SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
ANNUAL REPORT FILED PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 COMMISSION FILE NUMBER 1-9887
OREGON STEEL MILLS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-0506370
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1000 S.W. BROADWAY
SUITE 2200
PORTLAND, OREGON 97205
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(Address of principal executive office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (503) 223-9228
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Name of each exchange
Title of each class on which registered
------------------------ --------------------------------
Common Stock, $.01 par value per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[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 Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant (1) is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
--- ---
The aggregate market value of the voting and non-voting common equity held
by nonaffiliates of the registrant at June 28th, 2002, was approximately
$153,460,617. The aggregate market value was computed by reference to the price
at which the common equity was last sold as of the last business day of the
registrant's most recently completed second fiscal quarter.
Indicate the number of shares outstanding of each of the registrant's
classes of stock as of January 31, 2003:
COMMON STOCK, $.01 PAR VALUE 25,789,854
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(Title of Class) (Number of shares outstanding)
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy statement for the Registrant's Annual Meeting of Stockholders to be
held May 1, 2003 is incorporated by reference into Part III of this report.
OREGON STEEL MILLS, INC.
TABLE OF CONTENTS
PAGE
PART I
ITEM
1. BUSINESS......................................................... 1
General.................................................... 1
Products................................................... 3
Raw Materials and Semi-finished Slabs ..................... 5
Marketing and Customers.................................... 6
Competition and Other Market Factors....................... 7
Environmental Matters...................................... 9
Labor Matters.............................................. 12
Employees.................................................. 14
Available Information...................................... 14
2. PROPERTIES....................................................... 15
3. LEGAL PROCEEDINGS................................................ 15
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.............. 16
Executive Officers of the Registrant....................... 16
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS................................ 17
6. SELECTED FINANCIAL DATA.......................................... 18
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............. 19
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK................................................ 26
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...................... 27
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.................... 55
PART III
10.
and 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
AND EXECUTIVE COMPENSATION................................. 56
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS............. 56
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 56
14. CONTROLS AND PROCEDURES ......................................... 56
PART IV
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.............................................57
SIGNATURES....................................................... 61
CERTIFICATIONS................................................... 62
PART I
ITEM 1. BUSINESS
GENERAL
Oregon Steel Mills, Inc. ("Company" or "Registrant") was founded in
1926 by William G. Gilmore and was incorporated in California in 1928. The
Company reincorporated in Delaware in 1974. The Company changed its name in
December 1987 from Gilmore Steel Corporation to Oregon Steel Mills, Inc.
During 2002, the Company and its subsidiaries operated two steel
minimills and seven finishing facilities in the western United States and
Canada. The Company manufactures and markets one of the broadest lines of
specialty and commodity steel products of any domestic minimill company. The
Company emphasizes the cost efficient production of higher margin specialty
steel products targeted at a diverse customer base located primarily west of the
Mississippi River and in western Canada. The Company's manufacturing flexibility
allows it to manage actively its product mix in response to changes in customer
demand and individual product cycles. The Company is organized into two business
units known as the Oregon Steel Division and Rocky Mountain Steel Mills ("RMSM")
Division.
The Oregon Steel Division is centered on the Company's steel plate
minimill in Portland, Oregon ("Portland Mill"), which supplies steel for the
Company's steel plate and large diameter pipe finishing facilities. The Oregon
Steel Division's steel pipe mill in Napa, California ("Napa Pipe Mill") is a
large diameter steel pipe mill and fabrication facility. The Oregon Steel
Division also produces large diameter pipe and electric resistance welded
("ERW") pipe at its 60% owned pipe mill in Camrose, Alberta, Canada ("Camrose
Pipe Mill").
The RMSM Division consists of steelmaking and finishing facilities of
CF&I Steel, L.P. ("CF&I") (dba Rocky Mountain Steel Mills) located in Pueblo,
Colorado ("Pueblo Mill"). The Company owns 87% of New CF&I, Inc. ("New CF&I"),
which owns a 95.2% general partnership interest in CF&I. In addition, the
Company owns directly a 4.3% limited partnership interest in CF&I. The Pueblo
Mill is a steel minimill which supplies steel for the Company's rail, rod and
bar, and seamless tubular finishing mills.
OREGON STEEL DIVISION
PORTLAND MILL. The Portland Mill is the only hot-rolled steel plate
minimill and steel plate production facility in the eleven western states. The
Portland Mill has the capability to produce slab thicknesses of 6", 7", 8" or 9"
and finished steel plate in widths up to 136".
During 1997, the Company completed the construction of a Steckel
Combination Mill ("Combination Mill") at its Portland Mill. The project included
installation of a new reheat furnace, a 4-high rolling mill with coiling
furnaces, a vertical edger, a down coiler, on-line accelerated cooling, hot
leveling and shearing equipment, extended roll lines, and a fully automated
hydraulic gauge control system.
The Combination Mill gives the Company the ability to produce steel
plate in commercially preferred dimensions and sizes, increase its manufacturing
flexibility and supply substantially all the Company's plate requirements for
large diameter line pipe, as well as coiled plate for applications such as the
smaller diameter ERW pipe manufactured at the Camrose Pipe Mill. The Combination
Mill produces discrete steel plate in widths from 48" to 136" and in thicknesses
from 3/16" to 8". Coiled plate can be produced in widths of 48" to 120" and in
thicknesses that range from 0.09" to 0.75". With the Combination Mill, the
Company is in a position to produce all grades of discrete steel plate and
coiled plate for all of the Company's commodity and specialty plate markets,
including heat-treated applications.
NAPA PIPE MILL. The Napa Pipe Mill produces large diameter steel pipe
of a quality suitable for use in high pressure oil and gas transmission
pipelines. The Napa Pipe Mill can produce pipe with an outside diameter ranging
from 16" to 42", with wall thicknesses of up to 1-1/16" and in lengths of up to
80 feet, and can process two different sizes of pipe simultaneously in its two
finishing sections. Although the Portland Mill can supply substantially all of
the Napa Pipe Mill's specialty plate
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requirements, due to market conditions and other considerations, the Napa Pipe
Mill may purchase steel plate from third-party suppliers.
CAMROSE PIPE MILL. The Company acquired a 60% interest in the Camrose
Pipe Mill in June 1992 from Stelco, Inc. ("Stelco"), a large Canadian steel
producer. The Camrose Pipe Mill has two pipe manufacturing mills, a large
diameter pipe mill similar to the Napa Pipe Mill and an ERW pipe mill which
produces steel pipe used by the oil and gas industry. The large diameter pipe
mill produces pipe in lengths of up to 80 feet with a diameter ranging from 20"
to 42". The ERW mill produces pipe in sizes ranging from 4.5" to 16" in
diameter.
See Part I, Item 2, "Properties", for discussion of the operating
capacities of the Portland Mill, the Napa Pipe Mill and the Camrose Pipe Mill.
RMSM DIVISION
On March 3, 1993, New CF&I, a wholly-owned subsidiary of the Company,
acquired a 95.2% interest in a newly formed limited partnership, CF&I Steel,
L.P. ("CF&I"), a Delaware limited partnership. The remaining 4.8% interest was
owned by the Pension Benefit Guaranty Corporation ("PBGC"). CF&I then purchased
substantially all of the steelmaking, fabricating, metals and railroad business
assets of CF&I Steel Corporation. In August of 1994, New CF&I sold a 10% equity
interest in New CF&I to a subsidiary of Nippon Steel Corporation ("Nippon"). In
connection with that sale, Nippon agreed to license to the Company a proprietary
technology for producing deep head-hardened ("DHH") rail products as well as to
provide certain production equipment to produce DHH rail. In November 1995, the
Company sold equity interests totaling 3% in New CF&I to two subsidiaries of the
Nissho Iwai Group ("Nissho Iwai"), a large Japanese trading company. In 1997,
the Company purchased the 4.8% interest in CF&I owned by the PBGC. In 1998, the
Company sold a 0.5% interest in CF&I to a subsidiary of Nippon.
Shortly after the acquisition of the Pueblo Mill in 1993, the Company
began a series of major capital improvements designed to increase yields,
improve productivity and quality and expand the Company's ability to offer
specialty rail, rod and bar products. The primary components of the capital
improvements at the Pueblo Mill are outlined below.
STEELMAKING. The Company installed a ladle refining furnace and a
vacuum degassing facility and upgraded both continuous casters. During 1995, the
Company eliminated ingot casting and replaced it with more efficient continuous
casting methods that allow the Company to cast directly into blooms. These
improvements expanded the Pueblo Mill steelmaking capacity to 1.2 million tons.
ROD AND BAR MILL. At the time of its acquisition, the rod and bar mills
at the Pueblo Mill were relatively old and located in separate facilities, which
resulted in significant inefficiencies as the Company shifted production between
them in response to market conditions. In 1995, the Company commenced operation
of a new combination rod and bar mill with a new reheat furnace and a high speed
rod train, capable of producing commodity and specialty grades of rod and bar
products. These improvements enable the Company to produce a wider range of high
margin specialty products, such as high-carbon rod, merchant bar and other
specialty bar products, and larger rod coil sizes, which the Company believes
are preferred by many of its customers.
RAIL MANUFACTURING. At the time of the Company's acquisition of the
Pueblo Mill, rail was produced by ingot casting using energy-intensive processes
with significant yield losses as the ingots were reheated, reduced to blooms and
then rolled into rail. Continuous casting has increased rail yields and
decreased rail manufacturing costs. In 1996, the Company invested in its
railmaking capacity by entering into the agreement with Nippon for the license
of its proprietary technology to produce DHH rail, and acquired the production
equipment necessary to produce the specialty rail. DHH rail is considered by the
rail industry to be longer lasting and of higher quality than rail produced
using conventional methods and, accordingly, the DHH rail usually has a
corresponding higher average selling price. The Company believes it is able to
meet the needs of a broad array of rail customers with both traditional and DHH
rail.
SEAMLESS PIPE. Seamless pipe produced at the Pueblo Mill consists of
seamless casing, coupling stock and standard and line pipe. Seamless pipe casing
is used as a structural retainer for the walls of oil or gas wells. Standard and
line pipe are used to transport liquids and gasses both above and
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underground. The Company's seamless pipe mill is equipped to produce the most
widely used sizes of seamless pipe (7" outside diameter through 10-3/4" outside
diameter) in all standard lengths. The Company's production capability includes
carbon and heat treated tubular products. The Company also sells semi-finished
seamless pipe (referred to as green tubes) for processing and finishing by
others.
See Part I, Item 2, "Properties", for discussion of the operating
capacities of the Pueblo Mill.
