-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O750Zg7RZTVJaED48zLH4+dgYagBipY4KgpR0E/2Rx3F5BrOS8ZdVVnZuqND9jHI PLlJ5/jMCgDX6vMiZ4r/Eg== 0000007383-97-000021.txt : 19970804 0000007383-97-000021.hdr.sgml : 19970804 ACCESSION NUMBER: 0000007383-97-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970801 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: 97650002 BUSINESS ADDRESS: STREET 1: 301 GRANT ST - 15TH FLR STREET 2: ONE OXFORD CENTRE 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, 1997 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, 1997 -------------------------------------- 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 June 30, 1997: 107,049,587 ARMCO INC. INDEX Pages Part I. Financial Information Condensed Statement of Consolidated Financial Position - June 30, 1997 and December 31, 1996 2 Condensed Statement of Consolidated Income and Accumulated Deficit - Three and Six Months Ended June 30, 1997 and 1996 3 Condensed Statement of Consolidated Cash Flows - Six Months Ended June 30, 1997 and 1996 4 Notes to Condensed Consolidated Financial Statements 5-6 Management's Discussion and Analysis of the Condensed Consolidated Financial Statements 7-10 Segment Report 11 Part II. Other Information Item 1. Legal Proceedings 12 Item 5. Other Information 12 Item 6. Exhibits and Reports on Form 8-K 12 Signatures 13 Exhibit 11 Computation of Earnings (Loss) Per Common Share -1- ARMCO INC. CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION (Unaudited)
(Dollars in millions) June 30, December 31, 1997 1996 ---------- ---------- ASSETS Current assets Cash and cash equivalents $ 175.2 $ 168.9 Receivables, less allowance for doubtful accounts 191.6 149.6 Inventories (Note 2) 265.0 246.9 Other 5.9 6.4 - ----------------------------------------------------------------------------- Total current assets 637.7 571.8 Investments Investment in Armco Financial Services Group (Note 6) 85.6 85.6 Other, less allowance for impairment 47.7 52.4 Property, plant and equipment 1,284.1 1,267.7 Accumulated depreciation (627.4) (597.6) - ----------------------------------------------------------------------------- Property, plant and equipment - net 656.7 670.1 Deferred tax asset 325.8 325.8 Goodwill and other intangible assets 141.5 144.8 Other assets 12.7 17.3 - ----------------------------------------------------------------------------- Total assets $1,907.7 $1,867.8 - ----------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' DEFICIT Current liabilities Trade accounts and notes payable $ 163.0 $ 136.3 Employment-related obligations 112.6 115.1 Other liabilities 68.4 79.6 Current portion of long-term debt 27.3 27.2 - ----------------------------------------------------------------------------- Total current liabilities 371.3 358.2 Long-term debt, less current portion 337.0 344.3 Long-term employee benefit obligations 1,203.7 1,200.2 Other liabilities 186.0 177.1 Commitments and contingencies (Note 6) 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 967.4 965.0 Accumulated deficit (1,341.9) (1,363.9) Other (2.8) (0.1) - ----------------------------------------------------------------------------- Total shareholders' deficit (190.3) (212.0) - ----------------------------------------------------------------------------- Total liabilities and shareholders' deficit $1,907.7 $1,867.8 - ----------------------------------------------------------------------------- See Notes to Condensed Consolidated Financial Statements.
