[Congressional Record Volume 140, Number 142 (Tuesday, October 4, 1994)]
[Senate]
[Page S]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: October 4, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                         STEELMAN IN WING TIPS

  Mr. HATCH. Mr. President, the July 4, 1994, issue of Forbes magazine 
included a profile of one of Utah's distinguished citizens: Joe Cannon, 
chief executive officer of Geneva Steel Corp.
  I want to join Forbes in recognizing the important work done by Joe 
Cannon. Through ingenuity, integrity, and plain old-fashioned hard 
work, Joe Cannon, together with his partner Robert Grow, took a 
troubled company and made it prosper.
  Their efforts have helped make Geneva Steel a leader in this tough 
industry and the employer for 3,000 Utahns. Joe has also been a great 
community leader, participating in many charitable projects as well as 
in educational partnerships with the Provo and Orem School Districts. 
Geneva has been an inspiration for emerging businesses and promising 
entrepreneurs across the country.
  I ask unanimous consent, that the article from Forbes be inserted in 
the Congressional Record.
  There being no objection, the article was ordered to be printed in 
the Record, as follows:

                         Steelmen in Wing Tips

                            (By Seth Lubove)

       ``The fact of the matter is, we didn't know a thing about 
     the steel industry,'' admits Joseph Cannon, chief executive 
     of Geneva Steel Corp. ``We were too stupid to know it was 
     stupid to buy a steel mill.'' But they weren't too stupid to 
     ask some very basic questions that helped turn a white 
     elephant into a successful company.
       Cannon, a cherubic, bespectacled lawyer, has demonstrated 
     how creative entrepreneurship can increase economic value in 
     an ingrown industry. Formerly a division of U.S. Steel, and 
     the only integrated steel mill west of the Mississippi, the 
     sprawling Geneva Steel Works in Vineyard, Utah was a rusting 
     relic of World War II, when it was built as part of the war 
     effort and as a move to decentralize industrial production 
     away from the militarily vulnerable coasts.
       In 1986 U.S. Steel faced a choice: Spend $1 billion to 
     modernize Geneva or shut the mill down. For the Pittsburgh-
     based U.S. Steel management, it wasn't a tough choice. It had 
     just signed a deal to get cheaper raw steel for its finishing 
     mill in California from Korea's Pohang Iron & Steel Co. Good-
     bye, Geneva. Who needed its high-cost steel that had to be 
     hauled over land to the coast? U.S. Steel decided to shut the 
     mill and lay off its 1,850 workers.
       The shuttering would be a blow to Utah. Almost 1% of the 
     total personal income in the state was generated by the 
     mill's payroll. Its belching smokestacks may have been 
     offensive to trendy skiers on their way to actor Robert 
     Redford's Sundance ski resort, but they meant jobs with good 
     benefits that pay a lot more than does scrubbing toilets at 
     Redford's resort.
       At the time of the threatened closing, Cannon, a Utah 
     native and a Mormon, was practicing environmental law in San 
     Francisco, after a stint in the Reagan Administration's 
     Environmental Protection Agency. He proposed to Robert Grow, 
     a Salt Lake City lawyer and longtime friend, that they try to 
     save Geneva Steel to help the community. Grow knew as little 
     about steel as Cannon did. He had been practicing real estate 
     and corporate law.
       U.S. Steel was happy to sell. It asked $44 million--a tiny 
     fraction of what the mill had cost. Cannon and Grow scratched 
     around for capital, finally borrowing $34 million of the 
     purchase price. They tapped a now failed Texas savings and 
     loan, Union Carbide's pension fund, ITT Financial Corp. and 
     an insurance company. To sweeten the pot, Cannon and Grow 
     gave the lenders 49.6% of the equity in the newly formed 
     company. U.S. Steel agreed to defer payment on the remaining 
     $10 million (which has since been paid off). To get the plant 
     running again, Cannon and Grow and some local law and 
     accounting firms put in $4 million.
       The United Steelworkers of America also made concessions, 
     and U.S. Steel agreed to absorb the mill's extensive 
     liabilities for paying retired pensioners. The steel giant 
     also accepted partial liability for previous environmental 
     costs.
       But to whom would Geneva sell its steel? With its costs 
     sharply reduced and heavy environmental and pension costs 
     shed, Geneva could produce at a very competitive price. Luck 
     was with it, too. Demand was picking up. Cannon and Grow 
     began selling on the spot market in the South and Midwest 
     through independent distributors. From 1988 onward, the plant 
     was profitable.
       It was soon after they took over that Cannon and Grow 
     demonstrated why motivated and shrewd outsiders can sometimes 
     breathe new life into a hidebound business. Cannon had 
     intended to leave management to the steelmen, but when orders 
     began pouring in 12 days after the deal closed in August 
     1987, he asked the management to restart a second blast 
