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EXHIBIT 13
FINANCIAL REVIEW
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------------------------------------
Dollars in Millions (except per share data) 1993 1992 1991
- --------------------------------------------- ---------------------------------------
Net sales $3,888.2 $3,494.3 $3,404.5
Operating profit (loss) $ 26.6 $ (173.4) $(300.9)
Net loss $ (37.6) $ (815.6) $(275.1)
Net loss per common share $ (1.96) $ (25.82) $ (9.88)
- --------------------------------------------- ---------------------------------------
The Company's 1993 net loss of $37.6 million, or $1.96 per common
share, was significantly less than the 1992 net loss of $815.6 million, or
$25.82 per common share. Included in the 1992 loss is $656.2 million, or
$19.99 per common share, related to a one-time charge to recognize the
cumulative effect of adopting a new accounting standard, Financial Accounting
Standards Board ("FASB") Statement No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." Even excluding the 1992 charge,
1993 results were significantly improved from the 1992 loss of $159.4 million,
or $5.83 per common share.
Net sales of $3.89 billion in 1993 were 11 percent higher than 1992
levels, primarily due to increased volume as average selling prices remained
virtually unchanged at both of the Company's business segments. This compared
with a slight increase in sales in 1992 over 1991 as higher volume was largely
offset by declining prices.
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Two primary factors that adversely impacted 1993 results, both at the
Company's Integrated Steel Segment, were a $22.3 million charge for the early
closure of coking operations and a scheduled outage associated with a
mini-reline of its largest blast furnace which unfavorably impacted steel
operations by approximately $30 million. Despite these factors, significant
improvements in volume and continued cost reductions resulted in the Company
posting a $27 million operating profit for the year, a $200 million improvement
compared with 1992.
In 1992, the Company experienced the largest net loss in its history
due primarily to the adoption of FASB Statement No. 106 on retiree health care
costs and the Company's election to recognize immediately, rather than amortize
over 20 years, a $656 million after-tax transition obligation reflecting the
aggregate amount that would have been accrued had the standard been in effect
in prior years. This charge was reported on a separate line as a change in
accounting principle on the Statement of Operations and did not impact the
year's operating loss. However, operating results for 1993 and 1992, as
compared with 1991, were penalized by approximately $43 million ($28 million
after tax) and $63 million ($41 million after tax), respectively, from the
incremental costs of the accrual method required by FASB Statement No. 106
versus the prior method of accounting. See Financial Review -- Accounting
Matters for further details.
In 1992, the Company also adopted FASB Statement No. 109, "Accounting
for Income Taxes," which, at the time of adoption, had no material impact on
results of operations or the financial position of the Company. However,
without the adoption of this Statement, the Company would not have been able to
reduce its 1993 and 1992 losses by credits for deferred tax benefits of $39
million and $463 million, respectively. See Financial Review -- Accounting
Matters for further details.
Excluding the effect of the charge for the early closure of coking
operations in 1993, the effect in 1993 and 1992 of the adoption of FASB
Statement No. 106, and a 1991 restructuring provision of $215 million ($165
million after tax), the Company's adjusted net income would have been $6
million in 1993 compared with net losses of $119 million and $110 million in
1992 and 1991, respectively. The 1992 loss was lessened by an after-tax gain
of $15 million, or 44 cents per share, from the sale of a joint-venture
interest.
With I/N Tek and I/N Kote having reached the end of their learning
curves and completion of major upgrades at the steelmaking operations, the
Company's modernization program is complete. In addition, a new six-year labor
contract at Inland Steel Company is in place. These factors, coupled with the
Company's turnaround strategy launched in 1991 to improve performance by
increasing revenues, reducing costs and enhancing asset utilization, are
anticipated to provide the basis for continued improvement in 1994 operating
results.
To maintain financial flexibility, the Company sold 5.75 million new
shares of common stock in 1993 and 4.3 million new shares during 1992. Average
shares outstanding were 36 million in 1993, 33 million in 1992, and 31 million
in 1991. Results per common share are reported after preferred stock
dividends.
The Company's Integrated Steel Segment accounted for 64 percent of its
identifiable assets at year-end 1993, and during the year provided 53 percent
of its sales. Sales of sheet, strip and plate in the Integrated Steel Segment
accounted for 45 percent of consolidated net sales in 1993, 1992 and 1991.
There was no other class of similar products of the Company accounting for 10
percent or more of consolidated net sales in any of such years.
INTEGRATED STEEL SEGMENT
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Dollars and Tons in Millions 1993 1992 1991
- -------------------------------- -------------------------------------------------
Net sales $2,174.9 $1,909.4 $1,895.4
Operating loss $ (28.2) $ (200.6) $ (313.2)
Net tons shipped 4.8 4.3 4.2
- -------------------------------- -------------------------------------------------
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Inland Steel Company reported an operating loss of $28 million for
1993, the smallest loss since 1990, following operating losses of $201 million
in 1992 and $313 million in 1991. The 1991 operating loss included a $205
million restructuring provision but was not affected by the incremental expense
related to the adoption of FASB Statement No. 106 that negatively impacted 1993
and 1992 results by $39 million and $53 million, respectively.
The 1993 financial results were further negatively affected by
approximately $30 million due to the unfavorable impact on steel operations of
the scheduled outage of the largest blast furnace at the Indiana Harbor Works
for a mini-reline. In addition, there was a $22.3 million charge taken for the
early closure of the Company's remaining cokemaking facilities due to their
inability to meet environmental regulations and deteriorating operating
performance. Partially offsetting these unfavorable items was a $24 million
LIFO profit recognition due to inventory reductions.
Net sales increased 14 percent in 1993 to $2.17 billion due almost
entirely to an increase in shipments to 4.8 million tons. The average selling
price for 1993 was virtually unchanged from 1992. In 1992, the slight increase
in volume of 2 percent to 4.3 million tons was largely offset by lower selling
prices resulting from the sale of steel to I/N Kote at a contractual price less
than the cost of production, as discussed below. Inland Steel Company operated
at 83 percent of its raw steelmaking capability in 1993, compared with 79
percent in 1992 and 74 percent in 1991.
In 1992, a slower-than-expected shift in galvanized products to I/N
Kote, as well as the initial recognition of interest and depreciation expense
associated with the I/N Kote facility, added approximately $40 million to
operating losses. Also, an outage of the No. 7 Blast Furnace reduced
production by 140,000 tons, which increased the operating loss by nearly $30
million. These 1992 problems, coupled with an addition of $12 million to a
reserve for environmental matters, more than offset the benefits of reduced
costs and a $23 million gain on the sale of half of Inland's 25 percent
interest in Walbridge Coatings.
Inland Steel Company embarked in 1991 on a three-year turnaround
program to significantly reduce its underlying cost base by year-end 1994. The
1991 restructuring charge of $205 million provided for the write-off of
facilities, an environmental reserve and the cost of an estimated 25 percent
reduction in the workforce. Employment has been reduced by approximately 2,300
people from the end of 1991 through year-end 1993, and an additional 1,200 jobs
are expected to be eliminated by the end of 1994. The 1993 effect of this
program represents a savings of approximately $140 million in employment costs
and $10 million in decreased depreciation expense. However, the savings from
reduced employment was partially offset by increased wages under the Company's
labor agreements and increased medical benefit costs as the Company began to
accrue in 1992 for postretirement medical benefits.
By year-end 1992 and throughout 1993, I/N Tek was operating near
capacity and producing consistently high-quality steels. In August 1993, I/N
Kote was operating near design capacity and, by year-end 1993, had achieved
product qualification at all major customers. Under the I/N Kote partnership
agreement, Inland Steel Company supplies all of the steel for the joint venture
and, with certain limited exceptions, is required to set the price of that
steel to assure that I/N Kote's expenditures do not exceed its revenues.
During 1993, Inland Steel Company's sales price approximated its cost of
production, but was still significantly less than the market value for
cold-rolled steel. Beginning in 1993, I/N Kote expenditures included principal
payments and provision for return on equity to the partners. Therefore, Inland
Steel Company's ability to realize a satisfactory price on its sales to I/N
Kote depends on the facility achieving near capacity operations and obtaining
appropriate pricing for its products.
The Company's remaining cokemaking facilities were closed by year-end
1993. The Company determined that it was uneconomical to repair the coke
batteries sufficiently to continue cost-effective operations that would comply
with current environmental laws. To replace the Company-produced coke, Inland
Steel Company entered into a long-term contract and other arrangements to
purchase coke. In addition, Inland Steel Company and NIPSCO, a local utility,
formed a joint venture which constructed and is operating a pulverized coal
injection facility at the Indiana Harbor Works. This facility injects coal
directly into the blast furnaces and is expected to reduce coke requirements by
approximately 30 percent, or 600,000 tons a year, when fully operational. The
joint venture commenced operations in the third quarter of 1993.
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SERVICE CENTER SEGMENT
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Dollars and Tons in Millions 1993 1992 1991
- --------------------------------------- -----------------------------------------------------------
Net sales $1,893.3 $1,716.6 $1,655.9
Operating profit $ 56.4 $ 27.1 $ 16.2
Net tons shipped 2.08 1.87 1.74
Plants operated 56 56 56
- --------------------------------------- -----------------------------------------------------------
The Service Center Segment, known as Inland Materials Distribution
Group ("IMDG"), continued to expand market share in 1993. In the past two
years, operating profits rose 248 percent to $56 million. Excluding the
incremental effect of FASB Statement No. 106, which affected 1993 and 1992,
IMDG's operating profits were $60 million in 1993, $37 million in 1992 and $16
million in 1991. This two year increase has been accomplished, despite some
reduction in prices, through increased volume.
Net sales rose 10 percent in 1993 due almost entirely to an increase
in volume as the average selling price per ton increased minimally. In 1992,
the 4 percent increase in net sales resulted from a 7 percent increase in
tonnage that was partially offset by a 3 percent decrease in average selling
price per ton.
Both of IMDG's businesses were profitable in 1993. The general line
business, which supplies a wide range of metals as well as industrial plastics,
was profitable in all four regions while expanding market share. The coil
processing business was profitable in 1993 after recording a slight operating
loss in 1992.
LIQUIDITY AND FINANCING
Cash and cash equivalents increased to $251 million at year-end 1993 from $138
million on December 31, 1992. Cash and cash equivalents on December 31, 1991
totaled $47 million. There was no short-term bank borrowing outstanding at
year-end 1993 or at any time during 1993. During 1992, short-term bank
borrowing averaged $13 million and peaked at $40 million in that year.
In the 1993 fourth quarter, the Company sold 5.75 million shares of
common stock, and is using the net proceeds of $179 million to reduce fixed
charges of the Company and its subsidiaries. At year-end 1993, Inland Steel
Company called the remaining $75 million principal amount of outstanding Series
O, P, and Q First Mortgage Bonds for redemption on January 28, 1994. In
January 1994, the Company announced that Inland Steel Company would purchase a
currently leased caster facility. Under the terms of the purchase agreement,
Inland Steel Company will pay $83 million for the lessor's equity interest in
the No. 2 Basic Oxygen Furnace Shop caster facility that is leased from a
subsidiary of General Electric Capital Corporation. In addition, in connection
with such purchase, Inland Steel Company will record $63 million of debt.
In the second quarter of 1993, Inland Steel Company refinanced $40
million of 9.75 percent and 10.0 percent coupon pollution control revenue bonds
at an interest rate of 6.8 percent.
In 1992, approximately $150 million and $100 million, respectively,
was raised through the sale of the Company's 12.75% Notes and the Company's
common stock.
Cash availability as well as various covenants in subsidiary borrowing
arrangements limited the cash that subsidiaries could transfer to the Company
in the form of dividends and advances to approximately $225 million at year-end
1993. This amount is subject to change based on the financial performance of
each subsidiary.
An earnings coverage test in the indenture covering the Inland Steel
Company First Mortgage Bonds precluded issuance of additional mortgage bonds in
1993. In addition, the Company's subsidiary borrowing arrangements, as well as
both the Series T First
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Mortgage Indenture and the indenture under which the 12.75% Notes were issued,
contain covenants limiting financial flexibility and the Company's ability to
issue additional debt. Certain covenants in the indenture relating to the
12.75% Notes also limit the Company's ability to declare and pay cash
dividends.
In 1989 the Company sold $185 million of its Series F Exchangeable
Preferred Stock and agreed to repurchase an identical amount of Company common
stock. By year-end 1993, $144 million had been spent to purchase 4.6 million
shares. In December 1990, the Company suspended further open-market stock
purchases under this agreement.
The Company's subsidiaries continue to maintain committed credit
facilities totaling $225 million. In the second quarter of 1993, one of these
agreements, a $100 million credit facility arranged by a special-purpose
subsidiary of Inland Steel Company, was extended to November 30, 1995. The
credit facility is secured by receivables sold to this subsidiary by Inland
Steel Company. The $100 million Ryerson unsecured revolving credit facility
extends to March 31, 1995 and the $25 million Tull unsecured credit facility
extends to December 15, 1994. The interest rates on borrowings under such
credit agreements are, at the Company's option, based on Eurodollar,
Certificate of Deposit, or Base (the greater of federal funds or prime) rates.
At year-end, the highest interest rate option for borrowings under any of these
credit agreements was the applicable prime rate plus .75 percent. In addition
to the Company's credit facilities, a $55 million revolving credit agreement
secured by inventories and receivables was established in 1993 for I/N Kote to
provide for the joint venture's working capital needs, thus reducing the need
for the partners to provide additional funds to I/N Kote for that purpose.
The Company believes that its present cash position, augmented by its
subsidiaries' credit facilities and the anticipated cash flow from operations
provided by cost reductions and increased revenues, will provide sufficient
liquidity to meet its scheduled debt retirements, pay preferred dividends, fund
its capital program and meet any operating cash requirements that may arise for
at least the next two years. The Company ended 1993 with long-term debt of
$777 million. The average interest rate on this debt is approximately 10
percent.
