ITEM 1. BUSINESS.
Inland Steel Company (the "Company"), a Delaware corporation and a wholly owned subsidiary of Inland Steel Industries, Inc. ("Industries"), is a fully integrated domestic steel company. The Company produces and sells a wide range of steels, of which approximately 99% consists of carbon and high-strength low-alloy steel grades. It is also a participant in certain steel-finishing joint ventures.
The Company has a single business segment, which is comprised of the operating companies and divisions involved in the manufacturing of basic steel products and in related raw materials operations.
OPERATIONS
General The Company is directly engaged in the production and sale of steel and related products and the transportation of iron ore, limestone and certain other commodities (primarily for its own use) on the Great Lakes. Certain subsidiaries and associated companies of the Company are engaged in the mining and pelletizing of iron ore and in the operation of a cold-rolling mill and steel galvanizing lines. All raw steel made by the Company is produced at its Indiana Harbor Works located in East Chicago, Indiana, which also has facilities for converting the steel produced into semi-finished and finished steel products.
The Company has two divisions -- the Inland Steel Flat Products Company division and the Inland Steel Bar Company division. The Flat Products division manages the Company's iron ore operations, conducts its ironmaking operations, and produces the major portion of its raw steel. This division also manufactures and sells steel sheet, strip and plate and certain related semi-finished products for the automotive, appliance, office furniture, steel service center and electrical motor markets. The Bar division manufactures and sells special quality bars and certain related semi-finished products for forgers, steel service centers, heavy equipment manufacturers, cold finishers and the transportation industry. The Bar division closed its 28-inch structural mill in early 1991, completing the Company's withdrawal from the structural steel manufacturing business.
The Company and Nippon Steel Corporation ("NSC") are participants, through subsidiaries, in two joint ventures that operate steel-finishing facilities near New Carlisle, Indiana. The total cost of these two facilities was approximately $1.1 billion. I/N Tek, owned 60% by a wholly owned subsidiary of the Company and 40% by an indirect wholly owned subsidiary of NSC, operates a cold-rolling mill that began shipping commercial product in 1990 and reached its design capability in 1992. I/N Kote, owned equally by wholly owned subsidiaries of the Company and NSC (indirect in the case of NSC), operates two galvanizing lines which began start-up production in late 1991, became fully operational in the third quarter of 1992, and have operated near design capacity since August 1993. The Company is also a participant, through a subsidiary, in another galvanizing joint venture located near Walbridge, Ohio.
Raw Steel Production and Mill Shipments
The following table shows, for the five years indicated, the Company's production of raw steel and, based upon American Iron and Steel Institute data, its share of total domestic raw steel production:
--------------- * Net tons of 2,000 pounds.
** Based on preliminary data from the American Iron and Steel Institute.
The annual raw steelmaking capacity of the Company was reduced to 6.0 million net tons from 6.5 million net tons effective September 1, 1991, as the Company ceased making ingots. The basic oxygen process accounted for 94% of raw steel production of the Company in each of 1994 and 1993. The remainder of such production was accounted for by electric furnace.
The total tonnage of steel mill products shipped by the Company for each of the five years 1990 through 1994 was 5.2 million tons in 1994; 4.8 million tons in 1993; 4.3 million tons in 1992; 4.2 million tons in 1991; and 4.7 million tons in 1990. In 1994, sheet, strip, plate and certain related semi-finished products accounted for 86% of the total tonnage of steel mill products shipped from the Indiana Harbor Works, and bar and certain related semi-finished products accounted for 14%.
In 1994 and 1993, approximately 95% and 93%, respectively, of the shipments of the Flat Products division and 93% and 92%, respectively, of the shipments of the Bar division were to customers in 20 mid-American states. Approximately 77% of the shipments of the Flat Products division and 84% of the shipments of the Bar division in 1994 were to customers in a five-state area comprised of Illinois, Indiana, Ohio, Michigan and Wisconsin, compared to 75% and 83% in 1993. Both divisions compete in these geographical areas, principally on the basis of price, service and quality, with the nation's largest producers of raw steel as well as with foreign producers and with many smaller domestic mills.
According to data from the American Iron and Steel Institute, steel imports to the United States in 1994 totaled approximately 30.1 million tons, compared with 19.5 million tons imported in 1993. Steel imports constituted approximately 24.7% of apparent domestic supply in 1994, compared with approximately 18.7% of apparent domestic supply in 1993. During 1984, the previous peak year for steel imports into the U.S., such imports accounted for 26.4% of apparent domestic supply.
Many foreign steel producers are owned, controlled or subsidized by their governments. In 1992, Industries and certain domestic steel producers filed unfair trade petitions against foreign producers of certain bar, rod and flat-rolled 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. Industries and certain domestic producers have filed formal appeals of the adverse ITC decisions in the U.S. Court of International Trade ("CIT") or similar jurisdictional bodies, and foreign producers have appealed certain of the findings against them. The CIT sustained the ITC in the bar and rod product cases and in the hot-rolled and cold-rolled flat product cases. Appeals are pending regarding the corrosion-resistant flat products. It is not certain how the ITC actions and the appeals have impacted 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, and agreements regarding various subsidy and dumping practices as well as dispute settlement procedures. Legislation to implement the Uruguay Round agreement was enacted into federal law in December 1994. The agreement went into effect January 1, 1995.
