Chairman's Letter
To Our Stockholders
For Bethlehem, 1997 was a year of considerable achievement and significant progress toward
our Vision to be the Premier Steel Company.
Our objective is to maximize stockholder value by achieving and sustaining superior rates of return on the capital we have invested in each of our businesses and by effectively serving our customers, having partnerships among our employees and being a good corporate citizen. Our strategy for achieving this Vision is to: concentrate on steel, with a focus on being a low-cost, high-quality producer; rebuild our financial strength; and improve continuously in everything that we do.
Some of the highlights for 1997 include:
Our financial performance improved substantially over last year, with net income of $281 million, including an after-tax gain of $113 million on the sale of our equity interest in Iron Ore Company of Canada.
Our 1996 Comprehensive Restructuring Plan was completed, which included exiting five underperforming businesses, and we announced a decision to discontinue our Bethlehem Coke Division by the end of the first quarter 1998. These actions will eliminate the significant losses that were incurred at these Divisions.
Substantial progress was made in rebuilding our financial strength, especially by reducing our debt and unfunded pension liability and by increasing our stockholders’ equity and liquidity.
We announced a $300 million investment for a new cold rolling mill complex at Sparrows Point that, when combined with Division-wide competitiveness and cost-reduction initiatives, should enable Sparrows Point to achieve and sustain a superior rate of return on its assets.
We entered into a definitive merger agreement to acquire Lukens Inc., a leading North American plate producer.
Our bank credit facility was extended by two years to September 2002, and its size was increased by $25 million to $525 million.
Concentrating on Steel
During 1997, we strengthened the competitive position of our three core steel businesses – the Burns Harbor Division, the Sparrows Point Division and Pennsylvania Steel Technologies, Inc. – by continuing our focus on improving customer service, productivity, quality and costs.
Burns Harbor
Our Burns Harbor Division represents about 55% of our total revenues and ships about five
million tons per year of sheet and plate products, primarily to the automotive, service
center and machinery markets. Burns Harbor is one of the best, if not the best, steel
businesses in the world. Its costs are fully competitive with minimills, and we believe
that the quality of its products is superior.
We are currently enhancing Burns Harbor’s competitiveness by making a series of improvements to its hot strip mill and to its 160-inch plate mill. Also, we have recently approved a $70 million capital appropriation to modernize one of its two continuous casters to improve slab quality, increase productivity and reduce costs. We intend to keep Burns Harbor one of the most modern and competitive steel mills in the world.
Sparrows Point
Our Sparrows Point Division represents about 35% of our total revenues and ships over
three million tons per year of sheets, plates and tin mill products, primarily to the
construction, service center and container markets. Over the past few years, Sparrows
Point has made significant improvements in its competitiveness and profitability. It has
an excellent tidewater location and a number of highly competitive facilities, such as its
primary ironmaking and steelmaking operations, a modern hot strip mill and two new coating
lines. During 1997, Sparrows Point achieved outstanding levels of production in its
ironmaking, steelmaking, hot mill, cold mill and tin mill operations. Also, breakthrough
performance was achieved in reducing its costs.
In October of last year, our Board of Directors authorized a capital appropriation of about $300 million to construct a new cold rolling mill complex at Sparrows Point. This major investment is part of the Division’s comprehensive plan to achieve and sustain a superior rate of return on its assets. The new complex, which is scheduled to begin production early in 2000, is expected to help Sparrows Point lower its costs, improve its quality and further enhance its capabilities to meet customers’ expectations.
The decision to locate the new mill at Sparrows Point was made after months of consideration of alternative sites in other states. Significant factors in the decision were the cumulative benefits to the entire Division and the strategic initiatives and the cost- reduction plan developed by Sparrows Point management, which included significant participation by the United Steelworkers of America. We believe that our stockholders will be well served by this value-adding facility. It represents another significant step toward Bethlehem’s vision of being the Premier Steel Company.
Pennsylvania Steel Technologies (PST)
PST is the largest rail producer in the United States. It has many excellent facilities,
including a modern steelmaking complex with a DC electric furnace, a vacuum degasser,
ladle treatment facilities and state-of-the-art technology for producing premium
head-hardened railroad rail.
In 1997, PST increased its sales to the trade of higher value, higher margin products, such as rails and specialty blooms for forging applications. PST’s capabilities to produce ultra-clean, high-quality steel make its specialty bloom product very desirable to such customers as gas cylinder manufacturers and producers of sophisticated bar products for the automotive industry. With the recent strength and growth in the domestic rail market, PST achieved a record level of rail shipments in 1997.
