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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, 1994 COMMISSION FILE NUMBER
1-9887
OREGON STEEL MILLS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 94-0506370
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1000 BROADWAY BUILDING
SUITE 2200
1000 S. W. BROADWAY
PORTLAND, OREGON 97205
(Address of principal executive office) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (503) 223-9228
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
Title of each class Name of each exchange on which
------------------- ------------------------------
registered
----------
Common Stock, $.01 par value
per share New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.[X]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90
days.
Yes X No
---- ----
State the aggregate market value of the voting stock held by non-
affiliates of the registrant.
BASED ON LAST SALE, JANUARY 31, 1995: $310,037,488
Indicate the number of shares outstanding of each of the
registrant's classes of stock as of January 31, 1995:
COMMON STOCK, $.01 PAR VALUE 19,377,343
---------------------------- ----------
(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 28, 1995 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 Expenditures.......................... 2
Business Strategy............................. 3
Products...................................... 5
Raw Materials................................. 7
Marketing and Customers....................... 8
Competition and Other Market Factors.......... 10
Environmental Matters......................... 11
Employees..................................... 13
ITEM 2. PROPERTIES...................................... 14
ITEM 3. LEGAL PROCEEDINGS............................... 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS.............................. 15
Executive Officers of the Registrant.......... 15
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS................... 16
ITEM 6. SELECTED FINANCIAL DATA......................... 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.................................... 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA..... 23
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.......................... 43
PART III
ITEMS 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE
and 11. REGISTRANT AND EXECUTIVE COMPENSATION........... 43
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT......................... 43
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.. 43
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K........................... 43
PART I
ITEM 1. BUSINESS
GENERAL
Oregon Steel Mills, Inc. (the "Company" or the "Registrant") was
founded in 1926 by William G. Gilmore and was incorporated in
California in 1928. The Company reincorporated in Delaware in 1974.
The Company changed its name in December 1987 from Gilmore Steel
Corporation to Oregon Steel Mills, Inc.
During 1994, the Company operated two steel mills and five
finishing facilities serving the United States, Canada and certain
international markets. The Company manufactures and markets one of the
broadest lines of specialty and commodity steel products of any
domestic minimill company. In 1993, the Company organized into two
business units known as the Oregon Steel Division and the CF&I Steel
Division.
The Oregon Steel Division is centered on the Company's Portland,
Oregon steel minimill (the "Portland Steel Mill"), which supplies
steel for the Company's steel plate and large diameter pipe finishing
facilities. The Portland Steel Mill operates under the name of Oregon
Steel Mills, Inc. The wholly-owned and majority-owned operating
divisions, which are included in the Oregon Steel Division, are:
Oregon Steel Mills - Fontana Division, Inc., a steel plate rolling
mill in Fontana, California (the "Fontana Plate Mill"); Napa Pipe
Corporation, a large diameter steel pipe mill and fabrication facility
in Napa, California (the "Napa Facility"); and Camrose Pipe
Corporation ("CPC") which owns a 60 percent interest in Camrose Pipe
Company ("Camrose"), a large diameter pipe and electric resistance
welded ("ERW") pipe facility in Camrose, Alberta, Canada (the "Camrose
Facility"). The Company ceased operating the Fontana Plate Mill during
the fourth quarter of 1994.
The CF&I Steel Division consists of the steelmaking and finishing
facilities of CF&I Steel, L.P. ("CF&I") located in Pueblo, Colorado
(the "Pueblo Steel Mill"). The Company owns 90 percent of New CF&I,
Inc., which owns a 95.2 percent general partnership interest in CF&I.
The Pueblo Steel Mill is a steel minimill which produces long-length
and standard steel rails, seamless oil country tubular goods ("OCTG"),
wire rod, wire and bar products.
In total, the Company produces eight steel products which include
most standard grades of steel plate, a wide range of higher margin
specialty steel plate, large diameter steel pipe, ERW pipe, long-
length and standard rails, OCTG, wire rod, wire and bar 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 Steel Mill is the only hot-rolled steel plate
minimill and one of two steel plate producers located in the eleven
western states. The Portland Steel Mill produces slab thicknesses of
6", 7" and 8" and has an annual rolling mill capacity, depending on
product mix, of up to 450,000 tons of finished steel plate in widths
of up to 102".
The Company's Napa Facility produces large diameter pipe of a
quality suitable for use in high pressure oil and gas transmission
pipelines. The Napa Facility 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 Facility has an annual capacity in excess of 350,000
tons of pipe. Substantially all of the Napa Facility's requirements
for specialty steel plate, which is fabricated into steel pipe, are
currently supplied by the Portland Steel 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 can roll plate up to 136" wide,
which is sufficient for fabricating the Napa and Camrose Facilities'
largest diameter pipe products. The Company acquired the rolling mill
machinery used at the Fontana Plate Mill in November 1989 for
approximately $7.5 million. The land and buildings at the Fontana
1
Plate Mill are leased by the Company. In the third quarter, the
Company announced the permanent closure of the Fontana Plate Mill and
it ceased plate production in the fourth quarter.
The Company acquired a 60 percent interest in the Camrose
Facility in June 1992 for approximately $18 million from Stelco, Inc.,
a large Canadian steel producer. The Camrose Facility has two pipe
manufacturing mills. One is a large diameter pipe mill similar to that
of the Napa Facility, 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 Napa Facility.
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 142,000 tons depending upon product mix.
On March 3, 1993, New CF&I, Inc., a wholly-owned subsidiary of
the Company, acquired for $22.2 million a 95.2 percent interest in a
newly formed limited partnership, CF&I. The remaining 4.8 percent
interest is owned by the Pension Benefit Guaranty Corporation. CF&I
purchased substantially all of the steelmaking, fabricating, metals
and railroad business assets of CF&I Steel Corporation for $113.1
million. The Pueblo Steel Mill has melting capacity in excess of 1
million tons and a finished ton capacity of approximately 1.5 million
tons. In August of 1994, the Company sold a 10 percent equity interest
in New CF&I, Inc. 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, Inc. received a
cash payment of $16.8 million in connection with that transaction.
CAPITAL EXPENDITURES
As part of its strategy to be a low cost producer of steel
products, the Company has undertaken extensive capital expenditure
programs at its Portland and Pueblo Steel Mills. The purposes of the
programs are to (i) reduce the cost of plate rolling and other
finishing operations at the Portland Steel Mill while increasing
yields and capacities, (ii) improve the steelmaking capability at the
Pueblo Steel Mill, and (iii) reduce the cost of producing rail, rod
and bar, and other products at the Pueblo Steel Mill while improving
product quality and expanding the specialty grades that can be
manufactured there. The Company also expects to invest in alternate
metallic capability to help stabilize raw materials costs.
Construction of the Combination Mill at Portland. The Company
has begun construction of a new Steckel combination rolling mill (the
"Combination Mill") at its Portland Steel Mill which is expected to
cost approximately $190 million and to reduce average production costs
for commodity and specialty grades of plate, primarily as a result of
higher product yields as well as a reduction in transportation and
labor costs as all of the Company's plate production is shifted to the
Portland Steel Mill. The project is expected to include 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 additions are expected to include an
extension of the rolling line and the installation of a fully
automated hydraulic gauge control system designed to roll steel plate
to exacting standards. These anticipated additions will enable the
Company to roll coiled steel plate in lengths up to 2,100 feet and
decrease end crop, side trim and crown loss. The Company estimates
that these and other related improvements will increase average
finished steel plate yields by approximately 8 percent, and that upon
completion annual steel plate rolling capacity of the Portland Steel
Mill will increase to 1.2 million tons and approximate the current
combined capacity of the Portland and Fontana rolling mills.
The Combination Mill is expected to begin operation in the third
quarter of 1996. It is expected to provide considerable manufacturing
flexibility and supply substantially all the Company's plate
requirements for large diameter pipe as well as coiled plate for such
applications as the smaller diameter ERW pipe manufactured at the
Camrose Facility. The Portland Steel Mill currently produces discrete
steel plate in dimensions up to 102" wide and 3/16" to 6" thick. The
Combination Mill as currently planned would be capable of producing
widths from 48" to 136", in thicknesses
2
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.
Capital Improvements at the Pueblo Steel Mill. The Company
anticipated making significant capital additions to the Pueblo Steel
Mill as part of its strategy in acquiring the facility in 1993. In
1993, work began on a series of capital improvements principally to
the steelmaking facility, rod and bar mills and rail production
facilities. The capital improvement program at the Pueblo Steel Mill
is expected to cost approximately $172 million from 1994 through 1996
and be substantially completed by the end of 1995. Certain major
improvements are expected to be completed by the first quarter of
1995, including upgrading from ingot to continuous casting for rail
production, enhancement of the Company's ability to produce specialty
grades of steel, and construction of a new rod/bar mill. These changes
are expected to increase yields, improve productivity and quality, and
expand the Company's ability to offer specialty rod and bar products.
The primary components of the capital improvements at the Pueblo Steel
Mill are outlined below.
The Company completed in 1994 various capital improvements to the
steelmaking facility, including installation of a ladle refining
furnace, a vacuum degassing facility and upgrades to the continuous
casters. The Company anticipates that after the capital improvements
are completed, the Pueblo Steel Mill will be capable of producing
approximately 1.2 million tons of hot metal annually. The Company
expects that these and other related improvements will reduce the cost
of production of molten steel, improve existing product quality and
enable the Pueblo Steel Mill to produce additional specialty grades of
steel including alloy, high carbon and super clean steels.
The current rod and bar mills at the Pueblo Steel Mill are
relatively older mills located in separate facilities and generate
significant costs as the Company shifts production between them in
response to market conditions. During January of 1995, the Company
completed a new combination rod and bar mill with a new reheat furnace
and a high speed rod train. The new facility will be 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 and reduce the
average cost per ton of rod and bar, principally as a result of
decreased labor and energy requirements and increased product yields.
In addition, these improvements will enable the Company to increase
production of higher margin specialty products, such as high carbon
rod, merchant bar and other specialty bar products, and produce larger
rod coil sizes, which the Company believes are preferred by many of
its customers.
Rails are currently produced by ingot casting using processes
which incur significant energy costs and yield losses as the ingots
are reheated, reduced to blooms and then rolled into rails. During the
first quarter of 1995, improvements in the melt shop are expected to
replace ingot casting with more efficient continuous casting methods
allowing the Company to cast directly into blooms. This is expected to
increase rail yields from approximately 79 percent to approximately 95
percent and decrease the average cost of rail produced. The capital
improvements are also expected to include installation of technology
capable of producing approximately 200,000 tons annually of in-line
head-hardened rail. As a result of these improvements, the Company
expects to provide a functionally superior higher margin product and
to be favorably positioned to increase its share of the domestic rail
market.
BUSINESS STRATEGY
The Company seeks to be a low cost producer of specialty and
commodity steel products and is implementing specific strategies to
achieve that goal. The Company's diversified product line and flexible
manufacturing operations allow it to manage its product mix and reduce
the impact of individual product cycles on the Company's overall
performance. The Company's manufacturing flexibility allows it, on
short notice, to allocate its production resources to products which
it believes will enhance profitability. Having completed the Camrose
and CF&I acquisitions, which expanded the Company's product offerings
from two to eight, the Company's efforts are focused on reducing
production costs and emphasizing the manufacture of higher margin,
high quality specialty products. The Company considers that
substantial opportunities exist to reduce costs significantly and
improve financial performance through execution of the following
strategies:
3
Invest in Efficient and Flexible Manufacturing Technologies. As
part of its effort to reduce manufacturing costs significantly,
upgrade its steelmaking facilities and improve product quality, the
Company initiated an expanded capital expenditure program in 1993,
including approximately $385 million of planned expenditures from 1994
through 1996. Major components of the program yet to be completed
include (i) construction of the new Combination Mill at the Portland
Steel Mill and (ii) improvements to the rail production process at the
Pueblo Steel Mill designed to expand the product mix into higher
margin specialty products and increase manufacturing flexibility.
Manufacture Higher Margin Specialty Products. The Company has
been expanding the number of specialty steel products it produces. The
Company's emphasis on higher profit margin specialty steel products
will further enhance its ability to reduce the impact of individual
product cycles on the Company's overall performance. The Company
considers the market for these products to be less subject to
competitive pressures because of the significant capital requirements
necessary to produce products of the requisite quality. The Company's
current range of specialty steel products includes alloy plate, heat
treated plate, and large diameter and ERW pipe manufactured to
demanding specifications. The Company's capital expenditure program at
CF&I will enhance its ability to produce head-hardened and premium
rail and a variety of specialty rod and bar products.
Pursue Alternative Raw Material Sources. To reduce the effects
of scrap price volatility and to insure access to quality raw
materials, the Company is seeking to decrease its dependence on steel
scrap as an input for the production process. The Company has
successfully integrated directly reduced iron in briquetted form
("HBI") into the production process at both the Portland and Pueblo
Steel Mills as a low residual scrap substitute. Because HBI is
typically purchased on a contract basis (whereas scrap is typically
purchased on the spot market), it provides some insulation from the
price fluctuations experienced in the scrap market. In 1994, the
Company used approximately 107,000 tons of HBI as substitute for
approximately 13% of total scrap requirements at the Portland Steel
Mill. The Company intends to increase the amount and percentage of
HBI or other substitutes used in the production process.
4
PRODUCTS
OVERVIEW
The following table sets forth for the periods indicated the
tonnage shipped and the Company's total shipments by product class.
TONS SHIPPED
----------------------------------
PRODUCT 1994 1993(2) 1992(1)
------- --------- --------- ---------
Oregon Steel Division:
Commodity Plate................ 261,400 292,500 241,200
Specialty Plate................ 162,700 143,700 138,500
Large Diameter Pipe............ 356,300 248,600 269,500
ERW Pipe....................... 94,900 75,100 16,100
Other.......................... 45,400 18,400 -
--------- --------- -------
Total Oregon Steel Division.. 920,700 778,300 665,300
CF&I Steel Division(2):
Rail........................... 246,600 185,600 -
Rod............................ 199,200 183,800 -
Bar Products................... 121,000 115,300 -
Wire........................... 65,000 53,300 -
Seamless Pipe.................. 121,400 81,500 -
Other.......................... 12,400 5,200 -
--------- --------- -------
Total CF&I Steel Division.... 765,600 624,700 -
--------- --------- -------
Total Company................ 1,686,300 1,403,000 665,300
========= ========= =======
- -------------
(1) Results for 1992 include the results of operations of the Camrose
Facility from the date of the Camrose acquisition on June 30,
1992.
(2) Results for 1993 include the results of operations of the Pueblo
Steel Mill from the date of the CF&I acquisition on March 3, 1993.
Oregon Steel Division
Steel Plate. The Company's commodity grade steel plate is
produced at the Portland Steel Mill, and at the Fontana Plate Mill
prior to its closure in December 1994. Commodity steel plate products
currently consist of hot-rolled carbon plate varying in widths from
48" to 136" and in thicknesses varying from 3/16" to 3". Following the
closure of the Fontana Plate Mill, the Company will only be able to
produce steel plate up to 102" wide until the Combination Mill is
completed. Commodity steel plate is used in a variety of applications,
such as the manufacture of storage tanks, machinery parts, barges and
ships.
