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TO OUR STOCKHOLDERS:
1995 was a year of significant achievement for the mill
modernization program we initiated in 1993. The program included
extensive modernization of the manufacturing facilities at the CF&I
Steel Division and the start of construction of the Steckel
combination rolling mill (Combination Mill) at the Oregon Steel
Division's Portland steel mill. The ambitious modernization program is
the final step of a strategy we implemented in 1991 to build greater
value for our shareholders. This strategy was focused on expanding
production capabilities and product offerings through acquisitions and
investments in technology to provide flexible, modern manufacturing
facilities. By the end of 1995, we had accomplished the following:
(Bullet) Successful conversion of the rail mill at CF&I,
enabling us to eliminate ingot casting
(Bullet) Major improvements to our steelmaking and casting
processes at CF&I, resulting in record steel production
during October of 1995
(Bullet) Full operational capability of the new rod and bar mill
at CF&I, resulting in expanded product capability
(Bullet) Start of construction on in-line head hardening at
CF&I's rail mill
(Bullet) Significant progress on the construction of the
Combination Mill at the Portland steel mill
We began the modernization program at CF&I in November of 1993
and in less than two years we have completed and started up seven
major capital projects. This modernization was completed in record
time with successful start-ups in steelmaking and casting and the rail
mill. The new rod and bar mill started up in January of 1995 and
extended to August which was beyond our original expectations. As a
result, CF&I experienced significantly higher manufacturing costs
during 1995 due to the expanded start-up period and the reduced
volumes of rod and bar products. By the end of the fourth quarter of
1995, however, both production volumes and manufacturing costs in the
mill showed marked improvements over the prior quarters. The eighth
and final project in our modernization of CF&I is in-line head
hardening at the rail mill which is expected to be commissioned during
the second quarter of 1996.
Our Oregon Steel Division began 1995 with reduced plate and pipe
volumes due to the closure of the Fontana plate mill at the end of
1994. This presented two challenges. The first was to manage the
excess melt capacity at the Portland steel mill brought on by the
shuttering of Fontana. By selling steel slabs and streamlining our
operations to maximize utilization of our employees and facilities, we
were able to maintain our cost competitiveness throughout 1995. The
second challenge was to operate our Portland plate rolling facility at
maximum capacity in order to ensure that both internal plate needs for
our Napa pipe mill and the needs of our customers were adequately met
during the construction phase of the Combination Mill. We were
successful in maximizing the output of our Portland plate mill,
producing a record 415,000 tons. During 1995, we also set a record for
heat treated plate production and shipments of 79,000 tons. The Napa
pipe mill shipped over 190,000 tons in spite of reduced internal plate
supply.
The Combination Mill which is currently under construction at our
Portland Steel Mill will provide the additional plate rolling capacity
needed to utilize all of our steelmaking capacity and supply all of
the Company's plate and pipe requirements. The Combination Mill is
scheduled to start up in the third quarter of 1996. During the start-
up period, we will continue production of plate on our current rolling
mill until the Combination Mill has reached full operational
capability in 1997.
Net income for 1995 was $12.4 million on shipments of 1.4 million
tons and revenues of $711 million. Revenues and shipments during 1995
decreased from those of 1994 as a result of reduced production volumes
at each of our divisions. At the Oregon Steel Division, plate
shipments declined primarily due to the closure of Fontana at the end
of 1994 which reduced effective plate rolling capacity by
approximately 50 percent. During 1994, Fontana shipped 309,000 tons of
plate, of which 168,000 were converted into pipe at Napa compared to
approximately 19,000 tons shipped during 1995. Welded pipe shipments
declined during 1995 due to the completion of a large international
order which was produced in 1994 and adverse market conditions in
Canada. The reduction in plate and welded pipe shipments was partially
offset by the sale of slabs to customers. As noted above, sales and
shipments of rod and bar at the CF&I Steel Division were negatively
impacted by difficulties relating to the start-up of the new rod and
bar mill.
During the third quarter of 1995, we entered into a strategic
alliance with the Nissho Iwai Group, a Japanese trading company, to
assist in the international marketing of our various steel products.
Nissho Iwai has a strong international presence which we believe will
be beneficial to help us gain global marketshare. In conjunction with
this agreement, Nissho Iwai also purchased a 3 percent equity interest
in our subsidiary, New CF&I, Inc.
We enter 1996 more than half way through our mill modernization
program, poised to reap the benefits of a modernized CF&I. Our rod and
bar mill appears to have achieved sustainable productivity and related
conversion cost reductions. Our reduced manufacturing costs and
improved competitiveness in all products should provide enhanced
opportunities and allow CF&I to begin to achieve its full potential.
Our biggest challenge during 1996, will be the commissioning of
the Combination Mill. We have spent considerable time and resources
planning for a successful start-up of this facility. The completion of
the Combination Mill will mark the end of the transition period which
began in 1993. We will emerge with flexible, modern manufacturing
facilities capable of providing the broadest range of commodity and
specialty steel products of any domestic minimill.
We remain committed to our shareholders and will not lose sight
of our goal to provide continued growth and value. With the successful
completion of our modernization at CF&I and the integration of the
Combination Mill into our manufacturing facilities at Portland, we
will be prepared to meet the future and be competitive throughout the
world.
/s/ Thomas B. Boklund
Thomas B. Boklund
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
February 1, 1996
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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, 1995 COMMISSION FILE NUMBER
1-9887
OREGON STEEL MILLS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-0506370
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1000 BROADWAY BUILDING
SUITE 2200
1000 S. W. BROADWAY
PORTLAND, OREGON 97205
(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
---- ----
State the aggregate market value of the voting stock held by non-
affiliates of the registrant.
BASED ON LAST SALE, FEBRUARY 1, 1996: $279,088,593
Indicate the number of shares outstanding of each of the
registrant's classes of stock as of January 31, 1996:
COMMON STOCK, $.01 PAR VALUE 19,421,614
---------------------------- ----------
(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 25, 1996 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
Capital Improvement Program........................ 2
Products........................................... 4
Raw Materials...................................... 6
Marketing and Customers............................ 6
Competition and Other Market Factors............... 8
Environmental Matters.............................. 9
Employees.......................................... 11
2. PROPERTIES............................................ 11
3. LEGAL PROCEEDINGS..................................... 12
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS... 13
Executive Officers of the Registrant................ 13
PART II
5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS......................... 14
6. SELECTED FINANCIAL DATA............................... 14
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS....... 15
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........... 21
9. DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE................................ 38
PART III
10 and
11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
AND EXECUTIVE COMPENSATION.......................... 38
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT....................................... 38
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......... 38
PART IV
14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND
REPORTS ON FORM 8-K.................................. 38
PART I
ITEM 1. BUSINESS
GENERAL
Oregon Steel Mills, Inc. (the "Company" or the "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 1995, the Company operated two steel minimills and four
finishing facilities serving the United States, western Canada and
certain international markets. The Company manufactures and markets
one of the broadest lines of specialty and commodity steel products of
any domestic minimill company. In 1993, the Company organized into two
business units known as the Oregon Steel Division and the CF&I Steel
Division.
The Oregon Steel Division is centered on the Company's steel
plate minimill in Portland, Oregon (the "Portland Mill"), which
supplies steel for the Company's steel plate and large diameter pipe
finishing facilities. The Oregon Steel Division's steel pipe mill in
Napa, California (the "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 percent owned pipe mill in Camrose, Alberta, Canada (the "Camrose
Pipe Mill"). The Company operated a steel plate rolling mill in
Fontana, California (the "Fontana Plate Mill"), until the first
quarter of 1995 when it ceased shipments. The mill is currently being
held for sale.
The CF&I Steel Division consists of steelmaking and finishing
facilities of CF&I Steel, L.P. ("CF&I") located in Pueblo, Colorado
(the "Pueblo Mill"). The Company owns 87 percent of New CF&I, Inc.
("New CF&I") which owns a 95.2 percent general partnership interest in
CF&I. The Pueblo Mill is a steel minimill which produces long-length
and standard steel rails, seamless oil country tubular goods ("OCTG"),
wire rod, bar and wire products.
In total, the Company produces eight steel products which include
most standard grades of steel plate, a wide range of higher margin
specialty steel plate, large diameter steel pipe, ERW pipe, long-
length and standard rails, OCTG, wire rod, bar and wire products. The
steel industry, including the steel products manufactured by the
Company, has been highly cyclical and is generally characterized by
overcapacity, both domestically and internationally.
The Portland Mill is the only hot-rolled steel plate minimill in
the eleven western states and one of only two steel plate production
facilities operating in that region. The Portland Mill produces slab
thicknesses of 6", 7" and 8" and has an annual rolling mill capacity,
depending on product mix, of up to 430,000 tons of finished steel
plate in widths of up to 102".
The Company's 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.
Depending on product mix, the Napa Pipe Mill has an annual capacity in
excess of 350,000 tons of pipe. Substantially all of the Napa Pipe
Mill's requirements for specialty steel plate, which is fabricated
into steel pipe, are currently supplied by the Portland Mill and until
December of 1994, the Fontana Plate Mill.
The Company expanded its plate rolling capacity by commencing
operations at the Fontana Plate Mill in December 1989. Depending on
product mix, the Fontana Plate Mill had an annual rolling mill
capacity of up to 750,000 tons of finished steel plate, bringing the
Company's total plate rolling capacity to approximately 1.2 million
tons per year. The Fontana Plate Mill rolled plate up to 136" wide,
which was sufficient for fabricating the Napa and Camrose Pipe Mills'
largest diameter pipe products. In the third quarter of 1994, the
Company announced the permanent closure of the Fontana Plate Mill and
it ceased plate shipments in the first quarter of 1995. The equipment
at the Fontana Plate Mill is currently being held for sale.
1
The Company acquired a 60 percent interest in the Camrose Pipe
Mill in June 1992 for approximately $18 million from Stelco, Inc.