We believe that PST will continue to improve the utilization of its assets, its product mix and its profitability over the next few years. Once it achieves these improvements, we believe that it can earn a superior rate of return on the capital that we have invested in this business and can be a significant contributor to improving our overall profitability.
Rebuilding Our Financial Strength
We made further progress during 1997 in improving our financial condition, especially by
reducing our unfunded pension obligation. Over the past four years, we have reduced our
pension liability by about $1.2 billion, from just over $1.6 billion at the end of 1993 to
$440 million at the end of 1997. We contributed $425 million to our Pension Trust in 1997,
and our plan is now about 95% funded. Eliminating our unfunded pension liability is one of
our highest priorities because it will significantly reduce our pension expense and
further strengthen our financial position.
Total liquidity for 1997 improved to $612 million from $446 million at December 31, 1996, and cash from operating activities increased to $551 million from $341 million in 1996.
Our objective is to have a capital structure that will earn us an investment-grade credit rating. Our debt-to-invested-capital ratio was 29% at the end of 1997, compared with 36% a year earlier, and our debt level and maturities over the next few years are relatively modest.
Restructuring Actions
During this past year, we completed our 1996 Comprehensive Restructuring Plan. We closed
our Bethlehem Structural operation in March, and we are currently in the process of
selling the individual assets of the mill. In September, we completed the sale of our
BethForge and CENTEC businesses. We will purchase a portion of our roll supply from Lehigh
Heavy Forge, the new operator, and we will also supply ingots from PST to Lehigh Heavy
Forge’s forging operation. In October, we sold our Sparrows Point Shipyard to the
Veritas Capital Fund, a New York-based merchant banking and investment firm. In October,
we also sold our High Power Mountain coal assets in West Virginia to Power Mountain Coal
Company, a subsidiary of A.T. Massey Coal Co., and in December, we announced our intention
to discontinue our Bethlehem Coke operations by March 31, 1998.
Profitable Growth
We intend to profitably grow our business to add value for our stockholders and to provide
new opportunities for our employees.
Recent Investments
In recent years, we have invested in three new sheet coating lines – one at Burns
Harbor, one at Sparrows Point and another in a joint venture in Jackson, Mississippi. We
have also made several other investments to grow our company through joint ventures, such
as Chicago Cold Rolling, Indiana Pickling and Processing, and Walbridge Coatings.In 1997,
we made an investment in TWB, a joint venture that produces laser-welded blanks for the
automotive industry and operates the largest blank welding plant in North America. We also
made an investment in Steel Construction Systems, a joint venture located in Orlando,
Florida, which supplies residential and commercial construction products. These
investments are helping us to upgrade our product mix into higher value products to supply
the fastest growing markets for steel.
Lukens Inc.
As previously announced, Bethlehem will acquire Lukens Inc. in a transaction valued at
about $740 million, including the assumption of about $250 million of debt. The equity
value of the transaction is about $490 million. Of the total consideration to be paid by
Bethlehem, 68% will be in the form of cash, with the remaining 32% in the form of
Bethlehem Common Stock. The acquisition should increase Bethlehem’s earnings per
share after an initial period required to integrate the operations of the two companies
and to sell Lukens’ stainless business. The transaction is expected to close by early
second quarter 1998, subject to approval by Lukens’ stockholders and regulatory
authorities.
The combination will create a more globally competitive and customer-focused plate business, with the broadest range of plate products in the industry. It will result in significant synergies, improved customer satisfaction and overall lower costs, which we believe will enhance value for our stockholders.
We have also announced that Bethlehem has entered into agreements with Allegheny Teledyne Incorporated that will become effective immediately after Bethlehem closes its merger with Lukens. Under these agreements, Bethlehem will provide Allegheny with conversion services for stainless steel hot bands and coiled plate wider than Allegheny can currently produce; Allegheny will purchase certain assets that Lukens uses in the manufacture of stainless steel products; and Allegheny will supply hot rolled bands to Bethlehem for further processing on the stainless steel coil finishing facilities that Lukens currently owns. We believe that this arrangement provides an excellent way for both Bethlehem and Allegheny to achieve important goals that will enhance distinctive businesses.
Improving Continuously
We recognize that we must continue to improve our performance in all areas, and we made
important progress during this past year.
Customers
In 1997, for the second consecutive year, Bethlehem was selected to receive General
Motors’ prestigious “Supplier of the Year” award. Bethlehem is the only
domestic supplier of flat rolled steel ever selected by General Motors to receive this
award and is one of only two such steel suppliers in the world. Also, Burns Harbor
received the Aegis Shipbuilding Award from Ingalls Shipbuilding and the Exemplary
Performance Award from Avondale Shipyards for its plate products.
