0000007383-95-000053.txt : 19950815
0000007383-95-000053.hdr.sgml : 19950815
ACCESSION NUMBER: 0000007383-95-000053
CONFORMED SUBMISSION TYPE: 10-Q
PUBLIC DOCUMENT COUNT: 3
CONFORMED PERIOD OF REPORT: 19950630
FILED AS OF DATE: 19950814
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ARMCO INC
CENTRAL INDEX KEY: 0000007383
STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312]
IRS NUMBER: 310200500
STATE OF INCORPORATION: OH
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-Q
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-00873
FILM NUMBER: 95562268
BUSINESS ADDRESS:
STREET 1: 301 GRANT ST - 15TH FLR
CITY: PITTSBURGH
STATE: PA
ZIP: 15219-1415
BUSINESS PHONE: 4122559859
MAIL ADDRESS:
STREET 1: 301 GRANT ST - 15TH FLR
CITY: PITTSBURGH
STATE: PA
ZIP: 15219-1415
FORMER COMPANY:
FORMER CONFORMED NAME: ARMCO STEEL CORP
DATE OF NAME CHANGE: 19790506
10-Q
1
JUNE 30, 1995
1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1995
--------------------------------------
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from to
----------------- ------------------
Commission File No. 1-873-2
--------------------------------------------------
ARMCO INC.
----------
(Exact name of registrant as specified in its charter)
Ohio 31-0200500
------------------------------------ ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Oxford Centre, 301 Grant St., Pittsburgh, PA 15219-1415
-----------------------------------------------------------
(Address of principal executive offices, Zip Code)
(412) 255-9800
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days.
Yes X No
------- ------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
------- ------
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Shares of common stock outstanding at July 31, 1995: 106,141,961
2
ARMCO INC.
INDEX
[CAPTION]
Page
Part I. Financial Information
Condensed Statement of Consolidated Financial Position -
June 30, 1995 and December 31, 1994 2
Condensed Statement of Consolidated Operations and
Retained Deficit - Three and Six Months Ended
June 30, 1995 and 1994 3
Condensed Statement of Consolidated Cash Flows -
Six Months Ended June 30, 1995 and 1994 4
Notes to Condensed Consolidated Financial Statements 5-8
Management's Discussion and Analysis of the Condensed
Consolidated Financial Statements 9-13
Segment Report 14
Part II. Other Information
Item 1. Legal Proceedings 15
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit 11 Computation of Income Per Common Share
-1-
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ARMCO INC.
CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION
(Unaudited)
(Dollars in millions) June 30, December 31,
1995 1994
---------- ----------
ASSETS
Current assets
Cash and cash equivalents $ 204.2 $ 202.8
Short-term liquid investments 1.5 25.8
Receivables, less allowance for
doubtful accounts 197.7 183.3
Inventories (Note 2) 197.8 165.5
Net assets held for sale - 25.6
Other (Note 6) 30.2 46.0
---------------------------------------------------------------------------
Total current assets 631.4 649.0
Investments
Investment in National-Oilwell (Note 5) 83.2 79.5
Investment in AFSG (Note 7) 85.6 97.1
Other, less allowance for impairment 38.6 39.9
Property, plant and equipment 1,157.8 1,064.2
Accumulated depreciation (524.0) (499.6)
---------------------------------------------------------------------------
Property, plant and equipment - net 633.8 564.6
Deferred tax asset 321.8 321.8
Goodwill and other intangible assets 151.3 156.4
Other assets 14.4 26.6
---------------------------------------------------------------------------
Total assets $ 1,960.1 $ 1,934.9
---------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities
Accounts and notes payable $ 146.2 $ 122.6
Employee benefit obligations 125.6 133.8
Accrued salaries and wages 33.8 32.7
Other accrued liabilities 78.2 90.8
Current portion of long-term debt 10.0 10.5
---------------------------------------------------------------------------
Total current liabilities 393.8 390.4
Long-term debt, less current portion 375.4 363.8
Long-term employee benefit obligations 1,270.9 1,255.3
Other liabilities 134.1 143.9
Commitments and contingencies (Notes 7 and 9)
Shareholders' deficit (Note 7)
Preferred stock - Class A 137.6 137.6
Preferred stock - Class B 48.3 48.3
Common stock 1.1 1.1
Additional paid-in capital 962.9 956.3
Retained deficit (1,361.0) (1,390.4)
Unrealized gain on equity securities (Note 6) - 31.6
Other (3.0) (3.0)
---------------------------------------------------------------------------
Total shareholders' deficit (214.1) (218.5)
---------------------------------------------------------------------------
Total liabilities and
shareholders' deficit $ 1,960.1 $ 1,934.9
---------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
-2-
4
ARMCO INC.
CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS
AND RETAINED DEFICIT
(Unaudited)
(Dollars and shares in millions,
except per share amounts)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ------------------
1995 1994 1995 1994
------ ------ ------ ------
Net sales $ 390.6 $ 354.9 $ 759.0 $ 734.5
Cost of products sold (342.0) (316.3) (669.7) (663.0)
Selling and administrative expenses (22.8) (24.6) (47.0) (48.4)
Special charge (Note 3) - - - (20.0)
------------------------------------------------------------------------------
Operating profit 25.8 14.0 42.3 3.1
Interest income 3.2 1.9 6.9 3.8
Interest expense (8.5) (8.4) (16.0) (17.3)
Gain on sales of investments in joint
venture and related stock (Note 6) 25.9 36.5 27.2 36.5
Sundry other - net (Note 4) (12.4) (10.4) (24.9) (21.1)
------------------------------------------------------------------------------
Income before income taxes 34.0 33.6 35.5 5.0
Credit (provision) for income
taxes (Note 6) (0.6) 29.8 (0.8) 29.6
------------------------------------------------------------------------------
Income from Armco and consolidated
subsidiaries 33.4 63.4 34.7 34.6
Equity in income of equity companies
(Note 5) 2.5 6.5 3.6 8.1
------------------------------------------------------------------------------
Net income 35.9 69.9 38.3 42.7
Retained deficit, beginning of
period (1,392.5) (1,482.0) (1,390.4) (1,450.3)
Preferred stock dividends (4.4) (4.4) (8.9) (8.9)
------------------------------------------------------------------------------
Retained deficit, end of period $(1,361.0) $(1,416.5) $(1,361.0) $(1,416.5)
Weighted average number of common
and common equivalent shares
outstanding - primary 106.2 104.6 106.0 104.4
Net income applicable to common
stock $ 31.5 $ 65.5 $ 29.4 $ 33.8
Net income per common share -
primary $ 0.30 $ 0.63 $ 0.28 $ 0.32
Net income per common share -
fully dilutive 0.28 0.55 * *
Cash dividends per share
$2.10 Class A $ 0.525 $ 0.525 $ 1.050 $ 1.050
$3.625 Class A 0.906 0.906 1.813 1.813
$4.50 Class B 1.125 1.125 2.250 2.250
* Antidilutive or dilution less than 3%
See Notes to Condensed Consolidated Financial Statements.
-3-
5
ARMCO INC.
CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS
(Unaudited)
(Dollars in millions)
Six Months Ended
June 30,
------------------
1995 1994
-------- --------
Cash flows from operating activities:
Net income $ 38.3 $ 42.7
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and lease-right amortization 26.0 24.6
Net gain on sales of investments and facilities (28.4) (37.2)
Deferred income tax benefit - (30.0)
Equity in net undistributed earnings of associated companies (2.5) (5.7)
Special charge - 20.0
Other 6.4 3.5
Change in assets and liabilities, net of effects of dispositions:
Accounts receivable (30.3) (8.2)
Inventory (31.1) 28.2
Payables and accrued expenses 25.7 10.9
Other assets and liabilities - net 19.4 (28.1)
------------------------------------------------------------------------------------------
Net cash provided by operating activities 23.5 20.7
------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net proceeds from the sale of businesses and assets 20.3 1.8
Proceeds from the sale and maturity of liquid investments 24.7 -
Proceeds from the sale of investments 29.8 15.9
Purchase of investments (1.2) (8.3)
Contributions to equity investees - (6.1)
Capital expenditures (85.8) (41.0)
Net cash used in businesses held for sale (0.5) (2.5)
Other (0.1) 2.7
------------------------------------------------------------------------------------------
Net cash used in investing activities (12.8) (37.5)
------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from drawdown of construction debt - 7.5
Principal payments on debt (0.5) (10.9)
Dividends paid (12.0) (8.9)
Other 3.2 (2.3)
------------------------------------------------------------------------------------------
Net cash used in financing activities (9.3) (14.6)
------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 1.4 (31.4)
Cash and cash equivalents:
Beginning of period 202.8 183.5
------------------------------------------------------------------------------------------
End of period $ 204.2 $ 152.1
------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest (net of capitalization) $ 14.9 $ 17.3
Income taxes 0.1 0.1
Supplemental schedule of noncash investing and financing activities:
Issuance of restricted stock 4.4 2.5
Debt incurred directly for property 11.6 -
Not receivable in partial payment for asset sale 1.0 -
See Notes to Condensed Consolidated Financial Statements.
-4-
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in millions,
except per share amounts)
1. The condensed consolidated financial statements of Armco Inc. (Armco)
should be read in conjunction with the financial statements in Armco's Annual
Report to Shareholders for the year ended December 31, 1994. In the opinion
of Armco's management, the accompanying condensed consolidated financial
statements contain all adjustments, which were of a normal recurring nature,
necessary to present fairly, in all material respects, the financial position
as of June 30, 1995, the results of operations for the three and six months
ended June 30, 1995 and 1994 and cash flows for the six months ended June 30,
1995 and 1994. The results of operations for the six months ended June 30,
1995 are not necessarily indicative of the results to be expected for the year
1995.
2. Armco's inventories are valued at the lower of cost or market. Cost of
inventories at most of Armco's domestic operations is measured on the LIFO -
Last In, First Out - method. Other inventories are valued principally at
average cost.
June 30, December 31,
1995 1994
------------ ------------
Inventories on LIFO:
Finished and semi-finished $ 183.3 $ 158.7
Raw materials and supplies 38.8 24.8
Adjustment to state inventories at
LIFO value (47.5) (41.1)
------- -------
Total 174.6 142.4
------- -------
Inventories on average cost:
Finished and semi-finished 15.2 14.8
Raw materials and supplies 8.0 8.3
------- -------
Total 23.2 23.1
------- -------
Total inventories $ 197.8 $ 165.5
======= =======
3. In the six months ended June 30, 1994, Armco recorded a special charge of
$20.0 for expenses associated with the temporary idling and restructuring of
its Mansfield and Dover, Ohio steelmaking and finishing facilities. These
facilities were idled in March of 1994. Approximately two-thirds of the
charge was associated with group insurance and other benefits for employees
while the plant was idled. The remainder of the charge related to asset
writedowns. At June 30, 1995, $3.3 of the reserves remain and are recorded in
Other accrued liabilities in Armco's Condensed Statement of Consolidated
Financial Position. The Dover plant started limited production in early 1995
and the new thin-slab caster and renovated hot strip mill at the Mansfield
facility resumed operating in early April 1995. The remainder of the
Mansfield finishing facilities are expected to resume operations in the third
quarter.
4. Sundry other - net in Armco's Condensed Statement of Consolidated
Operations and Retained Deficit includes expense of $10.0 and $19.6 for the
three and six months ended June 30, 1995, respectively, and $8.9 and $17.2 for
the three and six months ended June 30, 1994, respectively, for interest on
employee benefit obligations related to facilities which have been divested.
