian securities regulatory authority or have entered into a settlement agreement with a Canadian securities regulatory authority, or (ii) any other penalties or sanctions imposed by a court of regulatory body that would likely be considered important to a reasonable investor in making an investment decision. PERSONAL BANKRUPTCIES None of the directors or officers of the Company, or, to IPSCO's knowledge, shareholders holding sufficient shares to materially affect the control of the Company, or a personal holding company of any such persons has become, within the previous 10 years of this annual information form, bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold their assets. CONFLICTS OF INTEREST To IPSCO's knowledge, there are no existing or potential material conflicts of interest between the Company or a subsidiary of the Company and a director or officer of the Company or a subsidiary of the Company. 14 NOTE REGARDING FORWARD-LOOKING STATEMENTS Information contained in this document and in the documents incorporated or deemed to be incorporated by reference herein, other than historical information, may be considered forward-looking. Forward-looking information reflects Management's current views of future events and financial performance that involve a number of risks and uncertainties. The factors that could cause actual results to differ materially include, but are not limited to, the following: general economic conditions, changes in financial markets, political conditions and developments, including conflict in the Middle East and the war on terrorism, changes in the supply and demand for steel and specific steel products of the Company, the level of demand outside of North America for steel and steel products, equipment performance at the Company's manufacturing facilities, the progress of any material lawsuits, the availability of capital, the ability to properly and efficiently staff the Company's manufacturing facilities, domestic and international competitive factors, including the level of steel imports into the Canadian and United States markets, economic conditions in steel exporting nations, trade sanction activities and the enforcement of trade sanction remedies, supply and demand for scrap steel and iron, alloys and other raw materials, supply, demand and pricing for the electricity and natural gas used by the Company, changes in environmental and other regulations, including regulations arising from the Canadian Parliament's ratification of the Kyoto Protocol, and the magnitude of future environmental expenditures, inherent uncertainties in the development and performance of new or modified equipment or technologies, North American interest rates, exchange rates and other risks detailed in the "Business Risks and Uncertainties" section of this document. This list is not exhaustive of the factors which may impact the Company's forward-looking statements. These and other factors should be considered carefully and readers should not place undue reliance on the Company's forward-looking statements. As a result of the foregoing and other factors, no assurance can be given as to any such future results, levels of activity or achievements and neither the Company nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. The Company undertakes no obligation to update forward-looking statements contained in this document. ADDITIONAL INFORMATION Additional information, including particulars of directors' and officers' remuneration and indebtedness, principal holders of the Company's securities, options to purchase securities and interest of insiders in material transactions, where applicable, is contained in the Management Proxy Circular of the Company for the Annual General Meeting of the Shareholders of the Company to be held on Wednesday, April 30, 2003. Additional financial information is provided in the Company's Audited Consolidated Financial Statements for the year ended December 31, 2002. The Company will provide to any person, on request to the Secretary of the Company: (a) when the Company's securities are in the course of a distribution pursuant to a short form prospectus or a preliminary short form prospectus: (i) one copy of this annual information form, together with one copy of any document, or the pertinent pages of any document, incorporated by reference herein; (ii) one copy of the comparative financial statements of the Company for its most recently completed financial year, together with the accompanying report of the Company's auditor and one copy of the most recent interim financial statements of the Company that have been filed, if any, for the period after the end of the most recently completed financial year; (iii) one copy of the management proxy circular of the Company in respect of its most recent annual meeting of shareholders that involved the election of directors or of any annual filing prepared in lieu of that management proxy circular; and 15 (iv) one copy of any documents that are incorporated by reference into the preliminary short form prospectus or the short form prospectus and are not required to be provided under (i) through (iii) above; or (b) at any other time, one copy of any other documents referred to in (a)(i), (ii) and (iii) above, for which the Company may require the payment of a reasonable charge if the request is made by a person who is not a security holder of the Company. For copies of documents, please check the Company's website (www.ipsco.com) or contact: Mr. John Comrie, Q.C. Secretary 650 Warrenville Road, Suite 500 Lisle, Illinois 60532 Telephone: (630) 810-4800 Facsimilie: (630) 810-4602 16 EX-99 4 exhibit201-form40f_2002.txt EXHIBIT 20.1 NOTE REGARDING FORWARD-LOOKING STATEMENTS Information contained in this document, other than historical information, may be considered forward-looking. Forward-looking information reflects Management's current views of future events and financial performance that involve a number of risks and uncertainties. The factors that could cause actual results to differ materially include, but are not limited to, the following: general economic conditions, changes in financial markets, political conditions and developments, including conflict in the Middle East and the war on terrorism, changes in the supply and demand for steel and specific steel products of the Company, the level of demand outside of North America for steel and steel products, equipment performance at the Company's manufacturing facilities, the progress of any material lawsuits, the availability of capital, the ability to properly and efficiently staff the Company's manufacturing facilities, domestic and international competitive factors, including the level of steel imports into the Canadian and United States markets, economic conditions in steel exporting nations, trade sanction activities and the enforcement of trade sanction remedies, supply and demand for scrap steel and iron, alloys and other raw materials, supply, demand and pricing for the electricity and natural gas used by the Company, changes in environmental and other regulations, including regulations arising from the Canadian Parliament's ratification of the Kyoto Protocol, and the magnitude of future environmental expenditures, inherent uncertainties in the development and performance of new or modified equipment or technologies, North American interest rates, exchange rates and other risks detailed in the "Business Risks and Uncertainties" section of this document. This list is not exhaustive of the factors which may impact the Company's forward-looking statements. These and other factors should be considered carefully and readers should not place undue reliance on the Company's forward-looking statements. As a result of the foregoing and other factors, no assurance can be given as to any such future results, levels of activity or achievements and neither the Company nor any other person assumes responsibility for the accuracy and completeness of these forward-looking statements. The Company undertakes no obligation to update forward-looking statements contained in this document. 1 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS - -------------------------------------------------------------------------------- GENERAL IPSCO is a North American steel producer incorporated in Canada with facilities and process equipment located at 12 sites throughout Canada and the United States (U.S.). These facilities produce carbon steel slabs, hot rolled discrete plate and coil, as well as finished tubular products. In addition, IPSCO has several scrap collection sites located principally in Western Canada. The Company produces steel in three North American steelworks: Regina, Saskatchewan, Montpelier, Iowa and Mobile, Alabama. All three steelworks use electric arc furnace technology to convert scrap steel into liquid steel. Alloys are added at ladle metallurgy stations to create a wide variety of grades for various customer applications. Each steelworks casts the liquid steel into slabs and hot rolls the slabs into discrete plate or coil. The plate and coil can be sold directly to customers or may be further processed within IPSCO's downstream facilities. Five coil processing locations produce cut-to-length plate and sheet to customer requirements. Pipe mills at six locations use coil feedstock to produce tubular products that range from one and one-half inches up to 16 inches in diameter ("small diameter") and 16 inches through 80 inches in diameter ("large diameter"). IPSCO currently has over 600 active customers spanning a large number of applications. IPSCO produces steel plate and sheet in an assortment of widths, lengths, gauges, and grades used to make railroad cars, barges, and ships; industrial, construction and farm equipment; storage tanks, bridges, structural poles, and a host of additional products. Tubular products include pipe for low pressure water and air distribution; oil and gas well casing and tubing ("oil country tubular goods" or "OCTG"); pipe for transporting oil and gas from wells, transmitting oil and/or gas long distances, and for final distribution to end-customers ("line pipe"); water and sewage transmission pipe; and tubular products for building and construction applications, most often in square or rectangular cross-sections ("hollow structural sections", "HSS" or "structural tubing"). IPSCO markets steel through two separate commercial channels. One sells steel mill products such as discrete plate, cut plate, and coil. The second sells tubular products. Each marketing operation is disciplined with regard to the products it sells and the markets it pursues, and each continually enhances its diversified product lines. While sales personnel are located to maximize customer service, each commercial channel is centrally managed. Commercial employees are experienced and well trained to deal with customer requirements. A pool of highly trained research and technical experts also supports both sales organizations. The Company faces significant competition from steel manufacturers in North America as well as the rest of the world. Competition also comes from manufacturers of other materials that can be substituted for steel. World steelmaking capacity currently exceeds demand, which has led to unfair trading of steel in the North American market. Because of these conditions, the Company supports trade actions in the form of anti-dumping and countervailing duty cases or other trade remedies. In recognition of the overwhelming surge of imported steel the U.S. government imposed significant sanctions in 2002 against steel from many offshore sources. The action was taken as the result of the injury these imports inflicted on domestic producers and to allow domestic producers an opportunity to recover. 2 ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ IPSCO has invested substantial sums of money to construct modern, highly efficient facilities. The Company has built two steelworks in the U.S.; Montpelier, Iowa opened in 1997, and Mobile County, Alabama opened in 2001. The investments resulted in 2.5 million tons of additional plate and coil capacity, more than tripling IPSCO's prior capacity. Both facilities have modern, efficient production equipment and highly motivated, well-trained work forces. The two major investments were sited close to end users and raw material sources in order to minimize freight costs, a significant cost of business. In addition, all three of the Company's steelworks can manufacture similar products, providing increased flexibility, versatility and efficiency, resulting in improved customer service. The Company's strategic investments in the two U.S. steelworks were based on estimates of return spanning a variety of market conditions over long-term economic cycles, where conditions can vary significantly in the short-term. In the future IPSCO may pursue a number of other strategic initiatives such as acquisitions, joint ventures and/or alliances that would allow the Company to better serve customers and improve financial performance. Company management must address several key performance drivers simultaneously in order to compete successfully. The foundation of the commercial operation is good market intelligence about customer requirements and product alternatives. Information relating to customer requirements and appropriate pricing is generated through close, direct coordination and communication with customers as well as through industry associations and consulting arrangements. IPSCO has approximately 2,300 employees and uses performance incentives to reward them for cost, efficiency, service and quality improvements ultimately leading to increased customer satisfaction. Armed with world-class facilities and an effective workforce, IPSCO's keys to operational success include reducing cost, increasing operating efficiency and maximizing capacity utilization. IPSCO's major steelmaking raw material is scrap for the three steelworks, which normally trends with prices for plate and coil. Higher plate and coil prices are generally associated with higher scrap prices. Likewise, prices for industrial pipe products often track coil feedstock prices. IPSCO manages these variable costs using a number of strategies. IPSCO owns General Scrap Partnership, a Canadian scrap metal operation with seven collection locations in western Canada and two in north central U.S. In addition, IPSCO cultivates close business relationships with most major scrap yards and brokers throughout mid America. IPSCO also purchases steel from other steel manufacturers. Coil feedstock for tubular and coil processing operations can either be sourced internally or purchased from third party vendors, thereby optimizing IPSCO's steelworks' utilization rates. Electricity and natural gas are also important variable costs for IPSCO. These are addressed through different strategies including competitive long-term supply contracts. Economic success also rests in large part with the efficient absorption of the substantial fixed costs at each facility. Optimum absorption requires making the product right the first time, at maximum throughput rates. High utilization rates, high yields and superior quality are a reflection of optimum performance. 3 - ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------ Another key performance driver is management's ability to effectively control working capital, primarily customer receivables, inventory levels and vendor payables. Most products from the three steelworks are manufactured only when a firm order is received, either from an external customer or an internal requirement to provide feedstock for IPSCO's own downstream processing lines. Production based on demand helps minimize finished inventory levels. However, some pipe products such as OCTG are produced in advance of orders and made available at selected sites that are convenient to customer locations. This is especially important given the seasonal well drilling cycle for the Western Canadian energy market, as well as the short time interval between customer order dates and required delivery. Well drilling traditionally is most active in the late fall and winter season and slowest during the early spring thawing season. Careful accounts receivable management is also important given the cyclical nature of the steel business. IPSCO uses a number of techniques to minimize credit risk starting with a thorough knowledge of customers who request credit. That, combined with variable payment terms and close attention to account detail, helps minimize losses. IPSCO supports its operations with a sound capital structure that combines equity from both common and preferred stock along with a variety of debt instruments, generally of a long-term fixed rate nature. The long-term structure of these capital resources is important given both the long-term nature of the Company's investment in facilities and the cyclical nature of world steel markets. BUSINESS RISKS AND UNCERTAINTIES Continued weakness in the Canadian or U.S. industrial economies could result in a lessening of demand for IPSCO's steel products. The Company needs to maintain minimum levels of sales to operate profitably. There can be no assurance that the overall market demand for IPSCO products will not decrease in the future or that the Company will be successful in retaining necessary market share for its products. Reduction in overall market demand or the failure to hold market share could have an adverse effect on earnings. The Company supplies tubular goods used for oil and natural gas exploration and production which are linked to energy prices. There can be no assurance that future oil and natural gas price volatility will not materially impact the Company's ability to sell these products and maintain profitability. Credit risk can be a significant factor in a weak industrial economy. While the Company uses a number of techniques to address this exposure, there can be no assurances that losses will not occur. Excess global capacity and the effect on North American steel prices remain a significant risk. Excess supply resulted in surges of low-priced steel into North American markets and drove prices to historically low levels over the past few years. That led to the March 2002 Section 201 ruling when the U.S. International Trade Commission concluded that, for the majority of products reviewed, imported steel had seriously injured domestic producers. There are no assurances that current remedies beneficial to the North American steel industry will be sustained long term, or that these actions will allow the domestic industry to fully recover. 