-2- ARMCO INC. CONDENSED STATEMENT OF CONSOLIDATED INCOME AND ACCUMULATED DEFICIT (Unaudited) (Dollars and shares in millions, except per share amounts)
Three Months Ended Six Months Ended June 30, June 30, ------------------- ------------------- 1997 1996 1997 1996 -------- -------- -------- -------- Net sales $ 490.3 $ 450.8 $ 931.6 $ 881.2 Cost of products sold (436.1) (414.3) (833.6) (805.6) Selling and administrative expenses (26.2) (24.3) (50.8) (48.3) - ------------------------------------------------------------------------------ Operating profit 28.0 12.2 47.2 27.3 Interest income 2.4 2.8 4.9 5.8 Interest expense (8.5) (9.3) (17.2) (18.5) Sundry other - net (Note 3) (0.6) (9.5) (4.0) (11.1) - ------------------------------------------------------------------------------ Income (loss) before income taxes 21.3 (3.8) 30.9 3.5 Provision for income taxes (1.1) (0.2) (1.3) (0.6) - ------------------------------------------------------------------------------ Income (loss) from continuing operations 20.2 (4.0) 29.6 2.9 Discontinued operations - Gain on sale of Aerospace and Strategic Materials (Note 5) 1.3 - 1.3 - - ------------------------------------------------------------------------------ Net income (loss) 21.5 (4.0) 30.9 2.9 Accumulated deficit, beginning of period (1,359.0) (1,376.1) (1,363.9) (1,378.5) Preferred stock dividends (4.4) (4.4) (8.9) (8.9) - ------------------------------------------------------------------------------ Accumulated deficit, end of period $(1,341.9) $(1,384.5) $(1,341.9) $(1,384.5) - ------------------------------------------------------------------------------ Weighted average number of common and common equivalent shares outstanding - primary 107.1 106.7 106.9 106.5 Net income applicable to common stock $ 17.1 $ (8.4) $ 22.0 $ (6.0) Income (loss) per common share from continuing operations 0.15 (0.08) 0.20 (0.06) Income per share from discontinued operations 0.01 - 0.01 - - ------------------------------------------------------------------------------ Net income (loss) per common share - primary $ 0.16 $ (0.08) $ 0.21 $ (0.06) Net income (loss) per common share - fully diluted * * * * 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- ARMCO INC. CONDENSED STATEMENT OF CONSOLIDATED CASH FLOWS (Unaudited)
(Dollars in millions) Six Months Ended June 30, ------------------- 1997 1996 -------- -------- Cash flows from operating activities: Net income $ 30.9 $ 2.9 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation expense 30.8 29.3 Net gain on disposal of investments and facilities (1.0) (1.4) Other 4.9 (1.1) Change in assets and liabilities: Trade accounts and notes receivable (44.7) (30.4) Inventory (18.1) (10.2) Payables and accrued operating expenses 30.2 11.7 Employee benefit obligations (1.0) 11.3 Other assets and liabilities - net 2.6 (2.4) - ----------------------------------------------------------------------------- Net cash provided by operating activities 34.6 9.7 - ----------------------------------------------------------------------------- Cash flows from investing activities: Net proceeds from the sale of businesses and assets 2.5 4.9 Proceeds from the sale of investments 0.3 79.2 Contributions to investees - (3.6) Capital expenditures (15.1) (27.0) Other (0.2) (6.4) - ----------------------------------------------------------------------------- Net cash (used in) provided by investing activities (12.5) 47.1 - ----------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from drawdown of debt 2.0 0.6 Payments on debt (7.4) (3.2) Dividends paid (8.9) (8.9) Other (1.5) (1.1) - ----------------------------------------------------------------------------- Net cash used in financing activities (15.8) (12.6) - ----------------------------------------------------------------------------- Net change in cash and cash equivalents 6.3 44.2 Cash and cash equivalents: Beginning of period 168.9 136.8 - ----------------------------------------------------------------------------- End of period $175.2 $181.0 - ----------------------------------------------------------------------------- Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (net of capitalized interest) $ 16.6 $17.4 Income taxes 1.6 0.6 Supplemental schedule of noncash investing and financing activities: Issuance of restricted stock 2.4 3.0 Note received in partial payment for asset sale 0.3 10.6 See Notes to Condensed Consolidated Financial Statements.
-4- ARMCO INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Dollars in millions, except per share amounts) 1. The condensed consolidated financial statements of Armco Inc. should be read in conjunction with the financial statements in Armco's Annual Report to Shareholders for the year ended December 31, 1996. In the opinion of Armco's management, the accompanying condensed consolidated financial statements contain all adjustments, which are of a normal recurring nature, necessary to present fairly, in all material respects, Armco's financial position as of June 30, 1997, its results of operations for the three and six months ended June 30, 1997 and 1996, and its cash flows for the six months ended June 30, 1997 and 1996. The results of operations for the three and six months ended June 30, 1997 are not necessarily indicative of the results to be expected for the year 1997. Certain amounts in the prior year financial statements have been reclassified to conform to the 1997 presentation. 2. Armco's inventories are valued at the lower of cost or market. Most of Armco's domestic inventories are valued using the LIFO - Last In, First Out - method. Other inventories are valued principally at average cost.
