Financial Review and Operating Analysis
General
Bethlehem reported net income of $81 million in 1994 compared to net losses of $266 million in 1993 and $550 million in 1992. Excluding the effects in 1993 and 1992 of the restructuring charges and changes in accounting discussed below, Bethlehem had net income of $24 million in 1993 and a net loss of $210 million in 1992. The improvement in results for 1994 compared to 1993 was primarily due to strong demand from the automotive, light construction and machinery markets that improved our realized prices, volume and mix.
The net loss for 1993 included a $350 million restructuring charge ($290 million after-tax). See Note D, Estimated Restructuring Losses, to the Consolidated Financial Statements. In addition, 1993 results included a one-time tax benefit of $25 million resulting from new tax legislation (see Note E, Taxes, to the Consolidated Financial Statements) and approximately $20 million in unusual costs incurred in connection with the labor contracts negotiated during 1993. See "Employees and Employment Costs" on page 9.
The net loss for 1992 included a $340 million net charge for the cumulative effect of changes in accounting, a $25 million litigation charge and a $31 million gain at the BethShip Divisionfor recovery of losses reported in prior years on a United States Navy contract.
Segment Results
Basic Steel Operations. The Basic Steel Operations segment had income from operations of $166 million in 1994 compared to losses from operations of $274 million in 1993 and $214 million in 1992. Excluding the effect in 1993 of the previously mentioned restructuring charge, this segment had income from operations of $76 million in 1993.
The improvement in this segment's operating results for the year 1994 compared to the year 1993 (excluding the restructuring charge) was due to higher realized steel prices, increased shipments and an improved product mix for flat rolled products. Average realized prices on a constant mix basis were 5% higher in 1994 than in 1993. This segment shipped 9.3 million net tons of steel products in 1994 compared to 9.0 million net tons in 1993 and 8.4 million net tons in 1992.
Raw steel production of the Basic Steel Operations segment, excluding discontinued facilities, was 9.8 million net tons in 1994 compared to 10.3 million net tons in 1993 and 10.0 million net tons in 1992.
The effects of changes in average realized prices, product mix and volume on total steel mill product revenues during the last two years were as follows:
Increase from prior year 1994 1993 Realized prices 5% 1% Product mix 4 3 Volume 3 7 Total Revenues 12% 11%
The benefit of these improvements in revenues in 1994 was partially offset by higher operating costs incurred in connection with capital projects at Burns Harbor and Pennsylvania Steel Technologies (PST) and severe winter weather early in the year, as well as losses at Bethlehem Structural Products Corporation (BSPC) and PST. Employment costs were also higher, principally from profit-sharing and pension expense.
The Burns Harbor Division shipped a record 5.1 million tons of steel products in 1994 compared to 4.8 million tons in 1993 and 4.4 million tons in 1992 and incurred approximately $120 million in higher operating costs in connection with a blast furnace reline and a coke oven rebuild. While these projects were under way, raw steel and coke production were reduced and we incurred significantly higher costs for purchased slabs and coke.
The Sparrows Point Division shipped 2.9 million tons of steel products in 1994 compared to 2.8 million tons in 1993 and 2.7 million tons in 1992, and in 1994 realized the benefit of significant capital investments made in recent years for a modernized hot-strip mill and a new hot-dip galvanizing line.
In 1994, BSPC incurred operating problems at its blast furnace operations, weak demand for heavy structural shapes and higher costs resulting from severe winter weather. As previously announced, BSPC will phase out its iron and steelmaking operations, production of heavy structural shapes, and foundry operations in 1995. Future structural shapes production will be consolidated on the 44-inch rolling mill, which is being upgraded and which will be sourced with continuously cast steel produced primarily at PST's newly modernized steelmaking facilities.
PST completed a modernization program in late 1994 designed to establish it as the low cost North American producer of high quality railroad rails, flat bars and specialty blooms. Start-up costs incurred in connection with the modernization program, higher scrap costs and costs resulting from severe winter weather, combined with lower shipments of rail products in 1994, hampered their results. As PST's modernized facilities achieve their design capability, Bethlehem expects to benefit from higher shipments of premium head-hardened rail, lower costs and improved quality.
