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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, 1996 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:
Name of each exchange on
Title of each class which registered
------------------- ---------------------------
Common Stock, $.01 par value per share New York Stock Exchange
11% First Mortgage Notes due 2003 New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.[ X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ------
State the aggregate market value of the voting stock held by nonaffiliates
of the registrant.
BASED ON LAST SALE, JANUARY 31, 1997: $446,424,059
Indicate the number of shares outstanding of each of the registrant's
classes of stock as of January 31, 1997:
COMMON STOCK, $.01 PAR VALUE 25,693,471
---------------------------- -----------------------------
(TITLE OF CLASS) (NUMBER OF SHARES OUTSTANDING)
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy statement for the Registrant's Annual Meeting of Stockholders to be
held April 29, 1997 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................................... 7
Competition and Other Market Factors...................... 8
Environmental Matters..................................... 9
Employees................................................. 11
ITEM 2. PROPERTIES.................................................. 12
ITEM 3. LEGAL PROCEEDINGS........................................... 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......... 14
Executive Officers of the Registrant...................... 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS............................... 15
ITEM 6. SELECTED FINANCIAL DATA.................................... 15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................ 21
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE....................................... 39
PART III
ITEMS 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
and 11. AND EXECUTIVE COMPENSATION................................. 39
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT............................................. 39
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 39
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K........................................ 40
PART I
ITEM 1. BUSINESS
GENERAL
Oregon Steel Mills, Inc. ("Company" or "Registrant") was founded in 1926
by William G. Gilmore and was incorporated in California in 1928. The Company
reincorporated in Delaware in 1974. The Company changed its name in December
1987 from Gilmore Steel Corporation to Oregon Steel Mills, Inc.
During 1996, the Company operated two steel minimills and four finishing
facilities in the western United States and Canada. The Company manufactures and
markets one of the broadest lines of specialty and commodity steel products of
any domestic minimill company. The Company emphasizes the cost efficient
production of higher margin specialty steel products targeted at a diverse
customer base located primarily west of the Mississippi River, western Canada
and the Pacific Rim. The Company's manufacturing flexibility allows it to manage
actively its product mix in response to changes in customer demand and
individual product cycles. 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 ("Portland Mill"), which supplies steel for the Company's
steel plate and large diameter pipe finishing facilities. The Oregon Steel
Division's steel pipe mill in Napa, California ("Napa Pipe Mill") is a large
diameter steel pipe mill and fabrication facility. The Oregon Steel Division
also produces large diameter pipe and electric resistance welded ("ERW") pipe at
its 60 percent owned pipe mill in Camrose, Alberta, Canada ("Camrose Pipe
Mill"). The Company operated a steel plate rolling mill in Fontana, California
("Fontana Plate Mill"), until the first quarter of 1995 when it ceased
shipments.
The CF&I Steel Division consists of steelmaking and finishing facilities of
CF&I Steel, L.P. ("CF&I") located in Pueblo, Colorado ("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 tubular products
("seamless pipe"), wire rod, bar and wire products.
In total, the Company produces eight steel products which include most
standard grades of steel plate and a wide range of higher margin specialty steel
plate, large diameter steel pipe, ERW pipe, long-length and standard rails,
seamless pipe, 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 470,000
tons of finished steel plate in widths of up to 103".
The Napa Pipe Mill produces large diameter steel pipe of a quality suitable
for use in high pressure oil and gas transmission pipelines. The Napa Pipe Mill
can produce pipe with an outside diameter ranging from 16" to 42", with wall
thicknesses of up to 1-1/16" and in lengths of up to 80 feet, and can process
two different sizes of pipe simultaneously in its two finishing sections.
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.
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 then 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 companies
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.
On June 19, 1996, the Company completed public offerings of an additional
6,000,000 shares of common stock at $12.75 per share and $235 million principal
amount of 11% First Mortgage Notes ("Notes") due 2003. On July 9, 1996, the
Company issued an additional 271,857 shares of common stock at $12.75 per share
pursuant to an underwriter's over-allotment option. The proceeds from these
offerings were $302.3 million, net of expenses and underwriting discounts. The
Notes are guaranteed by New CF&I and CF&I ("Guarantors"). The Notes and
guarantees are secured by a lien on substantially all the property, plant and
equipment and certain other assets of the Company and the Guarantors. The
proceeds from the common stock and debt offerings were used to repay in full
borrowing under the Company's bank credit agreement. The remaining proceeds were
used for capital expenditures and general corporate purposes.