June 30, December 31, 1997 1996 -------- -------- Inventories on LIFO: Finished and semi-finished $ 268.9 $ 259.0 Raw materials and supplies 25.3 21.4 Adjustment to state inventories at LIFO value (55.3) (52.8) -------- -------- Total 238.9 227.6 -------- -------- Inventories on average cost: Finished and semi-finished 19.8 11.9 Raw materials and supplies 6.3 7.4 -------- -------- Total 26.1 19.3 -------- -------- Total inventories $ 265.0 $ 246.9 ======== ========
3. Sundry other - net in Armco's Condensed Statement of Consolidated Income and Accumulated Deficit includes $0.5 and $2.1 for the three and six months ended June 30, 1997 and $7.9 and $15.8 for the three and six months ended June 30, 1996, respectively, of expense for employee benefit obligations related to facilities that have been divested. The reduction in expense in 1997 is primarily due to favorable investment returns on pension plan assets and favorable experience in pension and retiree medical benefit costs. In the six months ended June 30, 1996, Sundry other - net includes a gain of $6.3, which resulted from the recognition of gains previously deferred in connection with asset sales at the Greens Port Industrial Park, which operates a loading dock on the Houston Ship Channel, and leases buildings and land located on its property to third parties. 4. Effective January 1, 1997, having reevaluated its plan to sell the remaining assets of Greens Port as a single entity, Armco began to report the consolidated results of the operations of the industrial park in its Fabricated Products business segment. In the first six months of 1997, Greens Port had revenues of $3.5 and operating profit of $2.2. -5- 5. In the three and six months ended June 30, 1997, Armco recorded $1.3 of income in discontinued operations for a state tax refund related to a company in the previously divested Aerospace and Strategic Materials business segment. 6. There are various claims pending involving Armco and its subsidiaries regarding product liability, antitrust, patent, employee benefits, environmental, reinsurance and insurance arrangements, 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. There are various pending matters relating to litigation, arbitration and regulatory affairs arising out of the runoff operations of the Armco Financial Services Group (AFSG) companies, including matters related to Northwestern National Insurance Company (NNIC), a runoff company currently involved in, among other matters, litigation with respect to certain reinsurance programs. In March 1997, a group of international insurance companies, previously affiliated with AFSG and sold in 1991, filed an application for voluntary liquidation in the United Kingdom. NNIC is currently investigating its exposure with respect to reinsurance transactions entered into with these companies. Armco believes that its investment in AFSG will not be materially affected as a result of pending claims, contingent liabilities or matters related to AFSG. Armco believes that its ultimate liability for pending claims, contingent liabilities, environmental matters and matters related to AFSG identified to date will not materially affect its consolidated financial condition or liquidity. However, it is possible that future developments with respect to such pending claims, contingent liabilities and other matters could have a material effect on the results of its operations in future periods. At June 30, 1997, Armco had recorded in its Condensed Statement of Consolidated Financial Position, legal and environmental reserves of $78.1, of which $15.3 was classified as current. 7. 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 future. At its July 25, 1997 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. 8. Information relating to Armco's industry segments can be found on page 11. -6- ARMCO INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per share data) GENERAL - ------- Armco's consolidated results for the three and six months ended June 30, 1997 and 1996 were as follows:
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 1997 1996 1997 1996 -------- -------- -------- -------- Net sales $490.3 $450.8 $931.6 $881.2 Operating profit 28.0 12.2 47.2 27.3 Net income (loss) 21.5 (4.0) 30.9 2.9 Earnings (loss) per common share 0.16 (0.08) 0.21 (0.06)