PRODUCTS
OVERVIEW
The Company manufactures and markets one of the broadest lines of
specialty and commodity steel products of any domestic minimill company. Through
acquisitions and capital improvements, the Company has expanded its range of
finished products from two in 1991, discrete plate and large diameter welded
pipe, to eight currently by adding ERW pipe, rail, rod, bar, seamless pipe and
coiled plate. It has also expanded its primary selling region from the western
United States to national and international markets. (See Note 3 to the
Consolidated Financial Statements.)
The following chart identifies the Company's principal products and the
primary markets for those products.
PRODUCTS MARKETS
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OREGON STEEL DIVISION Specialty steel and coiled plate Steel service centers
Heavy equipment manufacturers
Railcar manufacturers
Pressure vessel manufacturers
Welded pipe mills
Commodity steel and coiled plate Steel service centers
Construction
Ship and barge manufacturers
Heavy equipment manufacturers
Large diameter steel pipe Oil and petroleum natural
gas transmission pipelines
Construction
Electric resistance welded (ERW) Oil and natural gas line pipe
pipe Construction
RMSM DIVISION Rail Rail transportation
Rod and Bar products Construction
Durable goods
Capital equipment
Seamless pipe Oil and petroleum producers
Semi-finished Seamless tube mills
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The following table sets forth for the period indicated the tonnage
shipped and the Company's total shipments by product class:
TONS SHIPPED
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PRODUCT CLASS 2002 2001 2000
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Oregon Steel Division:
Steel Plate 402,000 463,100 709,900
Coiled Plate 65,600 8,900 16,900
Large Diameter Steel Pipe 444,600 281,300 71,300
Electric Resistance Welded Pipe 34,800 76,400 73,400
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Total Oregon Steel Division 947,000 829,700 871,500
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RMSM Division:
Rail 384,100 246,000 314,700
Rod and Bar 419,700 432,500 395,100
Seamless Pipe (FN1) 30,000 97,700 10,400
Semi-finished 2,700 4,700 36,800
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Total RMSM Division 836,500 780,900 757,000
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Total Company 1,783,500 1,610,600 1,628,500
========= ========= =========
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(FN1) The Company suspended operation at the seamless pipe mill from May 1999 to
September 2000, from November 2001 to April 2002 and from mid-August 2002
to mid-September 2002.
OREGON STEEL DIVISION
STEEL PLATE AND COIL. The Company's specialty grade and commodity steel
plate is produced at the Portland Mill on the Combination Mill. The Combination
Mill allows for the production of discrete plate widths up to 136" and coiled
plate up to 120" wide. The majority of steel plate is commonly produced and
consumed in standard widths and lengths, such as 96" x 240". Specialty steel
plate consists of hot-rolled carbon, high-strength-low-alloy, alloy and
heat-treated steel plate. Specialty steel plate has superior strength and
performance characteristics as compared to commodity steel plate and is
typically made to order for customers seeking specific properties, such as
improved malleability, hardness or abrasion resistance, impact resistance or
toughness, higher strength and the ability to be more easily machined and
welded. These improved properties are achieved by chemically refining the steel
by either adding or removing specific elements, and by accurate temperature
control while hot-rolling or heat-treating the plate. Specialty steel plate is
used to manufacture railroad cars, mobile equipment, bridges and buildings,
pressure vessels and machinery components. Commodity steel plate is used in a
variety of applications such as the manufacture of storage tanks, machinery
parts, ships and barges, and general load bearing structures. Coiled plate is
the feeder stock for the manufacture of ERW pipe, welded tubing, spiral welded
pipe and for conversion into cut-to-length plate.
The heat-treating process of quenching and tempering improves the
strength, toughness, and hardness of the steel. Quenched and tempered steel is
used extensively in the mining industry, the manufacture of heavy transportation
equipment, construction and logging equipment, and armored vehicles for the
military. In early 1994, the Company installed a hot leveler at the heat-treat
facility which flattens the steel plate following heat-treatment and ensures
that the steel plate will retain its desired shape after cooling. These
additions enable the Company to manufacture a superior hardened plate product.
LARGE DIAMETER STEEL PIPE. The Company manufactures large diameter,
double submerged arc-welded ("DSAW") steel pipe at its Napa and Camrose Pipe
Mills. Large diameter pipe is manufactured to demanding specifications and is
produced in sizes ranging from 16" to 42" in outside diameter with wall
thickness of up to 1 1/16" and in lengths of up to 80 feet. At the pipe mills,
the Company also offers customers several options, which include internal
linings, external coatings, double end pipe joining and, at the Napa Pipe Mill,
full body ultrasonic inspection. Ultrasonic inspection allows examination of the
ends, long seam welds and the entire pipe body for steelmaking or pipemaking
defects and records the results. The Company's large diameter pipe is used
primarily in pressurized underground or underwater oil and gas transmission
pipelines where high quality is absolutely necessary.
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The Company's ability to produce high-quality large diameter pipe and
other specialty steel plate products was enhanced by the installation of the
vacuum degassing facility at the Portland Mill in 1993. The vacuum degassing
process reduces the hydrogen content of the final product, which increases its
resistance to hydrogen-induced cracking. The vacuum degassing facility enables
the Company to produce some of the highest quality steel plate and line pipe
steel.
ERW PIPE. The Company produces smaller diameter ERW pipe at the Camrose
Pipe Mill. ERW pipe is produced in sizes ranging from approximately 4.5" to 16"
in diameter. The pipe is manufactured using coiled steel formed on a high
frequency ERW mill. The principal customers for this product are oil and gas
companies that use it for gathering lines to supply product to feed larger
pipeline systems.
RMSM DIVISION
RAIL. The Company produces standard carbon and high-strength
head-hardened rail at its Pueblo Mill. The Pueblo Mill is the sole manufacturer
of rail west of the Mississippi River and one of only two rail manufacturers in
the Western Hemisphere. Rails are manufactured in the six most popular rail
weights (ranging from 115 lb/yard through 141 lb/yard), in 39 and 80-foot
lengths. The primary customers for the Pueblo Mill's rail are the major western
railroads, with an increased share of the eastern railroad business in recent
years. The Company has also developed a major presence in the Canadian and
Mexican rail markets. Rail is also sold directly to rail contractors, transit
districts and short-line railroads.
As part of its capital improvement program, the Company improved its
rail manufacturing facilities to include the production of in-line head-hardened
rail. In-line head-hardened rail is produced through a proprietary technology,
known as deep head-hardened or DHH technology, which is licensed from a third
party. In 2002, the Company produced approximately 144,000 tons of head-hardened
product using the DHH technology. The in-line DHH technology allows the Company
to produce head-hardened product up to the capacity of the rail facility. Rail
produced using the improved in-line technology is considered by many rail
customers to be longer lasting and of higher quality than rail produced with
traditional off-line techniques. In 2001, the Pueblo Mill began producing and
marketing an improved head-hardened rail called High Carbon Pearlite ("HCP").
This rail metallurgy was designed for heavy application situations such as heavy
tonnage curves.
ROD AND BAR PRODUCTS. The Company's rod and bar mill located at the
Pueblo Mill is able to produce coils of up to 6,000 pounds. The improved steel
quality and finishing capabilities allow the Company to manufacture rods up to
1" in diameter, and to manufacture a variety of high-carbon rod products such as
those used for spring wire, wire rope and tire bead. The Company produces
several sizes of coiled rebar in the most popular grades for the reinforcement
of concrete products.
SEAMLESS PIPE. The Company's seamless pipe mill at the Pueblo Mill
produces seamless casing, coupling stock and standard and line pipe. The primary
use of these products is in the transmission and recovery of oil and natural gas
resources, through either above ground or subterranean pipelines. The seamless
mill produces both carbon and heat-treated tubular products. The Company also
markets green tubes to other tubular mills for processing and finishing. Due to
market conditions, operation at the seamless pipe mill was suspended from May
1999 to September 2000, from November 2001 to April 2002 and from mid-August
2002 to mid-September 2002.
RAW MATERIALS AND SEMI-FINISHED SLABS
The Company's principal raw material for the steel minimills at the
Portland and Pueblo Mills is ferrous scrap metal derived from, among other
sources, junked automobiles, railroad cars and railroad track materials and
demolition scrap from obsolete structures, containers and machines. In addition,
direct-reduction iron ("DRI"), hot-briquetted iron ("HBI") and pig iron
(collectively "alternate metallics") can substitute for a limited portion of the
scrap used in minimill steel production, although the sources and availability
of alternate metallics are substantially more limited than those of scrap. The
purchase prices for scrap and alternate metallics are subject to market forces
largely beyond the control of the Company, and are impacted by demand from
domestic and foreign steel producers, freight costs, speculation by scrap
brokers and other conditions. The cost of scrap and alternate metallics to the
Company can vary significantly, and the Company's product
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prices often cannot be adjusted, especially in the short-term, to recover the
costs of increases in scrap and alternate metallics prices.
The long-term demand for steel scrap and its importance to the domestic
steel industry may increase as steelmakers continue to expand scrap-based
electric arc furnace capacity; however, the Company believes that near-term
supplies of steel scrap will continue to be available in sufficient quantities
at competitive prices. In addition, while alternate metallics are not currently
cost competitive with steel scrap, a sustained increase in the price of steel
scrap could result in increased implementation of these alternative materials.
With the expanded finishing capability available to the Company
from the 1997 completion of the Combination Mill, along with the manufacturing
flexibility to purchase semi-finished steel slabs at a lower cost, the Company
has consequently purchased material quantities of semi-finished steel slabs on
the open market for the Portland Mill since 1999 and each year thereafter. These
purchases are made on the spot market and are dependent upon slab availability.
The slab market and pricing are subject to significant volatility and slabs may
not be available at reasonable prices in the future.
From mid-January to March 2003, the Company temporarily shut down its
Portland Mill melt shop in response to both adverse market conditions and a high
level of slab inventories at the end of 2002. The melt shop resumed operations
in early March 2003, however, the Company expects a further temporary closure to
occur on or about May 2003. The Company has forecasted that semi-finished slab
purchases for the Portland Mill will meet the majority of its production needs
for 2003. The Company is assessing the short and long term operation of the melt
shop and considering the feasibility of producing semi-finished slabs versus
the availability and cost of similar slabs for purchase. The book value of
assets and other commitments associated with the melt shop operations ("Melt
Shop Assets") was approximately $42 million at December 31, 2002. In the event
the Company were to permanently cease production at the Portland Mill melt shop,
the Company would expense the associated Melt Shop Assets with a charge to
operating income.
MARKETING AND CUSTOMERS
Steel products are sold by the Company principally through its own
sales organizations, which have sales offices at various locations in the United
States and Canada and, as appropriate, through foreign sales agents. In addition
to selling to customers who consume steel products directly, the Company also
sells to intermediaries such as steel service centers, distributors, processors
and converters.
The sales force is organized both geographically and by product line.
