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, 2003 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 Identification No.)
incorporation or organization)
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:
Title of each class Name of each exchange on which registered
---------------------------- -----------------------------------------
Common Stock, $.01 par value New York Stock Exchange
per share
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 is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
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The aggregate market value of the voting and non-voting common equity held
by nonaffiliates of the registrant at June 30, 2003, was approximately
$76,054,076. 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 common stock as of January 31, 2004:
COMMON STOCK, $.01 PAR VALUE 26,495,172
---------------------------- ------------------------------
(Title of Class) (Number of shares outstanding)
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy statement for the Registrant's Annual Meeting of Stockholders to be
held April 29, 2004 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.......................................... 8
Labor Matters..................................................11
Employees......................................................13
Available Information..........................................13
2. PROPERTIES............................................................13
3. LEGAL PROCEEDINGS.....................................................14
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................14
Executive Officers of the Registrant...............................15
PART II
5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS........................................16
6. SELECTED FINANCIAL DATA...............................................17
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.......................18
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.........................................................28
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA...........................30
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE..............................59
9A. CONTROLS AND PROCEDURES...............................................59
PART III
10.
and 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
AND EXECUTIVE COMPENSATION..........................................59
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS......................59
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................60
14. PRINCIPAL ACCOUNTANT FEES AND SERVICES................................60
PART IV
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K.................................................61
SIGNATURES.............................................................66
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 2003, the Company and its subsidiaries operated two steel mills
and nine 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 steel mill 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, structural tubing, 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"). In October 2003, the Oregon Steel Division began
production of structural tube at its Columbia Structural Tubing ("CST")
facility.
The RMSM Division consists of steelmaking and finishing facilities of
CF&I Steel, LP ("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 melt Shop has the capability to produce slab thicknesses of 6",
7", 8" or 9" and the Rolling Mill can produce finished steel plate in widths up
to 136" and coiled plate in widths up to 120". In May 2003, the Company shut
down its Portland Mill melt shop and recorded an asset impairment charge of
$27.0 million, and is currently producing its finished product from purchased
semi-finished steel.
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, increases its
manufacturing flexibility and supplies 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 and structural tube manufactured at CST. 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
substantially all of the Company's commodity and specialty 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 requirements, due to market conditions and
other considerations, the Napa Pipe Mill may purchase steel plate from
third-party suppliers.
-1-
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 1/2" to 16" in
diameter.
COLUMBIA STRUCTURAL TUBING. In October 2003, the Company leased (with
an option to buy) the equipment of the former LTV Structural Tube Facility
located in the Rivergate Industrial Park in Portland, Oregon. The lease expires
in March of 2017 and the Company has the option to purchase the assets at the
end of ten years. The equipment leased consists of a slitting line, a structural
tubing mill, a proprietary in-line coating system and a manufacturing/
warehousing structure. The facility, known as Columbia Structural Tubing,
is located one mile from the Portland Mill. The CST structural mill
produces rectangular hollow steel sections ("HSS") in sizes ranging from
21/2" to 10".
See Part I, Item 2, "Properties", for discussion of the operating
capacities of the Portland Mill, the Napa Pipe Mill, the Camrose Pipe Mill, and
Columbia Structural Tubing.
RMSM DIVISION
On March 3, 1993, New CF&I, a wholly owned subsidiary of the Company,
acquired a 95.2% interest in CF&I, a newly formed 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 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 Pueblo Mill
and the related capital improvements, as appropriate, 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 bloom. 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 pipes are used to transport liquids and gasses both above and underground.
The Company's seamless pipe mill is equipped to produce the most widely used
sizes of seamless pipe (5" outside diameter through 10-3/4" outside diameter) in
all standard lengths. The Company's production capability includes carbon and
heat-treated tubular
-2-
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 nine currently by adding ERW pipe, rail, rod, bar, seamless pipe,
coiled plate and structural tube. 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
Structural tube Steel service centers
Construction
Ship and barge manufacturers
Heavy equipment manufacturers
RMSM DIVISION Rail Rail transportation
Rod and Bar products Construction
Durable goods
Capital equipment
Seamless pipe Oil and petroleum producers
The following table sets forth for the period indicated the tonnage
shipped and the Company's total shipments by product class:
-3-
TONS SHIPPED
------------
PRODUCT CLASS 2003 2002 2001
---- ---- ----
Oregon Steel Division:
Steel Plate 424,500 402,000 463,100
Coiled Plate 76,800 65,600 8,900
Large Diameter Steel Pipe 181,200 444,600 281,300
Electric Resistance Welded Pipe 56,600 34,800 76,400
Structural Tubing FN1 1,600 -- --
--------- --------- ---------
Total Oregon Steel Division 740,700 947,000 829,700
--------- --------- ---------
RMSM Division:
Rail 360,400 384,100 246,000
Rod and Bar 482,400 419,700 432,500
Seamless Pipe FN2 51,300 30,000 97,700
Semi-finished -- 2,700 4,700
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Total RMSM Division 894,100 836,500 780,900
--------- --------- ---------
Total Company 1,634,800 1,783,500 1,610,600
========= ========= =========
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FN1 The Company began operations at the structural tube facility in October
2003.