4 ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ The Company has substantial investments in facilities in both the U.S. and Canada. As a result, the Company transacts business in the currencies of both countries, with the ratio between the U.S. dollar and Canadian dollar denominated sales and expenditures varying over time. The average value of the Canadian dollar declined slightly from $0.6460 U.S. in fiscal 2001 to $0.6369 U.S. in fiscal 2002. In addition, the strength of both the Canadian and U.S. dollars relative to other foreign currencies influences import and export activity. Both currencies weakened against the Euro and other major currencies in fiscal 2002. Future fluctuations in the exchange rate between the Canadian and U.S. dollars and other foreign currencies could have a material effect on the Company. IPSCO has accumulated net operating loss carry-forwards, on a tax basis, of $355 million as of December 31, 2002 on its U.S. operations, for which the Company has recorded future tax benefits. This compares to accumulated net operating loss carry-forwards of $359 million as of December 31, 2001. The ability to realize the future tax benefits is dependent on future profitability. Although 99% of the net operating loss carry-forwards do not begin to expire until 2018, there can be no guarantee the tax benefits related to these carry-forwards will be realized before they expire. Approximately 44% of IPSCO's employees are represented by trade unions. The United Steelworkers of America represents members in Regina, Saskatchewan and Calgary, Alberta and the International Association of Bridge, Structural and Ornamental and Reinforcing Ironworkers represents members in Red Deer, Alberta. These unions represent 98% of IPSCO's unionized labor force. Members of the unions ratified new labor agreements during 2002 that will expire by August 2006. Changing environmental legislation and regulatory practices may require future expenditures to modify operations, install additional pollution control equipment, dispose of waste products, and perform site remediation. During 2002 non-routine project expense and capital spending on programs aimed at environmental issues amounted to $2.7 million. The 2002 amount compares to $11.4 million spent in 2001 (including $7.5 million spent on the Mobile Steelworks). Another substantial risk to IPSCO is continued government subsidies to weaker, inefficient competition. Subsidized North American and international producers have hurt Company results. Several companies in the U.S. and Canada, who are otherwise uncompetitive because of old, inefficient, expensive operations, have remained in business under the protection of bankruptcy laws. In some cases competitors have emerged from bankruptcy or stayed in business only because governments are guaranteeing their debt or paying their obligations for pension and other benefits. Internationally, government subsidies also often sustain local producers at the expense of financially sound North American producers like IPSCO. The Company uses a systematic approach to routinely maintain all facilities and equipment. Nonetheless, there is risk of plant equipment failure, either because of maintenance issues or as the result of operational errors. Substantial capital costs to construct steelworks, combined with expensive labor contracts, were traditionally a barrier to entry into the steel industry. Recent events point to the ability of prospective investors to secure plants and equipment, especially from those in financial distress, for significantly less capital than historically 5 - ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------ required. Traditional labor contracts may be replaced with more competitive agreements. In addition, new technology may be developed. There is a risk that these changing conditions could lead to new entrants to the steel industry or the reconstitution of existing participants with more competitive cost structures. Canada is a signatory to the United Nations Framework Convention on Climate Change. On December 10, 2002, Parliament ratified the Kyoto Protocol, which sets binding targets to reduce national emissions of carbon dioxide, methane and a number of other gases collectively referred to as greenhouse gases. With ratification completed, focus has shifted to future federal and provincial legislation to implement programs with industry-specific numerical goals to meet the reductions set by the Protocol. The Canadian Government has issued a Climate Change Plan that identifies groups of large industrial emitters, which will be required to reduce emissions in an effort to meet the Protocol targets. "Iron and Steel Production Facilities" is one of the sectors included in this effort. While the Canadian Government has expressed its support for limiting the impact of the Kyoto Protocol on industry, the specific processes for achieving the targets have yet to be determined. It is too early to say whether implementation of required processes will have a material adverse impact on the Company's Canadian operations. The U.S. is not currently a signee of the Kyoto Protocol. RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2002 COMPARED WITH YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000 2002 COMPARED TO 2001 SALES IPSCO manages its business to maximize total corporate profit dollars, not individual facility profitability. This is done by optimizing internal steelmaking capacity, and augmenting internal steel production with outside feedstock purchases. A drop in the sales of one particular product line may indicate a fall in demand or a deliberate decision by IPSCO to sell less of that product in order to generate a more profitable product mix. Such decisions are taken on the basis of: 1) marginal production costs and revenues, 2) freight rates on raw material and/or steel movements between plants, and 3) the cost of delivering products to customers, all balanced by longer-term strategic requirements. In reading individual product commentaries the shareholder should bear in mind that the comments reflect the result of corporate profit maximization activities. 6 ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ The following table details tons shipped by major product line: - -------------------------------------------------------------------------------- TONS SHIPPED - -------------------------------------------------------------------------------- (in thousands) 2002 2001 2000 Plate and coil 1,543 1,071 944 Coil processing 572 490 434 - -------------------------------------------------------------------------------- 2,115 1,561 1,378 - -------------------------------------------------------------------------------- Energy tubulars 382 455 404 Non-energy tubulars 271 295 254 Large diameter pipe 129 134 197 - -------------------------------------------------------------------------------- 782 874 855 - -------------------------------------------------------------------------------- Total 2,897 2,435 2,233 ================================================================================ For a sixth consecutive year IPSCO shipped record tonnage, amounting to 2,896,900 tons, 19% more than a year earlier. This achievement took place in a year when North American apparent steel consumption is expected to be up only modestly. Revenue of $1.08 billion in 2002 reflects the significantly higher shipments made by the Mobile Steelworks, as well as continued market penetration by coil processing facilities opened over the past few years. Production capabilities have generally improved quarter over quarter following the Mobile commissioning process which concluded in September of 2001. IPSCO's average unit selling price declined to $369 per ton in 2002 from $380 per ton in 2001, primarily due to changes in product mix (a higher percentage of steel mill products compared to tubular products) but also due to continued price competition. Shipments to U.S. customers reached 2,125,800 tons, over 73% of the total, while Canadian based customers accounted for 771,100 tons, about 27%. Despite growth in the Company's total shipments, Canadian shipments were 11% below that of 2001, indicating that the U.S. market continued to provide the growth in sales. STEEL MILL PRODUCTS Shipments of 2,115,000 tons of discrete plate, cut plate and hot rolled coil ("steel mill products") surpassed those of a year earlier by 35%. U.S. destined tons increased by 50% while Canadian tons fell 5%. IPSCO's average unit selling price for steel mill products improved about 4% on a year-over-year basis primarily as the result of modest price increases and selective commercial practices offset by regional pricing differences. Market conditions did not improve appreciably year-over-year. Shipments from coil processing facilities were 572,100 tons, 17% higher than a year earlier. Canadian destined shipments were virtually identical to 2001 levels while U.S. shipments rose 26%. The average unit selling price increased 3% on a year-over-year basis. IPSCO's coil processing facilities in Houston, St. Paul, 7 - ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------ and Toronto all make temper-leveled plate products which offer superior flatness, surface quality, and higher strengths without furnace treatment, and which are gaining market share over competitors' cut-to-length plate. IPSCO estimates that its market share for plate, hot rolled steel coil, and sheet products reached about 5% of combined U.S. and Canadian markets in 2002. TUBULAR PRODUCTS About 27% of the Company's total shipments in 2002 were tubular products, down from about 36% in 2001, reflecting the impact of both the Mobile Steelworks ramp-up and a slow market for many tubular product lines. IPSCO produces tubular products from coil at eight facilities. By adding value to the basic steel mill product, profitability is enhanced. Further, because a number of these products involve some degree of customization, they are often less susceptible to unfair price competition from generic imported steel. Tubular product volume fell 11% from 2001 levels to 782,000 tons. Shipments of these products to U.S. customers fell 4% while shipments to Canadian customers fell 16%. Pipe sales declined due to the soft economy and slow activity within the oil and gas industries. Total shipments of large diameter pipe fell 4% to 129,300 tons from 134,400 tons. Shipments of OCTG and small diameter line pipe fell 14% from 445,000 tons to 381,400 tons. The average number of active drilling rigs fell on a year-over-year basis from 1,156 to 830 in the U.S. and from 341 to 263 in Canada for a combined decrease of 27%. Shipments of non-energy tubulars dropped from 294,800 tons to 271,200 tons, or 8%, primarily because of slower sales of both standard pipe and hollow structural pipe in the U.S. IPSCO's average unit selling price of energy tubular products fell about 3% while non-energy tubular prices increased about 8% over 2001. Large diameter pipe pricing, which can vary significantly based on project specifications and mix, fell about 2% year-over-year. The selling price decrease experienced by energy tubulars reflected the softer market conditions as evidenced by the 27% drop in drilling rates. The increase in average pricing for non-energy tubulars, however, was primarily the result of significantly higher feedstock costs, some of which were passed on to the ultimate consumer, even though market conditions were not appreciably better in 2002 than 2001. COST OF SALES Cost of sales increased 21% to $976.4 million compared to $807.9 million in 2001. Gross margin decreased slightly to 10% of sales from 11% in 2001, reflecting both increased sales of the lower than average margin products from the Mobile Steelworks, and decreased tubular product sales, which generate higher margins. This trend was partially offset by higher pricing for steel mill products and improved production costs at both U.S. steelworks, the result of higher production levels and therefore improved utilization. The choice of facility at which a given order will be produced is often based on the freight cost to a given customer location. However, some products tend to be unique to one of the steelworks; wide plate and coil to Montpelier and Mobile, narrow alloy plate to Regina. The operating level for a tubular facility is determined by whether or not feedstock is available at a low enough cost such that the facility can 8 ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ generate an incremental financial return. Given that IPSCO's third party sales of steel mill products (combined with the steel consumption of our own downstream operations) can exceed the capacity of IPSCO's steelworks, individual facilities' operating levels are determined by whether or not purchased steel is available at a suitable price. Thus plant operating levels are constantly adjusted to maximize corporate profitability. RAW MATERIALS In 2002, a total of $500 million dollars was spent on major raw materials and consumables for the Company's three steelworks, up by 27% from the $395 million spent in 2001. Included in the amount are expenditures for steel scrap, pig iron, alloy materials, carbon electrodes, oxygen, refractories, limestone, natural gas and electricity. During 2002, IPSCO recycled 3.3 million tons of purchased scrap, the principal raw material for its steel mills, at an average cost per ton about 15% higher than the previous year. IPSCO's General Scrap Partnership and IPSCO Direct Inc., an Alberta scrap collection company, provided 12% of the Company's overall needs. The remainder was readily available from other parties. Energy constitutes a significant portion of an electric furnace steelmaker's costs. In 2002 IPSCO's cost per kilowatt-hour edged up just slightly more than 4% due to escalation clauses in long term supply contracts. Natural gas costs per millions of British Thermal Units fell by about 26%. The combination had a negligible impact on production costs. IPSCO's coil processing and tubular operations consumed 118,200 tons of hot rolled coil purchased from third parties, supplementing the Company's own production. This was 70% below the 389,900 tons consumed a year earlier. The principal reason for the reduction was internal supply available from our steelworks coupled with restricted supply from third parties. MAINTENANCE AND OTHER EXPENSES Maintenance is an extremely important cost factor for IPSCO. With newer facilities, IPSCO enjoys lower maintenance costs relative to many competitors with older facilities. IPSCO has separate maintenance reserve accounts for every major production segment of the three steelworks as well as each coil processing and tubular facility. IPSCO provides for the anticipated costs of maintaining these segments (relining furnaces, replacing motors, etc.) based on maintenance schedules and past experience. When IPSCO does have scheduled maintenance shutdowns, like the 14-day outage in Regina last September, most costs to complete the work are charged against the reserves. However, fixed costs, which aren't absorbed into inventory as the result of the shutdown, are expensed as incurred. 9 - ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------ Pension expenses, principally for the defined benefit plans under Canadian labor contracts, increased $2.0 million compared to 2001. One-third of the increase was attributable to benefit improvements granted as part of new labor agreements reached during 2002. Future annual pension expenses are expected to increase significantly (an estimated $5 million in 2003) because of: 1) increased service costs attributable to the new labor agreements 2) increased interest costs on benefit obligations which are escalating, and 3) increased amortization of shortfalls in plan asset investment actual losses relative to expected investment returns incurred over the last two years. Amortization of capital assets increased by 38% to $51.0 million in 2002 from $37.1 million in 2001. Most of the increase reflects a full year's amortization of the Mobile Steelworks with just a minor increase from other assets placed into service in 2002. CAPACITY UTILIZATION Capacity utilization is a key driver of performance for IPSCO. Tons of output are related to the number of production turns at each facility. Theoretically, all production equipment is available for 168 hours a week, less operating downtime for routine maintenance. That is equivalent to operating 7 days per week, 24 hours per day. Therefore, in order to maximize plant and equipment utilization and minimize absorbed cost per ton of output, maximum performance occurs at IPSCO when four crews run the facilities around the clock. Optimum utilization after routine maintenance therefore is 95%. Capacity, utilization and production are as follows: - -------------------------------------------------------------------------------- Facilities Capacity (tons)(1) Utilization % Production (tons)(2) - -------------------------------------------------------------------------------- (in thousands) 2002 2001 2000 2002 2001 2000 Regina 1,000 89 94 93 961 1,068 1,041 Montpelier 1,250 91 87 90 1,114 967 980 Mobile(3) 1,250 80 -- -- 932 379 -- Coil Processing 1,200 37 38 35 559 502 439 Small Diameter 1,125 58 68 68 588 660 613 Large Diameter 600 34 45 38 142 189 231 1) In thousands of tons of finished product. 