In addition to commodity grades of steel plate, the Company
produces a wide range of specialty steel plate. Specialty steel plate
products consist of hot-rolled carbon, heat treated and alloy steel
plate currently produced in widths of 48" to 136" and in thicknesses
varying from 3/16" to 8". Specialty steel plate has superior strength
and performance characteristics for particular applications such as
the manufacture of construction, mining and logging equipment,
pressure vessels, oil and gas transmission pipe and the fabrication of
bridges and high-rise buildings. Specialty steel plate is typically
made to order for customers that wish to vary the properties of the
steel plate product, 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 of elements such as
carbon, manganese, chromium, molybdenum, nickel, boron, aluminum and
titanium and through the removal of elements such as phosphorous and
sulfur; by vacuum degassing; by temperature control while rolling; or
by heat treating the plate.
The Company has committed considerable capital to its ability to
offer a wide range of specialty steel plate products to its customers.
The Company recently expanded its heat treating production capacity at
the Portland Steel Mill by approximately 50 percent to 90,000 tons
annually. The
5
heat treating process of quenching and tempering improves the strength
and hardness of the steel plate. Quenched and tempered steel is used
extensively in the mining industry, the manufacture of heavy
transportation equipment and military armor. In 1994 the Company
installed a hot leveler at the Portland Steel Mill, 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.
The Company also offers customers the option of surface
processing steel plate, which includes descaling (the removal of
oxides from the surface of the plate) and painting. This process
provides a more efficient and economical means of cleaning and coating
steel products than the traditional sandblasting or hand cleaning
methods.
The Portland Steel Mill, on the basis of an audit conducted in
1992, has received registration under ISO-9002. This registration is
the emerging international designation for demonstrating that the
Company systems support the production of quality products. This was
one of the first ISO-9002 registrations of a steel mill in the United
States.
Large Diameter Steel Pipe. The Company manufactures large
diameter pipe at its Napa and Camrose Facilities. The Company has
manufactured large diameter pipe since 1988, after the Company
acquired the Napa Facility.
The Napa Facility pipe mill is one of the most versatile pipe
mills in the industry. The mill can produce large diameter steel pipe
ranging from 16" to 42" in diameter with wall thicknesses of up to
1-1/16" and lengths of up to 80 feet. In addition, the mill can
process two different sizes of pipe simultaneously in its two
finishing sections. Moreover, the Company can vary the pipe's
hardness, impact resistance, strength and ability to be welded to meet
the customers' specifications. The Company offers customers the option
of surface processing the steel pipe, which includes descaling and
internal and external coating on-site. The external coating facility
was acquired by Napa in 1993. During 1989, the Company completed the
construction of a full body ultrasonic inspection facility at the Napa
Facility. If requested by the customer, this facility inspects the
ends, long seam welds and entire body for all types of steelmaking and
pipemaking imperfections and records the results for a permanent
record.
The Camrose Facility produces large diameter steel pipe ranging
from 20" to 42" with maximum wall thickness limited to about 70
percent of that produced at the Napa Pipe Mill. The pipe can be
produced in lengths up to 80 feet. Unlike Napa, the mill has one
finishing section and can produce one size pipe at a time.
The Company's large diameter pipe is used primarily in
pressurized underground or underwater oil and gas pipelines where
quality is critical.
The Company's ability to produce high quality large diameter pipe
was recently enhanced by the installation of the vacuum degassing
facility at the Portland Steel Mill. The vacuum degassing process
reduces the hydrogen content of the final product and increases
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.
The closure of the Fontana Plate Mill in the fourth quarter of 1994
will require the Company to seek outside sources of steel plate if it
chooses to produce steel pipe in diameters greater than 32" until the
Combination Mill is completed.
Electric Resistance Welded Pipe. The Company produces smaller
diameter ERW pipe at the Camrose Facility. ERW pipe is produced in
sizes ranging from approximately 4" to 16" outside diameter. The pipe
is manufactured using coiled steel rolled on a high frequency electric
resistance weld mill. The principal customers for this product are oil
and gas companies that use it for gathering lines to supply product to
feed larger pipeline systems.
Demand for ERW pipe produced at the Camrose Facility is largely
dependent on the level of exploration and drilling activity in the gas
fields of western Canada.
6
CF&I Steel Division
Rail. The Company produces standard and premium head-hardened
rail at its Pueblo Steel Mill. The Pueblo Steel Mill is the sole
manufacturer of rail products west of the Mississippi River and one of
only two rail manufacturers in the United States. Rails are
manufactured in the five most popular rail weights (115 lb/yard
through 136 lb/yard), in 39 and 80 foot lengths as well as quarter
mile welded strings.
As part of the capital expenditure program the Company will
improve its rail manufacturing facilities to produce in-line head-
hardened rail instead of utilizing the current off-line process. The
Company has recently licensed technology (known as deep head-hardened
or DHH technology) from Nippon in connection with Nippon's investment
in New CF&I, Inc.
Rod Products. During 1994, the Company produced low carbon rod
products at the Pueblo Steel Mill in diameters ranging from 7/32" to
3/4", sold principally to wire drawers in the midwest and western
states. Typical end uses include a variety of construction and
agricultural applications such as nails, bailing wire, chain link and
woven wire fencing.
Construction of a new 600,000 ton rod/bar mill was completed by
the Company in early 1995 increasing rod production and adding a range
of high carbon product capabilities. With the rod/bar mill, the
Company is the first producer to make 6,000 pound coils in the U.S.
The new finishing facilities provide a range of rod products from
.197" to 1" in diameter.
Bar Products. Bar products are available in straight lengths
(rounds .625" to 2.5" in diameter; rebar nos. 4 to 11) and coils
(rounds .75" to 1.5"; rebar nos. 5 to 11). Products include
reinforcing bar, coiled rebar, merchant and specialty bar products.
Wire Products. The Company uses some of its own rod and draws
wire to produce various wire products at its Pueblo Steel Mill; and is
one of the few manufacturers which produce a wide variety of wire
products. Products include fencing, barbed wire, nails, staples,
bailor wire, welded wire fabric, rebar tie wire, and both high and low
carbon manufacturer's wire.
Seamless Pipe. Seamless pipe produced at the Pueblo Steel Mill
consists of seamless casing, coupling stock, and line pipe. Seamless
pipe casing is used as a structural retainer for the walls of oil or
gas wells. Line pipe is used to transport liquids and gasses above
ground. The Company's seamless mill produces pipe in standard lengths
(5" to 10-3/4" in diameter). The Company's production capability
includes both carbon and heat treated tubular products.
RAW MATERIALS
The Company's principal raw material for the Portland and Pueblo
Steel 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.
The purchase price for scrap is 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 to the Company can vary
significantly, and product prices cannot always be adjusted,
especially in the short-term, to recover the costs of increases in
scrap prices.
The Company maintains a 30 to 45 day supply of scrap to insulate
itself to some extent against possible short-term price fluctuations.
The Company purchases scrap through many outside dealers and is not
dependent on any single supplier or group of suppliers at its Portland
Steel Mill. The Pueblo Steel Mill purchases most of its scrap through
a broker. The Company believes that adequate supplies of scrap are
readily available from a number of sources, but that current demand
will keep pricing relatively high.
The Company also purchases a quantity of "HBI" for use as a
substitute for steel scrap. The successful integration of this
material into the steelmaking process provides the Company with an
alternate source of low residual material. Because this material is
purchased on a contract basis it provides some insulation from the
price fluctuations experienced in the scrap market. During 1993 and
1994, the Company also purchased pig iron as a scrap substitute and
believes it can be used successfully in limited quantities. With the
shift in the Company's product mix from carbon grades
7
to higher quality grades of steel, the need for higher quality scrap
must be assured. The availability of higher grades of scrap in
sufficient quantities may not be available in the Company's
traditional scrap markets, which will require the use of an alternate
source of metallics.
During the first quarter 1994, the Company signed a shareholders
agreement to purchase an approximately 13 percent equity interest in a
joint venture project (the "HBI Project") with several other entities
to design, construct and operate an industrial plant in Venezuela for
the processing of iron oxides into HBI. The Company believes that the
HBI Project has the potential to provide a long-term source of supply
of HBI. The plant is expected to have a rated design capacity of one
million metric tons per year and cost approximately $255 million. As
the HBI Project is currently structured, the Company will be required
to purchase 200,000 metric tons of HBI per year from the HBI Project.
The Company expects that its initial cash investment will be
approximately $15 million. Like other participants in the HBI Project,
however, the Company will be responsible for paying its share of cost
overruns or related financing shortfalls associated with the
construction or operation of the facility. The HBI Project is expected
to obtain non-recourse debt financing for approximately 60 percent of
its initially estimated capital needs. The shareholders agreement will
not become effective, and construction will not commence, until
agreements to provide debt financing to the HBI Project have been
obtained and certain other conditions satisfied. Plant construction is
expected to start in 1995 and plant operation is expected to commence
approximately 30 months thereafter, absent unforeseen delays or
difficulties.
In addition to the HBI Project, the Company is pursuing other
direct reduction technologies, such as iron carbide and direct
smelting. The Company may participate in one or more joint ventures
for these processes and is considering several possible projects.
However, the Company has not yet entered into any agreements or
letters of intent for any such projects except that, in August 1994,
the Company entered into an agreement to form a temporary joint
venture to explore the feasibility of constructing and operating an
iron carbide plant in the Caribbean. The agreement provides that,
following completion of the initial feasibility study, the parties
will decide whether to abandon or pursue the project. The Company is
unable to predict the outcome of this study or whether this project
will be pursued.
The Company purchases semi-finished steel slab from third parties
to supplement steel production capacity and enable it to produce steel
plate in thicknesses greater than three inches. Generally, the Company
has been able to adjust product prices in response to increases in
slab prices. The world demand for slab can, however, significantly
affect its purchase price and there can be no assurance that the
Company will be able to adjust product prices to offset increases in
slab prices in the future. The Company purchased significant
quantities of slab in the first six months of 1994, but was a net
seller of slab in the last half of 1994.
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 sells steel products 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, for tubular
products, and for rod and bar, rail and wire products. As of December
31, 1994, the Company employed 30 direct sales people and 20 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 1994, the Company did not
derive more than 10 percent of its sales from any single customer.
Except for contracts entered into from time to time to supply large
diameter pipe to significant projects, the Company does not have any
significant ongoing contracts with customers to purchase steel
products, and orders placed with the Company generally are cancelable
by the customer.
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.
8
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 contracts subject to
renegotiation.
Oregon Steel Division
Customers for the Company's commodity steel plate are typically
located in the western United States, primarily in the Pacific
Northwest and California. The Company's commodity steel plate is
typically sold to 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.
The Company believes the market for commodity steel plate is
mature and subject to overcapacity, and anticipates increased
competitive pressure on both volumes and prices. The Company believes
that its shipments of commodity plate will increase, however, as the
Combination Mill expands the Company's product offerings to include
coiled plate and lighter gauges.
Customers for specialty steel are located throughout the United
States, but the Company is most competitive in the west, southwest and
midwest where transportation costs are less of a factor. Typical
customers include service centers and equipment manufacturers. Typical
uses include pressure vessels, construction and mining equipment and
military armor.
Large diameter pipe is marketed on a global basis and sales
generally consist of a small number of large orders generated from
natural gas pipeline companies, public utilities and oil and gas
producing companies. During 1993, the Company began to market large
diameter pipe internationally, and the Company believes this will
continue to be an active market for its pipe products in the longer
term.
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 Facility is most competitive in western Canada. Sales of
large diameter pipe generally consist of a small number of large
orders and generally involve the Company responding to requests to
submit bids.
The principal customers for ERW pipe produced at the Camrose
Facility are in the provinces of Alberta and British Columbia, where
most of Canada's natural gas and oil is located, as well as the
northwestern United States. The primary customers for this product are
oil and natural gas companies who utilize ERW for gathering lines to
supply their product to feed the larger distribution pipelines.
CF&I Steel Division
The primary customers for the Pueblo Steel Mill's rail are the
major U.S. railroads. Rail is also sold directly to rail contractors,
transit districts and short-line railroads. The Company estimates that
the market for rail in the United States was approximately 650,000
tons in 1994 and that its share of the domestic rail market in 1994
was approximately 38 percent (with most of the Company's rail
shipments made to customers in the western United States). Imports
accounted for approximately 25 percent. The Company believes its
proximity to western rail markets benefits the Company's marketing
efforts in these markets and contributes to the Company's market
share.
Rail produced using the improved in-line technology is considered
by many rail customers to be more durable and higher quality rail than
that produced with existing off-line techniques and the Company
believes, based on discussions with its rail customers, that head-
hardened rail produced using DHH technology is preferred over head-
hardened rail manufactured with other technologies. The Company
believes that this capability, to be completed in the first quarter of
1996, will further enhance the Company's position in the domestic rail
market. The Company estimates, based on AISI data and internal
estimates, that premium rail represents approximately 40 percent of
the domestic rail market. The Company believes the domestic market for
premium rail will expand as in-line, head-hardened rail becomes more
available from domestic producers at competitive prices.
Seamless pipe is sold primarily through distributors to major and
independent oil exploration and production companies. Sales of line
pipe are made both through distributors and directly to oil
9
and gas transmission and production companies. The market for the
Company's seamless pipe product is primarily domestic and 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. The rig
count in the United States (and, consequently, the consumption of
seamless pipe) has been depressed in recent years.
During 1994 the Company sold its bar products (primarily
reinforcing bar) to fabricators and distributors. The majority of its
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.
The Company's wire rod products are sold primarily to wire
drawers in the western United States. The demand for wire rod is
driven by wire demand and is dependent upon a wide variety of markets,
including agricultural, construction and the durable goods segments.
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. The agricultural market remains constant but the
construction market is cyclical.
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, as 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.
These trends have caused the Company to seek new overseas markets for
large diameter pipe, and to seek higher quality, niche markets for its
plate. In addition, one of the Company's competitors for steel plate
in the western United States has recently resumed production (at less
than full capacity) after having been shut down for capital
improvements; the Company expects increased competition as that
competitor increases production.
The Company competes in its product markets primarily on the
basis of product quality, price, and responsiveness to customer needs.
Competition within the steel industry is driven by overcapacity in
most products and is intense. Some of the Company's competitors are
larger, have greater capital resources than the Company and have more
modern technology and relatively low labor and raw material costs.
Domestic steel producers face significant competition from foreign
producers, although currency fluctuations have dampened this
competition in the U.S. in recent years.
Oregon Steel Division
Some of the Company's steel plate competitors are larger, have
greater capital resources than the Company and have modern technology
and relatively low labor and raw material costs. Principal competitors
in the commodity steel plate market include Geneva Steel Company,
located in Utah, IPSCO, located in Regina, Saskatchewan, and several
other foreign producers. Principal competitors in the market for
specialty steel plate include Lukens Steel Company, U.S. Steel
Corporation and several foreign producers.