("Stelco"), a large Canadian steel producer. The Camrose Pipe Mill has
two pipe manufacturing mills. One is a large diameter pipe mill
similar to that of the Napa Pipe Mill, and the other is an ERW pipe
mill which produces steel pipe used in the oil and gas industry for
drilling and distribution. The large diameter pipe mill produces pipe
in lengths of up to 80 feet with a diameter ranging from 20" to 42"
with maximum wall thickness limited to about 70 percent of the
thickness of the pipe produced by the Napa Pipe Mill. Depending upon
the product mix, the annual capacity for large diameter pipe is up to
184,000 tons. The ERW mill produces pipe in sizes ranging from 4.5" to
16" in diameter and has an annual nominal capacity of up to 141,000
tons depending upon product mix.
On March 3, 1993, New CF&I, a wholly-owned subsidiary of the
Company, acquired for $22.2 million a 95.2 percent interest in a newly
formed limited partnership, CF&I. The remaining 4.8 percent interest
is owned by the Pension Benefit Guaranty Corporation. CF&I purchased
substantially all of the steelmaking, fabricating, metals and railroad
business assets of CF&I Steel Corporation for $113.1 million. The
Pueblo Mill has melting capacity of approximately 1.2 million tons and
a finished ton capacity of approximately 1.2 million tons. In August
of 1994, New CF&I sold a 10 percent equity interest in New CF&I to a
wholly-owned 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. New CF&I received a cash payment of $16.8 million in
connection with that transaction. In November 1995, the Company sold a
3 percent equity interest in New CF&I to two subsidiaries of the
Nissho Iwai Group ("Nissho Iwai"), a large Japanese trading company.
In connection with that sale, Nissho Iwai agreed to promote the
international sale of certain steel products produced by the Company.
CAPITAL IMPROVEMENT PROGRAM
As part of its strategy to invest in efficient and flexible
manufacturing technologies, the Company has undertaken a $400 million
(excluding capitalized interest) capital improvement program at its
Pueblo and Portland Mills, of which the Company had expended
approximately $295 million as of December 31, 1995. The purpose of
this program is to (i) improve the steelmaking and casting capability
at the Pueblo Mill, (ii) reduce the cost of producing rail, rod and
bar products at the Pueblo Mill while improving product quality and
expanding the specialty grades that can be manufactured there, (iii)
reduce the cost and improve the yield of plate rolling and other
finishing operations at the Portland Mill while increasing plate
rolling capacity from 430,000 tons to 1.2 million tons annually and
(iv) reduce dependence on scrap steel.
CAPITAL IMPROVEMENTS AT THE CF&I STEEL DIVISION. As part of
its strategy in acquiring the CF&I Steel Division in March 1993,
the Company anticipated making significant capital additions to
the Pueblo Mill. The Company began a series of major capital
improvements at the Pueblo Mill shortly after its acquisition in
1993 and, with the exception of the installation of the head
hardened rail equipment, these improvements had been
substantially completed by the end of the third quarter of 1995.
The Company believes these improvements will increase yields,
improve productivity and quality and expand the Company's ability
to offer specialty rod and bar products. The primary components
of the capital improvements at the Pueblo Mill are outlined
below.
STEELMAKING. The Company has installed a ladle refining
furnace and a vacuum degassing facility and upgraded both
continuous casters. By the end of the first quarter of 1995,
ingot casting had been replaced with more efficient continuous
casting methods, which allow the Company to cast directly into
blooms. As a result, the Company estimates that it has expanded
the steelmaking capacity at the Pueblo Mill to approximately 1.2
million tons of hot metal annually from approximately 900,000
tons of hot metal annually at the time of the acquisition.
ROD AND BAR MILL. At the time of the acquisition of the CF&I
Steel Division, the rod and bar mills at the Pueblo Mill were
relatively old and located in separate facilities, which resulted
in significant costs as the Company shifted production between
them in response to market conditions. In the third quarter of
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 pro-
2
ducing commodity and specialty grades of rod and bar products.
Depending on product mix, the new combined facility has a
capacity of approximately 600,000 tons per year. These
improvements should 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. Although the planned capital improvements at the
Pueblo Mill are substantially complete, the Company experienced
significant delays in bringing the new rod and bar mill
technology and equipment up to production capacity. Although the
Company believes these delays are typical of those encountered
when commissioning major pieces of capital equipment and that the
Pueblo Mill will be fully operational by mid-1996, the Company
may continue to experience difficulties with this equipment that
will adversely affect its production capability and results of
operations beyond mid-1996.
RAIL MANUFACTURING. At the time of the Company's acquisition
of the Pueblo Mill, rails were produced by ingot casting using
energy-intensive processes with significant yield losses as the
ingots were reheated, reduced to blooms and then rolled into
rails. Continuous casting has increased rail yields and decreased
rail manufacturing costs. In 1996 the Company plans to enhance
its existing 450,000 tons of annual railmaking capacity through
the addition of equipment capable of producing in-line DHH rail.
Rail produced using this technology is considered by many rail
customers to be more durable and higher quality rail than that
produced with existing techniques. As a result of these
improvements, expected to be operational in the third quarter of
1996, the Company believes it will be able to provide a
functionally superior, higher margin product.
CAPITAL IMPROVEMENTS AT THE OREGON STEEL DIVISION. Capital
improvements at the Oregon Steel Division consist primarily of
the construction of the new Steckel combination rolling mill (the
"Combination Mill").
COMBINATION MILL. The Company is constructing the
Combination Mill at its Portland Mill. The project includes
installation of a new reheat furnace, a 4-high rolling mill with
coiling furnaces capable of producing plate up to 136" wide, a
vertical edging mill, a down coiler, on-line accelerated cooling,
hot leveling and plate shearing equipment. Other planned
additions include an extension of the rolling line and the
installation of a fully automated hydraulic gauge control system
designed to roll steel plate to exacting standards. These
additions will enable the Company to roll coiled steel plate in
lengths up to 2,100 feet and are expected to decrease end crop,
side trim and crown loss. The Company estimates that upon
completion annual steel plate rolling capacity of the Portland
Mill will increase to approximately 1.2 million tons from
approximately 430,000 tons.
The Combination Mill is expected to begin operation in the
second half of 1996 and to be fully operational by mid-1997. The
Company believes the Combination Mill will be capable of
producing wider steel plate than any similar mill in the world.
The Company also believes the Combination Mill will increase its
manufacturing flexibility and supply substantially all the
Company's plate requirements for large diameter line pipe as well
as coiled plate for applications such as the smaller diameter ERW
pipe manufactured at the Camrose Pipe Mill. The Portland Mill
currently produces discrete steel plate in dimensions up to 102"
wide and 3/16" to 8" thick. Wider dimensions used for gas
transmission pipe in diameters greater than 30", formerly rolled
at the closed Fontana Plate Mill, are now purchased from other
steel producers. The Combination Mill as currently planned would
be capable of producing widths from 48" to 136" and in
thicknesses from 3/16" to 8". In addition, the Combination Mill
is being designed to produce both discrete steel plate and coiled
plate in units up to approximately 40 tons, and to produce steel
plate for all of the Company's commodity and specialty markets,
including heat treated applications.
RAW MATERIALS VENTURES. The Company is exploring the
possibility of a project to process iron oxides into hot
briquetted iron ("HBI"), as well as other reduction technologies
such as fastmet, romelt and iron carbide. The Company has
budgeted approximately $12 million through 1997 for joint
ventures or other arrangements involving one or more of these
processes and is considering several possible projects.
3
PRODUCTS
OVERVIEW
The following table sets forth for the periods indicated the
tonnage shipped and the Company's total shipments by product class.
TONS SHIPPED
----------------------------------
Product 1995 1994 1993(1)
------- --------- --------- --------
Oregon Steel Division:
Commodity Plate................. 136,200 269,400 278,900
Specialty Plate................. 159,700 154,700 157,300
Large Diameter Pipe............. 223,000 356,300 248,600
ERW Pipe........................ 48,400 94,900 75,100
Semifinished.................... 196,200 45,400 18,400
--------- --------- ---------
Total Oregon Steel Division.. 763,500 920,700 778,300
--------- --------- ---------
CF&I Steel Division(1):
Rail............................ 240,700 250,500 186,200
Rod, Bar and Wire............... 271,300 379,300 346,100
Seamless Pipe................... 116,100 130,000 85,300
Semifinished.................... 12,100 5,800 7,100
--------- --------- ---------
Total CF&I Steel Division.... 640,200 765,600 624,700
--------- --------- ---------
Total Company 1,403,700 1,686,300 1,403,000
========= ========= =========
- -----------
(1) Results for 1993 include the results of operations of the Pueblo
Mill from the date of the CF&I acquisition on March 3, 1993.
OREGON STEEL DIVISION
COMMODITY STEEL PLATE. The Company's commodity grade steel plate
is produced at the Portland Mill. Historically, commodity steel plate
products consisted of hot-rolled carbon plate varying in widths from
48" to 136" and in thicknesses from 3/16" to 3". As a result of the
closure of the Fontana Plate Mill in the fourth quarter of 1994, the
Company is and will only be able to produce steel plate up to 103"
wide until the Combination Mill is completed and operational.
Commodity steel plate is used in a variety of applications such as the
manufacture of storage tanks, machinery parts, barges and ships.
SPECIALTY STEEL PLATE. The Company's specialty grade steel plate
is produced at the Portland Mill. Specialty steel plate products
consist of hot-rolled carbon, heat-treated and alloy steel plate in a
variety of widths and thicknesses. Specialty steel plate has superior
strength and performance characteristics and is typically made to
order for customers seeking varying properties of steel plate,
including the plate's formability, hardness or abrasion resistance,
impact resistance or toughness, strength and ability to be machined or
welded. These variations are achieved by chemically altering the steel
through the addition or removal of specific elements, by temperature
control while rolling or by heat treating the plate.