FN2 The Company suspended operation at the seamless pipe mill from November
2001 to April 2002, from mid-August 2002 to mid-September 2002, and from
mid-November 2003 to date.
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, structural 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.
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.
-4-
STRUCTURAL TUBING. The Company produces rectangular HSS in sizes
ranging from 2 1/2" to 10". These products have A wide variety of uses,
including construction applications, structural support, safety and ornamental
tubing for buildings, bridges, and highways and is also used for an extensive
range of applications in industrial, transportation and agricultural equipment.
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 three 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 2003, the Company produced approximately 137,000 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 also began producing
and marketing an improved head-hardened rail called High Carbon Pearlite. 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 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 November 2001
to April 2002, from mid-August 2002 to mid-September 2002, and from mid-November
2003 to date.
RAW MATERIALS AND SEMI-FINISHED SLABS
The Company's principal raw material for the Pueblo Mill 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, hot-briquetted iron
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 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
-5-
and each year thereafter. The slab market and pricing are subject to
significant volatility and slabs may not be available at reasonable prices in
the future.
In May 2003, the Company shut down its Portland Mill melt shop. The
determination to close the melt shop was based on 1) the Company's ability to
obtain semi-finished slab through purchases from suppliers on the open market,
and 2) high energy and raw material costs and the yield losses associated with
the inefficient casting technology in use at the Portland Mill. The Company
believes that future semi-finished slab purchases for the Portland Mill,
combined with existing inventory on hand, will meet the production needs of the
Portland Mill finishing operation for the remainder of 2004 and into the
foreseeable future. The Company intends to maintain the melt shop in operating
condition.
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 and coiled plate, large diameter
steel pipe, ERW pipe, structural tube, rod and bar, seamless pipe and rail
products. Most of the Company's sales 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 Condition and Results of
Operations"), 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 2003 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.
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 including 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
-6-
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.
STRUCTURAL TUBE. The majority of customers for the Company's tube
products are steel service centers located in Oregon and Washington. The Company
has also started to expand into other regions including Alaska, British
Colombia, Montana, and Idaho.
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 over 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 and 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 is also
subject to industry trends and conditions, such as the presence or absence
of 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 International Steel Group ("ISG"), the
largest plate producer in North America - with six plate mills located in the
Midwest and East. ISG's estimated plate-making capacity now exceeds 3 million
tons, including the largest plate heat-treating tonnage capacity in North
America. ISG aggressively markets to major national accounts in fabrication and
heavy-duty manufacturing as a single source supplier.
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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's rated plate and plate coil
capacity exceeds 2 million tons annually. IPSCO also operates cut-to-length
lines (to convert coiled plate into flat sheets) in five strategic market
locations throughout North America. IPSCO competes primarily in the Midwest
commodity plate market, in other selected target markets, and in the coiled
plate market throughout the United States. Nucor Corporation completed a new
green field plate mill in 2001 at Hertford, North Carolina with 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, located in
Provo, Utah, was the only integrated steelmaking facility west of the
Mississippi, and historically produced approximately 1.8 million tons of
commodity plate and coil per year. Geneva has not restarted and the plant is
expected to be dismantled.
LARGE DIAMETER PIPE. The Company's principal domestic competitors in
the large diameter steel pipe market 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.
STRUCTURAL TUBE. The Company's primary competitors in the tube market
are Maruichi America Corporation, and Vest Industries both located in the Los
Angeles, California vicinity. Other competitors are located in the Mid and
Western United States as well as importers from Asia.
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 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. ISG is the only other
qualified 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 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.
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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 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 CAA 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 the 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 expenditure. 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.
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 Company is conducting a
full remedial investigation ("RI"), including areas of investigation throughout
the Portland Mill, and has committed to implement source control if required.