The Company has separate sales forces for plate, coiled plate, large diameter
steel pipe, ERW pipe, rod and bar, seamless pipe and rail products. Most of the
Company's sales and are initiated by contacts between sales representatives and
customers. Accordingly, the Company does not incur substantial advertising or
other promotional expenses for the sale of its products. Except for contracts
entered into from time to time to supply rail and large diameter steel pipe to
significant projects (see Part II, Item 7 "Management's Discussion and Analysis
of Financial Conditions and Results of Operation"), the Company does not have
any significant ongoing contracts with customers, and orders placed with the
Company generally are cancelable by the customer prior to production. Although
no single customer or group of affiliated customers represented more than 10% of
the Company's sales revenue in 2000 and 2001, during 2002 the Company had sales
to one customer, Kern River Gas Transmission Company, which accounted for nearly
20% of its total revenue for the year. It is not expected that sales to any
customer in 2003 will represent more than 10% of total sales.
The Company does not have a general policy permitting return of
purchased steel products except for product defects. The Company does not
routinely offer extended payment terms to its customers.
The demand for a majority of the Company's products is not generally
subject to significant seasonal trends. The Company's rail products are impacted
by seasonal demand, as dictated by the major railroads' procurement schedules.
Demand for oil country tubular goods ("OCTG"), which include both seamless pipe
and ERW pipe, can be subject to seasonal factors, particularly for sales to
Canadian customers. Overall demand for OCTG is subject to significant
fluctuations due to the volatility of oil and gas prices and North American
drilling activity as well as other factors includ-
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ing competition from imports. The Company does not have material contracts with
the United States government and does not have any major supply contracts
subject to renegotiation.
OREGON STEEL DIVISION
SPECIALTY STEEL PLATE. Customers for specialty steel are located
throughout the United States, but the Company is most competitive west of the
Mississippi River, where transportation costs are less of a factor. Typical
customers include steel service centers and equipment manufacturers. Typical end
uses include pressure vessels, construction and mining equipment, machine parts,
rail cars and military armor.
COMMODITY STEEL PLATE. Most of the customers for the Company's commodity
steel plate are located in the western United States, primarily in the Pacific
Northwest. The Company's commodity steel plate is typically sold to steel
service centers, fabricators and equipment manufacturers. Service centers
typically resell to other users with or without additional processing such as
cutting to a specific shape. Frequent end uses of commodity steel plate include
the manufacture of rail cars, storage tanks, machinery parts, bridges, barges
and ships.
LARGE DIAMETER STEEL PIPE. Large diameter steel pipe is marketed on a
global basis, and sales generally consist of a small number of large orders from
natural gas pipeline companies, public utilities and oil and gas producing
companies. The Company believes that the quality of its pipe enables it to
compete effectively in international as well as domestic markets. Domestically,
the Company has historically been most competitive in the steel pipe market west
of the Mississippi River. The Camrose Pipe Mill is most competitive in western
Canada. Sales of large diameter pipe generally involve the Company responding to
requests to submit bids.
ERW PIPE. The principal customers for ERW pipe produced at the Camrose
Pipe Mill are in the provinces of Alberta and British Columbia, where most of
Canada's natural gas and oil reserves are located. The Company believes its
proximity to these gas fields gives the Company a competitive advantage. Demand
for ERW pipe produced at the Camrose Pipe Mill is largely dependent on the level
of exploration and drilling activity in the gas fields of western Canada.
RMSM DIVISION
RAIL. The primary customers for the Pueblo Mill's rail are the major
western railroads, with an increased share of the eastern railroad business in
recent years. The Company has also developed a major presence in the Canadian
and Mexican rail markets. Rail is also sold directly to rail distributors,
transit districts and short-line railroads. The Company believes its proximity
to the North American rail markets benefits the Company's marketing efforts.
BAR PRODUCTS. The Company sells its bar products, primarily reinforcing
bar, to fabricators and distributors. The majority of these customers are
located in the United States, west of the Mississippi River.
ROD PRODUCTS. The Company's wire rod products are sold primarily to
wire drawers ranging in location from the Midwest to the West Coast. The demand
for wire rod is dependent upon a wide variety of markets, including
agricultural, construction, capital equipment and the durable goods segments.
The Company entered the high carbon rod market during 1995 as a direct result of
the investment in the new rolling facility. Since that time, the Company's
participation in the higher margin, high carbon rod market has steadily
increased, to the point where it now represents nearly two-thirds of total rod
product shipments. Typical end uses of high carbon rod include spring wire, wire
rope and tire bead.
SEAMLESS PIPE. The Company's seamless pipe is sold primarily through
its internal sales force to a large number of oil exploration, production
companies and directly to companies outside of the OCTG industry, such as
construction companies. The market for the Company's seamless pipe is primarily
domestic. The demand for this product is determined in large part by the number
and drilling depths of the oil and gas drilling rigs working in the United
States.
COMPETITION AND OTHER MARKET FACTORS
The steel industry is cyclical in nature, and high levels of steel
imports, worldwide production overcapacity and other factors have adversely
affected the domestic steel industry in recent years. The Company also is
subject to industry trends and conditions, such as the presence or absence of
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sustained economic growth and construction activity, currency exchange rates and
other factors. The Company is particularly sensitive to trends in the oil and
gas, construction, capital equipment, rail transportation and durable goods
segments, because these industries are significant markets for the Company's
products.
Competition within the steel industry is intense. The Company competes
primarily on the basis of product quality, price and responsiveness to customer
needs. Many of the Company's competitors are larger and have substantially
greater capital resources, more modern technology and lower labor and raw
material costs than the Company. Moreover, U.S. steel producers have
historically faced significant competition from foreign producers. The highly
competitive nature of the industry, combined with excess production capacity in
some products, results in significant sales pricing pressure for certain of the
Company's products.
OREGON STEEL DIVISION
SPECIALTY STEEL PLATE. The Company's principal domestic competitor in
the specialty steel plate market is Bethlehem Steel Corp. ("Bethlehem"), the
largest plate producer in North America and currently operating under an October
2001 Chapter 11 bankruptcy filing. Bethlehem has reportedly accepted an $1.5
billion offer to be acquired by International Steel Group ("ISG"). In 2002, ISG
acquired LTV's steel mills and Acme Steel. ISG has not publicly revealed how
they plan to operate Bethlehem's plate mills. Bethlehem owns five plate mills
located in Indiana, Pennsylvania, and Maryland, of which three are currently
operating, with an estimated annual capacity in excess of two million tons,
including the largest plate heat treating tonnage capacity in North America.
Bethlehem aggressively markets to major national accounts in fabrication and
heavy-duty manufacturing as a single source supplier. Although not a major
competitor in the western states, U.S. Steel Corporation, located in Indiana, is
the second largest domestic specialty plate producer and does represent a
significant competitor in the Midwest.
COMMODITY STEEL PLATE. The Company's principal domestic commodity plate
competitor is IPSCO Inc. ("IPSCO"). IPSCO brought into production a green field
120" wide Steckel mill in Iowa in 1998, with that mill operating to nearly the
same specifications as the Portland Mill. IPSCO also operates a smaller 72" wide
Steckel mill in Saskatchewan, Canada, and in early 2001, completed a new 120"
wide Steckel mill in Mobile, Alabama. IPSCO competes primarily in the Midwest
commodity plate market, in other selected target markets and in the coiled plate
market throughout the U.S. Nucor Corporation's new green field plate mill (circa
2001) in Hertford, North Carolina has an operating capacity of one million tons
per year, which has further increased competition in the steel plate market.
Until its shut-down in November 2001 and subsequent Chapter 11
bankruptcy filing in January 2002, Geneva Steel ("Geneva") was a major
competitor of the Company in the commodity plate market. Geneva has not
restarted and is generally regarded as permanently shut down and a candidate for
liquidation. Geneva, located in Provo, Utah, was the only integrated steel
making facility west of the Mississippi, and had historically produced
approximately 1.8 million tons of commodity plate and coil per year.
LARGE DIAMETER PIPE. The Company's principal domestic competitors in
the large diameter steel pipe market at this time are Berg Steel Pipe
Corporation, located in Florida, and South Texas Steel, located in Texas.
International competitors consist primarily of pipe producers from Japan, Europe
and Canada, with the principal Canadian competitor being IPSCO. Demand for the
Company's pipe in recent years is primarily a function of new construction of
oil and gas transportation pipelines and to a lesser extent maintenance and
replacement of existing pipelines. Construction of new pipelines domestically
depends to some degree on the level of oil and gas exploration and drilling
activity.
ERW PIPE. The competition in the market for ERW pipe is based on
availability, price, product quality and responsiveness to customers. The need
for this product has a direct correlation to the number of drilling rigs in the
United States and Canada. Principal competitors in the ERW product in western
Canada are IPSCO and Prudential Steel Ltd., a wholly-owned subsidiary of
Maverick Tube Corporation, located in Calgary, Alberta.
RMSM DIVISION
RAIL. The majority of current rail requirements in the United States
are replacement rails for existing rail lines. Imports have been a significant
factor in the domestic rail market in recent
-8-
years. The Company's capital expenditure program at the Pueblo Mill provided the
rail production facilities with continuous cast steel capability and in-line
head-hardening rail capabilities necessary to compete with other producers.
Pennsylvania Steel Technologies, a division of Bethlehem, is the only other
domestic rail producer at this time.
ROD AND BAR. The competition in bar products includes a group of
minimills that have a geographical location close to the markets in or around
the Rocky Mountains. The Company's market for wire rod ranges from the Midwest
to the West Coast. Domestic rod competitors include North Star Steel, Cascade
Steel Rolling Mills, Keystone Steel and Wire for commodity grades and GS
Industries, Ivaco Rolling Mills and North Star Steel for high carbon rod
products.
SEAMLESS PIPE. The Company's primary competitors in seamless pipe
include a number of domestic and foreign manufacturers. The Company has the
flexibility to produce relatively small volumes of specified products on short
notice in response to customer requirements. Principal domestic competitors
include U.S. Steel Corporation and North Star Steel, a division of Cargill, for
seamless product. Lone Star Steel competes with its welded ERW pipe in lieu of
seamless, which is acceptable for some applications.
ENVIRONMENTAL MATTERS
The Company is subject to extensive United States and foreign, federal,
state and local environmental laws and regulations concerning, among other
things, wastewater, air emissions, toxic use reduction and hazardous materials
disposal. The Portland and Pueblo Mills are classified in the same manner as
other similar steel mills in the industry as generating hazardous waste
materials because the melting operation of the electric arc furnace produces
dust that contains heavy metals. This dust, which constitutes the largest waste
stream generated at these facilities, must be managed in accordance with
applicable laws and regulations.