The increase in 1995 is primarily due to higher interest rates and additional
obligations recorded in 1994.
5. Armco owns a 50% interest in National-Oilwell, an oil field equipment and
supply joint venture with USX Corporation. National-Oilwell's results of
operations for the three and six months ended June 30, 1995 and 1994 were as
follows:
-5-
7
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1995 1994 1995 1994
------- ------- ------- -------
Net revenues $130.5 $132.0 $266.4 $261.4
Gross profit 18.3 21.1 36.0 40.6
Net income 7.7 9.9 10.7 10.4
In the three and six months ended June 30, 1995, Armco's equity income
included approximately $2.0 related to net gains on the sale of assets at
National-Oilwell. During the same periods in 1994, equity income included
$4.4 for net gains on asset sales by National-Oilwell.
Armco and USX Corporation entered into a letter of intent, dated May 17, 1995,
to sell their respective partnership interests in National-Oilwell to a group
including Duff & Phelps/Inverness LLC and Bain Capital. The sale, which is
subject to several contingencies, including the buyers obtaining financing for
the purchase, is expected to close by the end of this year.
6. On April 7, 1994, Armco Steel Company, L.P. (ASC), a fifty percent owned
joint venture limited partnership between subsidiaries of Armco and Kawasaki
Steel Corporation, completed an initial public offering and recapitalization.
As part of this transaction, the business and assets of ASC were transferred
to AK Steel Holding Corporation (AK Steel) and Armco received 1,023,987 shares
of the newly-formed corporation's stock, representing approximately 4% of the
outstanding shares. In addition, Armco was released from certain obligations
to make future cash payments to the former joint venture. At December 31,
1994, the investment in AK Steel stock was recorded in Other current assets
with a corresponding credit in Unrealized gain on equity securities in the
Condensed Statement of Consolidated Financial Position.
As a result of the transaction, Armco recognized a nonrecurring pretax gain in
the three and six months ended June 30, 1994 of $36.5, primarily as a result
of the release from certain obligations, discussed above, and recognition of
deferred pension curtailment gains established at ASC's formation. At the
same time, Armco reevaluated its deferred tax asset position in light of this
transaction and concluded that the amount of deferred tax asset, for which
realization of a future benefit is more likely than not, had increased by
$30.0. This latter amount is recorded in Credit (provision) for income taxes
in the Condensed Statement of Consolidated Operations and Retained Deficit.
On May 4, 1995, Armco announced that it had completed the sale of all of the
shares in AK Steel it had received as a result of the initial public offering
and recapitalization. In the three and six months ended June 30, 1995, Armco
recorded gains of $25.9 and $27.2, respectively, related to the sale of this
stock. Armco will use available capital loss carryforwards to offset federal
and state income taxes on this gain. With the completion of the sale, Armco
no longer owns any stock in AK Steel.
7. At December 31, 1994, Armco Financial Services Group (AFSG) consisted
primarily of insurance companies which Armco intended to sell and which
continued underwriting activities (AFSG companies to be sold) and insurance
companies that had stopped writing new business and are being liquidated
(runoff companies).
On April 7, 1995, the sale of the AFSG companies to be sold was completed. The
proceeds from the sale consisted of $64.2 in cash at the closing and $15.0 to
be received in three years. The latter amount is subject to potential
adjustment for adverse experience in certain insurance reserves.
Substantially all of these proceeds have been pledged as security for certain
note obligations due to the runoff companies and will be retained in the
investment portfolio of those companies.
In 1993, Armco recorded reserves totaling approximately $11.5, primarily for
employee benefit liabilities Armco expected to retain after the sale of the
AFSG companies to be sold. As part of the sale agreement, Armco received $4.2
in cash from the former companies to be sold and assumed an equal amount of
additional employee benefit obligations from them. Armco
-6-
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transferred the cash and all of the above liabilities to the runoff companies
in the second quarter of 1995, concurrent with the closing of the sale of the
AFSG companies to be sold. As a result of this transfer, Armco reduced its
investment in the runoff companies by $11.5 in the second quarter of 1995.
The runoff companies are accounted for by Armco as discontinued operations
under the liquidation basis of accounting whereby all future cash inflows and
outflows are considered. Armco management continues to believe, based on
current facts and circumstances and the views of outside counsel and advisors,
that future charges, if any, resulting from the runoff companies will not be
material to Armco's consolidated financial condition or liquidity. However,
it is possible that due to fluctuations in Armco's results, future
developments could have a material effect on the results of one or more future
interim or annual periods. Following the sale of the AFSG companies to be
sold and the transfer of the liabilities described above, Armco's investment
in the runoff companies totaled $85.6 at June 30, 1995.
There are various matters pending which involve AFSG, relating to litigation,
arbitration and regulatory affairs, including matters related to Northwestern
National Insurance Company, a runoff company currently involved in, among
other matters, arbitration and litigation with respect to certain reinsurance
programs. The ultimate liability from such matters at June 30, 1995 cannot be
determined; but in Armco's opinion, based on current facts and circumstances
and the views of outside counsel and advisors, any liability resulting will
not materially affect Armco's consolidated financial condition or liquidity.
However, it is possible that due to fluctuations in Armco's results, future
developments with respect to changes in the ultimate liability could have a
material effect on future interim or annual results of operations.
8. Under the terms of Armco's $170.0 amended bank credit agreement, which
expires on December 31, 1995, Armco is not permitted to pay cash dividends on
its common stock. The payment of dividends on preferred stock is prohibited
if Armco is in default under the credit agreement.
Under the terms of the indentures for Armco's 11.375% Senior Notes Due 1999
and 9.375% Senior Notes Due 2000, Armco cannot pay a dividend on its common
stock or repurchase its capital stock, unless it meets certain financial tests
described in the indentures. Armco does not expect to be able to meet all of
these tests in the near term.