The Company's best estimate for costs of the RI study will approximate $985,000
over the next two years. Based on a best estimate, the Company has accrued a
liability of $985,000 as of December 31, 2003. The Company has also recorded a
$985,000 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 Portland Harbor Superfund 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 as of December 31, 2003
is approximately $441,000, all of which has been covered by the Company's
insurer. As a best estimate of the RI/FS costs for years after 2003, the Company
has accrued a liability of $740,000 as of December 31, 2003. The Company has
also recorded a $740,000 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
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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. In June 2003, the
Company signed a Funding and Participating Agreement whereby it, with nine other
industrial and municipal parties, agreed to fund a joint effort with federal,
state and tribal trustees to study potential natural resource damages in the
Portland Harbor. The Company estimates its financial commitment in connection
with this agreement to be approximately $590,000 for years after 2003. Based on
this estimate, the Company has accrued a liability of $590,000 as of December
31, 2003. The Company has also recorded a $590,000 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 costs as incurred. This effort is expected to last until
2006. 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 alleged 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 sought injunctive relief and
unspecified civil penalties. The parties reached a settlement in April 2003. A
Consent Decree has been finalized and approved by the EPA. The U.S. District
Court signed and entered the Consent Decree on October 7, 2003. The Consent
Decree financial provisions were not material to the operations of the Company.
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 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, 2003, the accrued liability was $28.8 million, of
which $24.9 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
provided 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 $25 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 and the draft permit was issued for public comment on October 2,
2003.
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. The issue has been resolved by entry of a Consent
Decree on November 26, 2003, and the Tenth Circuit dismissed the appeal on
December 10, 2003. In that Consent Decree and overlapping with the commitments
made to the CDPHE described above, CF&I committed to the conversion to the new
NSPS AAa compliant furnace (demonstrating full compliance 21 months after permit
approval and expected to cost, with all related emission control improvements,
approximately $25 million), and to pay approximately $450,000 in penalties and
fund certain supplemental environmental projects valued at approximately
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$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.
In response to the CDPHE settlement and the resolution of the EPA
action, CF&I expensed $2.8 million in 2001 for possible fines and non-capital
related expenditures. As of December 31, 2003, the accrued liability was
approximately $600,000.
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 to a much lessor degree,
if necessary, purchasing semi-finished steel ("billets") for conversion into rod
products at spot market prices. Pricing and availability of billets is subject
to significant volatility.
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. The parties to the
above-referenced litigation have negotiated what purports to be an agreement to
settle the labor dispute and all associated litigation, including that
referenced above. See "Labor Matters" for a description of the settlement. If,
for any reason, that settlement is not finalized, the Company does not believe
the suit will have a material adverse effect on its results of operations;
however, the result of litigation such as this is difficult to predict and an
adverse outcome with significant penalties is possible.
LABOR MATTERS
CF&I LABOR DISPUTE AND RESULTANT LITIGATION
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, 2003, approximately 819 Unreinstated Employees
have either returned to work or have declined CF&I's offer of equivalent work.
At December 31, 2003, approximately 131 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 131 Unreinstated Employees as of December 31, 2003. 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 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
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believes both the facts and the law supports its position that the
strike was economic in nature and that it was not obligated to displace the
properly hired replacement employees.
In the event there is an adverse determination on 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.
CF&I LABOR DISPUTE SETTLEMENT
On January 15, 2004 the Company announced a tentative agreement to
settle the labor dispute between the Union and CF&I ("Settlement"). The
Settlement is conditioned on, among other things, (1) its approval by
shareholders of New CF&I, (2) ratification of a new collective bargaining
agreement being executed between CF&I and the Union, (3) approval of the
Settlement by the NLRB and the dismissal of cases pending before the NLRB
related to the labor dispute and (4) various pending legal actions between the
Company, New CF&I and CF&I and the Union being dismissed. The Settlement, if
approved, will provide remedies for all outstanding unfair labor practices
between CF&I and the Union and sets the stage for the ratification of a new
five-year collective bargaining agreement. The Settlement includes the creation
of a labor dispute settlement trust ("Trust") that will hold assets to be
contributed by either the Company or CF&I. Assets of the Trust will include: (1)
four million shares of the Company's common stock, (2) a cash contribution of
$2,500 for each beneficiary of the trust, estimated to be in total $2.5 million,
and (3) beginning on the effective date of the Settlement, a ten year profit
participation obligation consisting of 25% of CF&I operating income, as defined,
not to exceed $3 million per year for years one through five and $4 million per
year for years six through ten. The beneficiaries of the Trust are those
individuals who (1) as of October 3, 1997 were employees of CF&I and represented
by the Union, (2) as of December 31, 1997 had not separated, as defined, from
CF&I and (3) are entitled to an allocation as defined in the Trust. The
Settlement, certain elements of which will be effected through the new five-year
collective bargaining agreement, also includes: (1) early retirement with
immediate enhanced pension benefit where CF&I will offer bargaining unit
employees an early retirement opportunity based on seniority until a maximum of
200 employees have accepted the offer, the benefit will include immediate and
unreduced pension benefits for all years of service (including the period of the
labor dispute) and for each year of service prior to March 3, 1993 (including
service with predecessor companies) an additional monthly pension of $10, (2)
pension credit for the period of the labor dispute whereby CF&I employees who
went on strike will be given pension credit for both eligibility and pension
benefit determination purposes for the period beginning October 3, 1997 and
ending on the latest of said employees actual return to work, termination of
employment, retirement or death, (3) pension credit for service with predecessor
companies whereby for retirements after January 1, 2004, effective January 2,
2006 for each year of service prior to March 3, 1978 (including service with
predecessor companies), CF&I will provide an additional monthly benefit to
employees of $12.50, and for retirements after January 1, 2006, effective
January 2, 2008 for each year of service between March 3, 1978 and March 3, 1993
(including service with predecessor companies), CF&I will provide an additional
monthly benefit of $12.50 and (4) individuals who are members of the bargaining
units as of October 3, 1997 will be immediately eligible to apply for and
receive qualified long-term disability ("LTD") benefits on a go forward basis,
notwithstanding the date of the injury or illness, service requirements or any
filing deadlines. The Settlement also includes the Company's agreement to
nominate a director designated by the Union on its Board of Directors, and to a
broad based neutrality clause for certain of the Company's facilities in the
future.