CAPITAL IMPROVEMENT PROGRAM
As part of its strategy to invest in efficient and flexible manufacturing
technologies, the Company has undertaken a $430 million (excluding capitalized
interest) capital improvement program at its Pueblo and Portland Mills, of which
the Company had expended approximately $400 million as of December 31, 1996. 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, and (iii) reduce the cost and improve the
yield of plate rolling and other finishing operations at the Portland Mill while
increasing rolling capacity from 470,000 tons to 1.2 million tons annually. The
Company has also budgeted an additional $10 million to explore direct reduction
technologies in order to reduce its 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. Shortly after its acquisition in 1993, the Company began a series
of major capital improvements at the Pueblo Mill designed to increase
yields, improve productivity and quality and expand the Company's ability
to offer specialty rod and bar products. With the installation of in-line
rail head hardening capability in 1996, all capital improvements are now
complete. The primary components of the capital improvements at the
Pueblo Mill are outlined below.
2
STEELMAKING. The Company has installed a ladle refining
furnace and a vacuum degassing facility and upgraded both continuous
casters. During 1995, the Company eliminated ingot casting and replaced
it with more efficient continuous casting methods, 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 producing commodity and
specialty grades of rod and bar products. Depending on product mix, the
new combined facility is expected to have 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.
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 enhanced 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, 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. The Company estimates that
upon completion annual steel rolling capacity of the Portland Mill will
increase to approximately 1.2 million tons from approximately 470,000
tons.
The Combination Mill is expected to begin operation in the
first half of 1997 and to be fully operational by the end of 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
103" 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 will 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 $10 million
through 1998 for joint ventures or other arrangements involving one or
more of these processes and is considering several possible projects.
3
PRODUCTS
OVERVIEW
The Company manufactures and markets one of the broadest lines of
specialty and commodity steel products of any domestic minimill company. Through
acquisitions and capital improvements, the Company has expanded its range of
finished products from plate and welded pipe in 1991 to eight products currently
by adding ERW pipe, rail, rod, bar, wire and seamless pipe. It has also expanded
its primary selling region from the western United States to national and
international markets. (See Note 3 to the Consolidated Financial Statements.)
The Company believes its current product line will be extended further with
completion of the Combination Mill which will provide an additional product of
steel plate in coiled form.
The following chart identifies the Company's principal products and the
primary markets for those products.
PRODUCTS MARKETS
-------- -------
OREGON STEEL DIVISION Commodity and specialty Service centers
steel plate Railcar and barge
manufacturers
Heavy equipment manufacturers
Construction
Large diameter steel Oil and gas transmission
pipe pipelines
Electric resistance Oil and natural gas line pipe
welded pipe
CF&I STEEL DIVISION Rail Rail transportation
Wire rod Durable goods
Capital equipment
Bar products Construction
Durable goods
Capital equipment
Wire products Agriculture
Construction
Seamless pipe Oil and gas producers
Gas transmission
The following table sets forth for the periods indicated the tonnage
shipped and the Company's total shipments by product class.
TONS SHIPPED
----------------------------------------
PRODUCT 1996 1995 1994
------- --------- --------- ---------
Oregon Steel Division:
Commodity Steel Plate 131,700 136,200 269,400
Specialty Steel Plate 147,900 159,700 154,700
Large Diameter Steel Pipe 249,300 223,000 356,300
ERW Pipe 75,400 48,400 94,900
Semifinished 3,300 196,200 45,400
--------- --------- ---------
Total Oregon Steel Division 607,600 763,500 920,700
--------- --------- ---------
CF&I Steel Division:
Rail 287,700 240,700 250,500
Rod, Bar and Wire 392,600 271,300 379,300
Seamless Pipe 151,200 116,100 130,000
Semifinished 61,700 12,100 5,800
--------- --------- ---------
Total CF&I Steel Division 893,200 640,200 765,600
--------- --------- ---------
Total Company 1,500,800 1,403,700 1,686,300
========= ========= =========
4
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 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 formed 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
5
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 improved its rail
manufacturing facilities to include the production of in-line head-hardened and
other premium rail. The installation of the in-line head hardening process was
completed in the third quarter of 1996. In-line head-hardened rail is produced
through a proprietary finishing technology. The Company has licensed the
technology (known as deep head-hardened or DHH technology) from Nippon in
connection with Nippon's investment in New CF&I. In 1996 the Company produced
approximately 23,500 tons of head-hardened product using the DHH technology. The
in-line DHH technology allows the Company to produce up to 450,000 tons (the
capacity of the rail facility) of head-hardened product. 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 included
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 machinery and equipment and small structural
uses and special quality bar for cold drawing, hand tools and other forged
applications.
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 semifinished 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 and pig iron ("alternate
metallics") can substitute for a limited portion of the scrap used in minimill
steel production, although the sources and availability of alternate metallics
are substantially more limited than those of scrap. The purchase prices for
scrap and alternate metallics are subject to market forces largely beyond the
control of the Company including demand by domestic and foreign steel producers,
freight costs, speculation by scrap brokers and other conditions. The cost of
scrap and alternate metallics to the Company can vary significantly, and the
Company's product prices often cannot be adjusted, especially in the short-term,
to recover the costs of increases in scrap and alternate metallics prices.