Steel plate producers in the western United States have faced
competition in past years from foreign producers, including producers
in Japan, certain members of the European Economic Community, Korea,
Brazil and Canada. The effects of foreign competition were mitigated
in recent years by the decline and continued weakness of the U.S.
dollar relative to several foreign currencies. The Company believes
that its efforts in increasing productivity, reducing production costs
and shifting into higher margin product niches should enable the
Company to compete effectively with both foreign and domestic
producers even if the dollar strengthens relative to foreign
currencies.
The Company believes that competition in the market for large
diameter pipe is based primarily on quality, price and responsiveness
to customer needs. The Company competes on a global basis and believes
its ability to manufacture pipe of sufficiently high quality will
enable it to compete effectively.
10
Principal domestic competitors in the large diameter pipe market
at this time are Berg Steel Pipe Corporation, located in Florida, and
Bethlehem Steel Corporation, located in Pennsylvania. International
competitors consist primarily of Japanese and European pipe producers.
The principal Canadian competitor is IPSCO, located in Regina,
Saskatchewan. Demand for the Company's pipe in recent years is
primarily a function of new construction of oil and gas transportation
pipelines and to a lesser extent maintenance and replacement of
existing pipelines. Construction of new pipelines domestically depends
to some degree on the level of oil and gas exploration and drilling
activity, which has declined in recent years.
The competition in the market for ERW pipe is based on price,
product quality and responsiveness to customers. The need for this
product has a direct correlation to the drilling rig count in the
United States and Canada. Principal competitors in the ERW product in
western Canada are IPSCO located in Regina, Saskatchewan and
Prudential 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.
Consequently, domestic rail demand is projected to be stable for the
next several years. Imports have been a significant factor in the
domestic premium rail market in recent years. Premium rail represents
approximately 25 percent of the domestic market and is expected to
increase over the next few years. The Company's capital expenditure
program at CF&I will give the rail production facilities the
continuous cast steel and in-line head hardening rail capabilities
necessary to compete with the level of cost and quality available from
other producers. Pennsylvania Steel Technologies is the only other
domestic rail producer.
The Company's primary competitors in OCTG include a number of
domestic and foreign manufacturers, some of which have significantly
greater resources than the Company. The Company enjoys a freight
advantage over eastern producers in shipping to some of the major oil
drilling areas. The Company also 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. Some
of these mills utilize reinforcing bar as an incremental product to
keep mills operating at capacity. With the new rod/bar mill, market
expansion into other geographical locations is feasible because of the
addition of higher valued products, such as MBQ and SBQ products.
The Company's market area on wire and wire rod products is
considered to be west of the Mississippi River. The Company completed
construction of a new rod/bar mill which provides substantially larger
coils and reduced manufacturing costs. Domestic rod competitors
include GST, North Star Steel, Keystone Steel and Wire, and
Northwestern Steel & Wire. Major wire producers include 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 Steel 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, is managed in
accordance with applicable laws and regulations.
In 1993, the Environmental Protection Agency ("EPA") concluded a
site assessment of the Portland Steel Mill. The review ranked the
facility as a medium/low corrective action priority for identified
Solid Waste Management Units. The Company is proceeding with an
internal corrective action schedule. This schedule will make portions
of the Company's property useable for future development and is
expected to be completed by September 1995. The cost of these
corrective action improvements is estimated at approximately $1.2
million.
11
The property and building at which the Fontana Plate Mill is
located are leased to the Company. The Fontana Plate Mill was formerly
part of a larger integrated steel plant (the "Mill") operated on
property (the "Mill Property") surrounding the Fontana Plate Mill.
Prior to the termination of steel production at the Mill in 1983, the
Mill owner generated by-products that currently are defined as
hazardous by federal and California regulations. 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 has not included sampling
at the Fontana Plate Mill site. The Company has conducted only limited
testing at the Fontana Plate Mill site, and there can be no assurance
that the levels of hazardous substances in the subsurface soils and
groundwater at the Fontana Plate Mill are within permissible limits.
The Fontana Plate Mill operation is being terminated in 1995 and the
Company signed a lease termination agreement with the lessor on
January 18, 1995. A $900,000 accrual has been established for
restoring the leased premises. (See Note 13 to the Consolidated
Financial Statements.)
Prior to the acquisition of the Napa Facility by the Company, the
prior owner of the Napa Facility 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 Facility. The prior owner of the Napa Facility entered
into a stipulated judgment with the County of Napa which required a
site investigation of the Napa Facility 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 Facility, the Company's
subsidiary, Napa Pipe Corporation, is obligated by contract 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 Facility were submitted to local, regional and state
environmental authorities in February 1988. The Company is continuing
to negotiate certain terms of the remediation plans with such
environmental authorities.
In addition to local, regional and state environmental
authorities, the EPA conducted an investigation of the Napa Facility
and has taken soil and water samples at the Napa Facility. The
Company's proposed plans for investigating the soil and water
conditions at the Napa Facility were furnished to the EPA in March
1988. While awaiting possible further response from the EPA, the
Company is proceeding with its remediation plans as described in the
preceding paragraph. In April 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 Facility.
The total cost of the remedial action that may be required to
correct existing environmental problems at the Napa Facility,
including remediation of contaminants in the soil and groundwater,
depends on the eventual requirements of the relevant regulatory
authorities. As of December 31, 1994, the Company had expended $6.7
million for remediation and had reserved an additional $2.8 million to
cover future costs arising from environmental issues relating to the
site.
The Company owns a 60 percent interest in Camrose Pipe Company
located in Camrose, Alberta, Canada. A preliminary assessment of the
property indicates the potential presence of subsurface petroleum
contamination as a result of previous operations. The assessment also
identifies the potential for waste waters to have impacted the site.
An internal investigation is scheduled for 1995 to determine the
extent of this impact, if any.
At December 31, 1994, the Company had accrued a reserve of $34.1
million for environmental remediation at the Pueblo Steel Mill site.
This reserve is based upon a range of estimated remediation costs of
$23.1 million to $43.6 million at that date. The Company's estimate of
this environmental reserve was based on two separate remediation
investigations conducted by independent environmental engineering
consultants. The estimated costs were based on then available
technologies and laws and regulations in effect at the time. The
reserve includes costs for Resource Conservation and Recovery Act
facility investigation, corrective measures study, remedial action,
and operation and maintenance of the remedial actions taken. The State
of Colorado has issued
12
public notice for the post-closure permit of two historic hazardous
waste units at the CF&I facility. As part of the post-closure permit
requirements, CF&I must begin a corrective action program for the 82
solid waste management units at the facility. CF&I and the State of
Colorado Department of Public Health and Environmental are finalizing
a prioritized schedule of corrective actions to be completed which are
substantially reflective of a straight-line rate of expenditure over
30 years. The State of Colorado stated 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. It is
currently anticipated that the reserve is adequate to cover the
remediation costs.
In November 1990 the President of the United States signed into
law the Clean Air Act Amendments of 1990. This law has imposed new
responsibilities on many industrial sources of air emissions,
including plants owned by the Company. The Company cannot determine at
this time the financial impact of the new law since 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 will
be submitting Title V permits for the Portland and Pueblo in 1995.
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. 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 can be 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 so reserved.
EMPLOYEES
As of December 31, 1994, the Company had 3,019 full-time
employees. The Company's 972 employees at the Portland Steel Mill,
Fontana Plate Mill, Napa Facility and corporate headquarters are not
represented by a union. At the Pueblo Steel Mill, 1,439 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 95 employees
of the Camrose Facility are members of the Canadian Autoworkers Union.
A contract for these employees was renegotiated in January 1994 and
expires on January 31, 1997. The Company believes it has a good
relationship with its employees.
The domestic employees of the Oregon Steel Division participate
in the ESOP. As of December 31, 1994 the ESOP owned approximately 12
percent of the Company's common stock. Common stock is contributed to
the ESOP, as decided annually by the Board of Directors. The Company
also has a profit participation plan for its domestic employees of
both the Oregon Steel Division and the CF&I Steel Division which
permits eligible employees to share in the pre-tax profits of their
division unit.
13
ITEM 2. PROPERTIES
Oregon Steel Division
The Portland Steel 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, slab casting equipment and a plate rolling
mill. The Company's 24,500 square foot office building and its steel
mill facilities occupy approximately 84 acres of the site. The
remaining 63 acres consist of two waterfront sites totaling 59 acres
and a four-acre site. The adjacent water channel accommodates ocean-
going vessels. The Company's heat treating facilities are located near
its principal facilities on a five acre site owned by the Company. In
addition, the Company owns 74 acres of industrial property nearby, of
which 44 acres are leased.
The Company owns approximately 152 acres in Napa, California. The
Company's large diameter pipe mill occupies approximately 92 of these
acres. The Company also owns a steel fabricating facility located
adjacent to the pipe mill on this site. The fabricating facility is
not currently used 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 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 revolving credit facility (see Note 6 to
the Consolidated Financial Statements).
The land and buildings at the Fontana Plate Mill were leased to
the Company under a net lease. In connection with the closure of the
Fontana Plate Mill, the Company signed a lease termination agreement
with the lessor on January 18, 1995 and has agreed to vacate the
premises by June 30, 1995.
CF&I STEEL DIVISION
The Pueblo Steel 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 6-
strand continuous billet caster and a 6-strand continuous round caster
for producing semi-finished steel, and five finishing mills for
conversion of semi-finished steel to a finished steel product. These
finishing mills consist of a rail mill, a seamless tube mill, an 11"
bar mill, a rod mill and a wire mill. During 1993 the Company began a
major capital improvement program of CF&I. This program includes the
installation of two new reheat furnaces, a new rod mill, a continuous
caster and the upgrading of the steelmaking facilities with a new
ladle furnace and vacuum degassing system.
At December 31, 1994, the Company had the following nominal
capacities which are affected by product mix:
PRODUCTION
CAPACITY 1994
(TONS) (TONS)
--------- ----------
Portland Steel Mill: Melting.......... 800,000 713,000
Rolling.......... 425,000 402,500
Fontana Plate Mill Rolling.......... 750,000 312,700
Napa Facility Steel Pipe....... 350,000 258,200
Camrose Steel Pipe....... 326,000 169,000
Pueblo Steel Mill: Melting.......... 1,000,000 902,900
Finishing Mills.. 1,500,000 787,300
14
ITEM 3. LEGAL PROCEEDINGS
The Company is party to 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were voted upon during the fourth quarter of 1994.
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, their age as
of February 28, 1995, 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 55 Chairman of the July 1985
Board of Directors
Chief Executive
Officer and President
L. Ray Adams 44 Vice President of Finance March 1991
and Chief Financial
Officer
Christopher D. Cassard 41 Treasurer January 1994
Joe E. Corvin 50 Senior Vice President of April 1994
Manufacturing
and Chief Operating
Officer
Edward J. Hepp, Jr. 49 Senior Vice President of January 1995
Commercial
Richard J. Kasten 50 Vice President of Quality February 1992
and Metallurgy
LaNelle F. Lee 57 Secretary April 1994
Jack C. Longbine 48 Vice President of Employee February 1992
Resources
Robert R. Mausshardt 62 Vice President of March 1984
Marketing, Tubular
Products
Steven M. Rowan 49 Vice President of February 1992
Materials and
Transportation
Each of the executive officers named above has been employed by
the Company in an executive or managerial role for at least five
years, except Edward J. Hepp, Jr. and Christopher D. Cassard. Mr. Hepp
joined the Company in September of 1991 and until January 1995 served
as Vice President of Commercial. In January 1995 he was elected Senior
Vice President of Commercial. From 1972 until 1991 he was with Lukens
Steel Company where his last position was Manager of Product Sales.
Mr. Cassard joined the Company in August of 1992 as Assistant
Treasurer. 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.
15
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, 1994, the number of common
stockholders of record was 846. Information on quarterly dividends and common stock prices is shown on page 23 and
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1994 1993 1992 1991 1990
----------- ----------- ---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OTHER DATA AMOUNTS)
INCOME STATEMENT DATA:
Sales...................................... $ 838,268 $ 679,823 $397,722 $489,357 $331,234
Cost of Sales.............................. 761,335 608,236 316,455 386,517 252,036
Provision for rolling mill closures........ 22,134 - - - -
Selling, general and administrative
expenses................................. 50,052 41,447 29,785 28,910 21,610
Contributions to employee stock
ownership plans........................... 738 753 3,501 5,002 4,001
Profit participation....................... 2,336 4,527 10,510 14,284 11,362
---------- ---------- -------- -------- --------
Operating income......................... 1,673 24,860 37,471 54,644 42,225
Other income (expense), net................ (1,579) (3,421) 955 1,591 (100)
Settlement of litigation................... - 2,750 (5,040) - -
Gain on sale of subsidiary's
common stock............................. 12,323 - - - -
Minority interests......................... (3,290) (1,996) 1,097 - -
Income tax benefit (expense)............... 2,941 (7,388) (14,506) (20,770) (15,990)
---------- ---------- -------- -------- --------
Net income $ 12,068 $ 14,805 $ 19,977 $ 35,465 $ 26,135
========== ========== ======== ======== ========
COMMON STOCK INFORMATION:
Per common share:
Primary and fully diluted net
income per common and
common equivalent share................ $.60 $.75 $1.04 $1.89 $1.64
Cash dividends declared.................... $.56 $.56 $.56 $.50 $.42
Weighted average common shares and
common equivalents outstanding........... 19,973 19,822 19,183 18,735 15,959
BALANCE SHEET DATA:
Working Capital............................ $ 141,480 $ 139,461 $ 99,444 $ 122,780 $ 38,946
Total assets............................... 665,733 549,670 354,252 323,529 246,749
Current liabilities........................ 117,986 116,322 55,522 43,298 86,008
Long-term debt............................. 187,935 76,487 - 3,417 5,204
Total stockholders' equity................. 275,883 275,242 257,515 245,006 137,078
OTHER DATA:
Total tonnage sold:
Oregon Steel Division (1):
Plate products......................... 424,100 436,200 379,700 344,100 336,600
Pipe products.......................... 451,200 323,700 285,600 418,600 212,900
Semi-finished products................. 45,400 18,400 - - -
---------- ---------- -------- -------- --------
920,700 778,300 665,300 762,700 549,500
CF&I Steel Division...................... 765,600 624,700 - - -
---------- ---------- -------- -------- --------
1,686,300 1,403,000 665,300 762,700 549,500
========== ========== ======== ======== ========
Operating margin (2)....................... 2.8% 3.7% 9.4% 11.2% 12.7%
Operating income per ton sold (2).......... $14.12 $17.72 $56.32 $71.65 $76.84
- ----------------
(1) The Oregon Steel Division consists primarily of the operations of Oregon Steel Mills, Inc., Napa Pipe
Corporation, Oregon Steel Mills - Fontana Division, Inc., and Camrose Pipe Company.
(2) Excluding provision for rolling mill closures in 1994.