Primarily as a result of the influx of foreign steel imports and the depressed demand for domestic steel products that began in the early 1980s, certain facilities at the Indiana Harbor Works were permanently closed during the second half of the 1980s and the early 1990s and others were shut down for temporary periods. The 28-inch structural mill was closed in early 1991, reflecting a decision to withdraw from the structural steel markets. In late 1991 the mold foundry, No. 8 Coke Oven Battery, and selected other facilities were closed either as part of a program to permanently reduce costs through the closure of uneconomic facilities or for environmental reasons. Provisions with respect to the shut-down of the structural mill were taken in 1987. Provisions for estimated costs incurred in connection with the closure of the mold foundry, No. 8 Coke Oven Battery, and selected other facilities were made in 1991. Included in such provisions were costs associated with the Company's closure of its No. 11 Coke Oven Battery in June 1992. All remaining coke batteries were
closed by year-end 1993, a year earlier than previously anticipated. An additional provision was required with respect to those closures. (See "Environment" below.)
For the five years indicated, shipments by market classification of steel mill products produced by the Company at its Indiana Harbor Works, including shipments to affiliates of the Company, are set forth below. The table confirms that a substantial portion of shipments by the Flat Products division was to steel service centers and transportation-related markets. The Bar division shipped more than 53% of its products to the steel converters/processors market over the five-year period shown in the table.
Some value-added steel processing operations that the Company does not have the capability to perform are performed by outside processors prior to shipment of certain products to the Company's customers. In 1994, approximately 23% of the products produced by the Company were processed further through value-added services such as electrogalvanizing, painting and slitting, excluding products processed further by affiliates.
Approximately 48% of the total tonnage of shipments by the Company during 1994 from the Indiana Harbor Works was transported by truck, with the remainder transported primarily by rail. A wholly owned truck transport subsidiary of the Company was responsible for shipment of approximately 10% of the total tonnage of products transported by truck from the Indiana Harbor Works in 1994.
Substantially all of the steel mill products produced by the Flat Products division are marketed through its own selling organization, with offices located in Chicago; Southfield, Michigan; St. Louis; and Nashville, Tennessee. Substantially all of the steel mill products produced by the Bar division are marketed through its sales office in East Chicago, Indiana.
See "Product Classes" below for information relating to the percentage of consolidated net sales accounted for by certain classes of similar products of steel manufacturing operations.
Raw Materials
The Company obtains iron ore pellets primarily from three iron ore properties, located in the United States and Canada, in which subsidiaries of the Company have varying interests -- the Empire Mine in Michigan, the Minorca Mine in Minnesota and the Wabush Mine in Labrador and Quebec, Canada. In recent years the Company has closed or terminated certain less cost-efficient iron ore mining operations. See "Properties Relating to Operations -- Raw Materials Properties and Interests" in Item 2
ITEM 2. PROPERTIES.
PROPERTIES RELATING TO OPERATIONS
Steel Production
All raw steel made by the Company is produced at its Indiana Harbor Works located in East Chicago, Indiana. The property on which this plant is located, consisting of approximately 1,900 acres, is held by the Company in fee. The basic production facilities of the Company at its Indiana Harbor Works consist of furnaces for making iron; basic oxygen and electric furnaces for making steel; a continuous billet caster, a continuous combination slab/bloom caster and two continuous slab casters; and a variety of rolling mills and processing lines which turn out finished steel mill products. Certain of these production facilities, including a continuous anneal line, are held by the Company under leasing arrangements. The Company purchased the equity interest of the lessor of the No. 2 BOF Shop Caster Facility in March 1994 and assumed caster-related debt, which was repaid by year-end 1994. Substantially all of the remaining property, plant and equipment at the Indiana Harbor Works, other than the Caster Facility and leased equipment, is subject to the lien of the First Mortgage of the Company dated April 1, 1928, as amended and supplemented. See "Operations -- Raw Steel Production and Mill Shipments" in Item 1 above for further information relating to capacity and utilization of the Company's properties. The Company's properties are adequate to serve its present and anticipated needs, taking into account those issues discussed in "Capital Expenditures and Investments in Joint Ventures" in Item 1 above.
I/N Tek, a partnership in which a subsidiary of the Company owns a 60% interest, has constructed a 1,500,000-ton annual capacity cold-rolling mill on approximately 200 acres of land, which it owns in fee, located near New Carlisle, Indiana. Substantially all the property, plant and equipment owned by I/N Tek at this location is subject to a lien securing related indebtedness. The I/N Tek facility is adequate to serve the present and anticipated needs of the Company planned for such facility.
I/N Kote, a partnership in which a subsidiary of the Company owns a 50% interest, has constructed a 900,000-ton annual capacity steel galvanizing facility on approximately 25 acres of land, which it owns in fee, located adjacent to the I/N Tek site. Substantially all the property, plant and equipment owned by I/N Kote is subject to a lien securing related indebtedness. The I/N Kote facility is adequate to serve the present and anticipated needs of the Company planned for such facility.