At its July 28, 1995 meeting, the Board of Directors declared the regular
quarterly dividends payable on Armco's $2.10 Cumulative Convertible Preferred
Stock, Class A, $3.625 Cumulative Convertible Preferred Stock, Class A, and
$4.50 Cumulative Convertible Preferred Stock, Class B.
9. There are various claims pending involving Armco and its subsidiaries
regarding product liability, antitrust, patent, employee benefits,
environmental and hazardous waste matters, reinsurance and insurance
arrangements (Note 7), and other matters arising out of the conduct of Armco's
business.
Like other manufacturers, Armco is subject to various environmental laws.
These laws necessitate expenditures to assure compliance at Armco's facilities
and to remediate sites where contamination has occurred. Compliance costs are
either expensed as they are incurred or, when appropriate, are recorded as
capital expenditures. Armco has accrued its estimate of remediation costs for
sites where it is probable that a liability has been incurred and the amount
can be reasonably estimated. The recorded amounts are currently believed by
management to be sufficient. However, such estimates could significantly
change in future periods to reflect new laws or regulations, advances in
technologies, additional sites requiring remediation, new remediation
requirements at existing sites, and Armco's share of liability at multi-party
sites.
Armco believes, based on current facts and circumstances, that its ultimate
liability for pending claims, contingent liabilities and environmental matters
identified to date will not materially affect its consolidated financial
condition or liquidity. However, it is possible that due to fluctuations in
Armco's results, future developments with respect to such pending claims,
-7-
9
contingent liabilities and environmental matters could have a material effect
on the results of operations in future interim or annual periods.
At June 30, 1995, Armco had recorded on its Condensed Statement of
Consolidated Financial Position, legal and environmental reserves of $87.6, of
which $20.5 was classified as current.
10. Information relating to Armco's industry segments can be found on
page 14.
-8-
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
------------------------------------------
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
(Dollars in millions, except per share data)
GENERAL
-------
During the first six months of 1995, the asset sale by Eastern Stainless
Corporation (Eastern Stainless), an 84%-owned subsidiary of Armco Inc.
(Armco), was completed. In the third quarter of 1994, Armco announced that
Eastern Stainless was selling substantially all of its assets to Avesta
Sheffield Holding Company (Avesta Sheffield), a stainless steel plate
manufacturer. As of September 30, 1994, Armco stopped recording Eastern
Stainless' results as part of the Specialty Flat-Rolled Steel segment.
Eastern Stainless completed the asset sale on March 14, 1995, receiving
approximately $10.1 in cash and the assumption of certain Eastern Stainless
liabilities. As part of the transaction, Armco assumed all of the liabilities
of Eastern Stainless not assumed by Avesta Sheffield, totaling approximately
$60.0. The $10.1 cash received on the sale will be used by Armco to satisfy a
portion of the Eastern Stainless liabilities assumed by Armco (primarily
normal operating and employee benefit obligations). Upon completion of the
transaction, Eastern Stainless had no assets remaining as a corporate legal
entity and was dissolved and its corporate existence terminated without any
shareholder distribution.
On April 7, 1995, the sale of the Armco Financial Services Group ongoing
insurance companies was completed. The sale is more fully described under
DISCONTINUED OPERATIONS, below.
Armco's results in the second quarter and first six months of 1995 and 1994
were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1995 1994 1995 1994
------ ------ ------ ------
Net sales $390.6 $354.9 $759.0 $734.5
Special charge -- -- -- (20.0)
Operating profit 25.8 14.0 42.3 3.1
Net income 35.9 69.9 38.3 42.7
Net income per common
share - primary 0.30 0.63 0.28 0.32
Sales in the three months ended June 30, 1995 increased 10% from the same
period in 1994 on the strength of a 12% increase in the Specialty Flat-Rolled
Steel segment and a 5% increase in the Other Steel and Fabricated Products
segment. The increase from the Specialty Flat-Rolled Steel segment was
achieved despite the divestiture of Eastern Stainless, which had $18.3 of
sales in the second quarter of 1994 and was sold in the first quarter of 1995.
Year-to-date sales increased only 3% as increased sales at most units were
partially offset by lower sales at the Mansfield Operations, which was idle
during all of the first quarter of 1995.
As a result of the decision to idle and restructure Mansfield and Dover, Armco
recognized a $20.0 special charge in the first half of 1994. Absent the
special charge, increases in operating profit for both the quarter and year-
to-date reflect a significant improvement in the results of the Specialty
Flat-Rolled Steel segment, partially offset by higher losses in the Other
Steel and Fabricated Products segment, primarily due to the ramp-up of the new
equipment installed in Mansfield.
In the three and six months ended June 30, 1995, Armco's net income includes
gains of $25.9 and $27.2, respectively, for the sale of Armco's investment in
AK Steel Holding Corporation (AK Steel). In the three and six months ended
June 30, 1994, net income included $36.5 as a pretax gain and $30.0 of tax
gains related to the initial public offering and recapitalization of AK Steel.
These transactions are more fully described below in EQUITY AND OTHER
INVESTMENTS.
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Net income per common share reflects the deduction of $4.4 for the quarter and
$8.9 for the first six months for preferred stock dividends declared.
BUSINESS SEGMENT RESULTS
------------------------
Specialty Flat-Rolled Steel
---------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1995 1994 1995 1994
------ ------ ------ ------
Net sales $300.8 $269.2 $594.1 $532.4
Operating profit 53.5 34.7 100.6 64.8
Shipments (tons 000s) 183 174 370 351
Raw steel produced (tons 000s) 235 226 474 438
Customer sales and tons shipped increased by 12% and 5%, respectively, in the
second quarter of 1995 versus 1994, as strong market demand for all product
lines in this business segment continued. Included in the second quarter 1994
were Eastern Stainless sales of $18.3 and shipments of 8,000 tons. While the
Butler, Pennsylvania, and Zanesville and Coshocton, Ohio plants produced at
full capacity in both periods, productivity improvements increased output in
1995. Year-to-date 1995 shipments exceeded the first six months of 1994
primarily due to increased demand for automotive chrome stainless, specialty
sheet and strip, and electrical steels.