CF&I LABOR DISPUTE SETTLEMENT - ACCOUNTING
The Company has recorded a charge of $31.1 million in the fourth
quarter of 2003 related to the Settlement, the final amount of which is
dependant upon the price of the Company's common stock on the effective date of
the Settlement. The charge consisted of (1) $23.2 million for the value of 4
million shares of the Company's common stock valued as of December 31, 2003, (2)
the cash payment of $2.5 million noted above, and (3) $5.4 million accrual for
the LTD benefits noted above. The Company will adjust the amount of the common
stock charge, either up or down, for the change in the price of the common stock
between December 31, 2003 and the effective date of the Settlement. The accrual
for the LTD
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benefits may also change, as better claims information becomes available.
As employees accept the early retirement benefits, the Company will record
an additional charge totaling approximately $7.0 million related to these
benefits. The enhancements to pension and post-retirement medical benefits
for non-early retirees will be accounted for prospectively on the date at
which plan amendments occur pursuant to the new five-year collective
bargaining agreement in accordance with SFAS 87 and SFAS 106.
EMPLOYEES
As of December 31, 2003, the Company had approximately 1,400 full-time
employees. Within the Oregon Steel Division the employees of the Portland Mill,
the Napa Pipe Mill, CST, and the corporate headquarters are not represented by a
union. Approximately 79 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 2006. Approximately 560
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 had 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 (exclusive of CST)
participate in the Employee Stock Ownership Plan ("ESOP"). As of December 31,
2003, the ESOP owned approximately 2.1% 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 files with the
Securities and Exchange Commission ("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 the address of that site is www.sec.gov.
The Company's web site is www.osm.com. The Company makes available free
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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 SEC. Information contained on
the Company's web site is not part of this report.
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. In May 2003, the Company shut down its Portland
melt shop which includes the electric arc furnace, ladle metallurgy station,
vacuum degasser, and slab casting equipment. 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).
-13-
The Company leases equipment and approximately 25 acres in the
Rivergate Industrial Park in Portland, Oregon with the CST operations and sales
staff occupying the site. The equipment consists of a slitting line, a
structural tubing mill, a proprietary in-line coating system and a
manufacturing/warehousing structure.
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 (one of which has not
operated since 1998 and for accounting purposes is considered an impaired
asset), and three finishing mills (a rail mill, a seamless pipe mill, and a rod
and bar mill). Due to market conditions, operations at the seamless pipe mill
were suspended from November 2001 to April 2002, from mid-August 2002 to
mid-September 2002, and from mid-November 2003 to date.
At December 31, 2003, the Company had the following nominal capacities,
which are affected by product mix:
PRODUCTION PRODUCTION
CAPACITY IN 2003
---------- ----------
(TONS)
Portland Mill: Melting FN1 840,000 148,500
Finishing 1,200,000 691,100
Napa Pipe Mill: Steel Pipe 400,000 200,600
Camrose Pipe Mill: Steel Pipe 320,000 49,500
CST Tube Mill: Steel Tube 150,000 4,500
Pueblo Mill: Melting 1,200,000 876,500
Finishing Mills FN2 1,200,000 894,300
- -------------------------
FN1 In May 2003, the Company shut down its Portland Mill melt shop.
FN2 Includes the production capacity and production in 2003 of 150,000 tons and
46,600 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 and CST. 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.
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 Pipe 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, 2003.