2) In thousands; liquid steel for steelworks; finished production for other facilities. 3) Mobile was not in commercial production until fourth quarter 2001, therefore values are not included for 2000 and 2001. 10 ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ STEELMAKING Production at the Regina Steelworks dropped to 961,200 liquid tons, about 10% less than 2001, primarily because of a 14-day scheduled maintenance outage in September (also reflected in the decline in capacity utilization). The Montpelier Steelworks recorded production of 1,114,400 liquid tons of steel, more than 15% above 2001. Utilization increased to 91% reflecting product mix considerations, despite a mechanical failure on its static shear and an eight-day scheduled maintenance outage during 2002. The Mobile Steelworks produced 932,100 tons of liquid steel in 2002 vs. 379,000 tons in 2001. The percentage of prime production is increasing as the operation matures. The number of man-hours required to produce a ton of coil or discrete plate averaged 0.78 for the combined steelworks. A total of 559,000 tons of coil were processed by IPSCO's coil processing facilities, up 11% over 2001's 501,400 tons, reflecting market share improvements as customers demand higher quality. IPSCO's coil processing facilities include three temper leveling mills which provide the superior gauge control, flatness and surface quality features sought by end-users. TUBULAR OPERATIONS IPSCO pipe mills produced 14% fewer tons than a year earlier as a result of the impact of lower drilling activity on demand for energy tubulars and the negative impact of a slow economy on demand for non-energy tubulars. Production of large diameter gas transmission pipe was down 25%, and shipments decreased 4% to 129,300 tons, reflecting a limited number of projects in the transmission industry. The large diameter mills in Regina experienced a 34% utilization rate, lower than the 45% recorded a year earlier. The man-hours required to convert finished steel to one ton of finished pipe averaged 2.52 identical to 2.52 man-hours in 2001. This was despite the commissioning of new welding equipment on the mid-size mill in Regina. SELLING, RESEARCH AND ADMINISTRATION EXPENSE Selling, research and administrative expenses of $55.2 million were 4% lower than the $57.5 million reported in 2001. Bad debt expense was down $5.1 million reflecting the unusually high provisions recorded in 2001. Administrative expenses for the Mobile Steelworks were up $6.1 million reflecting the first full year of operation for that facility. Insurance costs were also $2.0 million higher than 2001, because of well-publicized problems in that industry. INTEREST ON LONG-TERM DEBT Interest expense on long-term debt increased to $23.8 million in 2002 compared to $6.6 million in the prior year. Most interest on long-term debt was capitalized to the Mobile Steelworks project during 2000 and 2001 under Canadian Generally Accepted Accounting Principles. 11 - ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------ 2001 COMPARED TO 2000 SALES Sales revenues decreased by 5% to $903.7 million in 2001, reflecting the price erosion that resulted from oversupply conditions largely attributed to dumping of unfairly priced imported steel. For a fifth consecutive year record tonnage shipments were recorded, amounting to 2,435,100 tons or 9% higher than 2000. This achievement took place in a year when a manufacturing recession saw North American apparent steel consumption fall by 13%. The average unit selling price declined by about 10% from $421 per ton in 2000 to $380 per ton, but in the last quarter dropped to $366 per ton, partly due to product mix (a higher percentage of steel mill products as compared to tubular products) but more generally indicative of severe price competition. Shipments to U.S. customers reached 1,570,300 tons, almost 65% of the total, while Canadian based customers accounted for 864,800 tons, about 35%. Despite growth in the Company's total shipments the Canadian figure was 7% below that of 2000, indicating that the U.S. market provided the growth in sales. STEEL MILL PRODUCTS Shipments of 1,561,000 tons of steel mill products surpassed those of 2000 by 13%, with the U.S. destined tonnage increasing 21% while Canadian tons fell 4%. In the U.S., unlike 2000 when equipment problems at the Montpelier Steelworks limited IPSCO's ability to service the market, the coming on stream of the new Mobile Steelworks meant that order receipt to delivery times became shorter and therefore more competitive in the second half, resulting in higher sales. The average unit selling price received by IPSCO for these products dropped almost 13% on a year-overyear basis as the result of supply-demand imbalances caused by the excess supply sited previously. The first quarter of the year saw lower price realizations than the closing quarter of 2000, followed by further erosion in the second quarter, a relatively flat third quarter, followed by an even more significant drop in the fourth. Coil processing steel shipments were 489,700 tons of the total, 13% higher than 2000. Canadian destined shipments were virtually identical to 2000 levels while U.S. shipments rose 21%. IPSCO estimated that its market share in the sizes and grades of steel mill products that it sold to third parties reached about 4% of the combined U.S. and Canadian markets in 2001. TUBULAR PRODUCTS Tubular products tonnage rose from 855,000 tons in 2000 to 874,200 tons in 2001. This was possible because of IPSCO's diverse product line and ability to address product mix issues based on market conditions. The drop in sales of large diameter oil and gas transmission pipe and non-energy tubulars in Canada exceeded sales increases for OCTG and small diameter line pipe, resulting in an overall 9% drop in shipments to Canadian customers. On the other hand U.S. sales tonnage rose 19% because of higher sales of OCTG and small diameter line pipe as well as non-energy tubulars. 12 ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ Total large diameter tonnage fell 32% to 134,400 tons from 197,400 tons. There were no major orders requiring oil or gas transmission pipe 16 inches or greater in diameter. On the other hand the tonnage of oil country tubulars and small diameter line pipe rose 10% from 404,100 tons to 445,000 as the average number of active rigs drilling rose on a year-over-year basis from 916 to 1,155 in the U.S. and from 383 to 392 in Canada. The normal pattern of sales of these products failed to materialize in Canada as weather conditions in the fourth quarter of 2001 proved to be less than conducive to a high drilling rate. Tonnage shipments of non-energy tubulars rose to 294,800 tons from 253,500 tons or 16% primarily because of higher sales of standard pipe in the U.S. Shipments of hollow structurals in both countries and standard pipe in Canada decreased. IPSCO estimates that its market share in North America for tubular products within the size and grade ranges that it manufactures was 8% in 2001. The average unit selling price of tubulars fell by just under 5%, largely due to substantial price erosion in non-energy tubular products. These products are less sophisticated than higher value added energy tubulars and therefore demonstrate price volatility more or less in line with steel mill products. However, the continued successful penetration of these markets plays an important role in providing diversity and flexibility to deal with market conditions, as mentioned above. COST OF SALES Cost of sales increased to $807.9 million from $799.9 million in 2000. Gross income as a percentage of sales was 11%, down from 16% in 2000. This significant decline primarily reflects the detrimental effects of price erosion caused by excess supply including unfairly priced imported steel. In addition, gross margin dropped 1% because the Mobile Steelworks operated below capacity. RAW MATERIALS In 2001 a total of $395 million was spent on major raw materials and consumables for the Company's three steelworks, up by 13% from the $351 million expended in 2000. Included in the figure are steel scrap, pig iron, alloy materials, carbon electrodes, oxygen, refractories, limestone, natural gas, and electricity. The startup of the Mobile Steelworks, with the resultant increase in company-wide steel production, as well as higher unit natural gas prices, exceeded the impact of lower unit scrap costs. During the year IPSCO recycled some 2.6 million tons of purchased scrap, the principal raw material for its steelmaking, at an average cost per ton that was about 10% lower than the previous year. IPSCO's 91% owned General Scrap Partnership and fully owned IPSCO Direct Inc., an Alberta scrap collection company, provided some 17% of the Company's overall needs. Energy constitutes a significant portion of an electric furnace steelmaker's costs. In 2001 IPSCO's cost per kilowatt hour edged up just slightly more than 3% as the result of escalation clauses in long term supply contracts. Natural gas costs per millions of British Thermal Units rose by over 50% due to higher costs in the earlier part of the year resulting in additional cost of sales of $10 million. These comparisons exclude Mobile, which was not operating in 2000. 13 - ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------ IPSCO's coil processing and tubular operations consumed 389,900 tons of hot rolled coil purchased from third parties, supplementing the Company's own production. This was 27% below the 534,200 tons used a year earlier. The principal reasons for the reduction were the softer markets and new capacity to source internally from Mobile. STEELMAKING Liquid steel production at 2,414,500 tons exceeded the previous year by 19%, reflecting the startup of the new Mobile Steelworks. Production at the Regina Steelworks reached 1,068,400 liquid tons, just under 3% higher than 2000. Capacity utilization was 94%. The Montpelier Steelworks recorded production of 967,100 tons of liquid steel, just slightly more than 1% below the year-earlier figure. This translated into an effective utilization rate of 70% because the facility was plagued by original equipment malfunctions and breakdowns. The new Mobile Steelworks produced 379,000 tons of liquid steel after initial production began at the end of the first quarter. While the first nine months of operation saw the typical issues involved in getting a steel mill of its size up and running, management considers it a success. The number of man-hours required to produce a ton of finished steel in discrete plate or coil form averaged 0.75 for Montpelier and Regina combined, somewhat higher than the 0.70 reported for 2000, chiefly as the result of the decision to perform certain maintenance functions in-house at Montpelier. Previously these had been undertaken by outside contractors whose manpower statistics are not reported to IPSCO. A total of 501,400 tons was handled by IPSCO's coil processing facilities, 14% higher than the 439,000 tons in 2000. TUBULAR OPERATIONS IPSCO pipe mills produced a record 848,800 tons, 1% higher than a year earlier, despite continuing weak markets for large diameter gas transmission pipe and the negative impact of a slowing economy on the demand for non-energy tubulars. Average capacity utilization at IPSCO's small diameter pipe mills remained at 68% while production tonnage rose 7% due to the improved efficiencies at the Blytheville, Arkansas pipe works and the Camanche, Iowa pipe works. The large diameter mills in Regina had 45% utilization, higher than the 38% recorded a year earlier. The man-hours required to convert finished steel to one ton of finished pipe averaged 2.52. This compares to 2.43 man-hours in 2000 and reflects a more labor-intensive product mix rather than a decrease in efficiency. SELLING, RESEARCH AND ADMINISTRATION EXPENSES Selling, research and administration expenses decreased 7% in 2001 to $57.5 million from the $62.1 million reported in the prior year. 14 ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ Significant costs incurred in 2000 for research and development and for legal and related expenses associated with the Mannesmann Demag lawsuit were not repeated in 2001. These decreases were partially offset by a $4 million increase in allowances for bad debts and expenses incurred by the Mobile Steelworks which were expensed subsequent to the end of its commissioning period ending September 30, 2001. In total, selling, research and administration expenses represent 6% of consolidated sales in 2001, compared to 7% in 2000. INTEREST ON LONG-TERM DEBT Interest on long-term debt expensed decreased by 4% to $6.6 million in 2001 after decreasing by 64% to $6.9 million in the prior year. The decrease in interest on long-term debt expensed in 2001 results from the increase in interest capitalized on the Mobile Steelworks more than offsetting increased interest incurred (refer to "Capital Structure"). Interest on long-term debt expensed in 2000 also decreased due to the increase in interest that was capitalized for the Mobile Steelworks. 2002 COMPARED TO 2001 AND 2000 INCOME BEFORE INCOME TAXES, NET INCOME AND NET INCOME AVAILABLE TO COMMON SHAREHOLDERS Income before income taxes decreased by 48% (20% excluding non-recurring items) to $31.7 million in 2002 as a result of the changes described in the previous sections. These results include one non-recurring transaction during 2002 and two non-recurring transactions during 2001. In 2002 the Company successfully completed the sale of certain assets held for sale and recorded associated pretax income of $6.5 million. In 2001 the Company settled a lawsuit against the turnkey contractor of the Montpelier Steelworks for $49 million. A total of $39 million represented claims for lost business and reimbursement of legal costs and was recorded in other income, and the $10 million balance was used to replace equipment. Additionally in 2001 a non-cash charge of $10 million was recorded to adjust the carrying value of assets held for sale to their estimated net realizable value. Income before income taxes for 2001 decreased by 25% to $60.7 million from $80.8 million in 2000. Net income decreased by 48% (20% excluding non-recurring items) to $20.3 million in 2002, after having decreased 33% to $38.9 million in 2001. Net income available to common shareholders declined 68% (46% excluding non-recurring items) to $8.9 million in 2002 from $27.4 million in 2001. EARNINGS PER SHARE Basic earnings per share fell 72% to $0.19 in 2002 after having fallen 42% to $0.67 in 2001 from $1.15 in 2000. Net non-recurring items represented $0.09 of the $0.19 reported for 2002 and $0.45 of the $0.67 in 2001. Diluted earnings per share fell 71% to $0.19 in 2002 after having fallen 27% to $0.66 in 2001 from $0.91 in 2000. RETURN ON COMMON SHAREHOLDERS' EQUITY The return on common shareholders' equity was 1% in 2002, down from 4% in 2001 and 6% in 2000. 15 - ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------ [GRAPHIC OMITTED - BAR CHART] [GRAPHIC OMITTED - BAR CHART] SELLING, RESEARCH INTEREST ON AND ADMINISTRATION LONG-TERM DEBT EXPENSES ($ millions) ($ millions) O0 7 00 62 01 7 01 58 02 24 02 55 [GRAPHIC OMITTED - BAR CHART] INCOME BEFORE INCOME TAXES, NET INCOME AND NET INCOME AVAILABLE TO COMMON SHAREHOLDERS ($ millions) NET INCOME AVAILABLE TO INCOME BEFORE TAX NET INCOME COMMON SHAREHOLDERS ----------------- ---------- ------------------- 00 81 58 47 01 61 39 27 02 32 20 9 [GRAPHIC OMITTED - BAR CHART] [GRAPHIC OMITTED - BAR CHART] DILUTED EARNINGS RETURN ON COMMON PER SHARE SHAREHOLDERS' EQUITY ($ per share) (%) 00 0.91 00 6 01 0.66 01 4 02 0.19 02 1 16 - -------------------------------------------------------------------------------- QUARTERLY RESULTS - -------------------------------------------------------------------------------- Results by quarter for 2002, 2001 and 2000 were as follows: 2002 2001 2000 TONS SHIPPED (thousands) (including Mobile shipments during commissioning in 2001) 1st Quarter 749.5 583.6 590.4 2nd Quarter 810.9 587.7 559.0 3rd Quarter 697.8 659.0 524.3 4th Quarter 638.7 604.8 559.5 ---------------------------------------- Total 2,896.9 2,435.1 2,233.2 ======================================== SALES (millions) (excluding Mobile sales during commissioning in 2001) 1st Quarter $ 271.1 $ 232.5 $ 257.8 2nd Quarter 287.6 219.6 236.6 3rd Quarter 266.9 229.1 223.0 4th Quarter 256.1 222.5 231.9 ---------------------------------------- Total $1,081.7 $ 903.7 $ 949.3 ======================================== NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS (millions) 1st Quarter $ (3.4) $ 5.7 $ 15.2 2nd Quarter 1.2 28.7 12.3 3rd Quarter 1.1 8.5 9.4 4th Quarter 10.0 (15.5) 9.9 ---------------------------------------- Total $ (8.9) $ 27.4 $ 46.8 ======================================== BASIC EARNINGS (LOSS) PER COMMON SHARE 1st Quarter $ (0.08) $ 0.14 $ 0.37 2nd Quarter 0.03 0.70 0.30 3rd Quarter 0.02 0.21 0.23 4th Quarter 0.21 (0.38) 0.24 Year 0.19 0.67 1.15 ======================================== DILUTED EARNINGS (LOSS) PER COMMON SHARE 1st Quarter $ (0.08) $ 0.14 $ 0.33 2nd Quarter 0.03 0.57 0.27 3rd Quarter 0.02 0.20 0.20 4th Quarter 0.19 (0.38) 0.20 Year 0.19 0.66 0.91 ======================================== 17 - ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------ ANALYSIS OF IPSCO'S TOTAL CAPITALIZATION The return on common shareholders' equity for 2002 decreased to 1% from 4% in 2001. This level of return is below the 2002 inflation rates of 3.9% in Canada and 2.4% in the U.S. Inflation rates in Canada and the U.S. in 2001 were 0.7% and 1.6% respectively. During 2002, IPSCO reduced borrowings under its committed $200 million revolving term bank line by $10.0 million for a total outstanding balance of $118.0 million at December 31, 2002. This contributed to the net decrease in long-term debt to $342.2 million as at December 31, 2002 from $386.8 million at the end of 2001. The Company converted its $50.0 million unsecured demand operating facility to an unsecured committed 364-day facility in 2002. Also, during the year, the Company completed an offering of 6.5 million common shares that netted proceeds of $90.7 million after payment of associated costs. SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) IPSCO, a Canadian company, uses U.S. dollars as the basis of reporting and follows Canadian Generally Accepted Accounting Principles (GAAP) in reporting financial results. The U.S./Canadian GAAP differences generally relate to timing issues for expense recognition. The 2001 differences were more significant than normal primarily because of the treatment of major transactions associated with start-up and commissioning of the new Mobile Steelworks. The differences in the reported results arising from using U.S. as opposed to Canadian GAAP are summarized in Note 21 to the 2002 financial statements. CRITICAL ACCOUNTING POLICIES The Company prepares its financial statements in conformity with Canadian GAAP. The Company's significant accounting polices are discussed in the notes to the consolidated financial statements. The application of these policies requires significant judgments or estimation that can impact financial position, results of operations and cash flows. The Company believes the accounting principles chosen are appropriate under the circumstances, and that the estimates, judgments and assumptions involved in its financial reporting are reasonable. Accounting estimates made by management of the Company are based on an analysis of historical experience and information on current events that is available to management at the time the estimate is made. If circumstances on which estimates were based change, the impact is included in the results of operations for the period in which the change occurs. Senior management has discussed the development and selection of the critical accounting estimates and the related financial statement disclosure with the Audit Committee of the Board of Directors. Critical accounting policies for the Company that are subject to significant estimates and assumptions are summarized on the following pages. 