EX-99 3 exhibit1_form6k053003.txt EXHIBIT 1 EXHIBIT 1 --------- [GRAPHIC OMITTED] "We're ready" First Quarter Report and Interim MD&A 2003 IPSCO FIRST QUARTER 2003 To The Shareholders This First Quarter Report and Interim MD&A contains forward-looking information with respect to IPSCO's operations. Actual results may differ from these forward looking statements due to numerous factors including potential markets and demand for the materials produced, levels of potential imports, production levels,market forces, North American pricing of steel products, trade laws, pricing of energy and raw material inputs, outcome of trade and safeguard cases and other matters. These and other factors are outlined in IPSCO's regulatory filings with the Securities and Exchange Commission, including those in IPSCO's Annual Report for 2002 and Form 40-F. FINANCIAL HIGHLIGHTS RESULTS OF OPERATIONS Net income for the first quarter of 2003 was $4.4 million with net income attributable to common shareholders being 3 cents per diluted share. This was substantially better than the 8 cents per diluted share loss reported for the first quarter of 2002, but lower than the 19 cents per diluted share income reported for the prior quarter, which included a non-recurring gain of 9 cents per share on the sale of surplus assets. Sales for the quarter were $279.9 million, up $8.7 million or 3% over the same period last year, with some improvement in pricing and mix more than offsetting a 10% drop in shipments. Sales were up $23.8 million or 9% over the prior quarter and tons shipped increased 6%. Steel mill product sales of $152.5 million were up just 2% over the same quarter last year and down 3% from prior quarter, reflecting continuing slow industrial markets and difficult pricing competition. Tubular product sales, excluding large diameter pipe, were at very healthy levels on the strength of drilling activity in Western Canada. Sales of large diameter pipe were off significantly compared to the first quarter of last year. Gross income of $23.1 million for the quarter was $3.2 million higher than the same period last year but was down $7.8 million from the last quarter. Composite pricing was up almost 15% over the first quarter of 2002 and was marginally stronger for most products other than for energy-related tubular product sales in the United States. First quarter composite pricing was up about 4% over the fourth quarter of 2002 due strictly to a richer product mix. Average pricing for our major steel mill products declined from last quarter. Lower average pricing combined with higher scrap and energy costs resulted in gross margin compression from 12.1% in the fourth quarter to 8.3%. Quarterly utilization rates and production tons were basically unchanged for all three steelworks compared to the first quarter of 2002. Utilization rates improved slightly for the two U.S. steelworks compared to last quarter. However, IPSCO experienced cost increases relative to both the first quarter of 2002 and the prior quarter, because of higher natural gas and scrap prices. Difficult market conditions lead to some planned production scale back and less than optimal plate mix. Quarterly selling, research and administration expenses totaled $12.0 million, down 13% from the first quarter of 2002 and comparable with last quarter. Spending declined in most expense categories because of tighter controls as part of management's response to continued soft markets. Interest expense on long-term debt was $5.8 million, comparable to last quarter, but down 9% or $0.6 million from the expense reported in the first quarter of 2002, principally reflecting lower interest rates. CASH FLOW AND FINANCIAL POSITION IPSCO generated $23.1 million from operations during the quarter. Cash at March 31, 2003 was $29.6 million, up $6.7 million in the quarter. Borrowing under IPSCO's revolving term credit facility decreased $58.0 million from $118.0 million to $60.0 million, and the funded debt to total capitalization ratio improved from 38.7% percent at the end of 2002 to 36.0% at March 31, 2003. Based on this ratio, which is limited to 50.0% under one of IPSCO's most restrictive loan agreement covenants, approximately $437 million in additional funded debt could have been accommodated under this covenant at March 31, 2003. Availability under existing borrowing facilities was about $128 million at quarter end. Accounts receivable decreased $4.2 million during the quarter and inventory levels decreased $13.2 million, principally in the energy tubular product line, reflecting seasonally improved sales. Over $33 million in cash was also derived from accounts payable and accrued charges during the quarter. Investments in capital assets were $3.5 million, down significantly from the first quarter of 2002, which had included final payments of certain contract holdbacks for the Mobile Steelworks construction project completed in late 2001. This spending level is indicative of continued capital spending restraint in light of slow market conditions. As previously disclosed, new investment for 2003 is expected to be under management's original limit of $40.0 million. Other uses of cash during the first quarter included $3.0 million for dividends and $4.3 million for interest on the subordinated notes. MARKET COMMENTS AND OUTLOOK The markets for IPSCO's steel products in North America continue to suffer low product demand from the end-user community, which together with competitor and distribution channel pressures has prevented pricing recovery. We now do not expect conditions in these industrial markets to improve until later in 2003 at best. Offsetting this situation is an easing trend for scrap and natural gas prices. With respect