Oregon Steel Mills, Inc. reported record net income of $50.3 million on record sales of $348 million for the third quarter of 2004.

Third Quarter Results—Record net income of $50.3 million ($1.87 per diluted share) compares to a net loss of $20.9 million (a negative $.79 per diluted share) for the third quarter of 2003. The 2004 income includes additional labor dispute settlement charges of a net $4.5 million and additions to long-term environmental reserves of $1.6 million. Net income for the third quarter of 2004 exclusive of the Settlement Charges was $54.8 million ($2.04 per diluted share). During the third quarter of 2003, the company recorded a valuation allowance on deferred tax assets of $9.2 million (a negative $.35 per diluted share) to income tax expense.

Sales of $348 million, a quarterly record for the company, compares to third quarter 2003 sales of $189 million. Average sales price per ton was $761 compared to $438 in the third quarter of 2003. Total shipments were 458,000 tons compared to the third quarter of 2003 shipments of 431,000 tons. This increase in shipments is primarily due to increased shipments of plate, coil, structural tubing and rail products partially offset by lower shipments of welded pipe, rod and bar and seamless pipe products. The increases in sales and average sales price per ton were primarily due to higher average selling prices for plate, coil, welded pipe, rail and rod and bar products and the increased shipments noted above.

Operating income was $64 million (an average of $140 per ton), including the $4.5 million Settlement Charges. Operating income before the Settlement Charges was $68.5 million (an average of $150 per ton). This compares to an operating loss of $12.9 million in the third quarter of 2003.

During the third quarter of 2004, the company finalized the settlement of the labor dispute at its majority-owned subsidiary Rocky Mountain Steel Mills, ending a labor dispute that has been ongoing for more than six years. The settlement implemented new five-year collective bargaining agreements. The Settlement called for the establishment of a trust and on September 10, 2004 the Rocky Mountain Steel Mills - United Steelworkers of America Back Pay Trust was established. As part of the tentative settlement, the company, on behalf of RMSM, had originally planned to issue four million shares of company common stock to the Trust. On September 10, 2004, the parties agreed instead that the Trust would receive cash in an amount equal to the gross proceeds from the sale of four million shares of company common stock in an underwritten stock offering. The four million shares of company common stock were sold to the public as of September 29, 2004 for $16 per share.

Settlement Charges of $4.5 million consists of the following:

• $5 million related to the Settlement in the third quarter of 2004. The charge is a result of adjusting the previously recorded value at June 30, 2004 of the four million shares of company common stock ($59 million at $14.74 per share) to the gross price at which the shares sold of $16 per share. Now that the Settlement has been finalized and the shares sold, there will be no further adjustments for changes in the market value of the four million shares related to the Settlement. The final cost of the common stock portion of the Settlement was $64 million (4 million shares at $16 per share), $40.8 million of which was expensed during 2004 and $23.2 million expensed in 2003.
• $3.2 million to be paid under certain circumstances relating to certain expenses that would otherwise be incurred by the Trust associated with the issuance of the four million shares of company common stock. The circumstances, which would have required the company to pay the $3.2 million, did not arise and accordingly the charge was reversed in the third quarter of 2004.
• $2.7 million related to the Settlement’s Early Retirement Option. The option includes immediate enhanced pension benefit for certain bargaining unit employees, based on seniority. The company expects to record a $4.5 million during the fourth quarter as other employees accept the Early Retirement Option. The enhancements to pension and post retirement medical benefits for non-early retirees will be accounted for prospectively on the date at which plan amendments occur pursuant to the new five-year collective bargaining agreements in accordance with SFAS No. 87 and SFAS No. 106.

During the third quarter of 2004, the company increased the non-current portion of its environmental reserve at RMSM by $1.6 million for environmental remediation. This non-cash reserve increase is related to the previously disclosed 30-year corrective action that began in 1993, related to the prior owner's operations at the steel mill in Pueblo, Colo.