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 alternate
metallics. The Company has successfully integrated alternate
6
metallics into the production process as a low residual scrap substitute. The
Company typically purchases alternate metallics 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. Pig iron is purchased from a variety of international producers.
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 seamless
pipe, rod, bar, wire and rail products. As of December 31, 1996, the Company
employed 18 direct sales people and 36 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 1996, 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 rail and 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.
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
7
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 1996 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 1996, 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.
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, a new minimill in Arizona and an
upgraded minimill in Oregon 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. 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 River. Geneva Steel has made significant investments to increase its
capacity with specific focus on the commodity plate market
8
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, U.S. 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 have 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.
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.
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 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 seamless pipe include a number of
domestic and foreign manufacturers. The Company has the flexibility to produce
relatively small volumes of specified products on short notice in response to
customer requirements. Principal domestic competitors include U.S. Steel
Corporation, 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 GS Technologies, North Star Steel, Cascade Steel Rolling
Mills, Keystone Steel and Wire and Northwestern Steel & Wire. 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.
9
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.
By-products of the steelmaking process at the Portland Mill have been collected
on-site. The Company has been carefully evaluating various commercial uses for
these materials. One viable commercial use, application as an agricultural
supplement, has been identified. The Company chose not to pursue this
opportunity because of potential risks associated with the use of these
materials as a soil supplement. The Company is actively searching for a viable
commercial use. The ultimate success of this effort is unknown and, if
unsuccessful, the effect on income of the cost of the off-site disposal is not
determinable at this time.
FONTANA PLATE MILL. The property and building at which the Fontana Plate
Mill was located were leased to the Company. The Fontana Plate Mill was formerly
part of a larger integrated steel plant ("Mill") operated by California Steel
Industries, Inc. ("CSI") on property ("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. 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. The Company expects to
satisfactorily vacate the site by the end of 1997.
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, 1996, the Company had accrued reserves of $2.4
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
10
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 continues
to assess other operations to determine their potential for causing future
contamination of the site.
PUEBLO MILL. At December 31, 1996 the Company had accrued a reserve of
$35.1 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
issued a postclosure permit for historic hazardous waste units at the Pueblo
Mill. As part of the postclosure permit requirements, CF&I must conduct a
corrective action program for the 82 solid waste management units at the
facility. At December 31, 1996, CF&I has completed corrective action on three
solid waste management units and continues to address projects on the
prioritized corrective action schedule which 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 governmental 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 $11.2 million
over a three-year period beginning in 1997.
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 consolidated financial condition of the Company.
EMPLOYEES
As of December 31, 1996, the Company had 2,730 full-time employees. The
Company's employees at the Portland Mill, Napa Pipe Mill and corporate
headquarters are not represented by a
11
union. At the Pueblo Mill, approximately 1,260 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 260
employees of the Camrose Pipe Mill are members of the Canadian Autoworkers
Union. The contract for these employees expired on January 31, 1997 and has
been renegotiated by the Company. The current contract expires on January 31,
2000. The Company believes it has a good relationship with its employees.
The domestic employees of the Oregon Steel Division participate in the
Employee Stock Ownership Plan ("ESOP"). As of December 31, 1996, the ESOP owned
approximately 8 percent of the Company's outstanding 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 pretax profits of their division.
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 oceangoing 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 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 $15 million
(Canadian dollars) revolving credit facility (see Note 7 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 semifinished steel,
and four finishing mills for conversion of semifinished 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.
12
At December 31, 1996, the Company had the following nominal capacities
which are affected by product mix:
PRODUCTION PRODUCTION
CAPACITY 1996
(TONS) (TONS)
---------- ----------
Portland Mill: Melting 840,000 598,300
Finishing 470,000 471,600
Napa Pipe Mill: Steel pipe 350,000 208,700
Camrose Pipe Mill: Steel pipe 325,000 104,900
Pueblo Mill: Melting 1,200,000 937,900
Finishing mills 1,200,000 802,800
The Notes and guarantees are secured by a lien on substantially all of
the property, plant and equipment of the Company and the Guarantors. (See Note 7
to the Consolidated Financial Statements.)
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 since the investigation began the Company has been fully
cooperating with OSHA. The Company has appealed the citation. An administrative
law judge has approved an agreement between OSHA and the Company to resolve
certain penalties for $31,360 and has entered interim orders dismissing certain
other violations. Approximately $500,000 in penalties remain at issue. 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
remaining penalties.