On January 2, 1995, price increases of 5% to 7% went into effect for
electrical steels. Due to strong market conditions, these increases, as well
as increases in stainless steel prices announced in late 1994 and early 1995,
are expected to remain in effect. Prices for products containing molybdenum,
nickel and chrome have also been favorably impacted by raw material price
surcharges placed in effect in the first quarter of 1995.
Operating profit as a percent of sales for the three months ended June 30,
1995 and 1994 was 18% and 13%, respectively, reflecting improved volume,
productivity and a favorable product mix, as well as elimination of the
operating losses of Eastern Stainless. Partially offsetting the favorable
effects on operating profit were higher raw material costs, including those on
scrap steel and alloys. The 55% increase in 1995 year-to-date operating
profit over last year is directly attributable to improved pricing, volume,
productivity and mix, as well as the elimination of losses from Eastern
Stainless.
Outlook: Operating results are expected to continue to improve relative to
1994 as a result of continued strong market conditions and improved production
efficiencies. Until Mansfield becomes fully operational, demand for
electrical steel is expected to exceed Armco's ability to supply. At June 30,
1995, order backlog for all products was 14% higher than one year ago and 17%
higher than December 31, 1994. However, shipments are expected to slow in the
second half of the year due to normal seasonal influences related to customer
plant vacation shutdowns and automotive model changeovers, as well as Armco's
own scheduled maintenance outages.
The Mansfield Operations, while still part of the Other Steel and Fabricated
Products segment, will use a portion of its capacity to melt and finish
specialty steels, relieving some of Armco's production constraints. Sales of
these specialty steel products will be reported in the Specialty Flat-Rolled
Steel business segment. As discussed in the Other Steel and Fabricated
Products segment, an extended restart of Mansfield's revamped and modernized
hot strip mill is delaying that operation's return to full production.
In 1994, Armco announced an expanded capital improvement program under which
it will spend up to $95.0 over the next two years to upgrade and expand its
specialty steel finishing facilities. The program is intended to reduce
existing production constraints by increasing specialty steel finishing
capacity approximately 180,000 tons per year, particularly in electrical
steels, specialty sheet and strip products and nonautomotive chrome stainless.
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Other Steel and Fabricated Products
-----------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1995 1994 1995 1994
------ ------ ------ ------
Net sales $ 89.8 $ 85.7 $164.9 $202.1
Special charge -- -- -- (20.0)
Operating loss (20.7) (13.1) (43.8) (47.2)
Net sales increased by 5% in the second quarter of 1995 compared to the same
period in 1994, primarily due to higher snowplow shipments at Douglas
Dynamics. Second quarter net sales from the Mansfield and Dover Operations
were 13% lower in 1995 compared to 1994, because, although idled at the
beginning of the second quarter of 1994, Mansfield was selling on-hand coil
inventory during 1994. During the second quarter of 1995, Mansfield was not
operating at full capacity as it was still ramping up production following the
start-up of the new thin-slab caster and modernized hot strip mill in early
April. Sales for the first six months of 1995 were 18% below sales for the
same period in 1994, reflecting a $44.6 decline in sales at the Mansfield and
Dover Operations during the first quarter of 1995 versus the first quarter of
1994. During the first three months of this year, Mansfield was still idle;
while, for most of the first quarter of 1994, the plant was operational.
Mansfield and Dover recorded operating losses of $26.1 and $50.1,
respectively, in the three and six months ended June 30, 1995. These losses
were higher than last year by $8.2 and $10.6 for the three and six month
periods, respectively, excluding the $20.0 special charge. Lower losses in
the second quarter of 1994 were the result of the sales of on-hand inventory
and reduced expenses as the idling became effective.
Douglas Dynamics' second quarter operating profit was approximately equal to
last year. Offsetting the second quarter increase in sales were higher
overheads related to aggressive new product development efforts. Although the
overall pipe market remains sluggish, Sawhill Tubular was able to increase
sales 3% over last year's second quarter and 8% for the first six months.
Sawhill's operating results also improved marginally in the 1995 periods.
Outlook: The Mansfield Operations started up at the beginning of April,
successfully casting and hot rolling carbon steel. In addition to installing
a new caster at Mansfield, Armco renovated and updated the hot strip mill,
adding automatic gauge controls, new electrical wiring, modernized drive
systems and other improvements. Integrating all elements of this revamped
mill requires a computer model to control set-up and operation, and full
production is being delayed by problems with the process control model. Armco
expects the complete integration of set-up and operating controls by the end
of the third quarter. The longer than anticipated hot mill restart, combined
with weakness in the carbon steel market, is expected to extend start-up
losses through the third quarter.
The improvement in second quarter sales at Douglas Dynamics was primarily the
result of customers taking shipments earlier than in the prior year. Sales
and earnings for the snowplow manufacturer are expected to be lower in 1995
than in 1994, as a result of the lack of snow last winter compared to the
prior two years. Sawhill Tubular's operating results are expected to remain
flat through the end of the year.
EQUITY AND OTHER INVESTMENTS
----------------------------
In the three and six months ended June 30, 1995, Armco recognized $2.5 and
$3.6, respectively, of equity income from its investments in joint ventures
and equity companies. This compared to $6.5 and $8.1 for the same periods in
1994. The 1994 income included the results of, and commission income from,
North American Stainless (NAS), a former 50%-owned joint venture with Acerinox
S.A. Armco sold 90% of its investment in NAS in the third quarter of 1994.
