10 South Geneva Road
Vineyard, Utah 84058
Fax: (801) 227-9431
Sales: $420 million
Stock Exchanges: New York Pacific
SICs: 3312 Blast Furnaces & Steel Mills
Geneva Steel is the only integrated steel mill operating west of the Mississippi River. The mill’s principal products are hot-rolled steel sheet, plate, and pipe products which are used for a variety of applications, including industrial and agricultural machinery, gas and water pipelines, ships and barges, storage tanks, railroad cars, and a variety of construction materials. They are primarily sold in the western and central United States. The company also produces semi-finished slabs and non-steel materials that are by-products of its steel-making operations. The company’s properties consist of a 1400-acre site in Vineyard, Utah, 45 miles south of Salt Lake City, on which the steel mill is located, plus a lease on a 300-acre site nearby.
Geneva was originally designed as a single-line plate mill when it was built by the U.S. government in 1942 as part of the war effort. When the government no longer had need of it, the mill was sold to the United States Steel Corporation, a unit of USX Corporation, and modified into a single-line plate/sheet mill. USX operated the mill from 1944 until 1986 when it decided to close down the mill.
USX suspended operation of the mill from July 1986 to August 1987 but kept it on “hot idle” status hoping to sell it. In August 1987, the mill was acquired by a group of investors for $44 million (less than a third of its estimated liquidation value). USX’s original asking price was $58 million.
The group was headed by Joseph Cannon, a native of Utah who was then working at a Washington, D.C. law firm, and Robert Grow, a real estate lawyer in Salt Lake City. Cannon was previously the associate administrator for policy and resource management with the Environmental Protection Agency (EPA) during the Reagan administration. Other members of the group included one of Cannon’s brothers, an uncle, and several other attorneys—none of whom had any appreciable experience in the operation of a steel mill.
It seemed the deal was going to fall through when one of the committed lenders—a Texas savings-and-loan institution—balked at providing financing. Adding more fuel to the fire, USX decided at that point to shut off the gas in the coke ovens, which would have destroyed the ovens and put the mill completely out of operation. It took a personal phone call from Joseph Cannon to Utah Senator Orrin Hatch (Republican) who, in turn, prevailed upon USX’s chairman, David Roderick, to delay shutting down the coke-ovens for the time being. Finally, the financing was secured and Geneva Steel went into business on August 31, 1987. Within days after the signing of the papers, the mill start-up began. The coke ovens were put back into production in record time and Geneva Steel was shipping out product 33 days later.
The acquisition agreement between the new owners and USX stipulated that USX would retain liability for life insurance, health care, and pension benefits for those employees on the payroll prior to the acquisition. This agreement made it possible for the new Geneva Steel company to start out with a clean slate. Joseph Cannon would soon become chairman and chief executive officer, and Robert Grow would serve as president and chief operating officer. Also stipulated in the agreement was that all prior obligations regarding the mill, including cleaning up of the environmental conditions that existed before the company was purchased, were to be the responsibility of USX. However, Geneva volunteered to share equally in the cost of the first $20 million of environmental expenditures.
Geneva adopted a program to modernize the plant after the mill operations got under way. The existing technology was outdated, operating costs needed careful scrutiny, and equipment needed replacing—especially if management intended to avoid future pollution liability.
One of the first orders of business for Geneva was to negotiate a new labor agreement. The company offered worker incentives and profit sharing in exchange for a wage package of $20 per hour (versus an industry average of $27 per hour). The workers accepted this offer.
After laying the groundwork, Geneva Steel showed a profit in its first month in business and continued to do so through 1991. In 1989 they shipped 1,368,000 tons of steel; in 1990 they shipped 1,375,000 tons. After the mill became operational, Geneva put its modernization program into effect. It was specifically geared towards reducing operating costs, strengthening and adding to its product lines, increasing its efficiency, and bringing the company into compliance with environmental regulations. The estimated modernization cost, when completed, is expected to be in the neighborhood of $320 million—more than seven times the purchase price.