-14-
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, 2004 and position(s) and office(s) held by each executive officer are as
follows:
DATE ASSUMED
NAME AGE POSITION(S) PRESENT POSITION(S)
- -------------------- --- ------------------------ -------------------
James E. Declusin 61 President and August 2003
Chief Executive Officer
L. Ray Adams 53 Vice President, Finance March 1991
Chief Financial Officer
and Treasurer
Steven M. Rowan 58 Vice President, February 1992
Materials and Transportation
Robert A. Simon 42 Vice President and September 2000
General Manager -
RMSM Division
Jennifer R. Murray 47 Vice President Administration August 2001
and Secretary
Jeff S. Stewart 42 Corporate Controller January 2000
The Company has employed each of the executive officers named above,
except James E. Declusin, in an executive or managerial role for at least five
years. James E. Declusin retired from California Steel Industries ("CSI") as
Executive Vice President and Chief Operating Officer in 2000. Prior to joining
CSI, Mr. Declusin spent seventeen years with Kaiser Steel Corporation. Mr.
Declusin has been a director of Oregon Steel Mills since 2000.
-15-
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, 2003, the number of common stockholders of record was 1,062.
Information on quarterly dividends and common stock prices is shown on page 30
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, 2003. 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").
-16-
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
2003 2002 2001 2000 1999
----------------------------------------------------------------------------
(IN THOUSANDS, EXCEPT TONNAGE, PER TON AND PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Sales FN1 $ 723,297 $ 904,950 $ 780,887 $ 672,017 $ 884,649
Cost of sales 713,601 783,940 694,941 619,016 756,461
Settlement of litigation -- -- (3,391) -- (7,027)
Labor dispute settlement charges 31,089 -- -- -- --
Fixed and other asset impairment charges 36,113 -- -- -- --
Loss (gain) on sale of assets (1,835) (1,283) (10) (290) 501
Selling, general and administrative expenses 50,477 58,600 64,300 51,486 55,992
Incentive compensation 354 3,761 244 698 10,540
----------- ----------- ----------- ----------- -----------
Operating income (loss) (106,502) 59,932 24,803 1,107 68,182
Interest expense (33,620) (36,254) (35,595) (34,936) (35,027)
Other income, net 1,448 961 3,044 4,355 1,290
Minority interests 6,108 (3,036) (339) (7) (1,475)
----------- ----------- ----------- ----------- -----------
Income (loss) before tax (132,566) 21,603 (8,087) (29,481) 32,970
Income tax benefit (expense) 6,617 (9,244) 2,159 11,216 (13,056)
Net income (loss) before cumulative effect
of change in accounting principle (125,949) 12,359 (5,928) (18,265) 19,914
Cumulative effect of change in accounting
principle, net of tax -- (17,967) -- -- --
----------- ----------- ----------- ----------- -----------
Net income (loss) $ (125,949) $ (5,608) $ (5,928) $ (18,265) $ 19,914
=========== =========== =========== =========== ===========
COMMON STOCK INFORMATION:
Basic earnings (loss) per share $(4.77) $(0.21) $(0.22) $(0.69) $0.76
Diluted earnings (loss) per share $(4.77) $(0.20) $(0.22) $(0.69) $0.76
Cash dividends declared per share $ -- $ -- $ -- $ 0.06 $0.56
Weighted average common shares &
common equivalents outstanding
Basic 26,392 26,388 26,378 26,375 26,375
Diluted 26,392 26,621 26,378 26,375 26,375
BALANCE SHEET DATA (AT DECEMBER 31):
Net Working capital $ 126,727 $ 171,521 $ 62,145 $ 108,753 $ 101,177
Total assets 763,978 844,320 869,576 880,354 877,254
Current liabilities 131,833 118,899 196,924 126,748 101,660
Long-term debt 301,832 301,428 233,542 314,356 298,329
Total stockholders' equity 187,252 306,990 318,586 331,645 352,402
OTHER DATA:
Depreciation and amortization $ 40,809 $ 45,868 $ 46,097 $ 46,506 $ 47,411
Capital expenditures $ 19,754 $ 18,246 $ 12,933 $ 16,684 $ 15,908
Total tonnage sold:
Oregon Steel Division 740,700 947,000 829,700 871,500 969,800
RMSM Division 894,100 836,500 780,900 757,000 734,900
----------- ----------- ----------- ----------- -----------
Total tonnage sold 1,634,800 1,783,500 1,610,600 1,628,500 1,704,700
=========== =========== =========== =========== ===========
- ----------------------------------
FN1 Includes freight revenues of $38.9 million, $54.5 million, $54.8 million and
$36.1 million in 2003, 2002, 2001, and 2000, respectively, and sales of
electricity of $19.1 million and $2.8 million in 2001 and 2000, respectively.
During 2001, 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.