to the non-energy tubular markets, volume has remained flat with pricing moving with input costs and individual pipe producer circumstances. Imports continue to be a major factor in this market. The Western Canadian energy sector did reflect increased activity because of higher oil and gas price levels, albeit with a higher level of competition. This same activity trend did not occur in the United States where the market for energy tubular products, while somewhat improved, was not as strong. IPSCO does, however, anticipate continued strength in the oil and gas sector, which bodes well for the Company's energy tubular products lines. No significant oil and natural gas transmission pipe projects are anticipated in the near term. Trade issues continue to be a factor in the recovery of the steel industry; in Canada as the government looks at potential safeguard actions and in the United States as the Section 201 process moves toward a mid-term review. In conclusion, while IPSCO has demonstrated the ability to maintain profitability in this very difficult environment, a recovery in the industrial sector as well as the general economy will be necessary for stronger financial performance. Continued soft business conditions in our industrial markets combined with the traditional seasonal drop in sales for our most profitable energy tubular product line will probably result in a modest second quarter loss. Nevertheless, IPSCO, with its modern facilities and cost efficient operations, continues to be ready to capitalize on business when economic conditions improve. --------------------- TONS SHIPPED --------------------- (thousands) FOR THE THREE MONTHS ENDED --------------------------------- MARCH 31 MARCH 31 DECEMBER 31 2003 2002 2002 -------------------------------------------------------------------------------- Discrete Plate and Coil 312.6 368.9 341.7 Cut Plate 141.2 139.2 119.7 --------------------------------- Total Steel Mill Products 453.8 508.1 461.4 -------------------------------------------------------------------------------- Energy Tubulars 145.3 107.4 105.3 Large Diameter Tubulars 11.4 62.5 15.0 Non-Energy Tubulars 63.7 71.5 57.0 --------------------------------- Total Tubular Products 220.4 241.4 177.3 -------------------------------------------------------------------------------- Total Shipments 674.2 749.5 638.7 -------------------------------------------------------------------------------- ------------------------------------- SELECTED FINANCIAL INFORMATION (d) ------------------------------------- (thousands of United States Dollars except for per ton data) FOR THE THREE MONTHS ENDED --------------------------------- MARCH 31 MARCH 31 DECEMBER 31 2003 2002 2002 -------------------------------------------------------------------------------- Operating Income Per Ton $ 17 $ 8 $ 30 EBIT (a) $12,537 $ 5,807 $ 25,893 EBITDA (b) 27,103 17,970 37,726 Net Capital Expenditures 3,498 19,877 2,429 Free Cash Flow (c) 23,605 (1,907) 35,297 Annualized Return on Common Shareholders' Equity 1% -2% 5% -------------------------------------------------------------------------------- (a) EBIT is defined as earnings before interest expense and income taxes. (b) EBITDA is defined as earnings before interest expense, income taxes and amortization. (c) Free Cash Flow is defined as EBITDA less net capital expenditures. (d) 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 others. These indicators should not be considered as a substitute or alternative for net income, net income available to common shareholders or cash flow. --------------------------------------- CONSOLIDATED STATEMENTS OF OPERATIONS --------------------------------------- (unaudited, thousands of United States Dollars except for share, per share and ton data) FOR THE THREE MONTHS ENDED ---------------------------------- MARCH 31 MARCH 31 DECEMBER 31 2003 2002 2002 -------------------------------------------------------------------------------- Plate and Coil Tons Produced (thousands) 660.4 679.8 662.7 -------------------------------------------------------------------------------- Finished Tons Shipped (thousands) 674.2 749.5 638.7 -------------------------------------------------------------------------------- Sales $ 279,863 $ 271,133 $ 256,083 Cost of sales Manufacturing and raw material 242,162 239,060 213,274 Amortization of capital assets 14,566 12,163 11,833 ---------------------------------- 256,728 251,223 225,107 ---------------------------------- Gross income 23,135 19,910 30,976 Selling, research and administration 12,010 13,748 11,726 ---------------------------------- Operating income 11,125 6,162 19,250 Other expenses Non-recurring items -- -- (6,464) Interest on long-term debt 5,753 6,345 5,852 Other interest (income) expense, net (168) 311 (8) Foreign exchange loss (gain) (1,412) 355 (179) ---------------------------------- Income (Loss) Before Income Taxes 6,952 (849) 20,049 Income Tax Expense (Benefit) 2,504 (304) 7,218 ---------------------------------- Net Income (Loss) 4,448 (545) 12,831 Dividends on Preferred Shares, including part VI.I tax 1,463 1,384 1,402 Interest on Subordinated Notes, net of income tax 1,443 1,443 1,442 ---------------------------------- Net Income (Loss) Attributable to Common Shareholders $ 1,542 $ (3,372) $ 9,987 -------------------------------------------------------------------------------- Earnings (Loss) Per Common Share - Basic $ 0.03 $ (0.08) $ 0.21 - Diluted $ 0.03 $ (0.08) $ 0.19 Denominator for Basic Earnings per Common Share (thousands) 47,667 43,214 47,596 Denominator for Diluted Earnings per Common Share (thousands) 47,743 43,214 68,393 -------------------------------------------------------------------------------- ----------------------------------------------- CONSOLIDATED