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentages of sales represented by selected
income statement items and information regarding selected balance sheet data:
YEARS ENDED DECEMBER 31,
----------------------------------------
1994 1993 1992
------- ------- -------
INCOME STATEMENT DATA:
Sales.......................................................... 100.0% 100.0% 100.0%
Cost of Sales.................................................. 90.8 89.4 79.6
Provision for rolling mill closures............................ 2.6 - -
Selling, general and administrative expenses................... 6.0 6.1 7.5
Contribution to employee stock ownership plans................. .1 .1 .9
Profit participation........................................... .3 .7 2.6
------ ------ ------
Operating income............................................. .2 3.7 9.4
Interest and dividend income................................... .2 .1 .2
Interest expense............................................... (.5) (.6) -
Other income (expense), net.................................... .1 - -
Settlement of litigation....................................... - .4 (1.3)
Gain on sale of subsidiary's common stock...................... 1.5 - -
Minority interests............................................. (.4) (.3) .3
------ ------ ------
Pretax income................................................ 1.1 3.3 8.6
Income tax benefit (expense)................................... .3 (1.1) (3.6)
------ ------ ------
Net income................................................... 1.4% 2.2% 5.0%
====== ====== ======
BALANCE SHEET DATA (AT DECEMBER 31):
Current ratio.................................................. 2.2:1 2.2:1 2.8:1
Long-term debt as a percent of capitalization.................. 40.5% 21.7% -
Net book value per share....................................... $14.24 $14.23 $13.41
The following table sets forth by division, for the periods indicated, tonnage sold, revenues and average
selling price per ton:
YEARS ENDED DECEMBER 31,
------------------------------------------
1994 1993 1992
--------- --------- -------
TOTAL TONNAGE SOLD:
Oregon Steel Division
Plate products............................................... 424,100 436,200 379,700
Pipe products................................................ 451,200 323,700 285,600
Semi-finished products....................................... 45,400 18,400 -
--------- --------- -------
920,700 778,300 665,300
CF&I Steel Division............................................ 765,600 624,700 -
--------- --------- -------
Total........................................................ 1,686,300 1,403,000 665,300
========= ========= =======
REVENUES (IN THOUSANDS):
Oregon Steel Division.......................................... $498,794 $415,165 $397,722
CF&I Steel Division............................................ 339,474 264,658 -
-------- -------- --------
Total........................................................ $838,268 $679,823 $397,722
======== ======== ========
AVERAGE SELLING PRICE PER TON:
Oregon Steel Division.......................................... $542 $533 $598
CF&I Steel Division............................................ $443 $424 -
Average...................................................... $497 $485 $598
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. In pursuing this goal, the Company has sought
alternatives to its recent reliance on the domestic market for large
diameter pipe, the demand for which declined significantly during 1993
and 1994. In an effort to decrease the Company's reliance on the
domestic
17
large diameter pipe market and provide additional end use for its
steel plate, the Company purchased an interest in the Camrose Facility
in 1992. During 1993 and 1994 the Camrose Facility shipped 155,400 and
172,800 tons respectively of steel pipe. The Company believes there
will continue to be opportunities in Canada for steel pipe sales as
the large reserves of natural gas in western Canada continue to be
developed during the next several years. To expand the Company's steel
product lines and enter new geographic areas, a company subsidiary,
New CF&I, Inc., purchased a 95.2 percent interest in CF&I in March of
1993. CF&I shipped 624,700 tons and generated $264.7 million of
revenue in 1993 and shipped 765,600 tons and generated $339.5 million
of revenue in 1994.
During 1994, the Napa Facility shipped 278,400 tons of large
diameter pipe. Of this amount, approximately 148,000 tons were shipped
pursuant to contracts awarded from the Petroleum Authority of Thailand
and British Gas to provide large diameter pipe for international
pipeline projects. However, due to transportation and other costs and
price competition, margins on international large diameter pipe sales
in 1994 were significantly lower than on domestic large diameter pipe
sales in 1993. The Company believes that its ability to compete
effectively in the international large diameter pipe market will
depend in large part on efficiencies that it expects to realize
following the completion and operation of the Combination Mill.
A majority of the plate used by the Napa Facility to produce
large diameter pipe was rolled at the Fontana Plate Mill which is more
than 40 years old, costly to maintain and no longer cost competitive.
The high operating costs of the facility, the current depressed
pricing in the international large diameter pipe market and the lack
of domestic pipeline activity resulted in a decision to permanently
close the Fontana Plate Mill in the fourth quarter of 1994 (see Note
13 to the Consolidated Financial Statements).
Until the Combination Mill is operational, the Company is unable
to produce plate for pipe sizes larger than 32" in diameter but
believes if market conditions permit, it will be able to purchase
plate for pipe sizes larger than 32". The pricing for international
pipe began to erode in 1994 and the Company has temporarily withdrawn
from the international market for this product. However, the Company
believes the international market for large diameter oil and gas
transmission pipe could provide significant opportunities in the next
few years. The completion of the Combination Mill is expected to
provide the Company with manufacturing cost reductions and enhance its
global competitiveness as well as provide plate for all of the Napa
Facility's size requirements. The Company expects to utilize its
excess hot metal capacity at the Portland Steel Mill by selling slabs
during 1995 and 1996 subject to market demand.
The Company expects the cost of raw materials and alloys to
remain high during 1995. The Company implemented price increases
during 1994 on most of its products in an effort to offset the
increased raw material costs. Pricing of the Company's steel products
will continue to be affected by the competitive environment in the
respective product markets.
COMPARISON OF 1994 TO 1993
Sales. Sales in 1994 of $838.3 million increased 23.3 percent
from sales of $679.8 million in 1993. Tonnage shipments increased 20.2
percent to 1.7 million tons in 1994 from 1.4 million tons in 1993.
Selling prices in 1994 averaged $497 per ton versus $485 in 1993. Of
the $158.5 million sales increase, $137.4 million was the result of
volume increase and $21.1 million from higher average selling prices.
The increase in sales and shipments was primarily due to the
inclusion of a full year's operation of CF&I which was acquired on
March 3, 1993. Increased shipments of pipe from the Napa Facility
(278,400 tons in 1994 versus 168,300 tons in 1993) and Camrose
Facility (172,800 tons in 1994 versus 155,400 tons in 1993) also
contributed to the increase in shipments. The Company realized price
increases on substantially all products except large diameter pipe
shipped from the Napa Facility which declined by approximately 20
percent.
Gross Profits. Gross profits as a percentage of sales for 1994
were 9.2 percent compared to 10.6 percent for 1993. Gross profit
margins were negatively impacted by significantly lower selling prices
for large diameter pipe shipped from the Company's Napa Facility and
the associated higher costs of producing a higher quality grade of
steel slab at the Company's Portland Steel Mill for
18
producing low carbon pipe grades for international shipments. Gross
profit margins were also negatively affected by costs and lower
volumes relating to the completion and start-up of a portion of the
equipment upgrades which are part of the capital improvement program
at CF&I.
Provision for Rolling Mill Closures. During 1994 the Company
recognized a loss associated with the closure of the Fontana Plate
Mill and the provision for loss on the shutdown of the existing
Portland Steel Mill plate rolling mill at completion of the
construction of the Combination Mill. Of the $13.7 million after-tax
charge, approximately $13 million is a non-cash charge relating to the
write-off of production supplies and property, plant and equipment.
The decision to permanently close the Fontana plate mill was based
upon the high operating costs of the facility, the current depressed
pricing in the international large diameter pipe market and the lack
of domestic pipeline activity.
Selling, General and Administrative. Selling, general and
administrative expenses for 1994 increased $8.6 million or 20.7
percent compared with 1993 but decreased as a percentage of sales from
6.1 percent in 1993 to 6.0 percent in 1994. The dollar amount increase
is primarily a result of the inclusion of CF&I costs (which increased
by $4.1 million) for 12 months in 1994, versus 10 months in 1993 and
increased shipping costs related to welded pipe shipments from the
Company's Oregon Steel Division ($2.8 million).
Contribution to ESOP and Profit Participation. The contribution
to the ESOP was $738,000 in 1994 compared with $753,000 in 1993.
Profit Participation Plan expense was $2.3 million for 1994 compared
with $4.5 million for 1993. These reductions are the result of the
decreased profitability of the Company in 1994 versus 1993.
Interest and Dividend Income. Interest and dividend income on
investments was $1.6 million in 1994 compared with $.9 million in
1993. This increase was primarily due to interest earned on the
property tax refunds (see Note 13 to the Consolidated Financial
Statements).
Interest Expense. Total interest cost for 1994 was $11.3
million, an increase of $5.6 million compared to 1993. This increase
was primarily related to interest cost incurred on debt issued to fund
the CF&I capital expenditure program. Of the $11.3 million of interest
cost, $7.4 million was capitalized as part of construction in
progress.
Gain on Sale of Subsidiary's Common Stock. The $12.3 million gain
on sale of subsidiary's common stock was realized from the sale of a
10 percent equity interest in New CF&I, Inc. to a subsidiary of Nippon
Steel Corporation (see Note 13 to the Consolidated Financial
Statements).
Income Tax Expense. The Company's effective income tax rate for
state and federal taxes was a benefit of 32.2 percent for 1994
compared to an expense of 33.3 percent for 1993. The effective income
tax rate for both periods varied from the combined state and federal
statutory rates due to earned state tax credits and deductible
dividends paid on stock held by the ESOP and paid to ESOP
participants. Income before income taxes in 1994 included a $12.3
million gain on the sale of a 10 percent equity interest in New CF&I,
Inc. which was treated as a nontaxable item (see Note 13 to the
Consolidated Financial Statements). Income before income taxes in 1993
included a $2.8 million insurance recovery related to a 1992
litigation settlement that was treated as a nontaxable item.
COMPARISON OF 1993 TO 1992
Sales. Sales in 1993 of $679.8 million increased 70.9 percent
from sales of $397.7 million in 1992. Tonnage shipments increased
110.9 percent to 1.4 million tons in 1993 from 665,300 tons in 1992.
Selling prices in 1993 averaged $485 per ton versus $598 in 1992. Of
the $282.1 million sales increase, $441 million was the result of
volume increase offset by $158.9 million of lower average selling
prices.
The increase in sales and shipments was primarily due to the
inclusion of the operations of CF&I and a full year contribution from
Camrose Pipe Company which was formed on June 30, 1992. The decrease
in selling price was primarily due to a decline in large diameter
steel pipe shipments from the Napa Facility (168,300 tons in 1993
versus 255,100 tons in 1992) and a larger percentage of CF&I's product
mix to total sales and shipments. On average CF&I's products have a
lower selling price than steel plate and large diameter pipe products.
19
Gross Profits. Gross profits as a percentage of sales for 1993
were 10.6 percent compared to 20.4 percent for 1992. The gross profit
margin decline year to year is due to higher raw material costs,
principally scrap, which could not be completely recovered through
sales price increases. During 1993 the Company experienced an average
increase of $26 per ton in scrap cost over the average 1992 cost per
ton. This increase reversed the downward spiral in costs experienced
for certain raw materials during the previous two years. In addition,
the reduction of pipe production and pipe shipments in 1993 at the
Napa Facility negatively impacted the Company's ability to absorb
fixed costs at both the Napa Facility and the Fontana Plate Mill,
since a majority of the Fontana Plate Mill production was shipped to
the Napa Facility for conversion into steel pipe. Decreased Napa
Facility shipments also required the Company to increase its sales of
lower margin commodity steel plate products in order to sustain the
operating efficiency of the Portland Steel Mill. Production began on a
number of large pipe orders during the fourth quarter of 1993;
however, the revenues related to these orders was not recognized until
shipments began in the first quarter of 1994.
Selling, General and Administrative. Selling, general and
administrative expenses for 1993 increased $11.7 million or 39.2
percent compared with 1992 but decreased as a percentage of sales from
7.5 percent in 1992 to 6.1 percent in 1993. The dollar amount increase
is primarily a result of the Company's acquisitions of the Camrose
Facility and CF&I ($11.5 million), increased expenses related to
increased support required by the Company's growth and general
inflation ($2.3 million), offset by decreased shipping costs due to
reduced pipe shipments from the Napa Facility ($2.1 million). The
percentage decrease is due primarily to the increased sales volume in
1993.
Contribution to ESOP and Profit Participation. The contribution
to the ESOP was $753,000 in 1993 compared with $3.5 million in 1992.
Profit Participation Plan expense was $4.5 million for 1993 compared
with $10.5 million for 1992. These reductions are a result of the
decreased profitability of the Company in 1993 versus 1992.
Interest and Dividend Income. Interest and dividend income on
investments was $.9 million in 1993 compared with $.7 million in 1992.
This increase was primarily the result of an increase in average cash
and cash equivalent balances available for investment and an increase
in average interest rates during 1993 compared with 1992.
Interest Expense. Total interest cost for 1993 was $5.7 million,
an increase of $5.4 million compared to 1992. This increase was
primarily related to interest cost incurred on debt issued by CF&I for
its purchase of substantially all the assets of CF&I Steel
Corporation. Of the $5.7 million of interest cost, $1.7 million was
capitalized as part of construction in progress.
Settlement of Litigation. The $2.8 million recovery from
settlement of litigation was received from the Company's excess
liability insurance carrier in the second quarter of 1993 and related
to former employee lawsuits which were settled in the fourth quarter
of 1992.
Income Tax Expense. The Company's effective income tax rate for
state and federal taxes was 33.3 percent for 1993 compared to 42.1
percent for 1992. The effective income tax rate for both periods
varied from the combined state and federal statutory rates due to
utilization of carryforward tax credits against state income taxes and
deductible dividends paid on stock held by the ESOP and paid to ESOP
participants. In 1993 the insurance recovery of $2.8 million related
to the 1992 litigation settlement was treated as a nontaxable item.
The higher effective income tax rate in 1992 resulted primarily
because the litigation settlement expense of $5 million was treated as
a nondeductible item for tax purposes.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from 1994 operations was $20.5 million compared to
$44.5 million in the corresponding 1993 period. The major items
affecting this $24 million decrease were positive cash flows from the
non-cash charge for provision for rolling mill closures ($22.1
million), decreased inventories ($15.3 million) and decreased other
current assets ($3.8 million). The positive cash flows were offset by
reduced net income ($2.7 million), the non-cash gain on sale of
subsidiary's common stock ($12.3 million), decrease in deferred taxes
($8.1 million), decreased trade accounts payable and accrued expenses
($35.9 million) and decreased other taxes payable ($2.5 million).
20
Net working capital at December 31, 1994 increased $2.0 million
due to a $3.7 million increase in current assets offset by a $1.7
million increase in current liabilities. The increase in current
liabilities is primarily a result of an increase in accounts payable
and accrued expense liabilities ($15.8 million) offset by the transfer
of short-term debt to the new long-term debt facilities ($14.2
million). The accounts payable and accrued expense liability increase
was due primarily to the capital spending programs, and increased
sales activity.
In December 1994, the Company entered into an agreement
establishing two credit facilities ("Senior Credit Facilities") which
provide for collateralized borrowing of up to $300 million from a
group of banks ("Lender Banks"). Use of the Senior Credit Facilities
is to fund capital expenditures, for general corporate purposes, and
for working capital. The Senior Credit Facilities are comprised of:
(1) a $200 million term loan facility ("Term Loan") which may be drawn
at any time through December 31, 1996; and (2) up to a $100 million
revolving loan facility ("Revolving Loan") which may be drawn and
repaid at any time through December 31, 1997 based upon the Company's
accounts receivable and inventory balances. Substantially all $100
million of the Revolving Loan is expected to be available throughout
its term. By mutual agreement of the Company and the Lender Banks, the
Revolving Loan may be extended for two additional one-year periods to
December 31, 1999.