Although the steel market was not strong, it seemed a good time to buy a steel mill for the buyers. At the time of its purchase, prices for steel plate and sheet were on the rise. Suppliers were willing to negotiate favorable contracts with Geneva. Even so, improving cash flow and cost-savings became a top priority for the company. One approach they employed was to change the generally accepted inventory practice used by steel producers. While USX regularly kept $100 million inventory on hand and up to a 60-day supply of various items, Geneva began operating with a ten-day inventory, trimming their inventory leads by more than $40 million. Also, by producing a product mix of plate and sheet, Geneva was able to accommodate changing market conditions faster and still operate at capacity. Even during the recent recessionary period, Geneva was able to operate at over 85 percent capacity. Union grievances also fell considerably.
Being novices in the industry, Cannon and Grow chose to keep most of USX’s managerial staff. It turned out to be a sound decision and a learning experience for them. The managers knew the mill, they knew the problems that existed, and so were able to suggest cost-effective solutions that could make the mill run more efficiently. Of the former USX managers Geneva Steel retained, only three left by the end of 1988.
Geneva Steel’s earnings totaled more than $100 million in its first two years in business. Most of the profits, according to Joseph Cannon, went back into modernization. Cannon made it very clear in a November 4, 1991, Industry Week article that Geneva Steel would be around for a very long time, citing the fact that Geneva’s iron ore mine in southern Utah had about 150 years worth of iron ore in it and they intend to use it all.
Geneva started out from a “no customer” base to more than 350 customers in 42 states. When the company was under the control of USX, no shipments of product were made west of Denver. But this changed; Geneva’s steel destinations included San Francisco to rebuild the broken bridges and highways after the 1989 earthquake and Alaska to repair the Exxon Valdez.
In November of 1989, the shareholders agreed upon plans to recapitalize the company and to earmark the proceeds towards their modernization program. Their common shares were redes-ignated class A common stock, and approximately 2.75 million class A shares were converted into 27.5 million class B shares. This concentrated the voting power and control of the company in the hands of Joseph Cannon and Robert Grow. On January 1, 1990, ten class B shares were convertible into one class A share. On March 27, 1990, Geneva Steel went public and the underwriters, Merrill Lynch Capital Markets and Salomon Brothers Inc., sold 7,750,000 GNV class A common shares at ten dollars each in the initial public offering. The company is listed as “GNV’ on both the New York and Pacific Stock Exchanges. The directors and officers of the company owned approximately 67 percent of the outstanding stock. Because they originally paid an average of 7.5 cents per share for their stock, they realized a 133-fold gain. Their plan was to put all the money back into a modernization program from 1990 to 1994 that would cost approximately $320 million.
The first step of their modernization commitment was the installation of two state-of-the-art Q-BOP furnaces (bottom-blown basic oxygen process furnaces) to replace the existing open hearths—the last ones still in operation in the United States. These new furnaces increased yields and quality and cut costs. Most importantly, with the Q-BOP, a batch of steel only took 45 minutes to produce, whereas an open hearth oven took 5.5 hours to do the same job.
Geneva purchased their two Q-BOPs for their scrap value ($4 million) from an idled Republic Steel facility near Chicago. It took five barges to move the parts down the Mississippi River, a convoy of 92 trucks to transport the pieces over the Rocky Mountains, and 67,000 man hours to install the furnaces, but it was considered a genuine bargain. If they were purchased and installed at the going price, it would have cost Geneva approximately $300 million to $400 million. To make the Q-BOPs fully operational cost the company an additional $73 million, plus additional costs for refinements and other improvements to make them environmentally efficient. By late September 1991, the furnaces were up and working and were far exceeding their expectations. Another time saver was the 1992 installation of in-line slab conditioning, or “hot scarfing,” which eliminated hand scarfing to remove surface defects. Before the installation, the slabs had to be cooled before the scarfing could be done. The cost of the installation represents an investment of $13 million, but, according to Robert Grow, in a July 13, 1992, American Metal Market article, “We now do in four minutes what used to take us a week to do.” Also, as part of their modernization program, the company installed continuous-casting technology and coil box equipment, which enabled them to roll large steel coils.