18 ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ VALUATION OF LONG-LIVED ASSETS The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. Impairment losses are recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amounts. The impairment loss is measured by comparing the fair value of the asset to its carrying amount. Factors that could impact IPSCO's estimate of undiscounted cash flows include, among other things, technological changes, economic conditions or changes in operating performance, resulting in the need to write-down those assets to fair value. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company has established an allowance for doubtful accounts for losses resulting from the potential that some customers may be unable to make payments. Management continually monitors payment patterns of customers, investigates past-due accounts to assess likelihood of collection and monitors industry and economic trends to derive an estimation of the required allowance. If the financial condition of IPSCO's customers were to deteriorate resulting in an impairment or inability to make payments, additional allowances would be recognized. INVENTORY VALUATION Inventories are valued at the lowest of average cost, replacement cost and net realizable value. On a monthly basis IPSCO performs an analysis to determine whether any reduction in the average cost of inventory is necessary to record inventory at the lowest value. In addition, and on an ongoing basis, an analysis is performed to determine whether saleable products on hand need to be written down to reflect their estimated net realizable value given the intended sales channel for the product. If the products do not achieve this lower net realizable value, further losses in their disposition would be recognized. FUTURE INCOME TAX ASSETS As part of the process of preparing consolidated financial statements IPSCO is required to estimate income taxes in each jurisdiction. This process involves estimating current tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in future tax assets and liabilities which are included within the consolidated balance sheet. An assessment is made as to the likelihood that the future tax assets will be recovered from future taxable income. To the extent recovery is not likely a valuation allowance is established. The Company has recorded a valuation allowance to reduce the recorded future tax assets to an amount that is more likely than not to be realized. In determining the valuation allowance management has utilized certain tax planning strategies considered to be prudent and feasible to allow for the realization of the future tax assets. In the event the probability of realizing the future tax asset does not meet the more likely than not threshold, the valuation allowance would be increased and a corresponding charge against income would be recorded. 19 - ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------ OBLIGATIONS RELATING TO EMPLOYEE PENSION PLANS The Company provides retirement benefits for substantially all of its employees under several defined benefit and defined contribution plans. The defined benefit plans provide benefits that are based on a combination of years of service and an amount that is either fixed or based on final earnings. The Company's policy with regard to the defined benefit plans is to fund the amount that is required by governing legislation. Independent actuaries perform the required calculations to determine pension expense in accordance with GAAP. Various statistical methods which attempt to anticipate future events are used in calculating the expense and liabilities related to the plans. The actuarial assumptions used by the Company may differ from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants. These differences may impact the net pension expense and liability recorded by the Company, as well as future funding requirements. LIQUIDITY AND CAPITAL RESOURCES Cash flows Working capital derived from operations in 2002 was $72.4 million compared to $57.8 million for the year ended December 31, 2001. Cash used for working capital totaled $59.8 million and was primarily comprised of increased receivables due to higher sales levels and increased inventory levels. Inventories were built in anticipation of improved seasonal drilling rates in the oil and gas sector and also to ensure uninterrupted customer service in the event of a work stoppage during the contract negotiations concluded in December 2002. Cash derived from working capital in 2001 totaled $50.5 million. In 2001 lower sales levels and the receipt of 2000 income tax refunds were the main sources of that cash. Net cash derived from operations totaled $12.6 million in 2002, down considerably from the $108.3 million in 2001. In February 2002, the Company issued 6.5 million shares of common stock for net cash proceeds of $90.7 million, used to pay down debt. The Company also renegotiated the terms of the $200.0 million revolving term facility to increase its flexibility, and converted the $50.0 million demand facility into a committed 364-day facility that expired February 18, 2003 and will not be renewed. Net repayments of long-term debt (including the revolving term credit facility) during 2002 were $31.1 million, compared to net issuances of $46.9 million in 2001. During 2001, the Company raised $15.0 million from the sale and leaseback of equipment at its Houston coil processing facility. The Company's commitments under this and other sale and leaseback transactions are accounted for as operating leases. Accordingly, the contractual obligations are included in the operating lease section of the commitments table that follows. The $35 million bank indebtedness outstanding at December 31, 2001, was also repaid during 2002. Interest paid on the Junior Subordinated Notes in 2002 amounted to $8.5 million, the same amount paid in 2001. Dividends to holders of common shares and Series 1 preferred shares amounted to $6.1 million and 20 ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ $5.3 million respectively during 2002, compared to $11.2 million and $5.3 million in 2001. The significant drop in common stock dividend payments is discussed later under Capital Structure. During 2002 $3.0 million was raised from common shares issued pursuant to the share option plan compared with $0.4 million in 2001. In 2002 $1.7 million was invested in General Scrap Partnership, increasing IPSCO's residual participation to 100%. The $2.0 million investment in General Scrap Partnership in 2001 brought IPSCO's participation up to 91%. The effect of exchange rates resulted in a decrease in cash of $0.5 million in 2002, compared to a $3.5 million decrease in 2001. Capital spending in 2002 of $34.2 million was down substantially from $155.8 million spent in 2001, primarily due to the completion of the Mobile Steelworks. Cash received from the sale of assets held for sale during 2002 totaled $1.5 million. Cash, net of bank indebtedness, increased by $20.4 million during 2002 to $22.9 million. This compares to a decrease of $15.7 million during 2001. There was no short-term bank indebtedness at the end of 2002, compared to $35.0 million outstanding at the end of 2001. RATINGS Standard & Poor's (S&P) and Dominion Bond Rating Service (DBRS) lowered their ratings on IPSCO's debt securities in November 2002. Both services cited continuing demand weakness for IPSCO's core products. The corporate credit and senior unsecured debt ratings were lowered by S&P from BBB- to BB+. The preferred stock rating was reduced to P-4 (high) on the Canadian scale (B+ Global scale) from P-3 (BB). DBRS lowered the unsecured debentures and preferred shares to BBB and Pfd-3 from BBB (high) and Pfd-3 (high) respectively. DBRS continues to regard IPSCO as investment grade, based in large part on a strong balance sheet and sufficient access to liquidity, regardless of how the markets perform in the near term. The ratings changes did not result in additional finance expenses under current outstanding financing arrangements. Improved earnings and successful generation of positive free cash flow will be needed to raise the ratings. CAPITAL INVESTMENTS Spending was kept to minimum levels consistent with the slow demand within the North American steel market and the resulting decreased cash generation. Total capital expenditures for 2002 were held to $34.2 million, down significantly from $155.8 million invested in 2001. In 2002, payments of $5.9 million were made for holdbacks on various equipment supply contracts for the Mobile Steelworks. In 2001, capital outlays for the Mobile Steelworks were $129.1 million. A substantial portion of the 2001 disbursements went to liquidating holdbacks on various equipment supply contracts and for capitalized start-up costs. Also in 2001, under Canadian GAAP, losses during the six-month commissioning period and interest during that period were recorded as capital items. These amounts were $35 million and $14 million respectively. The Mobile Steelworks operated at 80% effective capacity during 2002, a reasonable rate given the stage of mill development and market demand. Mobile, like Montpelier, is capable of producing coil as well as 21 - ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------ heavy and light discrete plate. The Mobile Steelworks produced its first liquid steel late in the first quarter of 2001, within the time frame announced at the commencement of the project, but about three months behind the time specified in the construction contract that included a guaranteed-not-to-exceed cost provision. The contractual amount was exceeded and damages of over $60 million are being sought by IPSCO in a court action commenced in September 2001. The defendant has denied liability and asserted certain counterclaims which the Company believes are without merit. The case remains in the discovery stage. Montpelier capital spending was $8.7 million in 2002 and reflects the benefit of improvements made in 2001 as well as management's control of capital spending. Capital spending for 2001 at Montpelier was $13.1 million. CAPITAL STRUCTURE IPSCO strives to maintain a strong balance sheet and a flexible capital structure. The Company believes that the principal indicators of its creditworthiness are its ability to generate cash from operations, its debt to total capitalization percentage, and the degree to which covenants in its existing lending agreements may affect its future ability to access debt markets. The Company's most restrictive covenant at December 31, 2002 with respect to funded debt requires that funded debt not exceed 50.0% of consolidated tangible net worth. In February 2002 the Company completed negotiations with its banking syndicate partners to amend the covenant to allow that funded debt not exceed 50.0% of consolidated tangible net worth, an increase from the 45.0% in the prior agreement. This amendment added short-term borrowings to the definition of funded debt contained in the existing covenant. For purposes of this covenant, funded debt includes: a) long-term debt (including the current portion), b) the Junior Subordinated Notes, c) the lease of the meltshop and caster equipment at the Montpelier Steelworks, d) certain letters of credit, and e) borrowings under the 364-day facility. At December 31, 2002, the percentage of funded debt, so calculated, to tangible net worth was 38.7% as compared to 43.0% at the end of 2001. Based on the aforementioned funded debt to tangible net worth covenant, the Company estimates that as at December 31, 2002 up to $363 million in additional funded debt could have been raised while still complying with this covenant. This compares to just $56 million available for draw at the end of 2001. This amount does not include amounts available for draw by the Company under its operating line or that may be available for use by the Company under other methods of financing which would not constitute funded debt for purposes of the Company's lending agreements. 22 ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ The Company had a receivables securitization facility arranged through a major Canadian bank that permitted the sale of up to CDN $75.0 million, or the U.S. dollar equivalent, of its Canadian or U.S. accounts receivable. The November 2002 reduction in the Company's debt ratings resulted in a termination event under the agreement. The Company has not sought, and has no plans to seek, a renegotiation of that agreement. No accounts receivable had ever been sold under the agreement. The ratio of the Company's long-term debt to total capitalization, as calculated based on Canadian GAAP financial statements at the end of 2002 decreased to 24% from 28% as at the end of 2001. The difference between the ratio of the Company's long-term debt to total capitalization and the ratio of the Company's funded debt to tangible net worth as described above results primarily from the differences in the accounting treatment given, under the relevant lending agreement and under Canadian GAAP, to the Company's Junior Subordinated Notes and the Montpelier Steelworks melt shop and slab caster lease. IPSCO's most restrictive covenant with respect to equity maintenance requires that tangible net worth, as defined by and calculated in accordance with the relevant lending agreement (excluding the Junior Subordinated Notes), be maintained at a minimum of $570 million, plus 50 percent of net income earned after December 31, 1998. The Company's equity exceeded this requirement by $317 million or 48% at December 31, 2002, and by $225 million or 34% at the end of 2001. As part of the regular review of the dividend level on common shares, IPSCO decided to change the quarterly dividend from CDN $0.125 per share to CDN $0.05 per share in the fourth quarter of 2001. This reduction was made to conserve cash because of short-term uncertainty in the North American steel industry. This dividend rate has been retained due to continued uncertainty. Even though there are no maintenance interest coverage restrictions related to IPSCO's current borrowings, the number of times that the Company's earnings before interest and taxes can cover its interest on long-term debt ("interest coverage") is an important indication of its ability to issue additional long-term debt. Interest incurred, capitalized and charged to earnings in 2002, 2001, and 2000 are as follows: - -------------------------------------------------------------------------------- 2000 2001 2002 - -------------------------------------------------------------------------------- (millions) Incurred $23.8 $26.1 $23.1 Capitalized -- 19.5 16.2 - -------------------------------------------------------------------------------- Charged to Earnings $23.8 $ 6.6 $ 6.9 ================================================================================ IPSCO's interest coverage in 2002 decreased to 2.3 times from 2.6 times in 2001, on an interest-incurred basis. The Mobile commissioning phase was completed in 2001 and no new major projects were initiated, therefore no interest was capitalized in 2002. 