The Clean Air Act Amendments ("CAA") of 1990 imposed responsibilities on
many industrial sources of air emissions, including the Company's plants. In
addition, the monitoring and reporting requirements of the law subject all
companies with significant air emissions to increased regulatory scrutiny. The
Company submitted applications in 1995 to the Oregon Department of Environmental
Quality ("DEQ") and the Colorado Department of Public Health and Environment
("CDPHE") for permits under Title V of the CAA for the Portland and Pueblo
Mills, respectively. A Title V permit was issued for the Portland Mill and
related operations in December 2000 and modified it in April 2002. See
"Environmental Matters-RMSM Division" below for a description of CAA compliance
issues relating to the Pueblo Mill. The Company does not know the ultimate cost
of compliance with the CAA, which will depend on a number of site-specific
factors. Regardless of the outcome of the matters discussed below, the Company
anticipates that it will be required to incur additional expenses and make
additional capital expenditures as a result of the law and future laws
regulating air emissions.
The Company's future expenditures for installation of and improvements to
environmental control facilities, remediation of environmental conditions,
penalties for violations of environmental laws, and other similar matters are
difficult to predict accurately. It is likely that the Company will be subject
to increasingly stringent environmental standards, including those relating to
air emissions, waste water and storm water discharge and hazardous materials
use, storage, handling and disposal. It is also likely that the Company will be
required to make potentially significant expenditures relating to environmental
matters, including environmental remediation, on an ongoing basis. Although the
Company has established reserves for environmental matters described below,
additional measures may be required by environmental authorities or as a result
of additional environmental hazards, identified by such authorities, the Company
or others each necessitating further expenditures. Accordingly, the costs of
environmental matters may exceed the amounts reserved. Expenditures of the
nature described below or liabilities resulting from hazardous substances
located on the Company's currently or previously owned properties or used or
generated in the conduct of its business, or resulting from circumstances,
actions, proceedings or claims relating to environmental matters, may have a
material adverse effect on the Company's consolidated financial condition,
results of operations, or cash flows.
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OREGON STEEL DIVISION
In May 2000, the Company entered into a Voluntary Clean-up Agreement
with the Oregon Department of Environmental Quality ("DEQ") committing the
Company to conduct an investigation of whether, and to what extent, past or
present operations at the Company's Portland Mill may have affected sediment
quality in the Willamette River. Based on preliminary findings, the DEQ has
requested the Company to begin a full remedial investigation ("RI"), including
areas of investigation throughout the Portland Mill, and implement source
control as required. The Company estimates that costs of the RI study could
range from $900,000 to $1,993,000 over the next two years. Based on a best
estimate, the Company has accrued a liability of $1,284,000 as of December 31,
2002. The Company has also recorded a $1,284,000 receivable for insurance
proceeds that are expected to cover these RI costs because the Company's insurer
is defending this matter, subject to a standard reservation of rights, and is
paying these RI costs as incurred. Based upon the results of the RI, the DEQ may
require the Company to incur costs associated with additional phases of
investigation, remedial action or implementation of source controls, which could
have a material adverse effect on the Company's results of operations because it
may cause costs to exceed available insurance or because insurance may not cover
those particular costs. The Company is unable at this time to determine if the
likelihood of an unfavorable outcome or loss is either probable or remote, or to
estimate a dollar amount range for a potential loss.
In a related manner, in December 2000, the Company received a general
notice letter from the U.S. Environmental Protection Agency ("EPA"), identifying
it, along with 68 other entities, as a potentially responsible party ("PRP")
under the Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") with respect to contamination in a portion of the Willamette River
that has been designated as the "Portland Harbor Superfund Site." The letter
advised the Company that it may be liable for costs of remedial investigation
and remedial action at the site (which liability, under CERCLA, is joint and
several with other PRPs) as well as for natural resource damages that may be
associated with any releases of contaminants (principally at the Portland Mill
site) for which the Company has liability. At this time, nine private and public
entities have signed an Administrative Order of Consent ("AOC") to perform a
remedial investigation/feasibility study ("RI/FS") of the Portland Harbor
Superfund Site under EPA oversight. The RI/FS is expected to take three to five
years to complete. The Company is a member of the Lower Willamette Group, which
is funding that investigation, and it signed a Coordination and Cooperation
Agreement with the EPA that binds it to all terms of the AOC. The Company's cost
associated with the RI/FS for 2002 is approximately $195,000, all of which has
been covered by the Company's insurer. As a best estimate of the RI/FS costs for
years after 2002, the Company has accrued $600,000 as of December 31, 2002. The
Company has also recorded a $600,000 receivable for insurance proceeds that are
expected to cover these RI/FS costs because the Company's insurer is defending
this matter, subject to a standard reservation of rights, and is paying these
RI/FS costs as incurred. Although the EPA has not yet defined the boundaries of
the Portland Harbor Superfund Site, the AOC requires the RI/FS to focus on an
"initial study area" that does not now include the portion of the Willamette
River adjacent to the Portland Mill. The study area, however, may be expanded.
At the conclusion of the RI/FS, the EPA will issue a Record of Decision setting
forth any remedial action that it requires to be implemented by identified PRPs.
A determination that the Company is a PRP could cause the Company to incur costs
associated with remedial action, natural resource damage and natural resource
restoration, the costs of which may exceed available insurance or which may not
be covered by insurance, which therefore could have a material adverse effect on
the Company's results of operations. The Company is unable to estimate a dollar
amount range for any related remedial action that may be implemented by the EPA,
or natural resource damages and restoration that may be sought by federal, state
and tribal natural resource trustees.
On April 18, 2001, the United Steelworkers of America (the "Union"),
along with two other groups, filed suit against the Company under the citizen
suit provisions of the Clean Air Act ("CAA") in U.S. District Court in Portland,
Oregon. The suit alleges that the Company has violated various air emission
limits and conditions of its operating permits at the Portland Mill
approximately 100 times since 1995. The suit seeks injunctive relief and
unspecified civil penalties. On January 30, 2003, the federal district court
judge dismissed the majority of the plaintiffs' claims and limited the type of
relief the plaintiffs could receive if they succeeded in proving the remaining
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allegations. Subsequently, the federal magistrate granted plaintiffs leave to
amend their complaint, but any amendments must be consistent with the judge's
ruling, which significantly limits the claims and type of relief that may be
alleged. The Company believes it has factual and legal defenses to the
allegations and intends to defend the matter vigorously. Although the Company
believes it will prevail, it is not presently possible to estimate the liability
if there is ultimately an adverse determination.
RMSM DIVISION
In connection with the acquisition of the steelmaking and finishing
facilities located at Pueblo, Colorado ("Pueblo Mill"), CF&I accrued a liability
of $36.7 million for environmental remediation related to the prior owner's
operations. CF&I believed this amount was the best estimate of costs from a
range of $23.1 million to $43.6 million. CF&I's estimate of this liability was
based on two remediation investigations conducted by environmental engineering
consultants, and included costs for the Resource Conservation and Recovery Act
facility investigation, a corrective measures study, remedial action, and
operation and maintenance associated with the proposed remedial actions. In
October 1995, CF&I and the Colorado Department of Public Health and Environment
("CDPHE") finalized a postclosure permit for hazardous waste units at the Pueblo
Mill. As part of the postclosure permit requirements, CF&I must conduct a
corrective action program for the 82 solid waste management units at the
facility and continue to address projects on a prioritized corrective action
schedule which substantially reflects a straight-line rate of expenditure over
30 years. The State of Colorado mandated that the schedule for corrective action
could be accelerated if new data indicated a greater threat existed to the
environment than was presently believed to exist. At December 31, 2002, the
accrued liability was $29.9 million, of which $25.9 million was classified as
non-current on the consolidated balance sheet.
The CDPHE inspected the Pueblo Mill in 1999 for possible environmental
violations, and in the fourth quarter of 1999 issued a Compliance Advisory
indicating that air quality regulations had been violated, which was followed by
the filing of a judicial enforcement action ("Action") in the second quarter of
2000. In March 2002, CF&I and CDPHE reached a settlement of the Action, which
was approved by the court (the "State Consent Decree"). The State Consent Decree
provides for CF&I to pay $300,000 in penalties, fund $1.5 million of community
projects, and to pay approximately $400,000 for consulting services. CF&I is
also required to make certain capital improvements expected to cost
approximately $20 million, including converting to the new single New Source
Performance Standards Subpart AAa ("NSPS AAa") compliant furnace discussed
below. The State Consent Decree provides that the two existing furnaces will be
permanently shut down approximately 16 months after the issuance of a Prevention
of Significant Deterioration ("PSD") air permit. CF&I applied for the PSD permit
in April 2002. Terms of that permit are still under discussion with the State
and it has not yet been issued.
In May 2000, the EPA issued a final determination that one of the two
electric arc furnaces at the Pueblo Mill was subject to federal NSPS AA. This
determination was contrary to an earlier "grandfather" determination first made
in 1996 by CDPHE. CF&I appealed the EPA determination in the federal Tenth
Circuit Court of Appeals, and that appeal is pending. CF&I has negotiated a
settlement of this matter with the EPA. Under that agreement and overlapping
with the commitments made to the CDPHE described below, CF&I committed to the
conversion to the new NSPS AAa compliant furnace (to be completed approximately
two years after permit approval and expected to cost, with all related emission
control improvements, approximately $20 million), and to pay approximately
$450,000 in penalties and fund certain supplemental environmental projects
valued at approximately $1.1 million, including the installation of certain
pollution control equipment at the Pueblo Mill. The above mentioned expenditures
for supplemental environmental projects will be both capital and non-capital
expenditures. Once the settlement agreement is finalized, the EPA will file
either one or two proposed federal Consent Decrees, which, if approved by the
court, will fully resolve all NSPS and PSD issues. At that time CF&I will
dismiss its appeal against the EPA. If the proposed settlement with the EPA is
not approved, which appears unlikely, it would not be possible to estimate the
liability if there were ultimately an adverse determination of this matter.
In response to the CDPHE settlement and the resolution of the EPA
action, CF&I has accrued $2.8 million as of December 31, 2002, for possible
fines and non-capital related expenditures.
-11-
In December 2001, the State of Colorado issued a Title V air emission
permit to CF&I under the CAA requiring that the furnace subject to the EPA
action operate in compliance with NSPS AA standards. This permit was modified in
April 2002 to incorporate the longer compliance schedule that is part of the
settlement with the CDPHE and the EPA. In September 2002, the Company submitted
a request for a further extension of certain Title V compliance deadlines,
consistent with a joint petition by the State and the Company for an extension
of the same deadlines in the State Consent Decree. This modification gives CF&I
adequate time (at least 15 1/2 months after CDPHE issues the PSD permit) to
convert to a single NSPS AAa compliant furnace. Any decrease in steelmaking
production during the furnace conversion period when both furnaces are expected
to be shut down will be offset by increasing production prior to the conversion
period by building up semi-finished steel inventory and, if necessary,
purchasing semi-finished steel ("billets") for conversion into rod products at
spot market prices at costs comparable to internally generated billets. Pricing
and availability of billets is subject to significant volatility. However, the
Company believes that near term supplies of billets will continue to be
available in sufficient quantities at favorable prices.