Annual commitment fees are 3/8 of 1 percent or 1/2 of 1 percent
of the unused portions of the Senior Credit Facilities, depending on
the Company's quarterly consolidated ratio ("Leverage Ratio") of
funded debt to the most recent four quarters' earnings before
interest, taxes, depreciation and amortization. At the Company's
election, interest is based on the London Interbank Borrowing Rate
("LIBOR"), the prime rate or, for the Revolving Loan only, the federal
funds rate, plus a margin determined by the Company's Leverage Ratio.
The outstanding balance of the Term Loan on December 31, 1996
will be repaid in eleven quarterly installments commencing June 30,
1997. If the Term Loan is fully drawn at December 31, 1996, the
repayments will total $50 million in 1997, $70 million in 1998, and
$80 million in 1999. Such payments will be reduced pro-rata if less
than the full amount is drawn.
The Term and Revolving Loans are collateralized by substantially
all of the Company's inventory and accounts receivable, except those
of Camrose. In addition, the Company has pledged as collateral its
material loans receivable from its subsidiaries, and the stock of
certain material subsidiaries. The Senior Credit Facilities are
guaranteed by the material wholly-owned subsidiaries of the Company.
The Senior Credit Facilities agreement contains various
restrictive covenants including a minimum current asset to current
liability ratio; minimum interest coverage ratio; minimum ratio of
cash flow to scheduled maturities of long-term debt, interest and
taxes; minimum tangible net worth; a maximum ratio of long-term debt
to total capitalization; and restrictions of capital expenditures,
liens, investments and additional indebtedness.
At December 31, 1994, $120 million was outstanding under the Term
Loan and $10 million was outstanding under the Revolving Loan.
The Company has entered into interest rate swap agreements with
banks, as required by the Senior Credit Facilities, to reduce the
impact of unfavorable changes in interest rates on its debt. (See Note
6 to the Consolidated Financial Statements.)
Term debt of $67.5 million was incurred by CF&I as part of the
purchase price of certain assets of CF&I Steel Corporation on March 3,
1993. This debt is uncollateralized and is payable over ten years with
interest at 9.5 percent. The Company has guaranteed the payment of the
first 25 months installment cash payments (a total remaining of
approximately $3.5 million of principal and interest at December 31,
1994). As of December 31, 1994, the outstanding balance on the debt is
$60.1 million, of which $54.8 million is classified as noncurrent.
The Company has an uncollateralized and uncommitted revolving
line of credit with a bank which matures May 31, 1995 which may be
used to support issuance of letters of credit, foreign exchange
contracts and interest rate hedges. At December 31, 1994, $13.6
million was restricted under outstanding letters of credit. In
addition, the Company has a $5 million unsecured and uncommitted
revolving credit line with a bank which is restricted to use for
letters of credit. At December 31, 1994, $3.2 million was restricted
under outstanding letters of credit.
21
Camrose maintains a $15 million 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 the
assets of Camrose and expires on October 31, 1996. 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 United
States dollar prime rate, or (3) LIBOR. As of December 31, 1994,
Camrose had $3.2 million outstanding under the facility.
During 1994 the Company expended approximately $120 million on
the capital program at CF&I and $10 million on the Combination Mill.
During 1995 the Company expects to expend $45 million on the capital
program at CF&I and $120 million on the Combination Mill.
In addition to the Combination Mill, the Company has budgeted
approximately $13 million for capital expenditures at its Oregon Steel
Division manufacturing facilities for recurring upgrade projects to
the present facilities and equipment. Approximately $10 million was
expended on various capital projects at these facilities in 1994. The
Company has also budgeted $15 million for an approximated 13 percent
equity interest in the planned Venezuelan HBI plant. Expenditures for
this project are expected to be $5 million in 1995.
The Company's total capitalization at December 31, 1994 of $463.8
million consists of $187.9 million in long-term debt and $275.9
million in stockholders' equity, for a long-term debt-to-
capitalization ration of .41 to 1. Net book value per share of common
stock at December 31, 1994 was $14.24 per share versus $14.23 per
share at December 31, 1993. The Company believes that anticipated
needs for working capital and capital expenditures through 1995 will
be met from existing cash balances, funds generated by operations and
borrowing pursuant to the Company's Senior credit facilities.
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. Property,
plant facilities and equipment purchased by the Company in prior years
have been subject to inflation; consequently, current charges to
depreciation are smaller than would be required if such assets were
valued at replacement cost.
22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
QUARTERLY FINANCIAL DATA - UNAUDITED
1994 1993
--------------------------------------- ----------------------------------------
4th 3rd 2nd 1st 4th 3rd 2nd 1st
-------- ------- ------- -------- -------- ------- -------- --------
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
Sales.......................... $191.5 $193.1 $234.8 $218.9 $152.5 $174.2 $204.1 $149.0
Operating income (loss)........ 6.6(1) (19.6)(2) 7.2 7.5 (1.5) 1.91 12.1 12.3
Net income (loss).............. 5.5 (.5)(3) 3.4 3.7 (1.2) - 9.2 6.8
Net income (loss)
per share.................... $.27 $(.02) $.17 $.18 $(.06) - $.46 $.35
Dividends declared per
common share................. $.14 $.14 $.14 $.14 $.14 $.14 $.14 $.14
Common stock price range:
High......................... $18 1/4 $20 1/4 $23 $27 3/8 $25 1/4 $22 3/4 $25 5/8 $27 1/2
Low.......................... $14 1/8 $15 7/8 $18 7/8 $22 5/8 $20 7/8 $17 1/2 $20 1/8 $21 3/4
Average shares
outstanding.................. 20.0 20.0 20.0 20.0 19.8 19.7 19.7 19.4
(1) Includes property tax refunds totalling $3.5 million related to prior years. (See note 13 to the Consolidated
Financial Statements.)
(2) Includes provision for rolling mill closures of $22.1 million. (See Note 13 to the Consolidated Financial
Statements.)
(3) Includes gain of approximately $12.3 million on the sale of a 10 percent interest in the Company's subsidiary,
New CF&I, Inc. (See Note 13 to the Consolidated Financial Statements.)
23
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Directors of
Oregon Steel Mills, Inc.
We have audited the consolidated financial statements and the
financial statement schedule of Oregon Steel Mills, Inc. and
Subsidiaries as listed in Item 14(a) of this Form 10-K. These
financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated financial
position of Oregon Steel Mills, Inc. and Subsidiaries as of December
31, 1994, 1993 and 1992, and the consolidated results of their
operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a
whole, presents fairly, in all material respects, the information
required to be included therein.
COOPERS & LYBRAND L.L.P.
Portland, Oregon
February 10, 1995
24
OREGON STEEL MILLS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 31,
--------------------------------------
1994 1993 1992
-------- -------- --------
Current assets:
Cash and cash equivalents............................................ $ 5,039 $ 9,623 $ 5,177
Trade accounts receivable, less allowance for
doubtful accounts of $2,063, $1,906, and $926...................... 80,203 71,649 23,900
Inventories.......................................................... 160,788 160,504 113,253
Other current assets................................................. 7,661 9,203 9,003
Deferred tax asset................................................... 5,775 4,804 3,633
-------- -------- --------
Total current assets 259,466 255,783 154,966
-------- -------- --------
Property, plant and equipment:
Land and improvements................................................ 28,319 24,466 21,652
Buildings............................................................ 36,943 35,821 32,180
Machinery and equipment.............................................. 230,019 240,833 197,492
Construction in progress............................................. 139,842 34,605 19,756
-------- -------- --------
435,123 335,725 271,080
Accumulated depreciation............................................. (97,027) (104,300) (84,287)
-------- -------- --------
338,096 231,425 186,793
-------- -------- --------
Excess of cost over net assets acquired................................ 42,569 39,474 -
Other assets........................................................... 25,602 22,988 12,493
-------- -------- --------
$665,733 $549,670 $354,252
======== ======== ========
LIABILITIES
Current liabilities:
Current portion of long-term debt.................................... $ 5,302 $ 4,680 $ -
Short-term debt...................................................... - 14,225 11,000
Accounts payable..................................................... 85,618 75,419 34,179
Accrued expenses..................................................... 24,692 19,091 9,306
Other taxes payable.................................................. 2,374 2,907 1,037
-------- --------- --------
Total current liabilities.......................................... 117,986 116,322 55,522
Long-term debt......................................................... 187,935 76,487 -
Deferred employee benefits............................................. 17,661 15,327 13,495
Other deferred liabilities............................................. 36,609 36,803 2,605
Deferred income taxes.................................................. 10,725 16,514 14,245
-------- --------- --------
370,916 261,453 85,867
-------- --------- --------
Minority interests..................................................... 18,934 12,975 10,870
-------- --------- --------
Commitments and contingencies (Note 11)
STOCKHOLDERS' EQUITY
Capital stock:
Preferred stock, par value $.01 per share; 1,000 shares
authorized; none issued
Common stock, par value $.01 per share; 30,000 shares
authorized; 19,377, 19,348, and 19,201 shares issued
and outstanding.................................................... 194 193 192
Additional paid-in capital............................................. 150,090 149,340 134,101
Retained earnings...................................................... 130,145 128,924 124,935
Minimum pension liability adjustment................................... - (297) -
-------- --------- --------
280,429 278,160 259,228
Cumulative foreign currency translation adjustment..................... (4,546) (2,918) (1,713)
-------- --------- --------
275,883 275,242 257,515
-------- --------- --------
$665,733 $ 549,670 $354,252
======== ========= ========
The accompanying notes are an integral part of the consolidated financial statements.
25
OREGON STEEL MILLS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------
1994 1993 1992
-------- -------- --------
Sales......................................................... $838,268 $679,823 $397,722
-------- -------- --------
Costs and expenses:
Cost of sales............................................... 761,335 608,236 316,455
Provision for rolling mill closures......................... 22,134 - -
Selling, general and administrative expenses................ 50,052 41,447 29,785
Contribution to employee stock ownership plan............... 738 753 3,501
Profit participation........................................ 2,336 4,527 10,510
-------- -------- --------
836,595 654,963 360,251
-------- -------- --------
Operating income.......................................... 1,673 24,860 37,471
Other income (expense):
Interest and dividend income................................ 1,620 921 741
Interest expense............................................ (3,910) (3,988) -
Settlement of litigation.................................... - 2,750 (5,040)
Gain on sale of subsidiary's common stock................... 12,323 - -
Minority interests.......................................... (3,290) (1,996) 1,097
Other, net.................................................. 711 (354) 214
-------- -------- --------
Income before income taxes................................ 9,127 22,193 34,483
Income tax benefit (expense).................................. 2,941 (7,388) (14,506)
-------- -------- --------
Net income................................................ $ 12,068 $ 14,805 $ 19,977
======== ======== ========
Primary and fully diluted net income per
common and common equivalent share.......................... $ .60 $ .75 $1.04
======== ======== ========
The accompanying notes are an integral part of the consolidated financial statements.
26
OREGON STEEL MILLS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1992, 1993 AND 1994
(IN THOUSANDS)
CUMULATIVE
MINIMUM FOREIGN
COMMON STOCK ADDITIONAL PENSION CURRENCY
---------------- PAID-IN RETAINED LIABILITY TRANSLATION
SHARES AMOUNT CAPITAL EARNINGS ADJUSTMENT ADJUSTMENT TOTAL
------- ------- ---------- -------- ---------- ----------- --------
Balances, December 31, 1991...... 18,986 $190 $129,136 $115,680 - - $245,006
Net income....................... 19,977 19,977
Issuance to employee stock
ownership plan................. 215 2 4,998 5,000
Adjust prior year common stock
issuance....................... (33) (33)
Foreign currency translation
adjustment..................... $(1,713) (1,713)
Dividends paid ($.56 per share).. (10,722) (10,722)
------- ---- -------- -------- ------ ------- --------
Balances, December 31, 1992...... 19,201 192 134,101 124,935 - (1,713) 257,515
Net income....................... 14,805 14,805
Issuance to employee stock
ownership plan................. 147 1 3,499 3,500
Common stock to be issued March
2003 (598,400 shares).......... 11,184 11,184
Warrants to purchase 100,000
shares of common stock for five
years, expiring March 3, 1998.. 556 556
Minimum pension liability
adjustment..................... $(297) (297)
Foreign currency translation
adjustment..................... (1,205) (1,205)
Dividends paid ($.56 per share).. (10,816) (10,816)
------- ---- -------- -------- ----- -------- --------
Balances, December 31, 1993 19,348 193 149,340 128,924 (297) (2,918) 275,242
Net income....................... 12,068 12,068
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 $130,145 $ - $(4,546) $275,883
======= ==== ======== ======== ===== ======= ========
The accompanying notes are an integral part of the consolidated financial statements.
27
OREGON STEEL MILLS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31,
---------------------------------------------
1994 1993 1992
-------- -------- --------
Cash flows from operating activities:
Net income...................................................... $ 12,068 $ 14,805 $ 19,977
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation................................................ 20,642 20,769 16,253
Amortization................................................ 1,370 606 -
Provision for rolling mill closures......................... 22,134 - -
Deferred income taxes....................................... (5,789) 2,269 3,050
Accruals for contribution of common stock to
employee stock ownership plan............................. 736 750 3,500
Gain on sale of subsidiary's common stock................... (12,323)
Loss on disposal of property, plant and equipment........... 147 591 958
Minority interests' share of income (loss).................. 1,482 905 (1,068)
Other, net.................................................. 53 1,198 (941)
Changes in current assets and liabilities net
of effect of acquisitions:
Trade accounts receivable.............................. (9,161) (7,980) 26,226
Refundable income taxes................................ (152) 2,413 (3,349)
Inventories............................................ (3,786) (19,124) (6,762)
Other current assets................................... 1,690 (2,136) (1,618)
Deferred tax asset..................................... (971) (1,171) 114
Accounts payable....................................... (12,568) 21,559 (1,330)
Accrued expenses....................................... 5,530 7,221 (4,612)
Other taxes payable.................................... (582) 1,870 (2,013)
-------- -------- --------
NET CASH PROVIDED BY
OPERATING ACTIVITIES.......................................... 20,520 44,545 48,385
-------- -------- --------
Cash flows from investing activities:
Additions to property, plant and equipment...................... (128,237) (40,905) (34,281)
Proceeds from disposal of property, plant and equipment......... 390 2,236 -
Investment in Camrose Pipe Company.............................. - - (17,972)
Investment in CF&I Steel, L.P................................... - (8,039) -
Other, net...................................................... (855) 565 (707)
-------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES........................... (128,702) (46,143) (52,960)
-------- -------- --------
Cash flows from financing activities:
Net borrowings under revolving loan agreements.................. 94,047 20,042 11,000
Proceeds from Senior Credit Facilities.......................... 137,600 - -
Payments on Senior Credit Facilities............................ (7,600) - -
Payment of existing debt with
proceeds from Senior Credit Facilities........................ (121,600) - -
Other reductions of debt........................................ (4,394) (3,033) (5,125)
Dividends paid.................................................. (10,847) (10,816) (10,722)
Proceeds from sale of subsidiary's common stock................. 16,800 - -
Other, net...................................................... 258 (42) (45)
--------- -------- --------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES.......................................... 104,264 6,151 (4,892)
--------- -------- --------
Effects of foreign currency exchange rate changes on cash......... (666) (107) (30)
--------- -------- --------
Net increase (decrease) in cash and cash equivalents.............. (4,584) 4,446 (9,497)
Cash and cash equivalents at beginning of year.................... 9,623 5,177 14,674
--------- -------- --------
Cash and cash equivalents at end of year.......................... $ 5,039 $ 9,623 $ 5,177
========= ======== ========
See Note 4 for additional supplemental disclosures of cash flow information:
Cash paid for:
Interest...................................................... $ 10,500 $ 5,443 $ 547
Income taxes.................................................. $ 3,967 $ 4,017 $ 15,442
The accompanying notes are an integral part of the consolidated financial statements.