23 - ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------ The most restrictive covenant in the Company's lending agreements with respect to working capital requires that the Company maintain a working capital ratio of 1.5:1. The Company comfortably exceeded this requirement with working capital ratios of 2.8:1 and 2.1:1 at the end of 2002 and 2001 respectively. LIQUIDITY The principal indicators of IPSCO's liquidity are its cash position and amounts available to be drawn under its bank lines of credit. The Company has a committed revolving term facility of $200.0 million to March 4, 2005, and had a 364-day facility of $50.0 million to February 18, 2003. These lines of credit can be drawn at spreads over the Canadian prime rate, the U.S. base rate, Canadian Bankers' Acceptances Reference Discount Rate or U.S. dollar LIBOR, in either Canadian or U.S. funds, subject to maintaining the prescribed working capital ratio and other financial covenants. At December 31, 2002, $118.0 million was drawn under the term bank lines and there were no drawings under the 364-day committed line. Letters of credit of $12.1 million were outstanding. In 2003, $35.4 million of long-term debt will mature compared to $21.1 million which was paid in 2002. During 2002, IPSCO's cash position decreased by $14.6 million to $22.9 million while the working capital ratio increased from 2.1:1 to 2.8:1. As at December 31, 2002 the committed cost to complete in-process capital projects was $5 million. As at the end of 2001, this amount was $4.7 million. Management, for the second consecutive year, plans to control spending by limiting 2003 investment to under $40 million for new and existing capital programs. Assuming continuing profitability, IPSCO expects that it will be able to finance future expenditures from its cash position, cash from operations, and its bank lines of credit but may also consider operating lease financing as well as additional debt or equity financing as appropriate. From time to time IPSCO makes use of interest rate swaps and foreign currency contracts to manage the Company's interest rate and foreign exchange risks. At the end of December 2002, the Company did not have any such contracts outstanding. The Company has entered into a swap agreement to hedge the cost of purchasing natural gas. The agreement fixes the price the Company must pay for 1,500 gigajoules per day through October 31, 2004. As at December 31, 2002 the unrealized loss under the swap agreement was $0.1 compared to an unrealized loss of $1.9 million at the end of 2001. 24 ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS ------------------------------------ COMMITMENTS The Company had ongoing commitments under various contractual and commercial obligations at December 31, 2002, as follows: - -------------------------------------------------------------------------------- CONTRACTUAL OBLIGATIONS (MILLIONS) PAYMENTS DUE BY PERIOD - -------------------------------------------------------------------------------- Less than 1 to 3 4 to 5 After Total 1 year years years 5 years Long-term debt $378 $ 35 $247 $ 43 $ 53 Operating leases 234 30 60 37 107 Other long-term obligations 292 45 107 59 81 - -------------------------------------------------------------------------------- Total contractual cash obligations $904 $110 $414 $139 $241 ================================================================================ OFF-BALANCE SHEET ARRANGEMENTS IPSCO's only significant off-balance sheet arrangements are related to the sale and leaseback of certain equipment and letters of credit. The sale and leaseback arrangements originally totalled $173 million, the most significant being the $150 million sale and leaseback of the Montpelier Steelworks meltshop and slab caster, completed in 2000. For Canadian GAAP purposes this transaction was treated as a sale, and the subsequent lease payments as operating expenses. For U.S. GAAP purposes this transaction was recorded as a financing lease, with no recognition of the disposal of the assets. See Note 19 "Commitments" and Note 21 "Significant Differences Between Canadian and United States Generally Accepted Accounting Principles" of the 2002 financial statements for further information. The Company's letters of credit have been previously referred to. OUTLOOK Developments in the overall condition of the North American steel business have been well documented through 2002. The end user demand for steel products in IPSCO's target markets has been flat or declining through the year. The impact of the slowing capital goods economy, overlaid with inventory adjustments through the distribution chain, resulted in an inverted saucer-shaped pattern of demand for IPSCO steel products over the last 12 months. Entering 2003 the steel products demand picture appears to be flat at best with some expectations of an improving industrial economy as overall economic recovery occurs. Within this weak demand environment IPSCO continues to consolidate market share gains and to adjust its product mix based on profitability determinations. Non-energy tubular product demand follows patterns similar to steel mill products demand including the significant distribution channel impact. Energy tubular product demand lagged expectations through 2002 given the underlying oil and natural gas price environment. Outside of the general steel demand pattern however there has been a more sustained pick-up in the demand for OCTG products, starting in December 2002 in Canada and continuing into the first quarter of 2003. 25 - ------------------------------------ MANAGEMENT'S DISCUSSION AND ANALYSIS - ------------------------------------ The major changes in the market for IPSCO products in 2003 however are likely to be on the steel supply side. Significant structural change in the industry has started with major consolidation activity. While most of this activity has had a limited direct impact on IPSCO's major markets this process is still at an early stage and the final outcome is not apparent. In addition the trade issues in steel continue to attract attention both within North America and internationally. To date there appears to be little tangible progress in dealing with excess global capacity. Rapidly shifting patterns of steel sector ownership and production internationally, along with the impact of exchange rates and quota, tariff and other import controlling measures, is resulting in the potential for a continued unsettled pattern of steel trade flows. Within the U.S. the 201 safeguard action is entering year two of its three year cycle with periodic reviews attracting considerable pressure from parties opposed to the President's steel program. Through all of this restructuring of the North American and international steel industry, IPSCO, based on its world-class facilities, expects to continue to gain market share in the North American steel market. Pricing is the result of all of the issues noted above. Given the essentially flat or declining demand and uncertainties on the supply side, IPSCO anticipates that the pricing for the majority of its products will be under pressure throughout 2003. Significant downward pressure would result from a further stalled economy or revitalized competitor. It is anticipated however that any further significant downward movement in pricing would be short lived based on the limited capability of the industry producers to sustain such lower prices. Likewise, meaningful price increases will require a more active economy or a material reduction in supply capacity aimed at those markets. Over the next several months IPSCO expects prices, particularly for steel mill products, to decline from fourth quarter 2002 levels based on the competitive pressures noted earlier. However they will be above first half 2002-price levels, which were at record lows. As part of its overall growth plans IPSCO continues to advance its product mix towards higher priced, value added products. The overall outlook then is one filled with considerable uncertainty based on macro trends. IPSCO's modern and effective supply capability will enable the Company to deal with the anticipated fluctuations in the coming year and remain very well positioned to take advantage as the economy picks up and the industry itself is rationalized. 26 EX-99 5 exhibit202-form40f_2002.txt EXHIBIT 20.2 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS The accompanying consolidated financial statements of IPSCO Inc., and all information in this report, were prepared by management, which is responsible for its integrity and objectivity. The financial statements have been prepared in accordance with Canadian generally accepted accounting principles and necessarily include some estimates based upon management's judgments. The significant accounting policies, which management believes appropriate for the Company, are described in Note 2 to the financial statements. Financial and operating data presented elsewhere in the annual report are consistent with the information contained in the financial statements. The integrity and reliability of IPSCO's reporting systems are achieved through the use of formal policies and procedures, the careful selection and development of employees and an appropriate division of responsibilities. Internal accounting controls are continually monitored by an internal audit staff through ongoing reviews and comprehensive audit programs. IPSCO regularly communicates throughout the organization the requirement for employees to maintain high ethical standards in their conduct of the Company's affairs. The Board of Directors is responsible for ensuring that management fulfills its responsibilities for financial reporting and internal control and exercises this responsibility principally through the Audit Committee of the Board. The Board of Directors annually appoints this Audit Committee which is comprised of directors who are neither employees of IPSCO nor of companies affiliated with the Company. This committee meets regularly with management, the head of the internal audit department, and the shareholders' auditors to review significant accounting, reporting and internal control matters. Both the internal and shareholders' auditors have unrestricted access to the Audit Committee. Following its review of the financial statements and annual report and discussions with the shareholders' auditors, the Audit Committee reports to the Board of Directors prior to the Board's approval of the financial statements and annual report. The Audit Committee recommends the appointment of the Company's external auditors, who are appointed by the Company's shareholders at its annual meeting. Ernst & Young LLP, the shareholders' auditors, have performed an independent audit in accordance with Canadian generally accepted auditing standards and have attested to the fairness, in all material respects, of the presentation of the financial statements. Their report follows. /s/ David Sutherland /s/ Robert Ratliff David Sutherland Robert Ratliff Vice President and Chief Financial President and Chief Executive Officer Officer January 28, 2003 1 AUDITORS' REPORT To the Shareholders of IPSCO Inc. We have audited the consolidated statements of financial position of IPSCO Inc. as at December 31, 2002 and 2001 and the consolidated statements of income and retained earnings, and cash flows for each of the years in the three year period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2002 and 2001 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2002 in accordance with Canadian generally accepted accounting principles. /s/ Ernst & Young LLP Chicago, Illinois January 28, 2003 2 - -------------------------------------------------------------------------------- IPSCO INC. CONSOLIDATED STATEMENTS OF FINANCIAL POSITION - -------------------------------------------------------------------------------- As at December 31 (thousands of United States dollars) NOTES 2002 2001 CURRENT ASSETS Cash and cash equivalents $ 22,859 $ 37,492 Accounts receivable Trade, less allowances 135,421 106,770 Other, including current portion 18,331 9,938 of mortgage receivable 255,410 239,394 Inventories 3 2,847 2,031 Prepaid expenses 41,402 44,490 --------------------------- Future income taxes 4 476,270 440,115 --------------------------- NON-CURRENT ASSETS Capital assets 5 1,134,357 1,155,901 Mortgage receivable 6 5,403 -- Deferred charges, less amortization 2,785 2,026 Deferred pension asset 7 3,911 -- Future income taxes 4 121,586 126,123 --------------------------- 1,268,042 1,284,050 --------------------------- TOTAL ASSETS $ 1,744,312 $ 1,724,165 =========================== CURRENT LIABILITIES Bank indebtedness 8 $ -- $ 35,000 Accounts payable and accrued charges 9 106,155 121,464 Accrued payroll and related liabilities 13,775 15,315 Income and other taxes payable -- 2,111 Current portion of long-term debt 8 35,386 21,100 Other current liabilities 16,142 13,926 --------------------------- 171,458 208,916 --------------------------- LONG-TERM LIABILITIES Long-term debt 8 342,202 386,809 Deferred pension liability 7 -- 234 Future income taxes 4 143,229 142,668 --------------------------- 485,431 529,711 --------------------------- SHAREHOLDERS' EQUITY Preferred shares 10 98,553 98,545 Common shares 11 351,311 256,163 Subordinated notes 12 104,250 104,250 Retained earnings 13 494,599 491,777 Cumulative translation adjustment 38,710 34,803 --------------------------- 1,087,423 985,538 --------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,744,312 $ 1,724,165 =========================== Commitments and contingencies 19 & 22 The accompanying notes are an integral part of the consolidated financial statements. Approved by the Board /s/ Burton Joyce /s/ David Sutherland Burton Joyce, Director David Sutherland, Director 3 - -------------------------------------------------------------------------------- IPSCO INC. CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS - -------------------------------------------------------------------------------- Years Ended December 31 (thousands of United States dollars except per share data)
NOTES 2002 2001 2000 Sales $ 1,081,709 $ 903,743 $ 949.263 ------------------------------------------ Cost of sales Manufacturing and raw material 925,343 770,788 764,633 Amortization of capital assets 51,049 37,107 35,257 ------------------------------------------ 976,392 807,895 799,890 ------------------------------------------ Gross income 105,317 95,848 149,373 Selling, research and administration 55,155 57,527 62,076 ------------------------------------------ Operating income 50,162 38,321 87,297 Other expenses (income) Interest on long-term debt 8 23,821 6,634 6,934 Other interest expense (income), net 174 (928) (800) Foreign exchange loss 938 882 365 Gain on sale of assets held for sale 6 (6,464) -- -- Litigation settlement 22 -- (39,000) -- Provision for loss on assets held for sale 5 -- 10,000 -- ------------------------------------------ Income before income taxes 31,693 60,733 80,798 Income taxes 4 11,414 21,865 23,125 ------------------------------------------ NET INCOME 20,279 38,868 57,673 Dividends on preferred shares, including part VI.I tax 10 5,608 5,692 5,935 Interest on subordinated notes, net of income tax 12 5,771 5,771 4,890 ------------------------------------------ NET INCOME AVAILABLE TO COMMON SHAREHOLDERS $ 8,900 $ 27,405 $ 46,848 ========================================== EARNINGS PER COMMON SHARE BASIC 14 $ 0.19 $ 0.67 $ 1.15 ========================================== DILUTED 14 $ 0.19 $ 0.66 $ 0.19 ========================================== RETAINED EARNINGS AT BEGINNING OF YEAR $ 491,777 $ 475,551 $ 442,571 NET INCOME 20,279 38,868 57,673 ------------------------------------------ 512,056 514,419 500,244 Dividends on preferred shares, including part VI.I tax 10 5,608 5,692 5,935 Interest on subordinated notes, net of income tax 12 5,771 5,771 4,890 Dividends on common shares 13 6,078 11,179 13,748 Issue costs, net of income tax 12 -- -- -- ------------------------------------------ RETAINED EARNINGS AT END OF YEAR $ 494,599 $ 491,777 $ 475,551 ==========================================
The accompanying notes are an integral part of the consolidated financial statements. 4 - -------------------------------------------------------------------------------- IPSCO INC. CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- Years Ended December 31 (thousands of United States dollars)
NOTES 2002 2001 2000 CASH DERIVED FROM (APPLIED TO) Operating activities Working capital provided by operations 15 $ 72,397 $ 57,766 $ 92,166 Change in non-cash operating working capital 15 (59,795) 50,557 (69,412) ------------------------------------------ 12,602 108,323 22,754 ------------------------------------------ Financing activities Proceeds from issuance of common shares 11 90,670 -- -- Proceeds from issuance of common shares pursuant to share option plan 11 2,953 391 115 Common share dividends (6,078) (11,179) (13,748) Preferred share dividends (5,254) (5,337) (5,540) Issue of subordinated notes, net of issue costs 12 -- -- 89,824 Subordinated notes interest (8,500) (8,500) (3,161) Proceeds from sale-leaseback of capital assets 19 -- 15,000 158,001 Issue of long-term debt 8 83,300 120,000 70,000 Repayment of long-term debt 8 (114,400) (73,100) (21,200) ------------------------------------------ 42,691 37,275 274,391 ------------------------------------------ Investing activities Expenditures for capital assets 16 (34,211) (155,775) (368,190) Proceeds from sale of assets held for sale 6 1,466 -- -- Investment in partnership 17 (1,706) (1,993) (2,075) ------------------------------------------ (34,451) (157,768) (370,265) ------------------------------------------ Effect of exchange rate changes on cash and cash equivalents (475) (3,489) (3,560) ------------------------------------------ INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS LESS BANK INDEBTEDNESS 20,367 (15,659) (76,680) CASH AND CASH EQUIVALENTS LESS BANK INDEBTEDNESS AT BEGINNING OF YEAR 2,492 18,151 94,831 ------------------------------------------ CASH AND CASH EQUIVALENTS LESS BANK INDEBTEDNESS AT END OF YEAR $ 22,859 $ 2,492 $ 18,151 ==========================================