PCI Associates, a partnership in which a subsidiary of the Company owns a 50% interest, has constructed a pulverized coal injection facility on land located within the Indiana Harbor Works. The Company leases PCI Associates the land upon which the facility is located. Substantially all the property, plant and equipment owned by PCI Associates is subject to a lien securing related indebtedness. The PCI Associates facility is adequate to serve the present and anticipated needs of the Company planned for such facility.
The Company owns three vessels for the transportation of iron ore and limestone on the Great Lakes, and a subsidiary of the Company owns a fleet of 404 coal hopper cars (100-ton capacity each) used in unit trains to move coal and coke to the Indiana Harbor Works. See "Operations -- Raw Materials" in Item 1 above for further information relating to utilization of the Company's transportation equipment. Such equipment is adequate, when combined with purchases of transportation services from independent sources, to meet the Company's present and anticipated transportation needs.
The Company also owns and maintains research and development laboratories in East Chicago, Indiana, which facilities are adequate to serve its present and anticipated needs.
Raw Materials Properties and Interests
Certain information relating to raw materials properties and interests of the Company and its subsidiaries is set forth below. See "Operations -- Raw Materials" in Item 1 above for further information relating to capacity and utilization of such properties and interests.
Iron Ore
The operating iron ore properties of the Company's subsidiaries and of the iron ore ventures in which the Company has an interest are as follows:
The Empire Mine is operated by the Empire Iron Mining Partnership, in which the Company has a 40% interest. The Company, through a subsidiary, is the sole owner and operator of the Minorca Mine. The Wabush Mine is a taconite project in which the Company owns a 13.75% interest. The Company also owns a 38% interest in the Butler Taconite project (permanently closed in 1985) in Nashwauk, Minnesota.
The reserves at the Empire Mine, the Minorca Mine and the Wabush Mine are held under leases expiring, or expected at current production rates to expire, between 2012 and 2040. Substantially all of the reserves at Butler Taconite are held under leases. The Company's share of the production capacity of its
interests in such iron ore properties is sufficient to provide the majority of its present and anticipated iron ore pellet requirements. Any remaining requirements have been and are expected to continue to be readily available from independent sources. During 1992, the Minorca Mine's original ore body was depleted and production shifted to a new major iron ore body, the Laurentian Reserve, acquired by lease in 1990.
Limestone and Dolomite
The limestone and dolomite properties of the Company located near the town of Gulliver in the Upper Peninsula of Michigan were permanently closed on December 29, 1989 and sold in 1990.
Coal
The Company's sole remaining coal property, the Lancashire No. 25 Property, located near Barnesboro, Pennsylvania, is permanently closed. All Company coal requirements for the past several years have been and are expected to continue to be met through contract purchases and other purchases from independent sources.
OTHER PROPERTIES
The Company and certain of its subsidiaries lease, under a long-term arrangement, approximately 15% of the space in the Inland Steel Building located at 30 West Monroe Street, Chicago, Illinois (where the Company's principal executive offices are located), which property interest is adequate to serve the Company's present and anticipated needs.
Certain subsidiaries of the Company hold in fee at various locations an aggregate of approximately 355 acres of land, all of which is for sale. The Company also holds in fee approximately 300 acres of land adjacent to the I/N Tek and I/N Kote sites, which land is available for future development. Approximately 1,060 acres of rural land, which are held in fee at various locations in the north-central United States by various raw materials ventures, are also for sale. I R Construction Products Company, Inc. (formerly Inryco, Inc.), a subsidiary of the Company and the Company's former Construction Products business segment, owns, in fee, a combination office building and warehouse in Hoffman Estates (IL), which is for sale.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
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 the 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 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 totalled $19 million. The consent decree also defines procedures for corrective action at the 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 actions is not significant. In addition, during 1994 the Company paid stipulated penalties of $184,000 pursuant to the provisions of the consent decree in connection with air emissions from its coke facilities, which were permanently shutdown at year-end 1993.
On March 22, 1985, the EPA issued an administrative order to the Company's former Inland Steel Container Company Division ("Division") naming the former Division and various other unrelated companies as responsible parties under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") in connection with the cleanup of a waste disposal facility operated by Duane Marine Salvage Corporation at Perth Amboy, New Jersey. The administrative order alleged that certain of the former Division's wastes were transported to, and disposed of at, that facility and required the Company to join with other named parties in taking certain actions relating to the facility. The Company and the other administrative order recipients have completed the work required by the order. In unrelated matters, the EPA also advised the former Division and various other unrelated parties of other sites located in New Jersey at which the EPA expects to spend public funds on any investigative and corrective measures that may be necessary to control any releases or threatened releases of hazardous substances, pollutants and contaminants pursuant to the applicable provisions of CERCLA. The notice also indicated that the EPA believes the Company may be a responsible party under CERCLA. The extent of the Company's involvement and participation in these matters has not yet been determined. While it is not possible at this time to predict the amount of the Company's potential liability, none of these matters is expected to materially affect the Company's financial position.
The EPA has adopted a national policy of seeking substantial civil penalties against owners and operators of sources for noncompliance with air and water pollution control statutes and regulations under certain circumstances. It is not possible to predict whether further proceedings will be instituted against the Company or any of its subsidiaries pursuant to such policy, nor is it possible to predict the amount of any such penalties that might be assessed in any such proceeding.