Net sales in the three and six months ended June 30, 1997 were higher by $39.5 and $50.4, respectively, than in the same periods last year, primarily due to increased volume of specialty semi-finished products and higher sales of galvanized steel products in the Specialty Flat-Rolled Steels segment, as well as sales growth in snowplows and tubular products in the Fabricated Products segment. Operating profit in the three months ended June 30, 1997 was more than double the amount reported in the same period last year, reflecting a substantial improvement in the Specialty Flat-Rolled Steels business segment, higher sales of snowplows and favorable experience in pension and retiree medical benefit expenses. Operating profit in the three- and six-month periods of 1997 included $1.1 and $2.2, respectively, for income generated by Greens Port Industrial Park, which Armco began consolidating in the Fabricated Products business segment on January 1, 1997. Prior to 1997, Greens Port was held for sale and its results were reported in Sundry other - net. Operating profit, in the six months ended June 30, 1997 and 1996, included income of $2.0 and $4.2, respectively, related to partial settlement of business interruption insurance claims. Excluding the results of Greens Port and the insurance credits, operating profit increased by $19.9 in the first six months of 1997 over the same period in 1996, primarily due to the reasons given for the quarterly improvement. Included in net income for the first six months of 1996 was the above- mentioned insurance settlement and $6.3 of gains previously deferred in connection with asset sales at Greens Port. In addition, net income for the three and six months ended June 30, 1997 included $1.3 for a tax refund related to a company in the divested Aerospace and Strategic Materials business segment. Armco's net income also improved as a result of lower expenses related to long-term benefit obligations for employees of Armco facilities that have been divested. The reductions of $7.4 and $13.7 for the three- and six-month period comparisons were primarily due to favorable investment returns on pension plan assets and lower pension and retiree medical benefit costs. Earnings (loss) per common share reflects the deduction from net income of preferred stock dividends declared. -7- BUSINESS SEGMENT RESULTS - ------------------------ Specialty Flat-Rolled Steels - ----------------------------
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 1997 1996 1997 1996 -------- -------- -------- -------- Customer sales $402.9 $376.1 $777.9 $748.2 Operating profit 22.3 12.2 44.7 32.2
Customer sales for the segment were 7% and 4% higher in the three and six months ended June 30, 1997 than in the respective periods in 1996, primarily as a result of increased volume of specialty semi-finished products and higher sales of galvanized steel products. The segment's average sales per ton in 1997 decreased from 1996 due to the effects of high levels of imports of stainless and electrical steels, partially offset by a shift in carbon steel product mix to higher priced galvanized products from lower priced hot bands. Specialty strip and sheet and semi-finished products were affected most by weakening prices. Customer sales and shipments by major product line and total cast production were as follows:
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1997 1996 1997 1996 ------------ ------------ ------------ ------------ (tons in thousands) Sales Tons Sales Tons Sales Tons Sales Tons ------ ---- ------ ---- ------ ---- ------ ---- Specialty flat-rolled $287.3 196 $297.2 199 $568.4 389 $584.2 386 Specialty semi- finished 65.1 53 39.3 29 105.2 87 70.9 50 Galvanized/carbon 40.6 76 31.4 67 86.6 162 75.6 175 Other 9.9 - 8.2 - 17.7 - 17.5 - ------ --- ------ --- ------ --- ------ --- Total $402.9 325 $376.1 295 $777.9 638 $748.2 611 Cast production 389 353 752 743
Shipments of specialty flat-rolled products, which include automotive exhaust stainless, electrical steel and specialty strip and sheet, were approximately the same in the respective three- and six-month periods of 1997 and 1996. However, 1997 average sales per ton declined 3% from the first six months of 1996, reflecting elimination of raw material surcharges on stainless steel and increased import competition on certain grades of chrome nickel stainless and cold rolled non-oriented electrical steels. Specialty semi-finished shipments increased substantially in 1997 over 1996, primarily as a result of increased sales of chrome nickel hot bands. However, a 15% reduction in average