Equity income in both years reflected the results of National-Oilwell,
including nonrecurring gains of $2.0 and $4.4 for the second quarter of 1995
and 1994, respectively. These represented Armco's proportionate share of net
gains on the sale of National-Oilwell assets. National-Oilwell, a 50%-owned
joint venture with USX Corporation, sells oil field tubular pipe, and produces
and sells drilling and production
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equipment and process pumps used in the world's oil and gas services industry.
National-Oilwell's results were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
1995 1994 1995 1994
------ ------ ------ ------
Net sales $130.5 $132.0 $266.4 $261.4
Gross margin 18.3 21.1 36.0 40.6
Net income 7.7 9.9 10.7 10.4
In the first quarter of 1995, Armco received a $1.0 cash dividend from
National-Oilwell.
National-Oilwell maintains its own cash and credit lines and funds its own
operations, liabilities and capital expenditures. National-Oilwell has a
$60.0 credit facility which expires in the first quarter of 1998.
Armco and USX Corporation entered into a letter of intent, dated May 17, 1995,
to sell their respective partnership interests in National-Oilwell to a group
including Duff & Phelps/Inverness LLC and Bain Capital. The sale, which is
subject to several contingencies, including the buyers obtaining financing for
the purchase, is expected to close by the end of this year.
On May 4, 1995, Armco announced that it had completed a series of transactions
resulting in the sale of 1,023,987 shares of AK Steel common stock. Armco had
received the stock, which represented approximately 4% of the outstanding
common stock of AK Steel, in April 1994 as part of the initial public offering
and recapitalization of that company. With the completion of these
transactions, Armco no longer owns any stock in AK Steel. In connection with
the sales, Armco realized total net proceeds of $27.2 and recognized gains of
$1.3, or $0.01 per share, in the first quarter and $25.9, or $0.24 per share,
in the second quarter of 1995. Armco will use available capital loss
carryforwards to offset federal and state income taxes on this gain.
DISCONTINUED OPERATIONS
-----------------------
Armco Financial Services Group
------------------------------
At March 31, 1995, the Armco Financial Services Group consisted primarily of
insurance companies which Armco intended to sell and which continued
underwriting policies (AFSG companies to be sold) and insurance companies that
have stopped writing new business for retention and are being liquidated
(runoff companies).
AFSG companies to be sold
On April 7, 1995, Armco completed the sale of the AFSG companies to be sold to
Vik Brothers Insurance Inc., a privately held, North Carolina-based property
and casualty insurance holding company. The proceeds from the sale, consisted
of $64.2 in cash at the closing and $15.0 to be received in three years. The
latter amount is subject to potential adjustment for adverse experience in
certain insurance reserves. Substantially all of the proceeds have been
pledged as security for certain note obligations due to the runoff companies
and will be retained in the investment portfolio of those companies.
Runoff companies
The addition of the proceeds from the sale of the AFSG companies to be sold to
the investment portfolio of the runoff companies is expected to have a long-
term positive effect on the liquidity and future strength of these companies.
In 1993, Armco recorded reserves totaling approximately $11.5, primarily for
employee benefit liabilities Armco expected to retain after the sale of the
AFSG companies to be sold. As part of the sale agreement, Armco received $4.2
in cash from the former companies to be sold and assumed an equal amount of
additional employee benefit obligations from them. Armco transferred the cash
and
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all of the above liabilities to the runoff companies in the second quarter of
1995, concurrent with the closing of the sale of the AFSG companies to be
sold. As a result of this transfer, Armco reduced its investment in the
runoff companies by $11.5 in the second quarter of 1995.
Armco management continues to believe, based on current facts and
circumstances and the views of outside counsel and advisors, that future
charges, if any, resulting from the runoff companies will not be material to
Armco's consolidated financial condition or liquidity. However, it is
possible that due to fluctuations in Armco's results, future developments
could have a material effect on the results of one or more future interim or
annual periods.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
At June 30, 1995, Armco had $204.2 of cash and cash equivalents compared to
$202.8 at December 31, 1994. In addition, Armco had $1.5 and $25.8 of short-
term liquid investments at June 30, 1995 and December 31, 1994, respectively.
Total cash and cash equivalents increased $1.4 during the first six months of
1995, including $23.5 of cash provided by operations, $24.7 from the maturity
of liquid investments and $50.1 for proceeds on the sale of assets and
investments. Offsetting these cash inflows were capital expenditures and
$12.0 for preferred stock dividends. Capital expenditures, totaling $97.4,
included $11.6 of direct project financing related to the Mansfield thin-slab
caster and $85.8 in cash outflow reported in the Condensed Statement of
Consolidated Cash Flows.
In addition to the cash on hand, Armco has a $170.0 revolving credit facility
that expires on December 31, 1995. At June 30, 1995, $80.7 of the credit
facility was used as support for letters of credit and $89.3 was available for
borrowing. Borrowings under the credit facility are secured by certain of
Armco's inventories and receivables. As amended in 1994, the credit agreement
requires Armco to be in compliance with several covenants and meet certain
ratio requirements. Based on its current financial condition and internal
forecasts through the end of 1995, Armco believes that it will remain in
compliance with all covenants.
As discussed above, Armco completed the divestments of Eastern Stainless and
the AFSG companies to be sold in 1995. Eastern Stainless received $10.1 in
cash, which will be used to satisfy a portion of the approximately $60.0 of
liabilities of Eastern Stainless that were assumed by Armco. Proceeds from
the sale of the AFSG companies to be sold, totaling $64.2, have been retained
in the investment portfolio of the runoff companies and will not be available
to Armco.