In 1994, the Company entered into an Agreed Order with the Indiana Department of Environmental Management ("IDEM") which resolved all outstanding Notices of Violation and other air emission issues at the Indiana Harbor Works raised by IDEM. The Agreed Order covers air emissions from coke oven batteries, steelmaking facilities and fugitive road dust and required the payment of a $572,000 cash penalty.
The Company received a Notice of Violation from IDEM dated March 3, 1989 alleging violations of the Company's National Pollution Discharge Elimination System permit regarding water discharges. The Company is presently in discussions with the staff of IDEM with respect to these matters and cannot currently estimate the time period within which these matters will be resolved. While it is not possible at this time to predict the amount of the Company's potential liability, this matter is not expected to materially affect the Company's financial position.
The Company received a Special Notice of Potential Liability ("Special Notice") from IDEM on February 18, 1992 relating to the Four County Landfill Site, Fulton County, Indiana (the "Facility"). The Special Notice stated that IDEM has documented the release of hazardous substances, pollutants and contaminants at the Facility and was planning to spend public funds to undertake an investigation and control the release or threatened release at the Facility unless IDEM determined that a potentially responsible party ("PRP") will properly and promptly perform such action. The Special Notice further stated that the Company may be a PRP and that the Company, as a PRP, may have potential liability with respect to the Facility. In August 1993, the Company, along with other PRPs, entered into an Agreed Order with IDEM pursuant to which the PRPs agreed to perform a Remedial Investigation/Feasibility Study ("RI/FS") for the Facility and pay certain past and future IDEM costs. In addition, the PRPs agreed to provide funds for operation and maintenance necessary for stabilization of the Facility. The costs which the Company has agreed to assume under the Agreed Order are not currently anticipated to exceed $178,000. The cost of the final remedies which will be determined to be required with respect to the Facility cannot be reasonably estimated until, at a minimum, the RI/FS is completed. The Company is therefore unable to determine the extent of its potential liability, if any, relating to the Facility or whether this matter could materially affect the Company's financial position.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
The Company meets the conditions set forth in General Instruction J(1)(a) and (b) of Form 10-K and is therefore omitting, pursuant to General Instruction J(2), the information called for by this Item.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company is a wholly owned subsidiary of Inland Steel Industries, Inc. thus, market, stockholder and dividend information otherwise called for by this Item is omitted.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The Company meets the conditions set forth in General Instruction J(2)(a) and (b) of Form 10-K and is therefore omitting, pursuant to General Instruction J(2), the information called for by this Item.
ITEM 7.
ITEM 7. MANAGEMENT'S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS.
The Company's 1994 net income of $53.9 million was a marked improvement from the 1993 net loss of $59.7 million. This was the Company's first reported net income and best operating profit performance since 1989.
The following table summarizes selected earnings and other data:
Net sales increased 14 percent, 7 percent due to an increase in the volume of steel mill products shipped and 7 percent due to improved selling prices and mix. The recovering economy continued to provide strong demand for products containing steel and this demand was the principal factor leading to both increased volume and price. The 1993 financial results were 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. The Company operated at 89 percent of its raw steelmaking capability in 1994, compared with 83 percent in 1993.
The Company embarked in 1991 on a turnaround program to increase revenues and asset utilization, and significantly reduce its underlying cost base by year-end 1994. A restructuring charge in 1991 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. Primarily due to the continued operation of its plate mill, the closure of which was anticipated in arriving at the targeted workforce reduction, the Company achieved only a 20 percent reduction in the workforce by year-end 1994. The 1994 effect of this program represents a savings of approximately $200 million in employment costs and $10 million in decreased depreciation expense. However, the savings from reduced employment was partially offset by increased wage and benefit costs.
I/N Tek continued to operate near capacity and produce consistently high-quality steels. In August 1993, I/N Kote achieved near design capacity operations and, by year-end 1993, had achieved product qualification at all major customers. Under the I/N Kote partnership agreement, the 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, the Company's sales prices approximated its costs of production, and in 1994, the prices exceeded production costs but were still less than the market prices for cold-rolled steel products. As I/N Kote expenditures include principal payments and provision for return on equity to the partners, the Company's ability to realize higher prices on its sales to I/N Kote depends on the facility continuing 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 Company-produced coke, the Company entered into a long-term supply contract and other arrangements to purchase coke. In addition, the 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 thereby reducing coke requirements. The joint venture commenced operations in the third quarter of 1993 and achieved design capacity by year-end 1994, reducing coke requirements by approximately 25 percent.
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 will continue to be paid as claims are submitted. The unfunded benefits liability reflected on the balance sheet as of December 31, 1994, was approximately $1.1 billion. The unfunded liability will continue to grow as long as accrual-basis costs exceed cash benefit payments. (See Note 7 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, 1994, the Company had a net deferred tax asset of $364 million, which includes $398 million related 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 $250 million of additional taxable income as of year-end 1994 which would serve to offset approximately $85 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 $800 million 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. Additionally, in accordance with the Industries tax sharing agreement, if the Company is unable to use all of its allocated tax attributes (net operating loss carryforwards and tax credit carryforwards) in a given year but other companies in the Industries group are able to utilize them, then the Company will be paid for the use of its attributes. The Company believes that it is more likely than not that it will achieve such taxable income level. (See Note 8 to the consolidated financial statements for further details regarding this net deferred tax asset.)
