-----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, RY11WVneuc6xm6wADkV3X8CA3uwAnPSc1jj76gCZDTnj++VV26HPwKmRLkQ+F0Yj akttzd9J+xgTebpCI69gEg== 0000007383-99-000007.txt : 19990504 0000007383-99-000007.hdr.sgml : 19990504 ACCESSION NUMBER: 0000007383-99-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990503 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: SEC FILE NUMBER: 001-00873 FILM NUMBER: 99608426 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 MARCH 31, 1999 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 March 31, 1999 -------------------------------------- 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 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 March 31, 1999: 108,692,326 ARMCO INC. INDEX Pages ----- Part I. Financial Information Condensed Consolidated Balance Sheets - March 31, 1999 and December 31, 1998 2 Condensed Consolidated Statements of Income and Accumulated Deficit - Three Months Ended March 31, 1999 and 1998 3 Condensed Consolidated Statements of Cash Flows - Three Months Ended March 31, 1999 and 1998 4 Notes to Condensed Consolidated Financial Statements 5-7 Management's Discussion and Analysis of the Condensed Consolidated Financial Statements 7-11 Segment Report 12 Part II. Other Information Item 1. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 6. Exhibits and Reports on Form 8-K 14 Signatures 15 -1- ARMCO INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in millions) March 31, December 31, 1999 1998 ------------ ------------ ASSETS Current assets Cash and cash equivalents $ 145.5 $ 263.8 Short-term liquid investments 10.7 7.0 Receivables, less allowance for doubtful accounts 190.9 157.9 Inventories (Note 2) 264.3 250.7 Other 12.2 13.4 - ---------------------------------------------------------------------------- Total current assets 623.6 692.8 Investments Investment in Armco Financial Services Group (Note 6) 85.6 85.6 Other, less allowance for impairment 26.3 28.4 Property, plant and equipment 1,341.7 1,336.1 Accumulated depreciation (730.9) (714.3) Property, plant and equipment - net 610.8 621.8 Deferred tax asset 312.8 315.8 Goodwill and other intangible assets 127.1 128.6 Other assets 21.6 20.8 - ---------------------------------------------------------------------------- Total assets $1,807.8 $1,893.8 ============================================================================ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Trade accounts and notes payable $ 130.5 $ 115.7 Employment-related obligations 119.9 128.0 Other current liabilities 53.2 56.5 Current portion of long-term debt 5.9 116.9 - ---------------------------------------------------------------------------- Total current liabilities 309.5 417.1 Long-term debt, less current portion 250.5 250.7 Long-term employee benefit obligations 889.7 898.0 Other long-term liabilities 158.9 149.3 Commitments and contingencies (Note 6) Shareholders' equity 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 975.9 972.0 Accumulated deficit (957.9) (975.8) Other (5.8) (4.5) - ---------------------------------------------------------------------------- Total shareholders' equity 199.2 178.7 - ---------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,807.8 $1,893.8 ============================================================================ See Notes to Condensed Consolidated Financial Statements.
-2- ARMCO INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND ACCUMULATED DEFICIT (Unaudited)
(Dollars and shares in millions, Three Months Ended except per share amounts) March 31, ------------------- 1999 1998 -------- -------- Net sales $ 407.9 $ 447.7 Cost of products sold (353.7) (404.4) Selling and administrative expenses (25.9) (22.0) - ------------------------------------------------------------------------------ Operating profit 28.3 21.3 Interest income 2.4 2.5 Interest expense (5.8) (7.6) Sundry other - net (Note 3) 4.7 5.9 - ------------------------------------------------------------------------------ Income before income taxes 29.6 22.1 Provision for income taxes (4.4) (1.8) - ------------------------------------------------------------------------------ Income from continuing operations before extraordinary loss and cumulative effect of an accounting change 25.2 20.3 Extraordinary loss on retirement of debt (Note 4) (2.8) - Cumulative effect of a change in accounting for postretirement benefits (Note 1) - 237.5 - ------------------------------------------------------------------------------ Net income 22.4 257.8 Accumulated deficit, beginning of period (975.8) (1,305.0) Preferred stock dividends (4.5) (4.5) - ------------------------------------------------------------------------------ Accumulated deficit, end of period $(957.9) $(1,051.7) ============================================================================== Basic earnings per share (Note 5) Weighted average shares 108.4 107.4 Income from continuing operations $0.19 $0.15 Extraordinary loss on retirement of debt (0.02) - Cumulative effect of a change in accounting - 2.21 - ------------------------------------------------------------------------------ Net income $0.17 $2.36 - ------------------------------------------------------------------------------ Diluted earnings per share (Note 5) Weighted average shares 126.8 125.7 Income from continuing operations $0.18 $0.15 Extraordinary loss on retirement of debt (0.02) - Cumulative effect of a change in accounting - 1.89 - ------------------------------------------------------------------------------ Net income $0.16 $2.04 - ------------------------------------------------------------------------------ Cash dividends per share $2.10 Class A $0.525 $0.525 $3.625 Class A 0.906 0.906 $4.50 Class B 1.125 1.125 See Notes to Condensed Consolidated Financial Statements.