The accompanying notes are an integral part of the consolidated financial statements. 5 - -------------------------------------------------------------------------------- IPSCO INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Years Ended December 31 (thousands of United States dollars except per share data) 1. NATURE OF OPERATIONS IPSCO Inc. is a producer of steel products. The Company's products are sold primarily in Canada and the United States. The Company currently employs approximately 2,300 people, of whom approximately 56% are non-unionized personnel and approximately 44% are represented by trade unions. The Company is a party to separate collective bargaining agreements with a term to July 31, 2006 with locals of the United Steelworkers of America (USWA) which represent unionized employees in Regina and Calgary. These employees account for approximately 89% of the Company's unionized employees. In 2002, 2001 and 2000, no individual customer accounted for 10% of sales. At December 31, 2002 and 2001, no customer represented 10% of the accounts receivable balance. 2. SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles, and include certain estimates based on management's judgments. These estimates affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year.Actual results may differ from those estimates. The accounting policies followed by the Company also conform in all material respects with accounting principles generally accepted in the United States, except as described in Note 21. REPORTING CURRENCY Assets and liabilities of the Company's operations having a functional currency other than the U.S. dollar are translated into U.S. dollars using the exchange rate in effect at the year-end and revenues and expenses are translated at the average rate during the year. Exchange gains or losses on translation of the Company's net equity investment in these operations are deferred as a separate component of shareholders' equity. The change in the cumulative translation adjustment results primarily from fluctuations of the Canadian dollar against the U.S. dollar. BASIS OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. Significant inter-company transactions are eliminated on consolidation. CASH EQUIVALENTS Cash equivalents are securities of the government of Canada and its provinces, the government of the United States, banks, and other corporations, with a maturity of less than three months when purchased. These highly liquid securities are short-term and have fixed interest rates. INVENTORIES Inventories are valued at the lowest of average cost, replacement cost and net realizable value. INCOME TAXES The Company follows the liability method of tax allocation in accounting for income taxes. Under this method, future tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and measured using the substantially enacted tax rates and laws that will be in effect when the differences are expected to reverse. 6 ------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ CAPITAL ASSETS Capital assets are stated at cost. For major projects under construction, the Company capitalizes interest based on expenditures incurred to a maximum of interest costs on debt. Amortization is provided on the straight-line basis at the following annual rates: Buildings 4% Machinery and Equipment 4% to 33% Amortization is provided on all assets acquired as they come into production. For certain major projects, the units-of-production method is used until a substantial level of production is reasonably sustained. REPAIR AND MAINTENANCE COSTS Repair and maintenance costs are expensed as incurred except for the estimated cost of major overhauls and repairs which are accrued over the period between the major overhauls and repairs. DEFERRED CHARGES Financing costs relating to long-term debt are deferred and amortized over the term of the related debt and included in interest expense for the year. GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, the Company adopted the recommendations of The Canadian Institute of Chartered Accountants Handbook Section 3062, Goodwill and Other Intangible Assets. This standard requires that goodwill and intangible assets with indefinite lives are no longer amortized; rather, their carrying value is reviewed annually for impairment. The adoption of this standard did not materially affect the Company. PENSION EXPENSE AND DEFERRED PENSION BALANCE The cost of pension benefits earned by the employees covered by defined benefit plans is actuarially determined using the projected benefit method prorated on service and management's best estimate of expected plan investment performance, salary escalation, terminations, and retirement ages of plan members. Adjustments for plan amendments, changes in assumptions and actuarial gains and losses are charged to operations over the expected average remaining service life of the employee group which is approximately 12 years. The costs of pension benefits for defined contribution plans are charged to operations as contributions are earned. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instrument: CASH AND CASH EQUIVALENTS The carrying value of cash and cash equivalents approximates its fair value. MORTGAGE RECEIVABLE The fair value of the mortgage receivable has been estimated based on current rates for similar instruments with similar maturities.At December 31, 2002, the estimated fair value of the mortgage receivable was $6,332. LONG-TERM DEBT The fair value of the Company's long-term debt has been estimated based on current market prices.Where no market price is available, an estimate based on current rates for similar instruments with similar maturities has been used to approximate fair value. NATURAL GAS SWAP The Company has entered into a swap agreement to hedge the cost of purchasing natural gas. The agreement fixes the price the Company must pay for 1,500 gigajoules per day from November 1, 2001 through October 31, 2004. As at December 31, 2002 the unrealized loss under the swap agreement was $78 (2001 - $1,892). 7 - ------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ STOCK BASED COMPENSATION The Company has a share option plan as described in Note 11 (c). No compensation expense is recognized when the share options are issued to employees since the options are issued at market value on the date of the grant. Any consideration paid by employees on exercise of share options is credited to share capital. The Company has a deferred share unit plan as described in Note 11 (d). Compensation expense equal to the amount deferred is recorded. The liability relating to the deferred share units is revalued quarterly based on the market value of the Company's common shares and the resulting adjustment recorded in income. REVENUE RECOGNITION Sales and related costs are recognized upon transfer of ownership which coincides with acceptance of and shipment of products to customers. DERIVATIVE FINANCIAL INSTRUMENTS The Company enters into hedging transactions, from time to time, in order to manage its exposure to changes in energy commodity prices. Gains or losses relating to derivative instruments are deferred and recognized in the same period and in the same financial statement category as the gains or losses on the corresponding hedged transactions. Premiums paid with respect to derivatives are deferred and amortized to income over the term of the hedge. RECLASSIFICATION Certain of the prior year's figures have been reclassified to conform with the presentation adopted for the current year. 3. INVENTORIES 2002 2001 Finished goods $ 99,489 $105,105 Work-in-process 70,492 62,029 Raw materials 31,831 18,755 Supplies 53,598 53,505 ------------------------ $255,410 $239,394 ======================== 4. INCOME TAXES a) The components of income (loss) before income taxes are summarized below: 2002 2001 2000 Canada $48,452 $61,033 $77,785 United States (16,759) (300) 3,013 ------------------------------ $31,693 $60,733 $80,798 ============================== b) The provision for income taxes is summarized as follows: 2002 2001 2000 Current Canada $ 3,695 $ 30,501 $23,003 United States (3,169) 5,020 (4,819) ------------------------------ 526 35,521 18,184 ------------------------------ Future Canada 14,642 (5,995) 6,649 United States (3,754) (7,661) (1,708) ------------------------------ 10,888 (13,656) 4,941 ------------------------------ $11,414 $ 21,865 $23,125 ============================== 8 ------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ c) Income tax expense differs from the amount computed by applying the corporate income tax rates (Canadian Federal and Provincial) to income before income taxes. The reasons for this difference are as follows: 2002 2001 2000 Corporate income tax rate 41.1% 45.9% 46.1% ---------------------------------------- Provision for income taxes based on corporate income tax rate $ 13,026 $ 27,870 $ 37,240 Increase (decrease) in taxes resulting from Manufacturing and processing profit (6,604) (6,748) (9,672) Large corporation tax 895 880 857 Income taxed at different rates in the United States 3,000 10,800 8,000 Valuation allowance 3,474 1,015 206 ---------------------------------------- Other $ 11,414 $ 21,865 $ 23,125 ======================================== d) Future income taxes are comprised of the following: 2002 2001 Future tax assets Accounting provisions not currently deductible for tax purposes $ 37,100 $ 34,669 Capitalized general and administration 4,296 9,821 Net operating loss carry-forwards 141,852 141,942 Pension expense in excess of contributions -- 517 Other 1,540 2,464 ------------------------- Total future tax assets 184,788 189,413 ------------------------- Future tax liabilities Tax depreciation in excess of accounting amortization 133,671 129,958 Pension contributions in excess of expense 1,420 -- Foreign exchange gain on debt 3,414 9,128 Other 4,724 3,582 ------------------------- Total future tax liabilities 143,229 142,668 ------------------------- Valuation allowance 21,800 18,800 ------------------------- Net future income tax asset $ 19,759 $ 27,945 ========================= e) At December 31, 2002, United States subsidiaries of the Company had accumulated net operating losses carried forward of $355,179 for which the future tax benefits have been recorded. The related tax benefits can be carried forward and, subject to certain limitations, offset against income tax expense arising in future periods up to the year 2021. In determining the valuation allowance for net future income taxes at December 31, 2002, the Company has considered certain tax planning strategies that it believes to be prudent and feasible. 9 - ------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ 5. CAPITAL ASSETS
2002 2001 ACCUMULATED ACCUMULATED COST AMORTIZATION NET COST AMORTIZATION NET -------------------------------------- -------------------------------------- Land and land improvements $ 55,789 $ -- $ 55,789 $ 55,741 $ -- $ 55,741 Buildings 312,724 38,775 93,949 130,165 33,956 96,209 Machinery and equipment 1,213,168 257,450 955,718 1,166,975 212,889 954,086 Construction in progress 14,085 -- 14,085 35,184 -- 35,184 -------------------------------------- -------------------------------------- 1,415,766 296,225 1,119,541 1,388,065 246,845 1,141,220 Assets held for sale 24,931 10,115 14,816 26,441 11,760 14,681 -------------------------------------- -------------------------------------- $1,440,697 $ 306,340 $1,134,357 $1,414,506 $ 258,605 $1,155,901 ====================================== ======================================
During the year, $nil (2001 - $20,523, 2000 - $17,055) of interest costs were capitalized in connection with major capital asset projects. Certain capital assets, which are not employed in production, have been segregated pending their ultimate disposition and are carried at an amount not exceeding management's best estimate of net realizable value. During 2001, the Company wrote down the carrying value of these assets by $10,000 to reflect the Company's valuation. The Company's valuation includes significant estimates concerning the cost to complete environmental remediation activities, as well as in estimating the ultimate net recovery value of the property. The estimated environmental costs could change depending on the remediation method used. The Company's estimates of net sales value could be impacted by the prevailing economic conditions and the Company's ability to obtain necessary zoning and other approvals. See Note 6 for discussion of asset sales. 6. MORTGAGE RECEIVABLE AND SALE OF ASSETS HELD FOR SALE During 2002, the Company sold certain of its assets held for sale for cash of $1,466 and a mortgage of $6,338. The transaction resulted in gain of $6,464. The mortgage bears interest at 5% for the first two years, and at bank prime plus 1/2% for the remaining term. Minimum principal payments due in each of the next five years are as follows: 2003 $ 954 2004 954 2005 954 2006 954 2007 2,541 ------ 6,357 Current portion, included in other accounts receivable 954 ------ $5,403 ====== 7. PENSION PLANS The Company provides retirement benefits for substantially all of its employees under several defined benefit and defined contribution plans. The defined benefit plans provide benefits that are based on a combination of years of service and an amount that is either fixed or based on final earnings. The defined contribution plans restrict the Company's matching contributions to 5% of each participating employee's annual earnings. 10 ------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ The Company's policy with regard to the defined benefit plans is to fund the amount that is required by governing legislation. Pension plan assets are invested in Canadian and U.S. equities and Canadian fixed income instruments with no investment in securities of the Company. During 2002, amendments were made to increase benefits payable under plans for the Company's Canadian unionized employees. Net pension expense attributable to the Company's pension plans for 2002, 2001, and 2000 included the following components: 2002 2001 2000 Defined benefit plans Service cost for benefits earned $ 3,288 $ 2,966 $ 2,899 Interest cost on benefit obligations 7,029 6,389 6,522 Expected return on plan assets (6,993) (7,303) (6,965) Net amortization 443 -- -- --------------------------- 3,767 2,052 2,456 Defined contribution plans 3,050 2,743 1,917 --------------------------- Net pension expense $ 6,817 $ 4,795 $ 4.373 =========================== The following table sets forth the defined benefit plans' funded status and amount included in the deferred pension balance in the Company's statement of financial position at December 31, 2002 and 2001: 2002 2001 Benefit obligation at beginning of year $ 97,449 $101,256 Service cost for benefits earned 3,440 3,088 Interest cost on benefit obligation 7,029 6,389 Plan amendments 8,344 -- Actuarial losses (gains) 11,076 (701) Benefit payments (6,603) (6,587) Currency translation 1,162 (5,996) ------------------- Benefit obligation at end of year 121,897 97,449 ------------------- Market value of plan assets at beginning of year 87,554 94,101 Actual return on plan assets (5,328) (484) Employer contributions 7,809 5,855 Plan participants contributions 253 158 Benefit payments (6,603) (6,587) Currency translation 1,092 (5,489) ------------------- Market value of plan assets at end of year 84,777 87,554 ------------------- Funded status at end of year (37,120) (9,895) Item not recognized in earnings Unamortized actuarial losses and plan amendments 41,031 9,661 ------------------- Deferred pension asset (liability) $ 3,911 $ (234) =================== Amounts applicable to the Company's pension plans with an accumulated benefit obligation in excess of plan assets are: 2002 2001 Projected benefit obligation $116,272 $ 67,721 =================== Accumulated benefit obligation $111,783 $ 65,961 =================== Market value of plan assets $ 79,702 $ 59,012 =================== 11 - ------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ The significant actuarial assumptions adopted in measuring the Company's accrued benefit obligations as at December 31, 2002 and 2001 follow. Variances between such estimates and actual experience, which may be material, are amortized over the employees' average remaining service life. 2002 2001 Weighted average discount rate 6.6% 6.6% Expected long-term rate of return on plan assets 7.0% 8.0% Weighted average rate of compensation increase 3.8% 3.7% 8. DEBT (a) Long-term debt
CARRYING VALUE FAIR VALUE 2002 2001 2002 2001 ------------------- ------------------- 10.58% Unsecured note, payable in three remaining equal annual installments with the next payment due September 1, 2003 $ 3,300 $ 4,400 $ 3,576 $ 4,774 6.94% Unsecured notes, payable in two remaining equal annual installments with the next payment due April 1, 2003 40,000 60,000 40,541 61,061 7.32% Unsecured notes, payable in seven equal annual installments commencing April 1, 2003 100,000 100,000 104,230 99,500 7.80% Unsecured debentures, (CDN $100,000) maturing and payable December 1, 2006 63,573 62,794 63,605 65,639 6.00% Unsecured loan, maturing and payable June 1, 2007. The Company has the option at maturity to extend the term of the loan to no later than June 1, 2027 at an interest rate to be negotiated 14,715 14,715 14,566 13,584 8.11% Unsecured financing, maturing and payable November 1, 2009. The Company has the option at maturity to extend the term of the loan to no later than November 1, 2029 at an interest rate to be negotiated 28,000 28,000 29,459 27,890 6.875% Unsecured financing, maturing and payable May 1, 2010. The Company has the option at maturity to extend the term of the loan to no later than May 1, 2030 at an interest rate to be negotiated 10,000 10,000 9,797 9,181 Various Bank lines of credit (b) 118,000 128,000 118,000 128,000 ------------------- ------------------- 377,588 407,909 383,774 409,629 Less current portion of long-term debt (35,386) (21,100) (41,330) (23,529) ------------------- ------------------- $342,202 $386,809 $342,444 $386,100 =================== =================== Fair value of debt has been estimated on the basis described in Note 2.