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements (including the financial statement schedules listed under Item 14(a)2 of this report) of the Company called for by this Item, together with the Report of Independent Accountants dated February 20, 1995, are set forth on pages to, inclusive, of this Report on Form 10-K, and are hereby incorporated by reference into this Item. Financial statement schedules not included in this Report on Form 10-K have been omitted because they are not applicable or because the information called for is shown in the consolidated financial statements or notes thereto.
Consolidated quarterly sales and earnings information for 1994 and 1993 is set forth in Note 14 of Notes to Consolidated Financial Statements (contained herein), which is hereby incorporated by reference into this Item.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The Company meets the conditions set forth in General Instruction J(1)(a) and (b) of Form 10-K and is therefore omitting, pursuant to General Instruction J(2), the information called for by this Item.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The Company meets the conditions set forth in General Instruction J(1)(a) and (b) of Form 10-K and is therefore omitting, pursuant to General Instruction J(2), the information called for by this Item.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The Company meets the conditions set forth in General Instruction J(1)(a) and (b) of Form 10-K and is therefore omitting, pursuant to General Instruction J(2), the information called for by this Item.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company meets the conditions set forth in General Instruction J(1)(a) and (b) of Form 10-K and is therefore omitting, pursuant to General Instruction J(2), the information called for by this Item.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) DOCUMENTS FILED AS A PART OF THIS REPORT.
1. CONSOLIDATED FINANCIAL STATEMENTS. The consolidated financial statements listed below are set forth on pages to, inclusive, of this Report and are incorporated by reference in Item 8 of this Annual Report on Form 10-K.
Report of Independent Accountants.
Consolidated Statements of Operations and Reinvested Earnings for the three years ended December 31, 1994.
Consolidated Statement of Cash Flows for the three years ended December 31, 1994.
Consolidated Balance Sheet at December 31, 1994 and 1993.
Schedules to Consolidated Financial Statements at December 31, 1994 and 1993, relating to:
Property, Plant and Equipment.
Long-Term Debt.
Statement of Accounting and Financial Policies.
Notes to Consolidated Financial Statements.
Financial Statement Schedule II (Reserves) for the three years ended December 31, 1994.
2. EXHIBITS. The exhibits required to be filed by Item 601 of Regulation S-K are listed under the caption "Exhibits" below.
(B) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed by the Company during the quarter ended December 31, 1994.
(C) EXHIBITS.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INLAND STEEL COMPANY
By: ROBERT J. DARNALL Robert J. Darnall Chairman
Date: March 28, 1995
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the dates indicated.
By: DAVID B. ANDERSON
David B. Anderson
Attorney in-fact
March 28, 1995
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OF INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of Inland Steel Company
In our opinion, the consolidated financial statements listed in the index appearing on page present fairly, in all material respects, the financial position of Inland Steel Company (a wholly owned subsidiary of Inland Steel Industries, Inc.) and Subsidiary Companies at December 31, 1994 and 1993, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1994, 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 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 7 and 8 to the consolidated financial statements, in 1992 the Company changed its method of accounting for postretirement benefits other than pensions and for income taxes.
PRICE WATERHOUSE LLP
Chicago, Illinois February 20, 1995
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS AND REINVESTED EARNINGS DOLLARS IN MILLIONS
See notes to consolidated financial statements.
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
CONSOLIDATED STATEMENT OF CASH FLOWS DOLLARS IN MILLIONS
See notes to consolidated financial statements.
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.) CONSOLIDATED BALANCE SHEET DOLLARS IN MILLIONS
See notes to consolidated financial statements.
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
SCHEDULES TO CONSOLIDATED FINANCIAL STATEMENTS DOLLARS IN MILLIONS
See notes to consolidated financial statements.
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
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% 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.
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% 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.
BENEFITS FOR RETIRED EMPLOYEES
Pension benefits are provided by the Company to substantially all employees under a trusteed non-contributory plan of Inland Steel Industries, Inc. Life insurance and certain medical benefits are provided for 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 now being accrued during their term of employment (see Note 7). 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. Cash management activities are performed by the Company's parent, Inland Steel Industries, Inc., and periodic cash transfers are made, thereby minimizing the level of cash maintained by the Company.
INCOME TAXES
Effective January 1, 1992, the Company adopted FASB Statement No. 109, "Accounting for Income Taxes" (see Note 8).
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. INVENTORIES
Inventories were classified on December 31 as follows:
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 million in 1993. The effect on cost of goods sold of LIFO liquidations in 1992 was not material.
Replacement costs for the LIFO inventories exceeded LIFO values by approximately $248 million and $241 million on December 31, 1994 and 1993, respectively.
NOTE 2. BORROWING ARRANGEMENTS
Inland Steel Administrative Service Company, a wholly owned subsidiary of the Company established to provide a supplemental source of short-term funds to the Company, has a $100 million revolving credit facility with a group of banks which extends to November 30, 1995. Under this arrangement the Company has agreed to sell substantially all of its receivables to Inland Steel Administrative Service Company to secure this facility. The facility requires the maintenance of various financial ratios including minimum net worth and leverage ratios.