In a related matter, in April 2000, the Union filed suit in U.S.
District Court in Denver, Colorado, asserting that the Company and CF&I had
violated the CAA at the Pueblo Mill for a period extending over five years. The
Union sought declaratory judgement regarding the applicability of certain
emission standards, injunctive relief, civil penalties and attorney's fees. On
July 6, 2001, the presiding judge dismissed the suit. The 10th Circuit Court of
Appeals on March 3, 2003 reversed the District Court's dismissal of the case and
remanded the case for further hearing to the District Court. No decision has
been yet reached whether to further appeal this ruling. While the Company does
not believe the suit will have a material adverse effect on its results of
operations, the result of litigation, such as this, is difficult to predict and
an adverse outcome with significant penalties is possible. It is not presently
possible to estimate the liability if there is ultimately an adverse
determination on appeal.
LABOR MATTERS
The labor contract at CF&I expired on September 30, 1997. After a
brief contract extension intended to help facilitate a possible agreement, on
October 3, 1997, the Union initiated a strike at CF&I for approximately 1,000
bargaining unit employees. The parties, however, failed to reach final agreement
on a new labor contract due to differences on economic issues. As a result of
contingency planning, CF&I was able to avoid complete suspension of operations
at the Pueblo Mill by utilizing a combination of new hires, striking employees
who returned to work, contractors and salaried employees.
On December 30, 1997, the Union called off the strike and made an
unconditional offer on behalf of its members to return to work. At the time of
this offer, because CF&I had permanently replaced the striking employees, only a
few vacancies existed at the Pueblo Mill. Since that time, vacancies have
occurred and have been filled by formerly striking employees ("Unreinstated
Employees"). As of December 31, 2002, approximately 773 Unreinstated Employees
have either returned to work or have declined CF&I's offer of equivalent work.
At December 31, 2002, approximately 157 Unreinstated Employees remain
unreinstated.
On February 27, 1998, the Regional Director of the National Labor
Relations Board ("NLRB") Denver office issued a complaint against CF&I, alleging
violations of several provisions of the National Labor Relations Act ("NLRA").
On August 17, 1998, a hearing on these allegations commenced before an
Administrative Law Judge ("Judge"). Testimony and other evidence were presented
at various sessions in the latter part of 1998 and early 1999, concluding on
February 25, 1999. On May 17, 2000, the Judge rendered a decision which, among
other things, found CF&I liable for certain unfair labor practices and ordered
as remedy the reinstatement of all 1,000 Unreinstated Employees, effective as of
December 30, 1997, with back pay and benefits, plus interest, less interim
earnings. Since January 1998, the Company has been returning unreinstated
strikers to jobs as positions became open. As noted above, there were
approximately 157 Unreinstated Employees as of December 31, 2002. On August 2,
2000, CF&I filed an appeal with the NLRB in Washington, D.C. A separate hearing
concluded in February 2000, with the judge for that hearing rendering a decision
on August 7, 2000, that certain of the Union's actions undertaken since the
beginning of the strike did constitute misconduct and violations of certain
provisions of
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the NLRA. The Union has appealed this determination to the NLRB. In both cases,
the non-prevailing party in the NLRB's decision will be entitled to appeal to
the appropriate U.S. Circuit Court of Appeals. CF&I believes both the facts and
the law fully support its position that the strike was economic in nature and
that it was not obligated to displace the properly hired replacement employees.
The Company does not believe that final judicial action on the strike issues is
likely for at least two to three years.
In the event there is an adverse determination of these issues,
Unreinstated Employees could be entitled to back pay, including benefits, plus
interest, from the date of the Union's unconditional offer to return to work
through the date of their reinstatement or a date deemed appropriate by the NLRB
or an appellate court. The number of Unreinstated Employees entitled to back pay
may be limited to the number of past and present replacement workers; however,
the Union might assert that all Unreinstated Employees should be entitled to
back pay. Back pay is generally determined by the quarterly earnings of those
working less interim wages earned elsewhere by the Unreinstated Employees. In
addition to other considerations, each Unreinstated Employee has a duty to take
reasonable steps to mitigate the liability for back pay by seeking employment
elsewhere that has comparable working conditions and compensation. Any estimate
of the potential liability for back pay will depend significantly on the ability
to assess the amount of interim wages earned by these employees since the
beginning of the strike, as noted above. Due to the lack of accurate information
on interim earnings for both reinstated and Unreinstated Employees and sentiment
of the Union towards the Company, it is not currently possible to obtain the
necessary data to calculate possible back pay. In addition, the NLRB's findings
of misconduct by the Union may mitigate any back pay award with respect to any
Unreinstated Employees proven to have taken part or participated in acts of
misconduct during and after the strike. Thus, it is not presently possible to
estimate the liability if there is ultimately an adverse determination against
CF&I. An ultimate adverse determination against CF&I on these issues may have a
material adverse effect on the Company's consolidated financial condition,
results of operations, or cash flows. CF&I does not intend to agree to any
settlement of this matter that will have a material adverse effect on the
Company. In connection with the ongoing labor dispute, the Union has undertaken
certain activities designed to exert public pressure on CF&I. Although such
activities have generated some publicity in news media, CF&I believes that they
have had little or no material impact on its operations.
During the strike by the Union at CF&I, certain bargaining unit
employees of the Colorado & Wyoming Railway Company ("C&W"), a wholly-owned
subsidiary of New CF&I, refused to report to work for an extended period of
time, claiming that concerns for their safety prevented them from crossing the
picket line. The bargaining unit employees of C&W were not on strike, and
because the other C&W employees reported to work without incident, C&W
considered those employees to have quit their employment and, accordingly, C&W
declined to allow those individuals to return to work. The various unions
representing those individuals filed claims with C&W asserting that C&W had
violated certain provisions of the applicable collective bargaining agreement,
the Federal Railroad Safety Act ("FRSA"), or the Railway Labor Act. In all of
the claims, the unions demand reinstatement of the former employees with their
seniority intact, back pay and benefits.
The United Transportation Union, representing thirty of those former
employees, asserted that their members were protected under the FRSA and pursued
their claim before the Public Law Board ("PLB"). A hearing was held in November
1999, and the PLB, with one member dissenting, rendered an award on January 8,
2001 against C&W, ordering the reinstatement of those claimants who intend to
return to work for C&W, at their prior seniority, with back pay and benefits,
net of interim wages and benefits received elsewhere. On February 6, 2001, C&W
filed a petition for review of that award and has referred the matter back to
the PLB to determine the specific Relief which should be granted as to each
claimant in accordance with the terms of the award. On May 23, 2002, C&W filed
an appeal of the District Court's order in the United States Court of Appeals.
The appeal was dismissed as being premature given that the hearing on back pay
had not yet occurred. The Company does not believe an adverse determination
against C&W of this matter would have a material adverse effect on the Company's
results of operations.
The Transportation-Communications International Union, Brotherhood
Railway Carmen Division, representing six of those former C&W employees,
asserted that their members were pro-
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tected under the terms of the collective bargaining agreement and pursued their
claim before a separate PLB. A hearing was held in January 2001, and that PLB,
with one member dissenting, rendered an award on March 14, 2001 against C&W,
ordering the reinstatement of those claimants who intend to return to work for
C&W, at their prior seniority, with back pay and benefits, net of interim wages
earned elsewhere. As of December 31, 2002, two of the six former employees have
accepted a settlement from C&W. The Company does not believe an adverse
determination against C&W of this matter would have a material adverse effect on
the Company's results of operations.
EMPLOYEES
As of December 31, 2002, the Company had approximately 2,000 full-time
employees. Within the Oregon Steel Division, except as noted below, the
employees of the Portland Mill, the Napa Pipe Mill and the corporate
headquarters are not represented by a union. In December 2002, 13 employees of a
small technical department at the Portland Mill voted in favor of allowing
Northwest Metal Producers Association ("NWMPA") to represent them in collective
bargaining with management. Approximately 50 employees at the Camrose Pipe Mill
are members of the Canadian Autoworkers Union ("CAW") and are working under the
terms of a collective bargaining agreement that expires in 2003. Approximately
600 employees of the RMSM Division work under collective bargaining agreements
with several unions, including the United Steelworkers of America. The Company
and the United Steelworkers of America have been unable to agree on terms for a
new labor agreement and are operating under the terms of the Company's last
contract offer, which was implemented in 1998. See "Business-Labor Matters".
The domestic employees of the Oregon Steel Division participate in the
Employee Stock Ownership Plan ("ESOP"). As of December 31, 2002, the ESOP owned
approximately 3% of the Company's outstanding common stock. At the discretion of
the Board of Directors, common stock is contributed to the ESOP. The Company
also has profit participation plans for its employees, with the exception of
bargaining unit employees of Camrose and executive officers of the Company,
which permit eligible employees to share in the pretax income of their operating
unit. The Company may modify, amend or terminate the plans, at any time, subject
to the terms of various labor agreements.
AVAILABLE INFORMATION
The public may read and copy any materials the Company file with the
SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington DC
20549. The public may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC maintains an Internet site that contains reports, proxy and
information statements, and other information regarding issuers that file
electronically with the SEC and that the address of that site is www.sec.gov.
The Company's Web site is www.oregonsteel.com. The Company makes
available free of charge, on or through its Web site, its annual, quarterly and
current reports, and any amendments to those reports, as soon as reasonably
practicable after electronically filing such reports with the Securities and
Exchange Commission ("SEC"). Information contained on the Company's Web site is
not part of this report.
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ITEM 2. PROPERTIES
OREGON STEEL DIVISION
The Portland Mill is located on approximately 143 acres owned by the
Company in the Rivergate Industrial Park in Portland, Oregon, near the
confluence of the Columbia and Willamette rivers. The operating facilities
principally consist of an electric arc furnace, ladle metallurgy station, vacuum
degasser, slab casting equipment and the Combination Mill, as well as an
administrative office building. The Company's heat-treating facilities are
located nearby on a 5-acre site owned by the Company.
The Company owns approximately 152 acres in Napa, California, with the
Napa Pipe Mill occupying approximately 92 of these acres. The Company also owns
a 325,000 square foot steel fabricating facility adjacent to the Napa Pipe Mill.
The fabricating facility is not currently operated by the Company, but is
instead leased to operators on a short-term basis, and consists of industrial
buildings containing equipment for the production and assembly of large steel
products or components.