In 1994 the Company completed expansion of the heat treating
production capacity at its Portland Mill by approximately 50 percent
to 90,000 tons annually. The heat treating process of quenching and
tempering improves the strength and hardness of steel plate. Quenched
and tempered steel is used extensively in the mining industry, the
manufacture of heavy transportation equipment and military armor. In
early 1994 the Company installed at the Portland Mill a hot leveler
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 grade of
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 Napa Pipe Mill the Company also
offers customers the option of surface processing the steel pipe,
which can include
4
internal and external coating and full body ultrasonic inspection.
This process allows inspection of the ends, long seam welds and entire
pipe body for all types of steelmaking and pipemaking imperfections
and records the results for a permanent record. The Company's large
diameter pipe is used primarily in pressurized underground or
underwater oil and gas transmission pipelines where quality is
critical.
The Company's ability to produce high-quality large diameter pipe
was enhanced by the installation of the vacuum degassing facility at
the Portland Mill in 1993. The vacuum degassing process reduces the
hydrogen content of the final product, which increases its resistance
to hydrogen-induced cracking. The vacuum degassing facility enables
the Company to produce some of the highest quality steel plate and
line pipe steels and has been key to the Company's ability to produce
large diameter steel pipe for the international pipe market. Following
the closure of the Fontana Plate Mill in the fourth quarter of 1994,
the Company has been required to purchase steel plate to produce steel
pipe in diameters greater than 30". These purchases will continue
until the Combination Mill is completed.
ELECTRIC RESISTANCE WELDED PIPE. The Company produces smaller
diameter ERW pipe at the Camrose Pipe Mill. ERW pipe is produced in
sizes ranging from approximately 4" to 16" outside diameter. The pipe
is manufactured using coiled steel rolled on a high frequency electric
resistance weld 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.
CF&I STEEL DIVISION
RAIL. The Company produces conventional, premium and head-
hardened rail at its Pueblo Mill. The Pueblo Mill is the sole
manufacturer of rail west of the Mississippi River and one of only two
rail manufacturers in the United States. Rails are manufactured in the
five most popular rail weights (115 lb/yard through 136 lb/yard), in
39 and 80 foot lengths as well as quarter mile welded strings. The
primary customers for the Pueblo Mill's rail are the major western
railroads. Rail is also sold directly to rail contractors, transit
districts and short-line railroads.
As part of its capital improvement program, the Company
anticipates improving its rail manufacturing facilities to include the
production of in-line head-hardened and other premium rail. In-line
head-hardened rail will be produced through proprietary finishing
technologies not currently used by the Company for head-hardened rail
production. The Company has licensed one such technology (known as
deep head-hardened or DHH technology) from Nippon in connection with
Nippon's investment in New CF&I. In 1995 the Company produced
approximately 41,300 tons of head-hardened product using a more costly
off-line process. Rail produced using the improved in-line technology
is considered by many rail customers to be more durable and of higher
quality than rail produced with existing off-line techniques.
ROD PRODUCTS. The Company historically produced a narrow range of
generally low-carbon rod products at the Pueblo Mill in diameters
ranging primarily from 7/32" to 9/16". The Company's rod products were
sold principally to wire drawers in the midwestern and western states.
Typical end uses include a variety of construction and agricultural
applications such as nails, bailing wire and chain link and woven wire
fencing.
The Company's new rod and bar mill has enabled the Company to
increase its rod product offerings. With the old rod and bar mills,
the Company was limited to a 1,100 pound coil size. With the new rod
and bar mill, the Company 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 over time
the Company expects to manufacture a variety of high-carbon rod
products such as those used for spring wire, wire rope, tire bead and
tire cord.
BAR PRODUCTS. Historically, most of the bar products sold by the
Company have been various grades of concrete reinforcing bar, ranging
from 3/8" to 1-3/8" in diameter. With the new rod and bar mill, the
Company expects to manufacture a broader assortment of higher margin
bar products, including merchant quality bar for use in miscellaneous
machinery and equipment and small structural uses and special quality
bar for cold drawing, hand tools and other forged applications.
5
WIRE PRODUCTS. The Company draws wire and produces various wire
products at its Pueblo Mill. These are principally low carbon wires
for uses such as fencing, bailing wire and wire nails.
SEAMLESS PIPE. Seamless pipe produced at the Pueblo Mill consists
of seamless casing, coupling stock and standard and line pipe.
Seamless pipe casing is used as a structural retainer for the walls of
oil or gas wells. Standard and line pipe are used to transport liquids
and gasses both above and underground. The Company's seamless pipe
mill is equipped to produce the most widely used sizes of seamless
pipe (2-3/8" outside diameter through 10-3/4" outside diameter) in all
standard lengths. The Company's production capability includes both
carbon and high quality, high strength (heat treated) tubular
products. The Company also sells semi-finished seamless pipe (known as
"green tubes") for processing and finishing by others.
RAW MATERIALS
The Company's principal raw material for the Portland and Pueblo
Mills is ferrous scrap metal derived from, among other sources, junked
automobiles, railroad cars and railroad track materials and demolition
scrap from obsolete structures, containers and machines. In addition,
HBI can substitute for a limited portion of the scrap used in minimill
steel production, although the sources and availability of HBI are
substantially more limited than those of scrap. The purchase prices
for scrap and HBI are subject to market forces largely beyond the
control of the Company including demand by domestic and foreign steel
producers, freight costs, speculation by scrap brokers and other
conditions. The cost of scrap and HBI 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 HBI prices.
To reduce the effects of scrap price volatility and improve
access to high quality raw materials, the Company is seeking to
decrease its dependence on steel scrap as an input for the production
process by utilizing HBI. The Company has successfully integrated HBI
into the production process as a low residual scrap substitute. The
Company typically purchases HBI on a contract basis (whereas scrap is
typically purchased on the spot market), which limits the effects of
price fluctuations experienced in the scrap market. To date, the
Company has purchased substantially all of the HBI it has used from a
single source, but it has no long-term contracts for material amounts
of HBI, and there is no assurance that it will be able to obtain
significant quantities of HBI in the future.
In addition to HBI, the Company is exploring direct reduction
technologies, such as fastmet, romelt and iron carbide. The Company
may participate in one or more joint ventures for these processes and
is considering several possible projects.
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 steel service centers,
distributors, processors and converters.
The sales force is organized both geographically and by product line.
The Company has separate sales people for plate, DSAW and ERW pipe,
and for OCTG, rod, bar, wire and rail products. As of December 31,
1995, the Company employed 30 direct sales people and 25 customer
service representatives. 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. In 1995, the Company did not
derive more than 10 percent of its sales from any single customer.
Except for contracts entered into from time to time to supply large
diameter DSAW pipe to significant projects, 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.
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 business is generally not subject to significant seasonal
trends. The Company does not have material contracts with the United
States Government and does not have any major supply contracts subject
to renegotiation.
6
OREGON STEEL DIVISION
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 grade steel plate include the manufacture of
rail cars, storage tanks, machinery parts, bridges, barges and ships.
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 uses include pressure vessels, construction and mining
equipment, machine parts and military armor.
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. In 1993 the Company began to market large diameter pipe
internationally.
The Company believes that the quality of its pipe enables it to
compete effectively in this market. Domestically, the Company is most
competitive in the steel pipe market west of the Mississippi River.
The Camrose Pipe Mill is most competitive in western Canada. Sales of
large diameter pipe generally involve the Company responding to
requests to submit bids.
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 decreases transportation
costs and 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.
CF&I STEEL DIVISION
The primary customers for the Pueblo Mill's rail are the major
western railroads. Rail is also sold directly to rail distributors,
transit districts and short-line railroads. The Company believes its
proximity to western rail markets benefits the Company's marketing
efforts.
Seamless pipe is sold primarily through distributors to a large
number of oil exploration and production companies. Sales of standard
and line pipe are made both through distributors and directly to oil
and gas transmission and production companies. The market for the
Company's seamless pipe is primarily domestic and is focused in the
western and southwestern United States. 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.
During 1995 the Company sold its bar products (primarily
reinforcing bar) to fabricators and distributors. The majority of
these customers are regional, located within Colorado. Incremental
costs for transportation limit the Company's ability to ship the
product out of the region and surrounding states. Some merchant and
special bar quality product was also shipped during 1995, as the new
rod and bar facility has provided the ability to provide certain new
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 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.
Sales of wire products are made to a large number and wide
variety of customers in the western United States. The customers are
primarily in the distribution of agricultural and construction
products.
7
COMPETITION AND OTHER MARKET FACTORS
The steel industry is cyclical in nature, and the domestic steel
industry has been adversely affected in recent years by high levels of
steel imports, worldwide production overcapacity and other factors.
The Company also is 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, gas transmission,
construction, capital equipment, rail transportation, agriculture and
durable goods segments, because these industries are significant
markets for the Company's products. Further, the Company has seen
substantial shrinkage in the domestic large diameter pipe market in
recent years which adversely affected the Company's average price per
ton of steel shipped and results of operations beginning in 1993.
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. In addition, several new or upgraded minimills are expected
to commence production of rod and bar products in the near future. The
Company expects increased competition as these competitors commence
and increase production. Moreover, U.S. steel producers have
historically faced significant competition from foreign producers,
although the weakness of the U.S. dollar relative to certain foreign
currencies has dampened this competition in the United States in
recent years. The highly competitive nature of the industry, combined
with excess production capacity in some products, may in the future
exert downward pressure on prices for certain of the Company's
products. There is no assurance that the Company will be able to
compete effectively in the future.