-17-
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.
OVERVIEW
The consolidated financial statements include the accounts of the
Company and its subsidiaries, which include wholly-owned Camrose Pipe
Corporation, which owns 100% of Columbia Structural Tubing and 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, the Camrose Pipe Mill and Columbia Structural Tubing. The RMSM Division
consists of the steelmaking and finishing facilities of the Pueblo Mill, as well
as certain related operations.
In May 2003, the Company shut down its Portland Mill melt shop. The
determination to close the melt shop was based on 1) the Company's ability to
obtain semi-finished slab through purchases from suppliers on the open market,
and 2) high energy and raw material costs and the yield losses associated with
the inefficient casting technology in use at the Portland Mill. The Company
forecasts that future semi-finished slab purchases for the Portland Mill,
combined with existing inventory on hand, will meet the production needs of the
Portland Mill finishing operation for the remainder of 2004 and into the
foreseeable future. The Company intends to maintain the melt shop in operating
condition. In addition, CF&I determined in the second quarter of 2003 that the
new single furnace operation (as referenced in Note 16 to the Consolidated
Financial Statements) will not have the capacity to support a two caster
operation and therefore CF&I has determined that one caster and other related
assets have no future service potential. The Company recorded a pre-tax charge
to earnings of approximately $36 million in the second quarter of 2003 related
to these asset impairments. For a discussion of these impairments, see
"IMPAIRMENT CHARGES" section below.
On January 15, 2004 the Company announced a tentative agreement to
settle the labor dispute between the Union and CF&I. The Company has recorded a
charge of $31.1 million in the fourth quarter of 2003 related to the tentative
settlement. See "LABOR DISPUTE SETTLEMENT CHARGES" section below for further
discussion of this tentative agreement.
-18-
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,
-----------------------------------------------
2003 2002 2001
------------- -------------- ----------------
INCOME STATEMENT DATA:
Sales 100.0 % 100.0 % 100.0 %
Cost of sales 98.7 86.6 89.0
Settlement of litigation -- -- (0.4)
Labor dispute settlement charges 4.3 -- --
Fixed and other asset impairment charges 5.0 -- --
Loss (gain) on sale of assets (0.3) (0.1) --
Selling, general and administrative expenses 7.0 6.5 8.2
Incentive compensation -- 0.4 --
---------- ----------- -------------
Operating income (loss) (14.7) 6.6 3.2
Interest expense (4.6) (4.0) (4.6)
Other income, net 0.2 0.1 0.4
Minority interests 0.8 (0.3) (0.1)
---------- ----------- -------------
Pretax income (loss) (18.3) 2.4 (1.1)
Income tax benefit (expense) 0.9 (1.0) 0.3
---------- ----------- -------------
Net income (loss) before cumulative effect of
change in accounting principle (17.4) 1.4 (0.8)
Cumulative effect of change in accounting principle,
net of tax -- (2.0) --
---------- ----------- -------------
Net loss (17.4)% (0.6)% (0.8)%
============= ============== =============
BALANCE SHEET DATA (AT DECEMBER 31):
Current ratio 2.0 : 1 2.4 : 1 1.3 : 1
Total debt as a percentage of capitalization FN1 61.8% 49.6% 51.6%
Net book value per share $7.09 $11.90 $12.35
- -----------------
FN1 Calculation of debt, as a percentage of capitalization is equal to total
debt (short and long-term) divided by the sum of adjusted stockholders equity
(total equity less net goodwill) and total debt.
-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,
----------------------------------------------
TOTAL TONNAGE SOLD: 2003 2002 2001
-------------- ----------- ------------
Oregon Steel Division:
Plate and Coil 501,300 467,600 472,000
Welded Pipe 237,800 479,400 357,700
Structural Tube FN1
1,600 -- --
---------- ---------- ----------
Total Oregon Steel Division 740,700 947,000 829,700
---------- ---------- ----------
RMSM Division:
Rail 360,400 384,100 246,000
Rod and Bar 482,400 419,700 432,500
Seamless Pipe FN2 51,300 30,000 97,700
Semi-finished -- 2,700 4,700
---------- ---------- ----------
Total RMSM 894,100 836,500 780,900
---------- ---------- ----------
Total Company 1,634,800 1,783,500 1,610,600
========== ========== ==========
PRODUCT REVENUES (IN THOUSANDS): FN3
Oregon Steel Division $ 343,755 $ 535,049 $ 414,994
RMSM Division 340,658 315,448 291,993
---------- ---------- ----------
Total Company $ 684,413 $ 850,497 $ 706,987
========== ========== ==========
AVERAGE SELLING PRICE PER TON:FN3
Oregon Steel Division $ 464 $ 565 $ 500
RMSM Division $ 381 $ 377 $ 374
Company Average $ 419 $ 477 $ 439
- -----------------------
FN1 The Company began operations at the structural tube facility in October
2003.