Percentage of Bethlehem's Net Sales
by Segment and Major Product 1994 1993 1992
Basic Steel Operations
Steel mill products:
Sheets and tin mill products 66.1% 63.1% 59.1%
Plates 14.0 13.6 13.3
Structural shapes and piling 6.7 8.5 9.6
Rail products 2.8 3.6 2.8
Bars, rods and semifinished 1.2 1.2 2.6
Other steel mill products 1.3 .8 1.2
Other products and services
(including raw materials) 5.5 6.8 7.5
97.6 97.6 96.1
Steel Related Operations 2.4 2.4 3.9
100.0% 100.0% 100.0%
Percentage of Steel Mill Product
Shipments by Principal Market
(Based on net tons shipped) 1994 1993 1992
Principal Market
Service Centers, Processors
and Converters (including
semifinished customers) 45.9% 47.3% 46.3%
Transportation
(including automotive) 24.2 22.2 19.9
Construction 14.7 15.5 16.0
Containers 5.7 5.4 4.8
Machinery 4.9 5.1 5.5
Other 4.6 4.5 7.5
100.0% 100.0% 100.0%
Includes shipments to Bethlehem's manufacturing and fabricating operations.
Steel Related Operations. The Steel Related Operations segment (comprising the BethShip Division, BethForge, Inc. and CENTEC) reported a loss from operations of $32 million in 1994 compared to a loss from operations of $22 million in 1993 and income from operations of $11 million in 1992. The businesses of this segment experienced losses in 1994 due to a weak ship repair market, costs related to severe winter weather and higher operating costs, primarily related to BethForge's modernization program. Losses in 1993 were due to weak market conditions and costs incurred at the BethShip Division in connection with a new labor agreement. The 1992 results at the BethShip Division included a $31 million gain for recovery of losses reported in prior years on a United States Navy contract.
In 1995, the BethForge modernization program should improve cost and quality competitiveness. BethForge will discontinue operating its electric furnace steelmaking and ingot production facilities in Bethlehem later this year. Lower cost, higher quality ingots will then be supplied from PST's newly modernized steelmaking facilities. Also, the ship repair market has recently shown some improvement.
Liquidity
At December 31, 1994, total liquidity, comprising cash, cash equivalents and available borrowings under bank commitments, was $566 million compared to $523 million at December 31, 1993. Cash and cash equivalents were $160 million at December 31, 1994 compared to $229 million at December 31, 1993, and $406 million was available under Bethlehem's revolving credit agreement.
Cash provided from operating activities in 1994 was $384 million compared to $203 million in 1993 and $135 million in 1992. Principal uses of cash during 1994 were for pension funding, capital expenditures and debt repayments.
Bethlehem contributed $472 million to its pension fund in 1994 compared to $261 million in 1993 and $40 million in 1992. Contributions included net proceeds of $355 million from a public offering of Common Stock in March 1994. As a result of these contributions and the increase in long-term interest rates, Bethlehem's pension liability decreased to $1.1 billion at December 31, 1994 from $1.6 billion at December 31, 1993. The decrease in pension liability arising from the increase in long-term interest rates resulted in an increase in stockholders' equity of $50 million at December 31, 1994. See Note L, Stockholders' Equity, to the Consolidated Financial Statements.
In December 1994, Congress passed new pension legislation. The new legislation is not expected to significantly increase Bethlehem's annual required minimum contribution to its pension plans for the next several years, but it will increase over time the annual premium due to the Pension Benefit Guaranty Corporation. Bethlehem has contributed amounts to its pension fund substantially in excess of amounts required under current law and regulations. As a result, Bethlehem currently has a funding standard credit balance which would allow it under current law and regulations to defer all pension funding for about two years, although it presently has no plans to do so.
Bethlehem realized net cash proceeds from asset sales of $32 million in 1994, primarily from the sale of the remaining assets of its former Bar, Rod and Wire Division.
During 1994, Bethlehem issued approximately $31 million in new debt, principally to fund the construction of a solid waste facility at Burns Harbor, and refinanced about $103 million in tax-exempt revenue bonds. The proceeds were used to refund existing bonds that would have matured over the next several years.