There are a number of claims arising out of the Company's contract with
Dick Corporation, the prime contractor on the Combination Mill. The Company's
position is that the prime contractor was failing to perform, so it terminated
the contract and made arrangements with other contractors to complete the
project. The prime contractor filed an arbitration claim against the Company
and the Company has counterclaimed. While it is difficult to determine at this
stage the amount claimed by the prime contractor, the prime contractor filed a
lien in the approximate amount of $16.5 million. The prime contractor claimed
certain other unspecified damages. However, the Company believes that the lien
amount includes amounts that were subsequently paid by the Company to certain
subcontractors and suppliers of the prime contractor in the amount of
approximately $7.7 million. As a result, it appears that the net amount claimed
by the prime contractor in the arbitration would be approximately $8.8 million
plus unspecified damages.
The Company has filed a counterclaim against the prime contractor in the
arbitration. The amount of this counterclaim cannot be finalized until the
Combination Mill project is complete. However, it is expected that the amount of
the counterclaim will exceed the amount of the prime contractor's claim.
On the same project, five other liens have been filed by subcontractors
and/or suppliers of the prime contractor. These liens total approximately $6
million. The Company believes these claims are included in the amount of the
lien filed by the prime contractor.
The Company denies liability on all of the claims of the prime contractor
and its subcontractors and suppliers and, as stated above, believes it is
entitled to recover from the prime contractor all damages incurred. To the
extent that the Company owes any amounts to the prime contractor or any of its
subcontractors or suppliers, the Company may have claims for reimbursement
against certain of its other engineers, vendors or consultants on the project.
13
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were voted upon during the fourth quarter of 1996.
EXECUTIVE OFFICERS OF THE REGISTRANT
Officers are elected by the Board of Directors of the Company to serve
for a period ending with the next succeeding annual meeting of the Board of
Directors held immediately after the annual meeting of stockholders.
The name of each executive officer of the Company, age as of February 1,
1997 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 57 Chairman of the July 1985
Board of Directors and
Chief Executive Officer
Joe E. Corvin 52 President and December 1996
Chief Operating Officer
L. Ray Adams 46 Vice President of Finance March 1991
and Chief Financial Officer
Christopher D. Cassard 43 Corporate Controller February 1996
Richard J. Kasten 52 Vice President of February 1992
International Sales
LaNelle F. Lee 59 Vice President of April 1996
Administration and Secretary
Robert R. Mausshardt 64 Vice President of March 1984
Marketing, Tubular Products
Steven M. Rowan 51 Vice President of February 1992
Materials and Transportation
Jeff S. Stewart 35 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
Christopher D. Cassard. 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.
14
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, 1996, the number of common stockholders of record was 864.
Information on quarterly dividends and common stock prices is shown on page 21
and incorporated herein by reference.
The indenture under which the Company's 11% First Mortgage Notes due 2003
were issued contains restrictions on the payment of common stock dividends. (See
Note 7 to the Consolidated Financial Statements.) At December 31, 1996, $25.9
million was available for the payment of common stock dividends under these
restrictions.
ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------ -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE, TON AND PER TON AMOUNTS)
INCOME STATEMENT DATA:
Sales $ 772,815 $ 710,971 $ 838,268 $ 679,823 $ 397,722
Cost of sales 670,819 638,413 761,335 608,236 316,455
Provision for rolling mill closures - - 22,134 - -
Selling, general and administrative
expenses 44,857 43,121 50,052 41,447 29,785
Profit participation and ESOP
contribution 7,844 5,418 3,074 5,280 14,011
----------- ----------- ----------- ----------- -----------
Operating income 49,295 24,019 1,673 24,860 37,471
Other income (expense), net (12,937) (8,685) (1,579) (3,421) 955
Settlement of litigation - - - 2,750 (5,040)
Minority interests (1,204) 862 (3,373) (1,996) 1,097
Income tax benefit (expense) (11,407) (3,762) 2,941 (7,388) (14,506)
----------- ----------- ----------- ----------- -----------
Net income (loss) $ 23,747 $ 12,434 $ (338) $ 14,805 $ 19,977
=========== =========== =========== =========== ===========
COMMON STOCK INFORMATION:
Net income (loss) per share $1.02 $.62 $(.02) $.75 $1.04
Cash dividends declared per share $.56 $.56 $ .56 $.56 $.56
Weighted average common shares and
common equivalents outstanding 23,333 20,016 19,973 19,822 19,183
BALANCE SHEET DATA (AT DECEMBER 31):
Working capital $ 120,996 $ 115,453 $ 141,480 $ 139,461 $ 99,444
Total assets 913,355 805,266 665,733 549,670 354,252
Current liabilities 114,729 121,327 117,986 116,322 55,522
Long-term debt 330,993 312,679 187,935 76,487 -
Total stockholders' equity 353,041 266,790 263,477 275,242 257,515
OTHER DATA:
Depreciation and amortization $ 29,025 $ 24,964 $ 22,012 $ 21,375 $ 16,253
Capital expenditures $ 156,538 $ 176,885 $ 128,237 $ 40,905 $ 34,281
Total tonnage sold:
Oregon Steel Division 607,600 763,500 920,700 778,300 665,300
CF&I Steel Division 893,200 640,200 765,600 624,700 -
----------- ----------- ----------- ----------- -----------
1,500,800 1,403,700 1,686,300 1,403,000 665,300
=========== =========== =========== =========== ===========
Operating margin (FN1) 6.4% 3.4% 2.8% 3.7% 9.4%
Operating income per ton sold (FN1) $33 $17 $14 $18 $56
- --------
(FN1) Excluding provision for rolling mill closures in 1994.