-3- ARMCO INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in millions)
Three Months Ended March 31, -------------------- 1999 1998 -------- --------- Cash flows from operating activities Net income $ 22.4 $ 257.8 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation expense 16.9 16.1 Loss on retirement of debt 2.8 - Cumulative effect of accounting change - (237.5) Deferred income tax expense 3.4 0.8 Other 2.0 0.4 Change in assets and liabilities: Trade accounts receivable (30.6) (24.4) Inventories (13.6) (15.6) Payables and accrued operating expenses 10.1 (14.5) Employee benefit obligations (8.8) (12.4) Other assets and liabilities - net 1.2 4.9 - ------------------------------------------------------------------------------ Net cash provided by (used in) operating activities 5.8 (24.4) - ------------------------------------------------------------------------------ Cash flows from investing activities Net proceeds from the sale of assets 0.6 0.4 Proceeds from the sale and maturity of liquid investments 7.0 - Proceeds from the sale of investments 2.2 6.1 Purchase of liquid investments (10.7) (5.0) Capital expenditures (6.1) (4.2) Other 1.0 0.3 - ------------------------------------------------------------------------------ Net cash used in investing activities (6.0) (2.4) - ------------------------------------------------------------------------------ Cash flows from financing activities Payments on debt (113.2) (31.4) Dividends paid on preferred stock (4.5) (4.5) Other (0.4) (0.6) - ------------------------------------------------------------------------------ Net cash used in financing activities (118.1) (36.5) - ------------------------------------------------------------------------------ Net change in cash and cash equivalents (118.3) (63.3) Cash and cash equivalents: Beginning of period 263.8 189.9 - ------------------------------------------------------------------------------ End of period $ 145.5 $ 126.6 - ------------------------------------------------------------------------------ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest (net of capitalized interest) $ 9.0 $ 8.8 Income taxes 0.3 0.3 Supplemental schedule of non-cash investing and financing activities: Issuance of restricted stock 3.9 4.0 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 accompanying 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, 1998. 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 March 31, 1999, and results of operations and cash flows for the three months ended March 31, 1999 and 1998. The results of operations for the three months ended March 31, 1999 are not necessarily indicative of the results to be expected for the full year 1999. Effective January 1, 1998, Armco changed its method of amortizing unrecognized net gains and losses related to its obligations for pensions and other postretirement benefits. In the three months ended March 31, 1998, Armco recognized income of $237.5 for the cumulative effect of this accounting change. 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.
