From the case study, evaluate Bethlehem Steel’s valuation allowance in relation to the company’s ability to use deferred tax benefits in the future. Justify the position taken by Bethlehem Steel in the financial statements. From the case study, clarify the temporary differences identified in the tax footnote to Bethlehem Steel’s 2000 10-K due to employee benefits, depreciable assets, and the tax loss carried forward. Indicate what a user of the financial statement information can glean from reading the tax footnote to Bethlehem Steel’s 2000 10-K.

CASE STUDY

Bethlehem Steel in 2001: Big losses and some hope

By KEVIN NEVERS

Bethlehem Steel Corporation is reporting net losses of $547 million for the fourth quarter of 2001 and $1.950 billion for the year. According to a statement released today, both losses include unusual charges: $351 million in non-cash items for the fourth quarter, and $1.356 billion in non-cash charges for the year. Excluding those unusual items, the company reported net losses of $196 million in the fourth quarter and $594 million for the year, compared to net losses of $113 million in the fourth quarter of 2000 and $135 million for that year. Bethlehem, which filed for Chapter 11 bankruptcy protection on Oct. 15, also reported improved liquidity as of Dec. 31, comprising cash, cash equivalents, and funds available under credit arrangements of $276 million, compared to $60 million as of Sept. 30. In conjunction with its filing, the company obtained $450 million in debtor-in-possession financing from GE Capital Corporation. Bethlehem said that it used the initial proceeds from that facility to repurchase $260 million in accounts receivable which it had sold under a previous credit facility. In addition, $290 million which the company borrowed under its inventory credit facility remains outstanding as secured debt, the statement said. The company’s fourth quarter net loss of $547 includes impairment losses of approximately $344 million to write off the goodwill associated with its acquisition in 1998 of Luken Inc., the 110-inch plate mill at Burns Harbor Division, and a portion of its Chicago Cold Roll facility. In addition, it recorded a $7.5 million charge for employee-benefit related costs for the previously announced reduction in the company’s salaried non-represented workforce. Bethlehem’s 2001 net loss of $1.950 billion includes $1.356 million in two non-cash items: the fourth-quarter impairment losses and the $984 million non-cash charge to fully reserve the company’s deferred tax asset recorded in the second quarter. Bethlehem reported as well a loss from operations of $169 million in the fourth quarter, compared to a loss from operations of $116 million in the fourth quarter of 2000. “These operating results decreased from a year ago,” the statement said, “mainly as a result of significantly lower realized prices and shipments. Prices, on a constant mix basis, were down by about 7 percent, and shipments declined by about 169,000 tons.” The fourth quarter 2001 results also include about $27 million in costs related to the unscheduled outage and repair of “D” blast furnace at Burns Harbor Division. “D” blast furnace is currently producing at its scheduled capacity, the statement added. For the year Bethlehem reported loss from operations of $494 million, compared to a loss from operations in 2000 of $96 million. “This increased loss,” the statement said, “was primarily due to lower realized prices and lower shipments, partially offset by cost reductions. Prices, on a constant mix, declined by about 8 percent and shipments were lower by about 764,000 tons. Despite a 12 percent reduction in raw steel production, we were able to reduce our overall cost structure sufficiently that our operating cost per net ton shipped was about the same in 2000 and 2001.” Miller As Bethlehem President and CEO Robert “Steve” Miller Jr. indicated at a press conference last week at Burns Harbor Division, the company is pinning at least some of its hopes on a gradually improving economy in 2002, chiefly in the second half. “There are signs that the U.S. economy is beginning to strengthen,” he said. “The manufacturing sector appears to have bottomed out in December. Our order entry is improving and we, and others in the industry, have announced price increases for first quarter deliveries. Although auto sales are expected to be sluggish in the first half of the year, we anticipate growing strength in the demand for steel by the middle of the year as the economy continues to improve and customers replenish depleted inventories.” The company is also pinning its hopes, however, on action from President Bush, who has until March 6 to enact, reject, or modify recommendations made in December by the U.S. International Trade Commission, a majority of whose members have urged some sort of tariff to redress damage done to U.S. steel makers by dumped and subsidized imports. “In early March, President Bush is expected to announce his actions to remedy the substantial injury caused to the domestic steel industry by the flood of imported steel,” he said. “Five of six commissioners of the International Trade Commission recommended tariffs as high as 40 percent to address the injury. We believe the imposition of maximum tariffs is appropriate and necessary to reduce the levels of unfairly traded steel imports into the United States. We also believe that the elimination of inefficient, high cost steel capacity both here and abroad is essential to better balance global steel demand.” Miller also repeated his projection, made last week, that the company currently has enough liquidity to make it through the year. “Bethlehem is continuing to pursue various strategic alternatives, including possible consolidation opportunities,” he said. “Additionally, we are working to develop a reorganization plan to preserve production at Bethlehem’s low cost, high quality steel assets and jobs for our employees. We expect to have adequate financial resources to sustain operations during the year 2002 while pursuing these opportunities.” Miller emphasized as well the crucial role which the United Steelworkers of America has to play in the crafting of a workable reorganization plan. “Bethlehem has excellent steel facilities capable of producing high quality, low cost products to serve the requirements of our most demanding customers,” he said. “Our goal is to ensure that our competitive facilities remain a key part of the North American steel industry. In order to accomplish that, however, we need a modern, flexible labor agreement with the USWA and a solution to our almost $5 billion retiree pension and health care obligations. Chapter 11 provides us with a structured process to achieve those required changes.”

Answer rating: 100% (QA)

Evaluation of valuation allowance in relation to the companys ability to use deferred tax benefits in the future To evaluate the valuation allowance as above one must consider the FASB Statement 109 I... View the full answer