Armco anticipates that its 1995 cash expenditures for capital projects will
total approximately $140.0, including $37.0 for expenditures to complete the
thin-slab caster at Mansfield, $53.0 of the $95.0 expanded capital improvement
program and the remainder for normal replacement, environmental and expansion
programs. In addition, Armco anticipates that, for the year, a total of $16.2
of capital expenditures for the thin-slab caster will be funded through direct
project financing.
Armco has no significant debt commitments due through the end of the year.
However, Armco expects to contribute up to approximately $65.0 to its major
pension funds during the remainder of 1995. The capital expenditures and
pension funding will be paid out of existing cash balances and cash generated
from operations and asset sales, including the anticipated sale of an
industrial park near Houston, Texas. Upon closing this transaction, which is
expected by year end, Armco anticipates recognizing a gain.
On July 28, 1995, Armco's Board of Directors declared the regular quarterly
dividends of $.525 per share on the $2.10 Cumulative Convertible Preferred
Stock, Class A, and $.90625 per share on the $3.625 Cumulative Convertible
Preferred Stock, Class A, each payable September 29, 1995 to shareholders of
record on September 1, 1995. The Board of Directors also declared the regular
quarterly dividend of $1.125 per share on the $4.50 Cumulative Convertible
Preferred Stock, Class B, payable October 2, 1995, to shareholders of record
on September 1, 1995. Payment of dividends on Armco's common stock is
currently prohibited under the terms of certain of Armco's debt instruments
and under the terms of the amended bank credit agreement.
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15
ARMCO INC.
SEGMENT REPORT
(Unaudited)
(Dollars in millions)
1995 1994
--------------- ---------------------------------
2nd 1st 4th 3rd 2nd 1st
Qtr. Qtr. Qtr. Qtr. Qtr. Qtr.
------ ------ ------ ------ ------ ------
Specialty Flat-Rolled Steel:
Customer sales $300.8 $293.3 $237.0 $279.1 $269.2 $263.2
Special charge - - - (15.0) - -
Operating profit 53.5 47.1 34.0 27.5 34.7 30.1
Other Steel and Fabricated
Products:
Customer sales 89.8 75.1 98.1 88.9 85.7 116.4
Special charge - - - - - (20.0)
Operating loss (20.7) (23.1) (3.1) (4.6) (13.1) (34.1)
Corporate General (7.0) (7.5) (8.5) (9.2) (7.6) (6.9)
--------------------------------------------------------------------------------
Total operating profit (loss) 25.8 16.5 22.4 13.7 14.0 (10.9)
Interest income 3.2 3.7 3.3 3.4 1.9 1.9
Interest expense (8.5) (7.5) (8.3) (8.2) (8.4) (8.9)
Gain on sale of investments
in joint ventures and
related stock 25.9 1.3 - 26.1 36.5 -
Sundry other - net (12.4) (12.5) (10.9) (12.8) (10.4) (10.7)
Credit (provision) for
income taxes (0.6) (0.2) (0.5) (0.4) 29.8 (0.2)
--------------------------------------------------------------------------------
Income (loss) of Armco and
consolidated subsidiaries 33.4 1.3 6.0 21.8 63.4 (28.8)
Equity in income of equity
companies 2.5 1.1 3.6 3.6 6.5 1.6
--------------------------------------------------------------------------------
Net income (loss) $ 35.9 $ 2.4 $ 9.6 $ 25.4 $ 69.9 $(27.2)
See Notes to Condensed Consolidated Financial Statements.
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16
Part II. Other Information
Item 1. Legal Proceedings
-----------------
There are various claims pending against Armco and its subsidiaries involving
product liability, antitrust, patent, insurance arrangements, environmental
and hazardous waste matters, employee benefits and other matters arising out
of the conduct of the business of Armco as previously described in Armco's
Annual Report on Form 10-K for the year ended December 31, 1994 (the Form 10-
K) and Armco's Quarterly Report on Form 10-Q for the quarter ended March 31,
1995 (the Form 10-Q). The following summarizes significant developments in
previously reported matters and any new claims asserted since March 31, 1995:
In the Larry B. Ricke, Trustee v. Armco action, Armco filed a motion seeking
--------------------------------
interlocutory appellate review. This motion was granted on June 6, 1995.
Armco filed its Brief on July 27, 1995.
In the Adamson v. Armco action, on June 30, 1995, the plaintiffs filed a
----------------
petition for certiorari to the U.S. Supreme Court. Armco filed its Brief in
Opposition on July 24, 1995.
In the Cornerstones Litigation, on May 11, 1995, the Supreme Court of Texas
-----------------------
denied plaintiffs' application for writ of error. Plaintiffs did not move the
high court for reconsideration within the prescribed period and, thus, the
Cornerstones matter has been concluded in favor of Armco. Three other
------------
homeowner actions patterned after Cornerstones (Adducci, Arthur and
------------ ------- ------
Irons), along with the severed Kingsbridge claims, remain pending and in
----- -----------
discovery.
In the Eastern Stockholder Litigation, the Pension Benefit Guaranty
------------------------------
Corporation, on its own behalf and as class representative for all Class B
shareholders of Eastern Stainless Corporation (Eastern Stainless), filed suit.
In accordance with Virginia corporation law, a special independent committee
of the Board of Directors of Eastern Stainless has been appointed to evaluate
the merits of plaintiffs' derivative claims. Following a hearing on June 22,
1995, the district court declined to stay discovery pending review of the
matter by the special committee and deferred ruling upon Armco's motion to
dismiss pending further discovery. Armco is preparing for discovery.
In the CRS Litigation, on June 30, 1995, the Maryland Court of Appeals denied
--------------
CRS Sirrine, Inc.'s petition for further review. With this ruling by the
state's highest court, the matter has been conclusively resolved in Armco's
favor.
In Rosa Ann Barrett, et al. v. Atlantic Richfield Company, et al., the Fifth
--------------------------------------------------------------
Circuit has granted plaintiffs' motion to reinstate the Barrett appeal.