Due to a substantial decrease in stockholders' equity in 1992
primarily resulting from the adoption of FASB Statement No. 106, the ratio of
long-term debt to total capitalization of 55 percent and 63 percent reported at
year-end 1993 and 1992, respectively, was substantially higher than the 38
percent reported at year-end 1991. Including Series F Preferred Stock, the
ratio of long-term debt and redeemable preferred stock to total capitalization
was 69 percent at December 31, 1993 compared with 77 percent and 47 percent at
year-end 1992 and 1991, respectively.
In addition, Inland Steel Company guarantees its 50 percent share of
I/N Kote borrowings, a PCI joint-venture loan, and a portion of the debt of the
Empire Iron Mining partnership amounting to $258 million, $35 million, and $23
million, respectively, at year-end 1993. Because the Empire guarantee has not
been invoked since its inception in 1978 and because of the current strong
demand for steel products, the Company does not believe these guarantees will
be called upon.
The Company's debt ratings at year-end 1993 were unchanged from 1992
and were:
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Ratings at Year End 1993
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INLAND STEEL INDUSTRIES NOTES
Moody's Ba3
Standard & Poor's B+
Duff & Phelps BB-
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INLAND STEEL COMPANY FIRST MORTGAGE BONDS
Moody's Ba3
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Standard & Poor's BB-
Duff & Phelps BB+
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CAPITAL EXPENDITURES
Dollars in Millions 1993 1992 1991
- -------------------------------- -------------------------------------------------
Capital expenditures
Integrated Steel $ 86.1 $ 55.1 $ 124.7
Steel Service Centers 19.3 9.3 9.8
General corporate and other .2 - 5.7
- -------------------------------- -------------------------------------------------
Total capital expenditures $ 105.6 $ 64.4 $ 140.2
- -------------------------------- -------------------------------------------------
Capital expenditures of $106 million in 1993, although higher than the
30 year low experienced in 1992, remained below depreciation for the second
straight year. With the completion of the mini-reline of the No. 7 Blast
Furnace, all major facility upgrades are now complete.
Exclusive of the caster lease buyout discussed earlier, anticipated
capital expenditures in 1994 of $110 million will be slightly higher than 1993
but less than 1994 depreciation expense. These projects are expected to be
funded by cash generated from operations and cash on hand at year-end 1993.
EMPLOYMENT MATTERS
Inland Steel Company and the United Steelworkers of America entered into a new
labor agreement, effective August 1, 1993, covering wages and benefits through
July 31, 1999. Among other things, the agreement provides a wage increase of
$.50 per hour in 1995, a $500 bonus in each of 1993 and 1994 (totaling in each
case approximately $4 million) and a potential bonus of up to $1,000 per
employee (approximately $8 million in total) based on Inland Steel Company
achieving $150 million of pre-tax income in 1995 (adjusted to exclude the
incremental FASB Statement No. 106 costs and such bonus.) In addition, all
active employees will receive an additional week of vacation in 1994 and in
1996. The agreement provides for a reopener on wages and certain benefits in
1996 with an arbitration provision to resolve unsettled issues, thereby
precluding a work stoppage over the six-year contract term. The agreement also
provides for election to the Company's Board of Directors of a union designee
acceptable to the Board, restricts Inland Steel Company's ability to reduce the
union workforce (generally limited to attrition and major facilities
shutdowns), allows greater flexibility to institute work rule changes, and
requires quarterly rather than annual payment of profit sharing amounts,
significant improvements in pension benefits for active employees, and the
securing of retiree health care obligations through certain trust and second
mortgage arrangements. "First dollar" health care coverage is eliminated under
the agreement through the institution of co-payments and increased deductibles
for medical benefits. Due to expected reductions in the workforce, this
contract is not anticipated to result in a net increase in employment cost for
the next three years in spite of increased pension benefits, bonuses, and the
scheduled wage increase.
Average employment declined 6 percent during 1993 after declining 8
percent during each of the prior two years, reflecting continuing efforts by
the Company to implement its cost-reduction program. As announced in 1991, the
Company plans to reduce employment at its corporate headquarters and at Inland
Steel Company by 25 percent from year-end 1991 to year-end 1994. Total
employment costs in 1993 decreased 2 percent from 1992 while average employment
cost per employee increased 5 percent. In 1992, total employment costs and
average employment cost per employee increased 4 percent and 12 percent,
respectively, as the Company
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began to accrue for postretirement medical benefits and paid wage increases
under its previous agreement with the Steelworkers' union. Had the Company not
adopted FASB Statement No. 106, total employment costs would have decreased 3
percent in 1992 from 1991.
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EMPLOYEES
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(monthly average receiving pay) 1993 1992 1991
- ----------------------------------------------- ---------------------------------------------------
Integrated Steel 10,857 11,847 13,038
Steel Service Centers 5,157 5,168 5,392
Headquarters and other 138 166 170
- ----------------------------------------------- ---------------------------------------------------
Total 16,152 17,181 18,600
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CONSOLIDATED EMPLOYMENT COSTS*
Dollars in Millions (except averages)
1993 1992 1991
- ----------------------------------------------- ---------------------------------------------------
Direct compensation $665.0 $ 682.3 $ 697.5
- ----------------------------------------------- ---------------------------------------------------
Employee benefits
Group insurance costs 77.1 64.4 85.8
Postretirement benefits other than pensions 95.7** 111.0** 44.3
Pension costs (credits) (4.6) (9.2) (18.8)
Social security and unemployment compensation taxes 54.6 53.9 55.6
Workers' compensation expense 10.8 12.0 14.3
Thrift Plan costs 9.7 10.5 12.7
Cost of supplemental unemployment benefit plans 6.5 8.5 7.6
Industry welfare and retirement funds 3.2 2.5 2.7
All other 6.9 4.8 5.7
- ----------------------------------------------- ---------------------------------------------------
Total cost of employee benefits 259.9 258.4 209.9
- ----------------------------------------------- ---------------------------------------------------
Total employment costs $ 924.9 $ 940.7 $ 907.4
- ----------------------------------------------- ---------------------------------------------------
Average employment cost $57,265 $54,750 $48,785
per employee
- ----------------------------------------------- ---------------------------------------------------
*This table does not include the additional costs due to workforce reductions
included in the 1991 restructuring provision.
**Includes incremental non-cash costs resulting from adoption of FASB Statement
No. 106.
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PENSIONS
At year-end 1993, the market value of Inland Steel Industries Pension Plan
assets totaled $1,794 million, a $108 million increase during the year.
Liabilities also rose because of the increased pension benefits provided in the
new labor agreement with the United Steelworkers and the requirement for
financial reporting purposes, that the calculation of Plan liabilities be based
on the current yield on high grade fixed income obligations, which are
presently at a 20 year low. As a result, Pension Plan liabilities of $2,077
million exceeded assets at year-end 1993. However, under ERISA funding
guidelines, which take a longer term view in determining the interest rate to
use in valuing liabilities, the Pension Plan continues to be adequately funded.
The Company will report a pension cost in 1994 of approximately $34 million, as
compared with a credit of $5 million in 1993. This is the first reported
pension cost since 1985.
The annualized return earned in the Pension Plan's diversified
portfolio for the past ten years exceeded 14 percent annually and in 1993 the
Plan earned a 16.2 percent return. Pension benefits of $146 million were paid
to 15,748 retirees and their beneficiaries in 1993, compared with $143 million
paid to 15,642 retirees in 1992.
ACCOUNTING MATTERS
FASB Statement No. 106 requires that the cost of retiree medical and life
insurance benefits be accrued during the working years of each employee.
Previously, retiree medical benefits were expensed as incurred after an
employee's retirement. Adoption of this standard in 1992 did not and will not
affect cash flow as liabilities for health care and life insurance benefits are
not pre-funded and cash payments will continue to be made as claims are
submitted. The net present value of the unfunded benefits liability as of
December 31, 1993, calculated in accordance with that Statement was
approximately $1.0 billion. The expense provision for these benefits for 1993
was $96 million, which was $43 million more than the cash benefit payments for
the year. The unfunded liability will continue to grow, since accrual-basis
costs are expected to exceed cash benefit payments for several more years. The
reported year-end benefits liability and postretirement benefits cost for the
year reflect changes made during the year incorporating the favorable effects
of the new United Steelworkers of America labor contract and revised actuarial
assumptions incorporating more current information regarding claim costs and
census data, partially offset by a reduction in the discount rate used to
calculate the benefits liability. (See Note 10 to the consolidated financial
statements for further details).
FASB Statement No. 109 requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that have
been recognized in the Company's financial statements or tax returns. At
December 31, 1993, the Company had a net deferred tax asset of $473 million of
which $445 million relates to the temporary difference arising from the
adoption of FASB Statement No. 106. While the Company believes it is more
likely than not that taxable income generated through future profitable
operations will be sufficient to realize all deferred tax assets, a secondary
source of future taxable income could result from tax planning strategies,
including the Company's option of changing from the LIFO method of accounting
for inventories to the FIFO method (such change would have resulted in
approximately $350 million of additional taxable income as of year-end 1993
which would serve to offset approximately $120 million of deferred tax assets)
and selection of different tax depreciation methods. After assuming such
change in accounting for inventories, the Company would need to recognize
approximately $1.0 billion of taxable income over the 15-year net operating
loss carryforward period and the period in which the temporary difference
related to the FASB Statement No. 106 obligation will reverse, in order to
fully realize its net deferred tax asset. The Company believes that it is more
likely than not that it will achieve such taxable income level. (See Note 11
to the consolidated financial statements for further details regarding this net
deferred tax asset.)
ENVIRONMENTAL ISSUES
Inland Steel Company has significantly reduced discharges of air and water
pollutants at its Indiana Harbor Works complex in East Chicago, Indiana in
recent years and is committed to operating its facilities in an environmentally
acceptable manner. On June 10, 1993, the U.S. District Court for the Northern
District of Indiana entered a consent decree that resolved all matters raised
by a lawsuit filed by the EPA in 1990. The consent decree includes a $3.5
million cash fine, environmentally beneficial projects at the Indiana Harbor
Works through 1997 costing approximately $7 million, and sediment remediation
of portions of the Indiana Harbor Ship Canal
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and Indiana Harbor Turning Basin estimated to cost approximately $19 million
over the next several years. The fine and estimated remediation costs were
provided for in 1991 and 1992. After payment of the fine, the Company's
reserve for environmental liabilities, including those in connection with the
consent decree, totaled $19 million. The consent decree also defines
procedures for remediation at Inland Steel Company's Indiana Harbor Works. The
procedures defined establish essentially a three-step process, each step of
which requires agreement of the EPA before progressing to the next step in the
process, consisting of: assessment of the site, evaluation of corrective
measures for remediating the site, and implementation of the remediation plan
according to the agreed-upon procedures. The Company is presently assessing
the extent of environmental contamination. The Company anticipates that this
assessment will cost approximately $1 million to $2 million per year and take
another three to five years to complete. Because neither the nature and extent
of the contamination nor the corrective actions can be determined until the
assessment of environmental contamination and evaluation of corrective measures
is completed, the Company cannot presently reasonably estimate the costs of or
the time required to complete such corrective actions. Such corrective actions
may, however, require significant expenditures over the next several years that
may be material to the results of operations or financial position of the
Company. Insurance coverage with respect to such corrective action is not
significant.
Capital spending for pollution control projects totaled $7 million in
1993, down from $11 million in 1992. Another $44 million was spent in 1993 to
operate and maintain such equipment, versus $46 million a year earlier. During
the five years ended December 31, 1993, the Company has spent $302 million to
construct, operate and maintain environmental control equipment at its various
locations.
Environmental projects previously authorized and presently under
consideration, including those designed to comply with the 1990 Clean Air Act
Amendments, but excluding any amounts that would be required under the consent
decree settling the 1990 EPA lawsuit, will require capital expenditures of
approximately $20 million in 1994 and $13 million in 1995. It is anticipated
that the Company will make annual capital expenditures of $5 million to $10
million in each of the three years following. In addition the Company will
have ongoing annual expenditures of $40 million to $50 million for the
operation of air and water pollution control facilities to comply with current
Federal, state and local laws and regulations. Due to the inability to predict
the costs of corrective action that may be required under the Resource
Conservation and Recovery Act and the consent decree in the 1990 EPA lawsuit,
the Company cannot predict the amount of additional environmental expenditures
that will be required. Such additional environmental expenditures, excluding
amounts that may be required in connection with the consent decree in the 1990
EPA lawsuit, however, are not expected to be material to the results of
operations or financial position of Inland Steel Company.
INTERNATIONAL TRADE ISSUES
Domestic steel producers face significant competition from foreign producers
and have been adversely affected by imports. Imports of steel mill products
accounted for approximately 19 percent of the domestic market in 1993, down
from the 1984 peak of 26 percent. Many foreign steel producers are owned,
controlled or subsidized by their governments. In 1992, the Company and
certain domestic steel producers filed unfair trade petitions against foreign
producers of certain bar, rod and flat-rolled steel products. During 1993, the
International Trade Commission ("ITC") upheld final subsidy and dumping margins
on essentially all of the bar and rod products and about half of the
flat-rolled products, in each case based on the tonnage of the products against
which claims were brought. Appeals of the adverse ITC decisions have been
filed in the U.S. Court of International Trade or similar jurisdictional
bodies, and foreign producers have appealed certain of the findings against
them. These appeals are pending and decisions are not expected before
September 1994. It is not certain how the ITC actions and the appeals will
impact imports of steel products into the United States or the price of such
steel products.
On December 15, 1993, President Clinton notified the U.S. Congress of
his intent to enter into agreements resulting from the Uruguay Round of
multilateral trade negotiations under the General Agreement on Tariffs and
Trade. The key provisions applicable to domestic steel producers include an
agreement to eliminate steel tariffs in major industrial markets, including the
United States, over a period of 10 years commencing July 1995, and agreements
regarding various subsidy and dumping practices as well as dispute settlement
procedures. Legislation must be enacted in order to implement the Uruguay
Round agreements. Until that process is completed, it will not be possible to
assess the extent to which existing U.S. laws against unfair trade practices
may be weakened.