During 1994, Bethlehem received additional bank commitments under its 1992 revolving credit agreement raising its total borrowing capacity to $500 million from $400 million. Bethlehem's accounts receivable and inventories are pledged as collateral under the agreement. This agreement expires at the end of 1996.
At December 31, 1994, no amounts were outstanding under Bethlehem's 1992 revolving credit agreement and $94 million was used for letters of credit. At December 31, 1993, there were no borrowings under the agreement and $106 million in letters of credit were outstanding. During 1994, Bethlehem repaid about $100 million in debt and capital lease obligations. Major uses of funds in 1995 include an estimated $350 million of capital expenditures, repayment of approximately $90 million of debt and capital lease obligations, and contributions to its pension fund. Bethlehem expects to maintain an adequate level of liquidity throughout 1995 from cash flow from operations, reductions in working capital and available borrowings under its revolving credit agreement.
Common Stock Market and Dividend Information
1994 1993
Prices* Prices*
Period High Low High Low
First Quarter $24.125 $19.875 $20.000 $14.875
Second Quarter 21.875 16.875 21.000 16.375
Third Quarter 23.750 18.875 19.125 12.875
Fourth Quarter 20.625 16.500 20.625 13.750
*The principal market for Bethlehem Common Stock is the New York Stock Exchange. Bethlehem Common Stock is also listed on the Chicago Stock Exchange. The high and low sales prices of the Common Stock as reported in the consolidated transaction reporting system are shown. The trading symbol for Bethlehem Common Stock is BS. Bethlehem has not paid a dividend on its Common Stock since the fourth quarter of 1991.
Capital Expenditures
Capital expenditures were $445 million in 1994 compared to $327 million in 1993 and $329 million in 1992. During 1994, one of Burns Harbor's two coke oven batteries was rebuilt and one of its two blast furnaces was relined. Burns Harbor's operating costs per ton were higher while these projects were under way due primarily to lower raw steel and coke production and increased costs for purchased slabs and coke. Work also progressed during 1994 on the construction of a coal injection facility that will lower the Division's operating costs through elimination of the use of natural gas as a blast furnace injectant and a reduction of the use of coke in the blast furnaces. This facility is expected to be operational in the first quarter of 1995
In late 1994, PST completed a modernization program which includes a 1.2 million ton state-of-the-art DC electric furnace, in-line rail head-hardening equipment, a ladle furnace and a vacuum degassing unit.
Approximately $259 million of additional capital expenditures were authorized in 1994. At December 31, 1994, the estimated cost of completing authorized capital expenditures was approximately $325 million compared to $676 million at December 31, 1993. Such authorized capital expenditures are expected to be completed during the 1995-1997 period.
Employees and Employment Costs
At year-end 1994, Bethlehem had approximately 19,900 employees compared to approximately 20,600 employees at the end of 1993 and 22,600 employees at the end of 1992. Approximately two-thirds of Bethlehem's employees are covered by its labor agreements with the United Steelworkers of America (USWA).
Under the terms of Bethlehem's 1993 labor agreements with the USWA, eligible employees at most steel operations received lump-sum bonuses totaling $14 million during 1994. On March 1, 1995, each eligible employee will receive a bonus of either $500 or 25 shares of Bethlehem Common Stock, at the election of the employee, and on August 1, 1995, each such employee will receive a $.50 per-hour wage increase.
Under the terms of the 1993 labor agreements, a new profit-sharing plan was established, effective January 1, 1994, equal to 8% of consolidated income before taxes, unusual items and expenses applicable to the plan plus 2% of adjusted profits of certain operations. In addition, under other provisions of the labor agreements, Bethlehem is 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 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). Bethlehem expects to pay approximately $30 million for profit-sharing and shortfall amounts in early 1995. As of December 31, 1994, shortfall amounts to be paid out of future profits were about $7 million
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 1992 and 1993 plan years. Under other provisions of that labor agreement, Bethlehem issued approximately 134,800 shares of Series B Preference Stock in 1994 and approximately 211,400 shares in 1993 to a trustee for the benefit of employees for 1993 and 1992, respectively, and expects to issue approximately 40,900 shares in early 1995 for the 1994 plan year.
For additional information concerning Bethlehem's employment costs, see the table below.
