1995 Annual Report

Bethlehem reported net income of $180 million ($1.24 per share) in 1995 compared to $81 million ($.35 per share) in 1994. Excluding the effect of a $350 million ($290 million after-tax) restructuring loss, Bethlehem had net income of $24 million in 1993. 1995's improvement resulted principally from higher realized steel prices, partially offset by lower shipments and higher operating costs. 1994's improvement was from higher realized steel prices, higher shipments and an improved product mix. Sales in 1995 improved to $4.87 billion from $4.82 billion in 1994 and $4.32 billion in 1993.

Segment Results

Basic Steel Operations. Our Basic Steel Operations segment had income from operations of $311 million in 1995 compared to income from operations of $166 million in 1994 and, excluding the $350 million restructuring loss, $76 million in 1993.

1995's improvement was from higher realized steel prices, partially offset by lower shipments and higher operating costs. Shipments fell to 9.0 million tons from 9.3 million tons in 1994, principally from the softening in automotive markets and higher customer inventories at the beginning of 1995. Average realized prices were 5% higher than 1994. Employment costs were higher principally from higher profit sharing. Scrap and alloy market prices and depreciation expense were also higher.

1994's improvement, excluding 1993's restructuring charge, was from higher realized prices, increased shipments and an improved product mix for at rolled products driven by the strong demand in the automotive, light construction and machinery markets. 1994's shipments were about 250,000 tons higher than 1993's and average realized prices were up 5%.

The effects of changes in average realized steel prices, product mix and shipments on basic steel segment sales during the last two years were as follows:

Raw steel production increased to 10.4 million tons in 1995 from 9.8 million tons in 1994, when Burns Harbor relined a blast furnace, and 10.3 million tons in 1993.

Our Burns Harbor Division shipped 4.6 million tons of steel products in 1995 compared to 5.1 million tons in 1994 and 4.8 million tons in 1993. Despite the decline in shipments in 1995, Burns Harbor's operating results improved, principally from higher realized prices. The absence in 1995 of the costs related to rebuilding a blast furnace and coke oven in 1994 was partially offset by higher employment costs. In 1995, Burns Harbor received the coveted QS-9000 certification, after receiving ISO-9002 certification in 1994. The QS-9000 certification is the combination of the quality standards of domestic auto and truck manufacturers, which purchase a substantial portion of the sheet products produced at Burns Harbor. In 1995, Burns Harbor launched a relatively low-cost capital expenditure project to increase annual raw steel production by about 350,000 tons to reduce reliance on higher cost purchased steel.

Our Sparrows Point Division shipped 3.0 million tons of steel products in 1995 compared to 2.9 million tons in 1994 and 2.8 million tons in 1993. Sparrows Point's operating results improved as it also benefited from higher realized prices and increased facility utilization and productivity.

In late 1995, our Bethlehem Structural Products Corporation (BSPC) subsidiary discontinued iron and steelmaking operations, production of heavy structural shapes and foundry operations. Light and medium structural shapes production has been consolidated on the recently upgraded 44-inch rolling mill. It is now being supplied primarily with continuously cast blooms from our Pennsylvania Steel Technologies, Inc. (PST) subsidiary.

Shipments increased at PST as it increased sales of premium head-hardened rails. PST's modernization program and head-hardened rail trial qualifications have positioned it to benefit from the higher value head-hardened rail market. PST is now supplying cast blooms to BSPC and ingots to BethForge, significantly increasing steel production and reducing costs per ton at PST.

Percentage of Bethlehem's Net Sales by Segment and Major Product

Percentage of Steel Mill Product Shipments by Principal Market

Steel Related Operations. Our Steel Related Operations segment (BethShip, BethForge and CENTEC) reported a loss from operations of $42 million in 1995 compared to losses of $32 million in 1994 and $22 million in 1993. 1995 losses were from high costs at BethForge and a continued weak ship repair market for BethShip. In late 1995, BethForge shut down its electric furnace shop, incurring higher costs in the process, and began receiving ingots from PST. Losses in 1994 were due to costs related to severe winter weather and higher operating costs, primarily related to BethForge's modernization program and a weak ship repair market. Losses in 1993 were due to weak market conditions and costs incurred at BethShip in connection with a new labor agreement.

