1996 Annual Report

Financial Review and Operating Analysis

Our net loss of $309 million in 1996 included restructuring charges of $465 million ($382 million after tax) as a result of a Restructuring Plan that will result in our exiting five businesses. We plan to exit Bethlehem Structural, BethForge, CENTEC and BethShip Sparrows Point Shipyard. In the third quarter of 1996, we sold and leased assets of our Eagle Nest coal mine. We also wrote off impaired assets at Bethlehem Coke, which will continue to operate two coke oven batteries in Bethlehem, Pennsylvania. See Note C to the Consolidated Financial Statements.

Excluding the restructuring charges, we reported net income of $73 million ($.28 per share) in 1996, compared to net income of $180 million in 1995 and $81 million in 1994. Results for 1996 declined from 1995 principally from lower average realized steel prices and shipments, partially offset by a higher valued product mix. The improvement in 1995 over 1994 was from higher realized steel prices, partially offset by lower shipments and higher operating costs.

Sales in 1996 decreased to $4.68 billion from $4.87 billion in 1995 and $4.82 billion in 1994.

Segment Results

Basic Steel Operations. Our Basic Steel Operations segment had a loss from operations of $87 million in 1996, including $255 million of restructuring charges for exiting Bethlehem Structural, writing off impaired assets at Bethlehem Coke, and the sale and lease of certain assets of our Eagle Nest coal mine. Excluding restructuring charges, income from operations was $168 million in 1996, compared to $311 million in 1995 and $166 million in 1994.

1996’s results declined due to lower realized steel prices and lower structural product shipments, partially offset by an improved product mix from lower structural product shipments and a higher percentage of coated and cold rolled sheet products shipped at the Sparrows Point and Burns Harbor Divisions. Average realized prices were 3% lower in 1996 than they were in 1995. Shipments were 8.8 million tons in 1996 compared to 9.0 million tons in 1995.

The improvement in 1995 from 1994 was from higher realized steel prices, partially offset by lower shipments and higher operating costs. Shipments fell to 9.0 million tons in 1995 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.

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

Raw steel production decreased to 9.4 million tons in 1996 from 10.4 million tons in 1995 as a result of closing Bethlehem Structural’s steelmaking facilities. Raw steel production was 9.8 million tons in 1994.

The Burns Harbor Division shipped 4.8 million tons of steel products in 1996, compared to 4.6 million tons in 1995 and 5.1 million tons in 1994. Despite an increase in shipments and lower purchased steel and raw material costs in 1996, Burns Harbor’s operating results declined principally from lower average realized prices on all flat rolled products.

In 1996, Burns Harbor completed a capital expenditure project to increase annual steelmaking capability by nearly 400,000 tons to reduce its reliance on higher cost purchased steel. Burns Harbor is also realizing energy savings at its blast furnaces from the coal injection technology installed in 1995. We recently approved upgrading Burns Harbor’s No. 1 caster to improve productivity and costs. The work will be performed during a planned blast furnace reline in 1998.

The Sparrows Point Division shipped 3.2 million tons of steel products to trade customers in 1996, compared to 3.0 million tons in 1995 and 2.9 million tons in 1994. Despite increased shipments, improvements in its tin mill and hot strip mill operations and a better product mix from shipping more coated and cold rolled sheet products, Sparrows Point’s 1996 results declined principally from lower average realized prices on all light flat rolled products.

Shipments declined slightly at Pennsylvania Steel Technologies (PST) due to lower semifinished and large-diameter pipe shipments; however, shipments of PST’s premium head-hardened rail were double 1995’s levels. Extreme cold weather and a flood in early 1996 also affected PST’s results. PST has been a supplier of semifinished steel to Bethlehem Structural and BethForge. Although total shipments at PST could be lower due to our exiting Bethlehem Structural and BethForge, we believe there are market opportunities for higher margin semifinished products that could offset the loss of this business.

In 1995, we discontinued iron and steelmaking operations, production of heavy structural shapes and foundry operations in Bethlehem, Pennsylvania. In 1996, we announced a restructuring plan to improve financial performance and stockholder value, which included exiting the Bethlehem Structural business entirely. Efforts to sell Bethlehem Structural have been unsuccessful; therefore, Bethlehem Structural will cease production during the first quarter of 1997.

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 $241 million in 1996, including $210 million of restructuring charges related to our decision to exit all of the businesses in this segment. These businesses are continuing to operate while we are trying to sell them. Excluding the restructuring charges, the Steel Related segment had losses from operations of $31 million in 1996, compared to losses of $42 million in 1995 and $32 million in 1994.