Employment Cost Summary All Employees (Dollars in millions) 1994 1993 1992 Salaries and Wages $999.3 $950.9 $1,058.0 Employee Benefits (including retirees): Pension Plans: Actives 108.0 84.3 87.3 Retirees 95.1 99.3 101.4 Medical and Insurance: Actives 152.2 140.9 143.2 Retirees 114.5 110.9 111.6 Payroll Taxes 90.1 89.1 88.7 Workers' Compensation 46.3 43.8 48.6 Supplemental Unemployment, Savings Plan and Other 27.5 27.9 25.2 Total Benefit Costs 633.7 596.2 606.0 Total Employment Costs $1,633 $1,547 $1,664 Employment Costs as a Percent of Net Sales 33.9% 35.8% 41.5%
Environmental Matters
Bethlehem is subject to stringent 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, 1994, Bethlehem spent approximately $275 million for environmental control equipment. Expenditures for new environmental control equipment totaled approximately $44 million in 1994, $35 million in 1993 and $18 million in 1992. The costs incurred in 1994 to operate and maintain existing environmental control equipment were approximately $115 million (excluding interest costs but including depreciation charges of $18 million) compared to $125 million in 1993 and $130 million in 1992.
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. Bethlehem believes that there will not be any significant curtailment or interruptions of any of its important operations as a result of these proceedings and negotiations. Existing environmental laws may be amended, new laws may be enacted by Congress and state legislatures, and new environmental regulations may be issued by regulatory agencies. For these reasons, Bethlehem cannot predict the specific environmental control requirements that it will face in the future. Based on existing and anticipated regulations promulgated under presently enacted legislation, Bethlehem currently estimates that capital spending for installation of new environmental control equipment will range from $40 million to $50 million in each of the next two years. However, estimates of future capital expenditures and operating costs required for environmental compliance are imprecise due 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 Bethlehem's future results of operations in particular quarterly or annual periods could be materially affected by the future costs of environmental compliance, Bethlehem believes that the future costs of environmental compliance will not have a material adverse effect on its consolidated financial position or on its competitive position with respect to other integrated domestic steelmakers that are subject to the same environmental requirements.
Year Ended December 31
(Dollars in million, except per share data) 1994 1993 1992
Net Sales $4,319.4 $4,323.4 $4,007.9
Cost and Expenses:
Cost of sales 4,287.3 3,834.2 3,789.9
Depreciation (Note A) 261.1 277.5 261.7
Selling, administration and general expense 137.4 156.9 159.3
Estimated restructuring losses (Note D) - 350.0 -
Total Costs and Expenses 4,685.8 4,618.6 4,210.9
Income (Loss) from Operations 133.4 (295.2) (203.0)
Financing Income (Expense):
Interest and other financing costs (Note A) (46.2) (63.2) (57.2)
Interest income 7.1 7.1 4.9
Income (Loss) Before Income Taxes and
Cumulative Effect of Changes in Accounting 94.5 (351.3) (255.3)
Benefit (Provision) for Income Taxes (Note E) (14.0) 85.0 45.0
Income (Loss) Before Cumulative Effect of
Changes In Accounting -$.35, ($3.37) and
($2.86) per share 80.5 (266.3) (210.3)
Cumulative Effect of Changes In Accounting- (340.0)
($4.15) per share (Note B)
Net Income (Loss) 80.5 (266.3) (550.3)
Dividends on Preferred and Preference Stock 43.1 39.8 24.3
Net Income (Loss) Applicable to Common Stock-$.35,
($3.37) and ($7.Ol) per share $37.4 $(306.1) $(574.6)
December 31
(Dollars in millions, except per share data) 1994 1993
Assets
Current Assets:
Cash and cash equivalents (Note A) $ 159.5 $228.9
Receivables, less allowances of $18.6 and $16.3 (Note F) 519.5 508.2
Inventories (Notes A and F)