March 31, December 31, 1999 1998 -------- -------- Finished and semi-finished $284.9 $267.0 Raw materials 18.1 20.9 ----- ----- Total cost 303.0 287.9 Adjustment to state inventories at LIFO value (38.7) (37.2) ----- ----- Net inventories $264.3 $250.7 ===== =====
3. Sundry other - net in the Condensed Consolidated Statements of Income and Accumulated Deficit includes income of $5.3 and $6.1 for the three months ended March 31, 1999 and 1998, respectively, for employee benefit obligations related to facilities that have been shut down or divested. 4. In the three months ended March 31, 1999, Armco recognized a $2.8 extraordinary loss on the early retirement of its 9-3/8% Senior Notes due 2000. 5. The following information was used in the calculation of basic and diluted earnings per share in accordance with Statement of Financial Accounting Standards No. 128, Earnings Per Share. -5-
Three Months Ended March 31, ------------------ 1999 1998 -------- -------- Income from continuing operations Income as reported $25.2 $20.3 Preferred stock dividends (4.5) (4.5) ----- ----- Income available to common shareholders - Basic 20.7 15.8 Assumed conversion of $3.625 Class A Preferred Stock 2.4 2.4 ----- ----- Income available to common shareholders - Diluted $23.1 $18.2 ===== ===== Common shares (in millions) Weighted average shares outstanding - Basic 108.4 107.4 Assumed exercise of stock options 0.1 - Assumed conversion of $3.625 Class A Preferred Stock 18.3 18.3 ----- ----- Weighted average shares outstanding - Diluted 126.8 125.7 ===== =====
6. There are various claims pending involving Armco and its subsidiaries regarding product liability, antitrust, patent, employee benefits, taxes, 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 an 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, North Atlantic Insurance Company, a group of international insurance companies previously affiliated with AFSG but sold in 1991, filed an application for voluntary liquidation in the United Kingdom. As a result of this voluntary liquidation filing, certain claims have been asserted against NNIC by insureds of North Atlantic. NNIC is defending these claims as well as pursuing related claims against third parties and North Atlantic. Armco believes that its ultimate liability for pending claims, contingent liabilities, environmental matters and matters related to AFSG, including the liquidation of North Atlantic, 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. -6- At March 31, 1999, Armco had recorded in its Condensed Consolidated Balance Sheets legal and environmental reserves totaling $61.4, of which $11.3 was classified as a current liability. 7. Effective January 1, 1998, Armco adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS No. 130). SFAS No. 130 requires Armco to report "other comprehensive income," as defined in the standard. For the three months ended March 31, 1999 and 1998, comprehensive income was as follows:
Three Months Ended March 31, ------------------ 1999 1998 -------- -------- Net income $22.4 $257.8 Foreign currency translation adjustment (0.4) (0.7) ----- ------ Comprehensive income $22.0 $257.1 ===== ======
8. Information relating to Armco's industry segments can be found on page 12. ARMCO INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per share amounts) GENERAL - ------- Armco's consolidated results for the three months ended March 31, 1999 and 1998 were as follows:
Three Months Ended March 31, ------------------ 1999 1998 -------- -------- Net sales $407.9 $447.7 Operating profit 28.3 21.3 Provision for income taxes (4.4) (1.8) Income from continuing operations before extraordinary loss and cumulative effect of an accounting change 25.2 20.3 Extraordinary loss on retirement of debt (2.8) - Cumulative effect of a change in accounting for postretirement benefits - 237.5 Net income 22.4 257.8 Basic earnings per share - Income from continuing operations 0.19 0.15 Net income 0.17 2.36 Diluted earnings per share - Income from continuing operations 0.18 0.15 Net income 0.16 2.04
-7- Net sales in the three months ended March 31, 1999 were $39.8 lower than in the same period last year, primarily due to lower pricing across all steel product lines and lower volume in specialty flat-rolled and specialty semi- finished steels, partially offset by higher snow and ice control product sales. Excluding a $2.5 business interruption insurance recovery recorded in 1999, operating profit in the three months ended March 31, 1999 was 21% higher than the amount reported in the same period last year, reflecting improved operating results at the Specialty Flat-Rolled Steels segment and the higher snow and ice control product sales. The 1999 provision for income taxes increased $2.6 on higher first quarter earnings and an increase in the effective tax rate. In the three months ended March 31, 1999, Armco recognized a $2.8 extraordinary loss for the early retirement of its 9-3/8% Senior Notes due 2000. Effective January 1, 1998, Armco changed its method of amortizing unrecognized net gains and losses related to its obligations for pensions and other postretirement benefits. In the three months ended March 31, 1998, Armco recognized income of $237.5 for the cumulative effect of this accounting change. BUSINESS SEGMENT RESULTS - ------------------------ Specialty Flat-Rolled Steels - ----------------------------