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SUMMARY BY QUARTER (Unaudited)
Dollars in Millions (except per share data)
- -----------------------------------------------------------------------------------------------------------------------------
Per Common Share
--------------------------------------------
Market Price
------------------------------
Net Gross Profit Income (Loss) Net Income Net Income
Sales (Loss) Before Taxes (Loss) (Loss) High Low Close
- -----------------------------------------------------------------------------------------------------------------------------
1993
First Quarter $ 941.5 $ 27.5 $ (47.5) $ (31.4) $ (1.12) $24 3/4 $20 $22
Second Quarter 996.4 72.8 (3.8) (2.5) (.30) 29 1/8 21 1/2 28 3/4
Third Quarter 972.0 84.0 9.0 17.0 .25 30 1/4 24 3/4 28 1/8
Fourth Quarter 978.3 63.3 (31.3)* (20.7)* (.79)* 35 28 33 1/8
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Year $3,888.2 $ 247.6 $ (73.6) $ (37.6) $ (1.96) $35 $20 $33 1/8
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
1992
First Quarter $ 895.9 $ 15.4 $ (56.3) $(694.0)** $(22.68)** $26 $21 1/8 $22 5/8
Second Quarter 909.4 37.2 (12.6) (8.5) (.53) 27 21 1/4 26
Third Quarter 858.6 4.6 (67.5) (45.4) (1.56) 26 1/4 18 1/8 18 1/2
Fourth Quarter*** 830.4 (50.9) (122.2) (67.7) (2.15) 23 3/8 16 1/4 22 5/8
- -----------------------------------------------------------------------------------------------------------------------------
Year $3,494.3 $ 6.3 $(258.6) $(815.6) $(25.82)**** $27 $16 1/4 $22 5/8
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
* Includes facility shutdown provision of $22.3 million, $14.7 million
after tax or $.41 per share.
** Includes $(656.2) million, $(21.20) per share, related to the
cumulative effect of the change in accounting for postretirement
benefits other than pensions. See notes to consolidated financial
statements.
*** Lower average selling prices at the Integrated Steel Segment resulted
in a significantly lower gross profit. Such lower gross profit margin
was the primary factor for the increased net loss.
**** Per share amounts for the quarters do not total to the amount reported
for the year, as per share amounts are computed independently for each
quarter and the year based on respective weighted average common
shares outstanding. Includes $(656.2) million, $(19.99) per share,
related to the cumulative effect of the change in accounting for
postretirement benefits other than pensions.
11
ELEVEN-YEAR SUMMARY OF SELECTED FINANCIAL DATA AND OPERATING RESULTS
Inland Steel Industries, Inc. and Subsidiary Companies
1993 1992 1991 1990 1989 1988
- ---------------------------------------------------------------------------------------------------------------------------------
Dollars in Millions
Results Net sales $3,888.2 $3,494.3 $3,404.5 $3,870.4 $4,146.7 $4,068.0
of Depreciation 131.8 129.6 118.2 119.7 131.2 134.8
Operations Interest expense 78.0 54.9 46.8 38.7 38.4 46.2
Rent expense 73.7 75.5 81.8 85.5 79.9 72.3
Continuing business
segments:
Income (loss) before
income taxes (73.6) (258.6) (381.1) (36.7) 175.6 364.6
Income taxes 36.0Cr. 99.2Cr. 106.0Cr. 16.1Cr. 55.9 115.8
Income (loss) (37.6) (159.4) (275.1) (20.6) 119.7 248.8
Net income (loss) (37.6) (815.6) (275.1) (20.6) 119.7 262.1
- ---------------------------------------------------------------------------------------------------------------------------------
Shares in Thousands
Data Average number of shares 35,540 32,828 30,943 32,195 35,581 33,623
Applicable Income (loss) per share
to Common Continuing business
Stock segments $ (1.96) $ (5.83) $ (9.88) $ (1.41) $ 3.15 $ 6.99
Net income (loss) (1.96) (25.82) (9.88) (1.41) 3.15 7.39
Dividends per share -- -- .15 1.40 1.40 .75
Stockholders' equity per
share 7.79 6.01 31.10 41.27 43.00 42.50
Stockholders of record 16,000 18,000 18,000 19,000 23,000 24,000
Shares traded (average daily
volume) 134.2 97.3 89.3 95.7 199.5 170.0
- ---------------------------------------------------------------------------------------------------------------------------------
Dollars in Millions
Changes in Cash provided from (used
Financial for) operations $ 112.0 $ (21.4) $ 25.0 $ 189.1 $ 240.2 $ 531.8
Position Capital expenditures 105.6 64.4 140.2 268.1 197.2 136.5
Investments in and advances
to joint ventures, net 1.9 6.3 24.9 49.8 15.5 73.6
Acquisitions -- -- -- -- 28.2 50.2
Dividends declared on common
stock -- -- 4.6 45.3 50.1 25.2
Dividends declared on
preferred stock 32.0 32.1 31.1 27.1 6.9 13.8
Financing
Long-term debt (net of
retirements) (96.6) 108.9 73.1 114.0 (17.8) (43.2)
Preferred stock sold -- -- 72.8 -- 185.0 --
Common stock sold 178.7 97.9 -- -- -- --
Net change in liquidity 112.8 90.6 (11.2) (179.1) (67.9) (124.2)
- ---------------------------------------------------------------------------------------------------------------------------------
Dollars in Millions
Financial Working capital $ 496.4 $ 441.0 $ 322.8 $ 395.9 $ 703.0 $ 719.8
Position Property (net) 1,507.7 1,548.8 1,635.0 1,708.3 1,569.8 1,493.9
at Year End Total assets 3,435.8 3,146.5 2,697.8 2,934.8 3,008.5 2,925.0
Long-term debt 777.1 873.7 764.8 691.7 577.7 595.5
Redeemable preferred stock 185.0 185.0 185.0 185.0 185.0 --
Other temporary equity 40.8 49.9 53.0 54.9 181.3 --
Stockholders' equity 397.6 271.4 1,009.4 1,234.0 1,313.8 1,559.4
Unused credit facilities 225 225 225 325 325 225
- ---------------------------------------------------------------------------------------------------------------------------------
Financial Net income (loss) as a % of
Ratios sales (1.0)% (23.3)% (8.1)% (.5%) 2.9% 6.4%
Long-term debt to total
capitalization 55.5% 63.3% 38.0% 31.9% 25.6% 27.6%
Long-term debt and
redeemable preferred
to total capitalization 68.7% 76.7% 47.2% 40.5% 33.8% 27.6%
Return on stockholders'
equity loss loss loss loss 9.1% 16.8%
- ---------------------------------------------------------------------------------------------------------------------------------
Dollars and Tons in Millions
Production
and Tons of raw steel produced 5.0 4.7 4.7 5.3 5.6 6.1
Employment Tons of steel mill shipments 4.8 4.3 4.2 4.7 4.9 5.0
Statistics Average number of employees 16,152 17,181 18,600 20,154 20,715 20,639
Total employment costs $ 924.9 $ 940.7 $ 907.4 $ 979.0 $ 964.3 $ 945.8
--------------------------------------------------------------------------------------------------------------------
1987 1986 1985 1984 1983
- -------------------------------------------------------------------------------------------------------------------
Dollars in Millions
Results Net sales $3,453.2 $3,173.2 $2,999.4 $3,135.0 $2.748.9
of Depreciation 123.4 124.0 119.7 124.5 119.9
Operations Interest expense 62.8 71.6 64.9 62.3 65.3
Rent expense 68.9 55.2 33.7 28.2 23.8
Continuing business
segments:
Income (loss) before
income taxes 97.5 36.7 (147.5) (36.5) (183.1)
Income taxes 14.2Cr. 1.9 .1Cr. 6.1 67.6Cr.
Income (loss) 111.7 34.8 (147.4) (42.6) (115.5)
Net income (loss) 145.0 19.3 (178.4) (41.4) (116.9)
- -------------------------------------------------------------------------------------------------------------------
Shares in Thousands
Data Average number of shares 31,854 28,479 25,266 25.054 24,727
Applicable Income (loss) per share
to Common Continuing business
Stock segments $ 3.09 $ .95 $ (6.14) $ (2.02) $ (4.70)
Net income (loss) 4.14 .40 (7.37) (1.97) (4.76)
Dividends per share -- -- .375 .50 .50
Stockholders' equity per
share 36.15 32.85 34.20 42.14 44.90
Stockholders of record 26,000 29,000 33,000 38,000 42,000
Shares traded (average daily
volume) 178.9 78.6 55.2 61.1 87.4
- -------------------------------------------------------------------------------------------------------------------
Dollars in Millions
Changes in Cash provided from (used
Financial for) operations $ 169.1 $ 129.1 N/A N/A N/A
Position Capital expenditures 128.0 124.8 $ 174.8 $ 185.1 $ 103.1
Investments in and advances
to joint ventures, net 10.5 9.0 7.8 2.3 --
Acquisitions -- 96.4 -- -- --
Dividends declared on common
stock -- -- 9.5 12.5 12.4
Dividends declared on
preferred stock 13.9 7.8 7.8 8.1 .8
Financing
Long-term debt (net of
retirements) (160.9) (122.5) 87.8 46.6 29.0
Preferred stock sold 96.6 -- -- 72.8 --
Common stock sold 83.7 85.2 -- -- 56.9
Net change in liquidity 71.7 157.2 (70.1) 24.0 (56.6)
- -------------------------------------------------------------------------------------------------------------------
Dollars in Millions
Financial Working capital $ 625.0 $ 428.0 $ 268.0 $ 339.5 $ 232.7
Position Property (net) 1,488.1 1,552.4 1,745.2 1,730.8 1,712.2
at Year End Total assets 2,651.4 2,526.6 2,631.5 2,607.7 2,626.4
Long-term debt 638.7 799.6 922.1 834.3 787.7
Redeemable preferred stock -- -- -- -- --
Other temporary equity -- -- -- -- --
Stockholders' equity 1,391.5 1,067.7 958.4 1,147.2 1,131.3
Unused credit facilities 225 150 135 228 190
- -------------------------------------------------------------------------------------------------------------------
Financial Net income (loss) as a % of
Ratios sales 4.2% .6% (5.9)% (1.3)% (4.3)%
Long-term debt to total
capitalization 31.5% 42.8% 49.0% 42.1% 41.0%
Long-term debt and
redeemable preferred
to total capitalization 31.5% 42.8% 49.0% 42.1% 41.0%
Return on stockholders'
equity 10.4% 1.8% loss loss loss
- -------------------------------------------------------------------------------------------------------------------
Dollars and Tons in Millions
Production
and Tons of raw steel produced 5.5 5.7 6.1 6.5 6.3
Employment Tons of steel mill shipments 4.9 4.9 4.7 5.0 4.8
Statistics Average number of employees 20,740 22,668 24,413 26,921 28,700
Total employment costs $ 878.4 $ 918.6 $ 988.5 $1,006.7 $1,084.4
- -------------------------------------------------------------------------------------------------------------------
Cr. = Credit
12
FINANCIAL RESPONSIBILITY
Senior management is responsible for the integrity and objectivity of the
financial data reported by Inland Steel Industries, Inc. and its subsidiaries.
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, and in management's judgment reflect
fairly the consolidated financial position, cash flows and results of
operations of Inland and its subsidiary companies.
The Company maintains systems of internal accounting controls and procedures
to provide reasonable assurance of the safeguarding and accountability of
Company assets, and to ensure that its financial records provide a reliable
basis for the preparation of financial statements and other data.
Internal accounting control is maintained through:
- The on-going activities of corporate staff and line officers and a
task force of accounting management which monitors the adequacy of
internal accounting control systems throughout the Company
- The selection and proper training of qualified personnel
- The appropriate separation of duties in organizational arrangements
- The establishment and communication of accounting and business
policies together with detailed procedures for their implementation
- The use of an intensive ongoing program of internal auditing
- The use of a detailed budgeting system to assure that expenditures
are properly approved and charged.
Stockholders annually elect a firm of independent accountants to audit
the annual financial statements (their current report appears below). The
principal role of the Audit Committee of the Board of Directors (consisting
entirely of non-management Directors) is to review the conclusions reached by
management in its evaluation of internal accounting controls, approve the scope
of audit programs and evaluate audit results of both independent accountants
and internal auditors. Both groups have unrestricted access to the Audit
Committee, without the presence of management.
13
REPORT OF INDEPENDENT ACCOUNTANTS
Price Waterhouse [LOGO]
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
INLAND STEEL INDUSTRIES, INC.
In our opinion, the consolidated financial statements on pages 27 through 41
present fairly, in all material respects, the financial position of Inland
Steel Industries, Inc. and Subsidiary Companies at December 31, 1993 and 1992,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As discussed in Notes 10 and 11 to the consolidated financial
statements, in 1992 the Company changed its method of accounting for
postretirement benefits other than pensions and for income taxes.
/s/ Price Waterhouse
---------------------
Price Waterhouse
Chicago, Illinois
February 23, 1994
14
STATEMENT OF ACCOUNTING AND FINANCIAL POLICIES
The following briefly describes the Company's principal accounting and
financial policies.
ACCOUNTING FOR EQUITY INVESTMENTS
The Company's investments in 20 percent or more but less than majority-owned
companies, joint ventures and partnerships, and the Company's majority interest
in the I/N Tek partnership, are accounted for under the equity method.
PER SHARE RESULTS
Primary per share results are based on the weighted average number of common
shares outstanding and take into account the dividend requirements of preferred
stock, net of tax benefits related to leveraged Employee Stock Ownership Plan
("ESOP") shares, and the dilutive effect of outstanding stock options.