OREGON STEEL DIVISION
The principal domestic competitor in the commodity steel plate
market is Geneva Steel, which is the only integrated steel producer
west of the Mississippi. Geneva Steel has made significant investments
to increase its capacity with specific focus on the commodity plate
market throughout the entire United States. Other North American
competitors include IPSCO, which is currently operating a steckel mill
in Regina, Saskatchewan, while constructing a greenfield steckel mill
operation in Iowa; Bethlehem Steel, Burns Harbor, Indiana; and to a
limited degree several other U.S. producers. Principal competitors in
the market for specialty steel plate include Lukens Steel, US Steel
Corporation and Algoma Steel Inc.
The commodity steel plate market has continued to face foreign
competition from Korea, Brazil, Canada, China and former Soviet
countries. Foreign competition also exists for the specialty grades
with imports from Sweden, European Economic community, Brazil, Canada
and former Soviet countries. Significant imports through Texas and
California, both in commodity and specialty products have and continue
to impact on the Company's participation in the western plate market.
The Company believes that competition in the market for large
diameter steel pipe is based primarily on quality, price and
responsiveness to customer needs. Principal domestic competitors in
the large diameter steel pipe market at this time are Berg Steel Pipe
Corporation, located in Florida, and Bethlehem Steel Corporation,
located in Pennsylvania. International competitors consist primarily
of Japanese and European pipe producers. The principal Canadian
competitor is IPSCO, located in Regina, Saskatchewan. 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, which has declined in
recent years.
The competition in the market for ERW pipe is based on price,
product quality and responsiveness to customers. The need for this
product has a direct correlation to the drilling rig count in the
United States and Canada. Principal competitors in the ERW product in
western Canada are IPSCO located in Regina, Saskatchewan and
Prudential Steel Ltd. located in Calgary, Alberta.
8
CF&I STEEL DIVISION
The majority of current rail requirements in the United States
revolves around replacement rail for existing rail lines. Imports have
been a significant factor in the domestic premium rail market in
recent years. The Company's capital expenditure program at CF&I
provided the rail production facilities with continuous cast steel
capability and, when completed in mid-1996, are expected to provide
in-line head hardening rail capabilities necessary to compete with
other producers. Pennsylvania Steel Technologies is the only other
domestic rail producer.
The Company's primary competitors in OCTG 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, Lone Star Steel and North Star Steel.
The competition in bar products include a group of minimills that
have a geographical location close to the intermountain market.
The Company's market for wire rod is considered to encompass the
Western United States. Domestic rod competitors include
Georgetown/GST, North Star Steel, Keystone Steel and Wire and
Northwestern Steel & Wire. In addition, several new or upgraded
minimills are expected to commence production of rod and bar products
during 1996. The Company's market for wire products is considered to
be west of the Mississippi River. The Company's wire facilities are
mainly suited to products for the agricultural and construction
markets. Domestic wire competitors include Keystone Steel and Wire,
Northwestern Steel and Wire, Davis Wire and Tree Island Steel.
ENVIRONMENTAL MATTERS
The Company is subject to 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 produces dust that contains
heavy metals ("EAF" dust). This dust, which constitutes the largest
waste stream generated at these facilities, must be managed in
accordance with applicable laws and regulations.
PORTLAND MILL. In 1993 the Environmental Protection Agency
("EPA") concluded a site assessment of the Portland Mill. The review
ranked the facility as a medium/low corrective action priority for
identified solid waste management units ("SWMUs") The Company has
remediated the medium priority SWMUs and is evaluating action, if any,
necessary with respect to the low priority SWMUs.
FONTANA PLATE MILL. The property and building at which the
Fontana Plate Mill is located were leased to the Company. The Fontana
Plate Mill was formerly part of a larger integrated steel plant (the
"Mill") operated by California Steel, Inc. ("CSI") on property (the
"Mill Property") surrounding the Fontana Plate Mill. The Company
operated the Fontana Plate Mill from December 1989 to March 1995 and
generated hazardous substances under California's regulations which
were disposed of in compliance with applicable law. The Company closed
the Fontana Plate Mill and has reached a lease termination agreement.
Prior to the use of the Mill Property by the Company, the prior owner
generated by-products that are now defined as hazardous by federal and
California regulations. The owner of the mill property has agreed to
indemnify the Company for damages, including the costs for
remediation, suffered by the Company as the result of, or in
connection with, toxic or hazardous substances at the Fontana Plate
Mill site, subject to receipt of a written approval from the County
Health Department of satisfactory performance of site cleanup
activities. Hazardous substances have been detected in the soil and
groundwater at a number of specific areas within the Mill Property on
the basis of inspections done by the prior owner and by the EPA. The
testing program carried out by the prior owner and the EPA at the Mill
Property did not include sampling at the Fontana Plate Mill site. The
Company conducted only limited testing at the Fontana Plate Mill site,
and there is no assurance that the levels of hazardous substances in
the subsurface soils and groundwater at the Fontana Plate Mill are
within permissible limits.
9
NAPA PIPE MILL. The Company acquired the Napa Pipe Mill in 1987.
The prior owner of the mill disposed of certain waste materials,
including spent sandblast materials, mill scale and welding flux, on-
site. As a result of these matters and other actions prior to the
acquisition, certain metals were released into the ground and certain
petroleum based compounds have seeped into the ground and groundwater
at the Napa Pipe Mill. The prior owner of the mill entered into a
stipulated judgment with the County of Napa which required a site
investigation of the Napa Pipe Mill and remediation (to the
satisfaction of local, regional and state environmental authorities)
of soil and groundwater contamination associated with activities
conducted at the site prior to its acquisition by the Company. As a
result of the acquisition of the Napa Pipe Mill, the Company agreed to
comply with the terms and requirements of the stipulated judgment.
Proposed plans for investigating and remediating the soil and water
conditions at the Napa Pipe Mill were submitted to local, regional and
state environmental authorities in 1988. The Company is continuing to
negotiate certain terms of the remediation plans with these
environmental authorities. In addition to local, regional and state
environmental authorities, the EPA conducted an investigation of the
Napa Pipe Mill and took soil and water samples at the site. The
Company's proposed plans for investigating the soil and water
conditions at the Napa Pipe Mill were furnished to the EPA in 1988.
While awaiting possible further response from the EPA, the Company is
proceeding with its remediation plans as described above. In 1992 the
State of California Environmental Protection Agency, Department of
Toxic Substances Control completed a site screening and recommended a
low priority preliminary endangerment assessment for the Napa Pipe
Mill. The total cost of the remedial action that may be required to
correct existing environmental problems at the Napa Pipe Mill,
including remediation of contaminants in the soil and groundwater,
depends on the eventual requirements of the relevant regulatory
authorities. As of December 31, 1995, the Company had expended $6.8
million for remediation and had accrued reserves of $2.7 million to
cover future costs arising from environmental issues relating to the
site.
CAMROSE PIPE MILL. A preliminary assessment of the property at
the Camrose Pipe Mill indicates the presence of limited subsurface
petroleum contamination as a result of previous operations. The
assessment also identifies the potential for waste waters to have
impacted the site. A voluntary assessment of the potential sources of
the subsurface petroleum contamination was conducted in 1992. In 1995
the Company determined that some of the contamination was due to on-
site processes and took action necessary to prevent further
contamination of the site. The Company will assess other operations to
determine their potential for causing future contamination of the
site.
PUEBLO MILL. At December 31, 1995 the Company had accrued a
reserve of $35.4 million for environmental remediation at the Pueblo
Mill. This reserve is based upon a range of estimated remediation
costs of $23.1 million to $43.6 million. The Company's estimate of
this environmental reserve was based on two remediation investigations
conducted by independent environmental engineering consultants. The
reserve includes costs for Resource Conservation and Recovery Act
facility investigation, corrective measures study, remedial action and
operation and maintenance of the remedial actions taken. The State of
Colorado has issued public notice for the post-closure permit of two
historic hazardous waste units at the Pueblo Mill. As part of the
post-closure permit requirements, CF&I must begin a corrective action
program for the 82 solid waste management units at the facility. In
October 1995, CF&I and the State of Colorado Department of Public
Health and Environment finalized a post-closure permit, which contains
a prioritized schedule of corrective actions to be completed and
substantially reflects a straight-line rate of expenditure over 30
years. The State of Colorado has indicated that the schedule for
corrective action could be accelerated if new data indicated a greater
threat to the environment than is currently known to exist. The
Company believes the reserve is adequate to cover the remediation
costs.
The Clean Air Act Amendments of 1990 imposed new responsibilities
on many industrial sources of air emissions, including plants owned by
the Company. The Company cannot determine the exact financial impact
of the new law because Congress is continuing to modify it. The impact
will depend on a number of site-specific factors, including the
quality of the air in the geographical area in which a plant is
located, rules to be adopted by each state to implement the law and
future EPA rules specifying the content of state implementation plans.
The Company anticipates that it will be required to make additional
expenditures, and will be required to pay higher fees to gov-
10
ernmental agencies, as a result of the new law and future laws
regulating air emissions. In addition, the monitoring and reporting
requirements of the new law have subjected and will subject all air
emissions to increased regulatory scrutiny. The Company submitted
applications for permits under Title V of the Clean Air Act for the
Portland and Pueblo Mills in 1995. The Company has budgeted capital
expenditures to comply with Title V requirements in the amount of $7.5
million over a three-year period beginning in 1996.
The Company's future expenditures for installation of and
improvements to environmental control facilities, remediation of
environmental conditions existing at its properties and other similar
matters are difficult to predict accurately. Environmental legislation
and regulations and related administrative policies have changed
rapidly in recent years. It is likely that the Company will be subject
to increasingly stringent environmental standards in the future
(including those under the Clean Air Act Amendments of 1990, the Clean
Water Act Amendments of 1990 stormwater permit program and toxic use
reduction programs) and will be required to make additional
expenditures, which could be significant, relating to environmental
matters on an ongoing basis. Furthermore, although the Company has
established certain reserves for environmental remediation as
described above, there is no assurance regarding the cost of remedial
measures that might eventually be required by environmental
authorities or that additional environmental hazards, requiring
further remedial expenditures, might not be asserted by such
authorities or private parties. Accordingly, the costs of remedial
measures may exceed the amounts reserved. There is no assurance that
expenditures or proceedings of the nature described above, or other
expenditures or liabilities resulting from hazardous substances
located on the Company's property or used or generated in the conduct
of its business, or resulting from circumstances, actions, proceedings
or claims relating to environmental matters, will not have a material
adverse effect on the Company.