Geneva installed a biological waste-water treatment plant, at the cost of $8 million. This was the first of its kind in America and an environmental achievement. It uses microorganisms—or “bugs”—to eat ammonia from the plant’s waste-water, converting it into harmless nitrogen. The “bug plant” operation served to improve the quality of water released into Utah Lake. They also installed a new benzene gas blanketing system that helped to reduce benzene emissions from Geneva’s coke plant to below the detectable limit. Geneva received an Outstanding Achievement Award from the U.S. Environmental Protection Agency for these modifications.
Geneva was one of only two of the top 12 North American integrated steel mills to show a profit during the 1990-91 recession. The falloff continued into 1992 and steel prices declined more than 30 percent. Geneva’s prices were down $90 per ton. The company experienced significant price competition due to reduced demand for steel products. Although the company still made a profit, their net income for fiscal 1990 was approximately 31 percent less than fiscal 1989. And the company’s net income for fiscal 1991 was approximately 54.1 percent less than for fiscal 1990.
To maintain a reasonable cash flow, the company took on significant amounts of debt in the early 1990s. In March 1990 Geneva issued over $110 in fixed-rate long-term debt. Of that $110 million, the company repaid its entire outstanding balance of $62 million. In April 1991 the company obtained a three-year revolving credit facility of up to $50 million from a syndicate of banks (later the company’s credit line came through Citibank). In addition, in June 1992 the company laid off about five percent of its work force and for the first nine months of its 1992 fiscal year the company reported a loss of $9.7 million.
As the economies in Europe and Japan turned down in 1992, exports of steel into the United States started to go up again. This was due in part to the expiration of the U.S. government’s Voluntary Restraint Agreements on March 30, 1992, which had been in place for 11 years. Before that time, the United States had become a virtual dumping ground for excess steel production. In 1981 the U.S. government established Voluntary Restraint Agreements whereby foreign governments put a cap on their steel exports. In return, the government agreed to prevent anti-dumping suits by domestic steelmakers. Since March 1992, at least 85 anti-dumping suits were filed by domestic steel producers. They are currently being handled by the U.S. International Trade Commission.
In July 1991, shortly before the Q-BOPs finally became operational, Joseph Cannon stepped down from directing the mill’s operations and assumed a less strenuous position with the company in order to be able to devote more of his time to seeking the Utah U.S. Senate seat that was vacated by the incumbent, Republican Jake Garn. Cannon was unsuccessful in his bid for the U.S. Senate, and on October 1, 1992, he resumed his former position as chief executive officer of the company.
At this time, Geneva began improving its rolling mill operation. This allowed the company to increase the size of its hot-rolled coil to 1,000 pounds per inch of width (PIW), or about 50,000 pounds per roll, approximately doubling its prior coil weights. The ability to produce coils of up to 1,000 PIW made it possible for Geneva to enter markets previously unreachable to them.
The steel industry is cyclical in nature and, according to Dean Witter Reynolds Inc., all signs point to steel price increases for the industry as well as for Geneva in the coming year. For the last four quarters, the company’s prices have remained in the $315 to $319 per ton price range. In spite of this bottoming out, Geneva’s cash position has improved so that the company should have little trouble in financing planned capital expenditures.
Although the steel industry is always affected by recessions, Geneva’s cost structure remains competitive in the face of mounting international competition. In addition, Geneva will undoubtedly bid for work that develops from the federal government’s plan to rebuild the nation’s infrastructure. The government has earmarked $140 billion of highway trust funds to pay for those repairs. Finally, most of the steel service centers, which represent the bulk of the Geneva’s sales, have reduced inventories to the straining point; these companies will have to start ordering again. All of these factors put Geneva in a strong strategic position for recovery.
“And They Say Americans Can’t Compete,” Reader’s Digest, January 1993; “Making Hay from Nuts and Bolts,” Forbes, May 2, 1988; “Steel Man May Alloy Clean Air, Politics,” Washington Post, July 31, 1991; “Utah’s Geneva Steel, Once Called Hopeless, Is Racking Up Profits,” Wall Street Journal, November 20, 1991; “Joe Cannon’s Unorthodox Journey,” Industry Week, November 4, 1991; Metals and Mining, December 4, 1992.