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following information contains forward-looking statements which are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such forward-looking statements are subject to risks and
uncertainties and actual results could differ materially from those projected.
Such risks and uncertainties include, but are not limited to, general business
and economic conditions; competitive products and pricing, as well as
fluctuations in demand; potential equipment malfunction, and plant construction
and repair delays.
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:
YEAR ENDED DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
INCOME STATEMENT DATA:
Sales 100.0% 100.0% 100.0%
Cost of Sales 86.8 89.8 90.8
Provision for rolling mill closures - - 2.6
Selling, general and administrative expenses 5.8 6.1 6.0
ESOP and profit participation contribution 1.0 .7 .4
------- ------- -------
Operating income 6.4 3.4 .2
Interest and dividend income .1 .1 .2
Interest expense (1.6) (1.5) (.5)
Other income, net - .2 .1
Loss on termination of interest rate swap agreements (.2) - -
Minority interests (.1) .1 (.4)
------- ------- -------
Pretax income (loss) 4.6 2.3 (.4)
Income tax benefit (expense) (1.5) (.5) .4
------- ------- -------
Net income 3.1% 1.8% .0%
======= ======= =======
BALANCE SHEET DATA (AT DECEMBER 31):
Current ratio 2.1:1 2.0:1 2.2:1
Long-term debt as a percent of capitalization 48.4% 54.0% 41.6%
Net book value per share $ 13.74 $ 13.74 $ 13.60
The following table sets forth by division, for the periods indicated,
tonnage sold, revenues and average selling price per ton:
YEAR ENDED DECEMBER 31,
---------------------------------------
1996 1995 1994
---------- ---------- ----------
TOTAL TONNAGE SOLD:
Oregon Steel Division
Plate 279,600 295,900 424,100
Welded Pipe 324,700 271,400 451,200
Semifinished 3,300 196,200 45,400
---------- ---------- ----------
Total Oregon Steel Division 607,600 763,500 920,700
---------- ---------- ----------
CF&I Steel Division
Rail 287,700 240,700 250,500
Rod/Bar/Wire 392,600 271,300 379,300
Seamless Pipe 151,200 116,100 130,000
Semifinished 61,700 12,100 5,800
---------- ---------- ----------
Total CF&I Steel Division 893,200 640,200 765,600
---------- ---------- ----------
Total Company 1,500,800 1,403,700 1,686,300
========== ========== ==========
REVENUES (IN THOUSANDS):
Oregon Steel Division $ 379,119 $ 407,968 $ 498,794
CF&I Steel Division 393,696 303,003 339,474
---------- ---------- ----------
Total $ 772,815 $ 710,971 $ 838,268
========== ========== ==========
AVERAGE SELLING PRICE PER TON:
Oregon Steel Division $624 $534 $542
CF&I Steel Division $441 $467(FN1) $443
Company Average $515 $504(FN1) $497
(FN1) 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.
16
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
percent 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 1994, 1995 and 1996 the Camrose Pipe Mill shipped 172,800, 79,400 tons,
and 114,300, respectively, of steel pipe and generated revenues of $110.0
million, $55.1 million, and $78.5 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.
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, 1995 and 1996 the Pueblo Mill shipped 765,600, 640,200 and 893,200
tons, respectively, and generated revenues of $339.5 million, $303.0 million,
and $393.7 million, respectively. In August 1994 New CF&I sold a 10 percent
equity interest in New CF&I to a subsidiary of 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 companies of
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.
1997 will be a year of transition for the Company as it completes
construction and begins commissioning and start-up activity on the Combination
Mill at its Portland Mill. The Combination Mill is expected to start up by the
second quarter of 1997 and be fully operational by the end of 1997. During this
transition period, the Company will incur training costs as well as production
inefficiencies related to the start-up of the Combination Mill. Additionally,
depreciation expense associated with the Combination Mill and interest costs
previously capitalized as a cost of construction are expected to be expensed
during the second half of 1997. The Company expects that these costs will
adversely affect financial results until the Combination Mill is fully
operational. In an effort to minimize adverse financial results and disruptions
of plate products to its external and internal plate customers, it is the
Company's intention to continue to operate its current plate rolling facility at
the Portland Mill until the middle of 1997 when the Combination Mill begins to
roll plate in excess of 103".