EMPLOYEES
As of December 31, 1995, the Company had 2,640 full time
employees. The Company's employees at the Portland Mill, Napa Pipe
Mill and corporate headquarters are not represented by a union. At the
Pueblo Mill, approximately 1,370 employees work under collective
bargaining agreements with several unions, principally the United
Steelworkers of America ("USWA"). The USWA contract was negotiated in
March 1993 and will expire in September 1997. The contract provides
for scheduled annual cost of living pay increases during the life of
the contract. Approximately 80 employees of the Camrose Pipe Mill are
members of the Canadian Autoworkers Union. A contract for these
employees was renegotiated in January 1994 and expires on January 31,
1997. The Company believes it has a good relationship with its
employees.
The domestic employees of the Oregon Steel Division participate
in the ESOP. As of December 31, 1995 the ESOP owned approximately 12
percent of the Company's common stock. Common stock is contributed to
the ESOP, as decided annually by the Board of Directors. The Company
also has a profit participation plan for its domestic employees of
both the Oregon Steel Division and the CF&I Steel Division which
permits eligible employees to share in the pre-tax profits of their
division unit.
ITEM 2. PROPERTIES
OREGON STEEL DIVISION
The Portland Mill is located on approximately 147 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 one electric arc furnace, ladle
metallurgy stations, vacuum degasser, slab casting equipment and a
plate rolling mill. The Company's 24,500 square foot office building
and its steel mill facilities occupy approximately 84 acres of the
site. The remaining 63 acres consist of two waterfront sites totaling
59 acres and a four acre site. The adjacent water channel accommodates
ocean-going vessels. The Company's heat treating facilities are
located near its principal facilities on a five acre site owned by the
Company. In addition, the Company owns 74 acres of industrial property
nearby, of which 44 acres are leased.
The Company owns approximately 152 acres in Napa, California. The
Company's large diameter pipe mill occupies approximately 92 of these
acres. The Company also owns a steel fabricating facility located
adjacent to the pipe mill on this site. The fabricating facility is
not currently used
11
by the Company and consists of approximately 325,000 square feet of
industrial buildings containing equipment for the production and
assembly of large steel products or components and is periodically
leased on a short-term basis.
Camrose Pipe Company ("Camrose") owns approximately 67 acres in
Camrose, Alberta, Canada. The large diameter pipe mill occupies
approximately 4 acres and the ERW pipe mill occupies approximately 3
acres of the site. In addition, there is a 3,600 square foot office
building on the site. The sales staff is located in Calgary, Alberta
in leased space. The assets of Camrose, including all property, plant
and equipment are collateral for the Camrose $18 million (Canadian
dollars) revolving credit facility (see Note 8 to the Consolidated
Financial Statements).
CF&I STEEL DIVISION
The Pueblo Mill is located in Pueblo, Colorado on approximately
570 acres. The operating facilities principally consist of two
electric arc furnaces for production of all raw steel, a ladle
refining furnace and vacuum degassing system, two 6-strand continuous
round casters for producing semfinished steel, and four finishing
mills for conversion of semi-finished steel to a finished steel
product. These finishing mills consist of a rail mill, seamless tube
mill, a rod and bar mill and a wire mill.
At December 31, 1995, the Company had the following nominal
capacities which are affected by product mix:
PRODUCTION
CAPACITY 1995
(TONS) (TONS)
--------- ------------
Portland Mill: Melting............. 840,000 697,100
Finishing........... 430,000 415,500
Napa Pipe Mill: Steel Pipe.......... 350,000 189,500
Camrose Pipe Mill: Steel Pipe.......... 325,000 67,400
Pueblo Mill: Melting............. 1,200,000 908,400
Finishing Mills..... 1,200,000 781,000
ITEM 3. LEGAL PROCEEDINGS
In July 1995 the Oregon Occupational Safety and Health Division
("Oregon OSHA") cited the Company $1.4 million in penalties for
alleged violations of Oregon occupational safety and health rules. Of
the 18 individual citations, 10 were alleged by Oregon OSHA to be
willful.
Oregon OSHA claims that a Material Safety Data Sheet ("MSDS")
that the Company had prepared for its glass frit product produced at
the Portland Mill was incomplete in its description of certain metals
present in the product. Oregon OSHA also alleges that certain aspects
of the glass plant's lead and cadmium protection programs were not in
complete compliance with applicable OSHA regulations. The Company has
conducted its own investigation of all the alleged violations and
believes no willful violation of the OSHA rules occurred. Oregon OSHA
has pointed out some areas where the Company has not been in complete
technical compliance with certain administrative and recordkeeping
rules, and the Company believes it has promptly corrected those
issues. Although the Company has appealed the citation and believes
the final outcome will not have a material adverse effect on the
Company, the Company's appeal may be unsuccessful and it may be
required to pay all or a material portion of the penalties.
The Company is also party to other various 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 product liability. The Company does not maintain
insurance against liability arising out of waste disposal, other
environmental matters or earthquake damage because of the high cost of
such insurance. There is no assurance that insurance currently carried
by the Company, including products liability insurance, will be
available in the future at reasonable rates or at all.
12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were voted upon during the fourth quarter of 1995.
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, his age as of
February 1, 1996 and position(s) and office(s) and all other positions
and offices held by each executive officer are as follows:
ASSUMED
PRESENT
EXECUTIVE
NAME AGE POSITIONS POSITION
- ---- --- --------- ---------
Thomas B. Boklund 56 Chairman of the July 1985
Board of Directors
Chief Executive
Officer and President
L. Ray Adams 45 Vice President of Finance March 1991
and Chief Financial
Officer
Christopher D. Cassard 42 Corporate Controller February 1996
Joe E. Corvin 51 Senior Vice President of April 1994
Manufacturing
and Chief Operating
Officer
Edward J. Hepp, Jr. 50 Senior Vice President of January 1995
Commercial
Richard J. Kasten 51 Vice President Market February 1992
Development and
Technical Support
LaNelle F. Lee 58 Secretary April 1994
Jack C. Longbine 49 Vice President of Employee February 1992
Resources
Robert R. Mausshardt 63 Vice President of March 1984
Marketing, Tubular
Products
Steven M. Rowan 50 Vice President of February 1992
Materials and
Transportation
Jeff S. Stewart 34 Treasurer February 1996
Each of the executive officers named above has been employed by
the Company in an executive or managerial role for at least five
years, except Edward J. Hepp, Jr. and Christopher D. Cassard. Mr. Hepp
joined the Company in September of 1991 and until January 1995 served
as Vice President of Commercial. In January 1995 he was elected Senior
Vice President of Commercial. From 1972 until 1991 he was with Lukens
Steel Company where his last position was Manager of Product Sales.
Mr. Cassard joined the Company in August of 1992 and until January
1996 served as Treasurer. In February 1996, he was elected Corporate
Controller. From 1990 to 1992 he was a consultant on various finance
projects for privately-held companies and from 1989 to 1990 was Chief
Financial Officer for Columbia Vista Corporation.
13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange. At December 31, 1995, the number of common
stockholders of record was 846. Information on quarterly dividends and common stock prices is shown on page 21 and
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------------
1995 1994 1993 1992 1991
----------- --------- ---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA AMOUNTS)
INCOME STATEMENT DATA:
Sales...................................... $ 710,971 $ 838,268 $ 679,823 $397,722 $489,357
Cost of Sales.............................. 638,413 761,335 608,236 316,455 386,517
Provision for rolling mill closures........ - 22,134 - - -
Selling, general and administrative
expenses................................. 43,121 50,052 41,447 29,785 28,910
Profit participation and ESOP
contribution............................. 5,418 3,074 5,280 14,011 19,286
---------- ---------- ---------- -------- --------
Operating income......................... 24,019 1,673 24,860 37,471 54,644
Other income (expense), net................ (8,685) (1,579) (3,421) 955 1,591
Settlement of litigation................... - - 2,750 (5,040) -
Minority interests (2)..................... 862 (3,373) (1,996) 1,097 -
Income tax benefit (expense)............... (3,762) 2,941 (7,388) (14,506) (20,770)
---------- ---------- ---------- -------- --------
Net income (loss)(2)..................... $ 12,434 $ (338) $ 14,805 $ 19,977 $ 35,465
========== ========== ========== ======== ========
COMMON STOCK INFORMATION:
Net income (loss) per share (2)............ $.62 $(.02) $.75 $1.04 $1.89
Cash dividends declared per share.......... $.56 $.56 $.56 $.56 $.50
Weighted average common shares and
common equivalents outstanding........... 20,016 19,973 19,822 19,183 18,735
BALANCE SHEET DATA:
Working capital............................ $ 115,453 $ 141,480 $ 139,461 $ 99,444 $122,780
Total assets............................... 805,266 665,733 549,670 354,252 323,529
Current liabilities........................ 121,327 117,986 116,322 55,522 43,298
Long-term debt............................. 312,679 187,935 76,487 - 3,417
Total stockholders' equity (2)............. 266,790 263,477 275,242 257,515 245,006
OTHER DATA:
Depreciation and amortization.............. $ 24,964 $ 22,012 $ 21,375 $ 16,253 $ 12,441
Capital expenditures....................... $ 176,885 $ 128,237 $ 40,905 $ 34,281 $ 38,481
Total tonnage sold:
Oregon Steel Division:
Plate products......................... 295,900 424,100 436,200 379,700 344,100
Pipe products.......................... 271,400 451,200 323,700 285,600 418,600
Semifinished products.................. 196,200 45,400 18,400 - -
---------- ---------- ---------- -------- --------
763,500 920,700 778,300 665,300 762,700
CF&I Steel Division...................... 640,200 765,600 624,700 - -
---------- ---------- ---------- -------- --------
1,403,700 1,686,300 1,403,000 665,300 762,700
========== ========== ========== ======== ========
Operating margin (1)....................... 3.4% 2.8% 3.7% 9.4% 11.2%
Operating income per ton sold (1).......... $17 $14 $18 $56 $72
- --------------
(1) Excluding provision for rolling mill closures in 1994.