The Camrose Pipe Mill is located on approximately 67 acres in Camrose,
Alberta, Canada, with the large diameter pipe mill and the ERW pipe mill
occupying approximately four acres and three acres, respectively. In addition,
there is a 3,600 square foot office building on the site. The sales staff leases
office space in Calgary, Alberta, Canada. The property, plant and equipment of
Camrose, and certain other assets, are collateral for the Camrose (CDN) $15
million revolving credit facility (see Note 6 to the Consolidated Financial
Statements).
RMSM DIVISION
The Pueblo Mill is located in Pueblo, Colorado on approximately 570
acres. The operating facilities principally consist of two electric arc
furnaces, a ladle refining furnace and vacuum degassing system, two 6-strand
continuous round casters for producing semi-finished steel, and three finishing
mills (a rail mill, a seamless pipe mill, and a rod and bar mill). Due to market
conditions, operation at the seamless pipe mill was suspended from May 1999 to
September 2000, from November 2001 to April 2002 and from mid-August 2002 to
mid-September 2002.
At December 31, 2002, the Company had the following nominal capacities,
which are affected by product mix:
PRODUCTION PRODUCTION
CAPACITY IN 2002
---------- ----------
(TONS)
Portland Mill: Melting 840,000 456,600
Finishing 1,200,000 847,000
Napa Pipe Mill: Steel Pipe 400,000 360,700
Camrose Pipe Mill: Steel Pipe 320,000 26,500
Pueblo Mill: Melting 1,200,000 916,600
Finishing Mills (FN1) 1,200,000 852,100
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(FN1) Includes the production capacity and production in 2002 of 150,000 tons
and 32,500 tons, respectively, of the seamless pipe mill.
The Company's 10% First Mortgage Notes due 2009 ("10% Notes") are
secured, in part, by a lien on substantially all of the property, plant and
equipment of the Company, exclusive of Camrose. New CF&I and CF&I (collectively,
the "Guarantors") have pledged substantially all of their property, plant and
equipment and certain other assets as security for their guarantees of the 10%
Notes. (See Note 6 to the Consolidated Financial Statements.)
ITEM 3. LEGAL PROCEEDINGS
See Part I, Item 1, "Business - Environmental Matters", for discussion
of (a) the lawsuits initiated by the Union alleging violations of the CAA, and
(b) the environmental issues at the Portland Mill and RMSM.
See Part I, Item 1, "Business - Labor Matters", for the status of the
labor dispute at RMSM.
-15-
The Company is party to various other claims, disputes, legal actions
and other proceedings involving contracts, employment and various other matters.
In the opinion of management, the outcome of these matters should not have a
material adverse effect on the consolidated financial condition of the Company.
The Company maintains insurance against various risks, including
certain types of tort liability arising from the sale of its products. The
Company does not maintain insurance against liability arising out of waste
disposal, on-site remediation of environmental contamination or earthquake
damage to its Napa Mill and related properties because of the high cost of that
coverage. There is no assurance that the insurance coverage carried by the
Company will be available in the future at reasonable rates, if at all.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were voted upon during the fourth quarter of the year ended
December 31, 2002.
EXECUTIVE OFFICERS OF THE REGISTRANT
Officers are elected by the Board of Directors of the Company to serve
for a period ending with the next succeeding annual meeting of the Board of
Directors held immediately after the annual meeting of stockholders.
The name of each executive officer of the Company, age as of February
1, 2003 and position(s) and office(s) held by each executive officer are as
follows:
DATE ASSUMED
NAME AGE POSITION(S) PRESENT POSITION(S)
- ---------------------- --- ------------------------- -------------------
Joe E. Corvin 58 President and January 2000
Chief Executive Officer
L. Ray Adams 52 Vice President, Finance March 1991
Chief Financial Officer
and Treasurer
Michael D. Buckentin 41 Vice President, July 2001
Operations -
Oregon Steel Division
Larry R. Lawrence 55 Senior Vice President, July 2001
Sales - Oregon Steel Division
Steven M. Rowan 57 Vice President, February 1992
Materials and Transportation
Robert A. Simon 41 Vice President and September 2000
General Manager -
RMSM Division
Jeff S. Stewart 41 Corporate Controller January 2000
Each of the executive officers named above has been employed by the
Company in an executive or managerial role for at least five years.
-16-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange. At
December 31, 2002, the number of common stockholders of record was 906.
Information on quarterly dividends and common stock prices is shown on page 27
and incorporated herein by reference.
The Indenture under which the Company's 10% Notes were issued contains
potential restrictions on new indebtedness and various types of disbursements,
including common stock dividends. One of the restrictions on cash dividends is
based on the cumulative amount of the Company's consolidated net income, as
defined. Under that restriction, there was no amount available for cash
dividends at December 31, 2002. In addition, the Company cannot pay cash
dividends under its Credit Agreement without prior approval from its lenders.
(See Note 6 to the Consolidated Financial Statements and Part II, Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources").
-17-
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT TONNAGE, PER TON AND PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Sales (FN1) $ 904,950 $ 780,887 $ 672,017 $ 884,649 $ 937,400
Cost of sales 783,940 694,941 619,016 756,461 826,606
Settlement of litigation -- (3,391) -- (7,027) (7,037)
Loss (gain) on sale of assets (1,283) (10) (290) 501 (4,746)
Selling, general and administrative expenses 58,600 64,300 51,486 55,992 56,189
Incentive compensation 3,761 244 698 10,540 2,890
--------- --------- --------- --------- ---------
Operating income 59,932 24,803 1,107 68,182 63,498
Interest expense (36,254) (35,595) (34,936) (35,027) (38,485)
Other income (expense), net 2,843 3,044 4,355 1,290 (484)
Minority interests (3,036) (339) (7) (1,475) (4,213)
Income tax benefit (expense) (10,032) 2,159 11,216 (13,056) (8,387)
--------- --------- --------- --------- ---------
Net income (loss) before extraordinary
loss and cumulative effect of change
in accounting principle 13,453 (5,928) (18,265) 19,914 11,929
Extraordinary loss from extinguishment
of debt, net of tax (1,094) -- -- -- --
Cumulative effect of change in accounting
principle, net of tax (17,967) -- -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $ (5,608) $ (5,928) $ (18,265) $ 19,914 $ 11,929
========= ========= ========= ========= =========
COMMON STOCK INFORMATION:
Basic earnings (loss) per share $ (0.21) $ (0.22) $ (0.69) $ 0.76 $ 0.45
Diluted earnings (loss) per share $ (0.20) $ (0.22) $ (0.69) $ 0.76 $ 0.45
Cash dividends declared per share $ -- $ -- $ 0.06 $ 0.56 $ 0.56
Weighted average common shares & common
equivalents outstanding
Basic 26,388 26,378 26,375 26,375 26,368
Diluted 26,621 26,378 26,375 26,375 26,368
BALANCE SHEET DATA (AT DECEMBER 31):
Working capital $150,377 $ 53,462 $ 108,753 $101,177 $ 34,428
Total assets 849,362 869,576 880,354 877,254 993,970
Current liabilities 145,085 205,607 126,748 101,660 252,516
Long-term debt 301,428 233,542 314,356 298,329 270,440
Total stockholders' equity 306,990 318,586 331,645 352,402 345,117
OTHER DATA:
Depreciation and amortization $ 45,868 $ 46,097 $ 46,506 $ 47,411 $ 45,164
Capital expenditures $ 18,246 $ 12,933 $ 16,684 $ 15,908 $ 27,754
Total tonnage sold:
Oregon Steel Division 947,000 829,700 871,500 969,800 808,800
RMSM Division 836,500 780,900 757,000 734,900 861,700
----------- --------- --------- --------- ---------
Total tonnage sold 1,783,500 1,610,600 1,628,500 1,704,700 1,670,500
=========== ========= ========= ========= =========
Operating margin (FN2) 6.5% 2.7% 0.1% 7.0% 5.5%
Operating income per ton sold (FN2) $33 $13 $1 $36 $31
- ----------------------------------
(FN1) Includes freight revenues of $54.5 million, $54.8 million and $36.1
million, in 2002, 2001, and 2000, respectively, and sale of electricity
of $19.1 million and $2.8 million in 2001 and 2000, respectively. During
2001 and 2000, the Portland Mill was the beneficiary of a committed power
supply contract with a local utility company. Under the contract, the
utility guaranteed to supply an amount of electricity to the mill at a
fixed rate. During the west coast electricity shortage in 2000 and 2001,
the Company agreed not to use a daily determined portion of the guaranteed
supply and was compensated by the local utility at a daily-determined rate
per megawatt/hour. The revenue from this was included in operating income
because the Company made an operational choice to not use power in return
for compensation rather than to produce product. There was no direct cost
of sales associated with this transaction and, accordingly, the net
revenue (compensation in excess of contracted price) fully impacted
operating income for the period.
(FN2) Excludes settlement of litigation and gains and losses on sale of assets.
-18-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following information contains forward-looking statements, which
are subject to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Statements made in this report that are not statements of
historical fact are forward-looking statements. Forward-looking statements made
in this report can be identified by forward-looking words such as, but not
limited to, "expect," "anticipate," "believe," "intend," "plan," "seek,"
"estimate," "continue," "may," "will," "would," "could," and similar
expressions. These forward-looking statements are subject to risks and
uncertainties and actual results could differ materially from those projected.
These risks and uncertainties include, but are not limited to, general business
and economic conditions; competitive products and pricing, as well as
fluctuations in demand; the supply of imported steel and subsidies provided by
foreign governments to support steel companies domiciled in their countries;
changes in U.S. or foreign trade policies affecting steel imports or exports;
potential equipment malfunction; work stoppages; plant construction and repair
delays; reduction in electricity supplies and the related increased costs and
possible interruptions of supply; changes in the availability and costs of raw
materials and supplies used by the Company; costs of environmental compliance
and the impact of governmental regulations; risks related to the outcome of the
pending union dispute; and failure of the Company to predict the impact of lost
revenues associated with interruption of the Company's, its customers' or
suppliers' operations.
The consolidated financial statements include the accounts of the
Company and its subsidiaries, which include wholly- owned Camrose Pipe
Corporation, which through ownership in another corporation holds a 60% interest
in Camrose Pipe Company ("Camrose"); and 87% owned New CF&I, which owns a 95.2%
interest in CF&I. The Company also directly owns an additional 4.3% interest in
CF&I. In January 1998, CF&I assumed the trade name Rocky Mountain Steel Mills.
All significant intercompany balances and transactions have been eliminated.
The Company currently has two aggregated operating divisions known as
the Oregon Steel Division and the RMSM Division. (See Note 2 to the Consolidated
Financial Statements on discussion of the Company's aggregate reporting of its
operating units). The Oregon Steel Division is centered at the Portland Mill. In
addition to the Portland Mill, the Oregon Steel Division includes the Napa Pipe
Mill and the Camrose Pipe Mill. The RMSM Division consists of the steelmaking
and finishing facilities of the Pueblo Mill, as well as certain related
operations.