NOTE 3. LONG-TERM DEBT
The outstanding First Mortgage Bonds of Inland Steel Company are the obligation solely of the Company and have not been guaranteed or assumed by, or otherwise become the obligation of, Inland Steel Industries, Inc. ("Industries") or any of its other subsidiaries. Each series of First Mortgage Bonds issued by the Company is limited to the principal amount outstanding, with the Pollution Control Series 1977 Bonds, the Pollution Control Series 1978 Bonds, and the Series R First Mortgage Bonds subject to a sinking fund. Substantially all the property, plant and equipment owned by the 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, 1994.
During the second quarter of 1994, the Company refinanced $20 million of 8.125 percent pollution control revenue bonds bearing an interest rate of 7.125 percent. In addition, in June 1993, the Company 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.
In 1994, the Company redeemed all $75 million of its outstanding Series O, P, and Q First Mortgage Bonds. At year-end 1993, all such remaining Bonds had been called for redemption and, accordingly, the
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
outstanding principal amount was classified as a current liability. The Company also acquired the equity interest in the operating lease of the No. 2 Basic Oxygen Furnace Shop continuous casters, assuming $63 million of debt. By year-end 1994, the assumed debt and approximately $40 million of other caster-related debt was repaid by the Company.
The amended and supplemented Mortgage under which the First Mortgage 12% Bonds, Series T, were issued contains covenants limiting, among other things, the creation of additional indebtedness; the declaration and payment of dividends and distributions on the Company's capital stock; and the acquisition or retirement of any debt of the Company that is subordinate to the Series T Bonds.
Maturities of long-term debt and capitalized lease obligations due within five years are: $6.6 million in 1995, $7.7 million in 1996, $7.9 million in 1997, $139.3 million in 1998, and $10.8 million in 1999. See Note 11 regarding commitments and contingencies for other scheduled payments.
Interest cost incurred by the Company totaled $54.4 million in 1994, $63.3 million in 1993, and $63.4 million in 1992. Included in these totals is capitalized interest of $1.1 million in 1994, $2.9 million in 1993, and $10.2 million in 1992.
NOTE 4. CAPITAL STOCK
In the fourth quarter of 1992, the Board of Directors authorized: (i) a reduction in the number of Company shares authorized, issued and outstanding and (ii) a change from no par to $1.00 par value stock. One share of $1.00 par value stock was issued for each 30,000 shares of the no par stock, rounded to the nearest whole share. As a result, capital in excess of par increased and corresponding capital accounts decreased by $674.5 million. Summarized below is the effect of these actions on the shares of Company stock:
Information provided below for each preferred issue is presented on an after-change basis, which reflects the current status of each such issue.
Cash dividends on Series A Preferred Stock are cumulative and payable quarterly at an annual rate of $72,000 per share. The shares are convertible into common stock at the rate of one share of common stock for each share of Series A Preferred Stock and are redeemable, at the Company's option, for $1,320,000 per share plus any accrued and unpaid dividends.
Cash dividends on Series B Preferred Stock are cumulative and payable quarterly at an annual rate of $142,500 per share. The shares are convertible into common stock at a conversion price of $1,128,750 per share, or 1.33 common shares for each preferred share, and have a liquidation value of $1,500,000 per share plus any accrued and unpaid dividends. The shares are redeemable at the Company's option, for $1,500,000 per share plus any accrued and unpaid dividends.
Cash dividends on Series C Preferred Stock are cumulative and payable quarterly at an annual rate of $360,000 per share. The shares have a liquidation value of $3,000,000 per share plus any accrued and unpaid
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
dividends. The shares are redeemable at the Company's option at a price (plus accrued and unpaid dividends) declining from $3,306,000 for the one-year period commencing December 1, 1994 to $3,000,000 beginning December 1, 2011. The Series C Preferred Stock is also exchangeable at the Company's option on any dividend payment date for the Company's 12% subordinated debentures due December 1, 2016, at a rate of $3,000,000 principal amount of debentures for each share of Series C Preferred Stock.
NOTE 5. DERIVATIVES AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.
Derivatives
The Company has only limited involvement with derivative financial instruments, none of which are used for trading purposes. Derivatives are used to hedge exposure to fluctuations in costs caused by the price volatility of certain metal commodities and natural gas supplies, and in foreign currency exchange rates related to firm commitments regarding a Canadian raw material joint venture. Gains and losses associated with these hedging transactions become part of the cost of the item being hedged. At no time during 1994 or 1993 were such hedging transactions material.
Long-term debt
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 $420 million at December 31, 1994 and $583 million at December 31, 1993 as compared with the carrying value of $424 million and $562 million included in the balance sheet at year-end 1994 and 1993, respectively.
NOTE 6. PROVISIONS FOR FACILITIES SHUTDOWN
In 1993, the Company recorded a facility shutdown provision of $22.3 million which covered costs associated with the earlier than planned closure of the Company's cokemaking facilities. Of the amount provided, $7.7 million related to the write-off of assets with the remainder provided for various expenditures associated with the shutdown of the facility, including personnel costs.