28
/PAGE
OREGON STEEL MILLS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of all
wholly-owned and majority-owned subsidiaries. Affiliates which are 20
percent to 50 percent owned are accounted for using the equity method.
Material wholly-owned and majority-owned subsidiaries of the Company
are Napa Pipe Corporation ("Napa"), Oregon Steel Mills - Fontana
Division, Inc. ("Fontana"), Camrose Pipe Corporation ("CPC") which
owns a 60 percent interest in Camrose Pipe Company ("Camrose"), and 90
percent owned New CF&I, Inc. which owns a 95.2 percent interest in
CF&I Steel, L.P. ("CF&I"). All material intercompany transactions and
account balances have been eliminated upon consolidation. Operations
of purchased businesses are included in the consolidated financial
statements from the date of acquisition.
CASH AND CASH EQUIVALENTS
The Company invests excess cash balances in short-term
securities, including corporate and municipal obligations, bank
repurchase agreements, commercial paper, remarketed preferred stock,
and similar liquid instruments which are readily converted to known
amounts of cash and are so near to maturity that they present
insignificant risk of changes in value because of changes in interest
rates. The carrying amounts approximate fair value because of the
short maturity of these instruments.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents, investments and trade receivables. The Company places its
cash and cash equivalents and investments with high-credit-quality
financial institutions and limits the amount of credit exposure at any
one financial institution. At times, temporary cash investments may be
in excess of the Federal Deposit Insurance Corporation insurance
limit. Management believes that risk of loss on the Company's trade
receivables is significantly reduced by ongoing credit evaluation of
customer financial condition and requirements for collateral, such as
letters of credit and bank guarantees.
INVENTORIES
Inventories are stated at the lower of average cost or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at historical cost,
including all costs directly related to the acquisition, construction,
and preparation for intended use, such as capitalized interest. Such
capitalized interest amounted to $7.4 million, $1.7 million, and
$318,000 in 1994, 1993 and 1992, respectively. Depreciation is
determined utilizing principally the straight-line method over the
estimated useful lives of the individual assets. Maintenance and
repairs are expensed as incurred and costs of improvements are
capitalized. Upon disposal, related costs and accumulated depreciation
are removed from the accounts and resulting gains or losses are
reflected in income.
EXCESS OF COST OVER NET ASSETS ACQUIRED
Excess of cost over net assets acquired relate to the
acquisitions of CF&I and Camrose. The excess is being amortized on a
straight-line basis over 40 years. Accumulated amortization was $1.8
million and $765,000 in 1994 and 1993, respectively.
INTEREST RATE SWAP AGREEMENTS
The differentials to be paid or received on interest rate swaps
are recognized as adjustments to interest expense during the term of
the swap agreements on an accrual basis. Cash flows from interest rate
hedging transactions are classified in the same category as the cash
flows from the related borrowing activity.
29
TAXES ON INCOME
Deferred income taxes reflect the tax consequences in future
years of differences between the financial reporting and tax bases of
assets and liabilities at year end based on enacted tax laws and
statutory tax rates. Tax credits are recognized on the flow through
method as a reduction of income tax expense in the year the credit
arises. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of foreign subsidiaries are translated at
the rate of exchange in effect as of the balance sheet date. The
related translation adjustments are reflected in the cumulative
foreign currency translation adjustment section of the consolidated
balance sheet. Income and expenses are translated at the average rates
of exchange prevailing during the year.
NET INCOME PER SHARE
The computation of net income per common and common equivalent
share is based upon the weighted average number of common shares
outstanding during each period plus (in periods in which they have a
dilutive effect) the effect of common shares contingently issuable.
The weighted average number of common shares and equivalents
outstanding was 20 million, 19.8 million and 19.2 million,
respectively, in 1994, 1993 and 1992. There were no dilutive common
share equivalents outstanding in any years presented.
REVENUE RECOGNITION
Revenue is recognized when the earnings process is complete and
an exchange has taken place. The earnings process is not considered
complete until collection of the sales price is reasonably assured.
RECLASSIFICATIONS
Certain amounts in the 1993 and 1992 financial statements have
been reclassified to conform with the current year's presentation. The
reclassifications do not affect previously reported net income.
30
2. BUSINESS SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one business segment in two geographical
locations, the United States and Canada.
Geographical area information is as follows:
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
SALES TO UNAFFILIATED CUSTOMERS
United States...................... $728,229 $587,247 $379,714
Canada............................. 110,039 92,576 18,008
-------- -------- --------
$838,268 $679,823 $397,722
======== ======== ========
OPERATING INCOME (LOSS) BY
GEOGRAPHIC LOCATION
United States...................... $ (7,186) $ 19,645 $ 39,917
Canada............................. 8,859 5,215 (2,446)
-------- -------- --------
$ 1,673 $ 24,860 $ 37,471
======== ======== ========
INCOME (LOSS) BEFORE INCOME TAXES
BY GEOGRAPHIC LOCATION
United States...................... $ 3,839 $ 19,192 $ 36,068
Canada............................. 5,288 3,001 (1,585)
-------- -------- --------
$ 9,127 $ 22,193 $ 34,483
======== ======== ========
IDENTIFIABLE ASSETS BY
GEOGRAPHIC AREAS
United States...................... $615,816 $508,084 $314,273
Canada............................. 49,917 41,586 39,979
-------- -------- --------
$665,733 $549,670 $354,252
======== ======== ========
The major industries to which the Company sells steel products
are fabricators, manufacturers, steel service centers, natural gas
pipeline companies and railroad companies. In 1993 and 1992, the
Company derived 11.8 percent and 44.9 percent, respectively, of its
sales from one customer. These sales were to the same customer in 1993
and 1992.
Operating income is total revenues less operating expenses
excluding investment income, interest expense, other nonoperating
income (expense), settlement of litigation, gain on sale of
subsidiary's common stock, equity in income or loss attributable to
minority interest and provision for income taxes.
3. INVENTORIES
Inventories at December 31 consist of:
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
Raw materials....................... $ 37,389 $ 26,242 $ 8,326
Semi-finished product............... 50,033 51,759 29,280
Finished product.................... 50,320 62,104 61,557
Stores and operating supplies....... 23,046 20,399 14,090
-------- -------- --------
$160,788 $160,504 $113,253
======== ======== ========
4. SUPPLEMENTAL CASH FLOW INFORMATION
During 1994 the Company (a) acquired property, plant and
equipment for $18.6 million which was included in accounts payable at
December 31, 1994, (b) incurred a non-cash charge of $22.1 million to
reduce the carrying value of various pieces of property, plant and
equipment, inventories, and other operating supplies relating to the
closure of the Company's Fontana, California plate mill and for those
assets unlikely to be used following the construction of the new
steckel combination mill ("Combination Mill") at the Company's
Portland, Oregon steel mill (see Note 13) and (c) accrued accounts
payable related to the annual performance purchase price adjustment at
Camrose for $3.6 million (see Note 11).
31
During 1993 the Company's purchase of certain of the CF&I Steel
Corporation's net assets was accomplished by remitting $8 million,
along with other non-cash items to the seller.
During 1992 the Company's purchase of Camrose net assets was
accomplished by remitting $18 million to the seller representing the
Company's net 60 percent acquisition cost. As a result, no funds were
paid to, or received from, the seller for its 40 percent interest in
the facility.
5. ACCRUED EXPENSES
Accrued expenses at December 31 are as follows:
1994 1993 1992
-------- -------- ------
(IN THOUSANDS)
Accrued vacation.................... $ 6,254 $ 5,391 $2,606
Other............................... 18,438 13,700 6,700
------- ------- ------
$24,692 $19,091 $9,306
======= ======= ======
6. DEBT AND FINANCING ARRANGEMENTS
LONG-TERM DEBT:
Long-term debt at December 31 is summarized as follows:
1994 1993
-------- -------
(IN THOUSANDS)
Term Loan...................................... $120,000 $ -
Revolving Loan................................. 10,000 16,700
CF&I term loan................................. 60,073 64,467
Other term loans............................... 3,164 -
-------- -------
193,237 81,167
Less current maturities........................ 5,302 4,680
-------- -------
$187,935 $76,487
======== =======
In December 1994 the Company entered into an agreement
establishing two credit facilities ("Senior Credit Facilities") which
provide for collateralized borrowing of up to $300 million from a
group of banks ("Lender Banks"). Use of the Senior Credit Facilities
is to fund capital expenditures, for general corporate purposes, and
for working capital. The Senior Credit Facilities are comprised of:
(1) a $200 million term loan facility ("Term Loan") which may be drawn
at any time through December 31, 1996; and (2) up to a $100 million
revolving loan facility ("Revolving Loan") which may be drawn and
repaid at any time through December 31, 1997 based upon the Company's
accounts receivable and inventory balances. By mutual agreement of the
Company and the Lender Banks, the Revolving Loan may be extended for
two additional one-year periods to December 31, 1999.
Annual commitment fees are .375 percent or .5 percent of the
unused portions of the Senior Credit Facilities, depending on the
Company's quarterly consolidated ratio ("Leverage Ratio") of funded
debt to the most recent four quarters' earnings before interest,
taxes, depreciation and amortization. At the Company's election,
interest is based on the London Interbank Borrowing Rate ("LIBOR"),
the prime rate or, for the Revolving Loan only, the federal funds
rate, plus a margin determined by the Company's Leverage Ratio. As of
December 31, 1994, interest on the Senior Credit Facilities was 8.13
percent.
The outstanding balance of the Term Loan on December 31, 1996
will be repaid in eleven quarterly installments commencing June 30,
1997. If the Term Loan is fully drawn at December 31, 1996, the
repayments will total $50 million in 1997, $70 million in 1998, and
$80 million in 1999. Such payments will be reduced pro-rata if less
than the full amount is drawn.
The Senior Credit Facilities are collateralized by substantially
all of the Company's inventory and accounts receivable, except those
of Camrose. In addition, the Company has pledged as collateral its
material loan receivables from its subsidiaries, and the stock of
certain material subsidiaries. The Senior Credit Facilities are
guaranteed by the material wholly-owned subsidiaries of the Company.
32
The Senior Credit Facilities agreement contains various
restrictive covenants including a minimum current asset to current
liability ratio; a minimum interest coverage ratio; a minimum ratio of
cash flow to scheduled maturities of long-term debt, interest and
taxes; and a minimum tangible net worth; a maximum ratio of long-term
debt to total capitalization; and restrictions on capital
expenditures, liens, investments and additional indebtedness.
The Company has entered into interest rate swap agreements with
banks, as required by the Senior Credit Facilities, to reduce the
impact of unfavorable changes in interest rates on its debt. At
December 31, 1994, the Company had outstanding four interest rate swap
agreements with commercial banks, having a notional principal amount
of $30 million. These agreements effectively change the Company's
interest rate costs on a portion of its Senior Credit Facilities to
9.34 percent on $10 million maturing on November 9, 1997, 9.35 percent
on $10 million maturing on November 9, 1997 and 9.64 percent on a
remaining $10 million maturing on December 22, 1997. These rates are
fixed over the indicated terms of the swap agreements except for the
effect of changes in the Company's leverage ratio, which could reduce
the interest by up to 1 percent, or increase interest by up to .5
percent. The Company is exposed to credit loss in the event of
nonperformance by the other parties in the interest rate swap
agreements. However, the Company does not anticipate nonperformance by
the counterparties.
Term debt of $67.5 million was incurred by CF&I as part of the
purchase price of certain assets of CF&I Steel Corporation on March 3,
1993. This debt is without stated collateral and is payable over ten
years with interest at 9.5 percent. The Company has guaranteed the
payment of the first 25 months installment cash payments on the $67.5
million note (a total remaining of approximately $3.5 million of
principal and interest at December 31, 1994). As of December 31, 1994,
the outstanding balance on this debt is $60.1 million, of which $54.8
million is classified as noncurrent.
Camrose maintains a $15 million 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 the
assets of Camrose and expires on October 31, 1996. 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 United
States dollar prime rate, or (3) LIBOR. As of December 31, 1994,
Camrose had $3.2 million outstanding under the facility with interest
at 8.13 percent.
As of December 31, 1994, principal payments on long-term debt are
payable in annual installments of:
1995...................................................... $ 5,302
1996...................................................... 7,269
1997...................................................... 38,678
1998...................................................... 60,165
1999...................................................... 50,800
Balance due in installments through 2003.................. 31,023
--------
$193,237
========
SHORT-TERM DEBT:
The Company has an uncollateralized and uncommitted revolving
line of credit with a bank which matures May 31, 1995 and may be used
to support issuance of letters of credit, foreign exchange contracts
and interest rate hedges. At December 31, 1994, $13.6 million was
restricted under outstanding letters of credit. In addition, the
Company has a $5 million uncollateralized and uncommitted revolving
credit line with a bank which is restricted to use for letters of
credit. At December 31, 1994, $3.2 million was restricted under
outstanding letters of credit. The weighted average interest rates on
short-term borrowings were 5.1 percent and 3.5 percent at December 31,
1993 and 1992, respectively.
33
7. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures
about Fair Value of Financial Instruments, defines the fair value of a
financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties, other than
in a forced or liquidation sale.
Based on quotations from counterparties, the fair value of the
Company's interest rate swap agreements (see Note 6) at December 31,
1994 was $192,000 which represents the estimated unrealized gain that
would result if the Company terminated the agreements. However, the
Company has no intention to exit these agreements. The interest rate
swap agreements are a part of an interest rate management strategy
that is required by the Senior Credit Facilities.
The carrying value of the Company's borrowings under its Senior
Credit Facilities and other revolving loan agreements (see Note 6) at
December 31, 1994 approximates fair value since the Senior Credit
Facilities and other revolving loan agreements carry a variable
interest rate.
The carrying value and fair value of the CF&I term loan at
December 31, 1994 is $60.1 million and $57.9 million, respectively. At
December 31, 1993 the carrying value of the CF&I term loan of $64.5
million approximated its fair value because there was only minor
variance in interest rates from the March 1993 acquisition of the debt
to the end of 1993. The lower fair value of the CF&I term loan at
December 31, 1994 reflects the benefit to the Company of having a
fixed interest rate while market rates have increased. The fair value
is estimated by discounting the future payments with an interest rate
which approximates the market rate as of December 31, 1994 for
obligations of similar size, term and security.