The company had an effective income tax rate of 3% in the third quarter of 2004. The effective income tax rate for 2004 varied from the combined state and federal statutory rate principally because the company reversed a portion of the valuation allowance ($19.9 million) established in 2003 due to less uncertainty regarding the realization of deferred tax assets. The 2003 valuation allowance was established due to uncertainties regarding realization of certain federal and state net operating loss carry-forwards, state tax credits and alternative minimum tax credits. The company expects to have a more normalized effective income tax rate throughout 2005.

Earnings before interest, taxes, depreciation and amortization (EBITDA) for the third quarter of 2004 was $70.5 million ($75.0 million exclusive of the $4.5 million Settlement Charges) compared to a negative $2.5 million in the third quarter of 2003. The higher operating income and EBITDA during the third quarter of 2004 compared to the third quarter of 2003 reflects increased volume and higher average selling prices partially offset by higher steel slab costs at the company's Oregon Steel Division, and higher scrap costs at the company's Rocky Mountain Steel Division. Average steel slab cost and average scrap cost were up 69% and 66%, respectively, compared to the third quarter of 2003.

Liquidity—At September 30, 2004, the company maintained a $65 million revolving credit facility of which $5 million was restricted, an additional $16 million was restricted under outstanding letters of credit and $44 million was available for use. There were no amounts outstanding on the revolving credit facility as of September 30, 2004. During the quarter the company generated $30.6 million of cash flow from operations and as a result, cash and cash equivalents at September 30, 2004 were $77 million. During the third quarter of 2004, the company incurred capital expenditures of $9.8 million; depreciation and amortization was $10.2 million. For all of 2004, the company anticipates that capital expenditures and depreciation and amortization will be approximately $30 million and $40 million, respectively.

On October 5, 2004, the company completed an underwritten offering of 8.625 million common stock shares at $16 per share (including the underwriters' over-allotment option of 1,125,000 shares). After distribution to the Trust noted above, the company received net proceeds from the offering of approximately $66.8 million.

Outlook—For all of 2004, the company expects to ship approximately 1.7 million tons of products and generate approximately $1.2 billion in sales. In the Oregon Steel Division the sales product mix is expected to consist of 600,000 tons of plate and coil, 200,000 tons of welded pipe and 65,000 tons of structural tubing. At these shipment levels the company expects to run its Portland combination mill at approximately 70% of its practical capacity. The company's RMSM Division expects to sell approximately 390,000 tons and 480,000 tons of rail and rod and bar products, respectively. At these shipment levels, the rail and rod mills would be at approximately 90% and 95%, respectively, of their practical capacities. Seamless pipe shipments will be dependent on market conditions in the drilling industry. At the present time the company's large-diameter welded pipe and seamless pipe mills are not operating.

Due to the fourth quarter having less shipping days in the November and December timeframe, the company expects total shipments for the fourth quarter to be lower than the third quarter. Fourth quarter shipments will also be impacted by a partial meltshop outage at RMSM that resulted in approximately 10,000 tons of lost production in October of 2004. While average selling prices are expected to be higher in the fourth quarter of 2004 than the third quarter, the company expects margins to decrease, as product surcharges will not offset higher scrap costs and the continuation of record slab prices. Overall, the company expects its customers to reduce inventory levels to be more in line with consumption levels during the fourth quarter. Consequently, the company anticipates earnings will be in the range of $1.05 to $1.15 per diluted share in the fourth quarter on 35.3 million diluted shares. These amounts exclude the estimated $4.5 million ($.13 per share) charge in the fourth quarter of 2004 related to the Early Retirement Option noted above. This compares to a negative $1.67 per diluted share in the fourth quarter of 2003 on 26.5 million diluted shares.

Oregon Steel Mills, Inc. is organized into two divisions. The Oregon Steel Division produces steel plate, coil, welded pipe and structural tubing from plants located in Portland, Ore.; Napa, Calif.; and Camrose, Alta., Canada. The Rocky Mountain Steel Mills Division, located in Pueblo, Colo., produces steel rail, rod, bar, and tubular products.