-------
In United States of America, State of Maryland v. Azrael, et al. v. Armco
----------------------------------------------------------------------
Steel Corporation, et al., Armco paid approximately $177,000 to settle its
-------------------------
liability on May 30, 1995.
In the matter involving the Fultz Landfill Superfund Site, the Department of
Justice filed a complaint against Armco in the U.S. District Court for the
Southern District of Ohio on July 21, 1995, seeking cost recovery of about
$4.5 million under the Comprehensive Environmental Responsibility,
Compensation & Liability Act.
In the matter involving the King River Ltd. Site, Armco conducted the
remaining cleanup at a cost of approximately $5.3 million; all contaminated
soil which had previously been excavated has been shipped off-site. Armco
believes it has complied with all requirements in the order issued by the
United States Environmental Protection Agency last year.
The total liability on the foregoing claims and those other claims described
under ITEM 3. LEGAL PROCEEDINGS in the Form 10-K or under Item 1 in the Form
10-Q is not determinable; but in the opinion of management, the ultimate
liability resulting will not materially affect the consolidated financial
condition or liquidity of Armco and its subsidiaries; however, it is possible
that due to fluctuations in Armco's results, future developments with respect
to changes in the ultimate liability could have a material effect on future
interim or annual results of operations.
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Item 5. Other Information
-----------------
On August 10, 1995, Armco entered into an agreement for the sale of its Greens
Port Industrial Park property, consisting of approximately 500 acres, located
in Harris County, Texas to John Frantz, as Trustee for an entity to be formed.
The sale is subject to satisfactory completion of due diligence by the
purchaser and is expected to close by year end.
Any shareholder proposals intended to be presented at the 1996 annual meeting
of shareholders must be received by Armco by November 15, 1995, in order to be
considered for inclusion in the proxy statement and form of proxy for that
meeting. Shareholders intending to nominate director candidates for election
at the 1996 annual meeting of shareholders must deliver written notice,
including specified information, to the Secretary of Armco, at its offices at
One Oxford Centre, 301 Grant Street, Pittsburgh, Pennsylvania 15219-1415, by
January 29, 1996.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. The following is an index of the exhibits included in the Form
10-Q:
Exhibit 11 Computation of Income Per Share
B. The following Reports on Form 8-K were filed by Armco since March
31, 1995.
Report Date Description
----------- -----------
April 7, 1995 Reporting that on April 7, 1995, Armco
completed the sale of its ongoing
insurance operations, Northwestern
National Holding Company, Inc. and its
subsidiaries, to Vik Brothers Insurance,
Inc.
May 18, 1995 Reporting that Armco together with USX
Corporation signed a letter of intent to
sell their respective 50% partnership
interests in National-Oilwell to a group
including Duff & Phelps/Inverness LLC and
Bain Capital.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed on behalf of the registrant by the following duly
authorized persons.
Armco Inc.
-----------------------------------------
(Registrant)
Date August 14, 1995 /s/ D. G. Harmer
----------------------- -----------------------------------------
D. G. Harmer
Corporate Vice President and Chief
Financial Officer
Date August 14, 1995 /s/ P. G. Leemputte
----------------------- -----------------------------------------
P. G. Leemputte
Corporate Vice President and Controller
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EX-11
2
EX-11
EXHIBIT 11
ARMCO INC
COMPUTATION OF INCOME PER COMMON SHARE
(Dollars and shares in millions,
except per share amounts) Three Months Ended Six Months Ended
PRIMARY June 30, June 30,
-------------------------------------------------------------------------------
1995 1994 1995 1994
-------------------------------------------------------------------------------
Net income $ 35.9 $ 69.9 $ 38.3 $ 42.7
Preferred stock dividends (4.4) (4.4) (8.9) (8.9)
-------------------------------------------------------------------------------
Net income applicable to
common stock $ 31.5 $ 65.5 $ 29.4 $ 33.8
-------------------------------------------------------------------------------
Weighted average number of
common shares 106.0 104.5 105.8 104.3
Weighted average number of
common equivalent shares 0.2 0.1 0.2 0.1
-------------------------------------------------------------------------------
Average common shares outstanding
as adjusted 106.2 104.6 106.0 104.4
-------------------------------------------------------------------------------
Net income per common share $ 0.30 $ 0.63 $ 0.28 $ 0.32
FULLY DILUTED*
-------------
Net income $ 35.9 $ 69.9 $ 38.3 $ 42.7
Preferred stock dividends - - - -
-------------------------------------------------------------------------------
Net income applicable to
common stock $ 35.9 $ 69.9 $ 38.3 $ 42.7
-------------------------------------------------------------------------------
Weighted average number of
common shares 106.0 104.5 105.8 104.3
Weighted average number of
common equivalent shares 0.1 0.1 0.2 0.1
Weighted average number of
preferred shares on an
"if converted" basis 22.7 22.7 22.7 22.7
-------------------------------------------------------------------------------
Average common shares outstanding
as adjusted 128.8 127.3 128.7 127.1
-------------------------------------------------------------------------------
Net income per common share $ 0.28 $ 0.55 $ 0.30 $ 0.34
Shares of stock outstanding at June 30
Common 106.1 104.6
Preferred - $2.10 Class A 1.7 1.7
Preferred - $3.625 Class A 2.7 2.7
Preferred - $4.50 Class B 1.0 1.0
* Calculation of fully diluted income per share for each of the six month periods
is submitted in accordance with Securities Exchange Act of 1934 Release No. 9083,
although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an
antidilutive result, or is not required by footnote 2 to paragraph 14 of APB Opinion
No. 15 because it results in dilution of less than 3%.
EX-27
3
ARTICLE 5 FDS FOR 2ND QUARTER 10-Q
5