COMPARISON OF 1996 TO 1995
SALES. Sales in 1996 of $772.8 million increased 8.7 percent from sales of
$711.0 million in 1995. Shipments increased 6.9 percent to 1.5 million tons in
1996 from 1.4 million tons in 1995. Average selling prices increased $11 to $515
per ton in 1996 compared to 1995. Of the $61.8 million sales increase, $48.9
million was the result of volume increases and $16.9 million from higher average
selling prices, offset by $4.0 million of 1995 insurance proceeds not recurring
in 1996.
The increases in sales and shipments was primarily the result of increased
shipments of rail, seamless pipe, rod and bar, and semifinished products by the
CF&I Steel Division and welded pipe products by the Oregon Steel Division,
offset in part by decreased semifinished product shipments by the Oregon Steel
Division. Shipments increased at the CF&I Steel Division due to increased
pro-
17
duction resulting from the completion of the capital improvement program.
Welded pipe shipments increased at the Napa Pipe Mill to 210,500 tons in 1996
versus 192,000 tons in 1995 and at the Camrose Pipe Mill to 114,200 tons in 1996
versus 79,400 tons in 1995. The higher average selling price in 1996 was due to
a combination of increased shipments of welded and seamless pipe, higher selling
prices for plate and seamless pipe products and reduced shipments of
semifinished products, partially offset by increased shipments of rod and bar,
which have a generally lower selling price per ton than the other finished
products sold by the Company.
GROSS PROFITS. Gross profits as a percentage of sales for 1996 were 13.2
percent compared to 10.2 percent for 1995. Gross profit margins were positively
impacted by increased selling prices of plate and seamless pipe products,
improved product mix and lower manufacturing costs of producing plate and welded
pipe at the Oregon Steel Division. Gross profit was negatively impacted by
higher costs and reduced shipments at CF&I due to an outage of the ladle
refining furnace during June 1996 as a result of a mechanical failure and by the
loss of the use of one of the two main transformers that supply electricity to
the melt shop at CF&I during the fourth quarter of 1996. As a result, steel
production volume was significantly affected, limiting availability of steel to
the finishing mills, particularly the rod and bar mill. The outages resulted in
low operating efficiencies, increased costs and lost sales opportunities. The
Company estimates that the transformer outage negatively affected operating
income by approximately $2 million, net of insurance proceeds recorded to date.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses for 1996 increased $1.7 million or 4.0 percent compared to
1995 but decreased as a percent of revenues from 6.1 percent in 1995 to
5.8 percent in 1996. The percentage decrease was primarily due to cost
controls and increased sales in 1996.
CONTRIBUTION TO ESOP AND PROFIT PARTICIPATION. There was no contribution to
the ESOP in 1996 and 1995. Profit participation plan expense was $7.8 million in
1996 compared to $5.4 million in 1995. The increase in 1996 profit participation
reflects the increased profitability as compared to 1995 at the Oregon Steel
Division.
INTEREST EXPENSE. Total interest cost for 1996 was $33.2 million, an
increase of $10.7 million compared to 1995. This increase was related to
interest cost incurred on debt issued to reduce bank borrowings and to fund the
capital improvement program at the Oregon Steel and CF&I Steel Divisions. Of the
$33.2 million of interest, $20.7 million was capitalized as part of construction
in progress.
INCOME TAX EXPENSE. The Company's effective income tax rate for state and
federal taxes was 32.4 percent for 1996 compared to 23.2 percent for 1995. The
effective income tax rate for both periods varied from the combined state and
federal statutory rate due to earned state tax credits, principally enterprise
zone 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.
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.
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
semifinished 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
18
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 were 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 business units of the Oregon Steel Division.
INTEREST AND DIVIDEND INCOME. Interest and dividend income on investments
was $557,000 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.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from 1996 operations was $80.9 million compared to $53.6 million
in 1995. The major items affecting this $27.3 million increase were increased
net income ($11.3 million), increased depreciation and amortization ($4.1
million), a larger increase in deferred income taxes ($5.4 million), a larger
decrease in inventory ($5.6 million) and an increase in accounts payable versus
a decrease in 1995 ($12.4 million). These cash increases were partially offset
by an increase in accounts receivable ($11.0 million).
Net working capital at December 31, 1996, increased $5.5 million compared
to December 31, 1995, reflecting a $1.1 million decrease in current assets and a
$6.6 million decrease in current liabilities. Accounts payable decreased from
$85.4 million at the end of 1995 to $75.4 at December 31, 1996. The decrease was
primarily due to the reduced accounts payable related to the capital improvement
program at the CF&I Division which was completed during 1996.