(2) The 1994 amounts have been restated to reflect proceeds from a subsidiary's issuance of stock as minority
interest. See Note 3 to the Consolidated Financial Statements.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentages of sales represented by selected
income statement items and information regarding selected balance sheet data:
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
------- ------- -------
INCOME STATEMENT DATA:
Sales..................................................... 100.0% 100.0% 100.0%
Cost of sales............................................. 89.8 90.8 89.4
Provision for rolling mill closures....................... - 2.6 -
Selling, general and administrative expenses.............. 6.1 6.0 6.1
ESOP and profit participation contribution................ .7 .4 .8
------ ------ ------
Operating income........................................ 3.4 .2 3.7
Interest and dividend income.............................. .1 .2 .1
Interest expense.......................................... (1.5) (.5) (.6)
Other income, net......................................... .2 .1 -
Settlement of litigation.................................. - - .4
Minority interests........................................ .1 (.4) (.3)
------ ------ ------
Pretax income (loss) (1)................................ 2.3 (.4) 3.3
Income tax benefit (expense).............................. (.5) .4 (1.1)
------ ------ ------
Net income (loss) (1)................................... 1.8% .0% 2.2%
====== ====== ======
BALANCE SHEET DATA (AT DECEMBER 31):
Current ratio............................................. 2.0:1 2.2:1 2.2:1
Long-term debt as a percent of capitalization (1)......... 54.0% 41.6% 21.7%
Net book value per share (1).............................. $13.74 $13.60 $14.23
The following table sets forth by division, for the periods indicated, tonnage sold, revenues and average
selling price per ton:
YEARS ENDED DECEMBER 31,
---------------------------------------
1995 1994 1993
--------- --------- ----------
TOTAL TONNAGE SOLD:
Oregon Steel Division
Plate products......................................... 295,900 424,100 436,200
Pipe products.......................................... 271,400 451,200 323,700
Semifinished products.................................. 196,200 45,400 18,400
--------- --------- ---------
763,500 920,700 778,300
CF&I Steel Division...................................... 640,200 765,600 624,700
--------- --------- ---------
Total.................................................. 1,403,700 1,686,300 1,403,000
========= ========= =========
REVENUES (IN THOUSANDS):
Oregon Steel Division.................................... $407,968 $498,794 $415,165
CF&I Steel Division...................................... 303,003 339,474 264,658
-------- -------- --------
Total.................................................. $710,971 $838,268 $679,823
======== ======== ========
AVERAGE SELLING PRICE PER TON:
Oregon Steel Division.................................... $534 $542 $533
CF&I Steel Division...................................... $467(2) $443 $424
Company Average........................................ $504(2) $497 $485
- ------------
(1) The 1994 amounts have been restated to reflect proceeds from a subsidiary's issuance of stock as minority
interest. See Note 3 to the Consolidated Financial Statements.
(2) Excludes insurance proceeds of approximately $4 million received in the second quarter of 1995 as reimbursement
of lost profits resulting from lost production and start-up delays at the Pueblo Mill caused by an explosion
that occurred during the third quarter of 1994.
15
The Company's long range strategic plan emphasizes providing
stability for its operations through expanding its product offerings
to minimize the impact of individual product cycles on the Company's
overall performance and by entering into long-term strategic
alliances. In pursuing these goals, the Company has sought
alternatives to its recent reliance in 1991 and 1992 on the domestic
market for large diameter pipe, the demand for which has declined
significantly from levels experienced in those years.
In an effort to decrease the Company's reliance on the domestic
large diameter pipe market and provide additional end use for its
steel plate, the Company acquired a 60 percent interest in the Camrose
Pipe Mill in June 1992 from Stelco, a large Canadian steel producer,
which owns the remaining 40% interest in the Camrose Pipe Mill. The
Camrose Pipe Mill has two pipe manufacturing mills. One is a large
diameter pipe mill similar to that of the Napa Pipe Mill and the other
is an ERW pipe mill which produces steel pipe used in the oil and gas
industry for drilling and distribution. The combined capacity of the
two mills is approximately 325,000 tons per year depending on product
mix. In 1993, 1994 and 1995 the Camrose Pipe Mill shipped 155,400,
172,800 and 79,400 tons, respectively, of steel pipe and generated
revenues of $92.6 million, $110.0 million and $55.1 million,
respectively. During those years Stelco was a major supplier of steel
plate and coil for the Camrose Pipe Mill. Under the acquisition
agreement for the mill, either the Company or Stelco may initiate a
buy-sell procedure pursuant to which the initiating party establishes
a price for the Camrose Pipe Mill and the other party must either sell
its interest to the initiating party at that price or purchase the
initiating party's interest at that price, at any time after March 31,
1997. The purchase price for the Camrose Pipe Mill included the
obligation to pay additional amounts over a five-year period beginning
in 1993 based on the financial performance of the mill. Although
Camrose made payments pursuant to this earn-out provision for 1993 and
1994, no such payments will be made for 1995.
To expand the Company's steel product lines and enter new
geographic areas, CF&I purchased the Pueblo Mill and related assets
in March 1993. The Pueblo Mill has melting and finishing capacity of
approximately 1.2 million tons per year. In 1994 and 1995 the Pueblo
Mill shipped 765,600 and 640,200 tons, respectively, and generated
revenues of $339.5 million and $303.0 million, respectively. In August
1994 New CF&I sold a 10 percent 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 its proprietary
technology for producing DHH rail under a separate equipment supply
agreement. In November 1995 the Company sold a 3 percent equity
interest in New CF&I to two subsidiaries of the Nissho Iwai Group
("Nissho Iwai"), a large Japanese trading company. In connection with
that sale, Nissho Iwai agreed to promote the international sale of
certain steel products produced by the Company. In connection with
those sales, the Company and New CF&I entered into a stockholder's
agreement with Nippon and Nissho Iwai pursuant to which Nippon and
Nissho Iwai were granted a right to sell all, but not less than all,
of their equity interest back to New CF&I at the then fair market
value in certain circumstances. Those circumstances include, among
other things, a change of control, as defined, certain changes
involving the composition of the board of directors of New CF&I, and
the occurrence of certain other events (which are within the control
of the Company) involving CF&I or its operations. The Company also
agreed not to transfer voting control of New CF&I to a non-affiliate
except in circumstances where Nippon and Nissho Iwai are offered the
opportunity to sell their interest in New CF&I to the transferee at
the same per share price obtained by the Company. The Company also
retained a right of first refusal in the event that Nippon and Nissho
Iwai desire to transfer their interest in New CF&I to a non-affiliate.
COMPARISON OF 1995 TO 1994
SALES. Sales in 1995 of $711.0 million declined 15.2 percent from
sales of $838.3 million in 1994. For 1995 sales included proceeds from
an insurance settlement of approximately $4.0 million as reimbursement
of lost profits resulting from lost production and start-up delays at
the Pueblo Mill caused by an explosion that occurred in the third
quarter of 1994. Shipments decreased 16.8 percent to 1.4 million tons
in 1995 from 1.7 million tons in 1994. Selling prices in 1995 averaged
$504 per ton versus $497 per ton in 1994. Of the $127.3 million sales
decrease, $140.5 million was the result of volume decreases, offset in
part by $9.2 million from higher average selling prices and
approximately $4.0 million from the proceeds of the insurance
settlement.
16
The decrease in sales and shipments was primarily the result of
reduced plate and welded pipe product shipments by the Oregon Steel
Division and reduced rod and bar shipments by the CF&I Steel Division,
offset in part by increased semi-finished product sales by the Oregon
Steel Division. Plate shipments declined primarily due to the closure
of the Fontana Plate Mill in the first quarter of 1995, which reduced
the Company's plate rolling capacity by approximately 50 percent.
During 1995 the Fontana Plate Mill shipped approximately 19,000 tons
of plate versus 309,000 tons in 1994, of which 168,000 tons were
converted into pipe at the Napa Pipe Mill. Shipments of welded pipe
products declined due to the completion of a large international order
that was produced in 1994 and adverse market conditions in Canada. Rod
and bar shipments by the CF&I Steel Division were negatively impacted
by difficulties relating to the start-up of the new combination rod
and bar mill which resulted in production delays and reduced
production. In addition, rod and bar costs of sales, net of sales were
capitalized through July 31, 1995. Thus the Company's income statement
for 1995 did not reflect $26.0 million from the sale of 78,700 tons of
rod and bar mill products, nor did it reflect $26.7 million for the
cost of those sales. The Company began recognizing all revenues and
costs associated with the new rod and bar mill in its income statement
beginning in August 1995.
GROSS PROFIT. Gross profit as a percentage of sales for 1995 was
10.2 percent compared to 9.2 percent for 1994. Gross profit margins
were positively impacted by higher selling prices for most of the
Company's products, offset by a 7.5 percent increase in the cost of
scrap and other metallics. Gross profit margin, as in 1994, continued
to be negatively affected by high costs and lower volumes relating to
the completion and start-up of a portion of the equipment upgrades
which are part of the capital improvement program at the Pueblo Mill.