12 ------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ b) Bank lines of credit At December 31, 2002, the Company had bank lines of credit aggregating U.S. $250,000 (2001 - U.S. $250,000), which can be drawn in Canadian or U.S. currency, of which U.S. $118,000 (2001 - U.S. $163,000) had been drawn down other than letters of credit of CDN $13,049, U.S. $3,775 (2001 - CDN $13,413, U.S. $3,775). Bank lines of credit are comprised of a U.S. $200,000 (2001 - U.S. $200,000) revolving term facility that expires March 4, 2005 and a U.S. $50,000 (2001 - U.S. $50,000) 364-day facility that expires February 18, 2003. Both facilities bear interest at spreads over the Canadian prime rate, the U.S. base rate, Canadian Bankers' Acceptances Reference Discount Rate or U.S. dollar LIBOR and are not secured by specific assets of the Company. At December 31, 2002, a partnership in which the Company has a 100% (2001 - 91%) residual interest had short-term bank lines of credit aggregating CDN $16,652 (2001 - CDN $16,652) of which CDN $Nil (2001 - CDN $Nil) had been drawn down. These bank lines of credit are reviewed at least annually and are revolving operating and term facilities that bear interest at either the Canadian prime rate or the U.S. base rate and are secured by certain assets of the partnership. Minimum payment requirements on long-term debt arrangements, without exercising the options to extend the terms outstanding, are as follows: 2003 $ 35,386 2004 35,386 2005 133,386 2006 77,859 2007 29,001 -------- 311,018 2008 - 2010 66,570 -------- $377,588 ======== 9. ACCOUNTS PAYABLE AND ACCRUED CHARGES Included in accounts payable and accrued charges is an accrual to cover the costs of major overhauls and repairs. Timing of these expenditures is dictated by future events and market conditions. At December 31, 2002 and 2001, the amounts accrued are $16,115 and $13,578 respectively. 10. PREFERRED SHARES a) Authorized The Company is authorized to issue unlimited first and second preferred shares. The first preferred shares rank in priority to the second preferred shares and the common shares as to payment of dividends and the distribution of assets. The first and second preferred shares may be issued in series and the directors of the Company may fix, before issuance, the further rights, privileges, restrictions and conditions attached thereto. The Company has issued first preferred shares, Series 1 (the Series 1 Preferred Shares) at a price of CDN $25.00 per Series 1 Preferred Share with a fixed cumulative preferential dividend as and when declared by the directors equal to 5.50% per annum payable quarterly on the 15th of February, May, August and November of each year. The Series 1 Preferred Shares are non-voting. However, if the Company fails to declare and pay eight quarterly dividends, consecutive or otherwise, and so long as any of those dividends are in arrears, the Series 1 Preferred Shares become voting. The Series 1 Preferred Shares may be redeemed in whole or in part by the Company at any time on or after May 15, 2004 for CDN $25.00 per share plus accrued and unpaid dividends. On or after May 15, 2004, the Company may elect to convert each Series 1 Preferred Share into that number of common shares determined 54 Notes to Consolidated Financial Statements by dividing CDN $25.00 plus accrued and unpaid dividends by the greater of CDN $3.00 and 95% of the market price of the common shares. In addition, on or after August 15, 2004, the holders have the option to convert each Series 1 Preferred Share into that number of common shares determined 13 - ------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ by dividing CDN $25.00 plus accrued and unpaid dividends by the greater of CDN $3.00 and 95% of the market price of the common shares subject to the Company's right to redeem the Series 1 Preferred Shares, arrange sales to substitute purchasers or a combination thereof. Unless all dividends are paid to the most recent dividend date, the Company may not: 1) pay cash dividends on shares ranking junior to the Series 1 Preferred Shares; 2) redeem, purchase or otherwise retire shares ranking on parity with or junior to the Series 1 Preferred Shares; or 3) redeem, purchase or otherwise retire less than all of the Series 1 Preferred Shares. The Series 1 Preferred Shares, including accrued and unpaid cumulative dividends, have been classified as equity since the Company has the unrestricted ability to settle the Series 1 Preferred Shares and related dividends by issuing its own common shares. b) Issued The Series 1 Preferred Shares amount at December 31 is comprised of: 2001 2002 NUMBER AMOUNT NUMBER AMOUNT ------------------- ------------------- Issued for cash 6,000,000 $097,829 6,000,000 $097,829 Accrued dividends -- 724 -- 716 ------------------- ------------------- Balance at end of year 6,000,000 $098,553 6,000,000 $098,545 =================== =================== 11. COMMON SHARES a) Authorized The Company is authorized to issue unlimited common shares. b) Issued In February 2002, the Company issued, for cash, 6,500,000 common shares at an issue price of CDN $23.25. Gross proceeds of U.S. $94,761 have been reduced by the related share issue expenses of $4,073, net of income taxes of $1,507. In July 2002, the Company granted 4,400 restricted shares to an officer of the Company whose salaried compensation was reduced by the fair value of the shares at the date of the award. Compensation expense was recorded in an amount equal to the fair market value of the shares as at the date of the grant. The rights of the recipient to dispose of the shares are restricted for three years from the date of the grant. Following is the continuity of common shares outstanding:
2002 2001 2000 NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT -------------------- -------------------- -------------------- Balance at beginning of year 40,843,536 $256,163 40,812,936 $255,772 40,796,436 $255,657 Issued for cash 6,500,000 92,195 -- -- -- -- Issue of restricted shares 4,400 61 -- -- -- -- Exercise of share options 319,551 2,892 30,600 391 16,500 115 -------------------- -------------------- -------------------- Balance at end of year 47,667,487 $351,311 40,843,536 $256,163 40,812,936 $255,772 ==================== ==================== ====================
14 ------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ c) Share Option Plan The Company has a share option plan under which common shares are reserved for directors, officers and employees. These options, which are exercisable within 10 years, are to be granted at a price established by the Board of not less than the last Toronto Stock Exchange board lot trading price on the day of the grant. The options vest over one to three years. Outstanding options at December 31, 2002 expire between 2003 and 2012. Following is the continuity of granted options outstanding in Canadian dollars:
2002 2001 2000 WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE NUMBER PRICE NUMBER PRICE NUMBER PRICE -------------------- -------------------- -------------------- Balance at beginning of year 3,311,955 $22.47 3,085,959 $22,70 2,471,325 $24.39 Options granted 439,500 22.22 284,885 20.00 654,760 16.13 --------- --------- --------- 3,751,455 22.44 3,370,844 22.48 3,126,085 22.66 Options exercised (319,551) 14.28 (30,600) 19.71 (16,500) 10.33 Options cancelled (10,500) 27.98 (28,289) 26.76 (23,626) 25.14 --------- --------- --------- Balance at end of year 3,421,404 23.18 3,311,955 22.47 3,085,959 22.70 ========= ========= =========
Following is the continuity of common shares reserved for future option grants under the share option plan: 2002 2001 2000 Balance at beginning of year 696,558 203,154 834,288 Options approved -- 750,000 -- Options granted (439,500) (284,885) (654,760) Restricted shares issued (4,400) -- -- Options cancelled 10,500 28,289 23,626 ------------------------------- Balance at end of year 263,158 696,558 203,154 ============================== Following is the range of exercise prices and contractual life of outstanding options under the plan in Canadian dollars as at December 31, 2002: WEIGHTED WEIGHTED AVERAGE AVERAGE EXERCISE CONTRACTUAL NUMBER PRICE LIFE --------------------------------- Balance of options outstanding at year end within the following ranges: $10.00 to $19.99 1,389,079 $16.91 4.9 $20.00 to $29.99 1,181,200 21.74 5.3 $30.00 to $50.00 851,125 35.41 4.5 --------- 3,421,404 23.18 4.9 ========= 15 - ------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Following is the range of exercise prices of options currently exercisable under the plan in Canadian dollars as at December 31, 2002: WEIGHTED AVERAGE EXERCISE NUMBER PRICE -------------------- Balance of options exercisable at year end within the following ranges: $16.82 $10.00 to $19.99 1,329,578 $16.82 $20.00 to $29.99 731,700 21.46 $30.00 to $50.00 844,225 35.32 --------- 2,905,503 23.36 ========= d) Deferred Share Unit Plan The Company has a deferred share unit plan into which directors must defer at least half of their annual retainer. Such deferrals are converted to deferred share units, each of which has a value equal to the value of one common share. On retirement from the Board, the director may receive payment of their deferred share units in cash, shares purchased on the open market or shares issued by the Company. The liability for deferred share units is included in accrued payroll and related liabilities. e) Additional Disclosure Section 3870 of the CICA Handbook requires the disclosure of pro forma information regarding net income and earnings per share using option valuation models that calculate the fair value of employee stock options granted. The fair value for the stock options was estimated at the date of grant using a Black-Scholes option pricing model using the following weighted-average assumptions for 2002, 2001 and 2000 respectively: risk-free interest rates of 3.6%, 4.8% and 5.8%; dividend yields of 0.9%, 2.5% and 3.1%; volatility factors of the expected market price of the Company's common stock of .44, .40 and .35; and a weighted-average expected life of the options of 1.0 year. The weighted-average grant-date fair value of the options granted during 2002 was $4.05 (2001 - $3.33, 2000 - $2.70). The Black-Scholes option valuation model was developed for use in estimating fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized over the options vesting period. The Company's pro forma information follows: 2002 2001 2000 Pro forma net income $19,304 $37,391 $55,720 ============================= Pro forma net income available to common shareholders $ 7,925 $25,928 $44,895 ============================= Pro forma earnings per common share: Basic $ 0.17 $ 0.64 $ 1.10 ============================= Diluted $ 0.17 $ 0.63 $ 0.88 ============================= 16 ------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 12. SUBORDINATED NOTES During 2000 and 1999, respectively, the Company issued $90,000 and $10,000 incremental rate junior subordinated notes maturing December 31, 2038. The incremental rate junior subordinated notes bear interest in arrears payable semi-annually at 8.5% for the ten year period ending December 10, 2008, 9.5% for the eleventh to fifteenth year and increasing by an additional 2% every five years thereafter. The incremental rate junior subordinated notes are redeemable, in whole or in part, by the Company, at any time, at the principal amount plus accrued and unpaid interest to the date of redemption (hereafter referred to as the Redemption Amount) and at maturity at the principal amount plus accrued and unpaid interest to the date of maturity (hereafter referred to as the Maturity Amount). The Company may, at its option, pay the Redemption Amount, Maturity Amount or any interest payment in cash or by delivering common shares to a trustee. The trustee would sell the Company's common shares and remit the proceeds to the holders of the incremental rate junior subordinated notes in payment of the Redemption Amount, the Maturity Amount or the accrued interest. The Company may, at its option, defer payment of interest on the incremental rate junior subordinated notes by extending the interest payment date for up to four consecutive semi-annual periods. Interest continues to accrue during the extension periods, but does not compound. An interest deferral can only commence if there have been no dividends paid on common or preferred shares during the preceding six months. Should the Company pay any dividends on common or preferred shares during the interest deferral period, the deferral period ceases and the payment of deferred interest is required. The principal amount of the incremental rate junior subordinated notes is classified as equity and accrued interest, on an after tax basis, is classified as a charge to retained earnings since the Company has the ability to settle the amounts by issuing its own common shares. In 2000, the related issue expenses of $176, $120 net of income taxes, were charged to retained earnings. 13. DIVIDENDS The most restrictive covenant pertaining to dividend payments in the Company's financing agreements requires consolidated shareholders' equity, excluding the balance of outstanding subordinated notes, to be maintained at a minimum of $570,000 plus 50% of net income earned after December 31, 1998. At December 31, 2002, the Company's shareholders' equity exceeded this requirement by $316,787. Dividends on common shares totalled CDN $0.20 per share in 2002 (2001-CDN $0.425 per share, 2000-CDN $0.50 per share). 14. EARNINGS PER COMMON SHARE Basic earnings per common share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding. Diluted earnings per share is calculated by dividing net income by the actual shares outstanding and share equivalents that would arise from the exercise of share options and deferred share units, and the conversion of preferred shares and subordinated notes. Out-of-themoney share options, those with an exercise price greater than market price, are excluded from the calculation as they are anti-dilutive. Preferred shares and subordinated notes have been excluded from the calculation in 2002 as they are anti-dilutive. 17 - ------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ The per share amounts disclosed on the Consolidated Statements of Income and Retained Earnings are based on the following:
2002 2001 2000 Numerator for basic earnings per share Net income available to common shareholders $ 8,900 $ 27,405 $ 46,848 Dividends on preferred shares, including part VI.I tax -- 5,692 5,935 Interest on subordinated notes, net of income tax -- 5,771 4,890 ----------------------------------------- Numerator for diluted earnings per share $ 8,900 $ 38,868 $ 57,673 ========================================= Common shares outstanding - January 1 40,843,536 40,812,936 40,796,436 Additional shares issued 5,638,318 19,282 9,183 ----------------------------------------- Denominator for basic earnings per share 46,481,854 40,832,218 40,805,619 Adjustment for share options 366,999 231,360 145,195 Adjustment for deferred share units 44,176 29,435 7,449 Adjustment for preferred shares -- 8,841,623 12,600,969 Adjustment for subordinated notes -- 8,971,601 9,796,926 ----------------------------------------- Denominator for diluted earnings per share 46,893,029 58,906,237 63,356,158 =========================================
15. CASH DERIVED FROM (APPLIED TO) OPERATING ACTIVITIES
2002 2001 2000 Working capital provided by operations Net income $ 20,279 $ 38,868 $ 57,673 Gain on sale of assets held for sale (6,464) -- -- Non-cash portion of litigation settlement -- (11,000) -- Non-cash provision for loss on assets held for sale -- 10,000 -- Amortization of capital assets 51,049 37,107 35,257 Amortization of deferred charges 813 549 544 Deferred pension expense (4,168) (3,958) (6,201) Income taxes allocated to future years 10,888 (13,656) 4,941 Other -- (144) (48) ------------------------------------------ $ 72,397 $ 57,766 $ 92,166 ========================================== Change in non-cash operating working capital Trade receivables $ (28,651) $ 28,642 $ (24,069) Other receivables (7,439) 21,099 (22,034) Inventories (16,016) (13,436) (13,576) Prepaid expenses (816) 600 127 Accounts payable and accrued charges (8,168) 6,916 (5,795) Accrued payroll and related liabilities (1,540) (1,523) (1,492) Income and other taxes payable 619 4,841 (4,851) Other current liabilities 2,216 3,418 2,278 ------------------------------------------ $ (59,795) $ 50,557 $ (69,412) ==========================================
16. EXPENDITURES FOR CAPITAL ASSETS
2002 2001 2000 Additions to capital assets $ 28,265 $ 155,007 $ 374,473 Decrease (increase) in accounts payable and accrued charges for capital expenditures 5,946 768 (6,283) ------------------------------------------ $ 34,211 $ 155,775 $ 368,190 ==========================================
18 ------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 17. INVESTMENT IN PARTNERSHIP A partnership formed between the Company and Jamel Metals Ltd. (Jamel), formerly General Scrap & Car Shredder Ltd. (General Scrap), purchased the Canadian scrap metal operations of General Scrap and the shares of Sametco Auto Inc., an automotive parts operation, effective April 1, 1997 for approximately $24,131, including the assumption of debt. IPSCO's interest in the capital of the partnership is 100% at December 31, 2002 (2001 - 91%). In 2002, the Company contributed $1,706 in exchange for the remaining 9% interest (2001 - $1,993 for an additional 10% interest). The partnership agreement requires annual payments of $1.3 million to Jamel through 2007 for services and land use. 18. SEGMENTED INFORMATION The Company is organized and managed as a single business segment, being steel products, and the Company is viewed as a single operating segment by the chief operating decision maker for the purposes of resource allocation and assessing performance. Financial information on the Company's geographic areas follows. Sales are allocated to the country in which the third party customer receives the product.