FN2 The Company suspended operation of the seamless pipe mill from November 2001
to April 2002, from mid-August 2002 to mid-September 2002, and from
mid-November 2003 to date.
FN3 Product sales and average selling price per ton exclude freight revenues of
$38.9 million, $54.5 million and $54.8 million, in 2003, 2002, and 2001,
respectively, and sale of electricity of $19.1 million in 2001. During 2001,
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 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 operating results were affected in 2003 by, among other
things, reduced demand and pricing for welded pipe products and increased
pricing pressure in plate and coil products and higher scrap and energy costs.
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. In
addition, the Company believes that 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. Operating income was
further reduced by the recognition of impairment to fixed assets and by the
charge for the tentative settlement of the labor dispute. 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 December 4, 2003, President Bush lifted the tariffs on imports of
steel that were imposed March 5, 2002. The tariffs were designed to give the
U.S. Steel Industry time to restructure and become competitive in the global
steel market. During the time that the tariffs were in effect, the Company
believes that the tariffs did not materially impact either the supply of, or the
cost of, steel slabs purchased by the Company on the open market for processing
into steel plate and coil. Since the lifting of the tariffs, the steel industry
has seen a dramatic increase in both the cost of raw materials and the selling
price of most steel products. The Company believes that current market
conditions are the result of the combination of a strong steel demand in China,
a weak United States dollar, and an increase in ocean freight costs. The Company
anticipates that market
-20-
conditions will remain unsettled until demand in China stabilizes. During
this period of time, the Company believes that it will continue to incur
increased costs for steel scrap, slabs, and ocean freight, and achieve increased
selling prices to offset these higher costs.
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. 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.
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 both historical and 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". As a result of continuing declines in
interest rates being offset by favorable investment returns of the Company's
defined benefit pension plans' assets, the Company reduced the minimum pension
liability at December 31, 2003 by $0.8 million after tax effect. 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.
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. 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, environmental authorities may require additional
remedial measures, and additional environmental hazards, necessitating further
remedial expenditures, may be asserted by these authorities or by private
parties. Accordingly, the costs of remedial measures may exceed the amounts
reserved.
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.
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, 2003, the allowance of
doubtful accounts was approximately $3.7 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.
LONG-LIVED ASSET IMPAIRMENTS. Long-lived asset impairments are
recognized when the carrying value of those productive assets exceeds their
aggregate projected undiscounted cash flows. These undiscounted cash flows are
based on the Company's long range estimates of market conditions, with due
consideration to historical, cyclical, operating cash flows and the overall
performance associated with the individual asset. If future demand and market
conditions are less favorable than those projected by the Company, or if the
probability of disposition of the assets differs from that previously estimated
by the Company, additional asset write-downs may be required.
-21-
CONTINGENCIES. The Company is subject to the possibility of loss
contingencies arising in the normal course of business. The Company considers
the likelihood of loss or impairment of an asset or the incurrence of a
liability, as well as its ability to reasonably estimate the amount of loss in
determining loss contingencies. An estimated loss is accrued when it is probable
that an asset has been impaired or a liability has been incurred and the amount
can be reasonably estimated. The Company regularly evaluates current information
available to determine whether such accruals should be adjusted. See Note 16 to
the Consolidated Financial Statements for a discussion of contingencies.
DISCUSSION AND ANALYSIS OF INCOME
COMPARISON OF 2003 TO 2002
(In thousands except tons, per ton, and percentages)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
2003 2002 CHANGE % CHANGE
---- ---- ------ --------
Product Sales
- -------------
Oregon Steel Division $ 343,755 $ 535,049 $ (191,294) (35.8)%
RMSM Division $ 340,658 $ 315,448 $ 25,210 8.0%
---------- ---------- ---------- ------
Consolidated $ 684,413 $ 850,497 $ (166,084) (19.5)%
========== ========== ========== ======
Tons shipped
- ------------
Oregon Steel Division:
Plate and Coil 501,300 467,600 33,700 7.2%
Welded Pipe 237,800 479,400 (241,600) (50.4)%
Structural Tube 1,600 -- 1,600 100.0%
--------- ---------- ---------- ------
Total Oregon Steel Division 740,700 947,000 (206,300) (21.8)%
--------- ---------- ---------- ------
RMSM Division:
Rail 360,400 384,100 (23,700) (6.2)%
Rod and Bar 482,400 419,700 62,700 14.9%
Seamless Pipe 51,300 30,000 21,300 71.0%
Semi-finished -- 2,700 (2,700) (100.0)%
--------- --------- ---------- ------
Total RMSM Division 894,100 836,500 57,600 6.9%
--------- --------- ---------- ------
Consolidated 1,634,800 1,783,500 (148,700) (8.3)%
========= ========= ========== ======
Sales price per ton
- -------------------
Oregon Steel Division $ 464 $ 565 $ (101) (17.9)%
RMSM Division $ 381 $ 377 $ 4 1.1%
---------- ---------- ---------- ------
Consolidated $ 419 $ 477 $ (58) (12.2)%
========== ========== ========== ======
SALES. The decrease in consolidated product sales and average sales
price was primarily due to a reduction in welded pipe sales at the Oregon Steel
Division. During 2002, the Oregon Steel Division sales were higher due to a
large pipe contract for the Kern River Gas Transmission Company at the Napa Pipe
Mill. No similar large pipe contract was in place in 2003 and consequently the
Oregon Steel Division's sales, shipments, and sales price per ton were
significantly reduced. The RMSM Division's sales, shipments and sales price per
ton all increased in 2003 due to higher shipments of rod and bar products as a
result of higher rod production and a reduction in domestic capacity.