The outstanding preferred shares have the potential of necessitating
presentation of fully diluted earnings per share, in addition to the primary
per share results, reflecting the further dilutive effect of the assumed
conversion into common stock of the outstanding shares of convertible preferred
stock, and the elimination of the related preferred stock dividends. Fully
diluted earnings per common share would also reflect an adjustment for the
additional ESOP contribution, net of tax benefits, that would be necessary to
meet debt service requirements that would arise upon conversion of the
leveraged Series E ESOP Convertible Preferred Stock ("Series E Preferred
Stock"), due to the current excess of the preferred dividend over the common
dividend.
INVENTORY VALUATION
Inventories are valued at cost which is not in excess of market. Cost is
determined by the last-in, first-out method except for supply inventories,
which are determined by the average cost or first-in, first-out methods.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is depreciated for financial reporting purposes
over the estimated useful lives of the assets. Steelmaking machinery and
equipment, a significant class of assets, is depreciated on a
production-variable method, which adjusts straight-line depreciation to reflect
production levels at the steel plant. The adjustment is limited to not more
than a 25 percent increase or decrease from straight-line depreciation. Blast
furnace relining expenditures are capitalized and amortized on a
unit-of-production method over the life of the lining. All other assets are
depreciated on a straight-line method.
Expenditures for normal repairs and maintenance are charged to income
as incurred.
Gains or losses from significant abnormal disposals or retirements of
properties are credited or charged to income. The cost of other retired assets
less any sales proceeds is charged to accumulated depreciation.
EXCESS OF COST OVER NET ASSETS ACQUIRED
The excess of cost over fair value of net assets of businesses acquired is
being amortized over 25-year periods.
15
BENEFITS FOR RETIRED EMPLOYEES
Pension benefits are provided by the Company to substantially all employees
under a trusteed non-contributory plan. Life insurance and certain medical
benefits are provided for substantially all retired employees.
The estimated costs of pension, medical, and life insurance benefits
are determined annually by consulting actuaries. With the adoption of
Financial Accounting Standards Board ("FASB") Statement No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," effective January
1, 1992, the cost of health-care benefits for retirees, previously recognized
as incurred, is being accrued during their term of employment (see Note 10).
Pensions are funded in accordance with ERISA requirements in a trust
established under the plan. Costs for retired employee medical benefits and
life insurance are funded when claims are submitted.
CASH EQUIVALENTS
Cash equivalents reflected in the Statement of Cash Flows are highly liquid,
short-term investments with maturities of three months or less that are an
integral part of the Company's cash management portfolio. The carrying amount
of cash equivalents approximates fair value because of the short maturity of
those instruments.
INCOME TAXES
Effective January 1, 1992, the Company adopted FASB Statement No. 109,
"Accounting for Income Taxes." Previously, the Company accounted for income
taxes under Accounting Principles Board ("APB") Opinion No. 11.
16
CONSOLIDATED STATEMENTS OF OPERATIONS AND REINVESTED EARNINGS
Inland Steel Industries, Inc. and Subsidiary Companies
Dollars in Millions (except per share data) Year Ended December 31 1993 1992 1991
--------------------------------------------------------------------- --------------------------------------
Consolidated NET SALE $3,882.2 $3,494.3 $3,404.5
Statement of --------------------------------------------------------------------- --------------------------------------
Operations OPERATING COSTS AND EXPENSES:
Cost of goods sold (excluding depreciation) 3,457.8 3,305.8 3,124.4
Selling, general and administrative expenses 190.0 193.9 200.0
Depreciation 131.2 128.9 117.6
State, local and miscellaneous taxes 60.3 61.6 58.4
Facility shutdown and restructuring provisions (Note 9) 22.3 -- 205.0
Gain on sale of partial interest in joint venture (Note 13) -- (22.5) --
--------------------------------------------------------------------- --------------------------------------
Total 3,861.6 3,667.7 3,705.4
--------------------------------------------------------------------- --------------------------------------
OPERATING PROFIT (LOSS) 26.6 (173.4) (300.9)
OTHER EXPENSE:
General corporate expense, net of income terms 22.2 30.3 23.4
Interest and other expense on debt 78.0 54.9 46.8
Corporate restructuring provision (Note 9) -- -- 10.0
--------------------------------------------------------------------- --------------------------------------
LOSS BEFORE INCOME TAXES (73.6) (258.6) (381.1)
--------------------------------------------------------------------- --------------------------------------
PROVISIONS FOR INCOME TAXES (Note 11):
Current taxes 2.8 .9 12.3Cr.
Deferred taxes 38.8Cr. 100.1Cr. 93.7Cr.
--------------------------------------------------------------------- --------------------------------------
Total 36.0Cr. 99.2Cr. 106.0Cr.
--------------------------------------------------------------------- --------------------------------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (37.6) (159.4) (275.1)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (Note 10) -- (656.2) --
--------------------------------------------------------------------- --------------------------------------
NET LOSS (37.6) (815.6) (275.1)
Dividend requirements for preferred stock (net of tax benefits
related to leveraged ESOP shares) 32.0 32.1 30.5
--------------------------------------------------------------------- --------------------------------------
Net loss applicable to common stock $ (69.6) $ (847.7) $(305.6)
--------------------------------------------------------------------- --------------------------------------
PER SHARE OF COMMON STOCK:
Before cumulative effect of change in accounting principle $ (1.96) $(5.83) $ (9.88)
Cumulative effect of change in accounting principle -- (19.99) --
--------------------------------------------------------------------- --------------------------------------
NET LOSS $ (1.96) $ (25.82) $ (9.88)
--------------------------------------------------------------------- --------------------------------------
1993 1992 1991
--------------------------------------------------------------------- --------------------------------------
Consolidated Earnings reinvested in the business (accumulated deficit)
Statement at beginning of year $ (302.3) $ 545.4 $ 856.2
of Reinvested Net loss for the year Earnings (37.6) (815.6) (275.1)
Dividends declared:
Common ($.15 per share in 1991) -- -- (4.6)
Preferred (Notes 4 and 6) (32.0) (32.1) (31.1)
--------------------------------------------------------------------- --------------------------------------
Earnings reinvested in the business (accumulated deficit)
at end of year $ (371.9) $ (302.3) $ 545.4
--------------------------------------------------------------------- --------------------------------------
See Notes to Consolidated Financial Statements
17
CONSOLIDATED STATEMENTS OF CASH FLOWS
Inland Steel Industries, Inc. and Subsidiary Companies
Increase (Decrease) in Cash 1993 1992 1991
Dollars in Millions Years Ended December 31
- ---------------------------------------------------------------------------- ------------------------------------
Operating NET LOSS $(37.6) $(815.6) $(275.1)
Activities ------------------------------------------------------------- ------------------------------------
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH PROVIDED FROM
(USED FOR) OPERATING ACTIVITIES:
Depreciation 131.8 129.6 118.2
Facility shutdown and restructuring provisions 18.9 -- 212.4
Deferred income taxes (36.8) (455.7) (93.7)
Deferred employee benefit cost, including cumulative 38.1 1,066.7 (14.3)
effect of change in accounting principle
Stock issued for coverage of employee benefit plan expense 19.1 13.4 14.0
Gain on sale of partial interest in joint venture -- (22.5) --
Change in: Receivables (46.4) (27.1) 53.8
Inventories (4.2) 5.6 72.1
Accounts payable 34.0 22.8 (74.0)
Accrued salaries and wages 1.6 (1.8) (6.7)
Other accrued liabilities 4.9 30.0 4.0
Other deferred items (11.4) 33.2 14.3
------------------------------------------------------------- ------------------------------------
NET ADJUSTMENTS 149.6 794.2 300.1
------------------------------------------------------------- ------------------------------------
NET CASH PROVIDED FROM (USED FOR) OPERATING ACTIVITIES 112.0 (21.4) 25.0
- ----------------------------------------------------------------------------- ------------------------------------
Investing Capital expenditures (105.6) (64.4) (140.2)
Activities Investments in and advances to joint ventures, net (1.9) (6.3) (24.9)
Proceeds from sales of assets 6.5 28.1 13.9
------------------------------------------------------------- ------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (101.0) (42.6) (151.2)
- ----------------------------------------------------------------------------- ------------------------------------
Financing Sale of common stock 178.7 97.9 --
Activities Sale of preferred stock -- -- 72.8
Long-term debt issued 46.8 145.4 121.4
Long-term debt retired (78.5) (49.4) (39.3)
Dividends paid (35.7) (35.8) (37.6)
Acquisition of treasury stock (9.5) (3.5) (2.3)
------------------------------------------------------------- ------------------------------------
NET CASH PROVIDED FROM FINANCING ACTIVITIES 101.8 154.6 115.0
- ----------------------------------------------------------------------------- ------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 112.8 90.6 (11.2)
Cash and equivalents--beginning of year 137.7 47.1 58.3
------------------------------------------------------------- ------------------------------------
Cash and equivalents--end of year $250.5 $137.7 $47.1
------------------------------------------------------------- ------------------------------------
- ----------------------------------------------------------------------------- ------------------------------------
Supplemental Cash paid (received) during the year for:
Disclosures Interest (net of amount capitalized) $ 76.0 $ 53.1 $40.4
Income taxes, net 1.9 (12.3) (12.5)
------------------------------------------------------------- ------------------------------------
See Notes to Consolidated Financial Statements
18
CONSOLIDATED BALANCE SHEET
Inland Steel Industries, Inc. and Subsidiary Companies
Dollars in Millions At December 31 1993 1992
- -------------------------------------------------------------------------------------------- ----------------------
Assets CURRENT ASSETS:
Cash and cash equivalents $ 250.5 $ 137.7
Receivables less provision for allowances, claims and
doubtful accounts of $28.2 and $23.2, respectively 427.3 380.9
Inventories (Note 1) 376.9 372.7
Deferred income taxes (Note 11) 44.2 35.2
------------------------------------------------------------------------- ----------------------
Total current assets 1,098.9 926.5
INVESTMENTS AND ADVANCES (see details on next page) 221.0 212.6
PROPERTY, PLANT AND EQUIPMENT, AT COST, LESS ACCUMULATED
DEPRECIATION (see details on next page) 1,507.7 1,548.8
DEFERRED INCOME TAXES (Note 11) 428.4 396.9
INTANGIBLE PENSION ASSET (Note 10) 122.1 --
EXCESS OF COST OVER NET ASSETS ACQUIRED 26.4 27.7
DEFERRED CHARGES AND OTHER ASSETS 31.3 34.0
------------------------------------------------------------------------- ----------------------
Total assets $ 3,435.8 $ 3,146.5
------------------------------------------------------------------------- ----------------------
Liabilities CURRENT LIABILITIES:
Accounts payable $ 300.9 $ 266.9
Accrued liabilities:
Salaries, wages and commissions 75.7 74.1
Federal income taxes 2.7 5.0
Taxes, other than Federal income taxes 75.6 68.7
Interest on debt 13.0 14.3
Terminated facilities costs and other (Note 9) 35.8 23.0
Long-term debt due within one year (Note 3) 98.8 33.5
------------------------------------------------------------------------- ----------------------
Total current liabilities 602.5 485.5
LONG-TERM DEBT (see details on next page and Note 3) 777.1 873.7
ALLOWANCE FOR TERMINATED FACILITIES COSTS AND OTHER (Note 9) 36.1 43.2
DEFERRED EMPLOYEE BENEFITS (Note 10) 1,371.1 1,211.0
DEFERRED INCOME 25.6 26.8
------------------------------------------------------------------------- ----------------------
Total liabilities 2,812.4 2,640.2
- -------------------------------------------------------------------------------------------- ----------------------
Temporary Equity REDEEMABLE PREFERRED STOCK, Series F, $1.00 par value, 185,000 shares
issued and outstanding, redeemable at $1,000 per share (Note 4) 185.0 185.0
COMMON STOCK REPURCHASE COMMITMENT (Note 4) 40.8 49.9
- -------------------------------------------------------------------------------------------- ----------------------
Stockholders' PREFERRED STOCK, $1.00 par value, 15,000,000 shares authorized for all
Equity series including Series F, aggregate liquidation value of $230.6 in 1993
and $231.6 in 1992 (Notes 5 and 6) 4.7 4.7
COMMON STOCK, $1.00 par value; authorized--100,000,000 shares;
issued--47,854,208 shares for 1993 and 42,104,208 shares for 1992
(Notes 6 through 8) 47.9 42.1
CAPITAL IN EXCESS OF PAR VALUE (Note 6) 1,106.4 945.0
ACCUMULATED DEFICIT (371.9) (302.3)
UNEARNED COMPENSATION--ESOP (Note 5) (112.2) (122.2)
COMMON STOCK REPURCHASE COMMITMENT (Note 4) (40.8) (49.9)
TREASURY STOCK AT COST--Common stock of 6,767,139 shares in 1993 and
6,857,020 shares in 1992 (236.5) (246.0)
------------------------------------------------------------------------- ----------------------
Total stockholder's equity 397.6 271.4
------------------------------------------------------------------------- ----------------------
Total liabilities, temporary equity, and stockholders' equity $ 3,435.8 $ 3,146.5
------------------------------------------------------------------------- ----------------------
See Notes to Consolidated Financial Statements
19
SCHEDULES TO CONSOLIDATED FINANCIAL STATEMENTS
Inland Steel Industries, Inc. and Subsidiary Companies
Dollars in Millions At December 31 1993 1992
- --------------------------------------------------------------------------------------------- ----------------------
Investments Steel processing joint ventures $ 168.2 $ 142.5
and Advances Raw material joint ventures 37.5 34.2
Common stock of Nippon Steel Corporation held for investment,
net of valuation allowances of $5.1 and $5.8, respectively 9.5 8.8
Other investments and advances 5.8 27.1
-------------------------------------------------------------------------- ----------------------
Total $ 221.0 $ 212.6
-------------------------------------------------------------------------- ----------------------
- --------------------------------------------------------------------------------------------- ----------------------
Property, Plant Land, land improvements and mineral properties $ 156.5 $ 155.9
and Equipment Buildings, machinery and equipment 3,749.0 3,786.0
Transportation equipment 135.1 136.7
Property under capital leases--primarily machinery and equipment 43.1 44.2
-------------------------------------------------------------------------- ----------------------
Total 4,083.7 4,122.8
Less--
Accumulated depreciation 2,432.1 2,433.3
Accumulated depreciation--capital leases 35.5 34.5
Allowance for retirements and terminated facilities (Note 9) 108.4 106.2
-------------------------------------------------------------------------- ----------------------
Net $ 1,507.7 $ 1,548.8
-------------------------------------------------------------------------- ----------------------
- --------------------------------------------------------------------------------------------- ----------------------
Long-Term Debt INLAND STEEL INDUSTRIES, INC.