sales per ton for the first six months of 1997 compared to 1996 reflected worldwide market softness and import competition. Carbon steel shipments in the second quarter of 1997 increased as a result of strong demand for galvanized steel, partially offset by the elimination of carbon hot band shipments and the increased use of Armco's melt capacity for specialty products. In the first half of 1996, Armco began exiting the lower priced hot band market, shifting to higher priced galvanized steel products and thus increasing average sales per ton by 24% in the six-month period comparison. Second quarter operating profit increased in 1997 as a result of higher sales and lower costs. The lower costs were primarily due to more stable operating conditions and favorable experience in pension and retiree medical benefit costs. Costs in 1996 were adversely affected by several planned outages necessary -8- to complete equipment upgrades. These outages disrupted operations and resulted in the increased use of outside processors. Specialty Flat-Rolled Steels' operating profit included gains of $2.0 and $4.2 in the first half of 1997 and 1996, respectively, from the partial settlements of a business interruption insurance claim. Outlook: Third quarter 1997 shipments of automotive chrome stainless are expected to decline from second quarter levels due to normal vehicle model changeovers. While vehicle production remained strong in the first half of the year, recent automotive sales figures trailed those of a year ago, raising concerns about weakening demand. Armco expects electrical products, in general, to be under pressure due to softening demand and continued high imports. Demand for specialty strip and sheet and semi-finished products has increased, but pricing remains low due to pressure from imports. Fabricated Products - -------------------
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 1997 1996 1997 1996 -------- -------- -------- -------- Customer sales $87.4 $74.7 $153.7 $133.0 Operating profit 11.9 6.4 14.5 7.9
Customer sales increased $12.7 and $20.7 for the second quarter and first six months, respectively, of 1997, primarily due to higher sales at Douglas Dynamics and Sawhill Tubular, and the consolidation of the Greens Port Industrial Park. Higher customer sales at Douglas Dynamics reflected a significant improvement in snowplow shipments primarily due to an expanded sales network and the introduction of new products. Higher sales at Sawhill were a result of volume increases along most major product lines. Greens Port recorded sales of $3.5 in the first six months of 1997 from loading dock fees and rental of land and buildings. During 1996, Greens Port revenues were not included in the segment. Douglas Dynamics' and Sawhill's operating profit were substantially higher in 1997. Douglas Dynamics' results improved due to manufacturing efficiencies achieved during the year and reduced operating expenses following the decision in 1996 to exit certain unprofitable product lines. The increase in Sawhill's profits was also driven by lower costs. This segment's operating profit in the first six months of 1997 included $2.2 from Greens Port. Outlook: Douglas Dynamics' sales are expected to be somewhat lower in the second half of 1997 compared to last year. However, savings from manufacturing efficiencies and cost reduction programs are expected to result in improved operating profit in the same comparative periods. Sawhill Tubular's 1997 sales and profitability are expected to exceed last year due to higher volume in certain product lines and lower costs. ARMCO FINANCIAL SERVICES GROUP (AFSG) - ------------------------------------- In March 1997, a group of international insurance companies, previously affiliated with AFSG and sold in 1991, filed an application for voluntary liquidation in the United Kingdom. NNIC is currently investigating its exposure with respect to reinsurance transactions entered into with these companies. Armco believes that its investment in AFSG will not be materially affected as a result of pending claims, contingent liabilities or matters related to AFSG. -9- LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At June 30, 1997, Armco had $175.2 of cash and cash equivalents compared to $168.9 at December 31, 1996. Cash and cash equivalents increased $6.3 during the first six months of 1997, primarily due to $34.6 of cash generated by operations, partially offset by capital