Raw materials and supplies 331.9 341.9
Finished and semifinished products 534.9 494.8
Contract work in progress less billings of $2.3 and $10.3 16.1 15.8
Total Inventories 382.9 352.5
Other current assets 7.2 6.5
Total Current Assets 1,569.1 1,591.1
Property, Plant and Equipment less accumulated depreciation of
$4,167.9 and $4,107.0 (Note A) 2,759.3 2,684.3
Investments and Miscellaneous Assets (Note A) 124.2 124.0
Deferred Income Tax Asset-net (Note E) 903.2 926.7
Intangible Asset-Pensions (Note H) 426.6 600.6
Total Assets $5,782.4 $5,876.7
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $387.0 $360.9
Accrued employment costs 165.8 130.1
Postretirement benefits other than pensions (Note I) 138.0 132.3
Accrued taxes (Note E) 67.6 65.4
Debt and capital lease obligations (Note F) 88.9 95.5
Other current liabilities 163.9 130.0
Total Current Liabilities 1,011.2 914.2
Pension Liability (Notes D and H) 1,117.1 1,613.6
Postretirement Benefits Other Than Pensions (Notes D and I) 1,441.4 1,448.3
Long-Term Debt and Capital Lease Obligations (Note F) 668.4 718.3
Other Long-term Liabilities 388.5 485.7
Stockholders' Equity (Notes J, K, and L):
Preferred Stock -- at $1 per share par value (aggregate liquidation
preference of $481.2); Authorized 20,000,000 shares 11.6 11.6
Preference Stock -- at $1 per share par value (aggregate liquidation
preference of $89.0); Authorized 20,000,000 shares 2.6 2.8
Common Stock -- at $1 per share par value; Authorized 150,000,000 shares;
Issued, 111,882,276 and 93,412,852 shares 111.9 93.4
Held in Treasury, 1,996,715 and 2,003,760 shares at cost (59.5) (59.7)
Additional Paid-in Capital 1,948.6 1,588.4
Accumulated Deficit (859.4) (939.9)
Total Stockholders' Equity 1,155.8 696.6
Total Liabilities and Stockholders' Equity $5,782.4 $5,876.7
Year Ended December 31
(Dollars in millions) 1994 1993 1992
Operating Activities:
Net Income (Loss) $80.5 $(266.3) $(550.3)
Adjustments for items not affecting cash from operating
activities:
Depreciation 261.1 277.5 261.7
Deferred income taxes 13.0 (87.0) (45.0)
Other -- net 15.8 19.6 26.5
Estimated restructuring losses (Note D) - 350.0 340.0
Cumulative effect of changes in accounting (Note B) 340.0
Working capital*:
Receivables (22.7) (99.9) 5.2
Inventories (28.1) 172.8
Accounts payable 20.6 (59.2)
Employment costs and other 45.8 (5.6) (17.6)
Other-net (2.3) 14.9 1.0
Cash Provided from Operating Activities 383.7 203.2 135.1
Investing Activities:
Capital expenditures (444.6) (327.1) (328.7)
Cash proceeds from sales of businesses and assets 32.4 15.2 124.9
Other -- net (1.4) 5.6 7.2
Cash Used for Investing Activities (413.6) (306.3) (196.6)
Financing Activities:
Pension financing (funding) (Note H):
Pension expense 203.1 183.6 188.7
Pension funding (472.3) (261.1) (40.2)
Revolving and other credit borrowings (payments) -- net - (80.0) (74.0)
Long-term debt borrowings (Note F) 31.1 171.2 104.0
Long-term debt and capital lease payments (Note F) (99.9) (73.8) (105.3)
Cash dividends paid (Note L) (40.4) (36.1) (22.5)
Preferred Stock issued (Note L) - - 248.4
Common Stock issued (Note L) 355.3 171.3
Other payments (16.4) (28.4) (36.1)
Cash Provided from (Used for) Financial Activities (39.5) 123.8 185.9
Net Increase (Decrease) In Cash and Cash Equivalents (39.4) 20.7 124.4
Cash and Cash Equivalents-Beginning of Period 228.9 208.2 83.8
-End of Period $ 159.5 $228.9 $208.2
Supplemental Cash Payment Information:
Interest, net of amount capitalized $ 41.6 $55.7 $57.1
Income taxes (Note E) $ .2 $ 3.7 $ 1.3
*Excludes Financing Activities and Investing Activities.
Financial
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Chairman's Letter Business Units and Facilities
Financial Notes
Report of Auditors and Management Statement
Five-Year Financial and Operating
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Directors and Officers Stockholder Information
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Environment History
Vision Statement Public
Affairs Research