Guaranteed ESOP notes, 7.96%, 8.43% and 8.80%
due through July 2, 2004 $ 123.6 $ 131.2
Notes, 12 3/4% due December 15, 2002 150.0 150.0
-------------------------------------------------------------------------- ----------------------
Total Inland Steel Industries, Inc. 273.6 281.2
INLAND STEEL COMPANY
First Mortgage Bonds:
Series O, 8 3/4% due July 15, 1995 -- 10.0
Series P, 8 7/8% due April 15, 1999 -- 22.5
Series Q, 9 1/2% due September 1, 2000 -- 42.8
Series R, 7.9% due January 15, 2007 87.9 93.1
Series T, 12% due December 1, 1998 125.0 125.0
Pollution Control Series 1977, 5 3/4% due February 1, 2007 26.5 26.5
Pollution Control Series 1978, 6 1/2% due May 15, 2008 52.0 52.0
Pollution Control Series 1980B, 9 3/4% due October 1, 2000 -- 25.0
Pollution Control Series 1980C, 10% due October 1, 2010 -- 5.0
Pollution Control Series 1982A, 10% due December 1, 2012 -- 10.0
Pollution Control Series 1982B, 10 3/4% due October 1, 2012 17.0 17.0
Pollution Control Series 1993, 6.8% due June 1, 2013 40.0 --
-------------------------------------------------------------------------- ----------------------
Total First Mortgage Bonds 348.4 428.9
Obligations for Industrial Development Revenue Bonds:
Pollution Control Projects No. 3 and No. 4 at rates ranging
from 6 1/4% to 8 1/8% due through June 1, 2005 32.0 34.0
Pollution Control Project No. 9, 10% due November 1, 2001 38.0 38.0
Obligations under capital leases including Pollution Control
Projects No. 1 and No. 2--primarily at rates ranging from
5.9% to 12.6%, due through August 1, 1998 20.7 26.0
No. 2 BOF Shop Caster Project Debt, 9.4% and 11 1/4%,
due through May 7, 2001 36.2 39.8
-------------------------------------------------------------------------- ----------------------
Total Inland Steel Company 475.3 566.7
JOSEPH T. RYERSON & SON, INC.
Obligation for Industrial Revenue Bond with floating rate,
set weekly based on 13-week Treasury bills, due November 1, 2007 7.0 7.0
Other long-term debt 10 1/4% due through November 30, 1997 1.7 1.9
J.M. TULL METALS COMPANY, INC.
Obligations for Industrial Revenue Bonds and other long-term debt with
variable rates and fixed rates to 9 7/8%, due through August 17, 1998 8.8 2.6
Senior Notes, 9.43% due through July 29, 1997 10.7 14.3
-------------------------------------------------------------------------- ----------------------
Total long-term debt $ 777.1 $ 873.7
- --------------------------------------------------------------------------------------------- ----------------------
See Notes to Consolidated Financial Statements
20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: INVENTORIES
Inventories were classified on December 31 as follows:
- -------------------------------------------------------------------------------------------------------------------------
Dollars in Millions 1993 1992
- --------------------------------------------------------------- -------------------------------
In process and finished products:
Integrated Steel Operations $ 55.6 $67.0
Steel Service Center Operations 276.3 259.5
- --------------------------------------------------------------- -------------------------------
331.9 326.5
- --------------------------------------------------------------- -------------------------------
Raw materials and supplies:
Iron ore 25.3 23.4
Scrap and other raw materials 7.8 9.3
Supplies 11.9 13.5
- --------------------------------------------------------------- -------------------------------
45.0 46.2
- --------------------------------------------------------------- -------------------------------
Total $376.9 $372.7
- --------------------------------------------------------------- -------------------------------
- --------------------------------------------------------------- -------------------------------
During 1993, various inventory quantities were reduced, resulting in
liquidations of LIFO inventory quantities carried at lower costs prevailing in
prior years as compared with the current year costs. The effect of these
liquidations on continuing operations was to decrease cost of goods sold by
$24.1 million in 1993. The effect on cost of goods sold of LIFO liquidations
in 1992 and 1991 was not material.
Replacement costs for the LIFO inventories exceeded LIFO values by
approximately $348 million and $380 million on December 31, 1993 and 1992,
respectively.
NOTE 2: BORROWING ARRANGEMENTS
On December 31, 1993, the Company's subsidiaries had available unused credit
facilities totaling $225 million. Each facility requires compliance with
various financial covenants including minimum net worth and leverage ratios.
A $100 million unsecured credit agreement between Joseph T. Ryerson &
Son, Inc. and a group of banks provides a revolving credit facility to March
31, 1995.
A special-purpose subsidiary of Inland Steel Company has a $100 million
revolving credit facility, which extends to November 30, 1995, with the same
banks as the Ryerson agreement. Inland Steel Company has agreed to sell
substantially all of its receivables to this special-purpose subsidiary and
these receivables are used to secure this facility.
J.M. Tull Metals Company, Inc. has a $25 million unsecured revolving
credit agreement with other banks, which extends to December 15, 1994.
21
Cash availability as well as various covenants in subsidiary borrowing
arrangements limited the cash that subsidiaries could transfer to the Company
in the form of dividends and advances to $225 million at year-end 1993. This
amount is subject to change during 1994 based on the financial performance of
each subsidiary.
NOTE 3: LONG-TERM DEBT
Each series of First Mortgage Bonds issued by Inland Steel Company is limited
to the principal amount outstanding and, with the exception of the Pollution
Control Series 1982 Bonds, the Pollution Control Series 1993 Bonds, and the
Series T First Mortgage Bonds, is subject to a sinking fund. Substantially all
the property, plant and equipment owned by Inland Steel Company at its Indiana
Harbor Works is subject to the lien of the First Mortgage. This property had a
net book value of approximately $1.0 billion on December 31, 1993.
In June 1993, the Company, through its Inland Steel Company subsidiary,
refinanced $40 million of pollution control revenue bonds at an interest rate
of 6.8 percent. The weighted average percentage rate of the refunded bonds was
9.9 percent. At year-end 1993 all remaining outstanding Series O, P, and Q
First Mortgage Bonds were called to be redeemed on January 28, 1994.
Accordingly, the outstanding principal amount of $75.1 million at December 31,
1993 has been classified as a current liability. Prior to the redemption of
the Series O, P and Q First Mortgage Bonds, under terms of the First Mortgage,
Inland Steel Company was prohibited, when its reinvested earnings were less
than $187.1 million, from paying dividends on its common stock (other than
stock dividends) to the Company. At year-end 1993, the accumulated deficit of
Inland Steel Company was $1.0 billion.
In December 1992, Inland Steel Industries issued $150 million principal
amount of unsecured 12 3/4% Notes due December 15, 2002. The Notes are
obligations solely of the Company and not of any of its subsidiaries. Net
proceeds of the offering were added to the general funds of the Company for
general corporate purposes. The Notes, which are not entitled to the benefit
of any sinking fund, are not subject to redemption prior to December 15, 1997.
In December 1991, Inland Steel Company issued $125 million principal
amount of First Mortgage 12% Bonds, Series T, due December 1, 1998. Net
proceeds of the offering were added to the general funds of Inland Steel
Company for general corporate purposes, allowing its special-purpose subsidiary
to repay its short-term bank borrowing. The Bonds are not subject to
redemption prior to their maturity.
Both the First Mortgage Indenture under which the Series T Bonds were
issued and the Indenture under which the Notes were issued contain covenants
limiting, among other things, the creation of additional indebtedness; the
declaration and payment of dividends and distributions on the Company's capital
stock; as well as mergers, consolidations, retirement of certain debt, and the
sales or purchases of certain assets.
The outstanding borrowing of the Company's ESOP is recorded as a
liability of the Company because the Company has committed to make payments
(dividends and supplemental contributions) to the ESOP Trust sufficient to
service the ESOP debt. See Note 5 for additional information on the ESOP debt.
Maturities of long-term debt and capitalized lease obligations due
within five years are: $98.8 million in 1994, $28.9 million in 1995, $31.8
million in 1996, $33.6 million in 1997, and $162.2 million in 1998. See Note
14 regarding commitments and contingencies for other scheduled payments.
Interest cost incurred by the Company totaled $80.9 million in 1993,
$65.1 million in 1992, and $60.3 million in 1991. Included in these totals is
capitalized interest of $2.9 million in 1993, $10.2 million in 1992, and $13.5
million in 1991.
22
The estimated fair value of the Company's long-term debt (including
current portions thereof) using quoted market prices of Company debt securities
recently traded and market-based prices of similar securities for those
securities not recently traded was $929 million, as compared with the carrying
value of $876 million included in the balance sheet, at year-end 1993.
NOTE 4: REDEEMABLE PREFERRED STOCK
In December 1989, the Company sold 185,000 shares of the Company's Series F
Exchangeable Preferred Stock, $1.00 par value per share ("Series F Preferred
Stock"), for $185 million to NS Finance III, Inc., an indirect wholly owned
subsidiary of Nippon Steel Corporation ("NSC"). The preferred stock entitles
the holder to cumulative annual dividends of 9.48 percent (based on the
purchase price of the stock) payable quarterly; to certain preferences
including preference in the payment of dividends and in liquidation over
holders of the Company's Series E Preferred Stock and common stock; and to
30.604 votes per share, which number may be adjusted from time to time upon the
occurrence of certain events. The voting power is based on the equivalent
number of common shares represented by a market value of $185 million at the
time the preferred stock was issued. In the event of a change in control or
certain other events, the holder may require the Company to redeem the Series F
Preferred Stock at a 10 percent premium. In the event of an early redemption,
the Company may be required to reimburse the holder for certain costs incurred
as a result of such redemption. Any accrued but unpaid dividends bear interest
at the annual rate of 11.48 percent, compounded quarterly. The preferred stock
is exchangeable at the option of the Company and with the consent of NSC for
the Company's 10.23% Subordinated Voting Note.
The Series F Preferred Stock or the Subordinated Voting Note is required
to be redeemed in two stages, consisting of $85 million on December 18, 1996,
and the remaining $100 million on December 17, 1999, plus, in each instance,
accrued and unpaid dividends thereon.
In connection with the sale of the Series F Preferred Stock, the Company
agreed to repurchase $185 million of the Company's common stock, of which $144
million (amounting to 4.6 million shares) has been repurchased. As of December
31, 1993, the amount representing the remaining repurchase commitment of $41
million has been classified as temporary equity with a corresponding reduction
of stockholders' equity. In December 1990, the Company suspended open-market
stock purchases and agreed to maintain cash, certain securities, a surety bond
or letter of credit, or some combination thereof, currently equal to $22
million to meet its obligation under the Series F Preferred Stock sale
agreement.
The terms of a letter agreement between the Company and NSC which
provided for the purchase of the Series F Preferred Stock generally restrict
the acquisition by NSC of additional securities of the Company and the
disposition of the preferred stock. Under certain circumstances related to a
potential change in control of the Company, NSC may seek to acquire voting
securities of the Company on terms and conditions no less favorable to the
Company's stockholders than the terms and conditions offered in connection with
the potential change in control.
The Company has agreed not to create issues of stock senior to the
Series F Preferred Stock. So long as the purchaser and permitted transferees
beneficially own at least $100 million of preferred stock or $100 million
aggregate principal amount of the subordinated notes, the Company has agreed
with NSC to nominate a mutually acceptable individual for election to the
Company's Board of Directors. No such individual has been nominated.
The Company believes that it is not practical to estimate a fair market
value different from the carrying value of this security as the security was
sold to a joint venture partner and has numerous features unique to this
security including, but not limited to, the right to appoint a director, the
ability to convert to voting debt, the right of first refusal in change in
control situations, a limitation on the acquisition of additional Company
stock, and the agreement by the Company to buy back $185 million of the
Company's common stock.
23
See Note 12 regarding other related party transactions.
NOTE 5: EMPLOYEE STOCK OWNERSHIP PLAN
In July 1989, the Board of Directors amended the Inland Steel Industries Thrift
Plan for salaried employees to include an ESOP. The ESOP Trust purchased
3,086,800 newly issued shares of Series E Preferred Stock from the Company with
the proceeds of loans totaling $150 million. The ESOP notes are payable in
semi-annual installments through July 2004 and are guaranteed by Joseph T.
Ryerson & Son, Inc., a wholly owned subsidiary of the Company.
Interest expense is recognized by the Company as it is incurred by the
ESOP Trust. Compensation expense recognition is equal to the original stated
value of the shares of Series E Preferred Stock allocated to the participants
during the period. Dividends on the Series E Preferred Stock are recorded as
declared and dividends on unallocated leveraged shares (shares purchased by the
ESOP Trust in July 1989) serve to reduce expense recognized by the Company.
Interest expense incurred by the ESOP Trust totaled $11.3 million, $11.9
million and $12.4 million in 1993, 1992 and 1991, respectively. In 1993, the
ESOP Trust received $10.6 million in dividends and $8.1 million in
contributions from the Company to make required principal and interest
payments. For 1992, the ESOP Trust received $10.7 million in dividends and
$8.0 million in contributions from the Company to make such required payments.