Gross profits for 1995 were positively impacted compared to 1994 due
to approximately $4.0 million received from the Company's business
interruption insurance carrier in the second quarter of 1995 for
reimbursements of lost profits at the CF&I Steel Division.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses for 1995 decreased $6.9 million or 13.8
percent compared with 1994 but increased as a percentage of sales from
6.0 percent in 1994 to 6.1 percent in 1995. The dollar amount decrease
is primarily due to reduced shipping expenses by the Oregon Steel
Division as a result of the closure of the Fontana Plate Mill in the
first quarter of 1995 and reduced shipping volume from the Napa and
Camrose Pipe Mills.
CONTRIBUTION TO ESOP AND PROFIT PARTICIPATION. There was no
contribution made to the ESOP in 1995, compared to a contribution of
$738,000 in 1994. Profit participation plan expense was $5.4 million
for 1995 compared to $2.3 million for 1994. The increase in 1995
profit participation reflects the increased profitability over 1994 of
certain segments of the Oregon Steel Division.
INTEREST AND DIVIDEND INCOME. Interest and dividend income on
investments was $600,000 in 1995 compared to $1.6 million in 1994.
This decrease was primarily due to interest of $1.1 million earned on
property tax refunds received in 1994 that did not reoccur in 1995.
INTEREST EXPENSE. Total interest cost for 1995 was $22.5
million, an increase of $11.2 million compared to 1994. This increase
was primarily related to interest on debt incurred to fund the capital
improvement program at the Oregon Steel and CF&I Steel Divisions. Of
the $22.5 million of interest cost in 1995, $12.2 million was
capitalized as part of construction in progress.
INCOME TAX EXPENSE. The Company's effective tax rate for state
and federal taxes was 23.2 percent in 1995 compared to a benefit of
89.7 percent in 1994. The effective income tax rate for both periods
varied from the combined state and federal statutory rate due to
earned state tax credits and deductible dividends paid on stock held
by the ESOP and paid to ESOP participants. In 1995 a net tax benefit
of $2.5 million was recognized related to enterprise zone credits for
eligible completed capital projects at the Pueblo Mill. In 1994 a tax
provision was recognized for foreign taxes in excess of the federal
statutory rates.
COMPARISON OF 1994 TO 1993
SALES. Sales in 1994 of $838.3 million increased 23.3 percent
from sales of $679.8 million in 1993. Tonnage shipments increased 20.2
percent to 1.7 million tons in 1994 from 1.4 million tons in 1993.
Selling prices in 1994 averaged $497 per ton versus $485 in 1993. Of
the $158.5 million sales increase, $137.4 million was the result of
volume increase and $21.1 million from higher average selling prices.
17
The increase in sales and shipments was primarily due to the
inclusion of a full year's operation of the CF&I Steel Division which
was acquired on March 3, 1993. Increased shipments of pipe from the
Napa Pipe Mill (278,400 tons in 1994 versus 168,300 tons in 1993) and
the Camrose Pipe Mill (172,800 tons in 1994 versus 155,400 tons in
1993) also contributed to the increase in shipments. The Company
realized price increases on substantially all products except large
diameter pipe shipped from the Napa Pipe Mill, the average price of
which declined in 1994 by approximately 20 percent.
GROSS PROFIT. Gross profit as a percentage of sales for 1994 was
9.2 percent compared to 10.6 percent for 1993. Gross profit margins
were negatively impacted by significantly lower selling prices for
large diameter pipe shipped from the Napa Pipe Mill and the associated
higher costs of producing a higher quality grade of steel slab at the
Portland Mill for producing low carbon pipe grades for international
shipments. Gross profit margins were also negatively affected by costs
and lower volumes relating to the completion and start-up of a portion
of the equipment upgrades which are part of the capital improvement
program at the Pueblo Mill. Gross profits for 1994 were positively
impacted due to a $4.6 million property tax refund related to
overassessments in prior years of the Portland and Pueblo Mills, which
reduced 1994 cost of sales by $3.5 million and, as described below,
increased 1994 interest income by $1.1 million.
PROVISION FOR ROLLING MILL CLOSURES. During 1994 the Company
recognized a total pre-tax charge of $22.1 million (before income
taxes of $8.4 million) associated with the closure of the Fontana
Plate Mill and to reduce the carrying value of certain plant,
equipment and inventories that are unlikely to be used following shut
down of the existing plate rolling mill at the Portland Mill upon
completion of the construction of the Combination Mill. Of the $13.7
million after-tax charge, approximately $13 million was a non-cash
charge relating to the write-off of production supplies and property,
plant and equipment. The decision to permanently close the Fontana
Plate Mill was based upon the high operating costs of the facility,
depressed pricing in the international large diameter pipe market and
the lack of significant domestic pipeline activity.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses for 1994 increased $8.6 million or 20.7
percent compared with 1993 but decreased as a percentage of sales from
6.1 percent in 1993 to 6.0 percent in 1994. The dollar amount increase
is primarily a result of the inclusion of CF&I Steel Division costs
(which increased by $4.1 million) for 12 months in 1994, versus 10
months in 1993 and increased shipping costs related to welded pipe
shipments from the Oregon Steel Division ($2.8 million).
CONTRIBUTION TO ESOP AND PROFIT PARTICIPATION. The contribution
to the ESOP was $738,000 in 1994 compared with $753,000 in 1993.
Profit participation plan expense was $2.3 million for 1994 compared
with $4.5 million for 1993. These reductions are the result of the
decreased profitability of the Company in 1994 versus 1993.
INTEREST AND DIVIDEND INCOME. Interest and dividend income on
investments was $1.6 million in 1994 compared with $.9 million in
1993. This increase was primarily due to $1.1 million of interest
earned on the property tax refunds described above.
INTEREST EXPENSE. Total interest cost for 1994 was $11.3
million, an increase of $5.6 million compared to 1993. This increase
was primarily related to interest incurred on debt issued to fund the
CF&I Steel Division capital expenditure program. Of the $11.3 million
of interest cost, $7.4 million was capitalized as part of construction
in progress.
SETTLEMENT OF LITIGATION. The $2.8 million recovery from
settlement of litigation was received from the Company's excess
liability insurance carrier in the second quarter of 1993 and related
to former employee lawsuits which were settled in the fourth quarter
of 1992.
INCOME TAX EXPENSE. The Company's effective income tax rate for
state and federal taxes was a benefit of 89.7 percent for 1994
compared to an expense of 33.3 percent for 1993. The effective income
tax rate for both periods varied from the combined state and federal
statutory rate due to earned state tax credits and deductible
dividends paid on stock held by the ESOP and paid to ESOP
participants. In 1994 a tax provision was recognized for foreign taxes
in excess of the federal statutory rates. Income before income taxes
in 1993 included a $2.8 million insurance recovery related to a 1992
litigation settlement that was treated as a nontaxable item.
18
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from 1995 operations was $53.6 million compared to
$20.5 million in 1994. The major items affecting this $33.1 million
increase were increased net income ($12.8 million), increased
depreciation and amortization ($3.0 million), increased deferred
income taxes ($9.4 million), reduced increase in trade accounts
receivables ($9.1 million), reduced inventories ($18.8 million) and a
decrease in the reduction of accounts payable and accrued expenses
($6.9 million).
Net working capital at December 31, 1995 decreased $26.0 million
compared to December 31, 1994 reflecting a $22.7 million decrease in
current assets and a $3.3 million increase in current liabilities.
Trade accounts receivable and inventories decreased from $241.0
million at the end of 1994 to $221.8 million at December 31, 1995. The
decrease was due primarily to decreased sales in the fourth quarter of
1995 versus the fourth quarter of 1994.
In December 1994 the Company entered into a Credit Agreement (the
"Credit Agreement"), which provides for collateralized borrowing of up
to $297 million from a group of banks ("Lender Banks"). Use of the
Credit Agreement is to fund capital expenditures, for general
corporate purposes and for working capital. The Credit Agreement is
comprised of (i) a $197 million term loan facility ("Term Loan") which
may be drawn at any time through December 31, 1996; and (ii) up to a
$100 million revolving loan facility ("Revolving Loan"), which may be
drawn and repaid at any time through December 31, 1997 based upon the
Company's accounts receivable and inventory balances. By mutual
agreement of the Company and the Lender Banks, the Revolving Loan may
be extended for two additional one-year periods to December 31, 1999.
Annual commitment fees are .5 percent of the unused portions of
the Credit Agreement. At the Company's election, interest is based on
LIBOR, the prime rate or, for the Revolving Loan only, the federal
funds rate, plus a margin determined by the Company's leverage ratio.
The outstanding balance of the Term Loan on December 31, 1996 is
required to be repaid in 11 quarterly installments commencing June 30,
1997. If the Term Loan is fully drawn at December 31, 1996, the
required repayments would total $49 million in 1997, $69 million in
1998 and $79 million in 1999. Such payments will be reduced pro-rata
if less than the full amount is drawn.
The Credit Agreement is collateralized by substantially all of
the Company's consolidated inventory and accounts receivable, except
those of Camrose, and stock of certain subsidiaries. Amounts
outstanding under the Credit Agreement are guaranteed by the principal
subsidiaries of the Company (other than Camrose). The Credit Agreement
contains various restrictive covenants including a minimum current
asset to current liability ratio; minimum interest coverage ratio;
minimum ratio of cash flow to scheduled maturities of long-term debt,
interest and taxes; minimum tangible net worth; a maximum ratio of
long-term debt to total capitalization; and restrictions on capital
expenditures, liens, investments and additional indebtedness.
At December 31, 1995, $196.9 million was outstanding under the
Term Loan and $58.4 million was outstanding under the Revolving Loan.
The Credit Agreement was amended as of September 30, 1995 and as
of December 31, 1995 to, among other things, modify the interest
coverage ratio covenant and certain other restrictive covenants, and
to facilitate the Company's ability to pursue other or additional
financing alternatives. The amendment to the interest coverage ratio
was needed for the Company to remain in compliance with certain
financial covenants in the Credit Agreement in light of lower than
anticipated earnings and higher than anticipated borrowings under the
Credit Agreement.