Losses in 1996, excluding restructuring charges, improved from 1995 because of lower costs at BethForge and improved pricing and productivity at 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, high operating costs at BethForge and a weak ship repair market.

Liquidity and Capital Structure

At December 31, 1996, total liquidity, comprising cash, cash equivalents and funds available under our bank credit arrangement, totaled $446 million compared to $512 million at December 31, 1995.

Cash provided from operating activities in 1996 declined to $341 million from $586 million in 1995 from lower earnings and changes in working capital. Cash provided from operating activities was $384 million in 1994. Principal uses of cash during 1996 included capital expenditures of $259 million, pension funding of $170 million and debt repayments of $92 million.

During 1996, long-term interest rates increased and the equity markets provided strong total returns for financial assets, including our pension fund assets. Better than market performance on our pension fund assets, a decrease in our pension obligation caused by the increase in interest rates, and our $170 million contribution to our pension fund more than offset the increase in our pension obligation from current year pension expense, actuarial losses and our restructuring charges. The resulting reduction in our pension obligation during 1996 from $1.1 billion to $870 million also eliminated 1995’s charge to our stockholders’ equity of $67 million under required accounting rules.

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 about two years, although we presently have no plans to do so.

Major projected uses of funds for 1997 include an estimated $280 million of capital expenditures, repayment of about $50 million of debt and capital lease obligations, and pension funding. We expect to maintain an adequate level of liquidity throughout 1997 from cash flow from operations, reductions in working capital, proceeds from the sale of our interests in the Iron Ore Company of Canada, and available funds under our credit arrangement.

Common Stock Market and Dividend Information

* 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 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 $259 million in 1996 compared to $267 million in 1995 and $445 million in 1994. Major strategic projects during 1996 included the upgrade of the 160-inch plate mill and the modernization of the hot strip mill at Burns Harbor. In 1996, Burns Harbor completed a project to increase the heat size of its basic oxygen furnaces, reducing its need to purchase higher cost semifinished steel. Construction of the Chicago Cold Rolling joint venture has been completed and operations began during the first quarter of 1997.

At December 31, 1996, the estimated cost of completing authorized capital expenditures was about $386 million compared to $400 million at December 31, 1995. Such authorized capital expenditures are expected to be completed during the 1997-1999 period.

Employees and Employment Costs

At year-end 1996, we had about 17,500 employees compared to about 18,300 employees at the end of 1995 and 19,900 employees at the end of 1994. 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 our steel operations received a bonus in 1996 of $.50 per hour worked (maximum payment of $1,000) 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. Profit sharing is also paid to non-represented employees based on specific Corporate and Business Unit plans and performance. We paid about $75 million in 1996 and expect to pay about $45 million for income related bonus, profit-sharing and shortfall amounts in early 1997.

The 1993 labor agreements provided for Reopener Negotiations in March 1996 for certain wage and benefit provisions (excluding pensions and health care benefits) with any changes to be effective August 1, 1996, and continuing through the expiration of the labor agreement on August 1, 1999. We did not reach a settlement with the USWA, and the parties submitted unresolved issues to arbitration. The Arbitrator selected our final offer which includes three wage increases totaling $1.00 per hour, lump sums totaling up to $2,000 (one-half depends on achieving certain annual profits in 1997 and 1998) and continuing one floating holiday each year for the next three years. As a result of the Arbitrator’s decision, most employees at steel operations received a $.50 per hour wage increase on August 1, 1996 and will receive a $.25 per hour wage increase on August 1, 1997 and 1998.

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). We issued approximately 61,000 shares of Series B Preference Stock in 1996 and approximately 40,800 shares in 1995 to a trustee for the benefit of employees for 1995 and 1994, respectively, and expect to issue about 35,000 shares in early 1997 for the 1996 plan year.

Additional information concerning our employment costs is presented 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, 1996, we spent approximately $160 million for environmental control equipment. Expenditures for new environmental control equipment totaled approximately $29 million in 1996, $36 million in 1995 and $44 million in 1994. The costs incurred in 1996 to operate and maintain existing environmental control equipment were approximately $115 million (excluding interest costs but including depreciation charges of $19 million) compared to $120 million in 1995 and $115 million in 1994.

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 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.

Since 1946, Bethlehem has had a formal program of environmental control. We were one of the first industrial companies in the United States to recognize our obligation to our communities, their citizens and our environment. We continue to expand our commitment to the environment through the development and implementation of progressive environmental programs consistent with the goals identified in our Corporate Environmental Policy and the CERES Principles that we first endorsed last year.

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