In 1991, the Company paid $10.8 million in dividends and provided $2.3 million
in contributions.
NOTE 6: CAPITAL STOCK
On December 31, 1993, 11,317,153 shares of common stock remained reserved for
issuance under the Company's various employee stock plans and upon conversion
of shares of preferred stock.
In the fourth quarter of 1993, the Company sold 5.75 million shares of
new-issue common stock, $1 par value per share, in a public offering. The net
proceeds of the offering totaled approximately $179 million.
In the third quarter of 1992, the Company sold 4.3 million shares of
new-issue common stock, $1 par value per share, in a public offering. The net
proceeds of the offering totaled approximately $98 million.
The indenture relating to the Industries 12 3/4% Notes prohibits the
Company from declaring or paying cash dividends on the Company common stock
under certain conditions. At year-end 1993, up to $67 million of common
dividends could have been paid under terms of the indenture.
The Series A $2.40 Cumulative Convertible Preferred Stock, $1.00 par
value per share ("Series A Preferred Stock"), is convertible into common stock
at the rate of one share of common stock for each share of Series A Preferred
Stock and is redeemable, at the Company's option, at $44 per share plus any
accrued and unpaid dividends. Each such share is entitled to one vote and
generally votes together with holders of common stock as one class.
Shares of Series E Preferred Stock, $1.00 par value per share, entitle
the holder to cumulative annual dividends of $3.523 per share, payable
semi-annually, and to 1.25 votes per share. Shares of Series E Preferred Stock
are convertible into the Company's common stock on a one-for-one basis. From
time to time, the Company elects to provide additional shares of Series E
Preferred Stock to the ESOP Trust to cover employee matching requirements not
covered by the release of shares through scheduled principal and interest
payments by the ESOP Trust on its outstanding notes (see Note 5).
24
In March 1991, the Company sold 1.5 million shares of Series G $4.625
Cumulative Convertible Exchangeable Preferred Stock, $1.00 par value per share
("Series G Preferred Stock"), in a public offering. Each share of Series G
Preferred Stock is convertible, at the option of the holder, into 1.802 shares
of Company common stock. The Series G Preferred Stock may be exchanged, at the
Company's option, on any dividend payment date for the Company's 9 1/4%
Convertible Subordinated Debentures due May 1, 2016, at a rate of $50.00
principal amount of the Debentures for each share of Series G Preferred Stock.
The shares are redeemable at the Company's option beginning May 1, 1994, at a
price (plus accrued and unpaid dividends) which declines in annual increments
from $53.2375 for the one-year period commencing May 1, 1994, to $50.00
beginning May 1, 2001. Net proceeds from the sale approximated $73 million.
The following table details changes in capital accounts:
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock Treasury Stock Preferred Stock Capital in
------------ -------------- ------------------------------------------- Excess of
Par Value
Series A Series E Series G ---------
Shares in Thousands and -------- -------- --------
Dollars in Millions Shares Dollars Shares Dollars Shares Dollars Shares Dollars Shares Dollars Dollars
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1991 37,804 $37.8 (6,918) $(253.9) 97 $.1 3,083 $3.1 -- $ -- $ 785.4
Acquisition of treasury
stock -- -- (99) (2.3) -- -- -- -- -- -- --
Issued under employee
benefit plans -- -- 185 7.8 -- -- 86 -- -- -- .5
Redemption of Series E
Preferred Stock -- -- -- -- -- -- (22) -- -- -- (1.1)
Issuance of Series G
Preferred Stock -- -- -- -- -- -- -- -- 1,500 1.5 70.9
Other changes -- -- (15) (.3) -- -- -- -- -- -- .2
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1991 37,804 37.8 (6,847) (248.7) 97 .1 3,147 3.1 1,500 1.5 855.9
Acquisition of treasury
stock -- -- (150) (3.5) -- -- -- -- -- -- --
Issued under employee
benefit plans -- -- 144 6.1 -- -- 19 -- -- -- (2.1)
Redemption of Series E
Preferred Stock -- -- -- -- -- -- (31) -- -- -- (1.5)
Issuance of Common Stock 4,300 4.3 -- -- -- -- -- -- -- -- 93.4
Other changes -- -- (4) .1 -- -- -- -- -- -- (.7)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1992 42,104 42.1 (6,857) (246.0) 97 .1 3,135 3.1 1,500 1.5 945.0
Acquisition of treasury
stock -- -- (341) (9.5) -- -- -- -- -- -- --
Issued under employee
benefit plans -- -- 440 19.3 -- -- 39 -- -- -- (7.5)
Redemption of Series E
Preferred Stock -- -- -- -- -- -- (59) -- -- -- (2.8)
Issuance of Common Stock 5,750 5.8 -- -- -- -- -- -- -- -- 172.9
Other Changes -- -- (9) (.3) -- -- -- -- -- -- (1.2)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1993 47,854 $47.9 (6,767) $(236.5) 97 $.1 3,115 $3.1 1,500 $1.5 $1,106.4
- ----------------------------------------------------------------------------------------------------------------------------------
NOTE 7: STOCK OPTION PLANS
The Inland 1992 Incentive Stock Plan, approved by stockholders on April 22,
1992, provides for the issuance, pursuant to options and other awards, of 2.2
million shares of common stock to officers and other key employees. Options
remain outstanding and exercisable under the Inland 1988 and 1984 Incentive
Stock Plans; however, no further options may be granted under these plans.
Under the various plans, the per share option exercise price may not be less
than 100 percent of the fair market value per share on the date of grant.
During 1993, options were granted to 235 executives under the 1992 Plan and a
total of 891,224 shares was available for future grants under that Plan as of
December 31, 1993. The following summarizes the status of options under the
plans for the periods indicated:
25
----------------------------------------------------------------------------
Option Exercise
Number of Price or Range
Shares Per Share
------------------------------------ ----------------------------
Options (granted and unexercised)
at December 31, 1990 1,196,145 $15.31 - $39.75
Granted 619,200 19.75 - 21.38
Exercised --
Cancelled or expired (68,000) 21.38 - 39.75
Surrendered (SAR Exercise) (250) 15.31
----------------------------------------------------------------------------
Options (granted and unexercised)
at December 31, 1991
(985,295 exercisable) 1,747,095 15.31 - 39.75
Granted 655,450 22.31 - 25.50
Exercised (600) 18.75
Cancelled or expired (48,450) 18.75 - 39.75
Surrendered (SAR Exercise) (8,000) 15.31 - 25.38
----------------------------------------------------------------------------
Options (granted and unexercised)
at December 31, 1992
(1,316,530 exercisable) 2,345,495 15.31 - 39.75
Granted 575,200 26.13
Exercised (231,953) 21.38 - 33.75
Cancelled or expired (198,911) 21.38 - 39.75
Surrendered (SAR Exercise) (20,675) 15.31 - 25.38
----------------------------------------------------------------------------
Options (granted and unexercised)
at December 31, 1993
(1,425,909 exercisable) 2,469,156 15.31 - 39.75
------------------------------------ ----------------------------
------------------------------------ ----------------------------
Options outstanding on December 31, 1993, under the 1984 Plan have
expiration dates ranging from June 26, 1994 to September 22, 1997, with a
weighted average exercise price per share of $29.78. Options outstanding under
the 1988 Plan have expiration dates ranging from July 26, 1998 to November 26,
2001, with a weighted average exercise price per share of $31.94. Options
outstanding under the 1992 Plan have expiration dates ranging from June 23,
2002 to May 25, 2003, with a weighted average exercise price per share of
$25.78. On December 31, 1993, there were 72 holders of options granted under
the 1984 Plan, 217 holders of options granted under the 1988 Plan, and 273
holders of options granted under the 1992 Plan.
Stock appreciation rights have also been granted with respect to 176,800
shares subject to outstanding options under the plans at the rate of one stock
appreciation right ("SAR") for each share subject to option. Upon exercise of
an SAR, the holder is entitled to receive the excess of the fair market value
of the shares for which the SAR is exercised over the related option exercise
price. The holder may elect to receive payment in stock, or in a combination
of stock and cash. An SAR is exercisable only upon surrender of the related
option and only to the extent that the related option is exercisable. No SAR
has been granted since 1990. Following is a summary of SAR activity:
26
---------------------------------------------------------------
Number Shares Average
of Rights of Stock Exercise
Exercised Issued Price Cash Paid
---------------------------------------------------------------
1991 250 40 $22.63 $ 1,000
1992 8,000 1,070 $23.66 $ 4,000
1993 20,675 2,794 $29.47 $84,000
---------------------------------------------------------------
---------------------------------------------------------------
SAR compensation expense recorded by the Company was not material for
any of the three years.
The 1992 Plan also provides, as did the 1988 and 1984 Plans, for the
granting of restricted stock and performance awards to officers and other key
employees. During 1993, restricted stock awards totaling 122,000 shares were
granted to 33 executives, and no performance awards were granted. Also during
1993, 7,052 shares of previously granted restricted stock awards vested, while
4,000 shares were forfeited. During 1992, restricted stock awards totaling
3,810 shares were granted to one executive, and no performance awards were
granted. The final performance period for awards granted prior to 1992 ended
December 31, 1992. As the performance criteria for such performance period
were not met, the remaining 95,436 shares subject to performance awards were
cancelled. Also during 1992, 75,657 shares of previously granted restricted
awards vested, while 1,143 shares were forfeited. During 1991, restricted
stock awards totaling 13,216 shares were granted to four executives and three
performance awards totaling 39,000 shares were granted under the 1988 Plan.
One existing performance award was amended to increase by 3,000 the total
number of shares subject to such award. Also during 1991, 23,327 shares of
previously granted restricted stock awards vested, while 37,045 shares
(including dividend-equivalent shares) subject to performance awards and 8,586
shares of restricted stock were forfeited.
NOTE 8: STOCKHOLDER RIGHTS PLAN
Pursuant to a stockholder rights plan, on November 25, 1987, the Board of
Directors declared a dividend distribution, payable to stockholders of record
on December 18, 1987, of one preferred stock purchase right (a "Right") for
each outstanding share of the Company's common stock. The rights plan was
amended by the Board on May 24, 1989. The Rights will expire 10 years after
issuance, and will become exercisable only if a person or group becomes the
beneficial owner of 20 percent or more of the common stock (a "20 percent
holder"), commences a tender or exchange offer which would result in the
offeror beneficially owning 20 percent or more of the common stock, or is
determined by the Board to beneficially own at least 10 percent of the common
stock and either intends to cause the Company to take certain actions not in
the best long-term interests of the Company and its stockholders or is
reasonably likely, through such beneficial ownership, to cause a material
adverse impact on the business or prospects of the Company and its stockholders
(an "Adverse Person"). Each Right will entitle stockholders to buy one newly
issued unit of one one-hundredth of a share of Series D Junior Participating
Preferred Stock at an exercise price of $90, subject to certain antidilution
adjustments. The Company will generally be entitled to redeem the Rights at
$.05 per Right at any time prior to 15 days after a public announcement of the
existence of a 20 percent holder.
If a person or group accumulates 20 percent or more of the common stock
(except pursuant to an offer for all outstanding shares of common stock which
the independent Continuing Directors determine to be fair to and otherwise in
the best interests of the Company and its stockholders), or a merger takes
place with a 20 percent holder where the Company is the surviving corporation
and its common stock is unchanged, or a 20 percent holder engages in certain
self-dealing transactions, or the Board determines that a person or group is an
Adverse Person, each Right (other than Rights held by such 20 percent holder
and certain related parties which become void) will represent the right to
purchase, at the exercise price, common stock (or, in certain circumstances, a
combination
27
of securities and/or assets) having a value of twice the exercise price. In
addition, if, following the public announcement of the existence of a 20
percent holder, the Company is acquired in a merger or other business
combination transaction, except a merger or other business combination
transaction that takes place after the consummation of an offer for all
outstanding shares of common stock that the independent Continuing Directors
have determined to be fair, or a sale of 50 percent or more of the Company's
assets or earning power is made to a third party, each Right (unless previously
voided) will represent the right to purchase, at the exercise price, common
stock of the acquiring entity having a value of twice the exercise price at the
time.
NOTE 9: PROVISIONS FOR RESTRUCTURING
In 1993, the Company recorded a facility shutdown provision of $22.3 million
which covered costs associated with the earlier than planned closure of Inland
Steel Company's cokemaking facilities. Of the amount provided, $7.7 million
relates to the write-off of assets with the remainder provided for various
expenditures associated with the shutdown of the facility, including personnel
costs.
In 1991, the Company recorded restructuring provisions aggregating $215
million, of which $205 million pertained to the Indiana Harbor steelmaking
complex of Inland Steel Company and $10 million was applicable to the Company's
corporate office. The provisions cover writedowns of uneconomic facilities,
principally cokemaking batteries, the ingot mold foundry, and selected older
facilities expected to be shut down, as well as provisions for environmental
matters and workforce reductions (consisting principally of added pension and
other employee benefit costs).
In 1992, as the specific identification of the continuing status of
pension liabilities associated with the shutdown provisions is not feasible,
these liabilities were transferred from the restructuring reserve to the
general pension liabilities of the Company. At December 31, 1993, the Company
had restructuring reserves, excluding pension-related liabilities, totaling
$149.7 million. Comparable reserves at December 31, 1992 and 1991 were $141.3
million and $137.5 million, respectively.
NOTE 10: RETIREMENT BENEFITS
PENSIONS
The Company has a non-contributory defined benefit pension plan which covers
substantially all Company employees, retirees and their beneficiaries.
Benefits provided participants of the plan are based on final pay and years of
service for all salaried employees and certain wage employees, and years of
service and a fixed rate for all other wage employees, including members of the
United Steelworkers union.