The Company has entered into interest rate swap agreements with
banks, as required by the Old Credit Agreement, to reduce the impact
of unfavorable changes in interest rates on its debt.
Term debt of $67.5 million was incurred by CF&I as part of the
purchase price of the Pueblo Mill on March 3, 1993. This debt is
uncollateralized and is payable over ten years with interest at 9.5
percent. As of December 31, 1995, the outstanding balance on the debt
was $55.2 million, of which $50.7 million was classified as long-term
debt.
The Company has an uncollateralized and uncommitted revolving
line of credit with a bank which may be used to support issuance of
letters of credit, foreign exchange contracts and interest rate
hedges. At December 31, 1995, $10.3 million was restricted under
outstanding letters of
19
credit. In addition, the Company has a $4 million uncollateralized and
uncommitted revolving credit line with a bank which is restricted to
use for letters of credit. At December 31, 1995, $3.6 million was
restricted under outstanding letters of credit.
Camrose maintains a $18 million (Canadian dollars) revolving
credit facility with a bank, the proceeds of which may be used for
working capital and general corporate purposes. The facility is
collateralized by substantially all of the assets of Camrose and
borrowings under this facility are limited to an amount equal to
specified percentages of Camrose's eligible trade accounts receivable
and inventories. The facility expires on January 3, 1997. Depending on
Camrose's election at the time of borrowing, interest is payable based
on (1) the bank's Canadian dollar prime rate, (2) the bank's U.S.
dollar prime rate or (3) LIBOR. As of December 31, 1995, Camrose had
$6.7 million outstanding under the facility.
During 1995 the Company expended approximately $51.8 million
(exclusive of capitalized interest) on the capital improvement program
at the Pueblo Mill and $111.9 million (exclusive of capitalized
interest) on the Combination Mill. During 1996 the Company expects to
expend approximately $18 million on the capital improvement program at
the Pueblo Mill and approximately $64 million on the Combination Mill.
In addition to the Combination Mill, the Company has budgeted
approximately $14 million for capital expenditures in 1996 at its
manufacturing facilities for recurring upgrade projects to the present
facilities and equipment.
The Company's working capital needs and completion of the capital
improvement program and certain other projects will require the
continued availability of funds from operations, borrowings under the
Credit Agreement and other sources of financing. To enhance its
ability to implement the capital improvement program as scheduled and
its flexibility in financing that program, the Company is actively
exploring additional and alternative sources of financing to
supplement or replace the Credit Agreement. In that regard, the
Company anticipates filing registration statements with the Securities
and Exchange Commission in the first quarter of 1996 to register for
sale to the public approximately six million shares of its common
stock and approximately $235 million principal amount of first
mortgage notes. (Any offering of common stock or first mortgage notes
will be made only by means of a prospectus.) In connection with these
proposed public financings, the Company expects amounts outstanding
under the Credit Agreement would be repaid in full and the Credit
Agreement would be amended to provide a $125 million principal amount
revolving credit line collateralized by accounts receivable and
inventory. There is no assurance that the proposed public offerings
will be completed or that the terms of such offerings will not differ
materially from those described above. In addition, there is no
assurance the Credit Agreement will be amended in the manner described
above.
The Credit Agreement requires, and debt instruments related to
additional financing may require, that the Company and its
subsidiaries comply with various financial tests and impose, and will
impose, restrictions affecting, among other things, the ability of the
Company and its subsidiaries to incur additional indebtedness, create
liens on assets, make loans or investments, pay dividends and effect
other corporate actions. Futhermore, the continued availability of
borrowings under the Credit Agreement will require improvement in the
Company's results of operations, including improved performance of the
Pueblo Mill. As a result, there is no assurance that borrowings will
be available under the Credit Agreement or that sufficient funds
otherwise will be available, whether from bank financing, public debt
or equity securities offerings or otherwise, to complete the capital
improvement program or meet the Company's other cash needs. Failure to
obtain required financing would, among other things, delay or prevent
some portions of the capital improvement program and other capital
expenditures from being initiated or completed, which would have a
material adverse effect on the Company.
IMPACT OF INFLATION. Inflation can be expected to have an effect
on many of the Company's operating costs and expenses. Due to
worldwide competition in the steel industry, the Company may not be
able to pass through such increased costs to its customers.
20
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
QUARTERLY FINANCIAL DATA - UNAUDITED
1995 1994
--------------------------------------- ----------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
-------- ------- ------- -------- -------- ------- -------- --------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
Sales.......................... $180.4 $188.5 $155.1(2) $187 $191.5 $193.1 $234.8 $218.9
Operating income (loss)........ 2.4 5.8 11.0 4.8 6.6(3) (19.6)(4) 7.2 7.5
Net income (loss).............. 2.8(1) 2.0 5.7 1.9 5.4 (12.8)(5) 3.4 3.7
Net income (loss)
per share.................... $.14 $.10 $.28 $.10 $.27 $(.64)(5) $.17 $.18
Dividends declared per
common share................. $.14 $.14 $.14 $.14 $.14 $.14 $.14 $.14
Common stock price range:
High......................... $16 1/8 $18 7/8 $19 3/4 $18 3/8 $18 1/4 $20 1/4 $23 5/8 $27 3/8
Low.......................... $13 1/8 $15 3/4 $15 1/2 $14 7/8 $14 1/8 $15 7/8 $18 7/8 $22 5/8
Average shares
outstanding.................. 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0
(1) Includes net tax benefit of $2.5 million for Enterprise Zone credits on the eligible completed capital projects
at CF&I.
(2) Includes proceeds from insurance settlement of approximately $4.0 million for reimbursement of lost profits
resulting from an explosion in 1994 at CF&I's rod and bar mill.
(3) Includes property tax refunds totalling $3.5 million related to prior years. (See Note 16 to the Consolidated
Financial Statements)
(4) Includes provision for rolling mill closures of approximately $22.1 million. (See Note 16 to the Consolidated
Financial Statements)
(5) The third quarter 1994 amounts have been restated to reflect proceeds from a subsidiary's issuance of stock as
minority interest. See Note 3 to the Consolidated Financial Statements.
21
/TABLE
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors of
Oregon Steel Mills, Inc.
We have audited the consolidated financial statements and
financial statement schedule of Oregon Steel Mills, Inc. and
Subsidiaries as listed in Item 14(a) of this Form 10-K. These
financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Oregon Steel Mills, Inc. and Subsidiaries as of December
31, 1995, 1994 and 1993, and their consolidated results of operations
and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
As discussed in Note 3 to the consolidated financial statements,
the 1994 financial statements have been restated to reflect the
proceeds from a subsidiary's issuance of stock as minority interest.
COOPERS & LYBRAND L.L.P.
Portland, Oregon
January 19, 1996
22
OREGON STEEL MILLS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 31,
---------------------------------------
(RESTATED
NOTE 3)
1995 1994 1993
--------- -------- ---------
Current assets:
Cash and cash equivalents............................................ $ 644 $ 5,039 $ 9,623
Trade accounts receivable, less allowance for
doubtful accounts of $1,905, $2,063, and $1,906.................... 80,520 80,203 71,649
Inventories.......................................................... 141,310 160,788 160,504
Deferred tax asset................................................... 9,461 5,775 4,804
Other................................................................ 4,845 7,661 9,203
--------- -------- ---------
Total current assets............................................... 236,780 259,466 255,783
--------- -------- ---------
Property, plant and equipment:
Land and improvements................................................ 28,471 28,319 24,466
Buildings............................................................ 37,126 36,943 35,821
Machinery and equipment.............................................. 376,217 230,019 240,833
Construction in progress............................................. 171,487 139,842 34,605
--------- -------- ---------
613,301 435,123 335,725
Accumulated depreciation............................................. (118,147) (97,027) (104,300)
--------- -------- ---------
495,154 338,096 231,425
--------- -------- ---------
Cost in excess of net assets acquired, net............................. 41,555 42,569 39,474
Other assets........................................................... 31,777 25,602 22,988
--------- -------- ---------
$ 805,266 $665,733 $ 549,670
========= ======== =========
LIABILITIES
Current liabilities:
Current portion of long-term debt.................................... $ 4,576 $ 5,302 $ 4,680
Short-term debt...................................................... - - 14,225
Accounts payable..................................................... 85,360 85,618 75,419
Accrued expenses..................................................... 31,391 27,066 21,998
--------- -------- ---------
Total current liabilities.......................................... 121,327 117,986 116,322
Long-term debt......................................................... 312,679 187,935 76,487
Deferred employee benefits............................................. 17,044 17,661 15,327
Other deferred liabilities............................................. 36,331 36,609 36,803
Deferred income taxes.................................................. 15,470 10,725 16,514
--------- -------- ---------
502,851 370,916 261,453
--------- -------- ---------
Minority interests..................................................... 35,625 31,340 12,975
--------- -------- ---------
Commitments and contingencies (Note 14)
STOCKHOLDERS' EQUITY
Capital stock:
Preferred stock, par value $.01 per share; 1,000 shares
authorized; none issued
Common stock, par value $.01 per share; 30,000 shares
authorized; 19,422, 19,377, and 19,348 shares issued
and outstanding.................................................... 194 194 193
Additional paid-in capital........................................... 150,826 150,090 149,340
Retained earnings.................................................... 119,302 117,739 128,924
Minimum pension liability adjustment................................. - - (297)
Cumulative foreign currency translation adjustment................... (3,532) (4,546) (2,918)
--------- -------- ---------
266,790 263,477 275,242
--------- -------- ---------
$ 805,266 $ 665,733 $ 549,670
========= ========= =========
The accompanying notes are an integral part of the consolidated financial statements.
23
/TABLE
OREGON STEEL MILLS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
(RESTATED
NOTE 3)
1995 1994 1993
-------- -------- --------
Sales...................