During 1997, all of our core steel businesses continued to improve their reliability in delivery performance and their product quality, which are becoming more important as our customers search for ways to improve efficiency, reduce costs and increase competitiveness in their markets. We are especially proud that independent surveys have shown that Sparrows Point is the industry leader in customer satisfaction in several key markets.
Suppliers
We achieved new milestones during 1997 in our Strategic Sourcing initiative to achieve
significant cost reductions in the $3 billion of goods and services that we purchase
annually. In addition, our improved relationships with world-class suppliers are
contributing to our ability to deliver superior value and quality to our customers.
Strategic Sourcing has also contributed to the corporate-wide effort to achieve strategic
change through process innovations, challenging the status quo, driving to meet stretch
targets and utilizing multidisciplinary teamwork.
Information Technology
Developing a timely and cost-effective solution to the Year 2000 computer problem is every
information technology officer’s immediate objective. Because of early planning, we
have already completed about 65% of our resolution efforts and expect to complete this
important project by the end of 1998. The objective of all these activities is to continue
to serve our customers with no adverse Year 2000 impact on our business and manufacturing
systems. Also, of great importance, the costs associated with this effort will not be
material and will be charged to normal operating expenses.
Safety and Good Citizenship
There can be no greater way to emphasize the value of our employees and our communities
than having as our goal zero lost-time accidents and zero environmental incidents. We have
made encouraging progress toward that goal through our Employee Safety Process (ESP), a
joint initiative with the United Steelworkers of America (USWA). ESP promotes a
value-based “actively caring” philosophy that gives each employee the
opportunity to participate in keeping the workplace safe. Since 1994, when we initiated a
comprehensive joint safety improvement effort with the USWA, the lost workday case
incidence rate has declined by 43%, the all-injury incidence rate is down 34% and OSHA
total recordable injuries have decreased 39%. In 1997, we experienced our best corporate
safety performance ever.
Good citizenship and stewardship are also strong, vital components of our approach to the environment. We are proud of the improvements we have made in environmental performance, as measured by the Corporate Environmental Compliance Index (ECI), which is the monthly sum of all agency-reportable incidents relative to air, water and land. Since 1994, Bethlehem has reduced its monthly ECI by 45%. Bethlehem was named one of the Environmental Protection Agency’s 20 “environmental champions” for achieving and exceeding the agency’s voluntary 33/50 program goals. We also earned inclusion in EPA’s 1997 “Success Stories” by surpassing timeline and emission targets for reduction of emissions from our coke operations. Both Burns Harbor and Sparrows Point have active community outreach programs, with broad representation, which provide a forum to discuss environmental issues with their neighbors.
Bethlehem continues to provide community leadership through various charitable, civic and economic development organizations. For example, for the second consecutive year, our United Way giving was highlighted with Sparrows Point and Burns Harbor contributing more than $1 million to their local campaigns, mostly through employee giving.
Employees
We are proud of our capable and loyal employees and the impact they have had on our
improved performance. Our ongoing effort to continuously improve the skills and leadership
capabilities of our employees is an investment in Bethlehem’s future success. In
1997, our employee education and training programs provided over 645,000 employee training
hours, an average of 42 hours per employee. Our efforts are focused on ensuring that
employees understand our customers’ needs, on safely and efficiently fulfilling those
needs and on increasing our return on net assets and stockholder value. Our employees will
be our sustainable competitive advantage for the future, and our ongoing partnership with
employees remains one of our most important objectives.
Business Outlook
We believe the domestic economy will continue on a course of moderate and sustainable
growth and low inflation even though there continues to be considerable uncertainty about
the impact of the Asian financial crisis. We also believe that steel markets will continue
to be relatively good in the United States and that domestic industry shipments in 1998
will be about 101 million tons, compared with the 105.5 million tons shipped in 1997
– the highest level of shipments in 23 years.
Competition in 1998 is expected to be intense. We are very concerned about the high levels of unfairly traded imports and have appropriate remedies under active consideration. We also expect that new steel capacity will enter the marketplace during 1998. While there will be pressure on steel prices, we will continue to take actions to improve our competitiveness. We will enhance our customer service and reliability, increase the utilization of our facilities and aggressively reduce costs.
For Bethlehem, 1997 was a year of considerable achievement and significant progress, and we believe that Bethlehem is entering 1998 well positioned to take advantage of the opportunities of the future and to further improve stockholder value.
Curtis H. Barnette, Chairman
January 28, 1998
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�1998, Bethlehem Steel Corporation