2002 2001 2000 Sales Canada $ 365,854 $ 395,841 $ 463,860 United States 715,855 507,902 485,403 ------------------------------------------ $ 1,081,709 $ 903,743 $ 949,263 ========================================== Capital Assets Canada $ 186,377 $ 195,390 United States 947,980 960,511 -------------------------- $ 1,134,357 $ 1,155,901 ==========================
Sales information by product group is as follows:
2002 2001 2000 Steel mill products $ 687,439 $ 458,625 $ 492,463 Tubular products 394,270 445,118 456,800 ------------------------------------------ $ 1,081,709 $ 903,743 $ 949,263 ==========================================
19. COMMITMENTS a) The Company and its subsidiaries have lease commitments on property for the period to 2015. The payments required by these leases, including the sale-leaseback transactions discussed below, are as follows: 2003 $ 30,075 2004 25,434 2005 18,236 2006 16,568 2007 18,010 -------- 108,323 2008 - 2015 125,364 -------- $233,687 ======== 19 - ------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ Rental expenses incurred under operating leases during 2002, 2001 and 2000 were $23,152, $26,858 and $10,839 respectively. In 2001, the Company concluded a sale and leaseback of the temper mill at its coil processing facility in Houston for cash proceeds of $15,000. The sale resulted in no gain or loss. The Company has the option, but not the obligation, to purchase the equipment for a predetermined amount after seven years of the 7.5 year lease term. In October 2000, the Company concluded the sale and leaseback of certain of its Montpelier Steelworks production equipment for cash proceeds of $150,000. The Company has options, but is not obligated, to purchase the equipment after seven and ten years for predetermined amounts and at the end of the lease term for the fair market value of the equipment. In December 2000, the Company concluded a sale and leaseback of the temper mill at its coil processing facility in St. Paul for cash proceeds of $8,251. The Company has the option, but not the obligation, to purchase the equipment for a predetermined amount after four years of the five year lease term. b) The Company and its subsidiaries have commitments under service and supply contracts for the period to 2017. Payments required under these contracts are as follows: 2003 $ 39,629 2004 37,952 2005 37,102 2006 32,328 2007 30,846 -------- 177,857 2008 - 2017 109,930 -------- $287,787 ======== c) At December 31, 2002, commitments to complete capital programs in progress total $5,021. 20. SUPPLEMENTAL INFORMATION 2002 2001 2000 Allowance for doubtful accounts $ 9,170 $10,326 $ 6,122 ============================= Doubtful accounts charged to expense (706) 4,435 11 ============================= Interest income 819 1,561 4,866 ============================= Other interest expense 993 633 4,066 ============================= Miscellaneous income 1,391 1,477 2,022 ============================= Research and development expense 1,391 1,306 5,507 ============================= Interest paid 20,856 25,466 25,219 ============================= Income tax installments paid 12,289 26,304 60,402 ============================= 20 ------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 21. SIGNIFICANT DIFFERENCES BETWEEN CANADIAN AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP) a) Reconciliation of net income (loss) between accounting principles generally accepted in Canada and the United States:
2002 2001 2000 Net income as reported under Canadian GAAP $ 20,279 $ 38,868 $ 57,673 Adjustments relating to the capitalization of interest (i) -- (8,908) (758) Adjustments relating to commissioning costs (ii) -- (22,776) (16,356) Adjustments relating to amortization of capital assets (iii) (1,839) (4,126) 998 Adjustments relating to subordinated notes (iv) (5,771) (5,771) (4,890) Adjustments relating to sale-leaseback (v) (1,404) (1,014) (709) Adjustments relating to change in accounting principles (vi) -- -- (8,977) Adjustments relating to natural gas hedge (vii) 736 (8) -- Adjustments relating to valuation allowance on net future income tax asset (viii) 26,700 (37,200) -- ------------------------------------------ Net income (loss) in accordance with U.S. GAAP 38,701 (40,935) 26,981 Dividends on preferred shares including part VI.I tax (5,608) (5,692) (5,935) ------------------------------------------ Net income (loss) available to common shareholders in accordance with U.S. GAAP $ 33,903 $ (46,627) $ 21,046 ========================================== Earnings (loss) per common share: United States Basic $ 0.71 $ (1.14) $ 0.52 ========================================== Diluted (ix) $ 0.66 $ (1.14) $ 0.50 ========================================== Common shares outstanding - January 1 40,843,536 40,812,936 40,796,436 Additional shares issued 5,638,318 19,282 9,183 ------------------------------------------ Denominator for basic earnings per share 46,481,854 40,832,218 40,805,619 Adjustment for share options 366,999 -- 145,195 Adjustment for deferred share units 44,176 -- 7,449 Adjustment for preferred shares 10,328,336 -- 12,600,969 Adjustment for subordinated notes 10,373,134 -- 9,796,926 ------------------------------------------ Denominator for diluted earnings per share 67,594,499 40,832,218 63,356,158 ==========================================
i) United States GAAP requires interest to be capitalized on the expenditures incurred for all major projects under construction to a maximum of all interest costs during the year or until the assets are placed into production. Commissioning and start-up costs are not included in the calculation of interest to be capitalized. For Canadian GAAP, commissioning and start-up costs are included in the calculation. ii) United States GAAP requires commissioning or start-up costs to be expensed as incurred. For Canadian GAAP, these costs are capitalized. 21 - ------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ iii) United States GAAP requires amortization of capital assets to commence when the capital assets are available for use. Under Canadian GAAP, amortization commences when the assets are placed into production which occurs at the end of the commissioning or start-up period. Further, the amount capitalized to capital assets under United States GAAP differs from the amount capitalized under Canadian GAAP (see i and ii above). iv) United States GAAP requires that the subordinated notes be classified as long-term debt, the related accrued interest to be classified as a liability, the related issue costs to be recorded as an asset which is amortized to interest expense over the term of the debt, the related pre-tax interest to be deducted in determining income and the related income tax benefit to be recorded as part of income tax expense. Under Canadian GAAP, as disclosed in Note 12, the Company has classified the subordinated notes as part of shareholders' equity and the interest, net of related tax effects, and the issue costs have been classified as charges to retained earnings. v) United States GAAP requires the financing method of accounting for the Montpelier Steelworks sale-leaseback transaction. Under Canadian GAAP, the transaction has been afforded operating lease treatment. U.S. GAAP gives rise to interest expense on the obligation and amortization of the capital asset. Under Canadian GAAP, a lease expense is incurred. vi) United States GAAP requires the cumulative effect of adoption of changes in accounting principles to be recorded, net of income taxes, as a charge to income. For Canadian GAAP, the cumulative effect is charged directly to retained earnings. In 2000, prior to the cumulative effect of the change in accounting principle, basic earnings per share were $0.74 and diluted earnings per share were $0.64. vii) United States GAAP requires recording of the ineffective portion of cash flow hedges in the income statement including the mark-to-market adjustment of the natural gas contract and the amortization of the effective portion (prior to the counterparty bankruptcy) of the natural gas hedge over the remaining life of the contract. Canadian GAAP allows for probable hedged transactions to be accounted for off-balance sheet. viii) Represents the change in the valuation allowance provided on the net tax asset allocated to future years for United States GAAP as a result of differences in accounting practices between United States and Canadian GAAP. See i), ii), and iii) above for explanation of the principal differences. ix) Due to the net loss in 2001, no adjustment was made for potentially dilutive instruments as the impact was anti-dilutive. b) Comprehensive income (loss):
2002 2001 2000 Net income (loss) in accordance with U.S. GAAP $38,701 $(40,935) $26,981 -------------------------------- Other comprehensive income Foreign currency translation adjustments (198) (15,686) (13,668) Adjustments relating to minimum pension liability (25,366) (3,853) 3,427 Tax effect 9,436 1,433 (1,275) Fair value adjustment for natural gas hedge -- (1,991) -- Tax effect -- 717 -- Amortization of natural gas hedge to income 664 111 -- Tax effect (239) (40) -- -------------------------------- (15,703) (19,309) (11,516) -------------------------------- Comprehensive income (loss) in accordance with U.S. GAAP $22,998 $(60,244) $15,465 ================================
22 ------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ c) Reconciliation of the statement of financial position between accounting principles generally accepted in Canada and the United States:
2002 2001 i) Capital assets Balance under Canadian GAAP $1,134,357 $1,155,901 Adjustments relating to the capitalization of interest (13,902) (13,902) Adjustments relating to commissioning costs (112,233) (112,233) Adjustments relating to amortization of capital assets (8,619) (5,690) Adjustments relating to sale-leaseback 136,432 142,269 ---------- ---------- Balance under U.S. GAAP $1,136,035 $1,166,345 ========== ========== ii) Deferred pension liability Balance under Canadian GAAP $ (3,911) $ 234 Adjustments relating to minimum pension liability 32,081 6,715 ---------- ---------- Balance under U.S. GAAP $ 28,170 $ 6,949 ========== ========== iii) Future income taxes Net future tax asset balance under Canadian GAAP $ (19,759) $ (27,945) Adjustments relating to the capitalization of interest (5,172) (5,172) Adjustments relating to commissioning costs (41,751) (41,751) Adjustments relating to amortization of capital assets (3,206) (2,117) Adjustments relating to minimum pension liability (11,934) (2,498) Adjustments relating to sale-leaseback (1,853) (1,020) Adjustments relating to natural gas contract (28) (681) Adjustments relating to valuation allowance on net future income tax asset 10,500 37,200 ---------- ---------- Net future tax asset balance under U.S. GAAP $ (73,203) $ (43,984) ========== ========== iv) Accounts payable and accrued charges Balance under Canadian GAAP $ 106,155 $ 121,464 Adjustments relating to subordinated notes 4,250 4,250 Adjustments relating to sale-leaseback 51 1,417 Adjustments relating to natural gas contract 78 1,892 ---------- ---------- Balance under U.S. GAAP $ 110,534 $ 129,023 ========== ========== v) Current portion of long-term debt Balance under Canadian GAAP $ 35,386 $ 21,100 Adjustments relating to sale-leaseback 9,973 2,234 ---------- ---------- Balance under U.S. GAAP $ 45,359 $ 23,334 ========== ========== vi) Long-term debt Balance under Canadian GAAP $ 342,202 $ 386,809 Adjustments relating to subordinated notes 100,000 100,000 Adjustments relating to sale-leaseback 131,388 141,361 ---------- ---------- Balance under U.S. GAAP $ 537,590 $ 628,170 ========== ==========
23 - ------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------
2002 2001 vii) Shareholders' equity Balance under Canadian GAAP $1,087,423 $ 985,538 Adjustments relating to the capitalization of interest (8,730) (8,730) Adjustments relating to commissioning costs (70,482) (70,482) Adjustments relating to amortization of capital assets (5,413) (3,573) Adjustments relating to minimum pension liability (20,147) (4,217) Adjustments relating to subordinated notes (104,250) (104,250) Adjustments relating to sale-leaseback (3,127) (1,723) Adjustments relating to natural gas hedge (50) (1,211) Adjustments relating to valuation allowance on net future income tax asset (10,500) (37,200) ---------- ---------- Balance under U.S. GAAP $ 864,724 $ 754,152 ========== ==========
In accordance with FASB Statement No. 87, the Company has recorded an additional minimum pension liability for underfunded plans representing the excess of unfunded accumulated benefit obligations over previously recorded pension cost liabilities. A corresponding amount is recognized as a deferred charge except to the extent that these additional liabilities exceed the related unrecognized prior service cost and net transition obligation, in which case the increase in liabilities is charged directly to shareholders' equity, net of related deferred income taxes. d) United States GAAP defines cash position to be cash and cash equivalents. Under Canadian GAAP, cash position, in certain circumstances, can be defined as cash and cash equivalents less bank indebtedness. This difference and the above U.S. GAAP adjustments result in the following statements of cash flows for the Company:
2001 2000 2002 Cash derived from (applied to) operating activities $ 12,602 $ 58,260 $ (4,498) ================================= Cash derived from financing activities $ 7,691 $ 72,275 $ 265,291 ================================= Cash applied to investing activities $(34,451) $(107,705) $(343,013) ================================= Effect of exchange rate changes on cash and cash equivalents $ (475) $ (3,489) $ (3,560) ================================= Cash position at December 31 $ 22,859 $ 37,492 $ 18,151 =================================
e) Stock Based Compensation For purposes of pro forma disclosures, the estimated fair value of the options is amortized over the options vesting period. Under FASB 123, Accounting and Disclosure of Stock Based Compensation, the Company's pro forma U.S. GAAP information follows:
2001 2000 2002 Pro forma net income (loss) $37,726 $(42,412) $25,028 ============================== Pro forma net income (loss) available to common shareholders $32,118 $(48,104) $19,093 ============================== Pro forma earnings per common share: Basic $ 0.69 $ (1.18) $ 0.47 ============================== Diluted $ 0.64 $ (1.18) $ 0.47 ==============================
24 ------------------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ f) Additional disclosure required under U.S. GAAP: i) The total interest paid, including interest on the subordinated notes, was $39,707, $41,961 and $28,380 in 2002, 2001 and 2000 respectively. The total fair market value of the Company's long-term debt, including the subordinated notes, was $658,156 (2001 - $652,610) and the current portion was $48,003 (2001 - $22,119). ii) The Company's natural gas swap contract was designated as a hedge against volatility in the price of natural gas purchased for consumption in the steel production process. The bankruptcy of the counterparty's parent company, as guarantor of the contract, has caused the contract to be deemed ineffective. As a result, the unrealized liability recorded in other comprehensive income at the time of the bankruptcy will be amortized to income over the remaining life of the contract. The fair value of the contract liability will be marked-to-market each reporting period with the change being recorded to income in the period. iii) Under Staff Accounting Bulletin 74, the Company is required to disclose certain information related to new accounting standards which have not yet been adopted due to delayed effective dates. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses the accounting for tangible long-lived asset retirements and their associated costs. SFAS No. 143 is effective for 2003, and will require a liability for the retirement of long-lived assets be recorded when incurred and amortized over its remaining life. The Company has not yet assessed the impact of SFAS No. 143, but its adoption could have a significant impact on the Company's financial position. 22. CONTINGENCIES AND ENVIRONMENTAL EXPENDITURES The major raw material used in the steelmaking process is reclaimed iron and steel scrap. This recycling has made a significant contribution to protecting the environment. As an ongoing commitment to the environment, the Company continues to monitor emissions, perform site clean-up, and invest in new equipment and processes. Nevertheless, rapidly changing environmental legislation and regulatory practices are likely to require future expenditures to modify operations, install pollution control equipment, dispose of waste products, and perform site clean-up and site management. The magnitude of future expenditures cannot be determined at this time. However, management is of the opinion that under existing legislation and regulatory practices, expenditures required for environmental compliance will not have a material adverse effect on the Company's financial position. Environmental expenditures that relate to ongoing environmental and reclamation programs are charged against earnings as incurred or capitalized and amortized depending on the future economic benefits. The Company settled the litigation with the turnkey contractors of the Montpelier Steelworks on April 27, 2001 for cash of $28,000 and retainage of construction holdbacks of $21,000. As a result of the settlement, the Company recorded income of $39,000 representing claims for lost business and reimbursement of legal costs and approximately $10,000 was recorded to cover the necessary cost of capital asset improvements to bring the Montpelier Steelworks to original contract specifications. The Company is involved in various other legal actions and claims, including environmental matters, arising from the normal course of business. It is the opinion of management that the ultimate resolution of these matters will not have a material adverse effect on the results of operations, financial position or net cash flows of the Company. 25 EX-23 6 exhibit231-form40f_2002.txt EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the use of our report dated January 28, 2003, with respect to the consolidated financial statements of IPSCO Inc. incorporated by reference in its Annual Report (Form 40-F) for the year ended December 31, 2002, filed with the Securities and Exchange Commission. /s/ Ernst & Young LLP - --------------------- Chicago, Illinois March 27, 2003 EX-99 7 exhibit991-form40f_2002.txt EXHIBIT 99.1 CERTIFICATION (Section 906 - Sarbanes-Oxely Act of 2002) In connection with the annual report of IPSCO Inc. (the "Company") on the Form 40-F for the fiscal year ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, David Sutherland, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. DATED this 1st day of April, 2003 /s/ David Sutherland David Sutherland President and Chief Executive Officer, IPSCO Inc. CERTIFICATION (Section 906 - Sarbanes-Oxley Act of 2002) In connection with the annual report of IPSCO Inc. (the "Company") on the Form 40-F for the fiscal year ending December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert Ratliff, Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. DATED this 1st day of April, 2003. /s/ Robert L. Ratliff Robert Ratliff Vice President and Chief Financial Officer, IPSCO Inc. -----END PRIVACY-ENHANCED MESSAGE-----