34
8. INCOME TAXES
The Company adopted Statement of Financial Accounting Standards
No. 109 (FAS No. 109), "Accounting for Income Taxes," as of January 1,
1992. The accounting change had no effect on 1992 or previously
reported net income. The income tax benefit (expense) consists of the
following:
1994 1993 1992
-------- -------- --------
(IN THOUSANDS)
Current:
Federal........................... $ (3,325) $ (5,287) $ (9,162)
State............................. (479) (984) (2,082)
Foreign........................... (14) (19) -
-------- -------- --------
(3,818) (6,290) (11,244)
-------- -------- --------
Deferred:
Federal........................... 5,856 (124) (3,932)
State............................. 2,148 (163) 670
Foreign........................... (1,245) (811) -
-------- -------- --------
6,759 (1,098) (3,262)
-------- -------- --------
Income tax benefit (expense)........ $ 2,941 $ (7,388) $(14,506)
======== ======== ========
The components of the deferred income tax benefit (expense) are
as follows:
1994 1993 1992
------- -------- ---------
(IN THOUSANDS)
Difference between tax and financial
statement accounting for:
Depreciation and amortization........ $ (4,722) $ (4,707) $ (2,673)
Inventories.......................... (368) 239 (447)
Unfunded pension liability........... 896 100 (126)
Accrued vacation liability........... 568 1,091 -
Alternative minimum tax.............. 2,599 1,665 -
Provision for rolling mill closures.. 5,450 - -
Federal and state tax credits........ 1,670 - -
Foreign tax credit................... 1,296 - -
Other................................ (630) 514 (16)
-------- -------- --------
$ 6,759 $ (1,098) $ (3,262)
======== ======== ========
35
The components of deferred tax assets and liabilities as of December 31 are as follows:
1994 1993 1992
--------- --------- ---------
(IN THOUSANDS)
Net current deferred tax asset:
Assets
Inventories........................................................ $ 1,904 $ 2,268 $ 2,029
Accrued vacation liability......................................... 2,488 1,920 829
Accounts receivable................................................ 697 597 384
State tax credits.................................................. 135 196 196
Provision for rolling mill closures................................ 1,906 - -
Other.............................................................. 1,717 920 366
-------- ------- --------
8,847 5,901 3,804
Liabilities
Other.............................................................. 3,072 1,097 171
-------- ------- --------
Net current deferred tax asset......................................... $ 5,775 $ 4,804 $ 3,633
======== ======= ========
Net noncurrent deferred income tax liability:
Assets
Post retirement benefits other than pensions....................... $ 1,182 $ 2,009 $ 1,124
State tax credits.................................................. 6,996 207 403
Alternative minimum tax credit..................................... 4,264 1,665 -
Excess of cost over net assets acquired............................ 12,673 13,282 -
Water rights....................................................... 4,052 4,247 -
Provision for rolling mill closures................................ 3,543 - -
Foreign tax credit................................................. 1,296 - -
Other.............................................................. 4,284 1,076 488
------- ------- --------
38,290 22,486 2,015
------- ------- --------
Valuation allowances............................................... 5,408 - -
------- ------- --------
32,882 22,486 2,015
------- ------- --------
Liabilities
Property, plant and equipment...................................... 23,655 19,015 14,308
Environmental liability............................................ 13,070 13,282 -
Other.............................................................. 6,882 6,703 1,952
------- ------- --------
43,607 39,000 16,260
------- ------- --------
Net non-current deferred tax liability................................. $10,725 $16,514 $ 14,245
======= ======= ========
A reconciliation of the statutory tax rate to the effective tax rate on income before income taxes is as
follows:
1994 1993 1992
------- ------- -------
U.S. statutory income tax rate......................................... (35.0%) (35.0%) (34.0%)
Tax credits............................................................ 20.3 1.4 1.8
Deduction for dividends to ESOP participants........................... 5.6 2.6 2.1
State income taxes..................................................... (5.0) (6.6) (5.2)
Settlement of litigation............................................... - 4.3 (6.1)
Rate changes on beginning deferred taxes............................... - (1.8) -
Gain on sale of subsidiary's common stock.............................. 47.3 - -
Foreign tax in excess of U.S. rate..................................... (5.5) - -
Other.................................................................. 4.5 1.8 (.7)
------- ------- -------
32.2% (33.3%) (42.1%)
======= ======= =======
A valuation allowance of $5.4 million has been established in 1994 to reflect the uncertainty of realizing
certain state tax credits.
At December 31, 1994, the Company has state tax credits of $7.1 million expiring 1997 through 2006 and a
federal tax credit of $546,000 expiring 2005 through 2009 which are available to reduce future income taxes payable.
36
9. EMPLOYEE BENEFIT PLANS
U.S. PENSION PLANS
The Company has noncontributory defined benefit retirement plans
covering all of its eligible domestic employees. The plans provide
benefits based on participants' years of service and compensation. The
Company funds at least the minimum annual contribution required by
ERISA. Pension cost included the following components:
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
Service cost.......................... $ 5,076 $ 3,857 $ 1,703
Interest cost......................... 2,014 1,714 1,528
Actual (return) loss on plan assets .. 398 (4,002) (2,256)
Net amortization and deferral......... (2,401) 2,423 1,002
------- ------- -------
$ 5,087 $ 3,992 $ 1,977
======= ======= =======
The following table sets forth the funded status of the plans and
amount recognized in the Company's consolidated balance sheet at
December 31:
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
Accumulated benefit obligation,
including vested benefits of
$25,017 in 1994, $23,589 in 1993,
and $17,781 in 1992................. $26,451 $26,543 $19,918
======= ======= =======
Projected benefit obligation.......... $28,110 $28,413 $21,987
Plan assets at fair value............. 26,790 27,380 20,464
------- ------- -------
Projected benefit obligation in
excess of plan assets............... (1,320) (1,033) (1,523)
Unrecognized net loss (gain).......... (2,296) 428 2,165
Unrecognized prior service cost....... 1,032 1,156 413
Unrecognized net obligation at
January 1, 1987 being recognized
over 15 years....................... 529 1,271 681
Adjustment required to recognize
minimum liability................... - (297) -
------- ------- -------
Pension asset (liability) recognized
in consolidated balance sheet....... $(2,055) $ 1,525 $ 1,736
======= ======= =======
The following table sets forth the significant actuarial
assumptions as of December 31:
1994 1993 1992
------- ------- -------
Discount rate......................... 8.5% 7.3% 8.0%
Rate of increase in future
compensation levels................. 4.5% 4.5% 4.5%
Expected long-term rate of return
on plan assets...................... 8.8% 8.0% 8.0%
Plan assets are invested in common stock and bond funds (85
percent), marketable fixed income securities (2 percent) and insurance
company contracts (12 percent) at December 31, 1994. The plans do not
invest in the stock of the Company.
SUPPLEMENTAL U.S. PENSION PLAN
The amounts of benefits which can be covered by the funded
domestic plans are limited by the Employee Retirement Income Security
Act of 1974 and the Internal Revenue Code. Therefore, in 1994, the
Company established an unfunded supplemental retirement plan designed
to maintain benefits for all non-union domestic employees at the plan
formula level. The amount expensed for this plan in 1994 was $160,000.
The accumulated benefit obligation recognized in the consolidated
balance sheet at December 31, 1994 was $857,000.
37
CANADIAN PENSION PLANS
The Company has noncontributory defined benefit retirement plans
covering all of its eligible Camrose employees. The plans provide
benefits based on participants' years of service and compensation.
The Canadian pension plan assets acquired with the Company's 60
percent interest in Camrose are still held by Stelco, Inc. until such
time as the transfer is approved by Canadian regulatory authorities.
Pension cost included the following components:
1994 1993 1992
------- ------- ------
(IN THOUSANDS)
Service cost.......................... $ 297 $ 303 $ 149
Interest cost......................... 408 8 -
Actual (return) loss on plan assets... (447) (13) -
Gains................................. (16) (3) -
------- ------ ------
$ 242 $ 295 $ 149
======= ====== ======
The following table sets forth the funded status of the plans and
amount recognized in the Company's consolidated balance sheet at
December 31:
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
Accumulated benefit obligation,
including vested benefits of
$4,045 in 1994, $4,212 in 1993,
and $3,979 in 1992.................. $ 4,596 $ 4,893 $ 4,787
------- ------- -------
Projected benefit obligation.......... $ 5,488 $5,870 $ 5,700
Plan assets at fair value............. 6,415 6,337 5,253
------- ------ -------
Projected benefit obligation
under (over) plan assets............ 927 467 (447)
Unrecognized net gain................. (627) (535) (71)
------- ------ -------
Pension asset (liability) recognized
in consolidated balance sheet....... $ 300 $ (68) $ (518)
======= ====== =======
The following table sets forth the significant actuarial
assumptions as of December 31:
1994 1993 1992
------- ------- -------
Discount rate......................... 8.5% 7.3% 8.0%
Rate of increase in future
compensation levels................. 5.0% 5.0% 5.0%
Expected long-term rate of return
on plan assets...................... 8.8% 8.0% 8.0%
EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")
The Company has an ESOP for eligible domestic employees which
enables an employee to own stock in the Company. This plan is a
noncontributory qualified stock bonus plan. Contributions to the plan
are made at the discretion of the Board of Directors. Company
contributions in 1994, 1993 and 1992 were $736,000, $753,000, and $3.5
million, respectively. Shares are allocated to eligible employees'
accounts based on annual compensation. At December 31, 1994, the ESOP
held 2.4 million shares of Company common stock which had been
allocated to employees.
PROFIT PARTICIPATION PLANS
The Company has discretionary profit participation plans under
which it distributes quarterly 12 percent to 20 percent, depending on
the operating division, of its pre-tax profits to its eligible
employees. The plans define profits as pre-tax earnings from
divisional operations after adjustments for certain non-operating
items. Each eligible employee receives a share of the distribution
based upon the level of the eligible employee's base compensation
compared with the total base compensation of all eligible employees of
the division.
THRIFT PLAN
The Company has a qualified thrift plan (401-k) for all of its
eligible domestic employees that is designed to receive and invest
their deferred compensation as provided by current laws. The Company
currently matches 25 percent of the first 4 percent of the
participant's deferred compensation. The Company's contribution
expense in 1994, 1993 and 1992 was $778,000, $461,000, and $424,000,
respectively.
38
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
The Company provides certain health care and life insurance
benefits for substantially all of its retired employees. Employees are
generally eligible for benefits upon retirement and completion of a
specified number of years of service. The benefit plans are unfunded.
The following table sets forth the plans' status at December 31:
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
Accumulated postretirement benefit
obligation:
Retirees............................. $ 4,557 $ 8,240 $ 7,155
Fully eligible plan participants..... 2,037 1,294 786
Other active plan participants....... 6,387 5,050 1,728
------- ------- -------
$12,981 $14,584 $ 9,669
======= ======= =======
Accumulated postretirement benefit
obligation in excess of plan
assets............................... $(12,981) $(14,584) $(9,669)
Unrecognized net (gain) loss........... (2,379) 34 (450)
Accrued postretirement benefit cost.... 8,777 7,557 2,716
-------- -------- -------
Postretirement asset recognized in
consolidated balance sheet........... $ 6,583 $ 6,993 $ 7,403
======== ======== =======
Net periodic postretirement benefit
costs include the following
components:
Service cost....................... $ 457 $ 395 $ 196
Interest cost...................... 1,033 1,017 733
Transition obligation at March 31,
1991 being amortized over 20
years............................ 410 410 410
Gains.............................. (3) - -
-------- -------- -------
Net periodic postretirement
benefit cost....................... $ 1,897 $ 1,822 $ 1,339
======== ======== =======
For measurement purposes, a long-term inflation rate of 4 percent
is assumed for health care cost trend rates. However, a lower
inflation rate (negative 6 percent in 1995 and 3.5 percent in 1996)
has been assumed over the next two years, based on negotiated health
care costs. A one percentage point increase in the assumed health care
cost trend rate for 1995 would increase the accumulated postretirement
benefit obligation by $473,000; the aggregate service and interest
cost would increase $98,000. The discount rate used in determining the
accumulated postretirement benefit obligation was 8.5 percent.
10. RELATED PARTY TRANSACTIONS
CAMROSE PIPE COMPANY
Camrose purchases steel coil, plate, and pipe under a steel
supply agreement from Stelco, Inc. (and its subsidiaries) whose
wholly-owned subsidiary, Stelcam Holdings Inc., owns 40 percent of
Camrose. Transactions under the agreement are at negotiated market
prices. The following table summarizes the transactions among Camrose,
Stelco Inc., and Stelcam Holdings Inc.:
1994 1993 1992
------- ------- -------
(IN THOUSANDS)
Sales to Stelco....................... $ 2,189 $ - $ -
Purchases from Stelco................. 72,642 59,019 17,000
Accounts payable to Stelco
at December 31...................... 9,053 6,755 7,100
Note payable to Stelcam at December 31
(interest at Canadian prime rate
plus 2 percent)..................... - - 2,200
NEW CF&I, INC.
In 1994 the Company's 90 percent owned New CF&I, Inc. paid a $1.7
million deposit on an equipment contract supply agreement for purchase
of deep head-hardened ("DHH") rail equipment to Nippon Steel
Corporation (together with its subsidiaries, "Nippon") which owns 10
percent of New CF&I, Inc.
39
11. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL
All material environmental remediation liabilities which are
probable and estimatable are recorded in the financial statements
based on current technologies and current environmental standards.
Adjustments are made when additional information is available that may
require different remediation methods or periods, and ultimately
affect the total cost. The best estimate of the probable loss within a
range is recorded. If there is no best estimate, the low end of the
range is recorded, and the range is disclosed.
The Company's Napa Pipe Corporation subsidiary has a reserve of
$2.8 million at December 31, 1994 for environmental remediation
relating to the Napa pipe mill. The Company's estimate of this
environmental reserve was based on several remedial investigations and
feasibility studies performed by an independent engineering
consultant. The reserve includes costs for remedial action which is
scheduled to be completed in 1998 with sampling, monitoring and
maintenance costs continuing through 2024.
In connection with the 1993 acquisition of CF&I, the Company
established a reserve of $36.7 million for environmental remediation
at CF&I's Pueblo steel mill. CF&I believed $36.7 million was the best
estimate from a range of $23.1 to $43.6 million. CF&I's estimate of
this environmental reserve was based on two separate remediation
investigations and feasibility studies conducted by independent
environmental engineering consultants. The reserve includes costs for
the Resource Conservation and Recovery Act facility investigation, a
corrective measures study, remedial action, and operation and
maintenance associated with the proposed remedial actions. CF&I and
the State of Colorado Department of Public Health and Environmental
are finalizing a prioritized schedule of corrective actions to be
completed which are substantially reflective of a straight-line rate
of expenditure over 30 years. The State of Colorado stated 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. At December 31, 1994, the reserve is $34.1 million and is
included in other deferred liabilities in the consolidated balance
sheet.