The Company has taken initiatives to reduce its production costs by shutdown of certain Indiana Harbor Works facilities and raw materials operations. Reserve balances related to provisions recorded in prior years for these shutdowns, which include long-term liabilities for mine reclamation costs and employee benefits, totaled $133.8 million, $149.7 million and $140.7 million at December 31, 1994, 1993 and 1992, respectively.
NOTE 7. RETIREMENT BENEFITS
Pensions
The Inland Steel Industries Pension Plan and Pension Trust, which covers certain employees of the Company, also covers certain employees of Industries and of certain of Industries' other subsidiaries. The plan is a non-contributory defined benefit plan with pensions based on final pay and years of service for all salaried employees and certain wage employees, and years of service and a fixed rate (in most instances based on frozen pay or on job class) for all other wage employees, including members of the United Steelworkers union. Because the fair value of pension plan assets pertains to all participants in the plan, no separate determination of the fair value of such assets is made solely with respect to the Company. At year-end 1994 and 1993, the
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
actuarial present value of benefits for service rendered to date and the fair value of plan assets available for benefits for the Industries consolidated group were as follows:
In 1993, Industries recorded an additional minimum pension liability of $122.1 million representing 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. In 1994, the additional minimum pension liability and corresponding intangible asset were no longer required.
A weighted average discount (settlement) rate of 8.8% in 1994 and 7.25% in 1993 was used in the determination of the actuarial present value of benefits.
Pension cost for the Company for 1994 was $25.2 million compared with a credit of $5.6 million in 1993 and $9.5 million in 1992.
Benefits Other Than Pension
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 does not prefund any of these postretirement benefits. Effective January 1, 1994, a Voluntary Employee Benefit Association Trust was established for payment of health care benefits made to 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").
In 1993, in connection with the 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.
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amount of net periodic postretirement benefit cost for 1994, 1993 and 1992 is composed of the following:
The following table sets forth components of the accumulated postretirement benefit obligation:
Any net gain or loss in excess of 10 percent of the accumulated postretirement benefit obligation is amortized over the remaining service period of active plan participants.
The assumptions used to determine the plan's accumulated postretirement benefit obligation are as follows:
A one percentage point increase in the assumed health care cost trend rates for each future year increases the annual net periodic postretirement benefit cost and the accumulated postretirement benefit obligation as of December 31, 1994 by $10 million and $88 million, respectively.
Postemployment Benefits
In November 1992, the FASB issued Statement No. 112, "Employers' Accounting for Postemployment Benefits." Adoption of the new Standard in 1994 did not have a material impact on the results of operations or the financial position of the Company.
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8. INCOME TAXES
The Company adopted FASB Statement No. 109, "Accounting for Income Taxes," effective January 1, 1992. As a result of adopting Statement No. 109, the Company recorded a $31.3 million charge reflecting the cumulative effect of the change on prior years. The Company is now required to record deferred tax assets and liabilities on its balance sheet as compared with the Company's past practice under APB Opinion No. 11 and Industries' former tax-sharing agreement under which no such recording was required.
To comply with the provisions of FASB Statement No. 109, a new tax-sharing agreement was adopted under which current and deferred income tax provisions are determined for each company in the Industries group on a stand-alone basis. Companies with taxable losses record current income tax credits not to exceed current income tax charges recorded by profitable companies. NOL and tax credit carryforwards are allocated to each company in accordance with applicable tax regulations as if a company were to leave the consolidated group.
The elements of the provisions for income taxes for each of the three years indicated below were as follows:
--------------- 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 percent to 35 percent, effective January 1, 1993. A credit to income of $9 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.
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of the deferred income tax assets and liabilities arising under FASB Statement No. 109 were as follows:
For tax purposes, the Company had available, at December 31, 1994, net operating loss ("NOL") carryforwards for regular Federal income tax purposes of approximately $715 million which will expire as follows: $60 million in year 2005, $288 million in year 2006, $258 million in year 2007, and $109 million in 2008. The Company also had investment tax credit and other general business credit carryforwards for tax purposes of approximately $14 million, which expire during the years 1995 through 2006. A valuation allowance of $5 million 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 $16 million, which may be used indefinitely to reduce regular Federal income taxes.
The Company believes that it is more likely than not that the $715 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 $205 million restructuring provision in 1991 to write off uneconomic facilities and provide for future workforce reductions at the Company.
Second, in 1992 the 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 early 1994, all facilities reached their design capabilities. This major investment program also shifts the
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 7). At December 31, 1994, the deferred tax asset related to the Company's FASB Statement No. 106 obligation was $398 million. To the extent that future annual charges under FASB Statement No. 106 continue to exceed deductible amounts, this deferred tax asset will continue to grow. 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, 1994, the Company had available for AMT purposes approximately $108 million of NOL carryforwards which will expire as follows: $74 million in 2007 and $34 million in 2008.
Total income taxes reflected in the Consolidated Statement of Operations differ from the amounts computed by applying the Federal corporate tax rate as follows:
--------------- Cr. = Credit
NOTE 9. TRANSACTIONS WITH NIPPON STEEL CORPORATION
On December 18, 1989, Industries sold 185,000 shares of its Series F Exchangeable Preferred Stock to NS Finance III, Inc., an indirectly wholly owned subsidiary of Nippon Steel Corporation ("NSC"), for $1,000 per share. With respect to Industries stockholder voting, such preferred stock entitles the holder to 30.604 votes per share, which number may be adjusted from time to time upon the occurrence of certain events. The following is a summary of the Company's relationships with NSC.