The Company's funding policy is to contribute annually the amount
necessary to satisfy the ERISA funding standards. No funding has been required
since 1984.
The assumptions used to determine the plan's funded status are as
follows:
------------------------------------------------------------------------------------------------------------
1993 1992
------------------------------------------------------------------------------------------------------------
Discount (settlement) rate 7.25% 8.6%
Rate of compensation increase 5.0% 5.0%
Rate of return on plan assets 9.5% 9.5%
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
28
The funded status of the plan as of December 31, 1993 and 1992 was
as follows:
---------------------------------------------------------------------------------
December 31
--------------------
Dollars in Millions 1993 1992
-------------------------------------------- --------------------
Fair value of plan assets
Equities $1,011 $ 943
Bonds 354 458
Real estate 136 137
Cash equivalents and accrued interest 293 148
-------------------------------------------- --------------------
1,794 1,686
-------------------------------------------- --------------------
Actuarial present value of benefits for
service rendered to date:
Accumulated Benefit Obligation based on
compensation to date, including vested
benefits of $1,808 and $1,433 for
1993 and 1992, respectively 1,960 1,534
Additional benefits based on estimated
future compensation levels 117 82
-------------------------------------------- --------------------
Projected Benefit Obligation 2,077 1,616
-------------------------------------------- --------------------
Plan Assets in excess (shortfall) of Projected
Benefit Obligation $ (283) $ 70
-------------------------------------------- --------------------
-------------------------------------------- --------------------
The Projected Benefit Obligation is the full measure of the Company's
"going concern" liability for pensions accrued to date based on current
interest rates. It includes the effect of future compensation increases for
benefits based on final pay. It does not, however, take into consideration
contingent benefits that are not expected to be paid but that would require
funding in any plan termination.
The pension cost reflected in the Company's balance sheet on December
31, 1993 and 1992, can be reconciled to the excess or shortfall of plan assets
as shown below:
----------------------------------------------------------------------------
December 31
--------------------
Dollars in Millions 1993 1992
----------------------------------------------------------------------------
Accrued pension cost $(166) $(50)
Unrecognized transition asset 139 162
Unrecognized net gain (loss) (237) 9
Unrecognized prior service cost (141) (51)
Adjustment required to recognize
minimum liability 122 --
----------------------------------------------------------------------------
Plan assets in excess (shortfall) of Projected
Benefit Obligation $(283) $ 70
----------------------------------------------------------------------------
----------------------------------------------------------------------------
The additional minimum pension liability represents the excess of the
unfunded Accumulated Benefit Obligation over previously accrued pension costs.
A corresponding intangible asset was recorded as an offset to this additional
liability as prescribed.
29
The unrecognized transition asset is being recognized in income by
reducing pension expense in equal annual installments of $23.1 million through
1999. Any subsequent unrecognized net gain or loss in excess of 10 percent of
the greater of the Projected Benefit Obligation or the fair value of plan
assets will be amortized over the remaining service period of active employees.
Pension credit for 1993 and 1992 is composed of the components set
forth in the table below:
----------------------------------------------------------------------------
Dollars in Millions 1993 1992
----------------------------------------------------------------------------
Service cost -- present value of benefits
earned during year $ 27 $ 27
Interest on service cost and Projected
Benefit Obligation 139 134
Actual return on plan assets (256) (151)
Net amortization and deferral 85 (19)
----------------------------------------------------------------------------
Total pension credit $ (5) $ (9)
----------------------------------------------------------------------------
----------------------------------------------------------------------------
BENEFITS OTHER THAN PENSIONS
Substantially all of the Company's employees are covered under postretirement
life insurance and medical benefit plans that involve deductible and
co-insurance requirements. The postretirement life insurance benefit formula
used in the determination of postretirement benefit cost is primarily based on
applicable annual earnings at retirement for salaried employees and specific
amounts for hourly employees. The Company did not prefund any of these
postretirement benefits in 1993. Effective January 1, 1994, a Voluntary
Employee Benefit Association Trust was established for payment of health care
benefits made to Inland Steel Company United Steelworkers of America ("USWA")
retirees. Funding of the Trust will be made as claims are submitted for
payment.
The Company adopted FASB Statement No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," effective January 1, 1992. FASB
Statement No. 106 requires accrual accounting for all postretirement benefits
other than pensions. The Company must be fully accrued for these
postretirement benefits by the date each employee attains full eligibility for
such benefits. In conjunction with the adoption of FASB Statement No. 106, the
Company elected to immediately recognize the accumulated postretirement benefit
obligation for current and future retirees (the "transition obligation").
Prior to the adoption of FASB Statement No. 106, the cost of medical
benefits for retired employees was expensed as incurred. For 1993, the accrued
expense for benefits other than pensions recorded in accordance with FASB
Statement No. 106 exceeded the expense that would have been recorded under the
prior accounting methods by $43 million, $28 million after tax or $.80 per
share. For 1992, the incremental expense was $63 million, $41 million after
tax or $1.24 per share.
The amount of net periodic postretirement benefit cost for 1993 and 1992
is composed of the following:
----------------------------------------------------------------------------
Dollars in Millions 1993 1992
----------------------------------------------------------------------------
Service cost $15 $ 15
Interest cost 85 96
Net amortization and deferral (4) --
----------------------------------------------------------------------------
Total net periodic postretirement cost $96 $111
----------------------------------------------------------------------------
----------------------------------------------------------------------------
30
The following table sets forth components of the accumulated
postretirement benefit obligation:
----------------------------------------------------------------------------
December 31
--------------------
Dollars in Millions 1993 1992
----------------------------------------------------------------------------
Accumulated postretirement benefit obligation
attributable to:
Retirees $ 552 $ 580
Fully eligible plan participants 212 234
Other active plan participants 280 313
----------------------------------------------------------------------------
Accumulated postretirement benefit obligation 1,044 1,127
Unrecognized net gain 73 --
Unrecognized prior service credit 76 24
----------------------------------------------------------------------------
Accrued postretirement benefit obligation $1,193 $1,151
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Any net gain or loss in excess of 10 percent of the accumulated
postretirement benefit obligation will be amortized over the remaining service
period of active plan participants.
In 1993, in connection with Inland Steel Company's new labor agreement
with the USWA, the postretirement medical benefit plan covering union employees
was amended, effective August 1, 1993, to provide for employee co-payments and
increased deductibles. As a result of these plan amendments, the Company
remeasured its postretirement benefit obligation under FASB Statement No. 106,
as of August 1, 1993. This remeasurement incorporated the effect of the union
contract changes as well as the effects of changes in actuarial assumptions to
reflect more current information regarding claim costs, census data and
interest rate factors. The net effect of these changes was to reduce net
periodic postretirement benefit cost for 1993 by $12 million and to reduce the
accumulated postretirement benefit obligation as of August 1, 1993 by $146
million.
The assumptions used to determine the plan's accumulated post-retirement
benefit obligation are as follows:
---------------------------------------------------------------------------------------------
1992 1993
--------------------------------------------
December 31 August 1 December 31
----------------------------- --------------------------------------------
Discount rate 9.0% 7.35% 7.25%
Rate of compensation increase 5.0% 5.0% 5.0%
Medical cost trend rate 9%-5% 7%-5% 7%-5%
Year ultimate rate reached 1997 1996 1996
----------------------------- --------------------------------------------
A one percentage point increase in the assumed health care cost trend
rates for each future year increases annual net periodic postretirement benefit
cost and the accumulated postretirement benefit obligation as of December 31,
1993 by $14 million and $131 million, respectively.
POSTEMPLOYMENT BENEFITS
In November 1992, the FASB issued Statement No. 112, "Employers' Accounting for
Postemployment Benefits." Adoption of the new Standard, which is required by
the first quarter of 1994, is not anticipated to have a material impact on
results of operations or the financial position of the Company.
31
NOTE 11: INCOME TAXES
The Company adopted FASB Statement No. 109, "Accounting for Income Taxes,"
effective January 1, 1992. The cumulative effect of prior years at the date of
adoption was not material to the results of operations or the financial
position of the Company. Through December 31, 1991, income taxes were
accounted for under APB Opinion No. 11.
The elements of the provisions for income taxes for each of the three
years indicated below were as follows:
---------------------------------------------------------------------------------------------
Dollars in Millions
Years Ended December 31 1993 1992 1991
-------------------------------- -----------------------------------------
Current income taxes:
Federal $ -- $ -- $ 10.5Cr.
State and foreign 2.8 .9 1.8Cr.
-------------------------------- -----------------------------------------
2.8 .9 12.3Cr.
Deferred income taxes 38.8Cr. 100.1Cr. 93.7Cr.
-------------------------------- -----------------------------------------
Total tax benefit $ 36.0Cr. $ 99.2Cr. $106.0Cr.
-------------------------------- -----------------------------------------
-------------------------------- -----------------------------------------
Cr.=Credit
In accordance with FASB Statement No. 109, the Company adjusted its
deferred tax assets and liabilities for the effect of the change in the
corporate Federal income tax rate from 34 to 35 percent, effective January 1,
1993. A credit to income of $11 million, which includes the effect of the rate
change on deferred tax asset and liability balances as of January 1, 1993 as
well as the effect on 1993 tax benefits recorded by the Company prior to the
enactment date of August 10, 1993, was recorded in the third quarter of 1993.
The components of the deferred income tax assets and liabilities arising
under FASB Statement No. 109 were as follows:
32
---------------------------------------------------------------------------------
December 31
-------------------
Dollars in Millions 1993 1992
---------------------------------------------- -------------------
Deferred tax assets (excluding postretirement
benefits other than pensions):
Net operating loss and tax credit
carryforwards $354 $306
Restructuring and termination reserves 95 84
Other deductible temporary differences 104 101
Less valuation allowances (9) (13)
---------------------------------------------- -------------------
544 478
---------------------------------------------- -------------------
Deferred tax liabilities:
Fixed asset basis difference 430 386
Other taxable temporary differences 86 75
---------------------------------------------- -------------------
516 461
---------------------------------------------- -------------------
Net deferred asset (excluding postretirement
benefits other than pensions) 28 17
FASB Statement No. 106 impact (postretirement
benefits other than pensions) 445 415
---------------------------------------------- -------------------
Net deferred asset $473 $432
---------------------------------------------- -------------------
---------------------------------------------- -------------------
For tax purposes, the Company had available, at December 31, 1993, net
operating loss ("NOL") carryforwards for regular Federal income tax purposes of
approximately $923 million which will expire as follows: $72 million in year
2000, $130 million in year 2005, $313 million in year 2006, $280 million in
year 2007, and $128 million in year 2008. The Company also had investment tax
credit and other general business credit carryforwards for tax purposes of
approximately $18 million, which expire during the years 1994 through 2006. A
valuation allowance has been established for those tax credits which are not
expected to be realized. Additionally, in conjunction with the Alternative
Minimum Tax ("AMT") rules, the Company had available minimum tax credit
carryforwards for tax purposes of approximately $13 million, which may be used
indefinitely to reduce regular Federal income taxes.
The Company believes that it is more likely than not that the $923
million of NOL carryforwards will be utilized prior to their expiration. This
belief is based upon the factors discussed below.
The NOL carryforwards and existing deductible temporary differences
(excluding those relating to FASB Statement No. 106) are substantially offset
by existing taxable temporary differences reversing within the carryforward
period. Furthermore, any such recorded tax benefits which would not be so
offset are expected to be realized by achieving future profitable operations
based on the following:
First, the Company launched a turnaround strategy to improve performance
by implementing a cost reduction program and enhancing asset utilization. This
resulted in a $215 million restructuring provision in 1991 to write off
uneconomic facilities and provide for future workforce reductions at the Inland
Steel Company and the Company.
Second, in 1992 Inland Steel Company completed a major plant and
equipment investment program that amounted to approximately $1.3 billion since
1988. This included the joint ventures of I/N Tek and I/N Kote and major
upgrades to facilities in the flat products and bar business. As expected,
these facility upgrades resulted in significant start-up costs and disruptions
to operations that negatively impacted financial results. By year-end 1993,
33
all facilities except the 12-inch Bar Mill reached their design capabilities.
This major investment program also shifts the product mix to higher value-added
products which historically have not experienced significant price volatility.
Consequently, the Company is now positioned with modern facilities that will
enhance its ability to generate taxable profits.
Finally, the Company operates in a highly cyclical industry and
consequently has had a history of generating and then fully utilizing
significant amounts of NOL carryforwards (during the years 1986-1989 the
Company utilized approximately $600 million of NOL carryforwards).
Subsequent to the adoption of FASB Statement No. 109, the Company
adopted FASB Statement No. 106 and recognized the entire transition obligation
at January 1, 1992, as a cumulative effect charge in 1992 (Note 10). This
adoption resulted in a $415 million deferred tax asset at December 31, 1992,
and future annual charges under FASB Statement No. 106 are expected to continue
to exceed deductible amounts for many years. Thereafter, even if the Company
should have a tax loss in any year in which the deductible amount would exceed
the financial statement expense, the tax law provides for a 15-year
carryforward period of that loss. Because of the extremely long period that is
available to realize these future tax benefits, a valuation allowance for this
deferred tax asset is not necessary.
While not affecting the determination of deferred income taxes for
financial reporting purposes, at December 31, 1993, the Company had available
for AMT purposes approximately $290 million of NOL carryforwards which will
expire as follows: $122 million in year 2006 and $168 million in year 2007.
The deferred income tax benefit of $93.7 million for 1991 arose from the
release of deferred tax liabilities as a result of the operating loss in that
year. Timing differences between tax and financial reporting purposes for that
year were composed primarily of the excess of tax over book depreciation and
provisions for restructuring.
Total income taxes reflected in the Consolidated Statement of Operations
differ from the amounts computed by applying the Federal corporate rate as
follows:
---------------------------------------------------------------------------------------------
Dollars in Millions
Years Ended December 31 1993 1992 1991
------------------------------------ -----------------------------------------
Federal income tax benefit computed
at statutory tax rate of 35% in
1993, and 34% in 1992 and 1991 $25.8Cr. $87.9Cr. $129.6Cr.