Three Months Ended March 31, ------------------ 1999 1998 -------- -------- Net sales $347.9 $391.4 Income from continuing operations 33.1 27.5
In the three months ended March 31, 1999, net sales for the segment were 11% lower than in the same period one year ago, primarily as a result of reduced specialty steel pricing and lower volumes of specialty flat-rolled and specialty semi-finished steels. Overall, 1999 first quarter average sales per ton decreased 4% compared to 1998, as imports continue to depress pricing across most stainless and electrical steel product lines. Net sales and shipments by major product line were as follows:
Three Months Ended March 31, ---------------------------- 1999 1998 ------------ ------------ (tons in thousands) Sales Tons Sales Tons ----- ---- ----- ---- Specialty flat-rolled $287.2 211 $306.1 223 Specialty semi-finished 25.3 31 47.9 44 Galvanized carbon 27.1 56 29.8 55 Other 8.3 - 7.6 - ----- --- ----- --- Total $347.9 298 $391.4 322 ===== === ===== ===
In the first three months of 1999, shipments of specialty flat-rolled steel products, which include automotive exhaust stainless, electrical steel and stainless sheet and strip, decreased 5% from the levels shipped in the first three months of 1998. The decline in stainless steel shipments reflected competitive pressures from an increased supply of imported steel delivered in advance of the trade cases. -8- Specialty semi-finished shipments and average sales per ton decreased substantially in the first three months of 1999 versus the same period in 1998 reflecting worldwide market softness and the effect of imports. Galvanized carbon steel shipments, produced by the Dover Operations from purchased steel coils, were equal to 1998 levels; however, as a result of increases in domestic competition and low-priced imports, sales per ton were down 11%. Armco continues in negotiations for the sale of Dover. However, no assurance can be given that a sale will be completed. In the first three months of 1999, income from continuing operations increased $5.6 over the same period in 1998, primarily as a result of lower costs and a $2.5 insurance recovery. Outlook: Shipments and net sales for 1999 will depend on consumer demand for durable goods and the outcome of the trade cases discussed below. Shipment levels for the remainder of 1999 are expected to be somewhat higher than last year. High levels of specialty steel imports continue to depress pricing. However, in June 1998, Armco and other domestic producers of flat-rolled stainless sheet and strip products filed petitions with the U.S. Department of Commerce and the International Trade Commission charging eight foreign countries with violations of U.S. trade laws. A finding that unfairly traded imports have caused injury to domestic producers could result in tariffs that may help reduce the level of imports, but probably not until mid to late 1999. Final antidumping determinations are expected to be announced in May, 1999. However, there can be no assurance of a successful final outcome and the imposition of tariffs on imports. Tubular Products - ----------------
Three Months Ended March 31, ------------------ 1999 1998 -------- -------- Net sales $ 43.4 $51.2 Income (loss) from continuing operations (1.2) 1.0
Net sales in the three months ended March 31, 1999 decreased 15% on lower selling prices and volume, and higher operating costs. This segment's results continue to be adversely affected by a general oversupply in the market brought on by high levels of imported pipe. Armco has been, and continues to be, in negotiations for the sale of Sawhill Tubular, the sole business in this segment. However, no assurances can be given that a sale will be completed. Other Businesses - ----------------
Three Months Ended March 31, ------------------ 1999 1998 -------- -------- Net sales $16.6 $ 5.1 Income (loss) from continuing operations 3.8 (2.3)
Net sales in the three months ended March 31, 1999 for this segment, which includes Douglas Dynamics LLC, a snow and ice control products manufacturer, and Greens Port Industrial Park, increased $11.5 compared to 1998. A substantial increase in shipments at Douglas Dynamics reflected higher average snowfall this past winter in many of its major markets and lower customer inventories compared to the previous year's mild winter and unusually high customer inventories. Income increased on the strength of the higher sales. Greens Port's revenues for 1999 were approximately equal to last year's first quarter, while income was slightly unfavorable. -9- Outlook: Douglas Dynamics' shipments and net sales for 1999, which are dependent on the amount of snowfall in its market areas and the strength of four wheel drive light truck sales, are expected to exceed those of last year. Greens Port is also expecting improved operating results. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- At March 31, 1999, Armco had $156.2 of cash, cash equivalents and liquid investments compared to $270.8 at December 31, 1998. Cash, cash equivalents and liquid investments decreased $114.6 during the first three months of 1999, primarily due to debt payments of $113.2, including $111.0 for the early retirement of the outstanding principal amount of Armco's 9-3/8% Senior Notes. In addition to cash on hand, Armco has two credit facilities with commitments totaling up to $170.0 for borrowings and letters of credit. Under a receivables 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 $100.0 secured by those receivables. In addition, Armco can borrow, depending on its available borrowing base and the amount of letters of credit outstanding, up to $70.0 under a credit facility secured by certain of its inventories. At March 31, 1999, no borrowings were outstanding under either facility. However, Armco had outstanding $59.1 of letters of credit under the receivables facility and a combined total of $110.9 was available for borrowing under both facilities. Armco anticipates cash outlays of approximately $45.0 to $55.0 during the remainder of 1999 for capital expenditures, which it expects to be paid out of existing cash balances and cash generated from operations. NEW ACCOUNTING STANDARD - ----------------------- In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS No. 133). Armco intends to adopt the new standard when required in 2000. Armco does not expect that SFAS No. 133 will have a material effect on its financial statements; however, its effect, if any, will depend on Armco's exposure to derivative instruments at the time of adoption and thereafter. THE YEAR 2000 ISSUE - ------------------- Many existing computer systems may not be able to appropriately interpret dates after December 31, 1999 because such systems allow only two digits to indicate a year in the date field. If not corrected, many computers and computer applications could fail or create erroneous results, causing safety, operational and financial problems. If such a failure were to occur to certain of its computer systems, Armco's manufacturing and financial systems could be temporarily shut down, resulting in a material adverse effect on its financial condition, liquidity and results of operations. In addition, the failure of vendor computer systems could cause interruption of deliveries of key supplies or utilities, which might result in similar material adverse impacts. Because of the complexity of the issues and the number of parties involved, Armco cannot reasonably predict with certainty the nature or likelihood of such impacts. However, Armco, using its internal staff and outside consultants, is actively addressing this situation and anticipates that it will not experience a material adverse impact to its operations, liquidity or financial condition related to systems under its control. Armco has completed an assessment of substantially all business information, manufacturing and facility control systems to identify areas of concern. Armco is in the process of modifying or replacing noncompliant computer hardware and software used internally. -10- In addition, Armco has surveyed its suppliers with regard to their Year 2000 preparations, focusing on those suppliers most critical to its operations. Armco intends to continue to monitor the Year 2000 compliance efforts of its suppliers and to obtain, to the extent possible, assurances that they will be able to deliver their products and services without interruption. To prepare for the reasonably likely worst case scenario, Armco is developing a contingency plan designed to mitigate the effects on its operations in case certain of its systems or suppliers fail to perform as planned. Completion of this plan is expected by the end of the second quarter of 1999. Contingency planning will consist of providing all required resources to repair internal systems should they fail at critical times, as well as establishing additional inventories and back-up procedures in the event suppliers are unable to deliver raw materials and services in a timely manner. Armco has prioritized its efforts, planning to complete work on noncompliant systems in the most critical areas first, with the expectation that virtually all Year 2000 compliance activities, including system testing, will be completed by September 30, 1999. In this process, Armco has redirected its systems resources from noncritical projects to Year 2000 compliance activities, resulting in an immaterial increase in expense. In the first three months of 1999, Armco spent approximately $4.0 on Year 2000 compliance activities and currently anticipates that it will spend an additional $7.0 during the remainder of 1999. These expenditures, which are expected to consist primarily of capital expenditures, outside consultants and internal personnel costs, have been and will be funded out of operating cash flows. FORWARD-LOOKING STATEMENTS - -------------------------- Certain statements made in this Management's Discussion and 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", the sections entitled NEW ACCOUNTING -------------- STANDARD and THE YEAR 2000 ISSUE, and Note 6 relating to contingencies. - -------- ------------------- As discussed in its Form 10-K for the year ended December 31, 1998, Armco cautions readers that such forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those currently expected by management. In addition to those risk factors specifically noted in the above referenced Management's Discussion and Analysis and Notes, such factors include, but are not limited to, the following: risks of a downturn in the general economy or in the highly cyclical steel industry; volatility in financial markets, which may affect invested pension plan assets and the calculation of benefit plan liabilities and expenses; 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; actions by reinsurance companies with which AFSG does business or foreign or domestic insurance regulators; and changes in application or scope of environmental regulations applicable to Armco. -11- Armco Inc. Segment Report (Unaudited) (Dollars in millions)