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% owned by a wholly owned subsidiary of the Company and 40% 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 the Company and $74.4 million by the subsidiary of NSC, with the balance borrowed by I/N Tek from three Japanese trading
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
companies. The 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, the Company was charged $131.1 million, $141.2 million and $122.6 million in 1994, 1993 and 1992, respectively, for such tolling services. NSC has the right to purchase up to 400,000 tons of cold-rolled steel from the Company in each year at market-based negotiated prices, up to half of which may be steel processed by I/N Tek. Purchases of Company products by a subsidiary of NSC aggregated $172.8 million, $157.8 million and $123.0 million during 1994, 1993 and 1992, respectively. At year-end 1994 and 1993, a subsidiary of NSC owed the Company $10.6 million and $8.2 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% by a wholly owned subsidiary of the Company and 50% 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 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. The 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 $485 million outstanding under its long-term financing agreement at December 31, 1994. 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 the 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 may be subject to an adjustment if the Company's return on sales differs from I/N Kote's return on sales. Purchases of Company cold-rolled steel by I/N Kote aggregated $275.6 million in 1994, $191.7 million in 1993 and $99.3 million in 1992. At year-end 1994 and 1993, I/N Kote owed the Company $26.0 million and $35.5 million, respectively, related to these purchases. Prices of cold-rolled steel sold by the 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, the Company sold cold-rolled steel to I/N Kote at prices that approximated its costs of production and in 1994 the prices exceeded production costs but were still less than the market prices for cold-rolled steel products. I/N Kote also provides tolling services to the Company for which it was charged $36.0 million in 1994 and $29.1 million in 1993. The 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, the Company incurred costs of $1.6 million, $3.7 million and $4.1 million for technical services and related administrative costs for services provided during 1994, 1993 and 1992, respectively.
NOTE 10. INVESTMENTS IN UNCONSOLIDATED JOINT VENTURES
The Company's investments in unconsolidated joint ventures accounted for by the equity method consist primarily of its 60% interest in I/N Tek, 50% interest in I/N Kote, 50% interest in PCI Associates, 40% interest in the Empire Iron Mining Partnership, 12 1/2% interest in Walbridge Electrogalvanizing Company and 13 3/4% interest in Wabush Mines. I/N Tek and I/N Kote are joint ventures with NSC (see Note 9). 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
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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% of the productive capacity. Following is a summary of combined financial information of the Company's unconsolidated joint ventures:
NOTE 11. COMMITMENTS AND CONTINGENCIES
The Company guarantees payment of principal and interest on its 40% 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 1994, the Company also guaranteed $32.5 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, the 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 1996, and the annual limestone needs of the Indiana Harbor Works from 1997 through 2002.
The Company and its subsidiaries have various operating leases for which minimum lease payments are estimated to total $125.5 million through 2019, including approximately $25.7 million in 1995, $20.5 million in 1996, $16.6 million in 1997, $13.5 million in 1998, and $9.5 million in 1999.
It is anticipated that the Company will make expenditures of $24 million in 1995 and $5 million to $10 million annually in each of the four 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.
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $39 million at year-end 1994.
NOTE 12. RELATED PARTY TRANSACTIONS
Industries has established procedures for charging its administrative expenses to the operating companies owned by it. These charges are for management, financial and legal services provided to those companies. Charges from Industries for 1994, 1993 and 1992 totaled $18.6 million, $24.2 million, and $25.4 million, respectively.
There are also established procedures to charge interest on all intercompany loans within the Industries group of companies. Such loans currently bear interest at the prime rate. For 1994, 1993 and 1992, the Company's net interest expense to companies within the Industries group totaled $7.7 million, $8.0 million and $5.1 million, respectively.
The Company sells to and purchases products from other companies within the Industries group of companies at prevailing market prices. These transactions for the indicated years are summarized as follows:
NOTE 13. CONCENTRATION OF CREDIT RISK
The Company produces and sells a wide range of steels, of which approximately 99% consists of carbon and high-strength low-alloy steel grades. Approximately 78% of the sales were to customers in five mid-American states, and 95% were to customers in 20 mid-American states. Over half the sales are to the steel service center and transportation (including automotive) markets.
Sales to General Motors Corporation approximated 12% of consolidated net sales in 1994, 1993 and 1992. No other customer accounted for more than 10% of the consolidated net sales of the Company during any of these years.
NOTE 14. CONSOLIDATED QUARTERLY SALES AND EARNINGS (UNAUDITED)
--------------- * Includes facility shutdown provision of $22.3 million, $14.7 million after tax.
INLAND STEEL COMPANY AND SUBSIDIARY COMPANIES (A WHOLLY OWNED SUBSIDIARY OF INLAND STEEL INDUSTRIES, INC.)
SCHEDULE II -- RESERVES
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993 AND 1992 DOLLARS IN MILLIONS
--------------- NOTES:
(A) Bad debts written off during year. (B) Allowances granted during year.
INDEX TO EXHIBITS