The following table sets forth, for the periods indicated, the
percentage of sales represented by selected income statement items and
information regarding selected balance sheet data.
YEAR ENDED DECEMBER 31,
--------------------------------------------
2002 2001 2000
-------- -------- --------
INCOME STATEMENT DATA:
Sales 100.0% 100.0% 100.0%
Cost of sales 86.6 89.0 92.1
Settlement of litigation -- (0.4) --
Loss (gain) on sale of assets (0.1) -- --
Selling, general and administrative expenses 6.5 8.2 7.7
Incentive compensation 0.4 -- 0.1
-------- -------- --------
Operating income 6.6 3.2 0.1
Interest expense (4.0) (4.6) (5.2)
Other income (expense), net 0.3 0.4 0.6
Minority interests (0.3) (0.1) --
-------- -------- --------
Pretax income (loss) 2.6 (1.1) (4.5)
Income tax benefit (expense) (1.1) 0.3 1.7
-------- -------- --------
Net income (loss) before extraordinary loss and
cumulative effect of change in accounting principle 1.5 (0.8) (2.8)
Extraordinary loss from extinguishment of debt of tax (0.1) -- --
Cumulative effect of change in accounting principle,
net of tax (2.0) -- --
-------- -------- --------
Net loss (0.6)% (0.8)% (2.8)%
======== ======== ========
BALANCE SHEET DATA (AT DECEMBER 31):
Current ratio 2.0:1 1.3:1 1.9:1
Total debt as a percentage of capitalization 47.6% 49.3% 49.6%
Net book value per share $11.90 $12.36 $12.87
-19-
The following table sets forth by division, for the periods indicated,
tonnage sold, revenues and average selling price per ton.
YEAR ENDED DECEMBER 31,
--------------------------------------------
2002 2001 2000
---------- ---------- ----------
TOTAL TONNAGE SOLD:
Oregon Steel Division:
Plate and coil 467,600 472,000 726,800
Welded pipe 479,400 357,700 144,700
---------- ---------- ----------
Total Oregon Steel Division 947,000 829,700 871,500
---------- ---------- ----------
RMSM Division:
Rail 384,100 246,000 314,700
Rod and Bar 419,700 432,500 395,100
Seamless Pipe (FN1) 30,000 97,700 10,400
Semi-finished 2,700 4,700 36,800
---------- ---------- ----------
Total RMSM 836,500 780,900 757,000
---------- ---------- ----------
Total Company 1,783,500 1,610,600 1,628,500
========== ========== ==========
PRODUCT SALES (IN THOUSANDS): (FN2)
Oregon Steel Division $ 535,049 $ 414,994 $ 363,624
RMSM Division 315,448 291,993 269,505
---------- ---------- ----------
Total Company $ 850,497 $ 706,987 $ 633,129
========== ========== ==========
AVERAGE SELLING PRICE PER TON:(2)
Oregon Steel Division $ 565 $ 500 $ 417
RMSM Division $ 377 $ 374 $ 356
Company Average $ 477 $ 439 $ 389
- -----------------------
(FN1) The Company suspended operation of the seamless pipe mill from May 1999
until October 2000, from November 2001 to April 2002 and from mid-August
2002 to mid-September 2002.
(FN2) Product sales and average selling price per ton exclude freight revenues
of $54.5 million, $54.8 million and $36.1 million, in 2002, 2001, and
2000, respectively, and sale of electricity of $19.1 million and $2.8
million in 2001 and 2000, respectively. During 2001 and 2000, the Portland
Mill was the beneficiary of a committed power supply contract with a local
utility company. Under the contract the utility guaranteed to supply an
amount of electricity to the mill at a fixed rate. During the west coast
electricity shortage in 2000 and 2001, the Company agreed not to use a
daily determined portion of the guaranteed supply and was compensated by
the local utility at a daily-determined rate per megawatt/hour. The
revenue from this was included in operating income because the Company
made an operational choice to not use power in return for compensation
rather than to produce product. There was no direct cost of sales
associated with this transaction and, accordingly, the net revenue
(compensation in excess of contracted price)fully impacted operating
income for the period.
The Company's long range strategic plan emphasizes the commitment to
increase the Company's offering of specialty products, particularly in the
plate, rail, rod and welded pipe businesses, while seeking to reduce the impact
of individual product cycles on the Company's financial performance. To achieve
these goals, the Company is developing additional product offerings and
extending its market from the western United States to a national marketing
presence.
The Company's operating results were positively affected in 2002 by,
among other things, increased demand for welded pipe products. However,
increased pricing pressure in plate products continued in 2002. The specialty
and commodity plate markets have been impacted by both new sources of domestic
supply and continued imports from foreign suppliers, which have adversely
affected average selling prices for the Company's plate products. High fixed
costs motivate steel producers to maintain high output levels even in the face
of falling prices, thereby increasing further downward pressures on selling
prices. The domestic steel industry and the Company's business are highly
cyclical in nature and these factors have adversely affected the profitability
of the Company.
On March 5, 2002, President Bush announced the imposition of
restrictions on a wide range of steel imports for three years, including a 30%
tariff on steel plate and hot-rolled coil and a 30% tariff on imports of steel
slabs in excess of 5.4 million tons in year one. The tariffs on steel plate,
-20-
coil, and slabs decline to 24% in year two and 18% in year three. The tariffs
for steel slabs are for imports in excess of 5.9 million tons in year two and
6.4 million tons in year three. Imports from Mexico, a large exporter of slab to
the U.S., and Canada and certain developing countries are exempted from these
restrictions. This action is expected to reduce the supply of certain steel
products available on the U.S. market, thereby increasing the prices domestic
steel manufacturers can charge for those products. These restrictions did not
materially impact either the supply or the cost of steel slabs which the Company
purchases on the open market to process into steel plate and coil.
The Company expects to ship approximately 1.8 million tons of product
during 2003. The Oregon Steel Division anticipates that it will ship
approximately 270,000 tons of welded pipe and approximately 700,000 tons of
plate and coil products during 2003. The product mix is expected to shift in
terms of tons, from 51% of welded pipe and 49% of plate and coil in 2002, to
approximately 25% and 75%, respectively in 2003. This shift in product mix is
expected to have a material negative impact on the 2003 average sales price and
operating income for the division. The RMSM Division anticipates that it will
ship approximately 390,000 tons of rail, and approximately 440,000 tons of rod
and bar products. Seamless pipe shipments will be dependent on market conditions
in the drilling industry. While the Company anticipates that product category
average selling prices will be similar in 2003 as in 2002, higher raw material
and energy costs are expected to have a negative impact on the operating income
for the division. Accordingly, the Company expects consolidated operating income
to be significantly lower in 2003 versus 2002. However, the Company expects
liquidity to remain adequate through 2003 unless there is a substantial negative
change in overall economic markets.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with Generally Accepted Accounting
Principles ("GAAP"). The preparation of these financial statements requires the
Company to make estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, the Company evaluates its
estimates. This includes allowance for doubtful accounts, inventories, income
taxes, contingencies and litigation. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances. This provides a basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions, and these differences may be
material.
The Company believes the following critical accounting policies
affect its more significant judgments and estimates used in the preparation of
its consolidated financial statements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. The Company maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. As of December 31, 2002, the allowance of
doubtful accounts was approximately $4.4 million. In establishing a proper
allowance for doubtful accounts, the Company evaluates the collectibility of its
accounts receivable based on a combination of factors. In cases where management
is aware of the circumstances that may impair a specific customer's ability to
meet its financial obligations, the Company records a specific allowance against
amounts due from customers, and thereby reduces the net recognized receivable
amount the Company reasonably believes will be collected. For all other
customers, the Company evaluates the allowance for doubtful accounts based on
the length of time the receivables are past due, historical collection
experience, customer credit-worthiness and economic trends.
INVENTORY. The Company's inventory consists of raw materials,
semi-finished, finished products and operating stores and supplies. At December
31, 2002, inventory was approximately $162.8 million. If appropriate, the
Company's inventory balances are adjusted to approximate the lower of
manufacturing cost or market value. No such adjustment was required in 2002.
Manufacturing cost is determined using the average cost method.
ENVIRONMENTAL LIABILITIES. All material environmental remediation
liabilities for non-capital expenditures, which are both probable and estimable,
are recorded in the financial statements based on current technologies and
current environmental standards at the time of evaluation.
-21-
Adjustments are made when additional information is available that suggests
different remediation methods or when estimated time periods are changed,
thereby affecting the total cost. The best estimate of the probable cost within
a range is recorded; however, if there is no best estimate, the low end of the
range is recorded and the range is disclosed. Even though the Company has
established certain reserves for environmental remediation, additional remedial
measures may be required by environmental authorities and additional
environmental hazards, necessitating further remedial expenditures, may be
asserted by these authorities or private parties. Accordingly, the costs of
remedial measures may exceed the amounts reserved.
LITIGATION LIABILITIES. All material litigation liabilities, which are
both probable and estimable, are recorded in the financial statements based on
the nature of the litigation, progress of the case, and opinions of management
and legal counsel on the outcome. Adjustments are made when additional
information is available that alters opinions of management and legal counsel on
the outcome of the litigation. The best estimate of the probable cost within a
range is recorded; however, if there is no best estimate, the low end of the
range is recorded and the range is disclosed.
EMPLOYEE BENEFITS PLANS AND OTHER POST-RETIREMENT BENEFITS. Annual
pension and other post-retirement benefits ("OPRB") expenses are calculated by
third party actuaries using standard actuarial methodologies. The actuaries
assist the Company in making estimates based on historical information, current
information and estimates about future events and circumstances. Significant
assumptions used in the valuation of pension and OPRB include expected return on
plan assets, discount rate, rate of increase in compensation levels and the
health care cost trend rate. The Company accounts for the defined benefit
pension plans using Statement of Financial Accounting Standards No. 87,
"EMPLOYER'S ACCOUNTING FOR PENSIONS" ("SFAS No. 87"). As a result of continuing
declines in interest rates and the market value of the Company's defined benefit
pension plans' assets, the Company was required to increase the minimum pension
liability at December 31, 2002 by $10.5 million. This adjustment did not impact
current earnings. For further details regarding the Company's benefits and
post-retirement plans, see Note 11 to the Consolidated Financial Statements.
DEFERRED TAXES. Deferred income taxes reflect the differences between
the financial reporting and tax bases of assets and liabilities at year-end
based on enacted tax laws and statutory tax rates. Tax credits are recognized as
a reduction of income tax expense in the year the credit arises. A valuation
allowance is established when necessary to reduce deferred tax assets to the
amount more likely than not to be realized.