GROSS PROFIT
2003 2002 CHANGE % CHANGE
---- ---- ------ --------
Gross Profit $9,696 $121,010 $(111,314) (92.0)%
The decrease in gross profit was a result of the decreased sales and
average sales price of high-priced welded pipe from the Napa Pipe Mill, and to
an increase in the Company's costs due to increased costs in scrap, slab, and
energy costs for electricity and natural gas.
-22-
SELLING, GENERAL AND ADMINISTRATIVE
2003 2002 CHANGE % CHANGE
---- ---- ------ --------
Selling, General and Administrative $50,477 $58,600 $(8,123) (13.9)%
The decrease in selling, general and administrative expenses ("SG&A")
for 2003 was the result of a decrease of $5.5 million in expenses related to the
handling and loading of goods for sale, which was due to a decrease in the
volume of tons shipped in 2003; a decrease of $1.0 million in expenses for
information technology support and equipment, and a decrease of $0.7 million in
bad debt expense.
INTEREST EXPENSE
2003 2002 CHANGE % CHANGE
---- ---- ------ --------
Interest Expense $33,620 $36,254 $(2,634) (7.3)%
The decrease in interest expense was primarily due to a decreased
borrowing rate during 2003. 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"). The Company also incurred additional interest
expense in 2002 due to interest accrued on the 11% Notes which were outstanding
concurrently with the 10% Notes for the period of July 15 to August 14, 2002.
INCOME TAX BENEFIT (EXPENSE)
2003 2002 CHANGE % CHANGE
---- ---- ------ --------
Income Tax Benefit (Expense) $6,617 $(9,244) $15,861 171.6%
The effective income tax benefit rate was 5.0% in 2003, compared to the
tax expense rate of 42.8% in 2002. The effective income tax rate for 2003 varied
from the combined state and federal statutory rate principally because the
Company established a valuation allowance for certain federal and state net
operating loss carry-forwards, state tax credits, and alternative minimum tax
credits. SFAS No. 109, "ACCOUNTING FOR INCOME TAXES," requires that tax benefits
for federal and state net operating loss carry-forwards, state tax credits, and
alternative minimum tax credits be recorded as an asset to the extent that
management assesses the utilization of such assets to be "more likely than not";
otherwise, a valuation allowance is required to be recorded. Based on this
guidance, the Company recorded a valuation allowance of $48.2 million in 2003
due to uncertainties regarding the realization of these deferred tax assets. The
Company will continue to evaluate the need for valuation allowances in the
future. Changes in estimated future taxable income and other underlying factors
may lead to adjustments to the valuation allowance.
-23-
COMPARISON OF 2002 TO 2001
(In thousands except tons, per ton, and percentages)
YEAR ENDED DECEMBER 31,
-------------------------------------------------
2002 2001 CHANGE % CHANGE
-------- ---------- ---------- ---------
Product Sales
- -------------
Oregon Steel Division $ 535,049 $ 414,994 $ 120,055 28.9%
RMSM Division $ 315,448 $ 291,993 $ 23,455 8.0%
---------- ---------- ---------- ------
Consolidated $ 850,497 $ 706,987 $ 143,510 20.3%
========== ========== ========== ======
Tons shipped
- ------------
Oregon Steel Division:
Plate and Coil 467,600 472,000 (4,400) (0.9)%
Welded Pipe 479,400 357,700 121,700 34.0%
---------- ---------- ---------- ------
Total Oregon Steel Division 947,000 829,700 117,300 14.1%
---------- ---------- ---------- ------
RMSM Division:
- --------------
Rail