     furnace. The plant manager balked, arguing that it was 
     financially too risky to bet that heavily on continuing 
     demand. Prove it, Cannon told him. After a cost study to 
     quantify the risk conducted at Cannon's request, the plant 
     manager changed his mind. The furnace was relined and started 
     up again. It has run ever since.
       This experience was a kind of epiphany for Cannon. ``For a 
     company to modernize and stay competitive takes more than 
     just the technical skills,'' he says. ``Strategic vision is 
     important.'' To Cannon, that vision was the ability to see 
     the big picture. He adds: ``The lesson for me was, hey, we 
     can add value. We're not just a bunch of lawyers here.'' To 
     bone up on steelmaking, Cannon, 44, read through a pile of 
     Harvard Business School case studies. Grown, also 44, checked 
     out 60 books on steelmaking from the University of Utah 
     library. ``Then we talked to people everywhere,'' Grow says.
       There remained the problem of modernization. Now 
     profitable, Geneva could borrow more readily, and borrow it 
     did. So far Geneva has spent $354 million on modernizing the 
     plant, with another $59 million slated for the next two 
     years. Debt has mounted to $325 million and carrying costs 
     are $33 million a year, but the modernization came in at just 
     41% of the $1 billion U.S. Steel had estimated. For instance, 
     U.S. Steel thought it would cost more than $250 million to 
     replace a set of obsolete open hearth furnaces with more 
     modern basic oxygen furnaces. ``We said we can't afford 
     that,'' says Grow, standing in front of a cracked conference 
     table inherited from U.S. Steel. So Cannon and Grow scrounged 
     around for used basic oxygen furnaces, which they found in a 
     shuttered Republic Steel mill, Total cost: just $80 million. 
     That upgrade cut costs significantly. Economics Associates 
     Inc., a consulting firm, estimates Geneva's production cost 
     for hot-rolled steel at $280 per ton, second only to Nucor's 
     $265 per ton and far lower than Armco's $315 per ton.
       The other major part of the modernization, just completed, 
     is a new continuous caster. The caster, made by the same firm 
     that built Nucor Corp.'s innovative casting system, is 
     designed to produce the industry's widest steel slabs, a 
     high-margin product used in railcars, ships and holding 
     tanks.
       That will open up Geneva's market enormously. Before, the 
     plant made a lot of flat-rolled steel coils out of ingots. 
     The total market for that product is about 5 million tons, 
     for which Geneva must battle with the big integrated steel 
     mills and some minimills. When the modernization program is 
     completed next year, its costs will have been reduced by $39 
     a ton since 1992, to $270 a ton. Total capacity will expand 
     to 1.9 million tons from 1.4 million tons.
       Geneva's unionized labor force was accustomed to the 
     autocratic management of a big company. ``The workers still 
     felt they could check their brains at the gate,'' Cannon 
     says. He and Grow have encouraged workers to offer their 
     ideas to cut costs. One suggestion: Plant workers argued that 
     they could dispose of the detritus from the mill's scrubbers 
     at a lower cost than the waste company that had the contract. 
     Geneva now has a ``supersucker'' truck to clean out the 
     scrubber's baghouses. In return for waiving work rules, 
     Cannon and Grow agreed to distribute 10% of pretax profits 
     (after deducting a portion of capital expenses).
       In the intensely cyclical steel business, the recent 
     recession took a toll. Sales fell to $465 million last year 
     from $525 million in 1989. After reporting earnings for the 
     four years following the acquisition, Geneva lost $25 million 
     in fiscal 1992 and 1993. It was barely profitable in the 
     first fiscal quarter that ended Dec. 31, and reported a loss 
     for the second quarter due to startup costs of the new caster 
     and the early retirement of debt. But analysts who follow the 
     company expect Geneva will be back in the black by the fourth 
     quarter. In a market that is turning upward, Geneva benefits 
     early since it sells entirely to the spot market, where price 
     increases show first. Piper Jaffray analyst Bob Toomey 
     estimates Geneva's operating profit per ton will increase 
     from just over $10 in 1991 to $83 in 1995.
       Cannon and Grow took the company public in March 1990, 
     raising $28 million for 22% of the shares. The original 
     lenders cashed out their nearly 50% interest at that time. 
     Cannon and Grow ended up with 15% of the shares, with a 
     market value of $40 million, but 62% of the voting shares. 
     The company's shares more than doubled in value to 21, before 
     falling back to 18\7/8\ recently.
       ``To this day, I still can't make steel,'' says Cannon. 
     ``My added value was in seeing a bigger picture and being 
     extremely future oriented.'' Inexperience when combined with 
     intense curiosity and entrepreneurial drive can be a virtue 
     in business.

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