1995 Annual Report

As we look to the years ahead, we know that the intensity of competition will increase and that we must continuously improve our performance. We remain committed to achieving our Corporate Objectives of serving our customers, partnering among our employees, being a good citizen and achieving sustained profitability and rates of return that will increase value for our stockholders.

Concentrating On Steel

Our Burns Harbor and Sparrows Point Divisions continued to strengthen their competitive positions in 1995. Together, these two Divisions shipped about 7.5 million tons of steel products, about 85 percent of Bethlehem's total steel shipments.

A significant portion of Burns Harbor's 1995 shipments of sheet steel products went to customers in the automotive industry. More than 90 different models of 1996 cars, vans and light trucks are manufactured with high-quality steel from Burns Harbor. In 1995, Burns Harbor earned the coveted QS-9000 quality certification of the Big-Three automakers. QS-9000 defines the fundamental quality system requirements of General Motors, Ford and Chrysler and major truck producers.

Burns Harbor is one of the most efficient producers of high-quality steel anywhere in the world. It is Bethlehem's largest, most productive and profitable business unit, and we continue to take significant actions to improve its preeminent position in the face of increasing competition.

In 1994, we completed three major capital projects at Burns Harbor to enhance its basic ironmaking capabilities - relining a blast furnace, installing coal injection for the blast furnaces and rebuilding a coke oven battery. During 1995, we began additional modernization projects at Burns Harbor to improve the productivity and quality of products produced by both its hot-strip mill and its 160-inch plate mill and to increase the capacity of its steelmaking facilities. We also entered into a joint venture in Indiana that will provide the capability to process hot rolled sheet from Burns Harbor into additional quantities of higher value cold rolled sheet.

Our Sparrows Point Division produces sheet steel, tin mill products and steel plate. In 1995, it improved its levels of shipments, revenues and profitability over 1994. With its tidewater location on the Chesapeake Bay, Sparrows Point was able to take advantage of strong export demand and had significant shipments of steel products to international markets. Operationally, Sparrows Point continues to improve its productivity. For example, in May the Division's "L" blast furnace produced 305,904 tons of iron, a monthly record for any blast furnace in North America.

Sparrows Point's four sheet coating lines plus the line at Double G Coatings, a joint-venture coating line in Mississippi, produce a total of about a million tons a year, making the Division a major supplier of corrosion-resistant galvanized and Galvalume® sheet to the metal building and roofing markets. These markets have grown by about 60 percent since 1992.

The combined production of steel plate from Sparrows Point and Burns Harbor makes Bethlehem the nation's largest producer of steel plate, accounting for 15 percent of our steel segment sales in 1995. Strong markets for steel plate in 1995 included construction, construction machinery, industrial machinery, farm equipment and shipbuilding.

At our Pennsylvania business units, 1995 was a year of major transition. Steelmaking was discontinued at our Bethlehem Structural Products Corporation and BethForge, Inc. subsidiaries. New steelmaking facilities, including a DC electric furnace, were brought into production at our Pennsylvania Steel Technologies, Inc. subsidiary. With PST now supplying high-quality semifinished steel to BSPC and BethForge, all three businesses will benefit from the utilization of these modernized facilities. PST also increased production of premium head-hardened railroad rail.

Rebuilding Our Financial Strength

Over the course of the year, we also made progress in rebuilding Bethlehem's financial strength. We reduced our long-term debt by about $120 million while increasing our stockholders' equity by about $80 million. As a result, we were able to reduce our debt to capitalization to 34 percent in 1995 from 40 percent in 1994.

Additionally, we maintained our financial flexibility by entering into a new five-year, nonreducing $500 million credit arrangement with 15 banks and by maintaining total liquidity of more than $500 million.

Continuous Improvement

Customers. We measure our success by the success of our customers. Our focus is on integrating Bethlehem's excellent steel production capabilities with our superior technical and logistical support to provide our customers with a "total solution" in terms of quality, delivery, service and value. As part of this "total solution," we completed a major reorganization of our commercial function to position our sales staff more closely to our customers and business units. We also relocated our credit function to the individual steel business units. These changes help us serve our customers more effectively by being more responsive to their needs in a rapidly changing marketplace and by improving the relationship between our business units and their customers.

Suppliers. As an extension of our Supplier Excellence Program, we launched a Strategic Sourcing initiative in 1995 to further improve the cost, quality and management of the $3 billion of materials and services that we purchase annually. Our objective is to achieve breakthrough improvements in total cost and quality and ensure that Bethlehem achieves full value from all of its supplier relationships. We are striving to strengthen relationships with existing suppliers and to identify new suppliers who will work with us to achieve mutual objectives. Partnership relationships will be based on joint commitment to continuous improvement, information exchange, planning and ongoing cost reduction. We seek the same level of mutual trust and commitment with our suppliers that we seek in our customer and employee partnerships. Progress has already been achieved, and we expect this activity to accelerate during 1996.

Employees. We have also been making good progress in partnering with employees. It is fundamental to this effort that all employees understand and carry out their responsibilities in achieving the business plan. Under our profit-sharing plans, we made payments of more than $25 million in 1995 for 1994 performance to about 18,000 salaried and hourly employees. Employee training centers to further the development of Bethlehem/USWA partnership activities were established at Burns Harbor and Sparrows Point, and community facilities are also available at other locations. A Learning Center for employees was established in Bethlehem, and we began a corporate initiative to promote higher education through scholarship grants for employees' children and matching gifts for contributions to colleges and universities.

Safety and Environment. During 1995, we intensified our efforts to improve our corporate safety and environmental performance. Sparrows Point improved its safety performance by more than 30 percent over 1994, and the corporate injury rate was reduced and the number of lost workday cases also declined. Burns Harbor maintained its excellent safety performance during 1995, and the PB&NE Railroad, a Bethlehem subsidiary, once again won an E. H. Harriman Institute award for outstanding safety performance.

In September, Bethlehem became the first steelmaker to endorse the CERES Principles, a comprehensive environmental code of conduct promoted by a coalition of national environmental groups and socially responsible investors.

In December, Bethlehem was among those honored as an "Environmental Champion" during an awards ceremony sponsored by McGraw-Hill in conjunction with the U.S. Environmental Protection Agency.

Outlook

As we look at 1996, the U.S. economy appears to be on a positive course of moderate and sustainable growth and low inflation. The U.S. manufacturing base that uses our steel is globally competitive in both technology and costs, and domestic steel producers, including Bethlehem, are the low-cost, high-quality suppliers to these manufacturers. These economic factors should result in good steel demand for the year and relatively high steel industry operating rates and levels of shipments.

We recognize that capacity additions in the domestic steel industry in the next few years will increase the intensity of competition in the United States, while further improving the international competitiveness of the American steel industry. We will continue to take actions to improve our competitive position by aggressively reducing costs throughout the corporation, improving our products and rebuilding our financial strength. Our Vision is to be the Premier Steel Company. By building on our achievements in 1995, and with the skills, dedication and teamwork of our employees, we fully intend to achieve that Vision.

Curtis H. Barnette, Chairman
January 31, 1996