The BethForge modernization program should improve cost and quality competitiveness because of the lower cost and higher quality ingots being supplied by PST's modernized steelmaking facilities. During 1995, market conditions continued to remain weak for ship repair. We will continue to closely monitor the performance of these business units to determine whether their plans for improvement are being achieved and whether they are a positive cash contributor.

Liquidity and Capital Structure

At December 31, 1995, total liquidity, comprising cash, cash equivalents and funds available under our bank credit arrangement, totaled $512 million compared to $566 million at December 31, 1994. Cash and cash equivalents were $180 million at December 31, 1995, compared to $160 million at December 31, 1994, and $332 million was available for use under our credit arrangement.

Cash provided from operating activities in 1995, including $30 million proceeds from selling accounts receivable under our credit arrangement, was $586 million compared to $384 million in 1994 and $203 million in 1993. Principal uses of cash during 1995 included pension funding of $330 million, capital expenditures of $267 million and debt repayment of $121 million.

During 1995, we entered into a new five-year credit arrangement for $500 million with 15 banks to replace our existing $500 million secured credit agreement that was scheduled to expire in December 1996. We now have a separate $300 million receivables sale/purchase agreement through a wholly-owned special purpose subsidiary and a $200 million secured credit agreement. Our capital structure improved during the year from our profits and reduction in long-term debt. In addition to the scheduled debt payments, we redeemed all of our outstanding 9% debentures due 2000, which totaled $30 million, by using funds from our new receivables sale/purchase agreement, which had lower financing costs.

During 1995, long-term interest rates declined substantially, providing strong total returns for the financial markets, including our pension fund assets. Our $330 million contribution to the pension fund and better than market performance of our pension assets were essentially offset by the current-year actuarial charges and increase in our pension obligation caused by the decline in interest rates. The resulting net change in our pension obligation during the year caused a charge to our stockholders' equity of $67 million under required accounting rules.

The new pension legislation that Congress passed in 1994 is not expected to have any significant impact on our annual required minimum contribution to our pension trust fund for the next several years. It will, however, increase over time our annual required premiums to the Pension Benefit Guaranty Corporation. We have contributed amounts to our pension fund substantially in excess of amounts required under current law and regulations. As a result, we currently have a funding standard credit balance that would allow us to defer pension funding for almost two years, although we presently have no plans to do so.

Major uses of funds for 1996 include an estimated $300 million of capital expenditures, pension funding and repayment of approximately $90 million of debt and capital lease obligations. We expect to maintain an adequate level of liquidity throughout 1996 from cash flow from operations, reductions in working capital and available funds under our new credit arrangement.

Common Stock Market and Dividend Information

Capital Expenditures

Capital expenditures were $267 million in 1995 compared to $445 million in 1994 and $327 million in 1993. Major strategic projects during 1995 included the upgrade of the 44-inch rolling mill at BSPC, the modernization of the 160-inch plate mill at Burns Harbor and a project to increase the heat size of the basic oxygen furnaces at Burns Harbor. In 1995, work was completed and start-up began on the coal injection facility at Burns Harbor, which reduces the use of coke and natural gas at the blast furnaces.

About $360 million of additional capital expenditures were authorized in 1995. Among the expenditures authorized was the participation in a new joint venture, Chicago Cold Rolling. The joint venture, of which we have a 45% ownership interest, plans to construct a reversing cold mill near our Burns Harbor Division. This facility will improve our product mix by increasing sales of cold rolled product. Also authorized for 1996 are continued expenditures at the plate mill and improvements to the hot-strip mill at Burns Harbor. We are installing an accelerated cooling facility and a high-capacity leveler at the plate mill. The hot-strip mill will receive improved gauge and shape control. At December 31, 1995, the estimated cost of completing authorized capital expenditures was about $400 million compared to $325 million at December 31, 1994. Such authorized capital expenditures are expected to be completed during the 1996-1998 period.

Employees and Employment Costs

At year-end 1995, we had about 18,300 employees compared to about 19,900 employees at the end of 1994 and 20,600 employees at the end of 1993. About three-quarters of our employees are covered by our labor agreements with the United Steelworkers of America (USWA).