STATEMENTS OF RETAINED EARNINGS ----------------------------------------------- (unaudited, thousands of United States Dollars) FOR THE THREE MONTHS ENDED ---------------------------------- MARCH 31 MARCH 31 DECEMBER 31 2003 2002 2002 -------------------------------------------------------------------------------- Retained Earnings at Beginning of Period $ 494,599 $ 491,777 $ 486,132 Net Income (Loss) 4,448 (545) 12,831 Dividends on Preferred Shares, including part VI.I tax (1,463) (1,384) (1,402) Interest on Subordinated Notes, net of income tax (1,443) (1,443) (1,442) Dividends on Common Shares (1,618) (1,494) (1,520) ---------------------------------- Retained Earnings at End of Period $ 494,523 $ 486,911 $ 494,599 -------------------------------------------------------------------------------- Notes to Consolidated Interim Financial Statements 1. The consolidated interim financial statements are unaudited and are based on Canadian generally accepted accounting principles and practices consistent with those used in the preparation of the annual financial statements. 2. Certain prior period amounts have been reclassified to conform with the current presentation. 3. The Company sold certain of its assets held for sale in the fourth quarter 2002 resulting in a gain of $6,464. The effect on basic earnings per common share was an increase in the fourth quarter 2002 of $0.09. ---------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ---------------------------------------------- (unaudited, thousands of United States Dollars) FOR THE THREE MONTHS ENDED ---------------------------------- MARCH 31 MARCH 31 DECEMBER 31 2003 2002 2002 -------------------------------------------------------------------------------- Cash Derived From (Applied To) Operating Activities Working capital provided by operations $ 23,058 $ 18,537 $ 18,374 Change in non-cash operating working capital 52,324 (3,837) (50,013) ---------------------------------- 75,382 14,700 (31,639) -------------------------------------------------------------------------------- Financing Activities Common share dividends (1,618) (1,494) (1,520) Issue of common shares, net of issue costs -- 90,670 -- Common shares issued pursuant to share option plan -- 1,490 1,011 Preferred share dividends (1,366) (1,294) (1,315) Subordinated notes interest (4,250) (4,250) -- Issue of long-term debt 10,000 10,000 38,300 Repayment of long-term debt (68,000) (60,000) (3,300) ---------------------------------- (65,234) 35,122 33,176 -------------------------------------------------------------------------------- Investing Activities Expenditures for capital assets (3,498) (18,171) (3,895) Proceeds on sale of assets held for sale -- -- 1,466 Investment -- (1,706) -- ---------------------------------- (3,498) (19,877) (2,429) -------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents 52 85 407 -------------------------------------------------------------------------------- Increase (Decrease) in Cash and Cash Equivalents less Bank Indebtedness 6,702 30,030 (485) Cash and Cash Equivalents less Bank Indebtedness at Beginning of Period 22,859 2,492 23,344 Cash and Cash Equivalents less Bank Indebtedness at End of Period $ 29,561 $ 32,522 $ 22,859 -------------------------------------------------------------------------------- ------------------------------------------------ CONSOLIDATED STATEMENTS OF FINANCIAL POSITION ------------------------------------------------ (thousands of United States Dollars)
MARCH 31, 2003 MARCH 31, 2002 DECEMBER 31 (UNAUDITED) (UNAUDITED) 2002 -------------------------------------------------------------------------------------------- Current Assets Cash and cash equivalents $ 29,561 $ 32,522 $ 22,859 Accounts receivable less allowance 154,200 146,828 153,752 Inventories 249,358 215,361 255,410 Other 2,425 2,252 2,847 Future income taxes 38,843 43,720 41,402 ---------------------------------------------- 474,387 440,683 476,270 -------------------------------------------------------------------------------------------- Non-Current Assets Capital and other 1,146,388 1,165,836 1,146,456 Future income taxes 128,456 80,093 121,586 ---------------------------------------------- 1,274,844 1,245,929 1,268,042 -------------------------------------------------------------------------------------------- Total Assets $ 1,749,231 $ 1,686,612 $1,744,312 -------------------------------------------------------------------------------------------- Current Liabilities Accounts payable and accrued charges $ 172,450 $ 153,485 $ 136,072 Current portion of long-term debt 35,386 21,100 35,386 ---------------------------------------------- 207,836 174,585 171,458 -------------------------------------------------------------------------------------------- Long-Term Liabilities Long-term debt 288,777 336,825 342,202 Deferred pension liability -- 1 -- Future income taxes 150,026 103,306 143,229 ---------------------------------------------- 438,803 440,132 485,431 -------------------------------------------------------------------------------------------- Shareholders' Equity Preferred shares 98,594 98,545 98,553 Common shares 351,311 348,323 351,311 Subordinated notes 102,125 102,125 104,250 Retained earnings 494,523 486,911 494,599 Cumulative translation adjustment 56,039 35,991 38,710 ---------------------------------------------- 1,102,592 1,071,895 1,087,423 -------------------------------------------------------------------------------------------- Total Liabilities and Shareholders' Equity $ 1,749,231 $ 1,686,612 $1,744,312 --------------------------------------------------------------------------------------------
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