19
On June 19, 1996, the Company completed public offerings of an additional
6,000,000 shares of common stock at $12.75 per share and $235 million principal
amount of 11% First Mortgage Notes due 2003. On July 9, 1996, the Company issued
an additional 271,857 shares of common stock at $12.75 per share pursuant to an
underwriter's over-allotment option. The proceeds from these offerings were
$302.3 million, net of expenses and underwriting discounts. The Notes are
guaranteed by New CF&I and CF&I. The Notes and the guarantees are secured by a
lien on substantially all the property, plant and equipment and certain other
assets of the Company and the Guarantors. The collateral for the Notes and the
guarantees do not include, among other things, inventory and accounts
receivable. The indenture under which the Notes were issued contains potential
restrictions on new indebtedness and various types of disbursements, including
dividends, based on the Company's net income in relation to its fixed charges,
as defined.
In June 1996, the Company amended and restated its existing $297 million
bank credit agreement to establish a $125 million revolving bank credit facility
("Amended Credit Agreement"), which expires June 11, 1999, and may be drawn upon
based on the Company's accounts receivable and inventory balances. At December
31, 1996, $45.5 million was outstanding under the Amended Credit Agreement. At
the Company's election, interest on the Amended Credit Agreement is based on the
London Interbank Borrowing Rate ("LIBOR"), the prime rate or the federal funds
rate, plus a margin determined by the Company's leverage ratio. The annual
commitment fees are .5 percent of the unused portion of the Amended Credit
Agreement. The Amended Credit Agreement is collateralized by substantially all
of the Company's consolidated inventory and accounts receivable, except those of
Camrose. Amounts outstanding under the Amended Credit Agreement are guaranteed
by the Guarantors. The Amended Credit Agreement contains various restrictive
covenants including a minimum tangible net worth, minimum interest coverage
ratio, and a maximum debt to total capitalization ratio.
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, 1996,
the outstanding balance on the debt was $51.3 million, of which $44.7 million
was classified as long-term.
Camrose maintains a $15 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 December 30, 1999.
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, 1996, Camrose had $5.8 million
outstanding under the facility.
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, 1996, $13.6
million was restricted under outstanding letters of credit.
During 1996 the Company expended approximately $28.2 million (exclusive of
capitalized interest) on the capital improvement program at the Pueblo Mill,
$98.8 million (exclusive of capitalized interest) on the Combination Mill, and
$8.8 million on other capital projects. During 1997 the Company expects to
expend approximately $32.3 million on the Combination Mill. In addition to the
Combination Mill, the Company has budgeted approximately $25.5 million for
capital expenditures in 1997 at its manufacturing facilities for upgrade
projects to the present facilities and equipment.
The Company believes that its anticipated needs for working capital and
capital expenditures through 1997 will be met from funds generated by operations
and borrowings pursuant to the Company's Amended Credit Agreement.
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
1996 1995
----------------------------------------- ---------------------------------------------
4TH 3RD 2ND 1ST 4TH 3RD 2ND 1ST
------ ------- ------- ------- ------ ------- -------- -------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
Sales $205.6 $ 187.7 $ 174.1 $ 205.5 $180.4 $ 188.5 $ 155.1(FN3) $ 187.0
Operating income 11.2(FN1) 12.8 9.9 15.3 2.4 5.8 11.0 4.8
Net income 6.7 6.4 4.1 6.5 2.8(FN2) 2.0 5.7 1.9
Net income
per share $ .26 $ .24 $ .20 $ .33 $ .14 $ .10 $ .28 $ .10
Dividends declared per
common share $ .14 $ .14 $ .14 $ .14 $ .14 $ .14 $ .14 $ .14
Common stock
price range:
High $17-3/4 $15-7/8 $16-7/8 $15-3/8 $16-1/8 $18-7/8 $ 19-3/4 $18-3/8
Low $14-5/8 $12-3/4 $12-1/2 $12-3/4 $13-1/8 $15-3/4 $ 15-1/2 $14-7/8
Average shares
outstanding 26.3 26.3 20.8 20.0 20.0 20.0 20.0 20.0
- -----------------
(FN1) Includes approximately $1 million write-down of older plant and
equipment held for sale, approximately $2.5 million of net negative
adjustments primarily related to inventory, and a decrease in gross
margin of approximately $2 million, net of insurance proceeds recorded
to date, related to the transformer outage at CF&I.
(FN2) Includes net tax benefit of $2.5 million for Enterprise Zone credits
on the eligible completed capital projects at CF&I.
(FN3) 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.