Under the terms of our 1993 labor agreements with the USWA, most employees at steel operations received a lump-sum bonus of either $500 or 25 shares of Bethlehem Common Stock, at the election of the employee, and a $.50 per hour wage increase in 1995. In early 1996, most employees at steel operations will receive a bonus of $.50 per-hour worked (maximum payment of $1,000) or the equivalent value of Bethlehem Common Stock, at the option of the Company, based on our having achieved the required level of 1995 adjusted consolidated pre-tax income. Also, profit sharing of 8% of adjusted consolidated annual income before taxes, unusual items and expenses applicable to the plan plus 2% of adjusted profits of certain operations is paid to USWA-represented employees in the following year. The 1993 labor agreements provide for Reopener Negotiations in March 1996 for certain wage and benefit items, but exclude pension and health care benefits. Issues that we are unable to reach agreement upon with the USWA will be submitted for final offer interest arbitration and any changes will be effective August 1, 1996.

Under other provisions of the labor agreements, we are required to pay "shortfall amounts" each year up to 10% of the first $100 million and 20% in excess of $100 million of consolidated income before taxes, unusual items and expenses applicable to the shortfall plan. Shortfall amounts arise when employees terminate employment and ESOP Preference Stock, held in trust for employees in reimbursement for wage and benefit reductions in prior years, is converted into Common Stock and sold for amounts less than the stated value of the Preference Stock ($32 for Series A and $40 for Series B). Profit sharing is also paid to nonrepresented employees based on specific Corporate and Business Unit plans. We paid about $38 million in 1995 and expect to pay about $75 million for income-related bonus, profit sharing and shortfall amounts in early 1996.

Under the terms of the profit-sharing plan provided for in the 1989 labor agreement with the USWA, no material profit-sharing payments were required for the 1993 plan year. Under other provisions of those labor agreements, we issued approximately 40,800 shares of Series B Preference Stock in 1995 and approximately 134,800 shares in 1994 to a trustee for the benefit of employees for 1994 and 1993, respectively, and expect to issue about 61,000 shares in early 1996 for the 1995 plan year.

For additional information concerning our employment costs, see the table below.

Employment Cost Summary-All Employees

Environmental Matters

We are subject to various federal, state and local environmental laws and regulations concerning, among other things, air emissions, waste water discharges, and solid and hazardous waste disposal. During the five years ended December 31, 1995, we spent approximately $235 million for environmental control equipment. Expenditures for new environmental control equipment totaled approximately $36 million in 1995, $44 million in 1994 and $35 million in 1993. The costs incurred in 1995 to operate and maintain existing environmental control equipment were approximately $120 million (excluding interest costs but including depreciation charges of $21 million) compared to $115 million in 1994 and $125 million in 1993.

Negotiations between Bethlehem and federal and state regulatory agencies are being conducted to resolve differences in interpretation of certain environmental control requirements. In some instances, those negotiations are being held in connection with the resolution of pending environmental proceedings. We believe that there will not be any significant curtailment or interruptions of any of our important operations as a result of these proceedings and negotiations. Existing environmental laws could be amended, new laws could be enacted by Congress and state legislatures and new environmental regulations could be issued by regulatory agencies. For these reasons, we cannot predict the specific environmental control requirements that we will face in the future. Based on existing and anticipated regulations promulgated under presently enacted legislation, we currently estimate that capital expenditures for the installation of new environmental control equipment will average about $30 million per year over the next two years. However, estimates of future capital expenditures and operating costs required for environmental compliance are subject to numerous uncertainties, including the evolving nature of regulations, possible imposition of more stringent requirements, availability of new technologies and the timing of expenditures.

Although it is possible that our future results of operations, in particular quarterly or annual periods, could be materially affected by the future costs of environmental compliance, we believe that the future costs of environmental compliance will not have a material adverse effect on our consolidated financial position or on our competitive position with respect to other integrated domestic steelmakers that are subject to the same environmental requirements.

To demonstrate our commitment to the environment, in September of 1995, Bethlehem and the Coalition of Environmentally Responsible Economies (CERES) signed a Statement of Endorsement and Mutual Commitment with respect to each other's environmental principles. A separate Safety, Health and Environmental Report will be available at a later date that will provide more information concerning our relationship with the CERES organization.

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