COMPARISON OF 2002 TO 2001
SALES. Consolidated sales for 2002 of $905.0 million increased $124.1
million, or 15.9%, from sales of $780.9 million for 2001. Included in 2001 sales
are $19.1 million in electricity sales; the Company did not have any sales of
electricity in 2002. Revenues from product sales increased 20.3% to $850.5
million in 2002 from $707.0 million in 2001. Shipments were up 10.7% at
1,783,500 tons for 2002 compared to 1,610,600 tons for 2001. The average product
selling price per ton increased from $439 in 2001 to $477 in 2002. Growth in
both product sales and related average selling prices were due primarily to
higher shipments of welded pipe and rail products and higher rod and bar prices
in 2002.
OREGON STEEL DIVISION. For 2002, the division shipped 947,000 tons of
plate, coil and welded pipe products, compared to 829,700 tons in 2001. This
increase was due to significantly higher shipments of welded pipe resulting from
the supply of more than 370,000 tons of large diameter pipe to Kern River Gas
Transmission Company, for its Kern River Expansion Project. Average selling
price per ton increased in 2002 to $565 from $500 in the prior year. The
increase was mainly due to a shift in product mix towards higher priced welded
pipe products attributable to the Kern River Expansion Project pipe order.
RMSM DIVISION. For 2002, the division shipped 836,500 tons, compared to
780,900 tons in 2001. The increase was due to higher shipments of rail products,
partially offset by decreased rod and bar shipments, as well as decreased
seamless pipe and semi-finished products. Average product selling price per ton
increased to $377 in 2002 from $374 in 2001. The shift of product mix to rail in
2002 was the principal reason for the improved pricing. In addition, the demand
for seamless pipe remained sluggish throughout 2002, and as a result, the
seamless mill was temporarily
-22-
shut down for the periods from November 2001 to April 2002 and from mid-August
2002 to mid-September of 2002.
GROSS PROFITS. Gross profit was $121.0 million, or 13.4% of sales, for
2002 compared to $85.9 million, or 11.0% of sales, for 2001. The increase of
$35.1 million in gross profit was positively impacted by increased sales of
high-priced welded pipe from the Napa Pipe Mill, and increased sales of rail
products and higher rod and bar prices at the RMSM Division.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses ("SG&A") of $58.6 million for 2002 decreased by 8.9%,
from $64.3 million for 2001. SG&A expenses decreased as a percentage of total
sales to 6.5% in 2002 from 8.2% in 2001. The decrease was due to higher general
adminstrative costs in 2001, including such non-recurring items as $3.1 million
of seamless pipe commission fees and $4.0 million of environmental and other
legal expenses reserves.
INTEREST EXPENSE. Total interest expense increased $659,000, or 1.9%,
to $36.3 million in 2002, compared to $35.6 million in 2001. The Company issued
its 10% First Mortgage Notes due 2009 ("10% Notes") on July 15, 2002 in order to
refinance its 11% First Mortgage Notes due 2003 ("11% Notes"). Although the
Company's 10% Notes bear a lower interest rate than the 11% Notes, the Company
incurred increased interest expense primarily attributable to the additional
interest accrued on the 11% Notes which were outstanding concurrently with the
10% Notes for the period of July 15 to August 14, 2002. This was partially
offset by the lower average borrowing levels from the Company's credit facility
in 2002. In 2001, interest expense included additional expensed loan fees due to
the amendment of the Company's credit facility.
INCOME TAX EXPENSE. The effective income tax expense rate was 42.7%
for 2002 versus an effective income tax benefit rate of 26.7% for 2001. The
effective income tax rate for 2002 varied principally from the combined state
and federal statutory rate due to a 1.7 million increase in the valuation
allowance for state tax credit carryforwards.
COMPARISON OF 2001 TO 2000
SALES. Consolidated sales for 2001 of $780.9 million increased $108.9
million, or 16.2%, from sales of $672.0 million for 2000. Included in 2001 sales
are $19.1 million in electricity sales and $54.8 million in freight revenue.
Included in 2000 sales is $2.8 million in electricity sales and $36.1 million in
freight revenue. Revenues from product sales increased 11.7% to $707.0 million
in 2001 from $633.1 million in 2000. Shipments were down 1.1% at 1,610,600 tons
for 2001 compared to 1,628,500 tons for 2000. However, the average product
selling price per ton increased from $389 in 2000 to $439 in 2001. Growth in
both product sales and related average selling prices were due primarily by the
shift in product mix from plate and coil products to welded and seamless pipe
products. Freight revenue increased in response to product sales growth, as well
as the product mix and customer preference on shipping.
OREGON STEEL DIVISION. For 2001, the division shipped 829,700 tons of
plate, coil and welded pipe products, compared to 871,500 tons in 2000. This
decrease was due to a weakness in market demand and also due, in large part, to
the 6-day temporary curtailment at the Portland Mill during August of 2001. This
curtailment was in response to the plate market decline. Despite the decline in
total shipments, average selling price per ton, net of revenues from the
electricity sales and shipping revenues, increased in 2001 to $500 from $417 in
the prior year. The increase was in large part due to greater mix of higher
priced welded pipe products attributable to the increased pipe orders at the
Napa Pipe Mill. Also included in 2001 sales is $16.9 million in electricity
sales. The Company sold approximately 50% of excess power load in its melting
facility at the Portland Mill back to the local utility under an electricity
exchange contract, which expired in October 2001.
RMSM DIVISION. For 2001, the division shipped 780,900 tons, compared to
757,000 tons in 2000. The increase was due to higher shipments of seamless pipe
and rod and bar products, partially offset by decreased rail shipments caused by
capital program reductions by the major railroads. Average product selling price
per ton increased to $374 in 2001 from $356 in 2000. The shift of product mix to
seamless pipe in 2001 was the principal reason for the improved pricing, as
seamless pipe has the highest selling price per ton of all the division's
products. Due to the adverse market conditions in the prior year, no seamless
products were shipped during the first nine months of 2000 because the operation
was temporarily shut down. While performance of seamless products
-23-
for the first half of 2001 was strong, market conditions again deteriorated as
demand from oil and gas distributors decreased toward the second half of the
year, due to significant decline of oil and natural gas prices. As a result, the
seamless mill was temporarily shut down in November 2001 and for the balance of
the year. Also included in 2001 sales is $2.2 million in electricity sales.
GROSS PROFITS. Gross profit was $85.9 million, or 11.0%, for 2001
compared to $53.0 million, or 7.9%, for 2000. The increase of $32.9 million in
gross profit was primarily related to the increased sales of high-priced welded
pipe and seamless pipe products. Additionally, the sale of electricity
positively impacted gross profit margin. This increase in gross profit was
partially offset by continued manufacturing overhead costs at the Portland Mill
that did not decline with the lower melt shop production that occurred as a
result of the sale of electricity back to the local utility.
SETTLEMENT OF LITIGATION. In 2001, the Company recorded a $3.4 million
gain from litigation settlements with various graphite electrode suppliers.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses ("SG&A") of $64.3 million for 2001 increased by 24.9%,
from $51.5 million for 2000. SG&A expenses increased as a percentage of total
sales to 8.2% in 2001 from 7.7% in 2000. The increase was due in part to $3.1
million in additional seamless pipe commission fees for 2001, as compared to
commission fees paid in 2000 when the seamless mill was shut down for the
majority of that year. In addition, shipping costs increased 18.1%, from $14.9
million in 2000 to $17.6 million in 2001. This was a direct result of higher
volume of shipments on welded and seamless pipe in 2001. The remaining increase
from the prior year was due to higher general and administrative costs. This
included an increase in bad debt expense of $2.7 million and an increase in
reserves for environmental and other legal expenses of $4.0 million.
INTEREST EXPENSE. Total interest expense increased $700,000, or 2.0%,
to $35.6 million in 2001, compared to $34.9 million in 2000. The increase in
interest expense in 2001 was primarily due to the acceleration of amortized loan
fees, additional loan fees, and higher interest costs associated with the
amendment of the Company's credit facility in the third and fourth quarters of
2001.
INCOME TAX EXPENSE. Effective income tax benefit rate was 26.7% and
38.0% for 2001 and 2000, respectively. The effective income tax rate for 2001
varied principally from the combined state and federal statutory rate due to the
adjustments created by structural changes in the Company's foreign operations,
and non-deductible fines and penalties.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, the Company's liquidity, comprised of cash, cash
equivalents, and funds available under its revolving credit agreement (" Credit
Agreement"), totaled approximately $94.9 million, compared to $46.3 million at
December 31, 2001.
Cash flow provided by operations for 2002 was $54.1 million compared to
$49.5 million in 2001. The items primarily affecting the $4.6 million increase
in cash flows were - a) non-cash transactions including: 1) the write-off of
$31.9 million worth of goodwill during the first quarter of 2002 resulting in a
cumulative effect of change in accounting principle of $18.0 million (net of a
$11.3 million tax effect and $2.6 million of minority interest); 2) a non-cash
provision for deferred income taxes of $12.1 million in 2002; and 3) the
refinancing of the Company's credit facility and the 11% Notes in July 2002
resulting in a $1.1 million extraordinary loss, net of taxes, on the early
extinguishment of debt; b) changes in working capital requirements
including: 1) increased inventories of $30.4 million versus $2.6 million in
2001; 2) a decrease of $4.6 million in net accounts receivable in 2002 versus an
increase of $2.0 million in 2001; 3) a $9.1 million increase operating
liabilities in 2002 versus an $18.0 million increase in 2001.
Net working capital at December 31, 2002 increased $96.9 million
compared to December 31, 2001, reflecting a $36.4 million increase in current
assets and a $60.5 million decrease in current liabilities. The increase in
current assets was primarily due to increased cash and inventories ($20.8
million and $30.4 million, respectively). An offset to the increase in current
assets was decreases in accounts receivable and deferred tax asset ($4.6 million
and $9.9 million, respectively). The accounts receivable for the year ended
December 31, 2002, as measured in average daily sales outstanding, decreased to
35 days, as compared to 40 days for the year ended December 31, 2001. The
decrease was attributable to a faster turnover of welded pipe and rail product
receivables from customers paying earlier in order to utilize cash discounts,
and an increased effort on collec-
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tions of receivables. The decrease in current liabilities was primarily due to a
$61.6 million decrease in short-term borrowings from the Company's credit
facility which was paid off with the proceeds of the 10% Notes. In addition, the
Company made a series of payments totaling $14.5 million to complete the payoff
of the 10-year CF&I acquisition term loan of $67.5 million, incurred by CF&I as
part of the purchase price of certain assets of CF&I Steel Corporation on March
31, 1993.
As of December 31, 2002, principal payments on debt are due as follows (in
thousands):
2003 -
2004-2008 -
2009 305,000