expenditures of $15.1, preferred stock dividends of $8.9 and principal payments on debt of $7.4. In addition to cash on hand, Armco has a receivables credit facility with a commitment of up to $120.0 for borrowings and letters of credit. Under this facility, Armco Funding Corporation, a wholly owned subsidiary to which Armco sells substantially all of its receivables, may borrow, depending on its available borrowing base and the amount of letters of credit outstanding, up to $120.0 secured by those receivables. In addition, Armco can borrow up to $50.0 under a credit facility secured by certain of its inventories. While no borrowings were outstanding under either facility, at June 30, 1997, Armco had outstanding $64.3 of letters of credit. A total of $91.4 was available for borrowing. Armco anticipates that expenditures for capital projects during the remainder of the year will total approximately $40.0. In addition, Armco has $19.8 of debt maturing through December 1997. Armco expects that these expenditures will be paid out of existing cash balances and cash generated from operations. On July 25, 1997, 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 30, 1997 to shareholders of record on August 29, 1997. 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 1, 1997 to shareholders of record on August 29, 1997. Payment of dividends on Armco's common stock is currently prohibited under the terms of certain of Armco's debt instruments and inventory credit facility. FORWARD LOOKING STATEMENTS - -------------------------- Certain statements made in this Management's Discussion & Analysis of the Condensed Consolidated Financial Statements and in the Notes to Condensed Consolidated Financial Statements reflect management's estimates and beliefs and are intended to be, and are hereby identified as, "forward looking statements" for purposes of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These include statements in the foregoing paragraphs entitled "Outlook" and ARMCO -- - --- FINANCIAL SERVICES GROUP (AFSG) and in footnote No. 6 relating to contingencies. - ------------------------------ As discussed in its Form 10-K for the year ended December 31, 1996, Armco cautions readers that such forward looking statements involve risks and uncertainties that could cause actual results to differ materially from those expected by management. These factors include, but are not limited to, the following: risks of a downturn in the general economy or in the highly cyclical steel industry; changes in demand for Armco's products; unplanned plant outages, equipment failures or labor difficulties; actions by Armco's foreign and domestic competitors; unexpected outcomes of major litigation and contingencies; changes in U.S. trade policy and actions respecting imports; disruptions in the supply of raw materials and changes in application or scope of environmental regulations applicable to Armco. -10- ARMCO INC. SEGMENT REPORT (Unaudited) (Dollars in millions) 1997 1996 -------------- ------------------------------ 2nd 1st 4th 3rd 2nd 1st Qtr. Qtr. Qtr. Qtr. Qtr. Qtr. ------ ------ ------ ------ ------ ------ Specialty Flat-Rolled Steels: Customer sales $402.9 $375.0 $322.5 $350.5 $376.1 $372.1 Operating profit 22.3 22.4 21.4 19.3 12.2 20.0 Fabricated Products: Customer sales 87.4 66.3 91.1 78.7 74.7 58.3 Special charges - - (8.8) - - - Operating profit 11.9 2.6 4.4 10.5 6.4 1.5 Corporate general (6.2) (5.8) (2.6) (5.6) (6.4) (6.4) - ------------------------------------------------------------------------------ Total operating profit 28.0 19.2 23.2 24.2 12.2 15.1 Interest income 2.4 2.5 2.1 2.2 2.8 3.0 Interest expense (8.5) (8.7) (8.8) (9.0) (9.3) (9.2) Sundry other - net (0.6) (3.4) (2.8) (7.2) (9.5) (1.6) - ------------------------------------------------------------------------------ Income (loss) before income taxes 21.3 9.6 13.7 10.2 (3.8) 7.3 Provision for income taxes (1.1) (0.2) (0.5) (0.3) (0.2) (0.4) - ------------------------------------------------------------------------------ Income (loss) from continuing operations 20.2 9.4 13.2 9.9 (4.0) 6.9 Discontinued operation - Gain on sale of Aerospace and Strategic Materials 1.3 - - 6.5 - - - ------------------------------------------------------------------------------ Net income (loss) $ 21.5 $ 9.4 $ 13.2 $ 16.4 $ (4.0) $ 6.9 ============================================================================== See Notes to Condensed Consolidated Financial Statements.