21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Oregon Steel Mills, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of changes in stockholders' equity and of
cash flows present fairly, in all material respects, the financial position of
Oregon Steel Mills, Inc. and its subsidiaries at December 31, 1996 and the
results of their operations and their cash flows for the year then ended, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Portland, Oregon
January 17, 1997
22
OREGON STEEL MILLS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
ASSETS
DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- ------ ------
Current assets:
Cash and cash equivalents $ 739 $ 644 $ 5,039
Trade accounts receivable, less allowance
for doubtful accounts of $2,735,
$1,905 and $2,063 91,480 80,520 80,203
Inventories 120,636 141,310 160,788
Deferred tax asset 17,084 9,461 5,775
Other 5,786 4,845 7,661
--------- --------- ---------
Total current assets 235,725 236,780 259,466
--------- --------- ---------
Property, plant and equipment:
Land and improvements 29,577 28,471 28,319
Buildings 37,617 37,126 36,943
Machinery and equipment 426,912 376,217 230,019
Construction in progress 255,558 171,487 139,842
--------- --------- ---------
749,664 613,301 435,123
Accumulated depreciation (145,096) (118,147) (97,027)
--------- --------- ---------
604,568 495,154 338,096
--------- --------- ---------
Cost in excess of net assets acquired, net 37,398 41,555 42,569
Other assets 35,664 31,777 25,602
--------- --------- ---------
$ 913,355 $ 805,266 $ 665,733
========= ========= =========
LIABILITIES
Current liabilities:
Current portion of long-term debt $ 6,574 $ 4,576 $ 5,302
Accounts payable 75,428 85,360 85,618
Accrued expenses 32,727 31,391 27,066
--------- --------- ---------
Total current liabilities 114,729 121,327 117,986
Long-term debt 330,993 312,679 187,935
Deferred employee benefits 18,262 17,044 17,661
Environmental liability 35,103 36,331 36,609
Deferred income taxes 24,365 15,470 10,725
--------- --------- ---------
523,452 502,851 370,916
--------- --------- ---------
Minority interests 36,862 35,625 31,340
--------- --------- ---------
Commitments and contingencies (Note 12)
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; 25,693, 19,422 and 19,377
shares issue and outstanding 257 194 194
Additional paid-in capital 226,085 150,826 150,090
Retained earnings 130,417 119,302 117,739
Cumulative foreign currency translation
adjustment (3,718) (3,532) (4,546)
--------- --------- ---------
353,041 266,790 263,477
--------- --------- ---------
$ 913,355 $805,266 $ 665,733
========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
23
OREGON STEEL MILLS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
--------- --------- ---------
Sales $ 772,815 $ 710,971 $ 838,268
--------- --------- ---------
Costs and expenses:
Cost of sales 670,819 638,413 761,335
Provision for rolling mill closures - - 22,134
Selling, general and administrative 44,857 43,123 50,052
Contributions to employee stock ownership plan - - 738
Profit participation 7,844 5,416 2,336
--------- --------- ---------
723,520 686,952 836,595
--------- --------- ---------
Operating income 49,295 24,019 1,673
Other income (expense):
Interest and dividend income 520 557 1,620
Interest expense (12,479) (10,307) (3,910)
Loss on termination of interest rate swap
agreements (Note 15) (1,232) - -
Minority interests (1,204) 862 (3,373)
Other, net 254 1,065 711
--------- --------- ---------
Income (loss) before income taxes 35,154 16,196 (3,279)
Income tax (expense) benefit (11,407) (3,762) 2,941
--------- --------- ---------
Net income (loss) $ 23,747 $ 12,434 $ (338)
========= ========= =========
Net income (loss) per share $ 1.02 $ .62 $ (.02)
========= ========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
24
OREGON STEEL MILLS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
CUMULATIVE
MINIMUM FOREIGN
ADDITIONAL PENSION CURRENCY
COMMON STOCK PAID-IN RETAINED LIABILITY TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT ADJUSTMENT TOTAL
------ ------ -------- -------- ---------- ---------- -----
Balances, December 31, 1993 19,348 $ 193 $149,340 $128,924 $ (297) $ (2,918) $275,242
Net loss (338) (338)
Issuance to employee
stock ownership plan 29 1 750 751
Minimum pension
liability adjustment 297 297
Foreign currency
translation adjustment (1,628) (1,628)
Dividends paid ($.56 per share) (10,847) (10,847)
------ -------- -------- -------- -------- -------- --------
Balances, December 31, 1994 19,377 194 150,090 117,739 - (4,546) 263,477
Net income 12,434 12,434
Issuance to employee stock
ownership plan 45 736 736
Foreign currency
translation adjustment 1,014 1,014
Dividends paid ($.56 per share) (10,871) (10,871)
------ -------- -------- -------- -------- -------- --------
Balances, December 31, 1995 19,422 194 150,826 119,302 - (3,532) 266,790
Net income 23,747 23,747
Issuance of common stock (Note 13) 6,271 63 75,259 75,322
Foreign currency
translation adjustment (186) (186)
Dividends paid ($.56 per share) (12,632) (12,632)
------ -------- -------- -------- ------- -------- --------
Balances, December 31, 1996 25,693 $ 257 $22