Additional taxes or credits from:
State and local income taxes, net
of Federal income tax effect 3.6 1.7Cr. 1.2Cr.
Percentage depletion 2.2Cr. 4.1Cr. 2.9Cr.
Adjustment of taxes of prior years -- 7.2Cr. --
Change in Federal statutory rate 10.6Cr. -- --
Loss for which no tax benefit
was recognized -- -- 26.6
All other, net 1.0Cr. 1.7 1.1
------------------------------------ -----------------------------------------
Total income tax benefit $36.0Cr. $ 99.2Cr. $106.0Cr.
------------------------------------ -----------------------------------------
------------------------------------ -----------------------------------------
Cr.=Credit
34
NOTE 12: RELATED PARTY TRANSACTIONS--
NIPPON STEEL CORPORATION
Following is a summary of the Company's relationships with NSC, whose indirect
wholly owned subsidiary became the holder of all of the Company's outstanding
Series F Preferred Stock on December 18, 1989 (see Note 4).
I/N Tek, a general partnership formed for a joint venture between the
Company and NSC, owns and operates a cold-rolling facility that commenced
operations in early 1990. I/N Tek is 60 percent owned by a wholly owned
subsidiary of Inland Steel Company and 40 percent owned by an indirect wholly
owned subsidiary of NSC. The cost of the facility was $525 million, of which
$111.6 million was contributed by the subsidiary of Inland Steel Company and
$74.4 million by the subsidiary of NSC, with the balance borrowed by I/N Tek
from three Japanese trading companies. Inland Steel Company has exclusive
rights to the productive capacity of the facility, except in certain limited
circumstances, and, under a tolling arrangement with I/N Tek, has an obligation
to use the facility for the production of cold-rolled steel. Under the tolling
arrangement, Inland Steel Company was charged $141.2 million, $122.6 million
and $95.0 million in 1993, 1992 and 1991, respectively, for such tolling
services. NSC has the right to purchase up to 400,000 tons of cold-rolled
steel from Inland Steel Company in each year at market-based negotiated prices,
up to half of which may be steel processed by I/N Tek. Purchases of Inland
Steel Company products by a subsidiary of NSC aggregated $157.8 million, $123.0
million and $100.6 million during 1993, 1992 and 1991, respectively. At
year-end 1993 and 1992, a subsidiary of NSC owed the Company $8.2 million and
$7.1 million, respectively, related to these purchases.
The Company and NSC also own and operate another joint venture which
consists of a 400,000 ton electrogalvanizing line and a 500,000 ton hot-dip
galvanizing line adjacent to the I/N Tek facility. I/N Kote, the general
partnership formed for this joint venture, is owned 50 percent by a wholly
owned subsidiary of Inland Steel Company and 50 percent by an indirect wholly
owned subsidiary of NSC. The facility commenced operations in the fourth
quarter of 1991 and became fully operational in the third quarter of 1992, with
the total cost of the project being $554 million. Permanent financing for the
project, as well as for capitalized interest and a portion of the working
capital, was provided by third-party long-term financing, by capital
contributions of the two partners of $60 million each and by subordinated
partner loans of $30 million each. Inland Steel Company and NSC each have
guaranteed the share of long-term financing attributable to their respective
subsidiary's interest in the partnership. I/N Kote had $516 million
outstanding under its long-term financing agreement at December 31, 1993.
Additional working capital requirements were met by partner loans and by
third-party credit arrangements. I/N Kote is required to buy all of its
cold-rolled steel from Inland Steel Company, which is required to furnish such
cold-rolled steel at a price that results in an annual return on equity to the
partners of I/N Kote, depending upon operating levels, of up to 10 percent
after operating and financing costs; this price is subject to an upward
adjustment if Inland Steel Company's return on sales is less than I/N Kote's
return on sales. Purchases of Inland Steel Company cold-rolled steel by I/N
Kote aggregated $191.7 million in 1993 and $99.3 million in 1992. At year-end
1993, I/N Kote owed the Company $35.5 million related to these purchases.
Prices of cold-rolled steel sold by Inland Steel Company to I/N Kote are
determined pursuant to the terms of the joint venture agreement and are based,
in part, on operating costs of the partnership. During 1993, Inland Steel
Company sold cold-rolled steel to I/N Kote at a price that approximated its
cost of production compared with 1992 when such sales were at less than its
cost of production. I/N Kote also provides tolling services to Inland Steel
Company for which it was charged $29.1 million in 1993. Inland Steel Company
sells all I/N Kote products that are distributed in North America.
The Company and NSC have entered into various agreements pursuant to
which NSC has provided technical services and licenses of proprietary steel
technology with respect to specific Company research and engineering projects.
Pursuant to such agreements, Inland Steel Company incurred costs of $3.7
million, $4.1 million and $7.0 million for technical services and related
administrative costs for services provided during 1993, 1992 and 1991,
respectively.
35
At midyear 1989, the Company and NSC, through a subsidiary, each
purchased in the open market approximately $15 million of the other company's
common stock. The estimated fair value of the NSC common stock at year-end
1993, based on the year-end quoted market price and exchange rate, was $6.7
million.
NOTE 13: INVESTMENTS IN UNCONSOLIDATED
JOINT VENTURES
The Company's investments in unconsolidated joint ventures accounted for by the
equity method consist primarily of its 60 percent interest in I/N Tek, 50
percent interest in I/N Kote, 50 percent interest in PCI Associates, 40 percent
interest in the Empire Iron Mining Partnership, 12 1/2 percent interest (25
percent interest in 1991) in Walbridge Electrogalvanizing Company, and 13 3/4
percent interest in Wabush Mines. I/N Tek and I/N Kote are joint ventures with
NSC (see Note 12). The Company does not exercise control over I/N Tek, as all
significant management decisions of the joint venture require agreement by both
of the partners. Due to this lack of control by the Company, the Company
accounts for its investment in I/N Tek under the equity method. PCI Associates
is a joint venture which operates a pulverized coal injection facility at the
Indiana Harbor Works. Empire and Wabush are iron ore mining and pelletizing
ventures owned in various percentages primarily by U.S. and Canadian steel
companies. On June 30, 1992, the Company, through subsidiaries, sold one-half
of its interest in Walbridge, resulting in a $22.5 million pre-tax gain.
Walbridge is a venture that coats cold-rolled steel in which Inland has the
right to 25 percent of the productive capacity (50 percent at year-end 1991).
Following is a summary of combined financial information of the Company's
unconsolidated joint ventures:
---------------------------------------------------------------------------------------------
Dollars in Millions 1993 1992 1991
--------------------------------- -----------------------------------------
Results of Operations for the
years ended December 31:
Gross revenue $ 956.7 $ 740.8 $ 595.4
Costs and expenses 945.1 748.3 586.8
--------------------------------- -----------------------------------------
Net income (loss) $ 11.6 $ (7.5) $ 8.6
--------------------------------- -----------------------------------------
--------------------------------- -----------------------------------------
Financial Position at December 31:
Current assets $ 279.7 $ 203.2 $ 137.3
Total assets 1,925.9 1,949.9 1,875.8
Current liabilities 241.6 174.0 145.0
Total liabilities 1,545.5 1,511.7 1,428.4
Net assets 380.4 438.2 447.4
--------------------------------- -----------------------------------------
--------------------------------- -----------------------------------------
NOTE 14: COMMITMENTS AND CONTINGENCIES
Inland Steel Company guarantees payment of principal and interest on its 40
percent share of the long-term debt of Empire Iron Mining Partnership requiring
principal payments of approximately $7.6 million annually through 1996. At
year-end 1993, Inland Steel Company also guaranteed $34.5 million of long-term
debt attributable to a subsidiary's interest in PCI Associates.
As part of the agreement covering the 1990 sale of the Inland Lime &
Stone Company division assets, Inland Steel Company agreed, subject to certain
exceptions, to purchase, at prices which approximate market, the full amount of
its annual limestone needs or one million gross tons, whichever is greater,
through 2002.
The Company and its subsidiaries have various operating leases for which
future minimum lease payments are estimated to total $370.6 million through
2018, including approximately $60.7 million in 1994, $53.6 million in 1995,
$48.2 million in 1996, $46.0 million in 1997, and $41.9 million in 1998.
Included in the above amounts
36
is a total of $154 million, approximately $20 million per year, related to the
lease of a caster facility that the Company plans to buy-out in 1994. Upon
completion of the transaction, the total and five year estimates provided
should be reduced accordingly. The Company will also record additional
long-term debt of approximately $63 million as part of the transaction, the
interest and principal of which will be paid on through 2001. In addition, at
year-end 1993, the Company guaranteed the lease and loans related to this
caster facility, which are partially secured by a surety bond, currently in the
amount of $62 million.
It is anticipated that the Company will make expenditures of $20 million
in 1994, $13 million in 1995, and $5 million to $10 million annually in each of
the three years thereafter for the construction, and have ongoing annual
expenditures of $40 million to $50 million for the operation, of air and water
pollution control facilities to comply with current Federal, state and local
laws and regulations. The Company is involved in various environmental and
other administrative or judicial actions initiated by governmental agencies.
While it is not possible to predict the results of these matters, the Company
does not expect environmental expenditures, excluding amounts that may be
required in connection with the consent decree in the 1990 EPA lawsuit, to
materially affect the Company's results of operations or financial position.
Corrective actions relating to the EPA consent decree may require significant
expenditures over the next several years that may be material to the results of
operations or financial position of the Company. At December 31, 1993, the
Company's reserves for environmental liabilities totaled $19 million related to
the sediment remediation under the 1993 EPA consent decree.
The total amount of firm commitments of the Company and its subsidiaries
to contractors and suppliers, primarily in connection with additions to
property, plant and equipment, approximated $15 million at year-end 1993.
NOTE 15: BUSINESS SEGMENTS AND
CONCENTRATION OF CREDIT RISK
The Company operates in two business segments, Integrated Steel and Steel
Service Centers.
Integrated Steel operations include the manufacture of steel mill
products and the mining and processing of iron ore. Integrated Steel produces
and sells a wide range of steels, of which approximately 99 percent consists of
carbon and high-strength low-alloy steel grades. Approximately 76 percent of
this segment's sales were to customers in five mid-American states, and 93
percent were to customers in 20 mid-American states. Over half the sales are
to the steel service center and transportation (including automotive) markets.
The Steel Service Center business segment processes and distributes a
broad line of steel products, non-ferrous metals and industrial plastics to a
wide range of industrial users on a nationwide basis. This segment includes
Joseph T. Ryerson & Son, Inc. and J.M. Tull Metals Company, Inc.
Substantially all sales between segments are recorded at current market
prices. Operating profit consists of total sales less operating expenses.
Operating expenses of segments do not include any allocation of general
corporate income and expense, other non-operating income or expense, interest
income or expense, or income taxes.
Identifiable assets are those that are associated with each business
segment. Corporate assets are principally investments in cash equivalents, the
intangible pension asset, and the assets of discontinued segments.
Substantially all of the Company's operations are located in the United
States, and foreign sales are not material.
37
INFORMATION ABOUT BUSINESS SEGMENTS
--------------------------------------------------------------------------------------------
Dollars in Millions
Years Ended December 31 1993 1992 1991
---------------------------------- -----------------------------------------
NET SALES
Integrated Steel Operations:
Sales to unaffiliated customers $2,001.3 $1,787.3 $1,757.9
Intersegment sales 173.6 122.1 137.5
---------------------------------- -----------------------------------------
2,174.9 1,909.4 1,895.4
---------------------------------- -----------------------------------------
Steel Service Center operations;
Sales to unaffiliated customers 1,882.5 1,707.0 1,645.6
Intersegment sales 10.8 9.6 10.3
---------------------------------- -----------------------------------------
1,893.3 1,716.6 1,655.9
---------------------------------- -----------------------------------------
Eliminations and adjustments (180.0) (131.7) (146.8)
---------------------------------- -----------------------------------------
Total net sales $3,888.2 $3,494.3 $3,404.5
---------------------------------- -----------------------------------------
OPERATING PROFIT (LOSS)
Integrated Steel Operations $ (28.2) $(200.6) $(313.2)
Steel Service Center Operations 56.4 27.1 16.2
Eliminations and adjustments (1.6) .1 (3.9)
---------------------------------- -----------------------------------------
Total operating profit (loss) $ 26.6 $(173.4) $(300.9)
---------------------------------- -----------------------------------------
IDENTIFIABLE ASSETS
Integrated Steel Operations $2,201.2 $2,212.3 $1,868.7
Steel Service Center Operations 788.3 742.9 750.3
---------------------------------- -----------------------------------------
2,989.5 2,955.2 2,619.0
General corporate and other 446.3 191.3 78.8
---------------------------------- -----------------------------------------
Total assets on December 31 $3,435.8 $3,146.5 $2,697.8
---------------------------------- -----------------------------------------
DEPRECIATION
Integrated Steel Operations $ 111.1 $ 110.2 $ 98.7
Steel Service Center Operations 19.2 18.7 18.4
---------------------------------- -----------------------------------------
130.3 128.9 117.1
General corporate and other 1.5 .7 1.1
---------------------------------- -----------------------------------------
Total depreciation $ 131.8 $ 129.6 $ 118.2
---------------------------------- -----------------------------------------
CAPITAL EXPENDITURES
Integrated Steel Operations $ 86.1 $ 55.1 $ 124.7
Steel Service Center Operations 19.3 9.3 9.8
---------------------------------- -----------------------------------------
105.4 64.4 134.5
General corporate and other .2 -- 5.7
---------------------------------- -----------------------------------------
Total capital expenditures $ 105.6 $ 64.4 $ 140.2
---------------------------------- -----------------------------------------
---------------------------------- -----------------------------------------