-11- Part II. Other Information Item 1. Legal Proceedings ----------------- There are various claims pending against Armco and its subsidiaries involving product liability, patent, reinsurance and insurance arrangements, environmental, antitrust, 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, 1996 (the Form 10-K) and Armco's Quarterly Report on Form 10-Q for the quarter ended March 31, 1997 (the Form 10-Q). The following summarizes significant developments in previously reported matters and any material claims asserted since March 31, 1997: In the Pension Benefit Guaranty Corporation v. Armco and Eastern Stainless ------------------------------------------------------------------- Corporation action, the parties agreed on a settlement of all claims in the - ----------- amount of $4.5 million. On June 19, 1997, the Court approved the settlement at a fairness hearing and no appeals were timely filed thereafter. The settlement of this matter is now final. In the Fultz Landfill Superfund action, Armco has added eight additional companies as third-party defendants. Armco continues to seek an equitable settlement of this case. In June, 1997, the Court approved a settlement agreement under which three of the companies initially identified as PRPs by the USEPA (Armco is not among them), plus their successors and certain other companies, have agreed to undertake remediation of the site. USEPA continues to seek approximately $6 million in oversight costs. No estimate of Armco's proportionate liability can be made at this time. 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. Item 5. Other Information ----------------- Any shareholder proposals intended to be presented at the 1998 annual meeting of shareholders must be received by Armco by November 17, 1997, 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 1998 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 25, 1998. 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 Earnings Per Common Share B. No report on Form 8-K was filed by Armco since March 31, 1997. -12- 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 1, 1997 /s/ Jerry W. Albright ----------------------- -------------------------------- Jerry W. Albright Vice President and Chief Financial Officer Date August 1, 1997 /s/ John N. Davis ----------------------- --------------------------------- John N. Davis Vice President and Controller -13- EX-11 2 COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE ARMCO INC. COMPUTATION OF EARNINGS (LOSS) PER COMMON SHARE
(Dollars and shares in millions, Three Months Ended Six Months Ended except per share amounts) June 30, June 30, - ------------------------------------------------------------------------------ 1997 1996 1997 1996 - ------------------------------------------------------------------------------ PRIMARY Income (loss) from continuing operations $20.2 $ (4.0) $29.6 $ 2.9 Preferred stock dividends (4.4) (4.4) (8.9) (8.9) - ------------------------------------------------------------------------------ Income (loss) from continuing operations applicable to common stock 15.8 (8.4) 20.7 (6.0) Income from discontinued operations 1.3 - 1.3 - - ------------------------------------------------------------------------------ Net income (loss) applicable to common stock $17.1 $ (8.4) $22.0 $ (6.0) - ------------------------------------------------------------------------------ Weighted average number of common shares 107.1 106.7 106.9 106.5 - ------------------------------------------------------------------------------ Income (loss) per common share from continuing operations $0.15 $(0.08) $0.20 $(0.06) Income per common share from discontinued operations 0.01 - 0.01 - - ------------------------------------------------------------------------------ Net income (loss) per common share $0.16 $(0.08) $0.21 $(0.06) - ------------------------------------------------------------------------------ FULLY DILUTED* Income (loss) from continuing operations $20.2 $ (4.0) $29.6 $ 2.9 Preferred stock dividends - (4.4) - (8.9) - ------------------------------------------------------------------------------ Income (loss) from continuing operations applicable to common stock 20.2 (8.4) 29.6 (6.0) Income from discontinued operations 1.3 - 1.3 - - ------------------------------------------------------------------------------ Net income (loss) applicable to common stock $21.5 $ (8.4) $30.9 $ (6.0) - ------------------------------------------------------------------------------ Weighted average number of common shares 107.1 106.7 106.9 106.5 Weighted average number of preferred shares on an "if converted" basis 22.7 ** 22.7 ** - ------------------------------------------------------------------------------ Average common shares outstanding as adjusted 129.8 106.7 129.6 106.5 - ------------------------------------------------------------------------------ Income (loss) per common share from continuing operations $0.16 $(0.08) $0.23 $(0.06) Income per common share from discontinued operations 0.01 - 0.01 - - ------------------------------------------------------------------------------ Net income (loss) per common share $0.17 $(0.08) $0.24 $(0.06) - ------------------------------------------------------------------------------ Shares of stock outstanding at June 30, Common 107.1 106.6 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 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 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ARMCO INC. CONDENSED STATEMENT OF CONSOLIDATED FINANCIAL POSITION AND CONDENSED STATEMENT OF CONSOLIDATED OPERATIONS AND RETAINED DEFICIT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS DEC-31-1997 JUN-30-1997 175,200 0 191,600 0 265,000 637,700 1,284,100 627,400 1,907,700 371,300 337,000 1,100 0 185,900 (377,300) 1,907,700 931,600 931,600 833,600 833,600 0 0 17,200 30,900 1,300 29,600 1,300 0 0 30,900 0.21 0.24
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