1999 1998 -------- ------------------------------------- 1Q Total 4Q 3Q 2Q 1Q -------- -------- ------ ------ ------ ------- Net Sales Specialty Flat-Rolled Steels $347.9 $1,418.9 $318.5 $332.8 $376.2 $391.4 Tubular Products 43.4 192.7 45.6 47.9 48.0 51.2 Other Businesses 16.6 94.9 29.2 34.7 25.9 5.1 - ----------------------------------------------------------------------------- Total $407.9 $1,706.5 $393.3 $415.4 $450.1 $447.7 - ----------------------------------------------------------------------------- Income from Continuing Operations Specialty Flat-Rolled Steels $33.1 $105.7 $28.2 $24.4 $25.6 $27.5 Tubular Products (1.2) 2.4 (1.7) 1.3 1.8 1.0 Other Businesses 3.8 28.2 10.0 12.6 7.9 (2.3) Corporate, interest, taxes, & other (10.5) (26.7) (9.0) (7.6) (4.2) (5.9) - ----------------------------------------------------------------------------- Total $25.2 $109.6 $27.5 $30.7 $31.1 $20.3 - ----------------------------------------------------------------------------- Specialty Flat-Rolled Steels Shipments (tons 000s) Specialty flat-rolled 211 826 195 195 213 223 Semi-finished 31 125 20 24 37 44 Galvanized carbon 56 245 56 66 68 55 - ----------------------------------------------------------------------------- Total 298 1,196 271 285 318 322 - -----------------------------------------------------------------------------
-12- 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, 1998. The following summarizes significant developments in previously reported matters and any material claims asserted since December 31, 1998: As previously reported, on September 30, 1998, Mansfield received an Order under Section 3013 of the Resource Conservation & Recovery ("RCRA") Act requiring Armco to develop a plan for investigation of eight areas of the plant which allegedly could be sources of contamination. On October 30, 1998, Armco filed a complaint in U.S. District Court in Cleveland seeking pre- enforcement review. Armco's complaint challenged the legal basis for the Order, the lack of support in the administrative record for such an Order, and the lack of due process the Order provides to Armco in responding to modifications and expansions USEPA could make to the scope of work to be performed under the Order. On April 1, 1999 the court dismissed Armco's action on the basis that the statute did not allow pre-enforcement review of such agency orders. Armco is preparing a motion for reconsideration. The total liability of those 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 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- The Annual Meeting of Shareholders was held on April 23, 1999, and all nine nominees to the Board of Directors named in Armco's Proxy Statement were elected. Approximately 83% of the outstanding common, $2.10 Cumulative Convertible Preferred and $3.625 Cumulative Convertible Preferred shares were voted. The vote on the election was as follows: Name For Withheld ---- --- -------- Dan R. Carmichael 92,337,395 792,872 Paula H.J. Cholmondeley 92,235,644 894,623 Dorothea C. Gilliam 92,297,857 832,410 John C. Haley 92,273,317 856,950 Charles J. Hora, Jr. 92,293,005 837,262 Bruce E. Robbins 92,358,925 771,342 Jan H. Suwinski 92,310,931 819,336 John D. Turner 92,386,139 744,128 James F. Will 92,291,289 838,978 -13- Item 6. Exhibits and Reports on Form 8-K -------------------------------- A. The following is an index of the exhibits included in the Form 10-Q: None B. No Report on Form 8-K was filed by Armco during the quarter ended March 31, 1999. -14- 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 May 3, 1999 /s/ Jerry W. Albright --------------------- --------------------------------------- Jerry W. Albright Vice President and Chief Financial Officer Date May 3, 1999 /s/ John N. Davis --------------------- --------------------------------------- John N. Davis Vice President and Controller -15- EX-27 2 ARTICLE 5 FDS FOR 1999 FIRST QUARTER FORM 10-Q
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ARMCO INC. CONDENSED CONSOLIDATED BALANCE SHEETS AND CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND ACCUMULATED DEFICIT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000007383 ARMCO INC. 1,000 U.S. DOLLAR JAN-01-1999 3-MOS DEC-31-1999 MAR-31-1999 1 145,500 10,700 190,900 0 264,300 623,600 1,341,700 730,900 1,807,800 309,500 250,500 0 185,900 1,100 12,200 1,807,800 407,900 407,900 353,700 353,700 0 0 5,800 29,600 4,400 25,200 0 (2,800) 0 22,400 0.17 0.16
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