CONTRACTS WITH KEY EMPLOYEES
The Company has employment agreements with certain of its
officers which provide for severance compensation in the event their
employment with the Company is terminated subsequent to a change in
control (as defined) of the Company under the circumstances set forth
in the agreements. Each agreement has automatic annual extensions
until the employee reaches the age of 65, unless either the Company or
the employee gives notice that the agreement shall not be extended. In
the event of a change in control while the agreements are in effect,
the agreements are automatically extended for 36 months from the date
the change in control occurs. The agreements will generally terminate
upon termination of employment prior to a change in control of the
Company.
If, within 36 months following a change in control, the
employee's employment with the Company is terminated by the Company
without cause (as defined) or by the employee with good reason (as
defined), then the Company will pay the employee his full base salary
through the date of termination at the rate in effect on the date the
change in control occurred, plus three times his annual base salary at
the above specified rate, the four most recent quarterly cash
distributions from the Company's profit participation plan and certain
post retirement benefits as specified in the agreement. The employee
is also entitled to be reimbursed for any reasonable legal fees and
expenses he may incur in enforcing his rights under the agreement.
CAMROSE ACQUISITION
On June 30, 1992 Camrose Pipe Corporation acquired a 60 percent
interest in a newly formed Canadian general partnership, Camrose Pipe
Company. Concurrent with the formation of Camrose and the purchase of
the partnership interest by Camrose Pipe Corporation, Camrose
purchased from Stelco, Stelco's steel pipemaking facility in Camrose,
Alberta, Canada and related receivables, inventories and other current
assets. Under the terms of the asset purchase agreement the purchase
price for the Camrose assets may be increased or decreased based upon
an annual performance adjustment over a five-year period as described
in the asset purchase agreement. The purchase price was increased by
$3.6 million and $485,000, respectively, in 1994 and 1993.
40
CAPITAL EXPENDITURES
During 1994 the Company began construction of various capital
improvement projects at both its Portland, Oregon and Pueblo, Colorado
steel mills. At December 31, 1994, the Company had commitments for
expenditures of approximately $73.8 million related to the completion
of these projects.
12. CAPITAL STOCK
The Board of Directors has the authority to issue shares of
preferred stock from time to time in one or more series and to fix the
number of shares to be included in such a series, the designation,
powers, preferences and rights of the shares of each such series and
any qualifications, limitations or restrictions of such series,
including but not limited to dividend rights, dividend rates,
conversion rights, voting rights, rights and terms of redemption
(including sinking fund provisions) and liquidation preferences, all
without any vote or action by the stockholders.
In connection with the acquisition of certain assets of CF&I
Steel Corporation, the Company, through its ownership interest in
CF&I, agreed to issue 598,400 shares of its common stock in March 2003
to specified creditors of CF&I Steel Corporation. The stock was valued
at $11.2 million using the Black-Scholes valuation method. The common
stock has no voting rights or rights to receive dividends until it is
issued. In connection with the acquisition, the Company also issued
five year warrants expiring March 3, 1998 to purchase 100,000 shares
of the Company's common stock at $35 per share to CF&I Steel
Corporation. The warrants were valued at $556,000 using the Black-
Scholes method.
13. UNUSUAL AND NONRECURRING ITEMS
GAIN ON SALE OF SUBSIDIARY'S COMMON STOCK
In August 1994 the Company sold a 10 percent equity interest in
its subsidiary, New CF&I, Inc., to a wholly-owned subsidiary of
Nippon. In connection with that sale, Nippon agreed to license to the
Company its proprietary technology for producing DHH rail products, as
well as to sell the Company certain production equipment to produce
DHH rail under a separate equipment supply agreement. New CF&I, Inc.
received a cash payment of $16.8 million in connection with the
transaction. The sale resulted in a gain of approximately $12.3
million for the Company. The gain is not subject to federal or state
income taxes.
PROVISION FOR ROLLING MILL CLOSURES
During the fourth quarter of 1994, the Company began construction
on the Combination Mill at its Portland, Oregon steel mill. When
completed in 1996 this mill will replace the Company's existing plate
rolling mill at the Portland steel mill. Accordingly, in the third
quarter of 1994 the Company recorded a non-cash charge of $8.9
million, before income taxes of $3.4 million, to reduce the carrying
value of various pieces of plant and equipment and inventories located
at the Portland steel mill which are unlikely to be used following the
completion of the Combination Mill.
The Company's Fontana, California plate mill ceased plate
production in the fourth quarter of 1994 and will close permanently in
the first quarter of 1995. As a result of the closure, the Company
recognized a loss for the disposal and exit costs of $13.2 million,
before income taxes of $5 million. Of this net amount, approximately
$7.4 million is a non-cash charge relating to the write-off of
production supplies and property, plant and equipment. The Fontana
plate mill is on leased property. The lease was terminated on January
18, 1995. The agreement provided for, among other stipulations, the
termination of the lease and vacating the premises by March 31, 1995.
The Company agreed to specific actions to restore the premises to a
condition acceptable to the lessor by June 30, 1995, or within 60 days
following receipt of all requirements for closure of the premises from
the local county environmental authorities. The lessor agreed to
indemnify the Company against environmental claims upon written
notification by this local authority that the Company has
satisfactorily performed all of the authority's requirements for
closure of the premises. The Company has established a $900,000
reserve at December 31, 1994 for probable and estimatable remediation
costs.
41
PROPERTY TAX REFUND
During the fourth quarter of 1994, the Company received property
tax refunds totaling $4.6 million related to prior years for the over
assessment of its Portland, Oregon and Pueblo, Colorado steel mills.
The refunds reduced cost of sales by $3.5 million and increased
interest income by $1.1 million.
42
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEMS 10 and 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT AND EXECUTIVE COMPENSATION
A definitive proxy statement of Oregon Steel Mills, Inc. will be
filed not later than 120 days after the end of the fiscal year with
the Securities and Exchange Commission. The information set forth
therein under "Election of Directors" and "Executive Compensation" is
incorporated herein by reference. Executive Officers of Oregon Steel
Mills, Inc. and principal subsidiaries are listed on page 15 of this
Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
Information required is set forth under the caption "Principal
Stockholders" in the Proxy Statement for the 1995 Annual Meeting of
Stockholders and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required is set forth under the caption "Executive
Compensation" in the Proxy Statement for the 1995 Annual Meeting of
Stockholders and is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
PAGE
(A) (i) FINANCIAL STATEMENTS:
Report of Independent Accountants.................. 24
Consolidated Financial Statements:
Balance Sheets at December 31, 1994, 1993
and 1992....................................... 25
Statements of Income for each of the three years
in the period ended December 31, 1994.......... 26
Statements of Changes in Stockholders' Equity
for each of the three years in the period
ended December 31, 1994........................ 27
Statements of Cash Flows for each of the three
years in the period ended December 31, 1994.... 28
Notes to Consolidated Financial Statements....... 29
(ii) Financial Statement Schedules for each of
the three years in the period ended
December 31, 1994:
Schedule II - Valuation and Qualifying Accounts.... 44
(iii) Exhibits: References made to the list on page 45
of the exhibits filed with this report.
(B) No reports on Form 8-K were required to be filed by
the Registrant during the fourth quarter of the
year ended December 31, 1994.
43
OREGON STEEL MILLS, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31
(IN THOUSANDS)
COLUMN C
------------------------
COLUMN B COLUMN E
---------- ADDITIONS COLUMN D ----------
COLUMN A BALANCE AT CHARGED TO CHARGED ---------- BALANCE AT
- ---------------- BEGINNING COSTS AND TO OTHER DEDUCTIONS END OF
CLASSIFICATION OF PERIOD EXPENSES ACCOUNTS (1) PERIOD
- ---------------- --------- ---------- -------- ---------- ----------
1994
----
Allowance for doubtful accounts....... $1,906 $ 488 - $ (331) $ 2,063
Provision for rolling mill closures:
Inventories......................... - $ 2,792 - - $ 2,792
Property, plant and equipment, net.. - $17,994 - - $ 17,994
Other assets........................ - $ 78 - - $ 78
Deferred tax assets valuation
allowance........................... - $ 5,408 - - $ 5,408
1993
----
Allowance for doubtful accounts....... $ 926 $ 764 $ 463(2) $ (247) $ 1,906
1992
----
Allowance for doubtful accounts....... $ 770 $ 360 - $ (204) $ 926
- -------------
(1) Results from write-offs of accounts receivable.
(2) Additions from purchase of assets of CF&I Steel Corporation.
44
LIST OF EXHIBITS*
2.0 Asset Purchase Agreement dated as of January 2, 1992, by and
between Camrose Pipe Company (a partnership) and Stelco Inc.
(Filed as exhibit 2.0 to Form 8-K dated June 30, 1992 and
incorporated by reference herein.)
2.1 Asset Purchase Agreement dated as of March 3, 1993, among CF&I
Steel Corporation, Denver Metals Company, Albuquerque Metals
Company, CF&I Fabricators of Colorado, Inc., CF&I Fabricators
of Utah, Inc., Pueblo Railroad Service Company, Pueblo Metals
Company, Colorado & Utah Land Company, the Colorado and
Wyoming Railway Company, William J. Westmark as trustee for
the estate of The Colorado and Wyoming Railway Company, CF&I
Steel, L.P., New CF&I, Inc. and Oregon Steel Mills, Inc.
(Filed as exhibit 2.1 to Form 8-K dated March 3, 1993, and
incorporated by reference herein.)
3.1 Restated Certificate of Incorporation of the Company. (Filed
as exhibit 3.1 to Form 10-K for the year ended December 31,
1992, and incorporated by reference herein.)
3.2 Bylaws of the Company. (Filed as exhibit 3.2 to Form 10-Q
dated March 31, 1993, and incorporated by reference herein.)
4.1 Specimen Common Stock Certificate. (Filed as exhibit 4.1 to
Form S-1 Registration Statement 33-38379 and incorporated by
reference herein.)
4.2 Form of Oregon Steel Mills, Inc. - Five-Year Common Stock
Purchase Warrant. (Filed as exhibit 4.2 to Form 8-K dated
March 3, 1993, and incorporated by reference herein.)
10.1 Employee Stock Ownership Plan, as amended. (Filed as exhibit
10.1 to Form S-1 Registration Statement 33-38379 and
incorporated by reference herein.)
10.2 Employee Stock Ownership Plan Trust Agreements. (Filed as
exhibit 10.2 to Form 10-K for the year ended December 31, 1990
and incorporated by reference herein.)
10.3 Profit Participation Plan. (Filed as exhibit 10.5 to Form S-1
Registration Statement 33-20407 and incorporated by reference
herein.)
10.4 Form of Indemnification Agreement between the Company and its
directors. (Filed as exhibit 10.6 to Form S-1 Registration
Statement 33-20407 and incorporated by reference herein.)
10.5 Form of Indemnification Agreement between the Company and its
executive officers. (Filed as exhibit 10.7 to Form S-1
Registration Statement 33-20407 and incorporated by reference
herein.)
10.6 Agreement for Electric Power Service between registrant and
Portland General Electric Company. (Filed as exhibit 10.20 to
Form S-1 Registration Statement 33-20407 and incorporated by
reference herein.)
10.7 Agreement dated February 21, 1994 between Oregon Steel Mills,
Inc. and Robert J. Sikora.
10.8 Key employee contracts for Thomas B. Boklund and Robert R.
Mausshardt. (Filed as exhibit 10.11 to Form 10-K for the year
ended December 31, 1988, and incorporated by reference
herein.)
10.9 Key employee contracts for L. Ray Adams and James R.
McCaughey. (Filed as exhibit 10.10 to Form 10-K for the year
ended December 31, 1990 and incorporated by reference herein.)
10.10 Key employee contract for Edward J. Hepp. (Filed as exhibit
10.11 to Form 10-K for the year ended December 31, 1991, and
incorporated by reference herein.)
10.12 Credit Agreement dated December 14, 1994 among Oregon Steel
Mills, Inc., as the Borrower, Certain Commercial Lending
Institutions, as the Lenders, First Interstate Bank of Oregon,
N.A., as the Administrative Agent for the Lenders, The Bank of
Nova Scotia, as the Syndication Agent for the Lenders, and
First Interstate Bank of Oregon, N.A. and The Bank of Nova
Scotia, as the Managing Agents for the Lenders.
- ------------
* The Company will furnish to stockholders a copy of the exhibit upon
payment of $.25 per page to cover the expense of furnishing such
copies. Requests should be directed to Vicki A. Tagliafico, Investor
Relations Contact, Oregon Steel Mills, Inc., PO Box 5368, Portland,
Oregon 97228.
45
11.0 Statement re computation of per share earnings.
21.0 Subsidiaries of registrant. (Filed as exhibit 22.1 to Form 10-K
for the year ended December 31, 1992, and incorporated by
reference herein.)
23.0 Independent Auditor's Consent
99.0 Partnership Agreement dated as of January 2, 1992, by and
between Camrose Pipe Corporation and Stelcam Holding, Inc.
(Filed as exhibit 28.0 to Form 8-K dated June 30, 1992, and
incorporated by reference herein.)
99.1 Amended and Restated Agreement of Limited Partnership of CF&I
Steel, L.P. dated as of March 3, 1993 by and between New CF&I,
Inc. and the Pension Benefit Guaranty Corporation. (Filed as
exhibit 28.1 to Form 8-K dated March 3, 1993, and incorporated
by reference herein.)
99.2 Oregon Steel Mills, Inc. Pension Plan, as amended. (Filed as
99.0 to Form 10-K for the year ended December 31, 1993, and
incorporated by reference herein.)
46
SIGNATURES REQUIRED FOR FORM 10-K
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Oregon Steel Mills,
Inc. has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
OREGON STEEL MILLS, INC.
(Registrant)
By /s/ Thomas B. Boklund
----------------------------------
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of Oregon Steel Mills, Inc. and in the capacities and on the dated indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Thomas B. Boklund Chairman of the Board,
- -------------------------- Chief Executive Officer and President
(Thomas B. Boklund) (Principal Executive Officer) March 1, 1995
/s/ L. Ray Adams Vice President of Finance
- -------------------------- and Chief Financial Officer
(L. Ray Adams) (Principal Financial Officer) March 1, 1995
/s/ Jackie L. Williams Controller
- --------------------------
(Jackie L. Williams) (Principal Accounting Officer) March 1, 1995
/s/ C. Lee Emerson Director March 1, 1995
- --------------------------
(C. Lee Emerson)
/s/ V. Neil Fulton Director March 1, 1995
- --------------------------
(V. Neil Fulton)
/s/ Edward C. Gendron Director March 1, 1995
- --------------------------
(Edward C. Gendron)
/s/ Robert W. Keener Director March 1, 1995
- --------------------------
(Robert W. Keener)
/s/ Richard G. Landis Director March 1, 1995
- --------------------------
(Richard G. Landis)
/s/ James A. Maggetti Director March 1, 1995
- --------------------------
(James A. Maggetti)
/s/ John A. Sproul Director March 1, 1995
- --------------------------
(John A. Sproul)
/s/ William Swindells Director March 1, 1995
- --------------------------
(William Swindells)
47